J^^2^ 

^^ 

^Bffl 

^ 

&^ 

UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


SCHOOL  OF  LAW 
LIBRARY 


-o 


A  TREATISE 


ON  THE  LAW   OF 


CORPORATIONS 


HAVING  A 


CAPITAL  STOCK 


BY 


WILLIAM!  W.  COOK,  LL.  D. 

Of  the  Nkw  York  Bab 


FIFTH  EDITION 


VOL.  II 


CHICAGO 

CALLAGHA^  AND  COMPANY 

1903 


T 

^ 7737c 
19^3 


Copyright,  1887, 

BY 

WILLIAM  W.  COOK 


Copyright,  1889, 

BY 

WILLIAM  W.  COOK. 


Copyright,  1894, 

BY 

WILLIAM  \\\  COOK. 


Copyright,  1898, 

BY 

WILLIAM   W.  COOK. 


Copyright,  1903, 

BY 

WILLIAM' W.  COOK. 


v/Z^ 


STATE  JOURNAL  PRINTIXG  COMPANY. 

Printers  and  Stereotvpeiw. 

madisox.  wis. 


CONTENTS  OF  VOLUME  II. 


PART  II  (Continued). 
TRANSFERS  OF  STOCK  (Continued). 

CHAPTEK  XX. 

SEa 
Sales  of  Stock  — The  Formation   and  Performance   of  the  Con- 
tract—Gambling Sales  —  Fraudulent  Sales  .  .      331 

A.  Formation  and  Performance  of  Contracts  to  Purchase  Stock. 

B.  Gambling  Sales  of  Stock, 

C.  Fraud  as  Affecting  a  Sale  of  Stock. 

CHAPTER  XXL 

Sales  of  Stock  — Sales  While  Suits  Are  Pending  Affecting  that 
Stock;  Forgery;  Lost  and  Stolen  Certificates  of  Stock; 
-  (Confiscation  of  Stock 358 

A.  Stolen  and  Lost  Certificates  and  Purchases  Without  a  Certificate 
'       •       of  the  Stock. 

B.  Sales  of  Stock  While  Suits  are  Pending  Affecting  that  Stock. 

C.  Forgery. 

D.  Confiscation  of  Stock. 

CHAPTER  XXII. 

Sales  OF  Stock  — Formal  Method  of  Transferring  Certificates  and 

Registry  Thereof 372 

A.  Method  of  Transferring  the  Certificate. 

B.  Method  of  Registering  a  Transfer  of  Stock. 

C.  Rights  and  Duties  of  the  Corporation  in  Allowing  or  Refusing  Reg- 

istry. 

CHAPTER  XXIII. 

Rules  for  Corporations  in  Regard  to  Refusing  or  Allowing  Reg- 
istries OP  Transfers  of  Stock 393 

CHAPTER  XXIY. 

Non-negotiability  op  Stock  and  Dangers  Incurred  in  the  Purchase 

of  Certificates  of  Stock 411 

A.  Non-negotiability. 

B.  Dangers  Incurred  in  Purchasing  Stock. 


IV  CONTENTS. 

PART  III. 

MISCELLANEOUS  RIGHTS  OF  STOCKHOLDERS. 

CHAPTER  XXV. 
Stock-brokers  and  Their  Contracts 445 

CHAPTER  XXYI. 
Pledges  and  Mortoaqes  of  Stock 4G3 

CHAPTER  XXYIL 
Levy  of  Attachment  and  Execution  Upon  Shares  of  Stock     .        .      480 

CHAPTER  XXYIII. 

Constitutionality  of  Amendments  to  Charters — Right  of  a  Stock- 
holder TO  Object 4y2 

CHAPTER  XXIX. 

"Trusts"  and  Unincorporated  Joint-Stock  Associations    .        .        .    503<j 

A.  "Trusts." 

B.  Unincorporated  Joint-Stock  Associations. 

CHAPTER  XXX. 

Stockholders'  Right  to  Inspect  the  Books  of  the  Corporation       .      511 

CHAPTER  XXXL 

Liens  of  the  Corporation  on  Stock  for  the  Stockholders'  Debts  to 

the  Corporation 520 

CHAPTER  XXXII. 
Dividends 534 

CHAPTER  XXXIII. 
Life  Estates  and  Remainders  in  Shares  of  Stock       ....      552 

CHAPTER  XXXIY. 

Taxation  of  Shares  of  Stock  and  of  Corporations   ....      561 

A.  Taxation  of  Shares  of  Stock. 

B.  Taxation  of  National  Bank  Stock. 

C.  Other  Methods  of  Taxing  Corporations. 


CONTENTS.  V 

CHAPTER  XXXY. 

Sec. 

Forms  op  Actions  and  Measure  of  Damages  Where  a  Stockholder 

Has  Been  Deprived  of  His  Stock 573 

CHAPTER  XXXYI. 

Stockholders'  Meetings  —  Calls,  Time,  Place,  and  Classes  of  Meetings.      588 

CHAPTER  XXXYII. 
Elections  and  Other  Corporate  Meetings 602 

CHAPTER  XXXYIIL 

Dissolution,  Forfeiture,  and  Irregular  Incorporation       .        .        ,628 


PAET  IT. 

FRAUDS  — ULTRA  VIRES  ACTS  —  INTRA  VIRES  ACTS —  NEGLIGENCE 
AND  IRREGULAR  CONTRACTS  OF  DIRECTORS,  STOCKHOLDERS, 
PROMOTERS,  AND  AGENTS. 

CHAPTER   XXXIX. 

Fraudulent  Acts  of  Directors,  Majority  of  Stockholders,  and  Third 

Persons 643 

A.  The  Occasion,  Scope,  and  Purpose  of  the  Subject  Herein. 

B.  Frauds  of  Corporate  Directors,  of  a  Majority  of  the  Stockholders  or 

of  Third  Persons,  to  Remedy  Which  a  Stockholder  May  Bring 
Suit. 

CHAPTER   XL. 

Ultra  Vires  Acts  and  Contracts  —  In  Other  Words.  Acts  and  Con- 
tracts Which  Are  in  Excess  op  the  Charter  Powers  of  the 
Corporation,  Directors,  or  Stockholders 667 

CHAPTER  XLI. 

Intra  Vires  Acts  and  Contracts  —  In  Other  Words,  Acts  and  Con- 
tracts Which  Are  Within  the  Charter  Powers  of  the  Corpora- 
tion, Directors,  or  Stockholders 683 

CHAPTER   XLIL 

Stockholder's  Actions  to  Hold  the  Directors  Liable  for  Negli- 
gence IN  THE  Discharge  of  Their  Duties '^^' 


VI  CONTENTS. 

CHAPTER  XLTII. 

Sec. 
The  Power  of  Various  Officers  and  Agents  to  Contract  for  a  Cor- 
poration, AND  THE  Mode  of  Drawing  and  Executing  Cor- 
porate Contracts  —  Admissions  and  Notice  ....      704 

A.  Power  of  Promoters,  Stockholders,  Directors,  Executive  Committee, 

President,  Secretary,  Treasurer,  Cashier,  General  Manager,  and 
Miscellaneous  Agents  to  Contract  for  a  Corporation. 

B.  The   Form   of  Corporate  Contracts  —  Corporate    Seal  —  Drafting, 

Signing,  and  Sealing  —  Liability  of  Officers  on  Contracts  Irregu- 
larly Executed. 

C.  Admissions  of  Officers  and  Notice  to  Officers. 

CHAPTER  XLIY. 

Ratification,  Acquiescence,  or  Laches  as  a  Bar  to  a  Stockholder's 

Action  Herein 72& 


PAKT  II  (Continued). 
TRANSFER  OF  STOCK  (Continued). 


CHAPTER  XX. 


SALES  OP  STOCK— THE   FORMATION   AND   PERFORMANCE  OF   THE 
CONTRACT— GAMBLING  SALES  —  FRAUDULENT  SALES. 


FORMATION  AND  PERFORMANCE 
CONTRACTS  TO  SELL  STOCK. 


OF 


331.  Shares  of  stock  are  transferable. 

333.  Restnctions.on  right  to  sell  stock 

and  contracts  against  selling. 

333.  "Pools,"  "corners,"  and  combi- 

nations in  stock. 

334.  Contract  for  sale  of  stock  may- 

be valid  without  delivery  or 
specific  time  for  delivery  — 
Construction  of  various  con- 
tracts. 

335.  336.  Remedies  for  breach   of  a 

contract  to  sell  stock  —  Ten- 
der. 

337,  338.  Specific  performance  as  a 
remedy  for  breach  of  a  con- 
tract to  sell  stock. 

339,  340.  Statute  of  frauds  as  affect- 
ing sales  of  stock. 

B.   GAMBLINO  SALES  OF  STOCK. 

341.  What  are  gamblingsalesof  stock. 

342.  Statutes  prohibiting  wager  con- 

tracts, and  also  certain  stock 
contracts. 


§  343.  Test  of  legality  of  stock  transac- 
tion. 

344.  When  intent  to  deliver  is  ques- 

tion for  the  jury  and  when  not. 

345,  346.  Gambling    stock    contracts 

as  affecting  the  relations  be- 
tween the  principal  and  his 
broker. 
347,  348.  Gambling  stock  transactions 
as  affecting  notes,  bonds,  mort- 
gages, etc.,  growing  out  there- 
of. 

C.    FRAUD     AS     AFFECTING     A     SALE    OF 
STOCK. 

349.  Extent  of  subject  treated  herein. 

350.  What  has  been  held  to  constitute 

a  fraud  herein. 

351.  Fraudulent  sale  by  agent,  etc.,  in 

breach  of  trust. 

352.  353.  Fraud  may  be  by  corporate 

reports  or  prospectus. 

354.  Remedies  for  the  fraud. 

355.  Action  for  deceit. 

356.  Remedy  in  equity. 

357.  Fraud     in    selling    stock    may 

amount  to  a  conspiracy. 


A.    FORMATION    AND    PERFORMANCE    OF    CONTRACTS    TO    SELL    STOCK. 

§  331.  Shares  of  stock  are  transferahle.—Thsit  shares  of  stock  in 
a  corporation  are  transferable  the  same  as  other  personal  property 
is  a  principle  of  law  coeval  with  th*e  existence  of  stock  itself.  The 
few  decisions  holding  that  shares  of  stock  were  real  estate  were 
exceptional  rulings,  and  are  no  longer  considered  good  law.'  The 
right  to  transfer  stock  is  of  vital  importance,  since  the  two  chief 
causes  of  the  phenomenal  growth  of  corporations  in  recent  times 
are  the  limited  liability  of  the  members  and  the  readiness  of  buy- 
ing or  selling  an  interest  in  the  corporation  by  a  transfer  of  the 
stock  a  person  has  therein.     The  common  law  regards  shares  of 


iSee  g  12,  supra. 
735 


§§332-334.]       CONTKACTS    TO    SELL GAMBLING    SALES,  ETO.         [ciL   XX. 

stock  as  personal  property,  capable  of  alienation  or  succession  in 
any  of  the  modes  by  which  personal  property  may  be  transferred.^ 

§  332.  Restrictions  on  right  to  sell  stocli  and  contracts  against 
selling. —  By-laws  restricting  the  sales  of  stock  and  contracts  against 
selling  are  generally  made  in  connection  with  contracts  for  voting 
at  elections  so  as  to  control  the  management  of  corporations.  These 
two  classes  of  contracts,  to  sell  together  and  to  vote  together,  are 
closely  allied,  and  consequently  are  treated  under  the  subject  of 
"Elections,"  in  another  part  of  this  work.^ 

§  333.  ^^Pools,^''  ^^  corners  "  and  combinations  in  stock. —  This  sub- 
ject also  is  closely  connected  with  the  subject  of  restrictions  on  the 
right  to  vote  and  pooling  arrangements  for  the  purpose  of  control- 
ling elections,  and  consequently  is  considered  elsewhere.^ 

§  334.  Contract  for  sale  of  stock  may  1)e  valid  without  delivery  or 
specific  time  for  delivery —  Construction  of  various  contracts. —  Gen- 
erally a  sale  of  stock  is  attended  with  an  immediate  delivery  of  the 
certificates  therefor,  or  it  is  agreed  that  the  certificates  shall  be 
delivered  at  some  specified  time  in  the  future.  If,  however,  the 
vendor  offers  to  sell  his  stock  and  the  vendee  accepts  the  offer,  the 
contract  is  complete  and  binds  both  parties,  although  nothing  has 
been  said  as  to  the  time  when  the  certificates  of  stock  shall  be  de- 
liv^ered.  The  law  implies  that  the  contract  will  be  performed  by  a 
delivery  of  the  certificates  immediately  or  within  a  reasonable 
-  time,  and  either  party  may  insist  upon  carrying  out  the  contract.* 

1  Mobile  Mut.   Ins.   Co.  v.  Cullom,  49  and  the  defendant  agreed  to  pay  hiui 

Ala.  558  (1873);  Cole  v.  Ryan,  53  Barb,  therefor  the  sum  of  $25.     No  time  was 

168  (1868);  Heart  v.  State  Bank,  2  Dev.  fixed  for  the  performance;  the  law  will 

Eq.  (N.  C.)  Ill  (1831);  Allen  v.  Montgom-  imply,  therefore,  that  it  was  to  be  per- 

ery  R.  R.,  11  Ala.  437,  451  (1847);  Boston  formed  immediately,  or  perhaps  within 

Music  Hall  Assoc,  i:  Cory,  129  Mass.  435  a  reasonable  time.     Had  a  future  day 

(1880);  Sargent  v.  Franklin  Ins.  Co.,  25  been  agreed  upon  for  the  performance 

Mass.  90  (1829);    Chouteau  Sprmg  Co.  v.  of   the    contract    on    each  side,  there 

Harris,  20  Mo.  382  (1855);  Poole  v.  Mid-  could  have  been  no  doubt  as  to  its  va- 

dleton,  29  Beav.  646  (1861);  Brightwell  lidity,  or  the  right  of  either  party  to 

V.  Mallory,  10  Yerg.  (Tenn.)  196  (1836).  enforce  it,  he  having  done  all  he  was 

'■^See  i^  622,  in/j-a.                                   .  required  to  do  on  his  part.  The  fact  that 

••See  ^g  621a,  622,  infra.  no  time  was  agreed  upon  for  perform- 

*  "  The  performance  of  a  contract,  or  ance  does  not  change  the  character  of 

the  tender  of  performance,  is  no  part  the  contract.  The  contract  did  not  pass 

of  the  contract.     Tiie  making  of  a  con-  any  title  to  the  stock,  but  it  was,  never- 

tract  is  one  thing,  but  the   perform-  tbeless,  a  valid  contract,  and  one  which 

ance  thereof,  or  the  tender  of  perform-  either  party  can   enforce,   he   having 

ance,   is  another  and    quite   different  been  in  no  default  himself."    Bruce  v. 

thing.     The  contract  set  up  in  the  par-  Smith,  44  Ind.    1   (1873);    Kerchner  v. 

agraph  in  question  is  an  executory  one,  G^ttys,  18  S.   C.  521  (1882);    Cheale  v. 

by  which  the  plaintiff  agreed  to  sell  to  Kenward,  3  De  G.  &  J.  27  (1858).  Usage 

the  defendant  the  shares  of  the  stock,  may  determine  what  is  a  reasonable 

736 


CH.  XX.]  CONTRACTS    TO    SELL  —  GAMBLING    SALES, 


ETC. 


[§  334. 


It  has  been  held  that  an  option,  for  which  nothing  is  paid,  is  unilat- 
eral, and  hence,  even  though,  by  a  subsequent  writing,  the  option 
is  exercised,  it  cannot  be  enforced  as  against  the  purchaser,  there 
.being  no  new  consideration  at  the  time  of  the  exercise  of  the  op- 


tion.^   Where  the  vendor  says,  in  his  contract,  "I  have  sold"  cer- 


time  for  delivery.  Seven  days  held  rea- 
sonable.    Stewart  v.  Cauty,  8  M.  &  W. 
160  (1841).     In  a  contract  by  which  one 
"  agrees  to  deliver  "  to  the  other  certain 
stock  at  a  certain  price,  performance 
is  to  be  within  a  reasonable  time,  and 
the  vendor  may  tender  the  stock  and 
then  sue  for  the  price.     Boehm  v.  Lies, 
60  N.  Y.  Super.  Ct.  436  (1892).     A  con- 
tract of  sale  may  be  an  executed  con- 
tract, even  though  it    reads  that  the 
parties  "have  agreed  to  sell."    State  v. 
Whited,  etc.,  104  La.  125  (1900).  Where 
two  persons  own  a  share  of  stock  in 
common,  each  agreeing  to  pay  one-half 
of  future  assessments,  and  one  of  them 
gives   his  interest  to  the  other  if  the 
latter  will  pay  future  assessments,  this 
is  a  sale  and  transfers  title.      Boll  v. 
Camp,  92  N.  W.  Rep.  703  (Iowa,  1902). 
Specific  performance  of  a  contract  to 
sell  stock  will  not  be  enforced,  where 
the  time  of  performance  and  of  pay- 
ment is  not  fixed,  and  where  five  years 
have  elapsed,  and  where  the  vendee, 
the     corporate     secretary,     misrepre- 
sented  the  value  of  the  stock  to  the 
vendor.     Todd  v.  Diamond  State  Iron 
Co.,  8  Houst.  (Del.)  372  (1889).  An  agree- 
ment to  transfer  stock  at  any  time  to 
a  trustee  for  creditors  is  not  enforce- 
able against  the  insolvent  estate  of  the 
deceased  stockholder.  Chafee  i-.Sprague, 
16  R  I.  189  (1888).   A  vague  offer  to  sell 
stock,  with  a  statement  that  the  stock 
could  probably   be  sent  with  a  draft, 
even  when  accepted  with  a  direction 
to  send  it  on,  does  not  made  a  binding 
contract.      Topliflf    v.   McKendree.    88 
Mich.  148  (1891).  Where  stock  is  sold  on 
condition  that  the  vendee  shall  be  "  in 
a  position  to  take  up  the  stock."  the 
condition  is  fulfilled  if  the  vendee  ac- 
cepts the  stock  and  acts  as  a  director. 


and  holds  the  stock  for  five  months. 
Wills  V.  Fisher,  112  N.  C.  529  (1893). 

1  Wescott  V.  Mitchell,  95  Me.  377  (1901). 
A  unilateral  contract  is  not  binding. 
A  consideration  must  exist  or  the  cov- 
enants be  mutual.     Jordan  v.  Indian- 
apolis, etc.  Co..  61  N.  E.  Rep.   12  (Ind. 
1901).     In  the  case  of  Clark  v.  Campbell, 
23  Utah,  569  (1901),  the  court  discussed 
the  question    of  whether    an    option, 
given  without  consideration,  was  bind- 
ing.    Where    an    option    to    purchase 
stock  provides  for  immediate  delivery 
in  the  hands  of  a  third  person,  and  for 
payments  by  instalments  in  case  the 
option  is  exercised,  the  payment  of  the 
first  instalment  constitutes  an  exercise 
of  the  entire  option.     Obery  v.  Lander, 
179  Mass.  125  (1901).     An  option  to  sell 
mining  stock,  with  no  definite  time 
fixed  as  to  the  duration  of  the  option, 
may  be  revoked  three  months  later,  no 
sale  having  been  made  in  the  mean- 
time;  and   a  subsequent  sale  by  the 
owner  of  the  stock  at  an  advanced 
price  to  a  party  whom  the  party  re- 
ceiving the  option  had  been  negotiat- 
ing with  does  not  entitle  such  party 
receiving  the  option  to  any  interest  in 
the  sale.    Rees  v.  Fellow,  97  Fed.  Rep. 
167  (1899),  the  court  holding  that  such 
an  option  may  be  terminated  at  any 
time  in  good  faith.     The  various  stock- 
holders of  a  company  may  give  inter- 
changeably a  first  option  of  thirty  days 
to  purchase  their  shares  of  stock  when- 
ever any  one  desires  to  sell,  each  con- 
tracting for  himself,  the  contract  fur- 
ther providing  that  such  thirty  days 
are  to  commence  in  case  of  the  death 
of  a  stockholder,  so  far  as  his  stock  was 
concerned,  and  they  may  further  con- 
tract that  another  person  is  to  have  a 
similar  option  in  case  the  first  option 


(47) 


737 


§  334.] 


CONTEACTS    TO   SELL  —  GAMBLING    SALES,  ETC. 


[CH.  XX. 


tain  stock,  deliverable  at  seller's  option,  within  a  specified  time,  a 
sale  inprcBsenti  is  made,  and  the  vendor  assumes  to  have  the  stock 
and  to  hold  it  for  the  benefit  of  the  purchaser  until  delivery.^  An 
agreement  to  purchase  stock  when  the  corporation  is  created  is  en- 
forceable only  after  a  complete  and  legal  incorporation  is  effected.- 
A  sale  of  stock  with  an  ao:reement  to  take  it  back  whenever  the 
vendee  desires  is  an  enforceable  contract,  even  though  the  contract 
is  oral.' 

Great  difficulty  often  arises  in  determining  whether  a  contract  of 
sale  of  stock  is  an  executed  or  is  merely  an  executory  contract  of 
sale.  There  are  a  few  general  rules  on  this  subject,*  but  each  con- 
tract for  the  sale  of  stock  is  construed  and  enforced  by  the  courts 


is  not  exercised.  A  party  entitled  to 
such  option  may  have  specific  perform- 
ance of  it.  The  mutual  covenants  of 
the  contract  are  a  sufficient  consider- 
ation to  support  it.  Scruggs  v.  Cotter- 
ill,  67  N.  Y.  App.  Div.  583  (1902).  A 
contract  of  sale  of  stock,  to  be  delivered 
in  blocks  of  five  shares  or  more  as 
called  for  by  the  vendee,  is  not  an  op- 
tion, but  an  obligation  on  the  part  of 
the  vendee  to  purchase,  and  if  he  does 
not  call  for  the  stock  it  may  be  ten- 
dered within  a  reasonable  time  and  the 
price  recovered,  and  the  vendor  may 
obtain  judgment  and  retain  the  stock 
until  payment  is  made.  Cragin  v. 
O'Connell,  50  N.  Y.  App  Div.  339  (1900j. 
An  option  to  sell  certain  stock  at  a 
certain  price  "on  or  after  three  months 
from  November  6,  1891,"  must  be  exer- 
ci.sed  within  a  reasonable  time  there- 
after and  cannot  be  exercised  seven 
years  thereafter.  McCracken  v.  Harned, 
66  N.  J.  L.  37  (1901).  An  offer  to  buy 
stock,  open  to  acceptance  after  Jan- 
uary 1,  must  be  accepted  before  July  9. 
Park  V.  Whitney,  148  Mass.  278  (1889). 
An  option  to  purchase  stock  within 
three  years  is  enforceable,  though  one 
party  has  an  option  which  the  other 
has  not.  Seddoii  v.  Rosenbaum,  85  Va. 
928  (1889).  An  option  running  to  two 
persons  cannot  be  exercised  by  one  of 
them.  Pratt  v.  Prouty,  104  Iowa,  419 
(1898).  A  person  holding  stock  in  es- 
crow under  an  option  agreement  may 
interplead  between  the   parties  in  in- 


terest if  they  make  conflicting  claims. 
Walker  r.  Bamberger,  17  Utah,  239 
(1898).  Where  the  owner  of  stock  offers 
to  sell  it  to  a  person  at  a  certain  price, 
the  offer  to  remain  open  until  a  certain 
date,  the  contract  is  not  unilateral,  if 
the  latter  accepts  the  offer  within  that 
time.  If  the  vendor  then  avoids  the 
vendee  so  that  the  vendee  is  unable  to 
tender  the  money,  tender  is  excused 
and  the  vendor  may  sue  the  vendee  for 
breach  of  contract.  Guilford  v.  Mason, 
53  Atl.  Rep.  284  (R.  I.  1902). 

1  Currie  v.  White,  45  K  Y.  822  (1871). 
When  the  option  is  exercised,  the  time 
of  delivery  as  fixed  is  as  though  that 
time  had  been  specified  in  the  original 
contract.  Kelley  v.  Upton,  5  Duer,  336 
(1856),  holds  otherwise  where  tlie  con- 
tract has  also  the  words  "at  buyers 
option  in  ninety  days."  Such  a  con- 
tract is  executory  as  to  time  of  passing 
title,  and  tender  is  necessary. 

2Childsv.  Smith,  55  Barb,  45  (1869). 
If  stock  is  sold  conditionally,  and  the 
condition  does  not  happen,  the  sale  is 
void.  Mitchell  v.  Wedderburn,  68  Md. 
139  (1887). 

3  See  g  339,  infra. 

*  A.  contract  of  sale  of  stock  was 
worded  as  follows: 

"  I  hold  of  the  stock  of  the  Washing- 
ton and  Hope  Railway  Company 
$33,250  or  1,350  shares,  which  is  sold  to 
Paul  F.  Beardsley  [the  appellee],  and 
which,  though  standing  in  my  name, 
belongs  to  him,  subject  to  a  payment 
■88 


CH.  XX.]  CONTRACTS   TO    SELL 


GAMBLING    SALES,  ETC. 


[§  334. 


according  to  the  intent  of  the  parties  as  manifested  by  the  writteij. 
terms  and  conditions  of  the  contract  itself.  Various  contracts  rela- 
tive to  the  sale  of  stock  are  explained  and  referred  to  in  the  notes 
below.^ 


of  $8,000,  with  interest  at  same  rate 
and  from  same  date  as  interest  on  my 
purchase  of  Mr.  Alderman's  stock." 

The  court  held  that  this  was  an  exe- 
cuted contract  by  which  the  ownership 
of  the  stock  passed  to  the  purchaser, 
with  a  reservation  of  title,  simply  as 
security  for  the  purchase-money  —  an 
equitable  mortgage.  The  court  pointed 
out  the  difference  between  an  executed 
and  executory  contract  of  sale  as  fol- 
lows: 

"If  an  agreement  to  sell,  the  moving 
party  must  be  the  purchaser.  If  a 
sale,  an  executed  contract  with  reser- 
vation of  security,  the  moving  party  is 
the  vendor,  the  one  retaining  security. 
.If  an  agreement  to  sell,  the  moving 
party,  the  purchaser,  must  within  a 
reasonable  time  tender  performance  or 
make  excuse  therefor.  If  an  executed 
contract,  a  completed  sale,  then  the 
moving  party  is  the  vendor,  the  secu- 
rity-holder, and  he  assumes  all  the  bur- 
dens and  risks  of  delay.  .  .  .  It  is  not 
always  easy  to  determine  whether  an 
instrument  is  a  contract  of  sale  or  one 
to  sell;  yet  certain  rules  of  interpreta- 
tion have  become  established.  .  .  . 
Where  the  buyer  is  by  the  contract 
bound  to  do  anything  as  a  considera- 
tion, either  precedent  or  concurrent, 
on  which  the  passing  of  the  property 
depends,  the  property  will  not  pass 
until  the  condition  be  fulfilled,  even 
though  the  goods  may  have  been  actu- 
ally delivered  into  the  possession  of  the 
buyer."  Beardsley  v.  Beardsley,  138 
U.  S.  262  (1891). 

1  See,  in  general,  Lindley,  Company 
Law,  6th  ed.,  pp.  676-688.  An  agree- 
ment of  a  party  to  sell  bonds  for  another 
party  at  a  certain  price  may  be  enforced 
by  the  party  who  is  to  give  the  bonds  to 
the  other  party  to  sell.  Plumb  v.  Camp- 
bell, 129   III  101  (1888).      The  fact  that 


the  corporation  loses  a  large  amount  of 
money  after  a  partner  agrees  to  take 
stock  as  a  part  of  his  share  of  the  part- 
nership assets  does  not  allow  him  to 
decrease  the  price  which  it  was  esti- 
mated to  be  worth.  Donahue  v.  Mc- 
Cosh,  70  Iowa,  733  (1886).  Only  a  de 
facto  corporation  need  be  proved. 
Reynolds  v.  Myers,  51  Vt.  444  (1879). 

The  memoranda  of  the  contract,  to- 
gether with  the  certificates  of  stock, 
are  sufficient  presumptive  evidence  of 
the  existence  of  the  corporation  and 
the  legal  issue  of  the  stock.  Mann  v. 
Williams,  143  Mass.  394  (1887).  Where 
stock  is  issued  to  a  person  for  con- 
struction work,  and  he  sublets  the 
contract  and  agrees  to  divide  the 
stock  with  others  who  are  to  share 
the  expense  of  construction,  they  all 
are  liable  to  the  subcontractor.  Mc- 
Fall  V.  McKeesport,  etc.  Co.,  123  Pa.  St. 
259  (1889).  Where  a  prospectus,  offer- 
ing for  sale  trustee's  transferable  cer- 
tificates, states  that  such  certificates 
represent  stock  deposited  with  the 
trustee,  the  stock  being  in  an  English 
corporation,  the  trustee  is  personally 
liable  if  it  turns  out  that  the  English 
corporation  had  a  prior  lien  on  the 
stock  to  the  full  exent  of  its  value. 
The  trustee  was  bound  to  take  notice 
of  the  lien  created  by  the  by-laws  of 
the  English  corporation.  The  rule  of 
caveat  emptor  has  been  relaxed  so  as  to 
create  an  implied  warranty  of  title  on 
the  part  of  the  seller.  Even  though 
the  trustee  acted  as  agent,  yet,  the 
principal  not  being  disclosed,  the  trus- 
tee is  liable.  McClure  v.  Central  Trust 
Co.,  165  N.  Y.  108  (1900).  A  broker  who 
claims  to  be  acting  for  an  undisclosed 
principal  in  contracting  for  the  pur- 
chase of  bonds,  and  who  stipulates  that 
he  shall  not  be  personally  liable,  can- 
not enforce  such  contract  if  in  fact  he 
■39 


53tt.] 


CONTRACTS    TO    SELL GAMBLING    SALES,  ETC.  [CH.  XX. 


A   contract  whereby  a  stockholder  delivers   certain  stock  for 
money  to  be  paid  to  the  corporation,  the  mone}'^  to  be  repaid  out 


was  the  principal  himself.  Paine  v. 
Loeb,  96  Fed.  Rep.  164  (1899).  In  the 
case  of  Clews  v.  Jamieson,  89  Fed.  Rep. 
63  (1898),  where  the  broker  was  author- 
ized to  sell  at  229  and  actually  did  sell 
at  221,  the  court  held  that  the  princi- 
pal could  not  adopt  and  enforce  the 
contract,  inasmuch  as  the  broker  was 
not  authorized  to  sell  at  that  price,  and 
the  contract  not  binding  the  principal 
when  made  did  not  bind  the  other  par- 
ties. Even  though  the  president  of  a 
corporation  brings  about  a  sale  of  all 
its  stock,  under  a  contract  by  which 
the  corporation  is  to  pay  him  a  certain 
sum,  nevertheless  he  cannot  collect 
that  sum  from  the  corporation  itself. 
Wood  V.  Manchester,  etc.  Co.,  54  N.  Y. 
App.  Div.  523  (1900).  It  is  legal  for  a 
person  to  contract  with  the  directors 
of  an  insurance  company  to  purchase 
at  least  sixty-five  per  cent,  of  the  stock 
of  the  company,  the  same  offer  being 
made  to  all  the  stockholders,  even 
though  it  is  proposed  to  thereupon 
wind  up  the  company.  Garrett  Co.  r. 
Morton,  65  N.  Y.  App.  Div.  366  (1901). 
Where  a  person  has  turned  in  securi- 
ties under  a  plan  of  consolidation  which 
states  the  aggregate  capacity  of  prop- 
erties which  it  is  proposed  to  acquire, 
or  so  many  of  them  as  the  organizers 
may  deem  best,  the  party  cannot  with- 
draw, where  the  plan  has  been  carried 
out.  even  though  less  than  half  of  the 
properties  have  been  actually  acquired. 
And  even  though  the  preliminary  con- 
tract provided  for  the  acquisition  of  a 
certain  company,  yet,  if  the  consoli- 
dated company  acquires  practically 
all  the  stock  and  bonds  of  that  com- 
pany, the  party  turning  in  securities 
cannot  withdraw,  and  especially  can- 
not reclaim  the  securities  as  against 
a  transferee  in  good  faith  who  had 
no  notice  of  personal  representations. 
Jewell  V.  Mclntyre,  62  N.  Y.  App.  Div. 
396    (1901).      Where    the    stockholders 


transfer  a  portion  of  their  stock  to  one 
of  their  number  to  be  disposed  of  by 
him  for  the  interests  of  the  company 
and  to  raise  money  to  carry  on  business, 
he  may  use  a  portion  of  the  same  to 
reimburse  one  of  the  stockholders  for 
stock  which  the  latter  used  in  the  in- 
terest of  the  company.  Playa,  etc.  Co. 
V.  Gage,  60  N.  Y.  App.  Div.  1  (1901). 
Where  the  evident  intent  of  a  contract 
of  sale  of  stock  with  partial  deliveries 
was  that  the  entire  amount  should  be 
taken  by  the  vendee,  he  cannot  have 
specific  performance  to  the  extent  of  a 
majority  of  the  stock  only.  Clowes  r. 
Miller,  50  Atl.  Rep  728  (Conn.  1901).  A 
sale  of  stock  in  a  company  to  be  organ- 
ized is  legal.  Van  Dam  v.  Tapscott,  40 
N.  Y.  App.  Div.  36  (1899).  Where  the 
incorporators  named  in  a  special  char- 
ter organize  by  subscribing  one  share 
each  and  allowing  another  person  to 
subscribe  for  the  remainder,  he  at  the 
same  time  entering  into  a  personal  con- 
tract with  them  that  he  would  con- 
struct the  street  railway  called  for  by 
the  charter  within  a  certain  time,  and 
for  failure  so  to  do  he  was  to  "  return 
the  charter,"  a  suit  by  the  original  in- 
corporators to  cancel  his  subscription 
and  to  obtain  control  of  the  board  of 
directors  will  not  lie,  inasmuch  as  the 
contract  was  an  attempt  to  transfer 
the  corporate  franchise.  Simonds  v. 
East  Windsor,  etc.  Ry.,  73  Conn.  513 
(1901). 

Where,  in  order  "  to  enable  the  com- 
pany to  keep  its  stock  in  tlie  owner- 
ship of  stockholders  of  its  own  choos- 
ing," each  stockholder  enters  into  an 
agreement  with  the  corporation  that  in 
case  he  wishes  to  sell  his  stock  it  shall 
first  be  appraised  and  then  offered  to 
the  corporation  before  it  is  offered  to 
anyone  else,  the  refusal  of  the  board  of 
directors  to  make  an  appraisal,  in  ac- 
cordance with  the  agreement,  does  not 
render  the  corporation  liable  in  dam- 


740 


CH.  XX.]  CONTRACTS   TO   SELL GAMBLING    SALES,  ETC. 


[§  334. 


of  dividends  and  in  other  ways,  and  the  stock  then  to  be  returned, 
is  a  conditional  sale  and  not  a  loan  to  the  corporation.^     Where  a 


ages,  inasmuch  as  it  is  clear  that,  even 
though  the  stock  were  appraised,  the 
corporation  would  not  buy  it.     Whiton 
V.  Batchelder,  etc.  Corp.,  179  Mass.  169 
(1901).     It  may  be  shown  by  parol  that 
a  written  sale  of  stock  was  to  be  bind- 
ing only  in  case  an  agent  had  not  al- 
ready sold  the  stock.     Reiner  v.  Craw- 
ford,  23  Wash.   669   (1901).     Where   a 
corporation   having  treasury  stock   in 
its  treasury  sells  all  its  assets  to  an- 
other corporation,  excepting  its  patent 
rights,  such  sale  is  not  a  sale  of  the 
treasury  stock  within  the  meaning  of 
a  prior  stock-pooling  contract  of  the 
old  corporation  that  certain  other  stock 
sliould    be  sold   before    such  treasury 
stock  was  sold.  Myers  v.  Buell,  67  N.  Y. 
App.  Div.  290  (1901).     Stockholders  in 
selling  their  stock  in  connection  with 
the  transfer  of  all  the  property  to  a  new 
corporation  may  reserve  what  may  be 
thereafter  realized   from    a  suit.     In- 
dependent, etc.    Co.   V.    Anderson,  106 
La.  95  (1901).     The  vendee  who  agrees 
to  pay  in  addition  to  a  certain  price  a 
specified  sum  whenever  the  same  is  re- 
ceived by  him  from  the  corporation  is 
not  liable  on  the  contract  if  he  sells 
the  stock    before  receiving  anything 
from    the    corporation.     Hamilton    v. 
Miller,   24    Ind.    App.    617   (1900).     An 
agreement  of  the  borrower  of  stock  to 
pay  for  the  same  in  case  the  stock  is 
not  returned  accrues  when  the  stock  is 
sold  by  the  pledgee  on  default  of  the 
borrower,  and  the  statute  of  limitations 
then  begins  to  run.     Jones  v.  Powning, 
25   Nev.  399  (1900).     A  contract  to  re- 
turn borrowed  stock  or  pay  for  it  is  a 
debt.     Dibble  v.  Richardson,  171  N.  Y. 
131  (1902).     A  contract  whereby  a  per- 
son receives  stock  and  agrees  to  return 
it  within  a  specified  time  or  else  pay  a 
specified  sum  is  not  a  bailment,  and 
hence  if  the  stock  is  not  returned  at 
the  specified  time  the  specified  price 


1  Crimp  V.  McCormick  Const.  Co.,  71  Fed.  Rep.  356  (1896). 

741 


may   be  recovered,  even  though    the 
party  at  a  later  time  desires  to  return 
the  stock.     Haskins  v.  Dern,  19  Utah, 
89  (1899).     A  stockholder  may  hold  lia- 
ble in  damages  a  person  who  has  broken 
his  agreement  to  loan  money  to  the 
corporation,  the  consideration  of  such 
agreement  having  been   furnished  by 
the  stockholder.     But  if  the  agreement 
did  not  provide  for  any  particular  du- 
ration of  the  loan,  only  nominal  dam 
ages  can  be  recovered.     Kelly  v.  Fahr- 
ney,  97  Fed.  Rep.  176  (1899).     Where  an 
agreement  for  the  pooling  and  voting 
of  stock  provides  that  any  holder  of 
trustees'  certificates  may  on  six  months' 
notice  demand  from  the  trustee  repay- 
ment of  the  price  which  he  paid  for  the 
stock,  such  demand  may  be  enforced 
by  a  suit  and  the  money  collected  from 
the  trustee.     Waggaman    v.  Nutt,   88 
Md.  265  (1898).     When  a  subscriber  to 
stock  agrees  to  sell  $5,000  worth  of  the 
same  at  its  "original  cost," such  cost  is 
the  cost  to  the  subscriber  and  not  the 
par  value,  nor  the  cost  including  loans 
by  the  subscriber  to  the  corporation. 
Eagan  v.   Clasbey,  5  Utah,  154  (1887). 
Where  a  person  sells  goods  to  a  corpo- 
ration and  agrees  to  take  payment  in 
stock,  he  must  take  the  stock  at  par, 
even  though    its  actual    and   market 
value  is  much  less  than  par.     Tilkey  v. 
Augusta,  etc.  R.  R.,  83  Ga.  757  (1889). 
A  contract  calling  for  "  original  ground- 
floor,  or  treasury  stock  "  means  any  of 
the    stock    that  is    issued,  where    the 
statutes   prohibit  fictitious  stock.     All 
the    stock    is    then    presumed    to    be 
"  ground-floor  "  stock  and  to  represent 
at  par  the  actual  value  received.    Will- 
iams V.  Searcy,  94  Ala,  360  (1891).    A 
contract  by  a  corporation  that  it  will 
issue  its  stock  for  one-fifth  of  its  par 
value  is  void  under  the  Alabama  con- 
stitutional prohibition.    The  subscriber 
having  sold   his    contract  to  another 
See  also  §  76,  supra. 


334] 


CONTRACTS    TO    SELL- 


GAMBLING    SALES,  ETC. 


[CH.  XX. 


note  is  given  in  payment  for  stock,  and  recites  on  its  face  that  it  is 
for  value  received,  parol  evidence  is  not  admissible  to  show  that 
the  sale  was  on  condition  that  the  stock  would  afterwards  pay  a 
certain  dividend,  and  in  case  such  dividend  was  not  paid  the  note 
was  not  to  be  paid.*  Kor  can  it  be  shown  by  parol  that  a  written 
contract  to  deliver  a  certain  amount  of  stock  was  to  be  satisfied  by 
the  delivery  of  a  less  amount.-     If  a  contract  of  sale  is  conditional 


person  cannot  collect  on  such  sale. 
Williams  V.  Evans,  87  Ala.  725  (18891 
See  ch.  Ill,  supra.  An  agency  to  sell 
the  stock  of  a  company  refers  to  the 
stock  then  issued  by  the  company. 
Gates  V.  National,  etc.  Union,  46  Minn. 
419  (1891).  An  executory  contract  to 
purchase  stock  is  not  such  a  claim 
against  the  estate  of  an  insolvent  ven- 
dee as  to  be  provable  against  the  as- 
signee. Be  Ives,  11  N.  Y.  Supp.  650  (1890). 
A  vendor  of  the  stock  of  a  street  rail- 
way company  may  collect  damages  for 
breach  of  the  contract  of  the  vendee  to 
construct  the  street  railvray  to  certain 
land  owned  by  the  vendor,  even  though 
the  corporation,  the  stock  of  which 
was  sold,  had  agreed  to  acquire  certain 
rights  of  way  and  had  not  done  so. 
Blagen  v.  Thompson,  23  Oreg.  239  (1892). 
Where  a  vendor  of  stock,  in  addition  to 
the  price  received,  is  to  have  an  addi- 
tional sum  equal  to  the  highest  price 
paid  to  any  others  for  their  stock,  he 
cannot  recover  such  additional  price 
bj'  proof  that  the  vendee,  in  order  to 
stop  a  stockholder's  suit,  paid  a  higlier 
price  for  other  stock.  Stewart  i\  Hunt- 
ington, 124  N.  Y.  127  (1890).  An  execu- 
tory agreement  by  the  holder  of  a  note 
that  he  will  cancel  it  in  payment  for 
stock  is  a  contract  by  itself,  and  is  no 
defense  to  the  note.  It  is  not  a  satis- 
faction of  the  note  nor  a  substituted 
contract.  It  may,  however,  give  a  right 
to  damages.  Hayes  v.  Allen,  160  Mass. 
286  (1894).  Where  an  employee  is  to  re- 
ceive certain  stock  if  he  remains  in  the 
employ  of  the  company  up  to  a  certain 
date,  a  receiver  of  his  property  prior  to 
that  date  cannot  demand  the  stock 
prior  to  that  date.    Delahunty  v.  Hake. 


10  N.  Y.  App.  Div.  230(1896).  The  holder 
of  an  option,  who  thereafter  takes  the 
stock  and  agrees  to  pay  for  iter  return 
it  within  a  certain  time,  must  pay  for 
it  if  he  keeps  the  stock  beyond  that 
time.  Stevens  v.  Hertzler,  109  Ala.  423 
(1896).  An  agreement  to  sell  and  de- 
liver all  the  stock  of  a  corporation 
within  a  certain  time  is  valid  even 
though  the  promisor  does  not  own  or 
control  the  stock.  He  may  be  sued  for 
damages  for  a  breach.  Wamsley  n 
H.  L.  Horton  Co.,  77  Hun,  817  (1894). 
Where  the  proposed  seller  offers  to  sell 
at  a  certain  price,  and  the  buyer  ac- 
cepts the  offer  payable  on  thx'ee  days' 
sight  draft,  and  on  the  next  day  the 
buyer  asks  for  certain  explanations  be- 
fore confirming  his  offer,  the  seller  may 
refuse  to  carry  out  the  sale.  Cameron 
V.  Wright,  21  N.  Y.  App.  Div.  395  (1897); 
aff'd,  163  N.  Y.  586.  Where  stock  is 
placed  in  escrow  to  become  the  prop- 
erty of  a  person  in  case  he  is  obliged  to 
pay  a  certain  obligation,  and  he  is  so 
obliged  to  pay,  the  ci-editors  of  the  party 
placing  the  stock  in  escrow  cannot 
reach  the  stock  nor  i-edeem  it.  Pabst, 
etc.  Co.  V.  Montana,  etc.  Co.,  19  Mont. 
294  (1897).  Where  upon  the  sale  of 
stock  it  is  placed  in  the  hands  of  a 
third  person  to  be  delivered  when  paid 
for,  and  is  partly  paid  for,  it  is  conver- 
sion for  the  person  so  holding  the  cer- 
tificates to  deliver  them  to  still  another 
person  on  the  order  of  the  vendor.  Ka- 
haley  v.  Haley.  15  Wash.  078  (1896). 

1  Dinkier  v.  Baer,  92  Ga.  432  (1893). 

2  Where  a  stockholder  has  agreed  to 
sell  and  deposit  in  a  trust  company 
seven  hundred  and  twenty  shares,  but 
only  deposited  six  hundred  and  eighty- 

743 


CH.  XX.]  CONTEACTS    TO    SELL  ■ 


GAMBLING    SALES,  ETC. 


[§  334. 


on  the  stock  being  increased,  and  the  vendor  prevents  such  increase, 
the  vendee  is  entitled  to  recover  back  a  partial  payment  already 
made  by  him.'  Where  a  person  contracts  to  give  to  another  person 
a  fourth  interest  in  any  mines  which  the  former  may  buy,  the  for- 
mer must  give  the  latter  a  fourth  of  stock  which  the  former  purchases 
in  a  mining  company.-  But  an  agreement  of  various  stockholders 
in  several  street  railway  companies  to  form  a  new  corporation  and 
transfer  their  interest  thereto,  and  divide  the  new  stock  in  a  certain 
proportion,  does  not  constitute  such  a  partnership  as  to  entitle  one 
to  sue  the  others  for  an  accounting  of  profits,  where  the  others  had 
formed  such  a  corporation  with  other  parties,  leaving  out  the  first- 
named  party.'  Where  the  vendor  guarantees  that  the  vendee  can 
sell  the  stock  within  a  year  at  a  certain  price,  and  the  vendee  sells 
it  after  the  year  at  a  less  price,  he  may  recover  the  difference  from 
the  vendor.*     The  agreement  of  vendors  of  stock  to  protect  the 


seven  shares,  and  the  vendor  has  on  his 
part  deposited  the  purcliase  price  with 
the  trust  company  to  be  paid  on  the  de- 
livery of  the  seven  hundred  and  twenty 
shares,  the  vendor  cannot  rescind  on  the 
ground  that  there  was  a  contempora- 
neous oral  understanding  that  six  hun- 
dred and  eighty-seven  shares  would  be 
sufficien  t.  Dady  v.  O'Rourke,  173  N.  Y. 
447  (1902).  A  contract  by  a  person  with 
another  to  purchase  all  of  certain  stock 
held  by  a  third  person  is  broken  by  a 
failure  to  purchase  only  a  part  thereof; 
but  where  there  are  other  provisions  in 
the  contract  sufficient  to  support  it,  the 
rule  may  be  different.  Stokes  v,  Foote, 
.172  N.  Y.  327(1902). 

1  Lovell  V.  Jacobs,  150  N.  Y.  84  (1896). 

2  Dennison  v.  Chapman,  105  Cal.  447 
(1895). 

3  Schantz  v.  Oakman,  163  N.  Y.  148 
(1900).  Cf.  §§  705-707,  infra,  and  §  320, 
supra. 

*  Lobeck  v.  Duke,  50  Neb.  568  (1897). 
The  vendor  may  guarantee  that  the 
stock  will  be  at  par  within  a  certain 
time.  Suit  lies  if  it  is  not  at  par  within 
that  time.  Hill  v.  Smith,  21  How.  283 
(1858).  A  contract  guaranteeing  a  cer- 
tain dividend  over  and  above  certain 
corporate  expenses  does  not  include  pay- 
ment of  salaries,  etc.  Central,  etc.  Assoc. 
V.  James,  81  Ga.  762  (1888).     A  guaranty 


upon  the  sale  of  stock  that  certain  div- 
idends will  be  declared  is  enforceable 
against  the  guaranteeing  firm,  even 
though  they  acted  as  agents  lor  an  un- 
disclosed principal.  Their  obligation  is 
primary,  and  not  that  of  guarantors 
for  the  company.  Kernochan  v.  Mur- 
ray, 111  N.  Y.  306  (1888).  See  also  as  to 
guarantees,  §  775,  infra.  "Where  the 
vendors  of  stock  guaranty  that  the 
stock  shall  be  non-assessable  until  they 
have  advanced  $30,000,  a  stockholder 
who  is  held  liable  on  a  statutory  liability 
may  hold  the  guarantors  liable  if  they 
have  not  paid  the  $30,000.  Omo  v.  Ber- 
nart,  108  Mich.  43  (1895).  An  agreement 
between  a  stockholder  of  an  insolvent 
company  and  another  person  that  in 
case  the  assets  did  not  net  to  such  stock- 
holder a  specified  sum.  the  latter  would 
make  up  the  difference,  is  not  assigned 
by  a  sale  by  the  former  of  his  stock, 
such  sale  being  made  subject  to  such 
agreement.  The  benefit  of  the  agree- 
ment belongs  to  the  vendor  of  the  stock. 
Bacon  v.  Grossman,  37  N.  Y.  Misc.  Rep. 
165  (1902).  A  contract  whereby  a  stock- 
holder  sells  his  stock  to  an  individual 
who  guarantees  that  the  former  will  bo 
employed  at  a  stated  salary  by  the 
corporation  for  two  years  is  enforcible 
against  the  person  so  purchasing  the 
stock,   even    though    the    corporation 


r43 


§  334.]  CONTRACTS   TO    SELL  —  GAMBLING    SALES,  ETC.  [CH.  XX. 


vendee  against  the  payment  of  existing  claims  of  a  corporation  is 
not  enforcible  until  payment  is  actually  made.^  Many  cases  are 
referred  to  in  the  notes  below  relative  to  the  contracts  and  rights 
of  agents,  promoters,  and  partners,  in  the  purchase  or  sale  of  stock.- 


passes  into  the  hands  of  a  receiver  be- 
fore the  expiration  of  the  two  years 
and  the  employment  is  thereby  stopped. 
Kinsman  u  Fisk,  37  N.  Y.  App.  Div.  443 
(1899). 

1  Cochran  v.  Selling,  36  Oreg.  333 
(1899).  Where  in  the  sale  of  the  stock 
of  a  street  railroad  a  warranty  is  made 
that  the  liabilities  of  the  company  do 
not  exceed  a  certain  sum,  a  note  given 
in  payment  for  the  stock  may  be  de- 
feated if  the  liabilities  exceed  that 
sum.  Millsaps  v.  Merchants',  etc.  Bank, 
71  Miss.  361  (1893).  A  corporation  can- 
not enforce  a  promise  made  by  a  stock- 
holder to  a  purchaser  of  his  stock  that 
he,  the  vendor,  would  pay  the  corporate 
debts.  German  St.  Bank  v.  Northwest- 
ern, etc.  Co.,  104  Iowa,  717  (1898).  See 
also  §  354,  infra. 

2  For  a  sale  of  stock  where  the  ven- 
dee was   to  divide  with    the  vendor 
the  amount  for  which  the  stock  should 
be  resold  by  the  vendee,  see  Jones  v. 
Kent,  80  N.  Y.  585  (1880).     An  agree- 
ment to  divide  the  profits  on  stock  in 
consideration  of  information  to  be  fur- 
nished is  enforceable.    Parsons  v.  Rob- 
inson, 59  N.  Y.  Super.  Ct  546  (1891); 
aff'd,  133  N.  Y.  537.     But  an  agreement 
to  set  on  foot  and  to  help  carry  along 
a  congressional  investigation  into  the 
affairs  of  a  corporation,  in  anticipation 
that  it  would  depress  the  market  value 
of  its  stock,  which  it  did,  and  to  fur- 
nish the  defendants  with  information 
from  time  to  time  respecting  damag- 
ing facts  brought  out  against  it  upon 
the  investigation   to   enable  them  to 
take  advantage  of  the  market,  in  con- 
sideration of  sharing  in  the  profits  of 
their   speculation,  is    void    as   against 
public  policy;  and  the  courts  will  not 
permit  a  recovery  upon  such  an  agree- 
ment.    Veazey  v.  Allen,  173  N.  Y.  359 
(1903).      A  contract  wliereby  an  agent, 


one  of   the  partners,  is  to  have  half 
of    what    he    could     sell    partnership 
shares  of  stock  for,  is   legal  and  en- 
forceable by  him.     Wight  v.  Wood,  85 
N.  Y.  402  (1881).     A  promoter  who  has 
brought  about  the  sale  of  a  large  plant 
to  new  parties,  who  have   agreed  to 
organize  a  new  corporation  and  give 
the  promoter  a  certain  amount  of  stock 
therein,  cannot,  upon  the  ground  that 
he   is  being  defrauded  of  his  commis- 
sions, enjoin  the  parties  from   closing 
the  transaction  irrespective  of  the  pro- 
moter, nor  can  he  have  specific  perform- 
ance of  the  contract  to  incorporate  a 
company  and  deliver  the  stock.     There 
is  no  fiduciary   relation   between   the 
parties;  the  value  of  the  stock  can  be 
estimated  in  damages;  there  was  no 
allegation    of  defendant's   insolvency 
and  the  promoter  has  ample  remedy  at 
law  for  damages.      Avery  v.  Ryan,  74 
Wis.  591  (1889).     A  promise  and  con- 
tract of   promoters   to   subscribers  to 
certain  bonds  may  create  an  equitable 
lien  on  the  bonds  enforceable  in  equity. 
Badgerow  v.  Manhattan  Trust  C6.,  64 
Fed.  Rep.  931  (1894).     The  question  of 
whether  a  sale  or  pledge  was  involved 
in  the  relations  between  a  contractor 
and    the    party   who    financiered    the 
matter  for  him  was  involved  in  Griggs 
V.  Day,  58  N.  Y.  Super.  Ct.  385  (1890), 
finally  decided  in  158  N.  Y.  1  (1899). 
The  fact  that  a  vendee  makes  out  a 
check  to  a  person  and  delivers  it  to 
him   in  payment    for  stock   does  not 
prove  that  the  latter  is  the  vendor  and 
liable  for  misrepresentations.     Aron  v. 
De  Castro,  131  N.  Y.  648  (1892).    For  a 
breach  of  an  agreement  to  give  a  certain 
quantity  of  stock  in  payment  for  serv- 
ices to  be  performed,  the   person  en- 
titled to  the  stock  may  sue  for  damages. 
Alford  r.  Wilson,  20  Fed.  Rep.  96  (1884). 
The  corporation  is  not  liable  for  the 
744 


<3H.  XX;]  CONTRACTS   TO   SELL — GAMBLING    SALES,  ETC. 


[§  335. 


oo 


5.  Remedies  for  Ireacli  of  a  contract  to  sell  stoch— Tender. — 
A  person  who  is  under  contract  to  sell  and  deliver  shares  of  stock 
may  fulfill  the  obligation  on  his  part  by  tendering  to  the  vendee 
certificates  of  stock,  duly  indorsed  by  himself,  and  containing  a 
power  of  attorney  authorizing  the  vendee  to  obtain  a  registry  of 
the  transfer  on  the  corporate  books.^  If  the  vendor  causes  the  stock 


breach  of  an  agreement  among  the 
organizers  as  to  the  distribution  of  stock. 
Summerlin  v.  Fronteriza,  etc.  Co.,  41 
Fed.  Rep.  249  (1890). 

Where  the  promoters  of  a  company 
agree  to  sell  property  to  the  company 
in  consideration  of  a  certain   number 
of  paid-up  shares,  specific  performance 
may  be  had.     See  Fyfe  v.  Swabey,  16 
Jur.  49  (1851),  M.  R.     As  to  promoters' 
contracts,  see  g§  705-707,  infra.   Where 
a  party  to  a  contract  relative  to  an  in- 
corporation and  division  of  the  stock 
sues  to  recover  his  interest  according 
to  the  contract,  the  court  will  deci'ee  a 
proper  division  of  the  stock,  all  parties 
being  allowed  the  amounts  invested  by 
them    in    forwarding    the    enterprise. 
Bates  V.  Wilson,   14  Colo.   140'  (1890). 
Where  the  owner  of  a  patent  agrees  to 
convey  it  to  a  corporation  for  stock,  and 
then  to  divide  the  stock  with  others,  he 
may  be  compelled  to  perform  his  agree- 
ment.   But  where  the  patentee  does  not 
•convey  the  patent  to  the  corporation, 
but  conveys  to  another  corporation,  the 
latter  is  protected  in  its  title,  though 
rsome  of  its  incorporators  and  directors 
knew  all  the  facts.     Davis,  etc.  Co.  v. 
Davis,  eta  Co..  20  Fed.  Rep.  699  (1884). 
Where  a  patentee  agrees  with  a  pro- 
moter to  sell  the  patent  to  the  corpora- 
tion for  stock,  and  divide  the  stock  with 
the  promoter,  but  the  patentee,  after 
obtaining  the  stock,  sells  the  certificates 
to  a ,  bona  fide  purchaser,  the  latter  is 
protected,  though  the  transfer  is  not 
registered  on  the  corporate  books.   The 
purchaser  may  come  into  a  suit  insti- 
tuted by  the  promoter  against  the  cor- 
poration to  compel  a  transfer.  Thurber 
V.  Crump.  86  Ky.  408  (1887).     Where  a 
tperson   holds  property  in   trust  or  as 


agent  for  others,  and  conveys  that  prop- 
erty to  a  corporation  for  its  shares  of 
stock,  the  persons  who  had  an  equitable 
interest  in  the  property  may  compel 
this  agent  or  trustee  to  transfer  to  them- 
selves such  stock.     But  all  the  princi- 
pals or  cestuis  que  trust  must  be  made 
parties  to  the  suit.    O'Connor  v.  Irvine. 
74  Cal.  435  (1887).  Where  there  is  a  joint 
operation  in  stocks,  a  "  pool,"  the  trans- 
actions being  carried  on  in  the  name  of 
one  only,  the  others  may  have  specific 
performance  leading  to  a  division  of 
the  stocks.    Johnson  v.  Brooks.  46  N.  "S. 
Super.    Ct.    13   (1880);  Thornton  v.   St. 
Paul,  etc.  Ry.,  45  How.  Pr.   416  (1873); 
S.  C.  dismissed,  6  N.  Y.  Week.  Dig.  309 
(1878).     Equity  has  jurisdiction  to  com- 
pel the  transfer  of  stock  as  between 
parties.     Thus,  where  stock  is  issued  in 
payment  for  property,  and  the  party  to 
whom  the  certificate  is  issued  refuses 
to  divide  it  among  the  ownei-s  of  the 
property,  as  provided   by  contract,  a 
court  of  equity  may  compel  the  division, 
and  may  enjoin  any  election  of  the  cor- 
poration until  such  division  is  made. 
Archer  v.  Amer.  etc.  Co.,  50  N.  J.  Eq.  33 
(1892).     It  is  a  question  of  fact  whether 
a  person  selling  stock  is  an  agent  or 
vendee  of  the   person  from  whom  he 
obtained  the  stock,  and  whether  the 
latter  is  liable    on   misrepresentation 
made  by  such  person.     Henneberger  v. 
Matter,  88  Mich.  396  (1891);  Florida,  etc. 
Co.  V.  Merrill,  52  Fed.  Rep.  77  (1892).    A 
party  selling  stock  is  not  liable  for  the 
false  representations  of  the  vendee  to 
another  person  to  whom  the  vendee  is 
reselling  the  stock.  Masterton  v.  Boyce, 
6  N.  Y.  Supp.  65  (1889). 

'"When    certificates   of  shares   are 
given  to  a  purchaser  they  are  analogous 


745 


335.] 


CONTRACTS   TO    SELL — GAMBLING    SALES,  ETC.  [CH.  XX, 


to  be  transferred  on  the  corporate  book  to  the  vendee,  this  is  suffi- 
cient.i  A  tender  of  a  certificate  indorsed  in  blank,  not  by  the 
vendor,  but  by  some  previous  owner,  is  insufficient.  The  vendee 
is  not  obliged  to  trace  his  vendor's  title  from  the  name  appearing 
on  the  certificate.^  A  contract  to  buy  stock  in  a  West  Virginia 
corporation  cannot  be  enforced  by  tendering  stock  in  a  Connecticut 
corporation.'  An  agreement  to  deliver  stock  in  a  company  to  be 
formed,  nothing  being  said  as  to  any  preferred  stock,  is  not  fulfilled 
by  delivering  common  stock,  where  there  is  preferred  stock  issued 
also.*  The  vendor  in  order  to  sue  for  the  purchase  price  must  keep 
on  hand  or  within  control  from  the  time  of  tender  to  the  time  of 
trial  the  stock  involved.^  Where  tender  of  the  stock  is  made  in 
court  and  the  vendor  obtains  judgment  for  the  price,  the  tender  is 


to  the  sale  of  chattels,  and  the  assign- 
ment and  delivering  of  the  certificates 
is  a  symbolical  delivery  of  the  shares 
themselves."     Noyes   v.  Spaulding,  27 
Vt.  420  (1855);  Duchemin  v.  Kendall,  149 
Mass.  171  (1889);  Merchants' Nat.  Bankr. 
Richards,  6  Mo.  App.  454  (1879);  East- 
man V.  Fiske,  9  N.  H.  182  (1838);  Munn 
V.  Barnum,24  Barb.  283  (1857);  Bruce  u. 
Smith,  44  Ind.  1  (1873).    Cf.  Moore  v. 
Hudson  River  R  R,  12  Barb.  156  (1851). 
It  is  jaot  a  sufficient  tender  to  deposit 
the  certificates  of  stock  with  the  clerk 
of  the  court  unindorsed.     Subsequent 
indorsement  after  the  stock  has  been 
sold  for  non-payment  of  assessments  is 
insufficient.     Kelley  v.  Owens,  120  Cal. 
502  (1898);  aff'd,  52  Pac.  Rep.  797  (1898). 
Where  a  firm  contracts  to  sell  stock, 
and  then  both  members  of  the  firm  die, 
a  tender  of  certificates  standing  in  the 
names  of  the  individual   members  of 
the  firm,  and  not  signed  in  blank,  is  not 
a  sufficient  tender.  Nicholls  v.  Reid,  109 
Cal.  630  (1895).     See  also  Holmes,  etc. 
Manuf.  Co.  v.  Holmes,  etc.  Metal  Co.,  53 
Hun,   52  (1889);    aff'd,    127  N.   Y.  252. 
Where  the  vendor  brings  into  court  a 
certificate  for  fifty-six  shares  of  stock, 
and   the  sale   was   for   only  fifty-one 
shares,  he  cannot  recover  the  purchase 
price.     Hamilton  v.  Finnegan,  91  N.  W. 
Rep.  1039  (Iowa,  1902). 

1  White  V.  Salisbury,  33  Mo.  150  (1862). 
See  Merchants'  Nat.  Bank  i'.  Richards, 


6  Mo.  App.  454  (1879).  Where  an  exec- 
utory sale  of  stock  is  made,  with  a  for- 
feit in  case  it  is  not  completed,  and  the 
vendor,  without  the  knowledge  of  the 
vendee,  causes  the  stock  to  be  trans- 
ferred to  the  vendee  on  the  bqoks  of 
the  company,  and  the  company  fails, 
and  the  next  day  the  parties,  without 
knowledge  of  the  failure,  close  the 
transaction,  the  vendor  may  be  held 
liable  on  the  statutory  liability  on  such 
stock.  May  v.  McQuillan,  89  N.  W.  Rep. 
45  (Mich.  1902). 

2  Hare  n  Waring.  3  M.  &  W.  362,  380 
(1838),  per  Parke,  B.  "The  party  is  to 
convey  and  deliver  certificates  showing 
either  on  the  face  of  them  or  from  the 
indorsements  that  the  title  is  in  the 
person  conveying." 

3  Craig  Silver  Co.  v.  Smith,  163  Mass. 
262  (1895). 

4McIlquham  v.  Taylor,  [1895]  1  Ch. 
53.  See  also  Faulkner  v.  Robinson,  70' 
S.  W.  Rep.  990  (Tex.  1902).  An  agree- 
ment that  a  note  may  be  paid  by  cer- 
tain stock  in  case  the  stock  is  not 
sold  when  the  note  becomes  due  is 
effective  only  in  case  the  stock  is 
tendered  when  the  note  becomes  due, 
and  if,  in  the  meantime,  the  stock  has 
been  largely  increased,  the  tender  is 
not  good.  Tranter  v.  Hibberd.  56  S.  W, 
Rep.  169  (Ky.  1900). 

sQrtmann  v.  Fletcher,  117  Mich.  501 
(1898). 
'46 


CH.  XX.]  CONTEACTS   TO   SELL GAMBLING    SALES,  ETC.  [§  335. 

presumed  to  have  been  continued.^  A  person  holding  an  option  or 
right  to  buy  stock  need  not  make  a  technical  common-law  tender 
of  the  money,  inasmuch  as  there  is  something  to  be  performed  on 
both  sides,  and  hence  if  the  purchaser  cannot  find  the  vendor  after 
due  search  for  him  and  the  purchaser  then  notifies  the  vendor  by 
letter,  there  is  a  sufficient  tender  on  his  part.^  Tender  of  stock  may 
be  made  by  the  vendors  depositing  the  same  in  a  bank  and  notifying 
the  vendees  of  such  deposit,  where  the  vendees  are  nine  in  number 
and  the  sale  is  to  all  of  them  jointly,  and  Avhere  such  delivery  is  a 
reasonable  one.  Even  though  such  tender  is  made  after  the  day 
fixed  by  the  contract,  yet,  if  other  features  of  the  contract  have  been 
carried  out  by  the  vendor,  a  tender  after  the  day  fixed  may  be  suffi- 
cient.* An  owner  of  stock,  having  the  option  to  sell  the  same  to  a 
person  on  a  certain  day,  must  tender  it  on  that  day,  even  though  it 
is  a  holiday  other  than  Sunday.  The  fact  that  the  tender  was  made 
later,  and  the  vendee  took  time  to  consider  and  then  returned  the 
stock,  and  the  fact  that  the  vendee  afterwards  offered  to  take  a 
part  of  the  stock,  is  not  a  waiver  of  the  tender.*  Tender  need  not 
be  made  where  the  ability  to  make  a  tender  is  shown,  and  the  other 
part}'^  refuses  to  accept  tender  and  denies  the  contract.^  In  England, 
where  a  transfer  of  shares  is  to  be  made  by  a  deed,  it  is  the  duty 
sometimes  of  the  vendor,"  and  sometimes  of  the  vendee,'^  to  furnish 
the  necessary  deed,  according  to  the  custom  of  the  market  in  which 

^  West  V.  Averill,  etc.  Co.,  109  Iowa,  part  not  so  tendered.  Stokes  v.  Mackay, 
488  (1899).  See  also  Cragin  v.  O'Connell,  147  N.  Y.  223  (1895).  No  tender  is  nec- 
50N.  Y.  App.  Div.  389  (1900).  Where  the  essary  under  a  contract  giving  the 
purchaser  of  a  plant  and  stock  issued  for  right  to  retui-n  stock  one  year  after  date, 
the  price  and  judgment  is  recovered,  he  where,  before  the  termination  of  the 
may  afterwards  bring  suit  for  the  stock  year,  the  original  vendor  refused  tender 
and  for  dividends  paid  after  the  time  and  ordered  the  vendee  not  to  return 
when  he  would  have  been  entitled  to  the  and  stated  that  the  stock  was  worth- 
stock,  if  he  had  fully  complied  with  hig  less,  which  was  a  fact.  Williams  %i. 
contract.  Beaty  v.  Johnston,  66  Ark,  Patrick,  177  Mass.  160  (iSoO).  A  tender 
529  (1899).     See  §  476  and  note  1.  p.  816.  of  the  stock  need  not  be  made  by  the 

2  Guilford  v.  Mason.  22  R  I.  422  (1901).  vendor  if  the  vendee  declines  to  com- 

3  Kauff man  v.  Reader,  108  Fed.  Rep.  plete  the  contract  on  the  ground  that 
171  (1901).  the  contract  was  not   legal.     West  v. 

4  Page  V.  Shainwald,  169  N.  Y.  246  Averill,  etc.  Co.,  109  Iowa,  488  (1899). 
(1901).  No  tender  of  the  stock  need  be  made  if 

SEames  r.  Haver,  111  Cal.  401  (1896).  the  vendor    repudiates   the    contract. 

Where  the  vendor  delivers  a  part  of  the  Maguire  v.  Halsted,M8  N.  Y.  App.  Div. 

securities  under  a  contract  of  sale,  and  228  (1897).     A  tender  may  be  waived, 

the  vendee  retains  the  same  and  claims  Kuhn  v.  McKay,  7  Wyo.  42  (1897). 

that  they  had  always  been  his  property,  ^  Shaw  v.  Rowley,  16  M.  &  W,  810 

the   vendor  need   not  tender  the    re-  (1847). 

mainder  befoi'e  suing  for  the  purchase  "^  Stephens  v.  De  Medina,  4  Q.  B.  422 

price,  but  is  liable  to  the  vendee  for  the  (1848). 

747 


§  335.] 


CONTEACTS   TO    SELL  —  GAMBLING    SALES,  ETC. 


[CH.  XX. 


the  sale  is  made.  If,  after  the  vendee  accepts  a  tender  of  the  cer- 
tificates, the  corporation  refuses  to  allow  a  registry  and  transfer  on 
the  corporate  books,  the  vendor  is  liable  to  him,  since  the  registry 
is  held  to  have  been  guaranteed.^  The  vendee  may  decline  to  ac- 
cept the  certificates  if  the  stock  has  been  attached.-  But  the  ven- 
dee cannot  decline  the  tender  on  the  ground  that  the  corporation 
has  issued  stock  at  a  discount,  nor  because  it  has  mortgaged  its 
property.'  A  contract  whereby  stock  is  sold  to  be  paid  for  in  the 
future  is  not  forfeited  by  mere  failure  to  pay  as  agreed  upon.* 


1  Wilkinson  v.  Lloyd,  7  Q.  B.  27  (1845). 

2  Eastman  v.  Fiske,  9  N.  H.  183  (1888). 
SNoyes  v.  Spaulding,  27  Vt.420  (1855). 

See  also  §  350,  etc.,  infra. 

*  Chater  v.  San  Francisco,  etc.  Co.,  19 
Cal.  219  (1861).  where  payment  was 
made  in  notes  and  labor,  and  the  notes 
were  not  paid.  Subsequent  dividends 
on  the  stock  are  to  be  applied  to  the 
payment  of  such  notes  when  the  divi- 
dends have  been  received  by  the  ven- 
dor. A  sale  of  stock  to  take  effect 
when  a  note  given  in  payment  is  paid 
does  not  enable  the  vendee  to  claim 
the  stock  long  subsequently,  the  note 
not  having  been  paid.  Davison  v.  Da- 
vis, 125  U.  S.  90  (1888).  Where,  how- 
ever, two  parties,  one  owning  stock, 
the  other  bonds,  contract  to  exchange 
the  same,  delivery  being  in  escrow  at 
once,  and  absolutely  after  the  perform- 
ance of  certain  things,  a  failure  of  one 
party  to  perform  on  his  part  enables 
the  other  to  have  the  contract  canceled 
by  a  court  of  equity.  Wilson  v.  Roots, 
119  111.  379  (1887).  Where  no  certifi- 
cates of  stock  are  issued  and  a  stock- 
holder delivers  an  assignment  of  her 
stock  for  a  specified  sum,  delay  in  pay- 
ing the  sum  does  notenable  the  vendor 
to  sell  the  stock  in  the  meantime  to 
some  one  else.  Judson  v.  Stonnington 
Min.  Co.,  87  N.  W.Rep.  108  (Mich.  1901). 
Where  fifty  sliares  of  stock  are  sold, 
but  only  twenty-five  shares  are  deliv- 
ered, and  the  vendor  declines  to  deliver 
the  balance,  a  suit  by  the  vendor  on 
the  ground  of  fraud  and  a  rescission 
will  fail.  Matthews  v.  Cady,  01  N.  Y. 
651  (1875).     Although  a  party  to  whom 


bonds  and  stock  have  been  sold  or  is- 
sued to  be  paid  for  in  instalments  has 
paid  in  part  and  is  unable  to  pay  the 
remainder,  the  vendor  cannot  rescind 
and  demand  back  the  securities  unless 
he  returns  the  money  already  paid. 
American  Water-works  Co.  v.  Venner, 
18  N.  Y.  Supp.  379  (1892).  Where  the 
owner  of  a  majority  of  the  stock  sells 
it,  the  purchase  price  being  only  paid 
in  part,  and  retains  the  stock  in  his 
own  name  until  the  full  price  is  paid, 
he  cannot  be  compelled  to  deliver  the 
stock  or  to  refrain  from  ousting  the 
vendee  from  the  presidency  of  the  cor- 
poration, where  the  vendee  fails  to 
meet  the  other  payments,  even  though 
the  vendee  has  proceeded  to  improve 
the  property.  Stockton  v.  Russell,  54 
Fed.  Rep.  224  (1892).  For  failure  to  de- 
liver, the  measure  of  damages  is  the 
difference  in  the  market  value  at  the 
date  of  the  contract  and  at  the  date 
fixed  in  the  contract  for  the  delivery, 
or  the  date  of  the  breach  of  the  con- 
tract. The  price  at  which  the  vendee 
had  resold  is  not  admissible  unless  the 
vendor  had  notice  thereof.  Coffin  v. 
State,  144  Ind.  578  (1896).  A  company 
may  give  a  person  an  option  to  sub- 
scribe for  shares  of  stock  in  the  com- 
pany. If  the  company  sells  its  assets 
before  such  option  is  exercised,  the 
party  holding  the  option  may  exercise 
it  and  sue  for  damages.  The  price  at 
which  the  company  sold  its  assets  is 
the  basis  of  the  damage.  Re  South  Af- 
rican, etc.  Co.,  74  L.  T.  Rep.  769  (1896); 
aff'd.  77  L.  T.  Rep.  377.  A  person  who 
contracts  to  sell  to  another,  on  or  be- 


ns 


CH.  XX.]  CONTKACTS   TO    SELL  —  GAMBLING    SALES,  ETC. 


[§ 


^  ^36. 


A  person  who  is  under  contract  to  purchase  stock  canot  defeat 
that  contract  by  the  fact  that  the  corporation  was  insolvent  at 
the  time  the  contract  was  entered  into.^  An  agreement  to  deliver 
stock  free  and  clear  of  all  incumbrances  does  not  refer  to  incum- 
brances against  the  corporation.-  The  legality  of  the  sale  of  stock  is 
governed  by  the  law  of  the  state  within  which  it  is  made.^  It  is  no 
defense  to  a  contract  to  buy  stock  for  the  vendee  to  allege  that  the 
directors  have  committed  an  vltra  vires  act  in  issuing  other  stock 
at  a  discounts 

§  336.  Difficulty  is  often  experienced  in  determining  what  the 
measure  of  damages  is  for  breach  of  a  contract  relative  to  the  sale 
of  stock.  In  certain  cases,  where  the  stock  has  been  delivered  or  ten- 
dered, the  measure  of  damages  is  the  purchase  price  fixed  by  the  con- 
tract itself.^     The  vendor  may  tender  the  stock  to  the  vendee  and 


fore  three  years  from  date,  certain 
stock  at  a  certain  price,  interest  to  be 
paid  by  the  vendee  in  the  meantime, 
and  the  stock  to  be  deposited  in  escrow, 
cannot  recover  the  price  at  the  end  of 
the  three  years  if  he  has  not  deposited 
the  stock  in  escrow  as  agreed.  Umfrid 
V.  Brooks,  14  Wash.  675  (1896).  An 
agreement  of  a  stockholder  that  if  he 
sells  a  certain  amount  of  his  stock  he 
shall  sell  to  another  stockholder  his  re- 
maining stock  does  not  apply  where  he 
transfers  only  a  portion  of  the  first- 
mentioned  stock.  Burden  v.  Burden,  8 
N.  Y.  App.  Div.  160  (1896);  aflf'd,  159 
N.  Y.  287  (1899).     See  also  §  766c,  infra. 

1  See  §  350,  infra. 

2  Williams  v.  Hanna,  40  Ind.  535 
(1872). 

3  Dow  V.  Gould,  etc.  Co.,  31  Cal.  629, 
653  (1867).     See  also  g  343,  infra. 

4  Faulkner  v.  Hebard,  26  Vt.  452 
(1854).  That  fraud  is  a  defense,  see 
g§  349-357,  infra. 

5  Where  the  stock  is  sold  to  be  deliv- 
ered thereafter,  and  the  vendee  refuses 
to  accept  the  stock,  the  vendor  may 
tender  the  stock  and  then  sue  for  the 
contract  price.  In  Mobley  v.  Morgan,  6 
Atl.  Rep.  694  (1886),  the  court  said: 
"  The  court  refused  to  instruct  the  jury 
that  it  was  necessaiy  for  Morgan  to  sell 
the  stock  on  the  market  for  the  best 
price  he  could  get,  and  that  the  meas- 


ure of  damages  would  be  the  difference 
between  the  price  thus  obtained  and 
the  contract  price;  and  this  refusal  is 
assigned  for  error.  Of  course,  the  seller 
would  be  at  liberty,  after  tender  and 
refusal,  to  adopt  this  course;  but  it 
was  not  essential  to  his  right  of  action. 
The  measure  of  damages  was  the  dif- 
ference between  the  market  price  oJ 
the  stock  at  the  time  of  the  breach 
and  the  contract  price.  This  is  the  or- 
dinary rule:  but  there  was  evidence 
that  the  stock  had  no  value,  and  there 
is  no  certainty  —  indeed,  no  proof  — 
that  upon  a  resale  any  price  could  have 
been  obtained  for  the  stock,  or  tbat  it 
had  any  market  value  when  Parker 
finally  refused  to  take  it.  Under  these 
circumstances  we  see  no  reason  why 
the  prfce  agreci  to  be  paid  should  not 
be  adopted  as  the  measure  of  damages, 
if  that  was  the  only  mode  by  which 
full  compensation  could  be  made  for 
the  breach  of  contract  by  the  pur- 
chaser.'"    67  N.  E.  Rep.  246. 

In  Barnes  v.  Brown,  130  N.  Y.  372 
(1892),  the  court  said :  "  In  the  absence 
of  special  circumstances  in  an  action 
for  conversion  of  personal  property  as 
well  as  one  for  failure  to  deliver  it  in 
performance  of  a  contract  where  con- 
sideration has  been  received,  the  value 
of  the  property  at  the  time  of  such 
conversion  or  default,  with  interest,  is 
49 


§  336.] 


CONTEACTS    TO    SELL GAMBLING    SALES,   ETC.  [CH.  XX. 


sue  for  the  price,  or  may  sell  after  notice  to  the  vendee  and  then 
sue  for  the  difference,  or  may  retain  the  stock  and  sue  for  the  dif- 


the  measure  of  compensation."  As  to 
remedies  for  a  breach,  see  also  Benja- 
min on  Sales.  For  the  measure  of 
damages,  see  oh.  XXXV,  infra.  The 
vendor  of  stock  which  has  been  deliv- 
ered to  a  third  person,  according  to  the 
agreement,  may  sue  for  the  price  irre- 
spective of  the  market  value  of  the 
stock.  Obery  v.  Lander,  179  Mass.  125 
(1901).  As  regards  the  pleadings  in  an 
action  by  a  vendor  of  stock  to  recover 
damages  against  the  vendee  for  refusal 
to  accept  and  pay  for  stock  w^hich  the 
latter  had  agreed  to  accept  at  a  stated 
price,  one  year  from  date,  if  the  former 
desired  to  sell,  see  Struthers  v.  Drexel, 
122  U.  S.  487  (1887).  The  vendor  may 
claim  damages  for  a  breach,  in  that 
the  vendee  does  not  jiay  the  contract 
price  and  take  the  stock,  or  he  may 
bring  an  action  "  in  effect  for  the  spe- 
cific performance  thereof,"  in  which 
case  he  must  allege  readiness  to  deliver 
the  stock.  Corning  v.  Roosevelt,  11 
N.  Y.  Supp.  758  (1890).  For  breach  the 
vendor  may  tender  the  stock  and  then 
sue  for  the  entire  price.  The  j  udgment 
will  allow  the  vendor  to  retain  the 
stock  until  the  judgment  is  satisfied. 
Finlaysou  v.  Wiman,  84  Him,  357  (1895). 
Where  the  vendee  agrees  to  give  a 
note  and  the  stock  as  collateral,  but 
gives  the  note  only,  the  vendor  may 
return  the  note  and  sue  at  once  for  the 
price.  Rennyson  v.  Reifsnyder,  1  Pa. 
Dist.  Rep.  758  (1892).  The  court  will 
compel  the  vendee  to  take  and  pay  for 
stock  where  it  would  compel  tlie  vendor 
to  deliver  the  stock  if  he  defaulted  on 
the  contract  to  sell.  Bumgardner  v. 
Leavitt,  35  W.  Va.  194  (1891).  Where 
the  vendor  gets  judgment  for  the  price 
.  of  the  stock  sold  but  not  delivered,  the 
court  will  order  him  to  deposit  the 
stock  with  the  court  or  lose  his  judg- 
ment. McKeever  v.  Dady,  18  N.  Y. 
Supp.  439  (1892). 
In  Perin  v.  Megibben,  53  Fed.  Rep. 


86  (1892),  the  coilrt  granted  specific  per- 
formance of  a  contract  to  sell  stock  in 
behalf  of  the  vendor  and  against  the 
vendee.  The  court  said:  "The  agree- 
ment was  in  form  a  contract  to  buy  all 
the  shares  of  stock  in  the  mcorporated 
companies.  The  language  of  the  con- 
tract, shows  that  the  real  agreement 
was  to  buy  certain  real  estate,  together 
with  the  personal  property  connected 
with  its  use  for  milling  and  distilling 
purposes.  Without  discussing  the  ques- 
tion whether  the  sale  of  shares  of 
stock  can  be  specifically  enforced  in 
equity,  it  is  sufficient  to  say  that  the 
sale  here  was  in  fact  a  sale  of  real  es- 
tate, and  the  circumstance  that  per- 
sonalty was  included  in  the  sale  would 
not  affect  the  power  of  a  court  of  equity 
to  afford  relief  by  requiring  specific 
performance.'"  The  measure  of  dam- 
ages for  breach  of  a  contract  to  pur- 
chase stock  is  the  difference  between 
the  contract  price  and  the  market 
value  of  the  stock  at  the  time  and  place 
of  delivery,  with  interest.  Corser  v. 
Hale,  149  Pa.  St.  274  (1892).  Where  a 
vendee  refuses  to  carry  out  an  execu- 
tory contract  for  the  sale  of  shares,  the 
measure  of  damages  is  the  difference 
between  the  price  as  fixed  by  the  con- 
tract and  the  value  of  the  stock  at  the 
time  of  tender  and  refusal  of  the  ven- 
dee to  fulfill.  See  Barned  v.  Hamilton, 
2  Ry.  &  Canal  Cas.  G24  (1841);  Tempest 
V.  Kilner,  3  C.  B.  249  (1846),  and  Stewart 
V.  Cauty,  8  M.  &  W.  160  (1841);  Shaw  v. 
Holland,  15  M.  &  W.  136  (1846).  If  a 
jjerson  sells  and  conveys  property  to  a 
company  to  be  paid  for  in  stock,  which 
the  vendee  refuses  to  deliver,  the  ven- 
dor may  recover  the  value  of  the  stock. 
Humaston  v.  Telegraph  Co.,  20  Wall. 
20  (1873).  Where  an  agent  to  sell  stock 
is  to  have  any  excess  of  price  over  a 
sum  named  to  him  by  the  vendor,  and 
the  agent  finds  a  customer  at  an  ad- 
vanced price  and  the  vendor  refuses  to 
■50 


•CH.  XX.]  CONTRACTS    TO    SELL — GAMBLING    SALES,  ETC, 


[§  336. 


ference  between  the  contract  and  market  price.'  The  supreme 
court  of  the  United  States  lays  down  the  rule  that  the  vendor  of 
stock,  upon  the  vendee  refusing  to  fulfill,  may  sell  the  same  to  the 
highest  bidder  at  a  time  and  place  mentioned  in  a  notice  to  the 
vendee,  and  may  hold  the  latter  liable  for  the  difference  between 
the  price  agreed  upon  and  the  price  realized  at  such  sale.  At  such 
sale  the  vendor  may  purchase,  wude  publicity  of  the  notice  having 
been  given  and  full  opportunity  for  competition  at  the  sale  having 
been  offered.^  The  statute  of  limitations  may  be  a  bar  to  the  ac- 
tion.^ 


sell,  the  agent  may  recover  such  profit 
as  he  lost  thereby.  Mattingly  v.  Roach,. 
84  Cal.  207  ( 1 890).  See  also,  as  to  agen  ts, 
§  334,  supra.  Where  the  vendor,  after 
tendering  the  stock,  assumes  to  be  the 
owner  and  directs  a  sale  and  gives  a 
proxy  to  vote,  he  can  recover  only  the 
difference  between  the  market  pi'ice  at 
the  time  of  delivery  and  the  contract 
price.  Hamilton  v.  Finnegan,  91  N.  W. 
Rep.  1039  (Iowa,  1902). 

1  See  the  cases  in  the  preceding  note. 
The  vendor's  remedies  for  a  breach  of 
a  contract  to  buy  stock  are:  (1)  To  hold 
the  stock   for  the  vendee  and  require 
payment  of  the  entire  price;  (2)  to  sell 
after  notice  to  the  vendee  and  sue  for 
the   difference    between  the  contract 
price  and  the  selling  price;  (3)  to  retain 
the  stock  and  sue  for  the  difference  be- 
tween the  contract  price  and  the  mar- 
ket value  price.     In  re  Ives,  11  N.  Y. 
Supp.  650   (1890).     No  tender  is  neces- 
sary when  the  suit  is  for  damages  and 
the  vendor  intends  to  retain  the  stock. 
Nysewander  v.  Lowman,  124  Ind.  584 
(1890).  When  suit  is  brought  to  recover 
the  price  of  stock  sold,  a  delivery  or 
tender  must  be  shown.      Holmes,  etc 
Co.  V.  Morse,  53  Hun,  58  (1889).     Where 
a  party  is  sued  on  a  note  he  may  recoup 
by  setting  up  that  the  note  was  given 
to  plaintiff  on  plaintiff's  agreement  to 
assign  and   deliver    certain  shares  of 
stock,  which  was  not    tendered   until 
eight    months  after  the  time  agreed 
upon.     Hill  V.  Southwick,  9   R.  L  299 
(1869).  For  failure  to  deliver,  the  meas- 
ure of  damages  is  the  difference  in  the 


market  value  at  the  date  of  the  con- 
tract and  at  the  date  fixed  in  the  con- 
tract for  the  delivery,  or  the  date  of  the 
breach  of  the  contract.  The,  price  at 
which  the  vendee  had  resold  is  not  ad- 
missible unless  the  vendor  had  notice 
thereof.  Coffin  v.  State,  144  Ind.  578 
(1896).  An  agreement  to  sell  acertaiu 
amount  of  stock  in  a  corporation  to  be 
organized  with  a  specified  capital  is 
not  fulfilled  by  tendering  stock  of  a 
corporation  with  a  less  capital.  Faulk- 
ner V.  Robinson,  70  S.  W.  Rep.  990  (Tex. 
1902). 

2  Clews  V.  Jamieson,  182  U.  S.  461,  497, 
(1901). 

3  The  statute  of  limitations  runs 
against  a  receipt  reciting  a  first  pay- 
ment of  stock  •'  standing  in  my  name 
but  owned  by  him,  and  he  remaining 
responsible  for  the  balance  of  the  in- 
stalments when  called  in,"  there  being 
no  agreement  as  to  the  future  disposi- 
tion of  the  stock  and  of  dividends. 
Cone  V.  Dunham,  59  Conn.  145  (1890). 
A  sale  of  a  certificate  to  the  effect  that 
when  stock  is  issued  a  specified  amount 
will  be  issued  to  the  holder  is  a  valid 
sale  and  is  not  defeated  by  the  statute 
of  limitations.  Meehan  v.  Sharp,  151 
Mass.  564  (1890).  Where  certain  owners 
of  stock  place  it  in  the  hands  of  a  trus- 
tee for  sale  and  the  trustee  invites  sub- 
scriptions thereto,  the  subscription 
contract  providmg  for  payment  of  one- 
third  down  and  the  balance  wiien 
called  for,  the  statute  of  limitations  is 
no  bar  to  an  action  for  the  two-thirds, 
although  six  years  have  elapsed  since 


r51 


§  337.] 


CONTKACTS    TO    SELL GAMBLING    SALES,  ETC. 


[CH. 


XX. 


The  vendee's  remedy  for  a  failure  on  the  part  of  the  vendor  to 
deliver  is  an  action  for  damages  ^  or  a  bill  in  equity  to  obtain  spe- 
cific performance."''  In  almost  all  cases,  however,  his  remedy  is  an 
action  for  damages  only,  inasmuch  as  specific  performanceof  a  sale 
of  personalty  is  rarely  granted. 

§  337.  Specific  i)erformance  as  a  remedy  for  'breach  of  a  contract 
to  sell  stock. —  It  frequently  happens  that  the  person  who  has  con- 
tracted to  purchase  stock  is  particularly  anxious  to  procure  that 
stock,  and  that,  under  the  circumstances  of  the  case,  the  stock  is 
worth  to  him  a  value  not  to  be  compensated  for  by  mere  money 
damages.  This  cannot  happen  in  the  case  of  a  contract  to  sell 
securities  issued  by  the  government,  since  they  may  be  easily  pur- 
chased in  the  market.     Accordingly  it  is  well  established,  both  in 


the  first  payment  was  made.  Williams 
V.  Taylor,  120  N.  Y.  244  (1890).  See  also 
note  6,  p.  660,  infra. 

1 A  person  entitled   by   contract  to 
purchase  stock  of  another  may  collect 
damages  against  the  latter  for  failure 
to  comply  with  the  terms  of  the  agree- 
ment.     Rand   v.  Wiley,   70   Iowa,  110 
(1886).  For  failure  to  deliver,  the  meas- 
ure of  damages  is  the  difference  in  the 
market  value  at  the  date  of  the  con- 
tract and  at  the  date  fixed  in  the  con- 
tract for  Che  delivery,  or  the  date  of  the 
breach  of  the  contract.     The  price  at 
which  the  vendee  has  resold  is  not  ad- 
missible unless  the  vendor  had  notice 
thereof.     Coffin  v.  State,  144  Ind.  578 
(1896).     The   measure  of  damages  in  a 
suit  brought  by  the  purchaser  of  stock 
for  failure  of  the  vendor  to  fulfill  is 
the  difference    between  the    contract 
price  and  the  market  value  of  the  stock 
on  the  day  of  delivery.     Market  quota- 
tions are  evidence  of  value  of  stock 
only  when  such  quotations  are  based 
on  actual  sales.  Where  there  have  been 
no  sales,  evidence  of  a  bid  for  the  stock 
is  not  admissible,  unless  it  is  shown 
under  wiiat  circumstances  the  bid  was 
made,  and  whether  it  was  in  good  faith 
and  with  intent  to  fulfill.     Wildes  v. 
Robinson,  50  N.  Y.  App.  Div.  WZ  (1900). 
•    In  a  suit  by  a  purchaser  of  stock  for 
failure  of  the  seller  to  deliver,  the  dam- 
age is  the  difference  between  the  pur- 
chase price  and  the  actual  value  of  the 


stock.  Written  reports  of  the  corpora- 
tion to  public  officials  not  purporting 
to  give  the  value  of  the  property  are 
insufficient  to  prove  value.  Patterson 
V.  Plummer,  10  N.  Dak.  95  (1901).  Where 
a  person  is  paid  for  stock  and  fails  to 
deliver,  the  measure  of  damages  for  a 
breach  of  the  contract  is  what  it  would 
cost  the  party  to  purchase  the  stock 
which  he  is  entitled  to.  If  he  cannot 
purchase  it,  then  the  par  value  of  the 
stock  is  the  measure  of  value,  inasmuch 
as  he  would  have  had  to  pay  that  to 
the  corporation  in  order  to  have  had 
the  stock  issued  to  him.  Barnes  v.  Selig- 
man.  55  Hun,  339  (1890).  Where  a  ven- 
'dor  of  stock  in  a  corporation  which 
has  a  franchise,  but  nothing  else,  is  en- 
titled to  two  thousand  shares  of  full- 
paid  stock  at  a  later  date,  according  to 
the  contract  of  sale,  his  measure  of 
damages  for  ^failure  of  the  vendee  to 
deliver  the  two  thousand  shares  is  nom- 
inal damages,  where  there  was  no  mar- 
ket or  actual  value  for  the  stock. 
Barnes  v.  Brown,  130  N.  Y.  372  (1892). 
Where  the  vendor  of  stock  is  unable  to 
obtain  the  stock  for  deliverj'  by  reason 
of  an  injunction  against  the  corpora- 
tion, the  vendee  may  sue  for  the  return 
of  the  purchase-money.  Rose  v.  Foord, 
96  Cal.  152  (1892).  That  damages  are  a 
sufficient  remedy,  see  1  University  Law 
Rev.  218  (1894). 
2  See  next  section. 


iO'-i 


CH.  XX.]  COKTKACTS    TO    SELL 


GAMBLING    SALES,  ETC. 


[§3^ 


England  and  America,  that  a  contract  for  the  sale  of  government 
securities  will  not  be  specifically  enforced  by  a  court  of  equity,  but 
the  vendee  may  sue  the  vendor  in  an  action  at  law  for  damages  for 
breach  of  contract.^ 

§  338.  An  entirely  different  rule  prevails  as  regards  contracts  for 
the  sale  of  stock  of  private  corporations.  If  the  stock  contracted 
to  be  sold  is  easily  obtained  in  the  market,  and  there  are  no  partic- 
ular reasons  why  the  vendee  should  have  the  particular  stock  con- 
tracted for,  he  is  left  to  his  action  for  damages.  But  where  the  value 
of  the  stock  is  not  easily  ascertainable,  or  the  stock  is  not  to  be  ob- 
tamed  readily  elsewhere,  or  there  is  some  particular  and  reasonable 
cause  for  the  vendee's  requiring  the  stock  contracted  to  be  deliv- 
ered, a  court  of  equity  will  decree  a  specific  performance  and  com- 
pel the  vendor  to  deliver  the  stock.- 

This  rule,  as  applicable  to  contracts  for  the  sale  of  railway  stock, 
was  clearly  established  in  England  in  1841,  in  the  case  of  Duncuft 
V.  Albrecht.*  Contracts  for  the  sale  of  stock  in  mining  and  other 
private  corporations  will  also  be  specifically  enforced  under  some 
circumstances.^ 


I  Eoss  V.  Union  Pac.  Ry.,  Woolw.  26, 
32  (1863);  s.  C,  20  Fed.  Cas.  1245,  1247; 
Cud  or  Cuddee  v.  Rutter,  1  P.  Wms.  570 
(1719);  S.  c,  5  Vin.  Abr.  538  (1720);  Dori- 
son  V.  Westbrook,  5  Vin.  Abr.  540(1722); 
Cappurv.  Harris,  Bunb.  135(1723);  Bux- 
ton V.  Lister,  3  Atk.  383  (1746).  Cf.  Dol- 
oret  V.  Rothschild,  1  Sim.  &  S.  590  (1824); 
Colt  V.  Nettervill,  2  P.  Wms.  304  (1725). 
See  also  South,  etc.  Co.  v.  Wallington, 
78  L.  T.  Rep.  426  (1898). 

'  Quoted  and  approved  in  Ryan  v.  Mc- 
Lane,  91  Md.  175  (1900). 

»12  Sim.  189  (1841);  Parish  v.  Parish, 
32  Beav.  207  (1863),  granting  also  an  ac- 
counting of  dividends;  Pooler.  Middle- 
ton,  29  Beav.  646  (1861);  Turner  v.  Moy, 
32  L.  T.  Rep.  56  (1875):  Beckitt  v.  Bil- 
brough,  8  Hare,  188  (1850),  dictum. 
Contra,  dictum  in  Ross  v.  Union  Pacific 
Ry.,  Woolw.  26,  32  (1863);  S.  C,  20  Fed. 
Cas.  1245,  1247,  per  Miller,  J.  In  Clieale 
V.  Kenward,  3  De  G.  &  J.  27  (1858).  the 
court  said:  "There  is  no  doubt  that  a 
bill  will  lie  for  a  specific  performance 
of  an  agreement  to  transfer  railway 
shares.  This  was  set  at  rest  by  Duncuft 
V.  Albrecht,  12  Sim.  189  (1841)."  Where 
the  control  of  a  railroad  is  deposited 
(48)  7 


with  a  third  party  to  be  delivered  to 
the  vendee  upon  certain  things  hap- 
pening,  and   such   things   do  happen, 
he  may  have  specific  performance,  the 
stock   having  no  ascei'tainable  value. 
Rumsey  v.   New  York,  etc.  R.  R.,  53 
Atl.   Rep.   495    (Pa.    1902).      In    Leach 
V.  Fobes,  77  Mass.  506   (1858),  specific 
performance  of  a  contract  to  convey 
land  and  stock  was  granted  chiefly  be 
cause  of  the  land  part  of  the  contract. 
Todd  V.  Taft,89  Mass.  371  (1863),  decreed 
specific  performance  of  contract  to  con- 
vey railway  shares.     See  also  Baldwin 
V.  Commonwealth,  11  Bush  (Ky.),  417 
(1875);   Ashe  v.  Johnson,  3  Jones,  Eq. 
(N.  C.)  149  (1855).     As  to  when  specific 
performance  of  a  contract  to  sell  stock 
will  be  specifically  enforced,  see  also  1 
White  &  T.  Lead.  Cas.  914-933,  etc.    As 
to  possibility  of  mandatory  injunction, 
see  authorities  in  High  on  Injunctions. 
•*  Treasurer  v.  Commercial  Coal  Min. 
Co.,  33  Cal.  390  (1863).  Specific  perform- 
ance of  a  contract  to  sell  stock  may  be 
had  where  its  value  is  not  easily  ascer- 
tainable.    Manton  v.  Ray,  18  R.  L  673 
(1894).    See  also  Frue  v.  Houghton,  6 
Colo.  318  (1883),  and  §  61,  supra,    Spe- 
53 


§  338.] 


CONTRACTS    TO    SELL 


GAMBLING    SALES,  ETC. 


[CH.  XX. 


The  various  stockholders  of  a  company  may  give  interchange- 
ably a  first  option  of  thirty  clays  to  purchase  their  shares  of  stock 


cific  performance  of  a  contract  relative 
to  stock  is  not  an  absolute  right  and 
will  not  be  granted  if  it  would  result  in 
injustice  to  either  party.  Shinkle  v. 
Vickery,  156  Mo.  1  (1900).  Specific  per- 
formance will  be  granted  where  the 
stock  has  no  market  value  and  cannot 
be  purchased  in  the  market;  but  where 
the  contract  is  an  unconscionable  one 
and  by  mistake  omits  an  important 
provision,  specific  performance  will  not 
be  granted.  Newton  v.  Wooley,  105 
Fed.  Rep.  541  (1900).  An  agreement  of 
several  parties  to  sell  their  property  to 
a  corporation  in  exchange  for  stock  of 
the  latter,  the  amount  of  stock  going  to 
each  to  be  determined  by  arbitrators, 
will  not  be  specifically  enforced  where 
the  arbitrators  have  fixed  the  value  in 
an  illegal  way.  Any  party  may  with- 
draw from  such  a  contract  prior  to  the 
time  when  it  has  been  signed  by  alU 
Consolidated,  etc.  Co.  v.  Nash,  109  Wis. 
490  (1901).  Where  a  purchaser  of  stock 
knew  or  had  reason  to  know  that  the 
stock  was  not  owned  by  the  vendor  per- 
sonally, but  by  a  firm  in  which  he  was 
interested,  the  purchaser  cannot  have 
specific  performance,  but  will  be  re- 
mitted to  a  court  of  law.  Jones  v.  Tunis, 
99  Va.  220  (1901).  Specific  performance 
will  not  be  granted  at  the  instance  of 
the  purchaser  of  stock  where  the  pur- 
chase is  from  the  committee  of  a  pool 
of  such  stock,  where  it  is  shown  tliat 
the  pooling  agreement  required  a  vote 
of  three-fourths  of  the  stock  in  the  pool 
before  a  sale  could  be  made,  and  it  is 
also  shown  that  the  contract  of  pur- 
chase was  partly  an  option  in  that  the 
purchaser  was  to  forfeit  a  deposit  he 
had  already  made,  in  case  he  did  not 
fulfill,  and  it  being  further  shown  that 
in  another  suit  the  complainant  had 
stated  the  value  of  the  stock,  and  it  be- 
ing further  shown  that  the  purpose  of 
the  contract  was  to  obtain  control  of  a 
large  system  of  railroads,  including  the 


board  of  directors.  Ryan  v.  McLane,  91 
Md.  175  (1900).  Even  though  stock  has 
no  market  value  and  no  dividends 
have  been  paid,  yet  in  an  action  for  spe- 
cific performance  it  must  be  alleged 
that  the  stock  had  no  value  that  could 
be  estimated  in  an  action  for  damages. 
Moulton  V.  Warren,  etc.  Co.,  81  Minn. 
259  (1900).  A  corporation  cannot  have 
specific  performance  of  an  agreement 
of  a  person  to  purchase  its  debentures. 
The  remedy  is  an  action  for  damages. 
South,  etc.  Co.  V.  Wallington,  [1898]  A. 
C.  309,  aflf'g  [1897]  1  Q.  B.  692.  Where 
an  insolvent  corporation  which  has 
never  issued  any  certificates  of  stock 
resolves  by  a  vote  of  its  stockholders  to 
apply  its  assets  to  the  extent  of  their 
value  to  the  payment  of  the  debts,  and 
that  new  stock  be  issued  to  the  stock- 
holders upon  their  paying  therefor  in 
full,  and  one  stockholder  sells  his  inter- 
est in  the  original  stock,  and  the  pur- 
chaser for  seven  years  does  not  com- 
plain, he  cannot,  after  the  corporation 
has  become  prosperous,  claim  that  he  is 
entitled  to  the  old  stock  or  any  interest 
in  the  corporation.  Stoddard  v.  Deca- 
tur, etc.  Co.,  184  111.  53  (1900),  A  sub- 
scriber for  stock  who  has  given  his  note 
in  payment  may  file  a  bill  in  equity  to 
compel  the  corporation  to  recognize 
him  as  a  stockholder,  where  the  corpo- 
ration denies  that  he  is  a  stockholder 
and  has  issued  all  its  stock  to  other  par- 
ties who  took  with  notice.  It  is  unnec- 
essary to  bring  into  the  suit  the  other 
parties  who  actually  have  the  stock,  the 
stock  having  been  held  by  the  company 
as  collateral  security.  Morey  v.  Fish,  etc. 
Co.,  108  Wis.  520  (1901).  See  also  §  58, 
supra.  A  contract  between  the  owner  of 
property  and  a  promoter,  by  which  the 
former  agrees  to  sell  his  property  to  a 
corporation  to  be  formed  by  the  latter, 
with  a  specified  capital  stock,  cannot,  a 
year  after  the  transaction  has  been  car- 
ried out,  be  made  the  basis  of  a  suit  in 


754 


CH.  XX.]  CONTRACTS   TO    SELL 


GAMBLING    SALES,  ETC. 


[§ 


o38. 


whenever  anyone  desires  to  sell,  each  contracting  for  himself,  the 
contract  further  providing  that  such  thirty  days  are  to  commence 


equity  to  compel  the  promoter  to  can- 
cel excessive  stock  which  was  issued  to 
the  promoter,  there  being  no  allegation 
that  the  promoter  still  had  the  stock. 
The  remedy  of  the  vendor  is  at  law. 
Even  though   several  vendors  to  the 
corporation  had  a  similar  claim,  yet  one 
of  them  cannot  file  such  a  bill  in  equity 
in  behalf  of  himself  and  others.  Brehm 
V.  Sperry,  92  Md.  378  (1901).    As  appli- 
cable to  manufacturing  corporations, 
see  Chater  v.  San  Francisco,  etc.  Co.,  19 
CaL  219  (1861).     Granted  in  a  towboat 
association  case  in  White  v.  Schuyler,  1 
Abb.  Pr.  (N.  S.)  300  (1865).     Refused  in 
the  case  of  stock  in  a  land  association. 
Jones  V.  Newhall,  115  Mass.  244  (1874). 
And   in   a  paper  company.     Noyes  v. 
Marsh,  123  Mass.  286  (1877).    See  Cush- 
man  v.  Tliayer  Mfg.  Co.,  76  N.  Y.   365 
(1879),  the  court  saying:    "  While  the 
general  rule  is  for  courts  of  equity  not 
to  entertain  jurisdiction  for  a  specific 
performance  on  the  sale  of  stock,  this 
rule  is  limited  to  cases  where  a  com- 
pensation in  damages  would  furnish  a 
complete    and    satisfactory    remedy." 
This  case,  however,  was  not  a  case  of 
specific  performance  of  a  sale  of  stock, 
but  of  compelling  the  corporation  to 
register  a  transfer.    See  also,  in  general, 
Austin  V.  Gillaspie,  1  Jones,  Eq.  (N.  C.) 
261  (1854);   Nutbrown  v.  Thornton,  10 
Ves.  Jr.  160  (1804);  Shaw  v.  Fisher,  5 
De  G.,  M.  &  G.  596  (1855);  Wynne  v. 
Price,  3  G.  &  Sm.  310  (1849);  Wilson  v. 
Keating,  7  W.  R.  484  (1859);  Oriental, 
etc.  Steam  Co.  v.  Briggs,  2  Johns.  &  H. 
625  (1861);  Paine  v.  Hutchinson,  L.  R.  3 
Eq.  257  (1866);  Shepherd  v.  Gillespie,  L. 
R.   5  Eq.   293  (1867);    Bermingham  v. 
Sheridan,  33  Beav.  660(1864);  Strasburg 
R.   R.  V.   Echternacht,  21   Pa.   St.  220 
(1853);  Fallon  v.  Railroad  Co.,  1  Dill.  121 
(1871);  s.  C,  8  Fed.  Cas.  977.     In  regard 
to  a  specific  performance  of  a  trust  of 
stock,  see  Ferguson  r.Paschall,  11  Mo.  267 
(1848);  Cowles  v.  Whitman,  10  Conn.  121 


(1834);  Clark u.  Flint,  39  Mass.  231  (1839); 
Mechanics'  Bank  v.  Seton,  1  Pet.  299 
(1828);  Gage  v.   Fisher,  5   N.  Dak.  297 
(1895).     Specific  performance  of  a  con- 
tract to  sell  stock  will  be  decreed  where 
the  stock   has  no  recognized  market 
value  and  cannot  be  bought  in  the  mar- 
ket.   Goodwin,  etc.  Co.'s  Appeal,  117  Pa. 
St.    514  (1888).      Specific   performance 
was  refused  in  Eckstein  v.  Downing,  64 
N.  H.  248  (1886),  there  being  no  evidence 
that  the  vendee  had  any  wish  or  reason 
for  wishing  to    own    that    particular 
stock  or  stock  in  that  particular  corpo- 
ration.   See  also  Cruse  v.  Paine,  L.  R.  6 
Eq.  641  (1868).     Where  a  stockholder, 
who  is  also  a  director,  contracts  to  give 
a  person  a  certain  amount  of  stock  if 
he  will  do  certain  work  for  the  corporar 
tion,  and  the  board  of  directors,  includ- 
ing this  director,  discharge  such  person 
without  cause,  and  thus  prevent  com- 
pletion, a  court  of  equity  will  compel  a 
delivery  of  the  stock.    Price  v.  Minot, 
107  Mass.  49  (1871).     In  suits  in  equity 
to  compel  a  transfer  of  stock,  parties  in- 
terested by  a  purchase  from  the  defend- 
ant should  be  brought  in.     O'Connor  v. 
Irvine,  74  Cal.  435  (1887).     Specific  per- 
formance of  a  contract  to  sell  stock 
will  be  decreed  where  the  property  of 
the  corporation  is  real  estate  —  a  distill- 
ery —  and  the  real  transaction  is  a  sale 
of  the  entire  property.     Megibben  v. 
Perin,  49  Fed.  Rep.  183  (1892).    Specific 
performance  will  not  be  decreed  where 
there  is  doubt  both  as  to  the  contract 
actually  being  made  and  as  to  the  con- 
sideration, one  party  being  dead.     Hib- 
bert  V.  Mackinnon,  79  Wis.  673  (1891). 
Where  a  debtor  agreed  to  transfer  stock 
as  collateral  security  for  a  debt,  and 
died  insolvent  before  doing  so,  the  court 
refused  to  enforce  specific  performance 
of  the  agreement  to  the  injury  of  other 
creditors.     City  F.  Ins.  Co.  v.  Olrastead, 
33  Conn.  476  (1866).     The  vendee  may 
file  a  bill  in  equity  for  a  specific  per- 


755 


§  338.] 


CONTRACTS    TO    SELL  —  GAMBLING    SALES,  ETC. 


[CH.  XX. 


ia  case  of  the  death  of  a  stockholder,  so  far  as  his  stock  was  con- 
cerned, and  they  may  further  contract  that  another  person  is  to 


forraance.  Willis  v.  Jefferis,  51  Atl.  Rep. 
1110  (N.  J.  1903).  Specific  performance 
of  a  contract  to  deliver  stock  for  serv- 
ices was  granted  in  Le  Vie  v.  Fenlon, 
39  N.  Y.  Misc.  Rep.  265  (1903).  In  gen- 
eral, see  also  Stevens  v.  Wilson,  18  N. 
J.  Eq.  447  (1867).  An  alleged  vendee's 
suit  for  a  dividend  is  res  judicata  as  to 
a  suit  for  the  stock.  Sliepard  v.  Stock- 
ham,  45  Kan.  244  (1891). 

Where  a  person  claims  that  he  has  a 
contract  for  the  purchase  of  stock 
which  the  stockholder  vendor  is  about 
to  sell  or  has  already  sold  to  others,  and 
the  first-named  person  brings  a  suit  in 
equity  to  obtain  the  stock,  he  must 
Bhowj  first,  that  it  is  a  case  for  specific 
performance;  and  second,  that  the  stock 
was  impressed  with  a  trust,  and  that 
the  last  purchaser  took  with  notice  of 
that  trust.  See  1  White  &  T.  Lead.  Cas. 
914,  919,  and  Pooley  v.  Budd,  14  Beav. 
34,  43,  44  (1851). 

Lindley  on  Company  Law  (5th  ed.), 
pp.  499,  500,  states  the  rule  as  follows: 
"  A  contract  for  the  sale  of  shares  by  one 
individual  to  another  is  distinguishable 
in  many  respects  from  a  contract  for 
the  allotment  and  acceptance  of  shares 
in  a  company,  and  Lord  Romilly  re- 
fused to  decree  specific  performance  of 
a  contract  of  this  kind,  on  the  ground 
that  the  decree  would  be  ineffectual,  as 
the  shares    might  be  transferred   im- 
mediately after  the  contract  was  per- 
formed.    Sheffield  Gas,  etc.  Co.  v.  Har- 
rison, 17  Beav.  294  (1853);  Bluck  v.  Mal- 
lalue,  27  Beav,  398  (1859);  Columbine  v. 
Chichester,  2  Ph.  Ch.  27  (1846).  ...  In 
this  last  case  there  were  circumstances 
to  show  that  specific  performance  was 
impossible."  Page  586.— "In  order  that 
specific  performance  of  an  agreement 
to  take  or  deliver  shares  in  a  company 
may  be  decreed,  it  is  necessary  that  the 
agreement    should  be    concluded  and 
binding  (which  it  was  not  in  Oriental, 
etc.  Co.  V.  Briggs,  4  De  G.,  F.  &  J,  191  — 


18G1),  and  be  untainted  by  fraud  (which 
was  not  the  case  in  New  Brunswick, 
etc.  Co.  V.  Muggeridge,  4  Drew.  686  — 
1859,  and  1  Drew.  &  Sm.  363;  or  in  Max- 
well V.  Port  Tennant,  etc.  Co.,  24  Beav. 
495  — 1858),  or  unfairness  (as  to  agree- 
ments between  co-directors,  see  Flana- 
gan V.  Great  Western  Ry.,  L.  R.  7  Eq. 
116  — 1868),  and  be  capable  of  being  per- 
formed by  the  defendant  (Ferguson  v. 
Wilson,  L.  R.  3  Ch.  App.  77  —  1866;  Col- 
umbine V.  Chichester,  2  Ph.  Ch.  27  — 
1846),  and  not  involve   any  breach  of 
trust  (Fry,  Sp.  Perf.,  p.  177,  2d  ed. ;  and 
see  Flanagan  v.  Great  Western  Ry.,  L. 
R.  7  Eq.  116  — 1868),  or  performance  by 
either  party  of  obligations  the  perform- 
ance of  which  a  court  cannot  practi- 
cally enforce  (Flanagan  v.  Great  West- 
ern R3^.  7  Eq.    116  —  1868;    Stocker  v. 
Wedderburn,  3  K.   &  J.   393  —  1857)." 
Page  587. —  '"An  action  will  lie  for  spe- 
cific performance  of  a  contract  for  the 
purchase  and  sale  of  shares,  if  it  is  ca- 
pable of  being  performed  (see  as  to  this, 
Berminghamu.  Sheridan,  33  Beav.  660 — 
1864,  and  compare  Poole  v.  Middleton, 
29  Beav.  646  — 1861);    .    .    .     and  the 
purchaser  will  be  compelled  to  pay  the 
price,  although  it  may  have  been  ex- 
pressed to  be  paid  in  the  deed  of  trans- 
fer, if,  in  fact,  it  was  not  thus  paid 
(Wilson  V.  Keating,  27  Beav.  121,  and  4 
De  G.  &  J.  588  — 1859).     The  case  seems, 
at  first  sight,  to  have  been  a  hard  one 
upon    the    defendant;    but    the    deed 
stated  that  he  had  paid  the  money,  and 
this  he  knew  was  not  the  fact/     He 
could  not,  therefore,  be  treated  as  hav- 
ing been  misled  by  the  plaintiff  or  by 
the  contents  of  the  deed;  and  will  be 
compelled  to  accept  a  transfer  of  the 
shares  he  has  bought  and  to  indemnify 
the  seller  from  all  liabilities  accruing 
subsequently  to    the  sale  (Wynne   v. 
Price,  3  De  G.  &  S.  310-1849).     As  to 
the  right  of  a  mortgagee  of  shares  to 
an  indemnity  from  his  mortgagor,  see 
56 


CH.  XX.]  CONTKACTS    TO    SELL  —  GAMBLING    SALES,  ETC. 


[§  33S. 


have  a  similar  option  in  case  the  first  option  is  not  exercised.  A 
party  entitled  to  such  option  may  have  specific  performance  of  it.^ 
In  Pennsylvania  it  is  held  that  specific  performance  will  be 
o^ranted  at  the  instance  of  the  vendee  in  a  contract  for  the  sale  of 
five-sixths  of  the  capital  stock  of  the  company  and  a  portion  of  its 
bonds,  inasmuch  as  such  stock  and  bonds  cannot  be  secured  el  se- 


Phene  v.  Gillan,  5  Hare,  1  (1845);  and 
the  seller  will  be  compelled  to  account 
for  any  moneys  he  may  have  received 
from  an  improper  subsequent  sale  to 
another  person  (Beckitt  v.  Bilbrough,  8 
Hare,  188  — 1850).  The  court  has,  how- 
ever, refused  to  compel  a  purchaser  of 
scrip  to  accept  shares,  and  indemnify 
the  seller  from  calls  upon  them  (Jack- 
son V.  Cocker,  4  Beav.  59  —  1841.  Com- 
pare this  with  the  last  case);  and  to 
compel  an  allottee  of  shares  to  accept 
them,  and  to  execute  the  company's 
deed  in  respect  of  them  (Sheffield,  etc. 
Gas  Co.  V.  Harrison,  17  Beav.  294  — 
1853);  and  to  compel  the  promoters  of 
a  company  to  deliver  shares  to  a  sub- 
scriber to  the  company  (Columbine  v. 
Chichester,  2  Ph.  Ch.  27  —  1846.  In  this 
case,  however,  the  promoters  did  not 
appear  to  have  any  shares  which  they 
could  allot).  Neither  will  the  court  in- 
terfere to  compel  the  completion  of  a 
gratuitous  and  intended  transfer  (see 
Milroy  v.  Lord,  4  De  G.,  F.  &  J.  264— 
1862)." 

1  The  mutual  covenants  of  the  con- 
tract are  a  sufficient  consideration  to 
support    it.     Scruggs    v.    Cotterill,    67 
N.  Y.  A  pp.  Div.  583  (1903).     In  the  case 
of  Jones  V.  Brown,  171  Mass.  318  (1898), 
in  a  close  corporation,  the  stockholders 
made  a  contract,  the  essential  parts  of 
which  are  set  forth  in  the  opinion  of 
the  court,  providing  for  the  purchase 
of  the  stock  of  a  certain  stockholder  in 
case  of  his  death,  and  for  the  purchase 
of  the  stock  of  any  other  stockholder 
who  ceased  to  be  connected  with   the 
corporation.     The   former  stockholder 
having  died,  the  court  granted  specific 
performance  of  the  contract  and  com- 
pelled his  estate  to  deliver  the  stock 
upon  payment  of  the  specified  price.  A 


court  will  enjoin  a  party  from  voting 
upon  or  disposing  of  his  stock  in  a  cor- 
poration pendente  lite  where  the  plaint- 
iffs show  that  they  transferred  the  stock 
to  the  defendant  on  the  latter's  agree- 
ment not  to  sell  the  same,  except  with 
the  consent  of  the   former,  and  that 
when  he  did  sell  the  stock  three-fourths 
of  the  proceeds  should  belong  to  the 
former,  and  it  appearing  further  that 
the  defendant  had  given  the  stock  to 
his  sister  without  consideration.    Wes- 
ton V.  Goldstein,  39  N.  Y.  App.  Div.  661 
(1899).     Where    one    person    advances 
money  to  another  to  purchase  a  certain 
stock  on  an  agreement  that  they  will 
co-operate,    and    in     case    the     latter 
wishes  to  sell  he  will  not  sell  to  un- 
friendly  parties    without    giving    the 
former  the  first  chance  lo  purchase, 
and  the  stock  is  in  the  possession  of  the 
former  as  security  for  the  loan,  a  sale 
by  the  latter  to  an  unfriendly  party 
with  notice  of  the  facts  is  not  sufficient 
to  sustain  a  bill  in  equity  to  compel 
the   first-named  party  to  transfer  the 
stock  to  such  purchaser.     The  court 
said:  "One  or  more  stockholders  in  a 
corporation   may  agree    to    stand    to- 
gether in  carrying  out  an  honest  busi- 
ness policy  consistent  with  what  they 
believe  to  be  to  the  best  interests  of  all 
the  stockholders.     This  was  not  a  pool- 
ing agreement,  to  vest  the  government 
of  the  corporation  for  a  time  in  certain 
members  of  it,  or  to  yield  the  control 
to  a  few  who  might  dominate,  regard- 
less of  the  interests  of  the  many.     It 
was  intended  to  maintain  a  status  of 
independence  for  the  railway  company 
that  it  might  be  operated  under  the 
purposes  of  its  charter."    Rigg  v.  Read- 
ing, etc.  Ry.,  191  Pa  St.  298  (1899).    See 
also  §  622,  infra;  54  Atl.  Rep.  48& 


757 


§  338.]  CONTKACTS    TO    SELL  —  GAMBLING    SALES,  ETC.  [CH.  XX. 

where  and  a  money  judgment  would  not  afford  a  substitute  for  the 
sale;  and  it  is  further  held  that,  even  though  the  vendor  has  sold 
the  stock  to  other  parties,  yet,  if  the  latter  took  with  notice  of  the 
prior  contract,  they  may  be  joined  as  parties  defendant  and  com- 
pelled to  deliver  up  the  stock.^ 

Specific  performance  is  often  granted  as  between  several  parties 
each  of  whom  is  entitled  to  a  certain  part  of  stock  which  is  re- 
ceived by  or  held  in  the  name  of  one  of  them.  A  court  will  com- 
pel him  to  distribute  the  stock  in  accordance  with  the  contract.^ 
Such  cases  arise  often  in  "  pools  "  of  stock,  and  in  selling  property 
to  the  company  in  consideration  of  stock,  and  in  buying  stock  in 
the  names  of  other  persons  or  agents.  Thus,  where  parties  to  a 
construction  contract  agreed  to  divide  the  stock  in  a  certain  way,  a 
court  of  equity  will  grant  specific  performance  and  order  transfers 
of  the  stock,  it  having  no  market  value  and  the  remedy  at  law  be- 
ing inadequate.^ 

Specific  performance  may  also  be  said  to  be  granted  where  a 
corporation  is  ordered  by  a  court  to  issue  certificates  of  stock  to  its 
stockholders.*  Principles  of  law  somewhat  similar  to  the  above 
are  involved  in  suits  brought  b}'^  a  purchaser  of  stock  to  compel  the 
corporation  to  transfer  the  stock  on  the  corporate  books,*  and  in 
suits  instituted  by  claimants  of  stock  against  other  parties  claim- 
ing the  same  stock;®  or  by  the  corporation  to  recover  back  stock 
improperly  issued.'' 

1  Northern,  etc.  R.  R.  v.  Walworth,  of  the  stock,  and  this  account  is  ac- 

193  Pa.  St.  207  (1899).     The  court  held  cepted,  a  suit  in  equity  lies  to  obtain 

also  that  the  fact  that  the  contract  re-  the  stock  upon  payment  therefor,  the 

cited  that  the  seller  merely  claimed  to  corporation  being  a  close  corporation, 

be  the  owner  of  the  stock  did  not  ren-  Rand  v.  Whipple,  71  N.  Y.  App.  Div.  63 

der  the  contract  so  uncertain  as  to  pre-  (1903).     Where,   by   contract    between 

vent  specific  performance,  and  that  the  two    stockholders    owning    an    equal 

fact  that  the  contract  provided  that  share  in  the  corporation,  future  stock 

the  buyer  purchased  only  on  condition  acquired  by  either  of  them  is  to  belong 

that    his    examination    of    the    books  one-half  to  each,  such  contract  may  be 

should  be  satisfactory  and  should  cor-  specifically  enforced.  Stewart  v.  Pierce, 

roborate  the  correctness  of  a  statement  89  N.  W.  Rep.  234  (Iowa,  1902).    See  also 

as  to  liabilities,  did  not  prevent  specific  §  330,  suprcu;  78  N.  Y.  App.  Div.  219. 

performance,  and  that  the   fact  that  ^  Krohn  v.  Williamson,  62  Fed.  Rep. 

the  seller  agreed  that  all  debts  of  the  869  (1894);  aff' d,  66  Fed.  Rep.  655.    See 

company  should  be  paid  on  the  day  of  also  §§  333,  334,  supra,  and  §  705,  infra, 

the  transfer  did   not  prevent  specific  and  Jones  v.  Brown,  171  Mass.  318  (1898). 

performanca  *  See  §  61,  supra,  and  §  766c,  infra. 

2AVhere  it  is  agreed  between' two  relative  to  contractors, 

brothers  that  one  shall  buy  stock  in  a  ^  See  §  391,  infra, 

corporation  in  joint  account,  and  this  ^  See  §  391,  infra, 

is  done,  and  the  one  purchasing  charges  ^  See  §  387,  infra, 
his  brother  with  the  cost  of  the  portion 

758 


CH.  XX.]  CONTRACTS    TO    SELL GAMBLING    SALES,  ETC. 


[§  338. 


Specific  performance  will  not  be  granted  where  the  purpose  of 
the  purchaser  of  stock  is  to  obtain  control  of  a  national  bank,  when 
the  change  in  management  would  probably  be  to  the  detriment  of 
the  bank.^  Where  the  vendor's  contract  is  to  deliver  stock  and 
construct  a  railway,  the  court  will  not  decree  specific  performance, 
since  part  of  the  contract  is  never  the  subject  of  such  compulsory 
performance.^  Specific  performance  of  a  contract  to  deliver  bonds 
will  not  be  granted  where  the  party  seeking  performance  is  not 
himself  able  to  fully  perform.^  A  vendor  cannot  have  specific  per- 
formance where  he  had  told  the  vendee  that  a  certain  person  of  re- 
sponsibility had  offered  a  higher  price  for  the  stock,  when  in  fact 
such  person,  after  making  the  offer,  had  investigated  and  then  had 
withdrawn  the  offer.''  If  the  vendor  is  not  in  possession  of  the  de- 
sired stock,  specific  performance  will  not  be  granted,^  except  to  the 
amount  of  stock  which  he  has.«  But  where  a  person,  who  is  under 
contract  to  deliver  certain  stock,  gives  the  stock  to  a  relative  for 
nothing,  the  party  entitled  to  the  stock  by  contract  may  compel 
such  relative  to  give  up  the  stock.''  Although  a  court  of  equity  re- 
fuses to  grant  specific  performance,  yet  it  will  not  always  send  the 
party  to  a  court  of  law,  but  in  some  of  the  states  will  grant  him 
damages.^    Where  a  vendee  of  stock  seeks  specific  performance  he 


1  Foil's  Appeal,  91  Pa.  St.  434  (1879), 
the  court  saying:  "I  know  of  no  in- 
stance in  this  state  in  which  a  court  of 
equity  has  decreed  specific  performance 
of  a  sale  of  stock." 

2  Ross  V.  Union  Pac.  Ry.,  Woolw.  26 
(1863),  per  Miller,  J.;  s.  C,  20  Fed.  Cas. 
1245.  The  court  will  not  decree  spe- 
cific performance  of  a  contract  of  a  com- 
pany to  deliver  its  stock  to  a  con- 
structor of  its  road,  even  though  the 
latter,  the  complainant,  is  willing  to 
perform.  The  court  cannot  compel  the 
latter  to  perform,  and  hence  will  not 
tie  up  the  stock  of  the  former.  Peto  v. 
Brighton,  etc.  Ry.,  1  Hem.  &  M.  468 
(1863). 

3  Stokes  V.  Stokes,  148  N.  Y.  708  (1896). 
*  Moline  Plow  Co.  v.  Carson,  73  Fed. 

Rep.  387  (1895). 

5  Columbine  v.  Chichester,  2  Ph.  Ch. 
27  (1846).  Specific  performance  as  to 
issuing  stock  is  not  decreed  when  per- 
formance is  impossible.  Summerlin  v. 
Fronteriza,  etc.  Co.,  41  Fed.  Rep.  249 
(1890).     An  injunction  against  a  trans- 


fer in  the  meantime  may  be  granted. 
Rut  t  man  v.  Hoyt,  N.  Y.  L.  J.,  July  19, 
1890. 

6  Turner  v.  Moy,  32  L.  T.  Rep.  56 
(1875).  In  the  case  of  Lamb,  etc.  Co.  v. 
Lamb,  119  Mich.  568  (1899),  where  a 
party  claiming  to  be  the  real  owner  of 
stock  filed  a  bill  to  compel  the  holder 
of  such  stock  to  deliver  up  the  same, 
but  it  appeared  that  the  defendant  had 
already  disposed  of  the  stock  before 
the  commencement  of  the  suit,  the 
court  refused  to  grant  relief,  even 
though  it  further  appeared  that  the 
defendant  had  other  stock  in  the  same 
corporation  equal  in  amount  to  the 
stock  in  issue. 

7  Graham  v.  O'Connor,  73  L.  T.  Rep. 
712  (1896). 

sWonson  v.  Fenno,  129  Mass.  405 
(1880).  Cf.  Austin  v.  Gillaspie,  1  Jones, 
Eq.  (N.  C.)  261  (1854).  Even  though  the 
vendor  of  stock  in  an  agreement  pro- 
viding for  general  releases  and  the  giv- 
ing of  certain  new  notes  cannot  obtain 
a  specific  performance,  the  court  being 


759 


338.] 


CONTRACTS    TO    SELL GAMBLING    SALES,  ETC. 


[CH. 


XX. 


must  tender  the  price,  and  cannot  first  demand  that  the  stock  be 
deposited  in  a  bank.^  In  a  suit  for  specific  performance  of  a  sale 
of  stock,  the  complaining  vendee  may  have  a  preliminary  injunc- 
tion against  the  vendor's  selling  to  others.-  "Where  a  vendee  of 
stock  brings  action  for  a  specific  performance,  and  obtains  judg- 
ment, the  judgment  should  be  in  the  alternative,  either  for  the 
stock  or  for  damages  specified  in  the  decree.*  In  a  suit  by  a  claim- 
ant of  stock  to  obtain  the  stock  from  another  person,  the  corpora- 
tion is  a  proper  but  not  a  necessary  party.*  But  in  a  suit  to  compel 
a  corporation  to  transfer  to  the  plaintifi"  stock  standing  on  its  books 
in  the  name  of  a  third  person,  the  corporation  and  the  third  person 
are  both  necessary  parties.*  Laches  may  constitute  a  bar  to  the 
bill  in  equity  to  enforce  specific  performance.^    "Where  a  person 


unable  to  grant  complete  specific  per- 
formance, yet  the  court  may  retain  the 
suit  and  assess  damages  for  that  part 
of  the  contract  which  cannot  be  specif- 
ically enforced.  Lyie  v.  Addicks,  63 
N.  J.  Eq.  123  (1901). 

iWescott  V.  Mulvane,  58  Fed.  Rep. 
305  (1893),  holding  also  that  if  the  ven- 
dee, after  obtaining  an  injunction 
against  a  sale  of  the  stock  by  the  ven- 
dor to  others,  withdraws  his  demand 
for  specific  performance  and  asks 
merely  for  damages,  the  injunction 
will  be  dissolved. 

2McLure  v.  Sherman,  70  Fed.  Rep.  190 
(1895).   See  also  §§  363,  391,  579,  infra. 

3  Eastman  v.  Reid,  101  Ala.  320  (1893). 

4  Williamson  v.  Krohn,  66  Fed.  Rep. 
655  (1895);  Johnson  v.  Kirby,  65  Cal.  482 
(1884).  In  a  suit  between  stockholders 
as  to  the  title  to  stock  the  corporation 
is  a  proper  party  defendant,  but  is  a 
nominal  party,  and  is  not  considered  in 
determining  whetlier  the  suit  is  re- 
movable to  the  United  States  court. 
Iliggitis  V.  Baltimore,  etc.  R  R.,  99 
Fed.  Rep.  640  (1900).  And  see  iJg  856, 
363,  '391,  579,  infra.  Tlie  corporation 
is  a  proper  but  not  a  necessary  party 
to  an  action  by  one  person  to  com- 
pel another  person  to  transfer  stock 
to  him  in  accordance  with  the  con- 
tract. Sayward  v.  Houghton,  82  Cal. 
628  (1890).  Where  a  citizen  of  Wiscon- 
sin claims  stock  in  a  Wisconsin  corpo- 


ration as  against  a  citizen  of  Illinois  in 
whose  name  the  stock  stands  on  the 
corporate  books,  the  corporation  is  a 
necessaiy  party  defendant  and  the  case 
cannot  be  removed  to  the  federal  courts. 
Rogers  v.  Van  Nortwick,  45  Fed.  Rep. 
513  (1891).  The  corporation  is  a  proper 
party  defendant.  Kendig  v.  Dean,  97 
U.  S.  423  (1878);  Budd  v.  Munroe,  18 
Hun,  316  (1879);  Crump  v.  Thurber,  115 
U.  S.  56  (1885'.  The  reason  of  this  rule 
is  that  complete  possession  of  the  stock 
can  be  obtained  only  by  obtaining  a 
transfer  of  that  stock  on  the  corporate 
books  to  the  plaintiff.  Where,  in  a  suit 
for  specific  performance,  the  corpora- 
tion is  joined  as  a  party  defendant,  in 
order  to  obtain  a  transfer  on  the  books, 
it  is  a  necessary  party,  and  the  other 
defendant  cannot  I'emove  the  case  to 
the  federal  court  if  the  complainant 
and  the  corporation  are  citizens  of  the 
same  state.  Patterson  v.  Farmington, 
etc.  Ry.,  Ill  Fed.  Rep  262  (1901). 

6  St.  Louis,  etc.  Ry.  v.  Wilson,  114  U. 
S.  60  (1885). 

*>  Seven  years' delay  in  bringing  suit 
for  specific  performance  is  a  bar.  York 
V.  Passaic,  etc.  Co.,  30  Fed.  Rep.  471 
(1887).  Five  years'  delay  held  fatal 
where  "the  relations  of  the  parties 
have  changed  and  the  stock  has  greatly 
appreciated  in  value."  Mundy  t?.  Davis, 
20  Fed.  Rep.  353  (1884).  Where  a  per- 
son sells  stock  to  be  delivered  within 
00 


CH.  XX.]  CONTKACTS    TO    SELL GAMBLING    SALES,  ETC. 


[§  338. 


claims  to  hold  stock  in  a  corporation,  as  against  another  person, 
and  sues  the  corporation  without  joining  the  second  claimant,  the 
latter  is  not  bound  by  the  judgment,  even  though  he  is  notified  of 
the  suit,  it  appearing  that  he  was  not  allowed  to  take  part  in  the 
trial.i  A  suit  by  the  purchaser  of  a  certificate  of  stock  to  compel 
delivery  may  be  brought  at  the  place  where  the  certificate  is,  and 
absent  defendants  may  be  served  by  publication.^  Where,  pending 
an  appeal  from  a  decree  ordering  a  person  to  turn  stock  over  to 
another,  the  former  pays  assessments  on  the  stock,  he  can  recover 
these  assessments  from  the  latter  if  the  decree  is  affirmed.^  If 
a  decree  directs  the  transfer  of  certain  stock  in  the  distribution  of 
an  estate,  and  the  corporation  makes  such  transfer,  and  thereafter 
the  decree  is  reversed  on  appeal,  the  executors  may  bring  suit  to 


a  reasonable  time,  and  receives   the 
money  for  it,  but  is  unable  to  perform 
his  contract  by  reason  of  an   injunc- 
tion, the  statute  of  limitations  begins 
to  run  from  the  vendee's  demand  for 
the    return    of    the     purchase-money. 
Rose  V.  Foord,  96  Cal.  154  (1892).    Three 
years"  delay  in  bringing  action  for  spe- 
cific   performance,    the    stock  in    the 
meantime  having  increased  tenfold  in 
value,  is   fatal.     Rogers  v.  Van   Nort- 
wiok,  87  Wis.  414  (1894).     Specific  per- 
formance will  not  be  granted  to  the 
vendee  of  stock  where  he  has  delayed 
for  over  two  years  in  commencing  suit 
and  in  the  meantime  the  situation  has 
materially    changed    and  the   vendee 
commenced  the  suit  for  the  benefit  of 
•  other  parties.     Ringler  v.  Jetter,  35  N. 
Y.  Misc.  Rep.  750  (1901).     Where  one  of 
the  partners  in  a  firm  organized  to  lo- 
cate, develop  and  operate  mines  does 
not  turn  into  the  firm  a  mine  located 
by  him,  but  transfers  the   same  to  a 
corporation   for  stock,  and   the  other 
partners    delay   for    two    years    after 
knowledge  thereof  before  filing  a  bill 
claiming  an  interest  in  the  stock,  and 
in  the  meantime  the  corporation  has 
expended   money  and  the  stock  may 
have  passed  into  other  hands,  the  court 
will  refuse  relief  on  the  ground  that 
the  firm   evidently  intended  to  deny 
any  obligation  if  the  mine  turned  out 
to  be  worthless,  but  to  claim  an  inter- 


est if  it  turned  out  to  be  valuable.  Cur- 
tis V.  Lakin,  94  Fed.  Rep.  251  (1899).  A 
court  of  equity  may  enforce  a  written 
agreement  for  the  delivery  of  stock. 
A  court  of  equity  has  jurisdiction  al- 
though the  party  who  contracted  to 
deliver  the  stock  has  disposed  of  the 
stock  for  cash.  The  lapse  of  time  is  no 
bar  to  the  suit,  there  being  a  complete 
breach  of  trust,  unless  such  lapse  is  ex- 
ceptionally great,  the  facts  having  been 
concealed.  Wood  v.  Perkins,  57  Fed. 
Rep.  258  (1893).  See  also  note  3,  p.  751, 
supra. 

» Fifth,  etc.  Society  v.  Holt,  184  Pa, 
St.  572  (1898). 

2  Ryan  v.  Seaboard,  etc.  R.  R.,  83  Fed- 
Rep.  889  (1897).  A  citizen  of  Alabama 
cannot  maintain  in  the  courts  of  Ala- 
bama a  suit  to  enjoin  non-residents 
from  transferring  stock  in  a  non-resi- 
dent corporation  where  the  defemlants 
are  not  personally  served  within  the 
state.  Rncker  v.  Morgan,  122  Ala.  308 
(1899).  Where  a  corporation  has  not  yet 
issued  stock  as  called  for  by  a  contract, 
a  claimant  of  such  stock  may  bring 
suit  in  the  state  where  corporation 
.was  organized  to  obtain  the  stock,  even 
though  the  other  claimant  is  a  non- 
resident. Jennings  v.  Rocky  Bar,  etc. 
Co.,  70  Pac.  Rep.  136  (Wash.  1902).  See 
g|^  12,  363;  44  S.  E.  Rep.  20. 

3  Irvine  v.  Angus,  93  Fed.  Rep.  629 
(1899). 


761 


33Q.] 


CONTKACTS   TO    SELL- 


GAMBLING   SALES,  ETC. 


[oh. 


XX. 


have  the  transfer  canceled.^  Where  a  sale  of  stock  is  decreed  and 
an  appeal  taken  and  a  bond  given  on  appeal,  and  the  stock  depre- 
ciates during  the  appeal  and  the  decree  is  affirmed,  the  liability  on 
the  bond  is  the  amount  of  the  depreciation.^ 

§  339.  Seventeenth  section  of  statute  of  frauds  as  affecting  sales  oj 
stoch. —  In  England  the  rule  is  firmly  established  that  the  seven- 
teenth section  of  the  statute  of  frauds,  relating  to  contracts  for  the 
sale  of  "goods,  wares,  and  merchandise,"  does  not  apply  to  sales  of 
stock.  No  delivery,  payment  of  earnest  money,  or  memorandum 
in  writing  is  necessary  in  order  to  render  the  contract  of  sale  valid. 
This  principle  of  law  was  doubted  in  the  early  cases,^  but  was  deter- 
mined by  the  case  of  Humble  v.  Mitchell,  in  1839."  In  1838  this 
question  arose  in  this  country,  apparently  for  the  first  time,  and  it 
was  decided  in  Tisdale  v.  Harris,^  chiefly  on  the  authority  of  the 
early  English  cases,  that  a  contract  for  the  sale  of  stock  was  within 
the  seventeenth  section  of  the  statute  of  frauds.  This  decision  has 
been  uniformly  followed  in  America.* 


1  The  suit  is  properly  in  equity.  Ash- 
ton  V.  Heggerty,  130  CaL  516  (1900). 
Under  the  statute  of  California,  even 
though  stock  is  distributed  by  execu- 
tors in  accordance  with  a  decree  of 
distribution,  and  the  distributees  sell 
the  stock  and  it  is  transferred  on  the 
books  of  the  company,  ne verthel  ess  if  the 
decree  is  reversed  on  appeal,  the  trans- 
fers are  void  and  the  company  is  liable 
for  dividends  paid  in  the  meantime  to 
8uch  purchasers.  In  a  suit  by  the  exec- 
utors to  recover  such  dividends  the 
purchasers  need  not  be  made  parties. 
Ashton  V.  Zeila  Min.  Co.,  134  Cal.  408 
(1001).    See  also  i^  330,  sztpm. 

2  Welch  V.  Welch,  60  S.  W.  Rep.  409 
(Ky.  1901). 

^Mussell  V.  Cooke,  Finch's  Prec.  in 
Ch.  533  (1730),  holding  that  the  statute 
applied,  but  was  not  properly  pleaded; 
Pickering  v.  Appleby,  1  Com.  Rep.  353 
(1721),  not  decided,  the  judges  being 
divided  six  and  six;  Colt  v.  Nettervill, 
2  P.  Wms.  304  (1725),  not  decided,  the 
lord  chancellor  saying  it  was  too  ditti- 
cult  to  decide  on  a  demurrer;  Crull  v. 
Dodson,  Sel.  Cas.  Ch.  t.  King  (2d  ed., 
p.  113  —  1725),  statute  held  to  apply. 

Ml  A.  &  E.  205,  followed  in  Duiicuft 
V.  Albrecht,  12  Sim.  189  (1841),  the  court 


saying  that  the  statute  applies  only  to 
goods  capable  of  part  delivery;  Hibble- 
white  V.  McMorine,  6  M.  &  W.  200,  214 
(1840);  Tempest  v.  Kilner,  3  C.  B.  249 
(1846);  Heseltine  uSiggers,!  Exoh.  856 
(1848). 

5  37  Mass.  9. 

ePaltzen  v.  Nicolay,  53  N.  Y.  467 
(1873),  rigidly  applying  the  rule;  North 
V.  Forest,  15  Conn.  400  (1843),  where  the 
court  said:  "  Such  contracts  fall  clearly 
within  the  mischiefs  which  the  legis- 
lature by  the  statute  intended  to  rem- 
edy. There  is  as  much  danger  of  fraud 
and  perjury  in  the  parol  proof  of  such 
contracts  as  in  any  other ; "  Pray  u  Mitch- 
ell. 60  Me.  430  (1872);  Fine  v.  Hornsby, 
2  Mo.  App.  61  (1876);  Colvm  v.  Will- 
iams, 3  Har.  &  J.  (Md.)  38  (1810);  Sher- 
wood V.  Tradesman's  Nat.  Bank,  16  N. 
Y.  W.  Dig.  522  (1883);  French  v.  Sanger, 
N.  Y.  L.  J.,  July  22.  1892.  Cf.  Brown- 
son  V.  Chapman,  63  N.  Y.  625  (1875). 
Contra,  dictum,  Vawter  v.  Griffin,  40^ 
Ind.  593,  602  (1872).  See  Reed,  Stat,  of 
Frauds,  §  234;  Hagar  v.  King,  38  Barb. 
200  (1862),  holding  that  the  sale  of  rail- 
road bonds  is  within  the  statuta  An 
oral  agreement  to  sell  stock,  the  price 
being  more  than  $50,  is  void  under  the 
statute    of  frauds,  even    though    the 


CH.  XX.] 


CONTEACTS    TO    SELL GAMBLING    SALES,  ETC. 


[§  339. 


A  broker,  however,  as  a  common  agent,  may  make  the  memo- 
randum for  both  parties.^  A  part  payment  of  the  consideration 
makes  the  contract  valid,^  and  a  payment  in  property'  or  services* 
suffices.  The  usual  transfer  on  the  back  of  a  certificate  of  stock, 
when  signed  by  the  stockholder,  is  sufficient  to  satisfy  the  statute 
of  frauds.*     The  statute  does  not  apply  as  between  partners  for  the 


agreement  involved  other  stock  which 
was  actually  delivered  and  paid  for. 
Tompkins  v.  Sheehan,  158  N.  Y.  617 
(1899).  A  sale  of  stock  is  within  the 
meaning  of  the  statutes  of  frauds  rela- 
tive to  the  sale  of  goods.  Raymond  v. 
Colton.  104  Fed,  Rep.  219  (1900).  A  sub- 
scription for  stock  is  not  a  contract  for 
the  sale  of  goods,  etc.,  within  the  mean- 
ing of  the  statutes  of  fraud.  Webb  v. 
Baltimore,  etc.  R.  R.,  77  Md.  92  (1893). 
In  Florida  the  statute  applies,  the 
word  "  personal  "  property  being  used. 
Southern  Life  Ins.  Co.  v.  Cole,  4  Fla. 
B59, 378  (1852).  See  also  Mason  v.  Decker, 
72  N.  Y.  595  (1878).  affirming  10  Jones 
&  S.  115;  Johnson  v.  Mulry,  4  Rob. 
(N.  Y.)  401  (1867),  holding  that  the  New 
York  Stock  Jobbing  Act  (Laws  N.  Y. 
1858,  ch.  134)  did  not  affect  the  applica- 
tion of  the  statute  of  frauds.  The  stat- 
ute is  not  sufficiently  pleaded  by  alleg- 
ing that  the  contract  of  sale  of  stock 
"  was  void  in  law  and  not  binding  upon 
him,"  Vaupell  v.  Woodward,  2  Sandf. 
Ch.  143  (1844).  The  question  of  whether 
there  was  a  delivery  sufficient  to  take 
a  case  of  sale  of  stock  out  of  the  stat- 
ute of  frauds  was  submitted  to  the  jury 
in  Hinchman  v.  Lincoln,  124  U.  S.  38 
(1888),  discussed  in  N.  Y.  D.  Reg.,  Jan. 
28,  1888.  A  contract  to  sell  stock  at 
the  vendee's  option  within  three  years 
is  not  void  by  the  statute  of  frauds, 
since  the  option  may  be  exercised 
within  a  year.  Seddon  v.  Rosenbaum, 
85  Va.  928  (1889).  A  subscription  pay- 
able when  the  road  reaches  a  certain 
point  becomes  absolutely  payable  then 
upon  demand.  The  statute  of  frauds 
does  not  apply  to  such  a  subscription. 
Webb  V.  Baltimore,  etc.  R.  R.,  77  Md.  92 
(1893). 
1  Colvin  V.  Williams,  3  Har.  &  J.  (Md.) 


38  (1810).  Without  a  memorandum  in 
writing  a  contract  for  the  sale  of  stock 
is  not  enforceable,  although  made  in  the 
Stock  Exchange,  whose  rules  provide 
that  the  contract  shall  be  enforceable. 
Ryers  v.  Tuska,  14  N.  Y.  Supp.  926  (1891). 
Where  a  stockholder  in  a  letter  offers  a 
commission  to  a  broker  to  sell  his  stock, 
this  is  sufficient  to  satisfy  the  statute 
of  frauds.  Jones  v.  Wattles,  92  N.  W. 
Rep.  765  (Neb.  1902). 

52  Thompson  v.  Alger,  53  Mass.  428 
(1847).  A  check  is  a  part  payment,  tak- 
ing a  sale  of  stock  out  of  the  statute  of 
frauds.  McLure  v.  Sherman.  70  Fed. 
Rep.  190  (1895).  An  oral  agreement  to 
purchase  stock  is  void  by  the  statute 
of  frauds,  notwithstanding  the  vendor 
claims  that  he  resigned  as  president  and 
delivered  the  stock  in  escrow,  there 
being  a  conflict  of  testimony  on  that 
subject.  Reynolds  v.  Scriber,  69  Pac 
Rep.  48  (Oreg.  1902). 

3  Eastern  R.  R.  v.  Benedict,  76  Mass. 
212  (1857). 

*  White  V.  Drew,  56  How.  Pr.  53  (1878), 
holding  that  the  furnishing  of  reliable 
information  is  sufficient. 

5  Flowers  v.  Steiner,  108  Ala.  440 
(1895).  Where  stock  is  sold  and  the  cer- 
tificate transferred  to  the  vendee,  and 
is  then  attached  to  a  note  given  in  pay- 
ment of  part  of  the  purchase  price,  this 
constitutes  a  delivery  and  acceptance 
of  the  stock,  and  the  statute  of  frauds 
does  not  mvalidate  the  sale.  Dinkier 
V.  Baer,  92  Ga.  432  (1893).  In  Cameron 
V.  Tompkins,  72  Hun,  113  (1893),  it  was 
held  that  the  statute  of  frauds  pre- 
vented the  collection  of  a  note  which 
was  given  in  payment  for  stock,  even 
though  the  stock  was  collateral  secu- 
rity for  the  note,  and  even  though  there 
were  letters  prior  to  the  sale  in  which 


763 


§  339.] 


CONTRACTS    TO    SELL GAMBLING    SALES,  ETC.  [CH.  XX. 


purpose  of  buying  stock.'  A  contract  for  the  sale  of  stock  in  a 
corporation  not  yet  incorporated  has  been  held  not  to  be  within 
the  statute.2  ^\^q  statute  must  be  pleaded  in  order  to  be  effective 
as  a  defense.'  The  assignee  of  a  contract  for  the  sale  of  stock,  void 
by  the  statute  of  frauds,  takes  nothing  by  the  assignment."  An 
agreement  by  the  vendor  of  stock  to  take  it  back  at  any  time  is 
not  affected  by  the  statute,  and  such  an  agreement  is  a  part  of  the 
executed  sale.*    Where  the  vendor  of  stock  agrees  to  take  it  back, 


the  proposed  sale  was  referred  to.  The 
court  said:  "A  contract  to  sell  shares 
of  stock  in  a  private  corporation  is 
witliin  the  third  section  of  the  statute 
of  fi-auds  of  tlie  state  of  New  York." 

1  Tomlinson  v.  Miller,  7  Abb.  Pr.  (N.  S.) 
364  (1869).  Nor  as  between  persons, 
one  of  whom  buys  stock  in  his  own 
name  for  the  joint  benefit  of  both. 
Stover  V.  Flack.  41  Barb.  162  (1862). 

2  Gadsden  u  Lance,  McMull.  Eq.  (S.  C.) 
87  (1841);  Green  v.  Brookins,  23  Mich. 
48,  54  (1871),  where  a  person  was  in- 
duced to  subscribe  on  parol  contract 
that  a  purchaser  for  the  stock  would 
afterwards  be  found.  In  Massachu- 
setts, on  similar  facts,  except  that  a 
certain  person  agreed  to  purchase,  a 
contrary  decision  was  rendei'ed.  Board- 
man  V.  Cutter.  128  Mass.  388  (1880). 

3  Porter  v.  Wormser,  94  N.  Y.  431,  450 
(1884). 

4  Mayer  v.  Child,  47  Cal.  142  (1873). 
SFitzpatrick  v.  Woodruff,   96  N.  Y. 

561  (1884);  Thorndike  v.  Locke,  98  Mass. 
340  (1867);  Fay  v.  Wheeler,  44  Vt.  292 
(1872);  Bank  of  Lyons  v.  Demmon,  Hill 
<&  D.  Supp.  398  (1844).  An  agreement 
by  promoters  witii  a  subscriber  for 
stock  that  they  would  take  the  stock 
from  him  within  a  certain  time,  if  he 
desired,  is  valid  and  enforceable. 
Meyer  v.  Blair,  109  N.  Y.  600  (1888);  Mor- 
gan V.  Struthers,  131  U.  S.  246  (1889). 
An  agreement  to  take  back  bonds  if 
the  vendee  desires  to  return  tliem  is 
valid  and  enforceable.  Johnston  v. 
Trask.  116  N.  Y.  136  (1889).  A  guar- 
ant)'  that  a  vendor  will  take  back  the 
stock  sold  if  the  vendee  desires  is  en- 
forceable, even  after  the  company  sells 


out  to  another  company  for  its  shares 
of  stock,  the  vendee  not  assenting. 
Richter  v.  Frank,  41  Fed.  Rep.  859 
(1890).  An  agreement  of  the  vendor  to 
buy  back  the  stock  is  enforceable.  Gra- 
ham V.  Houghton,  153  Mass.  384  (1891). 
A  broker's  agreement  to  take  bonds 
back  at  a  certain  price  at  any  time  is 
enforceable,  where  the  bonds  were  sold 
in  1888.  and  in  1890,  when  the  bonds 
were  tendered  back,  the  broker  delayed 
action  and  said  he  would  take  them 
at  any  time,  and  in  1895  a  final  ten- 
der was  made,  and  in  1897  suit  was 
commenced.  Lydig  v.  Braman,  177 
Mass.  212  (1900).  In  a  suit  on  a  note 
given  in  payment  for  stock  the  defend- 
ant may  prove  an  oral  agreement 
showing  that  he  had  a  right  to  return 
the  stock  and  demand  back  the  note. 
Germania  Bank,  etc.  v.  Osborne,  81 
Minn.  272  (1900).  The  joint  guarantee 
by  several  parties  of  a  specified  divi- 
dend for  a  specified  time  on  certain 
stock,  in  order  to  bring  about  its  sale, 
together  with  their  agreement  to  pur- 
chase the  stock  at  par  at  the  end  of 
the  time,  and  if  they  fail  to  do  so  to 
continue  to  pay  the  guaranteed  divi- 
dends, is  enforceable  against  all  for  the 
guaranteed  dividends  for  the  specified 
time,  but  as  to  the  purchase  is  enforce- 
able against  those  only  upon  whom  a 
demand  is  made  that  they  purchase 
the  stock  in  accordance  with  the  agree- 
ment. Rogers  v.  Burr,  105  Ga.  433 
(1898).  The  Illinois  statute  against  op- 
tions does  not  apply  to  a  contract  by 
which  the  vendor  of  stock  agrees  to 
buy  it  back  at  the  end  of  five  years  if 
the  vendor  so  desires,  the  vendee  on 


r64 


CH.  XX.]  CONTRACTS    TO    SELL  —  GAMBLING    SALES,  ETC. 


[§  339. 


and  in  the  meantime  the  corporation  fails  and  the  stock  is  assessed, 
the  vendor  must  refund  to  the  vendee  the  assessment  as  well  as. 


his  part  agreeing  not  to  sell  the  stock 
to  anyone  in  the  meantime,   without 
first  offering  it  to  the  vendor.     Ubben 
V.     Binnian,    183    111.    508    (1899).     An 
agreement  of  the  vendor  of  bonds  to 
buy  them  back  at  the  same  price  at  a 
certain  time  if  tliB  vendee  wishes  is  not 
a    gambling    contract.     Wolf    v.   Nat. 
Bank    of    Illinois,    178    IlL    85    (1899). 
Where  the  vendee  has  the  right  to  re- 
turn   the    stock    within   a   reasonable 
time,  the  statute  of  limitations  on  such 
right  is  not  to  begin  to  run  until  a  rea- 
sonable time  after  the  date  of  the  con- 
tract.    Oaks  V.  Taylor,  30  N.  Y.  App. 
Div.  177  (1898).     The  agreement  of  the 
vendor  of  stock  to  buy  it  back  at  the 
price  paid,  and  one  per  cent,  a  month 
in  addition,  is  not  usurious  as  a  matter 
of  law.     Phillips  v.  Mason,  66  Hun,  580 
(1893).     Where    the  vendor  agrees  to 
refund  the  money  upon  the  return  of 
the  stock  sold,  the  vendee  cannot  sue 
for  the  money  unless   he  returns  the 
.stock.     Henderson  v.  Wheaton,  139  111. 
581  (1891).     Where  stock  is  sold  with  a 
contract  on  the  part  of  a  vendor  that 
he  will  repurchase  it  if  desired  "  at  the 
end  of  one  year,"  the  time  may  be  ex- 
tended by  oral  agreement.      Weld  v. 
Barker,  153  Pa.  St.  465  (1893).     The  ven- 
dee, in  enforcing  the  contract  of  the 
vendor  to  take  the  stock  back,  must 
make  and  allege  a  tender.     Taylor  v. 
Blair,   59   Hun,  347  (1891).     An  agree- 
ment of  the  vendor  to  repurchase  the 
stock  at  the  option  of  the  purchaser  at 
the  end  of  one  year   becomes  enforce- 
able at  the  end  of  one  year,  excluding 
the  day  of  the  contract  from  the  count. 
A  custom  of  brokers  to  the  contrary 
does  not  apply  to  such  a  transaction. 
An  extension  of  the  time  by  the  original 
vendor  by  agreement   does  not  waive 
his  rigiits.     Weld  v.  Barker,  153  Pa.  St. 
465  (1893).    Where,  however,  the  vendee 
turns  in  his  stock  on  a  reorganization 
and  takes  new  stock,  he  cannot  enforce 


the  vendor's  contract.     Kolsky  v.  En- 
slen,  103  Ala.  97  (1894).     Where  a  party 
has  a  right  to  return  the  stock  and  re- 
ceive back  his  money,  he  may,  after 
making  a  tender,  do  any  acts  in  regard 
to  the  stock  reasonably  necessary  to 
protect  his  interest,  and  yet  not  lose 
his  right  to  rescind.     But  where  he 
directs  a  sale  of  the  stock,  and  gives  a 
proxy  thereon  and  attends  meetings,  he 
waives  his  right  to  rescind.    Jessop  v. 
Ivory,  158  Pa.  St.  71  (1893).     A  receipt 
given  by  a  vendor  may,  by  its  wording, 
be  a  contract  on  the  part  of  the  vendor 
to  take  the  stock  back  if  the  vendee 
becomes  dissatisfied.     Jessop  v.  Ivory, 
172  Pa.  St.  44  (1895).     Where  it  is  agreed 
between  the  vendor  and  vendee  stock- 
holder that  the  money  should  be  paid 
to    the  corporation   in  order  to  meet 
corporate  debts,  and  the  vendor  agreed 
to  repay  the  money  if  the  stock  became 
worthless,  the  statute  of  frauds  does- 
not  prevent  the  vendee  from  recovering 
the  money,  even  though  the  contract 
was  oral.     Kilbride  v.  Moss,  113  Cal.  432 
(1896).       Where   a    corporation    issues 
stock  in  payment  for  a  patent  right,  and 
agrees  to  take  back  the  stock  and  pay 
the  par  value  thereof  at  the  end  of  five 
years,  if  the  purchaser  so  wishes,  the 
purchaser  may  enforce  the  agreement. 
Browne  v.   St.   Paul   Plow  Works,  62 
Minn.  90  (1895).     A  contract  to  repur- 
chase stock  may  be  assigned   by  the 
holder  of  the  stock.     Mitchell  v.  Taylor, 
27   Oreg.  377  (1895).     A   verbal  agree- 
ment to  take  the  stock  back  is  not 
good  as  against  a  note  given  in   pay- 
ment.    Riley  v.  Treanor.  25  S.  W.  Rep. 
1054  (Tex.  1894).     The  right  to  rescind 
and  tender  back  stock  after  one  year 
can  be  exercised  only  by  a  tender  after 
the  year  and  not  before;  but  the  tender 
is  waived  if  the  vendor  states  that  he 
will  not  accept  the  tender.     The  fact 
that  the  vendee  has  sold  some  of  the 
stock  is  immaterial   if  he   has    other 


765 


§  339.] 


CONTEACTS    TO    SELL GAMBLING    SALES,  ETC.  [CH.  XX. 


the  purchase  price.'  Where  the  vendee  agrees  in  writing  to  re- 
sell the  stock  to  the  vendor  at  a  specified  price,  an  oral  notice  by 
the  vendor  that  he  wishes  to  repurchase  is  sufficient,  but  he  must 
tender  the  money  unless  such  tender  is  excused  by  the  conduct  of 
the  vendee." 

So,  also,  the  agreement  of  third  parties  to  take  the  stock,  or  to 
protect  from  loss  the  party  buying  it,  is  enforceable  if  founded  on 
a  sufficient  consideration.^ 


shares  to  take  the  place  of  the  part  sold- 
The  fact  that,  by  agreement,  the  prop- 
erty has  been  merged  in  another  cor- 
poration in  the  meantime  is  immaterial. 
Schultz  V.  O'Rourke,  18  Mont.  418  (1896). 
An  agreement  to  repurchase  at  the  end 
of  a  year  if  thirty  days'  notice  is  given 
is  effective  if  the  thirty  days'  notice  is 
given  at  any  time  before  the  expiration 
of  the  3'ear.  Maguire  v.  Halsted,  18  N. 
Y.  App.  Div.  228  (1897).  An  agreement 
to  reimburse  a  party  as  to  stock  "  at  or 
before  "  a  certain  date  cannot  be  en- 
forced by  the  promisee  prior  to  the 
expiration  of  the  specified  time.  Wilson 
V.  Bicknell,  170  Mass.  259  (1898).  An 
agreement  to  take  back  stock  on  a  cer- 
tain day  if  the  purchaser  so  desires 
does  not  enable  the  purchaser  to  tender 
the  stock  back  after  that  day.  Cabot 
V.  Kent,  20  R  L  197  (1897). 

1  Gay  V.  Dare,  103  Cal.  454  (1894). 

2  Hanson  v.  Slaven,  98  Cal.  377  (1893). 
swiierea  stockholder  subscribes  for 

an  increased  capital  stock  on  the  agree- 
ment of  parties  to  take  the  stock  if  the 
subscriber  does  not  want  it,  the  latter 
may  hold  the  former  liable  for  the  dif- 
ference between  what  the  latter  pays 
for  the  stock  and  what  he  is  able  to  sell 
it  for.  Herd  v.  Thompson,  149  Pa.  St. 
434  (1892).  A  guaranty  that  the  vendee 
of  stock  shall  not  lose  money  by  the 
purchase  may  be  enforced  by  the  vendee 
when  he  proves  that  the  stock  has  no 
market  value,  and  that  he  has  tried  to 
sell  it  but  has  failed.  Phipps  v.  Sharps, 
143  Pa.  St.  597  (1891).  A  statement  of  a 
party  who  is  endeavoring  to  sell  stock 
for  another,  that  he  will  see  the  latter 
whole  in  the  matter,  creates  no  liability 


on  the  part  of  the  former.  Martin's  Es- 
tate, 131  Pa.  St.  638  (1890).  A  person  who 
writes  to  a  party,  when  the  latter  sub- 
scribes for  stock,  that  the  former  will 
pay  the  subscription  if  the  road  is  not 
completed  within  a  certain  time,  is  a 
surety  and  may  be  held  liable,  Allison 
V.  Wood,  147  Pa.  St.  197  (1892).  The 
agreement  of  a  person  with  a  subscriber 
for  stock  that  he  will  pay  to  the  latter 
one  hundred  cents  on  the  dollar  for  the 
stock  within  ninety  days  is  not  enforci- 
ble  unless  the  subscriber  tenders  the 
stock  and  demands  the  money  within 
that  time;  and  a  guaranty  to  save  the 
subscriber  harmless  from  any  loss  as  a 
stockholder  does  not  guaranty  against 
loss  by  a  decline  in  the  value  of  the 
stock  itself.  Morris  v.  Veach,  111  Ga. 
435  (1900).  An  oral  promise  by  a  stock- 
holder that  he  would  repay  at  any  time 
after  one  year  the  amount  paid  by  an 
individual  to  the  corporation  for  stock, 
if  the  latter  did  not  receive  a  profit  of 
twenty  per  cent.,  is  void  under  the  stat- 
ute of  frauds.  Moore  v.  Vosburgh,  66 
N.  y.  App.  Div.  223  (1901).  The  promise 
of  the  directors  of  a  corporation,  induc- 
ing a  person  to  purchase  stock  from  the 
corporation,  that  they  will  pay  enough 
to  make  the  dividend  eight  per  cent,  as 
long  as  the  corporation  exists,  is  not 
void,  under  the  statute  of  frauds,  and 
is  enforceable.  People,  etc.  v.  Most,  36 
N.  Y.  Misc.  Rep.  139  (1901).  An  agree- 
ment of  a  stockholder  that  another 
stockholder  shall  be  made  "whole"  for 
any  loss  due  to  not  selling  stock  is  with- 
out consideration  and  void.  Martin's 
Estate.  4  Ry.  &  Cor|).  L.  J.  449  (Orphans' 
Ct.   Phil.  1888).     A  person  induced  to 


r66 


CH.  XX.]        CONTRACTS    TO    SELL GAMBLING    SALES,  ETC.       [§§  340,  341. 

§  340.  Other  sections  of  statute  of  frauds  as  affecting  sales  of 
stock. —  The  provisioii  of  the  statute  of  frauds  rekitive  to  answer- 
ing for  the  debts,  defaults,  or  miscarriages  of  another  does  not 
apply  to  a  guaranty  that  there  will  be  a  certain  dividend  on  stock 
purchased,^  nor  to  broker's  relation  towards  his  client.^  The  pro- 
vision of  the  statute  relative  to  transfers  of  land  does  not  apply  to 
stock,^  since  shares  of  stock  are  personal  property.*  A  transfer  of 
stock  for  the  purpose  of  defrauding  the  transferrer's  creditors  is 
void,  and  a  court  of  equity  will  set  it  aside,^  or  the  stock  may  be 
attached  or  sold  under  execution  the  same  as  though  no  attempt  at 
transfer  had  been  made.^  An  oral  agreement  whereby  one  party 
makes  a  loan  to  the  corporation  in  consideration  of  the  other  party 
keeping  the  former  in  control  and  giving  him  an  option  on  the 
latter's  stock  does  not  sustain  a  suit  for  damages^  even  if  broken 
by  the  latter,  inasmuch  as  it  is  void,  under  the  statute  of  frauds,  as 
not  to  be  performed  within  a  yearJ 

B.    GAMBLING    SALES    OF   STOCK. 

§  341.  What  are  wager  stoch  s«7es.— Executory  contracts  for  the 
sale  of  stock  may  be  made  with  an  intent  to  actually  deliver  the 
stock,  or  they  may  be  made  with  an  intent  not  to  deliver  it,  but  to 
pay  in  cash  the  amount  lost  or  won  by  the  rise  or  fall  of  the  mar- 
subscribe  by  an  agreement  of  a  third  poration.  Wilbur  v.  Stoepel,  83  Mich, 
perscyi  to  purchase  the  stock  at  par  at  344  (1890).  Where  certain  stockholders 
any  time  may  collect  from  the  latter  agreed  with  a  subscriber  for  stock  that 
the  difference  between  the  price  at  he  shall  receive  certain  dividends  and 
jphich  the  former  sells  and  the  par  that  they  will  take  his  stock  if  he  de- 
value, the  latter  having  declined  to  per-  sires  after  three  years,  he  has  a  reason- 
form.  LewisuCoates,  93  Mo.  170(1888).  able  time  after  the  three  years  to  ex- 
See  also  §  334,  supra.  A  memorandum,  ercise  his  right  to  sell  to  them.  Eogers 
•"  We  agree  to  pay  A.  Rampacker  the  v.  Burr,  97  Ga.  10  (1895);  s.  c,  105  Ga,  433 
par  value  of  this  stock  .  .  .  upon  (1898).  See  also  g  775,  infra. 
the  surrender  of  this  certificate"  in-  iMoorehouse  v.  Crangle,  36  Ohio  St. 
dorsed  on  the  back  of  the  certificate  130  (1880).  Cf.  73  S.  W.  Rep.  477. 
enables  him  to  tender  the  stock  and  ^  Genin  v.  Isaacson,  6  N.  Y.  Leg.  Obs. 
collect  the  par  value,  even  though  there  213  (1848):  Rogers  v.  Gould,  6  Hun,  229 
was  no  consideration  for  the  promise.    (1875). 

Wheaton  v.  Rampacker,  3  Wyo.   441        3  Watson    v.  Spratley,  10  Exch.  223 
(1891).     An  agreement  of  persons  hold-    (1854);  Powell  v.  Jessopp,  18  C.  B.  336 
ing  a  majority  of  the  stock,  they  being    (1856);  Walker  v.  Bartlett,  18  C.  B.  845 
directors  also,  that  a  person  purchasing    (1856);  Ash  worth  v.  Munn,  L.  R.  15  Ch. 
stock  from  them  shall  be  general  man-    D.  363,  368  (1880). 
ager,  and  may  at  the  end  of  two  years        *  See  ch.  I,  supra. 
sell  the  stock  back  to  them  at  a  stated        »  See  §  481,  infra. 
price,  is  contrary  to  public  policy  and        ^  See  §  484,  infra. 
void.   The  vendors  need  not  repurchase.        '  Gazzam  v.  Simpson,  114  Fed.  Rep.  71 
The  arrangement  is  unfair  to  the  cor-     (1902). 

767 


§  3il.] 


CONTEACTS    TO    SELL GAMBLING 


SALES,  ETC. 


[CH.  XX. 


ket  price  of  the  stock,  A  sale  with  the  former  intent  is,  at  cotn- 
mon  law,  legal  and  valid.^  A  sale  with  the  latter  intent  is  a 
gambling  or  wager  contract,  and  is  not  enforceable.^    The  essen- 


1  Irwin  V.  Williar.  110  U.  S..499,  508 
(1884),  the  court  saying:  "Tl»e  gener- 
ally accepted  doctrine  of  this  country 
is  .  .  .  that  a  contract  for  the  sale  of 
goods  to  be  delivered  at  a  future  day  is 
valid,  even  though  the  seller  has  not 
the  goods  nor  any  other  means  of  get- 
ting them  than  to  go  into  the  market 
and  buy  them;  but  such  a  contract  is 
only  valid  when  the  parties  really  in- 
tend and  agree  that  the  goods  are  to  be 
delivered  by  the  seller  and  the  price  to 
be  paid  by  the  buyer;  and  if  under 
guise  of  such  a  contract  the  real  intent 
be  merely  to  speculate  in  the  rise  or 
fall  of  prices,  and  the  goods  are  not  to 
be  delivered,  but  one  party  is  to  pay  to 
the  other  the  difference  between  the 
contract  price  and  the  market  price  of 
the  goods  at  the  date  fixed  for  execut- 
ing the  contract,  then  the  whole  trans- 
action constitutes  nothing  more  than 
a  wager,  and  is  null  and  void.  And 
this  IS  now  the  law  in  England  by  force 
of  the  statute  of  8  and  9  Vict.,  c.  109, 
§  18,  altering  the  common  law  in  that 
respect."  In  England  it  is  held  that 
although  the  parties  may  have  contem- 
plated that,  as  a  whole,  there  would  be 
a  mere  payment  of  differences  between 
them,  yet,  inasmuch  as  the  actual  con- 
tracts entered  into  involved  the  liabil- 
ity for  the  actual  delivery  of  tlie  stock 
dealt  with,  they  were  not  gaming  or 
wagering  transactions.  Universal  Stock 
Exch.  r.  Stevens,  66  L.  T.  Rep.  612  (1892). 
It  may  be  speculation;  nevertheless  it 
is  valid.  Clarke  v.  Foss,  7  Biss.  540 
(1878);  s.  C,  5  Fed.  Cas,  955;  Smith  v. 
Bouvier,  70  Pa.  St.  325  (1872);  Kirkpat- 
rick  V.  Bonsall,  72  Pa.  St.  155  (1872), 
where  the  court  said:  "We  must  not 
confound  gambling,  whether  it  be  in 
corporation  stocks  or  merchandise,  with 
what  is  commonly  termed  speculation. 
Merchants  speculate  upon  the  future 
prices  of  that  in  which  they  deal,  and 


buy  and  sell  accordingly."  Hatch  v. 
Douglas,  48  Conn.  116  (1880);  Flagg  v. 
Baldwin,  38  N.  J.  Eq.  219  (1884);  Kent 
V.  Miltenberger,  13  Mo.  App.  503  (1883). 
If  deliveries  are  made  the  transaction 
is  not  gambling.  Pratt  v.  Boody,  55  N. 
J.  Eq.  175  (1896).  A  corporation  organ- 
ized to  act  as  a  broker  in  buying  and 
selling  grain  is  subject  to  the  same  rule 
as  regards  gambling  contracts  that  in- 
dividuals are.  Peck  v.  Doran,  etc.  Co., 
57  Hun,  343  (1890).  An  agreement  of  the 
vendor  of  bonds  to  buy  them  back  at 
the  same  price  at  a  certain  time  if  the 
vendee  wishes  is  not  a  gambling  con- 
tract. Wolf  V.  Nat.  Bank  of  Illinois, 
178  III.  85  (1899). 

2'- Wagers  at  common  law  are  valid 
and  enforceable  in  the  courts;"  and, 
with  certain  exceptions  growing  out  of 
the  peculiar  subject  of  the  wager,  they 
have  been  held  to  be  valid  contracts. 
Dewey,  Contracts  for  Future  Delivery, 
etc.  (1886),  p.  10.  To  same  effect:  Good 
V.  Elliott.  3  T.  R.  693  (1790);  Gilbert  v. 
Sykes,  16  East,  150  (1812);  Atherfold  v. 
Beard,  2  T.  R.  610  (1788);  Morgan  v.  Peb- 
rer,  4  Sco.  230  (1837);  Hussey  v.  Crickitt, 
8  Camp.  168  (1811);  Grant  v.  Hamilton, 
3  McLean,  100  (1842):  s.  C,  10  Fed.  Cas. 
978;  Campbell  v.  Richardson,  10  Johns. 
406  (1813);  Bunn  v.  Riker,  4  Johns.  426 
(1809);  Johnson  r.  Fall,  6  Cal.  359(1856); 
Johnston  v.  Russell,  37  Cal.  670  (1869); 
Dewees  v.  Miller,  5  Harr.  '(Del.)  347 
(1851);  Porter  v.  Sawyer,  1  Harr.  (Del.) 
517  (1832);  Griffith  v.  Pearce,  4  Houst. 
(Del.)  209  (1870):  Richardson  v.  Kelly,  85 
111.  491  (1877);  Petillon  v.  Hippie,  90  111. 
420(1878);  Trenton,  etc.  Ins.  Co.  v.  John- 
son, 24  N.  J.  L.  576  (1854);  Dunman  v. 
Strother,  1  Tex.  89  (1846);  McElroy  v. 
Carmichael,  6  Tex.  454  (1851);  Wheeler 
V.  Friend,  22  Tex.  683  (1859);  Monroe  v. 
Smelly,  25  Tex.  586  (1860).  Contra:  In 
Pennsylvania  —  Edgell  v.  McLaughlin, 
6  Whart.   176  (1841);  Phillips  v.  Ives,  1 


768 


CH.  XX.]  CONTRACTS    TO    SELL  —  GAMBLING    SALES,  ETC. 


[§  341. 


tial  difference  between  a  wager  contract  and  a  contract  not  a 
wager  is  whether  there  is  an  intent  to  deliver  the  propert}'  sold.^ 
Even  though  the  original  intent  was  not  to  deliver,  yet  a  subsequent 
actual  sale  and  purchase  validates  the  transaction.^  "  In  order  to 
invalidate  a  contract  as  a  wagering  one,  both  parties  must  intend 
that  instead  of  the  delivery  of  the  article  there  shall  be  a  mere  pay- 
ment of  the  difference  between  the  contract  and  the  market  price."  * 
A  sale  for  future  delivery,  although  a  "  short "  sale,  is  not  a  gam- 
bling contract  jj^r  se}  An  "  option,"  "  put,"  "  call,"  "  straddle,"  or 
other  similar  stock-exchange  contract,  may  be  made  with  an  intent 


Rawle,  36  (1828);  Brua's  Appeal,  55  Pa. 
St.  294  (1867);  in  Vermont  —  CoUamer  v. 
Day,  2  Vt.  144  (1829);  Tarleton  v.  Baker, 
18  Vt.  9  (1843);  in  New  Hampshire  — 
Clark  V.  Gibson,  13  N.  H.  386  (1841); 
Winchester  v.  Nutter,  53  N.  H.  507 
(1872);  in  Maine  —  McDonough  v.  Web- 
ster, 68  Me.  530  (1878);  Gilmore  v.  Wood- 
cock, 69  Me.  118  (1879);  Missouri  —  Wat- 
erman V.  Buckland,  1  Mo.  App.  45  (1876); 
and  Massachusetts  —  Ball  v.  Gilbert,  53 
Mass.  397  (1847);  Babcock  v.  Thompson, 
20  Mass.  446  (1826);  Sampson  v.  Shaw. 
101  Mass.  145  (1869).  The  supreme  court 
of  the  United  States  said,  in  Irwin  v. 
Williar,  110  U.  S.  499  (1884):  "  In  Eng- 
land it  is  held  that  the  contracts, 
although  wagers,  were  not  void  at  com- 
mon law,  .  .  .  while  generally,  in 
this  country,  all  wagering  contracts 
are  held  to  be  illegal  and  void  as  against 
public  policy,"  citing  Dickson  v. 
Thomas,  97  Pa.  St.  378  (1881);  Gregory 
V.  Wendell,  40  Mich.  433  (1879);  Lyon  v. 
Culbertson,  83  111.  33  (1876);  Melchertu 
American  U.  Tel.  Co.,  3  McCrary.  531 
(1882);  s.  c,  11  Fed.  Rep.  193  and  note; 
Barnard  v.  Backhaus,  52  Wis.  593  (1881), 
Love  V.  Harvey,  114  Mass.  80  (1873); 
Embrey  v.  Jemison.  131  U.  S.  336  (1889). 
A  contract  for  the  sale  and  purchase  of 
stocks"  with  no  intent  of  delivery,  but 
merely  to  pay  differences,  is  illegal.  Re 
Gieve,  [1899]  1  Q.  B.  794. 

iRoundtree  v.  Smith,  108  U.  S.  369 
(1883);  Re  Hunt,  26  Fed.  Rep.  739(1886). 
Mr.  Dewey  (Contracts  for  Future  De- 


livery and  Commercial  Wagers,  p.  28) 
states  the  rule  accurately  as  follows: 
"  Where  the  parties  to  a  contract  in  the 
form  of  a  sale  agree  expressly  or  by  im- 
plication, at  the  time  it  is  made,  that 
the  contract  is  not  to  be  enforced,  that 
no  delivery  is  to  be  made,  but  the  con- 
tract is  to  be  settled  by  the  payment  of 
the  difference  between  the  contract 
price  and  the  market  price  at  a  given 
time  in  the  future,  such  a  transaction 
is  a  wager,"  citing  many  cases.  If  there 
is  an  intent  to  deliver,  then  the  trans- 
action is  legal,  though  the  parties 
"exercise  the  option  of  settling  the 
difference  in  price,  rather  than  make 
delivery  of  the  property."  Ward  v. 
Vosburgh,  31  Fed.  Rep.  12  (1887).  As  re- 
gards sales  and  margins,  see  §  457,  infra. 
In  Indiana  it  was  held  that  a  note 
given  in  New  York  to  settle  a  gambling 
cotton  debt  was  governed  by  New  York 
laws  as  to  its  legality.  Sondheim  v. 
Gilbert.  117  Ind.  71  (1888). 

2J)i  re  Taylor,  etc.,  193  Pa.  St.  304 
(1899).  Where  the  broker  actually  buys 
the  securities  for  the  customer  the 
transaction  is  not  gambling,  even 
though  the  securities  are  afterwards 
resold,  and  where  the  purchaser  takes 
up  stocks  still  held  by  the  broker  he  le- 
galizes all  the  past  transactions.  Young 
V.  Glendenning,  194  Pa.  St.  550  (1900). 

3  Clews  V.  Jaraieson,  182  U.  S.  461,  489' 
(1901). 

4  Clews  V.  Jamieson,  182  U.  S.  461,  48^ 
(1901). 


(49) 


769 


§  341.] 


CONTRACTS    TO   SELL  —  GAMBLING    SALES,  ETC.  [CH.  XX. 


to  actually  deliver  the  stock,  and,  if  so,  are  unobjectionable  and 
are  enforceable.^ 

The  fact  that  stock  transactions  were  carried  on  by  "  margins  " 
is  no  evidence  that  they  were  gambling  contracts,-  excepting  in 
Maryland  and  Xew  Jersey.     In  these  states  this  fact  alone  seems  to 


1  For  definitions  of  these  terms,  see 
§  445,  n.,  infra.  A  "  put "  is  not  per  se 
conclusive  evidence  of  an  intent  not 
to  deliver.  Bigelow  v.  Benedict,  70  N. 
Y.  202  (1877).  A  "straddle"  follows 
the  same  rule.  The  parties  may  have 
intended  to  deliver  the  stock.  Harris 
V.  Tumbridge,  83  N.  Y.  92  (1880);  Story 
V.  Salomon,  71  N.  Y.  420  (1877).  Cf.  Ex 
parte  Young,  6  Biss.  53  (1874);  s.  c,  30 
Fed.  Cas.  828;  Webster  n  Sturges.  7  111. 
App.  560  (1880);  Tenney  v.  Foote,  4  111. 
App.  594  (1879);  Lyon  v.  Culbertson,  83 
111.  33  j(1876);  Gilbert  v.  Gauger,  8  Biss. 
214  (1878);  S.  C,  10  Fed.  Cas.  345.  A 
short  sale  is  not  per  se  a  vv'ager,  nor  is 
it  presumed  to  be.  Maxton  v.  Gheen, 
75  Pa.  St.  166  (1874);  Hess  v.  Rau,  95  N. 
Y.  359  (1884);  Knowlton  v.  Fitch,  52  N. 
Y.  288  (1873);  White  v.  Smith,  54  N.  Y. 
522  (1874);  Cameron  v.  Durkheim,  55 
N.  Y.  425  (1874);  Third  Nat.  Bank  v. 
Harrison,  10  Fed.  Rep.  243  (1882).  These 
decisions  rest  upon  the  principle  of  law 
laid  down  in  Stanton  v.  Small,  3  Sandf. 
230  (1849),  that  "  a  contract  for  the  sale 
of  goods  to  be  delivered  at  a  future 
daj'  is  not  invalidated  by  the  circum- 
stance that  at  the  time  of  the  contract 
the  vendor  neither  has  the  goods  in  his 
possession,  nor  has  entered  into  any 
contract  to  buy  them,  nor  has  any  rea- 
sonable expectation  of  becoming  pos- 
sessed of  them  at  the  time  appointed 
for  delivering  them,  otherwise  than  by 
purchasing  them  after  making  the  con- 
tract." See  also  ^i  457,  infra.  There 
are  many  cases  to  the  same  eflfect.  See 
Noyes  v.  Spaulding,  27  Vt.  420  (1855); 
Shales  v.  Seignoret.  1  Ld.  Raym.  440 
(1700);  Frost  v.  Clarkson,  7  Cow.  25 
(1827);  Dewey,  Contracts  for  Future 
Delivery,   p.  97;   Thacker  v.  Hardy,  L. 


R.  4  Q.  B.  D.  685  (1878),  holding  that,  if 
the  intent  at  the  time  of  buying  was 
to  deliver,  it  is  not  a  wager,  even 
though  that  intent  be  afterwards 
changed.  As  to  the  legality  of  a  "  cor- 
ner," see  §  621&,  infra.  Where  there  is 
evidence  of  some  intent  to  deliver,  the 
transaction  is  not  gambling.  Coth- 
ran  v.  Ellis,  125  III.  496  (1888).  A  sale, 
delivery  to  be  in  twelve  months,  or,  if 
vendor  wishes,  before  then,  is  not 
a  gambling  contract.  Ferryman  v. 
Wolffe,  93  Ala.  290  (1890). 

2  Sawyer  v.  Taggart,  14  Bush  (Ky.), 
727  (1879);  Wall  v.  Schneider,  59  Wis. 
352  (1884);  Bartlett  v.  Smith,  13  Fed. 
Rep.  263  (1882);  Whitesides  v.  Hunt,  97 
Ind.  191  (1884);  Union  Nat.  Bank  v.  Carr, 
15  Fed.  Rep.  438  (1883):  Hatch  v.  Doug- 
las. 48  Conn.  116  (1880).  A  purchase  of 
stock  on  margin  is  not  necessai'ily  gam- 
bling, but  is  gambling  if  there  is  no  in- 
tention to  deliver  but  merelj-  to  settle 
the  loss  or  gain.  Wagner  u  Hildebrand, 
187  Pa.  St.  136  (1S98).  Many  other  cases 
do  not  directly  pass  on  this  question, 
but  assume  that  the  deposit  of  a  mar- 
gin, as  a  security  to  the  broker,  does 
not  prove  an  intent  not  to  have  a  deliv- 
ery of  the  stock.  Where  the  customer 
called  for  the  stock,  and  it  is  tendered 
to  him,  the  broker  may  recover  the 
price,  even  though  the  stock  was  first 
bought  on  a  margin.  Anthony  v.  Un- 
angst,  174  Pa.  St.  10  (1896).  Transactions 
on  margins  are  not  necessarily  gam- 
bling. Hopkins  v.  O'Kane,  169  Pa.  St. 
478  (1895).  But  see  Ruohizky  '  v.  De 
Haven,  97  Pa,  St.  202  (1881);  Dickson  v. 
Thomas,  97  Pa.  St.  278  (1881);  Fareira 
V.  Gabell,  89  Pa.  St.  89  (1879);  Maxton  v. 
Gheen,  75  Pa.  St.  166  (1874);  North  v. 
Philips,  89  Pa.  St.  250  (1879). 


770 


CH.  XX.]  CONTRACTS    TO    SELL  —  GAMBLING    SALES,  ETC. 


[§  342. 


be  sufBcient  evidence  of  a  wager.'  A  cotton  mill  may  purchase 
cotton  to  be  delivered  in  the  future  and  may  put  up  a  margin  to 
carry  the  contract.^  A  wager  contract  is  not  proved  by  the  fact 
that  the  party  selling  stock  to  be  delivered  at  a  future  time  intends 
to  purchase  that  amount  of  stock  in  time  for  the  delivery,  or  vice 
versa?  "An  executory  contract  for  the  sale  of  goods  for  future  de- 
livery is  not  infected  with  the  quality  of  a  wager  by  reason  of  the 
fact  that  at  its  date  the  vendor  had  not  the  goods,  and  had  not  en- 
tered into  any  arrangement  to  provide  them,  and  had  no  expecta- 
tion of  receiving  them,  unless  by  subsequently  going  into  the  mar- 
ket and  buying  them."*  A  bona  fide  sale  of  grain  deliverable  in  a 
certain  month,  on  a  day  to  be  fixed  by  seller,  is  not  a  gambling 
contract.^ 

§  3-1:2.  Statutes  proMMting  wager  contracts,  and  also  certain 
stock  contracts. —  There  are  two  classes  of  statutes  affecting  stock 


1  Flagg  V.  Baldwin,  38  N.  J.  Eq.  219 
(1884).  See  also  Justh  v.  Holiday,  13 
Mackey,  346  (1883).  A  purchase  on 
margin  is  gambling  per  se.  Cover  i\ 
Smith,  82  Md.  586  (1896).  A  broker  can- 
not enforce  a  contract  between  him- 
self and  his  customer,  where  the  cus- 
tomer testifies  that  he  put  up  $100  as  a 
margin  for  one  hundred  shares  of  stock, 
and  that  if  the  stock  advanced  a  point 
he  would  have  a  profit,  and  if  it  declined 
a  point  he  would  lose  the  $100,  and  also 
another  $100  to  be  paid.  Billingslea  v. 
Smith,  77  Md.  504  (1893). 

2 Sampson  v.  Camperdown  Cotton 
Mills,  82  Fed.  Rep.  833  (1897). 

3  In  Ashton  v.  Dakin,  7  W.  R.  384 
(1859),  the  court  held  it  not  to  be  a 
wager  contract  to  order  a  broker  to  buy 
stock,  "  and  let  the  bargain  be  so  as  to 
the  day  of  payment  that  you  may  have 
an  opportunity  of  reselling  it  for  me  by 
such  a  day,  when  I  expect  the  market 
will  have  risen,  and  then  you  will  pay 
the  seller  for  me  with  the  money  you 
receive  from  the  purchaser,  and  I  shall 
receive  the  gain  from  you,  if  any,  or 
pay  you  the  loss."  So,  also,  Smith  v. 
Bouvier,  70  Pa,  St.  325  (1872),  holds  that 
stocks  bought  and  sold  upon  specula- 
tion are  not  necessarily  wager  contracts. 
A  person  may  sell  without  owning  the 
stock,  and  at  time  of  delivery  buy  to  de- 


liver, and  yet  the  transaction  be  not  a 
wager,  where  the  jury  finds  that  there 
was  an  intent  to  deliver  in  both  the  sell- 
ing and  buying.  See  also  Thacker  v. 
Hardy,  L.  R.  4  Q.  B.  D.  685  (1878):  Saw- 
yer V.  Taggart,  14  Bush  (Ky.),  727  (1879). 
In  Massachusetts  it  is  held  that  the 
contract  is  not  gambling  merely  be- 
cause there  was  an  expectation  that 
only  differences  would  be  settled. 
Barnes  v.  Smith,  159  Mass.  344  (1893). 
Where  the  seller  of  grain  does  not  in- 
tend to  deliver  the  property  sold,  but 
simply  to  settle  the  difference  in  price, 
the  transaction  is  illegal  under  a  stat^ 
ute,  whether  his  brokers  and  the  pur- 
chaser knew  of  his  intention  or  not. 
Mai'gins  lost  in  such  transactions  can- 
not be  recovered  back.  Connor  u  Black, 
132  Mo.  150  (1896).  A  purchase  of  corn 
may  be  legal  although  made  to  fill  cer- 
tain sales  which  the  party  had  made 
previously.  A  mortgage  given  to  a 
broker  for  advancements  made  in  the 
transaction  is  valid.  Douglas  v.  Smith, 
74  Iowa,  468  (1888). 

*  Conner  v.  Robertson,  37  La.  Ann. 
814  (1885),  the  court  saying  also  that 
Lorymer  v.  Smith,  1  Barn.  &  C.  1  (1822), 
has  been  repeatedly  overruled.  See 
also  supra,  p.  770,  n.  1. 

5  White  V.  Barber,  123  U.  S.  392  (1887). 


771 


§  342.] 


CONTRACTS    TO    SELL GAMBLING    SALES,  ETC.  [CH.  XX. 


sales  as  regards  their  speculative  character.  One  class  does  not 
specify  sales  of  stock,  but  declares  in  general  terms  that  all  gara- 
ino"  and  wagering  contracts  shall  be  void,  thereby  rendering  actions 
for  the  recovery  of  money  won  on  such  wagers  unsustainable.  Such 
statutes  exist  in  England  ^  and  New  York.^  The  second  class  of 
statutes  is  more  explicit,  and  prohibits  specified  transactions  in 
stock,  irrespective  of  whether  such  transactions  be  wager  contracts 
or  not.  Statutes  affecting  speculative  sales  of  stock  exist  in  many 
of  the  states.  In  Massachusetts  short  sales  are  prohibited;'  in 
Ohio,  sales  of  stock  for  future  delivery,  which  the  vendor  has  not 
on  hand  or  the  vendee  the  means  to  pay  for;*  in  Illinois,  all  op- 
tions are  made  gambling  contracts  and  are  void ;  ^  in  Georgia,  short 


1  8  &  9  Vict.,  c.  109,  §  18;  Grizewood 
V.  Blane,  11  C.  B.  526  (1851).  Agree- 
ments between  buyers  and  sellers  of 
stock  to  pay  or  receive  the  differences 
between  their  prices  on  one  day  and 
their  prices  on  another  day  are  gaming 
and  wagering  transactions  within  the 
meaning  of  the  statute.  Thacker  v. 
Hardy,  L.  R  4  Q.  B.  D.  685  (1878).  The 
statute  does  not  necessarily  affect  "  cor- 
ners "  in  stocks.  Barry  v.  Croskey,  2  J. 
&  H.  1  (1861).  As  to  the  application  of 
this  statute,  see  also  Heiman  v.  Hardie, 
12  Ct.  of  Sess.  406  (Sc,  4th  ser.,  1885). 

2 1  N.  Y.  Rev.  Stats.  662,  §  8  (vol.  HI, 
p.  1962,  7th  ed.).  As  applied  to  stock 
cases,  see  Kingsbury  v.  Kirwan,  77 
N.  Y.  612  (1879);  Story  v.  Salomon,  71 
N.  Y.  420  (1877);  Harris  v.  Tumbridge, 
83  N.  Y.  92  (1880);  Yerkes  v.  Salomon, 
11  Hun,  471  (1877). 

3  Mass.  Gen.  Stat,  oh.  105,  §  6.  For 
cases  arising  under  this  and  similar 
statutes,  see  Howe  v.  Starkweather,  17 
Mass.  240  (1821);  Sargent  v.  Franklin 
Ins.  Co.,  25  Mass.  90  (1829);  Barrett  v. 
Mead,  92  Mass.  337  (1865);  Brigham  v. 
Mead,  92  Mass.  245  (1865);  Barrett  v. 
Hyde,  73  :\rass.  160  (1856);  Durant 
V.  Burt,  98  Mass.  161  (1867);  Brown  v. 
Phelps.  103  Mass.  313  (1869);  Price  v. 
Minot,  107  Mass.  49  (1871):  Colt  v.  Clapp, 
127  Mass.  476  (1879);  Rock  v.  Nicholis, 
85  Mass.  342  (1862);  Wyman  v.  Fiske,  85 
Mass.  238  (1861);  Pratt  v.  American 
Bell  Teleph.  Co.,  141  Mass.  225  (188G), 
following  the  decisions  under  the  New 


York  statute,  from  which  the  statute 
in  question  was  copied. 

In  Pennsylvania,  by  statute,  sales  for 
future  delivery  were  formerly  prohib 
ited.  See  Pa.  Laws  1841,  p.  398,  §6.  This 
statute  has  been  repealed.  For  decisions, 
see  Krause  v,  Setle}-,  2  Phila.  Rep.  32 
(1856);  Chillas  v.  Snyder,  1  Phila.  Rep. 
289  (1852). 

■»  Ohio  Laws,  1885,  p.  254.  Gambling 
contract  in  grain.  Lester  v.  Buel,  49 
Ohio  St.  240  (1892). 

5  111.  Rev.  Stat.  (Starr  &  C),  p.  791, 
^r  178.  For  decisions,  see  Wolcott  v. 
Heath,  78  III.  433  (1875 1:  Pickering  v. 
Cease,  79  III.  328  (1875);  Pixley  v.  Boyn- 
ton,  79  III.  351  (1875);  Sanborn  v.  Bene- 
dict, 78  111.  309  (1875);  Cole  v.  Milmine, 
88  111.  349  (1878).  This  statute  is  re- 
stricted by  the  decisions  to  cases  where 
the  transaction  is  to  be  "adjusted  only 
by  differences."  But  see  Ward  v.  Vos- 
burgh,  31  Fed.  Rep.  12  (1887).  In  Illi- 
nois, by  statute,  an  option  to  buy  coal 
at  a  future  time  is  void,  Osgood  v. 
Bander,  75  Iowa,  550  (1888).  A  sale 
with  an  agreement  of  the  vendor  to 
take  the  stock  back  at  the  same  price 
and  interest  within  a  certain  time  if 
the  vendee  desired  is  not  a  gambling 
contract  under  the  Illinois  statute. 
Richter  v.  Frank,  41  Fed.  Rep.  859  (1890). 
Concerning  an  indictment  under  the 
Illinois  law  for  keeping  a  "bucket 
shop,"  see  Soby  v.  People,  134  111.  66 
(1890).  In  Illinois,  by  statute,  a  "put" 
is  void.     Schneider  v.  Turner,  130  III.  28 


772 


CH.  XX.]  CONTRACTS    TO    SELL GAMBLING    SALES,  ETC. 


[§  342. 


sales  cannot  be  enforced.'  A  state  statute  declaring  illegal  all  op- 
tions to  sell  or  buy  at  a  future  time  is  constitutional,  even  though 
it  may  interfere  with  what  would  otherwise  be  legitimate  con- 
tracts.- The  California  constitutional  provision  making  void  all 
contracts  for  sales  of  stock  on  a  margin  and  providing  for  recovery 
back  of  money  paid  on  such  contracts  is  constitutional,  even  though 
it  applies  to  hona  fide  transactions  as  well  as  gambling  transac- 
tions.^ In  jSTew  York,  the  statute  of  1812,*  re-enacted  in  the  Ee- 
vised  Statutes  of  1828,'^  prohibiting  short  sales,  was  repealed  by 
implication  by  the  statute  of  1858,  declaring  the  sale  to  be  valid 
though  there  be  no  consideration  or  payment  of  consideration,  or 
no  ownership  by  the  vendor  of  such  stock  at  the  time  of  the  sale. 
Various  other  states  have  statutes  on  this  subject.^  Where  a  cus- 
tomer gives  to  his  broker  in  Missouri  an  order  to  buy  stock  and 
the  order  is  executed  in  Xew  York,  the  statute  of  Missouri  render- 
ing illegal  the  purchase  of  stock  without  intent  to  pay  for  the  same 
does  not  apply,  but  the  common  law,  which  is  presumed  to  be  the 
law  of  Xew  York,  does  appl}'',  and  the  transaction  is  legal.  More- 
over, proof  that  one  of  the  parties  intended  the  contract  to  be 
gambling  does  not  invalidate  the  transaction,  and  the  broker  may 
recover  from  the  customer  his  losses."     In  California  the  question 


(1889).  The  statute  against  cornering 
the  market  applies  to  a  purchase  of 
corn  to  raise  its  price.  Foss  v.  Cum- 
mings,  149  111.  353  (1894).  Under  the 
Illinois  statute  a  suit  by  one  stock  ex- 
change firm  against  another  stock  ex- 
change firm  for  damages  for  failure  to 
purchase  stock,  in  accordance  witli  a 
contract  made  on  the  exchange,  fails 
where  it  is  shown  that  by  the  rules  of 
the  exchange  differences  are  paid  in- 
stead of  the  stocks  being  delivered,  and 
other  evidence  in  the  case  shows  that 
there  was  no  intent  to  deliver.  Clews 
V.  Jamieson,  96  Fed.  Rep.  648  (1899). 

1  Ga.  Code,  §  2638. 

2  Booth  V.  Illinois,  184  U.  S.  425  (1902). 

3  Otis  V.  Parker,  187  U.  S.  606  (1903). 

4  2  R.  L.  187,  §  18. 

5 1  R.  S.,  p.  710,  ^5  6.  For  cases  coming 
under  this  statute,  see  Dykers  v.  Town- 
send,  24  N.  Y.  57  (1861),  disapproving 
Stebbins  v.  Leowolf,  57  Mass.  137,  143 
(1849).  See  also  Thompson  v.  Alger,  53 
Mass.  428  (1847).  on  the  New  York  stat- 
ute; Staples  r.  Gould,  9  N.  Y.  520  (1854), 


(criticising  Gram  v.  Stebbins,  6  Paige, 
124  —  1836);  Frost  v.  Clarkson,  7  Cow. 
24  (1827);  Cassard  v.  Hinmann,  14  How, 
Pr.  84  (1856);  aff'd,  1  Bosw.  207.  In 
New  York  a  director  is  prohibited  from 
selling  "short."  Penal  Code,  §  610.  In 
Arkansas  a  broker  and  others  are  liable 
criminally  for  doing  business  in  futures. 
Fortenbury  v.  State,  47  Ark.  188  (1886). 

*  A  promissory  note  is  void  under  the 
Tennessee  act  against  gambling  in  fut- 
ures where  such  note  was  given  tlierein. 
Snoddy  v.  American  Nat.  Bank,  88 
Tenn.  573  (1890).  The  California  con- 
stitution renders  void  a  transaction 
wherein  a  broker  buys  stock  for  the 
customer  with  the  broker's  money  and 
holds  the  stock  as  security  and  charges 
the  customer  interest  and  commissions. 
Cashman  v.  Root,  89  Cal.  373  (1891). 
Gambling  stock  transactions  have  been 
held  void  under  the  Kentucky  statute 
in  Lyons  V.  Hodgen,  90  Ky.  280  (1890). 

^Edwards,  etc.  Co.  v.  Stevenson,  160 
Mo.  516  (1901).  A  sale  is  not  gambling 
merely  because  one  of  the  parties  in- 


r73 


§  342.] 


CONTRACTS    TO    SELL GAMBLING    SALES,  ETC. 


[CH.  XX. 


whether  stock  purchased  on  a  margin  violates  the  constitutional 
prohibition  is  one  of  fact.^  The  constitutional  provision  in  Califor- 
nia against  sales  of  stock  on  margins  and  authorizing  the  recovery- 
back  of  money  paid  is  not  in  conflict  with  the  constitution  of  the 
United  States,  and  a  suit  may  be  maintained  under  such  constitu- 
tional provision.^  In  Massachusetts  also  the  statute  enables  the 
customer  to  sue  the  broker  for  any  losses,^  but  a  cause  of  action 
given  by  the  statute  for  margins  paid  may  be  released  after  it  has 
accrued.*  In  England  the  statute  of  1734,*  prohibiting  gambling 
in  the  public  funds,  was  repealed  in  I860,®  but  the  statute  of  1845 
still  exists.^     It  is  evident  from  the  history  of  these  statutes  against 


tended  it  so  to  be;  and  where  orders 
are  given  in  Missouri  to  be  executed  in 
New  Yorls,  the  New  York  law  governs. 
Gaylord  v.  Duryea,  69  S.  W.  Rep.  607 
(Mo.  1902).  A  note  given  by  a  resident 
of  Rhode  Island,  dated  in  Rhode  Island 
but  payable  to  brokers  in  Boston  and 
delivered  in  Boston,  becomes  valid  only 
upon  delivery,  and  hence  its  validity  is 
governed  by  Massachusetts  law.  Win- 
ward  V.  Lincoln,  51  Atl.  Rep.  106  (R  I. 
1902). 

1  Kullman  v,  Simmens,  104  Cal.  595 
(1894). 

2  Parker  v.  Otis.  130  Cal.  332  (1900). 
3Crandell  v.   White,    164    Mass.     54 

(1895).  The  Massachusetts  statute  en- 
abling the  principal  to  recover  back 
money  paid  by  him  to  his  broker  on 
stock  gambling  contracts  does  not  ap- 
ply where  the  broker  actually  bought 
the  securities  and  the  principal  knew 
it.  Rice  V.  Winslow,  62  N.  E.  Rep. 
1057  (Mass.  1902).  For  a  case  where  a 
recovery  was  had  against  the  broker, 
see  Ballou  v.  Willey,  62  N.  R  Rep.  1064 
(Mass.  1902).  In  the  case  of  Davy  v. 
Bangs,  174  Mass.  238  (1899),  a  customer 
recovered  against  a  broker  the  value  of 
stock  lost  in  a  gambling  contract,  such 
recovery  being  based  on  the  Massachu- 
setts statute.  A  suit  by  a  customer  to 
recover  back  losses  under  the  Massachu- 
settsstatute  succeeded  in  Allen  u.  Fuller, 
65  N.  E.  Rep.  31  (Mass.  1902).  The  Mas- 
sachusetts statute  against  gambling 
transactions  in  stock  was  enforced  in 
Marks  u.  Metropolitan  Stock  Exchange. 


63  N.  R  Rep.  410  (Mass.  1902),  where  the 
defendant  was  to  deliver  certain  stock 
at  a  certain  price  on  three  days'  notice, 
or  by  mutual  consent  was  to  pay  any 
profit  thereon  above  that  price,  and, 
on  the  other  hand,  the  margin  deposited 
was  to  be  applied  to  any  loss.  And  it 
was  also  enforced  in  Corey  v.  Griffin, 
63  N.  E.  Rep.  420  (Mass.  1902),  where,  in 
order  to  evade  the  statute,  a  customer 
agreed  to  indemnify  the  defendant 
against  all  damage.  Under  the  Ken- 
tucky statute  a  customer  may  recover 
back  money  lost  in  gambling  in  stocks. 
Boyd,  etc.  Co.  v.  Coates.  69  S.  W.  Rep.  1090 
(Ky.l902).  Under  the  Massachusetts  stat- 
ute a  customer  may  file  a  bill  to  have 
a  mortgage  canceled,  such  mortgage 
having  been  given  to  pay  gambling 
debts.  Rice  v.  Winslow,  65  N.  R  Rep. 
366  (Mass.  1902). 

<  Wall  V.  Metropolitan  Stock  Ex- 
change, 168  Mass.  282  (1897). 

5  7  Geo.  II.,  c.  8,  and  10  Geo.  II.,  c.  8. 
For  cases  under  this  statute,  see  Hewitt 
V.  Price,  4  Man.  &  G.  355  (1842);  Fisher 
V.  Price,  11  Beav.  194  (1848):  Mortimer 
r.  McCallan,  6  M.  &  W.  58  (1840);  Ells- 
worth V.  Cole,  2  M.  &  W.  31  (1836); 
Byles  on  Bills,  15th  ed.,  p.  161;  2  Kent, 
Com.,  468,  note  (i).  The  statute  did  not 
apply  to  stock  in  private  corporations. 
Hibblewhite  v.  McMorine,  5  M.  &  W. 
402  (1839),  overruling  Bryan  v.  Lewis, 
Ryan  &  K  386  (1826), 

«  23  &  24  Vict,,  c.  28. 

'Where  both  parties  to  a  transaction 
on  the  stock  exchange  intend  that  no 

r4 


CH.  XX.]         CONTRACTS    TO    SELL GAMBLING    SALES,  ETC.       [§§  343,  344. 

stock  gambling  that  it  is  a  difficult  and  delicate  task  to  frame  a 
statute  that  will  cure  the  evil.  The  great  danger  is  that  any  such 
statute  will  interfere  with  legitimate  transactions  —  transactions 
which  for  many  years  have  been  building  the  railways  and  devel- 
oping the  material  resources  of  the  country.' 

§  343.  Test  of  legality  of  stock  transactions. —  Although,  as  al- 
read37^  stated,  stock  sales,  where  no  delivery,  but  merely  a  settle- 
ment of  gain  or  loss,  is  intended,  are  wagers,  and  although  such 
wagers  are  void  b}''  the  statutes  of  some  states,  and  by  the  rules  of 
public  policy  in  others,^  yet  difficulty  is  experienced  in  determining 
whether  the  parties  really  intended  to  deliver  the  stock  or  to  pay 
differences.  The  question  of  intent  is  always  difficult  of  ascertain- 
ment and  of  positive  proof.  It  is  pre-eminently  a  question  for  the 
jury.  It  is  accordingly  found  in  most  of  the  cases  involving  the 
question  whether  the  transaction  was  stock  gambling,  that  the 
court  submitted  to  the  jury  whether  an  actual  delivery  of  the  stock 
was  intended  or  not.  If  there  was  no  such  intent,  then,  as  a  mat- 
ter of  law,  the  transaction  was  a  wager.  If  a  wager,  it  is,  by 
statute  in  some  states,  by  public  policy  in  others,  a  void  transac- 
tion, and  the  parties  have  only  the  rights  given  them  on  void  con- 
tracts.* 

§  344.  When  intent  to  deliver  is  question  for  the  jury  and  when 
not. —  The  question  whether  the  parties  to  an  executory  sale  of 
stock  intended  to  actually    deliver  the  stock,  or  merely   to  pay 

stocks  shall  be  delivered,  but  only  that  lation,'  despite  the  earnest  efforts  of 
"differences"  shall  be  paid,  the  fact  the  courts  to  enforce  them,  they  have 
that  the  contract  provides  that  either  finally  been  repealed.  It  is,  perhaps,  bet- 
party  may  require  completion  of  the  ter  to  allow  the  evil  to  correct  itself,  as 
purchase  and  delivery  or  receipt  of  the  it  surely  does,  than  to  bring  the  admin- 
stock  does  not  prevent  the  transaction  istration  of  justice  into  contempt  by 
from  being  a  gaming  and  wagering  filling  the  books  with  useless  laws, 
contract  within  the  Gaming  Act,  1845  which  are  at  all  times  openly  violated 
(8  &  9  Vict.,  c.  109),  and  therefore  void,  and  laughed  at,  and  which  seem  hardly 
Universal,  etc.  Exchange  v.  Strachan,  more  effective  to  prevent  the  practices 
[18961  A.  C.  166,  holding  also  that  secu-  at  which  they  are  aimed  than  legisla- 
rities  deposited  in  connection  with  tion  directed  against  the  laws  of  nat- 
such  a  contract  may  be  recovered  back,  ure." 

iDos  Passes,  Stock  Brokers  &  Stock        2  particularly   in    Pennsylvania    are 

Exch.  (1883),  p.  405,  says:  "The  history  such  stock  wagers  void  by  public  pol- 

of  these  stock-jobbing  acts  seems  to  icy.      North  v.  Phillips,  89  Pa.  St.  250 

prove    conclusively    that    they    have  (1879);  Fareira  v.  Gabell,  89  Pa.  St.  89 

never    been    effective    in    preventing  (1879);  Ruchizky  v.  De  Haven,  97  Pa. 

speculations  in  stocks.    In  almost  every  St.  202   (1881);  Dickson  v.  Thomas.  97 

instance  in    which     they    have    been  Pa.  St.  278  (1881);  Brua's  Appeal,  55  Pa. 

adopted,  after  lingering  for  years  on  St.  294  (1867). 

the  books,  scorned  and  violated  by  '  the        ^  gee     §§  345,  346,    infra.     See    also 

unbridled  and  defiant  spirit  of  specu-  Greenhood,  Pub.  Policy,  pp.  230-2-37. 

775 


§  344.] 


CONTKACTS   TO    SELL  —  GAMBLING    SALES,  ETC.  [CH.  XX. 


and  receive  the  gain  or  loss,  may  be  for  the  jury.^  In  the  ap- 
plication of  this  rule,  however,  great  care  is  to  be  exercised  in 
submitting  the  question  and  charging  the  jury.  The  parties 
may  be  asked  directly  whether  they  intended  that  a  delivery 
should  be  made.^  If  one  party  intended  to  have  a  delivery  the 
transaction  is  valid,  even  though  the  other  party  intended  other- 
wise.'' As  between  a  party  and  his  broker,  however,  greater  dif- 
ficulty arises,  and  in  some  jurisdictions  the  intent  between  them 
governs  their  relations,  irrespective  of  the  intent  of  the  party  deal- 
ino-  with  them.*     The  financial  responsibility  of  the  parties,^  and 


iWhitesides  v.  Hunt  97  Ind.  191 
(1884);  Gregory  v.  Wendell,  39  Mich. 
337  (1878).  And  all  the  circumstances 
are  to  be  taken  into  consideration. 
Beveridge  v.  Hewitt,  8  111.  App.  467 
(1881);  Hawley  u  Bibb,  69  Ala.  52(1881); 
Brand  v.  Henderson,  107  III.  141  (1883); 
Barnard  v.  Backhaus,  52  Wis.  593  (1881); 
Kirkpatrick  v.  Bonsall,  72  Pa.  St.  155 
(1872). 

2Yerkes  v.  Salomon,  11  Hun,  471 
(1877);  Cassard  v.  Hinman,  6  Bosw.  9, 
14  (1860);  First  Nat.  Bank  v.  Oska- 
loosa  Packing  Co.,  66  Iowa,  41  (1885); 
Ex  parte  Young,  6  Biss.  53  (1874);  s.  C, 
30  Fed.  Cas.  828.  In  the  case  of  Porter 
V.  Viets,  1  Biss.  177  (1857);  S.  G,  19  Fed. 
Cas.  1077,  the  court  refused  to  admit 
parol  evidence  that  the  contract  was 
gambling,  for  the  reason  that  it  varied 
a  written  contract. 

8  Wall  V.  Schneider,  59  Wis.  352  (1884); 
Irwin  V.  Williar,  110  U.  S.  499  (1884); 
Whitesides  v.  Hunt,  97  Ind.  191  (1884); 
Pixley  V.  Boynton,  79  111.  351  (1875); 
Ward  V.  Vosburgh,  31  Fed.  Rep.  13 
(1887);  Powell  u  McCord,  121  111.  380 
(1887);  Lehman  u  Strassburger,  2 
Woods,  554  (1875);  s.  C,  15  Fed.  Cas. 
254 ;  Conner  2\  Robertson,  37  La.  Ann.  814 
(1885).  Contra,  Fareira  v.  Gabell.  89  Pa, 
St.  89  (1879).  Cf.  Beveridge  v.  Hewitt, 
8  111.  App.  467  (1881).  In  Tennessee,  by 
statute,  dealing  in  futures  is  gambling, 
if  either  party  does  not  intend  to  de- 
liver. See  McGrew  v.  City  Produce 
Exchange,  85  Tenn.  572  (1887).  If  either 
of  the  parties  intends,  at  the  close  of  a 
series  of  transactions  in  buying  and 


selling  stocks,  to  accept  or  make  actual 
delivery  of  the  remaining  stock,  the 
tran.saction  is  not  gambling,  as  between 
the  customer  and  broker,  although  the 
buying  and  selling  are  done  upon  a  mar- 
gin in  the  hope  of  profit  from  the  fluc- 
tuations. Dillaway  v.  Alden,  88  Me. 
230  (1895).  The  intent  of  the  principal 
not  to  have  deliveries  but  to  pay  dif- 
ferences does  not  invalidate  a  note 
giTen  in  settlement,  where  there  is  no 
proof  of  any  such  intent  on  the  part  of 
the  brokers.  Winward  v.  Lincoln,  51 
Atl.  Rep.  106  (R.  L  1902).  A  gambling 
intent  on  the  part  of  one  party  is  im- 
material where  there  was  no  such  in- 
tent on  the  part  of  the  other  party. 
McCarthy  v.  AVeare,  etc.  Co.,  91  N.  W. 
Rep.  33  (Minn.  1902).  The  fact  that  a 
broker  advanced  all  the  money  except 
the  margin,  and  never  delivered  any 
stock  excepting  on  one  occasion,  and 
remitted  gains  and  collected  losses  on 
various  occasions,  is  evidence  to  prove 
that  the  contract  was  a  gambling  con- 
tract. Sharp  V.  Stalker,  52  Atl.  Rep. 
1120  (N.  J.  1902). 

*  See  §;^  345,  346,  infra. 

6  Kirkpatrick  v.  Bonsall,  72  Pa.  St.  155 
(1872);  First  Nat.  Bank  v.  Oskaloosa 
Packing  Co.,  66  Iowa,  41  (1885);  i^e  Green, 
7  Biss.  338  (1877);  S.  C,  10  Fed.  Cas.  1084; 
Beveridge  v.  Hewitt,  8  111.  App.  407 
(1881);  Justh  V.  Holliday,  13  Mackey, 
846  (1883);  North  v.  Phillips,  89  Pa.  St. 
250  (1879);  Patterson's  Appeal.  16  Rep. 
59  (Pa.  1883);  Flagg  v.  Baldwin,  38  N.J. 
Eq.  219  (1884);  Colderwood  v.  McCrea, 
11  III  App.  543  (1882).    The  fact  that 


776 


•CH.  XX.]  CONTRACTS    TO    SELL GAMBLINO    SALES,  ETC. 


[§  345. 


their  other  transactions  in  the  same  line,'  are  admissible  as  evidence 
as  to  whether  there  was  an  intent  to  deliver  the  stock  or  merely  to 
;pay  the  gain  or  loss.  The  burden  of  proving  that  a  stock  transac- 
tion is  a  gambling  contract  is  upon  him  who  affirms  it.'- 

§  345.  GamWmg  stocli  contracts  as  affecting  the  relations  letween 
the  2>rincipal  and  his  hrolier.—  A  broker  is  but  an  agent  of  his  prin- 
cipal. As  such  he  may  hold  the  principal  liable  for  commissions 
and  for  losses  paid  on  stock  transactions  where  those  stock  trans- 
actions are  legitimate  and  legal.  Where,  however,  the  stock  con- 
tracts are  of  a  wager  or  gambling  nature,  a  more  difficult  question 
arises,  and  the  decisions  are  irreconcilable.  In  England,  in  1878, 
Judge  Lindley,  in  Thacker  v.  Hardy,'  a  carefully-considered  case, 
held  that,  where  the  principal  has  been  carrying  on  gambling  trans- 
actions, he  cannot  escape  or  repudiate  his  liabilities  to  his  broker  in 
those  transactions,  even  though  the  latter  knew  of  the  gambling 
-character  of  the  business.  The  principal  is  liable  to  his  broker  as 
though  the  transactions  were  free  from  such  objections.  This  is 
the  well-established  rule  in  England.^ 


one  of  the  parties  is  already  under  obli- 
gation to  other  parties  to  purchase  cot- 
ton several  times  greater  in  value  than 
his  fortune  is  evidence  of  an  intent  to 
gamble.  Beadles  v.  McElrath,  85  Ky. 
230  (1887).  The  fact  that  a  party  is 
financially  unable  to  pay  for  property 
is  evidence  that  the  contract  is  gam- 
bling, Myers  v.  Tobias,  16  Atl.  Rep.  641 
(Pa.  1889). 

1  Kirkpatrick  v.  Bonsall,  72  Pa.  St.  155 
(1872);  Beveridge  v.  Hewitt,  8  111.  A  pp. 
467  (1881);  Irwin  v.  Williar,  110  U.  S.  499 
(1884).  Contra,  Torablin  v.  Callen,  69 
lovpa,  229  (1886).  The  jury,  in  passing 
upon  the  defense  to  a  note  that  it  was 
given  in  a  stock-gambling  operation, 
inay  consider  all  the  acts  and  accounts 
and  the  actual  dealings.  Gaw  v.  Ben- 
nett, 153  Pa.  St.  247  (1893).  As  to  the 
competency  of  evidence  herein,  and 
that  evidence  of  custom  of  settling  by 
differences  is  incompetent,  see  Scofield 
V.  Blackmarr,  4  Atl.  Rep.  208  (Pa.  1886). 
Proof  of  intent  to  deliver  may  be  by  the 
conduct  of  the  parties  as  well  as  the 
contract.  Press  v.  Duncan,  100  Iowa, 
355  (1896). 

-Dewey,   Contracts   for  Future   De- 
. livery,  p.  207,  says:  "All  the  cases  ex- 


cept Barnard  v.  Backhaus,  52  Wis,  593 
(1881);  Cobb  v.  Prell,  15  Fed.  Rep.  774 
(1883);  Beveridge  v.  Hewitt,  8  111.  App. 
467  (1881);  Stebbins  v.  Leowolf,  57  Mass. 
137  (1849),  and  possibly  Chandler's  Case, 
Ex  parte  Young,  6  Biss.  53  (1874);  s.  C, 
30  Fed.  Cas.  828,  hold  that  these  con- 
tracts are  presumed  to  be  bona  fide;  and 
in  order  to  show  them  to  have  been 
used  as  covers -for  wagers,  an  agree- 
ment to  that  effect  must  appear  to  have 
been  made.  According  to  these  ex- 
cepted cases,  option  contracts  are  pre- 
sumed to  be  invalid,  and  proof  must  be 
made  that  thej-  are  bona  fide."  See  also 
Dewey,  Contracts  for  Future  Delivery, 
p.  46.  In  Illinois  the  burden  of  proof  is 
on  the  defendant  to  prove  a  gambling 
intent  on  the  part  of  both  parties.  In 
Wisconsin  a  contrary  rule  seems  to 
prevail.  See  Ward  v.  Vosburgh,  31  Fed- 
Rep.  12  (1887), 

3  L.  R.  4  Q.  B.  D.  685. 

4  Be  Hart,  5  W.  N.  95  (1870);  Cooper  v. 
Neil,  13  W.  N.  128  (1878);  Ex  parte 
Rogers,  L.  R,  15  Ch.  D.  207  (1880); 
Faikney  v.  Reynous,  4  Burr.  2069  (1767); 
Jessopp  V.  Lutwyche.  10  Exch.  614 
(1854);  Knight  v.  Cambers,  15  C.  B, 
562  (1855);  Knight  v.  Fitch,  15  C.  B.  566 


i  i  i 


3ttG.] 


CONTKACTS   TO    SELL  —  GAMBLING    SALES,  ETC.  [CH.  XXi 


§  346.  In  this  conntry  an  opposite  rule  prevails  for  the  most  part. 
The  great  weight  of  authority  holds  that,  where  the  broker  hag- 
knowledge  of  the  purpose  to  gamble  in  stocks  and  aids  in  carrying 
out  that  purpose,  he  cannot  recover  for  services  rendered  or  losses 
incurred  and  paid  by  himself.^  A  few  cases  hold  to  the  same  effect 
as  the  Eno-lish  rule.^     Many  cases  which  seem  to  favor  the  English 


(1855);  Lyne  v.  Siesfeld,  1  H.  &  N.  278 
(1856);  Rosewarne  v.  Billing,  15  C.  B. 
(N.  S.)  316  (186:3).  In  Pidgeon  v.  Burslem, 
3  Exch.  465  (1849),  the  court  says  ex- 
pressly: "The  case  diflfers  altogether 
from  those  in  which  the  contract  is  for- 
bidden, as  under  the  acts  against  stock- 
jobbing, or  where  the  purpose  for  which 
the  money  was  paid  was  illegal." 
Contra,  Byers  v.  Beattie,  Ir.  Rep.  2  C. 
L.  220  (1867).  A  contract  is  not  a 
gaming  contract,  and  a  broker  may  re- 
cover the  balance  due  him  on  account, 
although  the  customer,  a  person  of 
small  means,  instructed  the  broker  to 
make  purchases  and  sales  and  advanced 
only  a  small  part  of  the  purchase- 
mone3%  the  balance  being  obtained  by 
the  broker  by  pledge  of  the  security, 
and  the  customer  never  asking  for  de- 
livery of  the  stock,  and,  as  the  broker 
well  knew,  did  not  purchase  as  an  in- 
vestment, but  as  a  speculation,  to  sell 
again  when  the  price  went  up,  and  the 
broker  was  paid  by  commissions  on  the 
transactions.  Forget  v.  Ostigny,  [1895] 
A.  C.  318.  A  customer  may  recover 
from  his  broker  margins  which  he  de- 
posited, the  transactions  having  re- 
sulted in  a  profit  to  the  customer.  Re 
Cronmire,  [1898]  2  Q  B.  383. 

1  Irwin  V.  Williar,  110  U.  S.  499,  510 
(1884);  Flagg  r.  Gilpin,  17  R.  I.  10  (1890); 
McLean  v.  Stuve,  15  Mo.  App.  317  (1884), 
per  Thompson,  J.;  Ream  v.  Hamilton, 
15  Mo.  App.  577  (1884).  Cf.  Kent  v. 
Milteuberger,  13  Mo.  App.  503,  511 
(1888)  See  also,  as  supporting  above 
rule,  Everingham  v.  Meighan,  55  Wis. 
354  (1882):  Re  Green,  7  Biss.  338  (1877); 
s.  C,  10  Fed.  Cas.  1084;  Bartlett  v. 
Smith,  13  Fed.  Rep.  263  (1882);  Tenney 
V.  Foote,  4  111.  App.  594  (1879);  affirmed, 
95  111.  99  (1880),  defeating  a  note  given 


to  the  broker;  Colderwood  v.  McCrea, 
11    111.    App.    543    (1882);   Webster    v. 
Sturges,  7  111.  App.  560  (1880);  Barnard^ 
V.  Backhaus,  52  Wis.  593  (1881),  defeat- 
ing notes;  Beveridge  v.  Hewitt,  8  111. 
App.  467  (1881):  Whitesides  v.  Hunt,  97 
Ind.  191,  203  (1884);  Melchert  v.  Ameri- 
can U.  Tel.  Co.,  11  Fed.  Rep.  193  (1882); 
First  Nat.  Bank  v.  Oskaloosa  Packing    ^ 
Co.,  66  Iowa,  41  (1885),  holding  a  note- 
void;   Stewart   v.   Schall,   65    Md.   289 
(1886).    Suit  by  broker  against  customer 
for  moneys  lost  in  purchase  of  grain 
for  the  customer.     Mohr  v.  Miesen,  47 
Minn.  228  (1891).     Brokers  are  bound  to- 
know   that   banks   have  no   power  to 
purchase   cotton   futures  on   margins, 
and  cannot  recover  commissions  and 
losses  on  such  transactions.     The  ultra 
vires  contract  was  not  executed,  inas- 
much as  the  corporation  received  no 
property.     Jemison    i'.    Citizens'    Sav. 
Bank,  44  Hun,  412   (1887).     A    broker 
may    recover   commissions,  etc.,  from 
his  principal  when   the  former    knew 
nothing    of    the    latter's  intention   to- 
gamble.     Lehman  i\  Feld,  37  Fed.  Rep. 
852(1889);  Edwards  r.  Hoeffinghoff,  38- 
Fed.  Rep.  635  (1889);  Boyd  v.  Hanson, 
41  Fed.  Rep.  174  (1890). 

2  Brown  v.  Speyers,  20  Gratt.  (Va.)296 
(1871);  Wyman  v.  Fiske,  85  Mass.  238 
(1861),  on  the  ground  that  the  note  sued 
on  was  a  voluntary  payment  to  the 
broker;  Warren  v.  Hewitt,  45  Ga.  501 
(1872);  Marshall  v.  Thruston,  3  Lea 
(Tenn.),741  (1879),  where  also  a  note  had 
been  given;  Jackson  v.  Foote,  12  Fed. 
Rep.  37  (1882),  also  a  note  case,  the  court 
saying  that,  as  between  the  broker  and 
his  principal,  the  decision  probably 
would  be  different.  Cf.  Tinsley's  Case,, 
cited  in  10  Fed.  Rep.  248. 


78 


ca. 


XX.] 


CONTKACTS    TO    SELL  —  GAMBLING    SALES,  ETC. 


[§  346. 


rule  do  so  only  by  dicta,  inasmuch  as  the  transactions  involved  in 
such  cases  are  held  not  to  be  wager  contracts.'  In  Pennsylvania 
and  Xe\v  Jersey  the  American  rule  is  rigidly  enforced.  The  broker 
is  held  to  be  dealing  as  a  principal,  not  as  an  agent,  in  all  stock- 
gambling  transactions.^  He  cannot  recover  commissions  or  losses.' 
If  his  principal  is  an  infant,  the  broker  is  liable  to  such  infant  for 
all  sums  received  by  way  of  margins.*  If,  however,  the  parties  do 
not  raise  the  question  of  the  legality  of  the  transaction,  the  court 
cannot.*  In  Ohio  it  is  held  that  the  broker  may  be  made  to  account 
for  profits,  even  though  the  transaction  was  a  gambling  one.*  A 
note  and.  mortgage  given  to  the  broker  in  settlement  of  a  gam- 
bling transaction  will  not  be  interfered  with.^  The  broker  is  not 
liable  for  a  sale  of  the  stock  on  failure  of  margin,  without  notice 
to  the  principal,  where  the  business  is  gambling.^  A  partner 
in  a  partnership  for  the  purpose  of  carrying  on  a  gambling  busi- 
ness on  the  market  cannot  have  an  accounting  from  his  partner  ** 
At  common  law  a  customer  cannot  recover  margins  and  profits 
from  a  broker  on  gambling  transactions.'"    A  bucket-shop  corpora- 


1  Lehman  v.  Strassberger,  2  Woods, 
554  (1875);  s.  C,  15  Fed.  Cas.  254;  Ram- 
sey V.  Berry,  65  Me.  570  (1876);  Sawyer 
V.  Taggart,  14  Bush  (Ky.),  727  (1879); 
Durrant  v.  Burt,  98  Mass.  161  (1867); 
Williams  v.  Carr,  80  N.  C.  294  (1879). 

2  Ruchizky  v.  De  Haven,  97  Pa.  St.  202 
(1881). 

3  North  V.  Phillips,  89  Pa  St.  250  (1879); 
Flagg  V.  Baldwin,  38  N.  J.  Eq.  219  (1884); 
Fareira  v.  Gabell,  89  Pa.  St.  89  (1879), 
holding  that  notes  given  to  the  broker 
are  void.  The  agent  cannot  recover 
Commissions  where  he  knew  the  trans- 
action was  gambling,  Dows  v.  Glas- 
tield,  4  N.  D.  251  (1894). 

*  Ruchizky  v.  De  Haven,  97  Pa.  St.  202 
(1881),  An  infant  gambling  in  stocks 
on  a  margin  may  recover  from  the 
brokers  all  that  he  deposited  with  them. 
Mordecai  v.  Pearl,  63  Hun,  553(1892); 
aff'd.  136  N.  Y.  625. 

5  Gheen  v.  Johnson,  90  Pa.  St.  38  (1879) ; 
Williams  v.  Carr,  80  N.  C.  294  (1879). 
Contra,  Minzesheimer  v.  Doolittle,  60  N. 
J.  Eq.  394  (1900). 

6  Norton  v.  Blinn,  39  Ohio  St.  145 
(1883).  Where  gambling  stock  trans- 
actions are  closed  and  the  account  set- 
tled, and  the  balance  due  the  customer 


/  i 


is  left  on  deposit  with  the  broker,  tlie 
latter  must  pay  it  over.  Peters  v.  Grim, 
149  Pa.  St.  163  (1892). 

7  Clarke  v.  Foss,  7  Biss.  540  (1878);  s.  c, 
5  Fed.  Cas.  955.  Cf.  Tantum  v.  Arnold, 
42  N.  J.  Eq.  60  (1886).  At  common  law 
a  mortgage  and  note  given  to  a  broker 
for  commissions  in  buying  and  selling 
futures  and  for  advances  are  legal. 
Where  such  note  has  been  reduced  tO' 
judgment  in  one  state  it  will  be  en- 
forced in  another  state.  Peet  v.  Hatcher, 
112  Ala.  514  (1896). 

8  North  V.  Phillips.  89  Pa.  St.  250 
(1879). 

9  Wright  V.  Cudahy,  168  111.  86(1897). 
iCNorthrup  v.  Buffington,    171   Mass. 

468  (1898).  A  principal  cannot  call  his 
agent  to  account  on  a  gambling  con- 
tract. Rogers  v,  Marriott,  59  Neb.  759 
(1900).  Brokers  receiving  a  draft  of  the 
president  of  a  bank  on  the  bank  itself 
for  margins  may  be  compelled  to  refund 
the  money  to  the  bank.  Lamson  v.  Beard, 
94  Fed.  Rep.  30  (1899),  On  this  point  see 
§  293,  supra.  Money  deposited  with  a 
broker  to  make  gambling  sales  maj*  be 
recovei'ed  back,  it  not  having  been  used. 
Munns  r.  Donovan,  etc.  Co.,  91  N.  W. 
Rep.  789  (Iowa,  1902). 
9 


§§  347,  348.]       CONTEACTS    TO    SELL GAMBLING    SALES,  ETC.         [CH.  XX. 


tion  cannot  maintain  a  bill  to  compel  a  board  of  trade  to  furnish 
quotations  to  it.^ 

§§  347,  348.  GamMing  stock  transactions  as  affecting  notes,  "bonds, 
mortgages,  etc.,  groiving  out  tliereof. —  The  penalty  of  engaging  in  a 
stock-gambling  operation  is  that,  in  case  the  transaction  is  de- 
clared by  a  court  of  justice  to  be  illegal  as  a  wager  contract,  the 
court  declines  to  aid  either  party .^  As  a  general,  rule,  all  liability 
on  the  part  of  either  party  is  unenforceable.  Money  paid  by  the 
principal  cannot  be  recovered  back.^  Neither  principal  can  col- 
lect the  gains  of  the  transaction,  and  neither  is  liable  for  a  loss,'* 
IS^otes  given  in  settlement  are  void  and  not  collectible,'  even  in  the 


1  Central,  etc.  Exch.  v.  Board  of  Trade, 
63  N.  E.  Rep.  740  (IlL  1902). 

2Rees  V.  Fernie,  13  W.  R.  6  (1864), 
holding  that  the  court  will  not  aid  one 
who  has  been  tricked  in  gambling  in 
stocks.  The  Chicago  Board  of  Trade 
cannot  obtain  an  injunction  against 
the  use  of  its  quotations  by  a  bucket- 
shop  concern,  where  the  evidence 
shows  that  the  transactions  of  the 
Chicago  Board  of  Trade  were  chiefly 
in  futures,  which  wei'e  settled  by  the 
payment  of  differences  in  violation  of 
law.  Board  of  Trade  v.  O'Dell,  etc.  Co,, 
115  Fed.  Rep.  574  (1902). 

'Gregory  v.  Wendell.  39  Mich.  337 
(1878):  s.  C,  40  Mich.  432  (1879);  Wy- 
man  v.  Fiske,  85  Mass.  238  (1861).  Cf. 
Norton  v.  Blinn,  39  Ohio  St.  145  (1883). 
In  Tennessee,  by  statute,  a  contrary 
rule  prevails.  McGrew  v.  City  Produce 
Exchange.  85  Tenn.  572  (1887);  Dunn  v. 
Bell.  85  Tenn.  581  (1887),  holding  also 
that  where  there  are  several  partners 
or  co-conspirators  who  take  the  princi- 
pal's money  they  are  liable  therefor 
jointly  and  severally.  Under  the  New 
York  statute  money  paid  by  a  customer 
to  a  broker  on  gambling  speculations 
may  be  recovered  back.  Peck  v.  Doran, 
etc.  Co.,  57  Hun,  343  (1890).  Where  a 
gambling  contract  is  illegal  by  statute, 
a  customer  who  gave  money  to  the 
broker  to  gamble  with,  according  to 
orders,  cannot  recover  it  back.  White 
V.  Barber,  123  U.  S.  392  (1887);  Sowles 
V.  Welden  Nat,  Bank,  61  Vt.  375  (1889). 
A  certificate    of    deposit    given  to   a 


broker  in  the  course  of  gambling  trans- 
actions may  be  recovered  back.  Demp- 
sey  V.  Harm,  12  Atl.  Rep.  27  (Pa.  1887). 
The  customer  may  recover  back  money 
deposited  in  the  hands  of  a  third  person 
for  margins  on  a  gambling  contract. 
Dauler  v.  Hartley,  178  Pa.  St.  23  (1896). 

*  Grizewood  v.  Blane,  11  C.  B.  526  (1851); 
Webster  V.  Sturges,  7X11.  App.  560(1880); 
Ex  parte  Young,  6  Biss.  53  (1874);  &  c, 
30  Fed.  Cas.  828;  Thompson  v.  Cum- 
mings,  68  Ga,  124  (1881);  Yerkes  v.  Salo- 
mon, 11  Hun,  471  (1877),  A  partner, 
however,  may  have  contribution  for 
losses  paid  at  the  express  request  of  tl^e 
other  member  of  the  firm,  Petrie  r. 
Hannay,  3  T.  R.  418  (1789), 

5  Barnard  i'.  Backhaus,  52  Wis.  593 
(1881);  Fareira  v.  Gabell,  89  Pa,  St,  89 
(1879);  Lowry  v.  Dillman,  59  Wis.  197 
(1884);  Davisr.  Davis,  119  Ind.  511(1889); 
Justh  V.  Holliday,  2  Mackey,  346(1883); 
Cunningham  v.  Augusta  Nat.  Bank,  71 
Ga.  400  (1883);  Tenney  r.  Foote,  4  111. 
App.  594  (1879);  afiirmed,  95  111.  99.  Cf. 
Wyman  v.  Fiske,  85  Mass.  238  (1861).  A 
person  loaning  money  and  taking  notes 
therefor  cannot  be  defeated  in  a  suit  on 
the  notes  by  evidence  that  he  knew  the 
loan  was  to  be  used  in  gambling  opera- 
tions. Defendant  must  prove,  also, 
that  plaintiff  intended  that  the  money 
should  be  so  used.  Waugh  r.  Beck,  114 
Pa,  St,  422  (1886).  Checks,  notes,  etc., 
in  gambling  contracts  are  void.  Kahn 
V.  Walton,  46  Ohio  St.  195  (1889);  Em- 
brey  r.  Jemison,  131  U.  S.  336  (1889). 
Sales  and  purchases  in  Ohio  on  margins 


780 


CH.  XX.]         CONTRACTS    TO    SELL GAMBLING    SALES.  ETC. 


QQ   Qj 


347,  343. 


hands  of  honafide  purchasers;^  but  the  better  rule  is  that  such  lona 
fide  holders  are  protected.^  Bonds  and  mortgages  given  in  payment 
are  void.^  Due-bills,*  acceptances,"*  and  guarantees  '^  of  notes  are 
not  valid  or  enforceable.  If  a  part  of  the  consideration  is  void 
the  whole  contract  and  all  securities  given  thereunder  are  void.'' 


are  gambling  and  void,  and  a  note  in 
settlement  of  such  transactions  is  void. 
Morris  v.  Norton,  75  Fed.  Rep.  912  (1896). 
Notes  given  by  the  customer  to  the 
broker  on  dealings  in  stock,  merely 
margins  being  paid,  are  illegal  and  not 
enforceable.  Mechanics',  etc.  Bank  v. 
Duncan,  36  S.  W.  Rep.  887  (Tenn.  1896). 
A  note  given  by  a  broker  for  profits  in 
gambling  in  grain  is  not  enforceable. 
Nave  V.  Wilson,  13  Ind.  App.  38  (1894). 
If  delivery  was  intended  and  made,  a 
note  by  one  of  the  principals  to  the 
other  is  good,  although  the  warehouse 
receipts  were  left  with  the  broker  to 
secure  advances.  Fisher  v.  Fisher,  8 
Ind.  App.  665  (1894). 

1  Barnard  v.  Backhaus,  53  Wis.  593 
(1881);  Steers  u.  Lashley,  6  T.  R.  61  (1794); 
Tenney  v.  Foote,  4  111.  App.  594  (1879j; 
aff'd,  95  111.  99:  Cunningham  v.  Au- 
gusta Nat.  Bank.  71  Ga.  400  (1883); 
Lowry  v.  Dillman,  59  Wis.  197  (1884); 
Root  v.  Merriam,  27  Fed.  Rep.  909  (1886). 

2  A  hona  fide  holder  of  a  note  given 
in  stock-gambling  transactions  can  en- 
force the  same  in  Pennsylvania.  North- 
ern Nat.  Bank  v.  Arnold,  187  Pa.  St.  356 
(1898);  Crawford  v.  Spencer,  92  Mo.  498 
(1887);  Third  Nat.  Bank  v.  Harrison,  10 
Fed.  Rep.  343  (1882);  Lilley  v.  Rankin, 
55  L.  T.  Rep.  814  (1886).  An  accommo- 
dation indorser  to  the  note  may  set  up 
the  defense  of  illegality.  Justh  v.  HoUi- 
day,  13  Mackey,  346  (1883).  A  note 
given  to  a  bank  is  valid,  though  the 
proceeds  were  to  pay  a  stock-gambling 
debt  and  the  bank  knew  that  fact. 
Marshall  v.  Thruston,  3  Lea  (Tenn.),  741 
(1879).  Cf.  Cannan  v.  Bryce,  3  B.  &  A. 
179  (1819). 

3  Amory  v.  Mery  weather,  2  B.  &  C. 
573  (1834);  Flagg  v.  Baldwin,  38  N.  J. 
Eq.  219  (1884):  Griffiths  v.  Sears,  113 
Pa.  St.  533  (1886);  Barnard  v.  Backhaus, 


53  Wis.  593  (1881).  A  judgment  en- 
tered by  confession  on  a  bond  given 
for  a  gambling  debt  may  be  set  aside. 
Everitt  v.  Knapp,  6  Johns.  331  (1810); 
Beveridge  v.  Hewitt,  8  111.  App.  467 
(1881).  A  court  of  equity  will  enjoin 
the  transfer  of  a  note  and  will  decree 
the  cancellation  of  a  mortgage  given 
by  a  married  woman  in  payment  of 
her  husband's  stock-gambling  debts. 
Tantum  v.  Arnold,  43  N.  J.  Eq.  60  (1886). 
But  will  not  where  given  by  the  party 
liimself  to  his  brokers.  Clarke  v.  Foss, 
7  Biss.  540  (1878);  S.  C,  5  Fed.  Cas.  955. 
A  mortgage  to  a  broker  to  pay  losses 
on  gambling  speculations  is  void  and 
not  enforceable.  Walters  v.  Comer,  79 
Ga.  796  (1887).  But  see  Crawford  v. 
Spencer,  93  Mj.  498  (1887).  Where  a 
citizen  of  Alabama  gives  to  a  New 
York  broker  a  deed  of  land  in  Alabama 
in  settlement  of  futures,  its  validity  as 
to  the  futures  depends  on  the  law  of 
New  York.  Hubbard  v.  Say  re,-  105 
Ala.  440  (1895). 

i  Rudolf  V.  Winters,  7  Neb.  125  (1878). 

^  Steers  v.  Lashley,  6  T.  R.  61  (1794). 
Rawlmgs  v.  Hall.  1  Car.  &  P.  11  (1823), 
holds  that  the  broker  on  the  witness 
stand  need  not  admit  that  the  consider- 
ation was  a  gambling  debt,  since  it 
would  subject  him  to  a  common-law 
criminal  prosecution. 

6  Tenney  v.  Foote,  95  111.  99  (1880). 

7  Tenney  v.  Foote,  95  111.  99  (18S0).  See 
also  Fareira  v.  Gabell,  89  Pa.  St.  89 
(1879).  But  where,  upon  the  close  of  a 
successful  "corner,"  which  is  illegal  by 
statute,  one  of  the  parties  leaves  his 
share  of  the  profits  with  the  other  party 
to  invest,  the  latter  must  account  for 
it  when  called  upon  so  to  do.  Where, 
upon  the  close  of  an  unsuccessful  "  cor- 
ner," the  parties  losing  settle  among 
themselves,  but  one  of  them  fraudu- 

781 


f§  349,  350.]       CONTRACTS    TO    SELL  —  GAMBLING    SALES,  ETC.        [CH.  XX. 

In  Illinois,  by  statute,  a  customer  who  deposits  securities  with  a 
broker  on  a  gambling  stock  contract  may  recover  them  back,  even 
though  he  has  not  paid  losses  incurred  by  the  transaction.^  In  Kew 
Jersey  it  is  held  that  purchases  and  sales  of  cotton  for  future 
delivery,  the  arrangement  being  to  pay  differences  on  the  rise  and 
fall  of  prices,  are  illegal,  and  even  though  a  judgment  is  obtained 
thereon  in  jSI^ew  York  state  and  a  judgment  on  that  judgment  ob- 
tained in  New  Jersey,  yet  a  court  of  equity  will  not  set  aside  a 
deed  of  land  as  being  in  fraud  of  such  judgment,  even  though 
the  gambling  nature  of  the  transaction  is  not  pleaded.'^ 

0,    FEAUD  AS   AFFECTING  A  SALK    OF    STOCK. 

§  349.  Extent  of  subject  treated  herein. — In  a  previous  chapter  of 
this  treatise  the  effect  of  fraud  and  fraudulent  representations  on 
a  subscription  for  stock  was  fully  treated.  There  is  little  difference 
in  the  principles  of  law  governing  fraud  as  affecting  sales  of  stock 
from  fraud  as  affecting  subscriptions  for  stock.  Most  of  the  cases 
assume  that  the  same  principles  apply  to  both  kinds  of  transactions. 
Consequently,  the  questions  of  what  constitutes  fraud  herein;  what 
remedies  the  defrauded  person  has;  and  the  general  principles  gov- 
erning this  branch  of  the  law,  will  be  fully  understood  otfly  by  a 
comparison  of  these  two  parts  of  this  work.^ 

§  350.  What  has  heen  held  to  constitute  a  fraud  herein. — Itis  dif- 
ficult to  lay  down  rules  as  to  what  does  and  what  does  not  amount 
to  fraudulent  misrepresentations.  The  courts,  consequently,  let 
each  case  stand  upon  its  own  facts.  Certain  states  of  fact  have, 
however,  been  passed  upon  as  constituting  fraud,  and  as  such  they 
aid  in  coming  to  a  conclusion  on  facts  in  somewhat  similar  cases. 
Thus,  it  has  been  held  to  be  a  fraudulent  representation  to  make 
false  statements  as  to  the  location,  explorations,  and  developed 
state  of  a  mine;*  or  that  a  patent  owned  by  the  company  was  of 
great  value,  and  that  certain  other  persons  were  owners  of  stock;  * 

lently  overstates  the  losses,  he  is  liable  *  Morgan  v.  Skiddy,  63  N.  Y.  319  (1875). 

to  account  for  the  amount  fraudulently  In  Crocker  r.  Manley,  164  111.  283  (1896), 

allowed  him.     Wells  v,   McGeoch,   71  the  court  held  that  it  was  not  fraudu- 

Wis.  196  (1888).  lent  to  represent  that  the  mines  owned 

1  Janiieson  v.  "Wallace,  167  111.  388  by  the  company  were  rich  and  would 
(1897).  pay  more  than  twenty  per  cent,  divi- 

2  Minzesheiraer  v.  Doolittle,  60  N.  J.  dends,  and  that  the  ore  on  hand  was  of 
Eq.  394  (1900).  a  certain  value,  where  it  is  shown  that 

3  See  ch.  IX,  supra.  In  the  important  the  vendee  made  a  personal  exaniina- 
case  of  Western  Bank  v.  Addie,  L.  R.  1  tion  and  was  satisfied,  and  no  actual 
H.  L.  (Sc.)  145  (1867),  part  of  the  shares  fraud  is  shown.  Rescission  was  re- 
had  been  subscribed  for  and  part  pur-  fused. 

chased.     The  courts  applied  the  same        '''Miller  v.  Barber,  66  N.  Y.  558  (1876). 
principles  to  botli. 

782 


■CH.  XX.]  CONTRACTS    TO    SELL  —  GAMBLING    SALES,  ETC. 


[§  350. 


that  the  company  was  prosperous,  when  in  fact  large  overissues  of 
stock  had  been  made;^  or  that  the  corporate  property  was  free 
from  incumbrance;^  or  that  the  corporation  would  guarantee  cer- 
tain dividends;^  or  any  false  statement  or  general  fraudulent  act, 
or  fraudulent  concealment  of  a  material  fact,  whereby  the  pur- 
chaser is  induced  to  complete  the  sale  of  stock.*     It  may  or  may 


iCazeaux  v.  Mali,  25  Barb.  578  (1857). 
False  representations  as  to  solvency  and 
financial  condition  of  the  corporation 
are  material,  and  the  purchaser  may 
testify  that  he  would  not  have  pur- 
chased the  stock  except  for  the  rep- 
resentations. Pridham  v.  Weddington, 
74  Tex.  354  (1889).  It  is  fraud  to  state 
falsely  that  the  company  is  prosperous, 
that  there  was  no  stock  for  sale,  and 
that  defendant  was  selling  stock  of 
others  and  not  his  own.  Miller  v.  Cur- 
tiss,  13  N.  Y.  Supp.  604  (1891). 

2  Southwestern  R.  R.  v.  Papot,  67  Ga. 
675,  693  (1881),  the  court  saying:  "  It  is, 
we  think,  sufficient  to  show  that  the 
misrepresentation  or  suppression  of  fact 
was  of  such  a  nature  as  to  prove  that 
the  property  purchased  was  of  no  value 
to  the  purchaser  for  the  purposes  for 
which  it  was  bought,  or  that  it  would 
be  reasonable  to  suppose  that  the  pur- 
chaser would  not  have  contracted  for 
it  had  he  had  knowledge  of  the  exist- 
ence of  this  defect."  It  is  fraudulent  to 
make  misstatements  to  the  effect  that 
the  corporation  is  out  of  debt  and  is 
making  certain  profits.  It  is  no  defense 
that  the  defendant  might  have  ascer- 
tained the  facts  from  the  corporation. 
Redding  v.  Wright,  49  Minn.  322  (1892). 
A  misrepresentation  as  to  the  amount 
of  corporate  indebtedness  is  material. 
McElwee  v.  Chandler,  198  Pa.  St.  575 
(1901).  A  jury  decided  that  a  false  rep- 
resentation, on  the  part  of  corporate 
ofiScers,  that  the  company  was  without 
debt,  was  a  fraud  on  the  vendee,  and 
held  its  perpetrators  liable  in  damages. 
Faville  v.  Shehan,  68  Iowa,  241  (1885). 
Where  a  corporation  issues  bonds  hav- 
ing the  words  printed  on  their  face 
"  first-mortgage  bonds,"  when,  as  a  mat- 
t-er  of  fact,  there  was  an  underlying 


mortgage  which  the  party  to  whom  the 
bonds  were  sold  agreed  to  pay,  but  did 
not  pay,  except  in  part,  the  officers  and 
the  directors  who  took  part  in  the  issue 
of  the  bonds  are  liable  to  an  innocent 
purchaser  who  relied  on  the  statement 
contained  on  the  face  of  the  bonds. 
His  measure  of  damages  is  the  differ- 
ence between  the  value  of  the  bonds  as 
first-mortgage  bonds  and  second-mort- 
gage bonds.  Bank  v.  Byers,  139  Mo.  627 
(1897).  A  purchaser  of  bonds  and  stock 
may  rescind  on  the  ground  that  the 
vendor  falsely  represented  that  there 
was  but  one  mortgage  on  the  property. 
It  is  immaterial  that  the  vendor  paid 
off  the  other  mortgage  after  suit  was 
brought.  Stevenson  v.  Marble,  84  Fed. 
Rep.  23  (1897j.  A  purchaser  of  a  major- 
ity of  the  stock  of  the  corporation  from 
a  stockholder  may  rescind  where  a  mis- 
representation was  made  that  the  cor- 
poration had  practically  no  debts.  Mer- 
ritt  V.  Ehrman,  116  Ala.  278  (1897). 

3  Gerhard  v.  Bates,  20  Eng.  L.  &  Eq. 
129  (1853).  Representations  that  divi- 
dends would  soon  be  paid  are  not  fraud- 
ulent, but  statements  as  to  present  con- 
dition and  prospects  may  be  for  the 
jury.  Warner  v.  Benjamin,  89  Wis.  290 
(1895). 

*  See  further  illustrations  in  ch.  IX, 
siipra.  Declaring  a  dividend  in  good 
faith  and  sound  discretion  is  not  fraud 
by  reason  of  its  turning  out  to  have 
been  ill-advised.  Burnes  v.  Pennell,  2 
H.  L.  Gas.  497  (1849).  A  representation 
that  the  stock  '•  is  good  property  or  in- 
vestment and  is  about  to  make  a  divi- 
dend "  is  a  false  representation  when 
untrue,  and  where  the  person  taking 
the  stock  as  trustee  from  a  preceding 
trustee  objected  to  receiving  it  on  ac- 
count of  his  doubt  or  ignorance  as  to 


783 


§  350.] 


CONTRACTS   TO    SELL 


GAMBLING    SALES,  ETC. 


[CH.  XX. 


not  be  a  fraudulent  representation  to  state  that  the  stock  is  worth 
a  certain  sura,  according  to  the  circumstances  of  the  case.^ 


its  character.  Lawton  v.  Kittredge,  30 
N.  H.  500  (1855).  Representations  that 
a  corporate  property  is  valuable  and 
one  of  the  best  properties  in  Colorado, 
when  in  fact  the  company  was  a  bub- 
ble company,  raises  a  question  of  fraud 
for  the  jury  to  pass  upon.  Bradley  v. 
Poole,  98  Mass.  169  (1867).  The  pay- 
ment of  an  excessive  and  speculative 
price  for  stock  is  not  fraud  and  is  no 
ground  for  setting  the  sale  aside.  Mof- 
fat u  Winslow,  7  Paige  Ch.  124  (1838). 
The  vendor  warrants  the  title  to  the 
stock,  but  not  its  quality  or  value.  Al- 
len V.  Pegram,  16  Iowa,  163  (1864).  A 
sale  of  stock  in  a  company  formed  to 
purchase  a  railroad  cannot  be  set  aside 
merely  because  its  title  to  the  railroad 
fails.  State  v.  North  Louisiana,  etc.  R. 
R.,  34  La.  Ann.  947  (1882).  In  Wright's 
Appeal,  99  Pa.  St.  425  (1882),  it  was  held 
that  the  corporation  was  not  liable  for 
the  conversion  of  stock  by  its  presi- 
dent, who  obtained  the  certificates  in- 
dorsed in  blank  from  the  owner  on 
false  representations  that  the  corpora- 
tion wished  to  use  them.  Newlands  v. 
National,  etc.  Assoc,  53  L.  T.  Rep.  242 
(1885);  March  v.  Eastern  R.  R.,  43  N.H. 
515  (1862),  holding  that  the  fact  that 
the  earnings  were  not  distnbuted  by 
dividends  until  after  a  sale  of  stock 
does  not  constitute  fraud.  A  confiden- 
tial agent  who  uses  his  position  to  ob- 
tain stock  of  which  the  principal  has 
been  deprived  wrongfully  must  turn  it 
over  to  the  principal.  Hardenbergh  v. 
Bacon,  33  Cal.  356  (1867).  Statements 
that  a  large  part  of  the  capital  stock 
had  been  taken  by  the  parties  them- 
selves, and  that  the  parties  themselves 
would  continue  the  management  of 
the  concern,  and  concealment  of  the 
fact  that  a  large  quantity  of  the  stock 
was  to  be  issued  for  the  good-will  of 
the  business,  and  statements  leading  to 
the  conclusion  that  all  subscribers  for 
stock  stood  on  an  equal  footing,  consti- 


tute material  misrepresentations,  and 
will  sustain  a  rescission  of  the  subscrip- 
tion if  untrue.  Such  statements  and 
concealments  made  to  agents  or  bro- 
kers who  are  selling  stock  are  the  same 
as  though  made  to  the  subscribers  for 
the  stock.  Walker  v.  Anglo-Am.  etc. 
Trust  Co.,  72  Hun,  334,  341  (1893). 

iThat  it  is  not,  see  Union  Nat.  Bank 
V.  Hunt,  76  Mo.  439  (1882).  A  false  rep- 
resentation that  the  stock  sold  is  worth 
eighty  cents  on  the  dollar  —  it  being 
worth  but  forty  cents  —  will  not  sus- 
tain an  action  for  deceit.  Ellis  v.  An- 
drews, 56  N.  Y.  83  (1874).  A  represen- 
tation as  to  the  value  of  stock  is  mate- 
rial where  the  vendor  was  a  director, 
and  evidence  may  be  introduced  to 
show  that  the  stock  was  issued  for 
property  at  an  overvaluation  and  that 
some  of  the  stock  was  issued  without 
being  paid  for.  Shelton  v.  Healy,  50 
Atl.  Rep.  742  (Conn.  1901).  It  is  fraudu- 
lent to  represent  that  the  stock  is  worth 
par  when  in  fact  it  is  worthless.  If  the 
vendor  persuades  the  vendee  to  make 
no  inquiries,  the  latter  may  recover, 
although  he  made  none.  The  measure 
of  damages  is  not  the  value  of  the  land 
given  for  the  stock,  but  the  difference 
between  the  actual  and  the  represented 
value  of  the  stock.  Nysewander  v. 
Lowman,  124  Ind.  584  (1890).  False  rep- 
resentations may  consist  of  statements 
that  the  stock  is  worth  a  certain  price 
and  is  sold  to  plaintiff  at  a  reduced 
price  in  order  to  obtain  his  services. 
Maxted  v.  Fowler,  94  Mich.  106  (1892). 
False  statements  as  to  the  value  of 
stock  and  the  dividends  it  would  pay 
and  the  purpose  for  which  it  was  in- 
corporated are  sufficient  to  sustain  re- 
scission. Murray  v.  Tolman,  162  111.  417 
(1896).  Misrepresentations  as  to  the 
value  of  the  stock  and  the  condition  of 
the  company  are  material.  Blacknall 
V.  Rowland,  116  N.  C.  389  (1895).  The 
statements  by  the  vendor  of  what  pur- 
■84 


CH.  XX.]  CONTEACTS   TO    SELL- 


GAMBLING    SALES,  ETC. 


[§  350. 


It  is  a  fraud  on  the  vendee  of  stock  to  sell  him  as  paid-up  stock 
that  which  is  not  paid  up,  although  issued  as  paid  up,  the  vendor 
having  participated  in  the  issue.^  It  is  fraud  in  the  vendor  to  rep- 
resent that  property  is  to  be  turned  in  by  him  to  the  corporation 
at  a  certain  price  and  then  to  refuse  to  carry  out  the  latter  con- 
tract." Where  the  vendor  agrees  to  sell  at  a  value  to  be  ascertained 
by  an  examination  of  the  corporate  books  and  affairs,  it  is  fraud  in 
the  vendee  to  cause  false  memoranda  to  be  made  by  the  employees 
of  the  corporation.'  The  vendee  of  stock  ma}"  sue  for  damages  for 
deceit,  where  the  vendor  fraudulently  represented  the  dividends 
that  had  been  paid  on  the  stock.*  A  misrepresentation  as  to  the 
amount  of  property  held  by  the  corporation  is  material.^     Where 


ports  to  be  a  certificate  of  bank  stock, 
that  the  bank  was  organized  and  tliat 
the  stock  was  worth  par,  and  that  the 
vendor  knew  this  to  be  the  case  be- 
cause he  was  one  of  the  first  stockhold- 
ers, and  that  the  stock  was  a  good  high 
dividend-paying  stock,  constitute  a 
warranty,  and  the  vendee  may  sue  for 
damages  if  the  facts  are  not  as  stated, 
the  measure  of  damages  being  the  dif- 
ference between  the  value  of  the  stock 
as  represented  and  its  actual  value. 
Titus  u  Poole,  73  Hun,  388  (1893);  aff"d, 
145  N.  Y.  414  (1895).  Where  an  heir 
sells  stock  at  a  nominal  figure,  it  being 
considered  worthless,  and  then  learns 
that  it  has  value  and  buys  it  back  at  a 
low  figure  on  his  statement  that  it  had 
no  value  and  that  he  wished  to  keep  it 
on  account  of  its  having  been  held  by 
his  father,  an  action  for  damages  for 
deceit  lies.  Edelman  v.  Latshaw,  180 
Pa.  St.  419  (1897).  Cf.  s.  C,  159  Pa,  St. 
644  (1894).  See  Lynch  v.  Murphy,  171 
Mass.  307  (1898). 

1  Sturges  V.  Stetson,  1  Biss.  246  (1858); 
s.  C,  23  Fed.  Cas.  311,  holding  that  the 
vendee  is  not  liable  on  a  note  given  in 
payment  thereof;  Fosdick  v.  Sturges,  1 
Biss.  255  (1858);  s.  C,  9  Fed.  Cas.  501, 
holding  that  the  vendee  may  recover 
back  money  paid;  Reeve  v.  Dennett,  145 
Mass.  23  (1887).  where  the  capital  of 
$1,000,000  was  issued  for  a  worthless 
patent;  holding  also  that  the  misrepre- 
sentations may  invalidate  also  a  second 
and  subsequent  purchase  of  stock,  even 


though  in  the  meantime  the  vendee  has 
become  a  dii"ector  in  the  corporation. 
A  person  who  deeds  land  in  exchange 
for  stock  which  is  represented  to  be  full 
paid  may  have  the  sale  rescinded  where 
only  $3  a  share  had  been  paid  in  on  the 
stock.  Coolidge  v.  Rhodes,  64  N.  E.  Rep. 
1074  (111.  1902). 

-  Seaman  v.  Low,  4  Bosw.  337  (1859). 

3  Hager  v.  Thomson,  1  Black,  80  (1861). 

*  Handy  v.  Waldron,  18  R.  L  567  (1894). 

5  Boddy  V.  Henry,  113  Iowa,  462  (1901). 
A  representation  by  the  vendor  of  a 
bond  that  it  was  secured  by  a  mortgage 
on  real  estate  worth  half  a  million,  when, 
in  fact,  the  corporation  owned  no  real 
estate,  is  suflScient  to  support  an  action 
for  false  representations,  even  though 
the  vendor  referred  to  other  people  as 
authority  for  the  statement.  Whiting. 
V.  Price,  172  Mass.  240  (1898).  A  state- 
ment to  a  mercantile  agency  as  follows: 
"  Capital  stock  paid  in,  $500,000,"  is  false 
as  to  a  creditor  relying  on  such  a  state- 
ment where  a  large  part  was  paid  in  by 
supposed  profits,  consisting  of  second 
mortgages  which  turned  out  to  be 
worthless.  Bradley  v.  Seaboard  Nat. 
Bank,  167  N.  Y.  427  (1901).  In  the  case 
of  Burnham  V.  Lutz,  8  Kan.  App.  361 
(1898),  where  a  mercantile  corporation 
had  been  organized  and  twenty-six 
shares  of  stock  only  were  issued  to  sup- 
ply a  board  of  directors,  but  not  paid 
for,  the  court  held  that  a  vendor  of 
goods  to  the  corporation  might  show 
that  such  an  organization  of  the  corpo- 


(50) 


785 


§  350.J 


CONTRACTS    TO    SELL GAMBLING    SALES,  ETC. 


[CH.  XX. 


a  person  owns  a  majority  of  the  stock  of  the  corporation  and  sells 
it,  and  agrees  with  the  purchaser  to  obtain  the  stock  held  by  others 
at  as  low  a  figure  as  possible,  and  misstates  to  such  persons  the 
price  which  he  obtained  for  his  own  stock,  he  is  liable  in  an  action 
for  deceit  to  parties  who  sell  their  stock  relying  on  such  state- 
ments.' In  a  suit  for  damages  for  misrepresentations  inducing  the 
purchase  of  bonds,  the  fact  that  the  interest  has  been  paid  on  the 
bonds  does  not  prevent  the  recovery  of  damages,  inasmuch  as 
the  bonds  may  not  be  marketable  or  adequately  secured.^  It  is 
not  fraud,  however,  for  a  director  or  other  corporate  oificer  to  buy 
or  sell  stock  at  a  profit,  due  to  his  oflBcial  knowledge  of  the  condi- 
tion of  the  corporation;'  nor  to  obtain  the  stock  by  a  threat  of  a 
call.*  The  fact  that  a  check  given  in  payment  for  stock  is  not  hon- 
ored, although  the  money  is  in  bank,  is  not  fraud  where  payment 
was  refused  because  of  other  frauds  of  the  vendor;*  nor  is  it  fraud 
to  issue  certificates  before  anything  has  been  paid  thereon,  there 
being  no  participation  b}"  the  vendor.*^  It  is  fraud,  however,  to 
represent  the  company  as  having  a  full-paid  capital  stock  when  in 
fact  the  stock  was  wholly  issued  in  payment  of  a  worthless  mine. 
The  person  making  such  representation  is  liable  to  the  vendee.^     It 


ration  was  fraudulent,  and  hence  that 
tlie  parties  interested  were  liable  as 
partners. 

1  Weaver  v.  Cone,  174  Pa.  St.  104  (1896). 
Where  the  president  induces  a  stock- 
holder to  give  up  his  stock  on  repay- 
ment of  the  amount  paid  thereon,  on 
the  representation  that  another  party 
will  take  all  the  stock  and  complete  the 
enterprise,  and  the  fact  is  that  the  presi- 
dent himself  gets  some  of  the  stock  so 
surrendered,  a  stockholder  may  have  the 
agreement  canceled.  Simrall  v.  Will- 
iamson, 35  S.  W.  Rep.  632  (Ky.  1896). 

2  Currier  u  Poor,  155  N.  Y.  344  (1898). 
3 Tippecanoe  County  v.  Reynolds,  44 

Ind.  509  (1873).  Where  one  of  the  part- 
ners in  the  building  of  railroads,  and  in 
owning  stocks,  bonds,  etc.,  dies,  and  his 
executor,  after  an  examination  of  all 
the  assets  by  means  of  experts,  etc., 
makes  a  settlement  with  the  other 
partner,  such  settlement  is  binding  al- 
though the  other  partner  did  not  im- 
part all  the  knowledge  or  information 
he  might  have  given.  The  subsequent 
rise  in  value  of  some  of  the  securities  is 


immaterial.  Colton  v.  Stanford,  82  Cal. 
851  (1890).  The  purchaser  of  stock  from 
the  secretary  of  the  company  cannot 
rescind  on  the  ground  of  fraud,  the  sec- 
retary having  given  at  the  time  of  the 
sale  all  the  information  which  he  had 
concerning  the  company.  No  confiden- 
tial or  fiduciary  relation  exists.  Krumb- 
haar  v.  Griffiths.  151  Pa.  St.  223  (1892). 
And  see  ^  320,  supra. 

4  Grant  v.  Attrill,  11  Fed.  Rep.  469 
(1882).  As  to  other  cases  of  fraud  by 
the  vendee,  see  Johnson  v.  Kirby,  65  Cal. 
482  (1884);  Hempfling  v.  Burr,  59  Mich. 
294  (1886). 

sComins  v.  Coe,  117  Mass.  45  (1875). 

6  Woodruff  V.  McDonald,  33  Ark.  97 
(1878). 

'Cross  V.  Sackett,  2  Bosw.  617  (1858). 
See  also  §§  40,  iS,  supra;  Coltr.  Woolas- 
ton,  2  P.  Wms.  154  (1723).  When  a  pro- 
moter misrepresents  to  a  subscriber  the 
price  paid  by  the  promoter  for  property 
conveyed  by  him  to  the  company,  the 
subscriber  may  sue  him  for  damages. 
Teachout  v.  Van  Hdesen,  76  Iowa,  113 
(1888).  A  sale  or  pledge  of  stock  stamped 


786 


CII.  XX.]  CONTRACTS    TO    SELL GAMBLING    SALES,  ETC. 


[§  350. 


is  fraudulent  for  a  vendor  to  represent  that  he  is  selling  the  stock 
of  others,  when  in  fact  he  is  selling  his  own  stock.^  Statements 
that  the  stock  sold  is  treasury  stock,  and  that  others  paid  the  same 
.price  to  the  treasury,  are  material.^  A  representation  as  to  the 
cost  of  the  stock,  with  an  agreement  to  sell  at  cost,  is  different 
from  an  agreement  to  sell  at  a  fixed  figure  which  is  represented  to 
be  cost.  A  misrepresentation  as  to  the  cost  of  the  stock  to  the 
vendor  is  not  actionable.''  Although  a  contractor,  taking  stock 
and  bonds  in  payment  for  work,  subcontracts  the  work  for  the 
stock  and  then  forecloses  the  mortgage  and  buys  in  the  property, 
the  subcontractor  cannot  hold  him  liable  for  the  stock.*  The  fact 
that  the  only  property  that  the  company  owns  consists  of  worth- 
less patents,  being  infringements  on  other  patents,  is  no  defense 
to  notes  given  for  stock,  there  being  no  warranty  or  fraud.  The 
value  is  immaterial.-^  A  vendor  of  stock  is  not  bound  to  tell  the 
vendee  the  company  is  insolvent,  even  though  the  former  knew 
that  fact  at  that  time;®  nor  is  the  vendee  bound  to  tell  what  he 


"non-assessable,"  when  in  fact  it  was 
not  legally  paid  up,  renders  liable  for 
false  representations  the  president  and 
secretary  who  made  such  sale  or  pledge 
and  who  knew  that  it  was  not  paid-up 
stock.  Windram  v.  French,  151  Mass. 
547  (1890).  A  suit  by  the  purchaser  of 
stock  for  damages  for  fraud,  in  that  the 
stock  had  been  fraudulently  paid  up  by 
property  conveyed  to  the  corporation  at 
an  overvaluation,  is  barred  by  the  stat- 
ute of  limitations  applicable  to  frauds. 
Smith  V.  Martin,  135  Cai.  247  (1901).  A 
statement  filed  with  the  state  commis- 
sioner as  required  by  statute,  in  regard 
to  the  amount  of  the  paid-up  stock,  is 
not  such  a  representation  as  will  sustain 
an  action  for  damages  for  fraudulent 
representations  inducing  a  person  to 
take  the  notes  of  the  company.  Hun- 
newell  v.  Duxbury,  154  Mass.  286  (1901). 
But  see  65  N.  E.  Rep.  901. 

iMayo  r.  Knowlton,  134  N.  Y.  250 
(1892);  Maturin  v.  Tredinnick,  2  New 
Rep.  514  (1863).  Where  a  person,  upon 
the  statement  of  the  president  that  the 
company  has  no  stock  for  sale,  but  will 
get  some,  authorizes  the  president  to 
buy  for  him,  and  the  president  turns 
out  stock  which  the  company  already 


has,  the  contract  is  voidable  by  such 
vendea  McDoel  v.  Ohio,  etc.  Co.,  36  S. 
W.  Rep.  175  (Ky.  1896). 

2  Caswell  V.  Hunton,  87  Me.  277  (1895). 

SQassett  v.  Glazier,  165  Mass.  473 
(1896). 

4  McLane  v.  King,  144  U.  S.  260  (1892). 
A  contractor  taking  payment  in  stock 
cannot  complain  that  the  property  was 
foreclosed  under  a  mortgage  which  he 
assented  to.  Kelley  v.  Collier,  11  Tex. 
Civ.  App.  353  (1895). 

5  Watts  V.  Stevenson,  165  Mass.  518 
(1896).  Where  a  note  is  given  for  en- 
tirely worthless  stock,  the  defense  of 
total  failure  of  consideration  may  be  set 
up  against  the  note,  even  though  no 
offer  to  return  stock  has  been  made. 
Taft  V.  Myerscough,  64  N.  K  Rep.  711 
(111.  1902). 

'^  Rothmiller  v.  Stein,  143  N.  Y.  581 
(1894);  Jones  v.  Garlington,  44  S.  C.  533 
(1895).  See  also  §  335,  supra.  A  ven- 
dor of  stock  may  collect  the  price  al- 
though the  stock  was  worthless  and 
known  so  to  be  by  the  vendor.  Hunt- 
ing u  Downer,  151  Mass.  275  (1890). 
A  person  who  is  under  contract  to  pur- 
chase stock  cannot  defeat  that  contract 
by  the  fact  that  the  corporation  was 


78^ 


§  35U.J 


CONTRACTS    TO    SELL 


Ci AMBLING    SALES,  ETC. 


[CH.  XX. 


knovvs.^  A  misstatement  as  to  what  the  corporation  received  for 
the  stock  issued  by  it  is  material.^  A  statement  that  the  vendor  is 
selling  at  the  same  price  to  others  is  fraudulent  if  such  is  not  the 
case.^  Where  several  subscribers  refused  to  take  their  stock,  and 
finally,  to  induce  them  to  do  so,  a  party  agrees  secretly  with  one 
of  them  to  purchase  his  holdings,  such  an  agreement  may  be  en- 
forced.* A  person  who  contracts  to  purchase  stock  may  defend 
against  an  action  for  the  price  by  setting  up  that  the  vendor  falsely 
represented  that  the  vendee  was  about  to  be  deprived  of  the  presi- 
dency of  the  company,  and  that  thereby  the  vendee  was  induced 
to  make  the  contract  of  purchase  at  an  unconscionable  price.* 

There  are  various  facts  which  constitute  fraud  herein,  and  vari- 
ous principles  of  law  applicable  to  the  remedy  to  be  pursued.  Such 
cases  are  arising  constantly,  and  various  decisions  on  this  subject 
are  given  in  the  notes  below.^ 


insolvent  at  the  time  the  contract  was 
entered  into.  Rudge  v.  Bowman,  L.  R. 
3  Q.  B.  GS9  (1868);  Gordon  v.  Parker, 
10  La.  56  (1836),  where  the  question  of 
whether  fraud  was  involved  was  sub- 
mitted to  the  jury.  Crabb  v.  Miller,  19 
W.  R,  419  (1871),  where,  by  reason  of  a 
winding  up,  a  transfer  on  the  corporate 
books  was  no  longer  possible;  Kerch- 
ner  v.  Gettys,  18  S.  C.  521  (1882),  holding 
that  a  loss  by  the  corporation  of  its 
property  is  no  defense.  Damages  can- 
not be  recovered  for  the  breach  of  an 
executory  contract  to  purchase  stock, 
if  at  the  time  of  making  the  contract 
the  corporation  had  been  dissolved  and 
the  purchaser  was  not  aware  of  that 
fact.  Kip  V.  Monroe,  29  Barb.  579 
(1859).  The  fact  that  stock  was  worth- 
less at  the  time  of  the  sale  thereof  is  no 
defense  to  an  action  for  the  purchase 
price,  unless  there  was  fraud  or  a  spe- 
cific warranty.  Peck,  etc.  Co.  v.  Strat- 
ton,  95  Fed.  Rep.  741  (1899).  A  person 
who  pays  for  land  by  transferring 
worthless  mining  stock  is  not  a  bona 
fide  purchaser.  Sewell  u  Nelson,  67 
S.  W.  Rep.  985  (Ky.  1902).  The  ven- 
dor is  not  liable  in  an  action  for 
deceit,  even  though  the  stock  was 
worthless,  it  having  a  market  value 
and  he  having  no  knowledge  of   its 


intrinsic    value.     Kirtley's    Adm'x   v. 
Shinkle,  69  S.  W,  Rep.  723  (Ky.  1902). 

1  A  sale  of  stock  July  6th,  "including 
all  dividends  due  or  to  become  due 
thereon,"  carries  a  stock  dividend  de- 
clared June  5th  and  payable  to  stock- 
holders of  record  July  1st,  and  the  sale 
is  not  fraudulent  although  the  seller 
did  not  know  of  such  stock-dividend 
and  the  buyer  did  know.  Rose  v.  Bar- 
clay, 191  Pa.  St.  594  (1899). 

2  Hoxie  V.  Small,  86  Me.  23  (1893). 
3Kilgore  v.    Bruce,   166    Mass.     136 

(1896). 

^Traphagen  v.  Sagar,  63  Minn.  317 
(1895). 

5  Delano  v.  Rice,  23  N.  Y.  App.  Div. 
327  (1897). 

6  Where  a  debtor  turned  over  to  his 
creditor,  as  trustee,  the  controlling 
stock  of  a  corporation,  for  the  latter  to 
manage,  and  the  latter  afterwards,  by 
threats  of  abandoning  the  enterprise, 
forced  the  debtor  to  sell  him  the  stock 
outright,  a  court  of  equity  will  set 
aside  such  sale  and  hold  the  creditor 
liable  as  a  trustee.  Ryle  v.  Ryle,  41 
N.  J.  Eq.  582  (1886).  A  failure  of  the 
vendor  to  state  that  the  company  is  a 
joint-stock  association  and  not  a  cor- 
poration is  not  fraud  avoiding  the  sale 
of  the  stock.     Curtiss  v.  Hurd,  30  Fed. 


788 


CH.  XX.]  CONTRACTS    TO    SELL  —  GAMBLING    SALES,  ETC. 


[§  350. 


Fraud  in  the  sale  of  stock  frequently  arises  in  the  organization  of 
the  company.     The  parties  who  cause  the  company  to  be  organ- 


Rep.  729  (1887).     It  is  a  question  for  the    Means  v.   Rees,   26  Fed.  Rep.  210,  216 


jury  whether  it  was  fraud  in  represent- 
ing that  the  stock  was  paid  up,  when 
in  fact  the  first  payment  only  had  been 
made,  and  the  balance  had  been  paid 
by  dividends.  Kryger  v.  Andrews.  65 
Midi.  405  (1887).  Fraud  may  be  by 
directors  in  fraudulently  making  div- 
idends. See  ch.  XXXII,  infra.  Where 
a  person  owning  all  the  stock  of  a  cor- 
poration sells  it  under  circumstances 
which  induce  the  purchaser  to  believe 
that  the  former  has  no  claim  against 
the  corporation,  he  may  be  enjoined 
from  enforcing  any  such  claim.  Given 
V.  Times-Republican,  etc.  Co.,  11-4  Fed. 
Rep.  92  (1902).  Where,  after  an  agree- 
ment to  sell  land  for  stock,  the  owner 
of  the  stock  attends  a  corporate  meet- 
ing and  votes  to  sell  all  corporate  prop- 
erty at  sixty  cents  on  the  dollar,  which 
is  done,  the  purchaser  of  the  stock  may 
have  the  land  returned.  Harris  v. 
Piatt,  64  Mich.  105  (1887).  Cases  of 
fraud  on  the  part  of  the  vendee  some- 
times occur,  where  the  vendee  is  given 
a  majoritj'  of  the  stock,  and  then  uses 
his  control  of  the  corporation  to  de- 
fraud the  vendor  in  the  execution  of 
his  contract  to  pay  for  the  stock.  Har- 
d.enbergh  v.  Bacon,  33  Cat  356  (1867); 
Johnson  v.  Kirby,  65  Cal.  482  (1884). 
Where  a  stockholder  sells  a  controlling 
interest  to  a  person  who  is  to  pay  there- 
for by  improving  the  corporate  prop- 
erty, but  who  elects  a  board  of  direct- 
ors and  defrauds  the  vendor,  the  latter's 
remedy  is  a  difficult  one.  Gates  v. 
Sparkraan,  etc.  Co.,  73  Tex.  619  (1889). 
The  vendor  cannot  rescind  on  the 
ground  that  the  vendee  said  that  he 
was  buying  for  himself  alone  and  such 
was  not  the  case.  Downs  v.  iSelf,  67 
S.  W.  Rep.  897  (Tex.  1902).  The  fraud 
or  mistake  must  have  been  such  that 
the  agreement  would  not  have  been 
made  in  its  absence,  where  a  rescission 
of  the  contract  is  sought   by  decree. 


(1886).  Even  though  an  inventor  is 
persuaded  to  turn  in  his  inventions  to 
a  corporation  for  stock  on  an  oral  assur- 
ance that  plenty  of  money  would  be 
forthcoming  to  take  the  stock  of  the 
company  and  make  the  business  suc- 
cessful, and  even  though  the  parties 
making  such  representations  do  not 
advance  the  money,  but  allow  the  com- 
pany to  become  insolvent  and  buy  in 
the  assets,  including  the  patents,  yet 
the  inventor  cannot  maintain  an  action 
for  fraud  in  failing  to  furnish  money 
according  to  promise.  Smith  v.  Parker, 
148  Ind.  127  (1897).  A  promise  of  em- 
ployment is  not  fraud,  even  though  not 
performed.  Hubbard  v.  Long,  105  Mich. 
442  (1894).  Fraud  may  be  by  the  agent's 
representations  as  to  the  cost  of  min- 
ing the  coal,  of  transportation,  and  of 
the  market  price.  Booth  v.  Smith,  117 
111.  370  (1886).  On  a  question  of  testi- 
mony by  the  defendant,  see  Reeve  v. 
Dennett,  141  Mass.  207  (1886).  It  has 
been  held  that  one  who  was  induced  by 
fraud  to  purchase  stock  in  an  insolvent 
corporation  may  bring  suit  to  have  his 
part  of  the  corporate  assets  ascertained, 
to  the  exclusion  of  a  debt  due  from 
the  corporation  to  the  person  inducing 
him  to  purchase.  Poole  v.  West  Point, 
etc.  Assoc,  30  Fed.  Rep.  513  (1887).  A 
person  making  sales  of  stock  by  false 
representations  may  be  indicted  for  ob- 
taining money  by  false  representations. 
Commonwealth  v.  Wood,  142  Mass.  459 
(1886).  The  statute  of  frauds  as  to  the 
answering  to  the  debt,  defaults,  etc.,  of 
another  person  has  no  application  to  a 
sale  of  stock  herein.  The  fact  that  the 
corporate  property  sold  several  years 
later  for  a  small  amount  is  immaterial 
and  not  admissible.  French  v.  Fitch, 
67  Midi.  492  (1887).  A  misstatement  as 
to  the  reason  why  the  vendee  pur- 
chases is  not  material.  Byrd  v.  Raut- 
man,  85  Md.  414  (1897).     Where  an  in- 


789 


§  350.] 


CONTKACTS    TO    SELL  • 


GAMBLING    SALES,  ETC. 


[CH.  XX. 


ized  are  called  the  "promoters  "  of  it.     As  such  they  are  disquali- 
fied from  making  a  profit  by  selling  property  to  the  company  at  a 


solvent  pledgor  sells  the  pledge  to  the 
pledgee  for  the  debt  itself,  $7,000,  the 
transaction  is  legal,  even  though  a 
jury  find  that  the  stock  was  vporth 
S1.500  more.  Wachovia  L.  &  T.  Co.  v. 
Forbes,  102  N.  C.  355  (1897).  See  5^  479, 
infra.  Where  an  agent  to  sell  a  mine 
induces  his  principals  to  place  in  his 
name  all  their  stock,  and  he  sells  the 
property  and  accounts  to  them  for 
part  only  of  the  price,  and  refuses  to 
return  the  stock,  they  may  sue  him  for 
an  accounting  vi'ithout  previously  ten- 
dering back  the  amount  they  received 
or  demanding  the  stock.  Wooster  v. 
Nevills,  73  Cal.  58  (1887). 

False  representations  as  to  the  corpo- 
rate property,  business,  and  prospects, 
and  the  use  of  a  corporate  prospectus 
which  the  vendee  knows  contains  false 
statements,  sustain  rescission  of  a  trans- 
fer of  land  for  stock.  A  person  pur- 
chasing the  land  with  full  knowledge 
of  the  fraud  is  not  protected.  The  cer- 
tificates may  be  filed  with  the  clerk  of 
the  court,  awaiting  the  retransfer  of 
the  land.  Ormsby  v.  Budd,  72  Iowa,  80 
(1887).  The  vendee  of  stock  cannot  re- 
scind or  collect  damages  on  the  ground 
that  the  corporation  was  not  legally  in- 
corporated. If  it  is  a  de  facto  corpora- 
tion the  vendor  is  not  liable.  Harter  v. 
Eltzroth,  111  Ind.  159  (1887).  The  vendee 
of  stock  for  which  he  gave  real  estate 
may  have  a  reconveyance  of  the  real 
estate  decreed,  where  the  sale  of  stock 
was  induced  by  fraudulent  representa- 
tions. Gray  v.  Robbins,  11  Atl.  Rep.  860 
(N.  J.  1887).  A  managing  director  who 
buys  stock  on  credit,  and  then  aids  in 
levying  an  attachment  on  the  stock 
against  the  vendor  and  conceals  the 
same  from  the  vendor,  and  buys  in  the 
stock  at  a  low  price,  and  then  repudi- 
ates his  debt  to  the  vendor,  is  guilty  of 
fraud.  Young  v.  Fox,  37  Fed.  Rep.  385 
(1888).  Where  the  president  in  selling 
stock  makes  false  representations,  the 


vendee  is  not  bound  to  investigate 
them.  He  may  defeat  a  note  given  in 
payment.  Wannell  v.  Kem,  57  Mo.  478 
(1874).  A  representation  that  a  bond  is 
an  "A  No.  1"  bond  is  not  a  material 
representation.  Deming  v.  Darling,  148 
Mass.  504  (1889).  See  also  instances  in 
§  334,  supra.  The  vendee  fails  in  his 
suit  for  damages  if  he  does  not  contra- 
dict the  defendant's  testimony  that  the 
plaintiff  vendee  knew  all  the  facts  at 
the  time  of  the  sale.  Nelson  v.  Luling, 
62  N.  Y.  645  (1875),  aff'g  36  N.  Y.  Super. 
Ct.  544. 

A  statement  on  April  10  that  the  last 
semi-annual  dividend  was  seven  per 
cent.,  and  that  the  fiscal  year  ended  on 
June  1,  is  a  fraudulent  suppression  of 
the  truth  where  but  one  dividend  had 
been  declared,  and  that  twenty-two 
months  before  the  date  of  the  state- 
ment. Tyler  v.  Savage,  143  U.  S.  79 
(1892).  Where  the  contract  of  sale  con- 
tains express  warranties,  parol  repre- 
sentations as  warranties  are  not  ad- 
mitted to  prove  false  representations. 
Humphrey  v.  Merriam,  46  Mmn.  413 
(1891).  The  fact  that  statements  as  to 
the  affairs  of  the  company  are  not  filed 
as  required  by  statute  does  not  amount 
to  fraud  in  the  sale  of  stock;  nor  do 
representations  that  the  stock  will  pay 
twenty  per  cent,  dividends  amount  to 
fraud.  The  question  as  to  the  validity 
of  stock  having  once  been  litigated 
cannot  be  again  raised  in  an  action  for 
deceit  in  the  sale  of  the  stock.  The 
mere  act  of  conspiracy  is  not  suflBcient 
to  sustain  the  action  unless  damage  is 
shown.  Robertson  v.  Parks,  76  Md.  118 
(1892).  A  representation,  in  a  transao 
tion  involving  water-company  stock, 
as  to  the  amount  of  water  that  can  be 
obtained  is  material.  A  tender  of  the 
certificate  is  sufficient  where  thero  has 
been  no  transfer  on  the  books.  Hill  v. 
Wilson,  88  Cal.  92  (1891).  Expressions 
of  opinion  as  to  the  future,  althougb 


790 


CH.  XX.] 


CONTRACTS    TO    SELL  —  GAMBLING    SALES,  ETC. 


[§  350. 


much  larger  price  than  they  gave  for  the  property.    The  promoters 
act  in  a  fiduciary  capacity.     Hence,  when  they  have  made  a  profit 


exaggerated,  are  not  representations. 
Columbia  Electric  Co.  v.  Dixon,  46 
Minn.  463  (1891).  Notes  given  in  the 
purchase  of  stock  in  a  corporation 
whose  sole  business  is  to  carry  on  an 
infringing  telephone  business  are  with- 
out consideration  and  void.  Clemshire 
V.  Boone  County  Bank,  53  Ark.  513 
(1890).  Under  the  New  York  statute 
it  may  be  legal  for  an  insurance  com- 
pany to  transfer  its  business  and  liqui- 
date its  affairs  by  dissolution  proceed- 
ings, in  accordance  with  the  statute, 
and  hence  a  purchaser  of  the  business 
may  maintain  a  suit  for  false  repre- 
sentations as  to  the  condition  of  the 
company.  L.  D.  Garrett  Co.  v.  Morton, 
65  N.  Y.  App.  Div.  366  (1901). 

Where  stock  is  issued  to  several  per- 
sons for  a  patent,  and  they  return  part 
o{  it  to  a  trustee  for  the  company  to 
oell  for  working  capital,  and  a  sub- 
scriber to  the  company's  stock  gives  his 
note  to  the  company,  and  the  com- 
pany indorses  the  note  to. one  of  the 
first-named  parties,  who  turns  out 
his  own  stock  to  fill  the  subscrip- 
tion, the  latter  may  recover  on  the 
note,  and  is  not  liable  for  false  rep- 
resentations of  one  of  his  associates  and 
an  agent  of  the  company.  King  v. 
boane,  139  U.  S.  166  (1891).  A  sale  of 
stock  will  not  be  set  aside  on  the 
ground  of  inadequacy  of  price  unless 
TiO  gross  as  to  shock  the  conscience  and 
give  decisive  evidence  of  fraud.  Perry 
V.  Pearson,  135  III  218  (1890).  It  is  not 
sufficient  to  prove  that  defendants 
managed  the  manufacturing  business 
of  the  company,  to  sustain  an  action 
for  fraud  in  stating  that  the  company 
was  doing  a  good  business  and  making 
ten  per  cent.,  it  appearing  that  the  busi- 
ness was  new,  and  defendants  did  not 
state  that  they  knew  of  the  financial 
condition.  Hatch  v.  Spooner,  13  N.  Y. 
Supp.  643  (1891).  A  statement  that 
drill-holes   in    coal-fields  showed  cer- 


tain results  are  material,  and  not 
matters  of  opinion.  Martin  v.  Hill,  41 
Minn.  337  (1889).  Where  a  banker  sells 
stock  to  a  lawyer  and  informs  the  lat- 
ter that  the  company,  the  owner  of 
land  in  Mexico,  had  a  right,  though  an 
alien  to  Mexico,  to  own  land  therein, 
as  the  banker  had  been  informed  by 
his  attorney,  a  note  of  the  vendee  in 
payment  of  the  stock  cannot  be  de- 
feated on  the  ground  that  such  corpo- 
ration could  not  legally  hold  the  land. 
Daly  V.  Brennan,  87  Wis.  36  (1894).  It 
is  not  fraud  on  the  vendee  that  his  ven- 
dor took  the  stock  from  the  corpora- 
tion  and  paid  for  it  with  funds  embez- 
zled from  another  party.  The  corpo- 
ration is  not  liable  for  the  fraud  of  the 
president  in  selling  his  own  stock. 
Dunn  V.  State  Bank,  59  Mmn.  221  (1894). 
A  sale  of  bonds  is  not  revocable  even 
though  bonds  are  invalid  and  the  ven- 
dor innocently  stated  that  they  were 
valid.  Ruohs  v.  Third  Nat.  Bank,  94 
Tenn.  57  (1894).  Cf.  §  296,  siqora.  False 
statements  as  to  the  condition  of  the 
company  constitute  fraud.  Carruth  v. 
Harris,  41  Neb.  789  (1894).  In  Ritchie 
V.  McMuUen,  79  Fed.  Rep.  523  (1897), 
the  court  held  that  if  a  pledgee,  being 
in  control  of  the  corporation,  refuses 
to  develop  the  property  and  to  accept 
subsidies  which  are  offered,  and  to  ac- 
cept profits  under  a  contract  which 
are  possible,  and  to  sell  the  property  at 
a  large  price,  all  for  the  purpose  of  de- 
preciating the  pledged  stock  and  thus 
obtain  the  stock  himself,  the  pledgor 
may  call  the  pledgee  to  account  for  the 
loss  suffered  from  this  conspiracj--  and 
wrong.  The  court  held  also  that  al- 
though the  damage  was  directly  to  the 
corporation,  yet  that  indirectly  it  was 
a  damage  to  the  pledgor,  and  that 
hence  the  pledgor  could  sue  in  his  own 
behalf  alone,  and  that  the  measure  of 
damage  is  the  difference  between  the 
market  value  at  the  time  of  "-uit  and 


791 


§  350.] 


CONTRACTS    TO   SELL  —  GAMBLING    SALES,  ETC.  [CH.  XX. 


at  the  expense  of  the  company,  they  may  be  compelled  to  turn 
over  that  profit  to  the  company,  or,  if  they  have  sold  stock  of  the 

what  it  would  have  been  if  the  con-    rescinded.    Merrill  v.  Florida,  etc.  Co., 


spiracy  had  not  been  set  on  foot.  The 
court  held,  however,  in  the  case  before 
it,  that  the  proofs  did  not  sustain  the 
allegationa  The  purchasers  of  stock 
which  they  suppose  is  the  original 
stock,  but  which  is  really  increased 
capital  stock,  cannot  sustain  a  bill  to 
cancel  the  original  capital  stock,  even 
though  the  latter  is  held  by  the  par- 
ties who  issued  the  increased  stock 
without  amending  the  charter  as  re- 
quired by  statute.  Byers  v.  Rollins,  13 
Colo.  23  (1889).  The  fact  that  the  com- 
pany has  not  paid  dividends  does  not 
prove  that  a  representation  that  it  was 
making  ten  per  cent,  profit  was  false. 
Hatch  V.  Spooner,  1  N.  Y.  App.  Div. 
408  (1896).  In  Kountze  v.  Kennedy, 
147  N.  Y.  124  (1895),  an  action  was 
brought  by  a  vendee  of  stock  and 
bonds  against  an  officer  of  the  com- 
pany, who  upon  the  application  of  the 
vendee,  before  the  purchase  was  made, 
made  a  false  statement  of  the  liabili- 
ties of  the  company.  The  suit,  being 
at  law,  failed,  because  no  fraudulent 
intent  was  proved.  Where  two  parties 
exchange  securities  of  various  kinds, 
and  in  the  contract  to  that  efi:ect  place 
a  value  upon  the  same,  there  is  no 
fraud  arising  from  the  fact  that  the 
value  given  to  particular  stocks  is 
greater  than  their  actual  value,  the 
transaction  really  being  one  of  barter. 
Rockefeller  v.  Merritt,  76  Fed.  Rep.  909 
(1896).  Where  an  agent  or  broker  is 
employed  to  buy  stock  for  a  "  pool," 
and  agrees  to  do  so  for  a  compensation 
consisting  of  a  part  of  the  profits,  he  is 
liable  in  damages  for  fraud  if  he 
charges  the  "  pool "  more  than  the  stock 
cost  him.  Manville  v.  Lawton,  19  N. 
Y.  Supp.  587  (1892).  The  purchaser  of 
bank  stock  may  rely  upon  the  state- 
ment of  its  president  as  to  the  bank's 
condition,  and.  the  purchase  having 
been  from  the  bank  itself,  it  may  be 


60  Fed.  Rep.  17  (1893).  An  action  for 
fraud  in  inducing  plaintiff  to  buy 
stock  of  defendant  is  defeated  by  proof 
that  the  stock  was  sold  by  the  corpo- 
ration itself.  Hubbard  v.  Long,  105 
Mich.  442  (1895).  Misrepresentations 
as  to  the  value  of  stock  as  investment 
and  relating  chiefly  to  the  future  will 
not  sustain  an  action  of  deceit.  Lynch 
V.  Murphy,  171  Mass.  307  (1898).  No 
fraud  is  proved  by  showing  that  the 
certificate  of  stock  recited  the  capital 
stock  as  being  $25,000  when  it  was 
claimed  to  be  $50,000,  nor  by  a  general 
statement  that  the  company's  affairs 
were  in  good  shape  and  that  it  was 
making  money,  such  statement  being 
practically  correct.  Hoeft  v.  Koch,  119 
Mich.  458  (1899).  It  is  no  defense  to 
notes  given  in  payment  for  stock  that 
the  agent  of  the  vendor  stated  that  he 
would  not  sell  the  notes  and  that  they 
could  be  paid  out  of  future  divi- 
dends. State  Bank  v.  Gates,  114  Iowa, 
323  (1901).  A  stockholder  cannot  pre- 
vent other  stockholders  from  selling 
their  stock  on  the  ground  that  the 
purchaser  may  manage  the  company  to 
the  detriment  of  minority  stockholders, 
and  the  fact  that  the  plaintiff's  stock 
was  on  deposit  with  the  trust  company 
and  that  he  cannot  get  the  stock  and 
thus  accept  the  order  to  purchase  his 
stock  also  is  no  ground  for  an  injunc- 
tion. Ingraham  v.  National  Salt  Co.,  72 
N.  y.  App.  Div.  582  (1902).  A  purchaser 
of  stock  who  makes  a  partial  payment 
and  gives  back  the  stock  as  collateral 
security  Cannot  abandon  the  contract 
and  claim  such  part  of  the  stock 
as  the  payment  already  made  would 
pay  for,  on  the  ground  that  the  seller 
has  again  obtained  control  of  the  cor 
poration  and  is  guilty  of  a  breach  of 
trust.  The  fact  that  the  seller  as 
pledgee  has  sold  the  stock  and  bought 
it  in  himself  is  immaterial,  inasmuch 


793 


CH.  XX.]  CONTRACTS    TO    SELL  —  GAMBLING    SALES,  ETC. 


[§  350. 


company,  the  purchasers  of  the  stock  from  them  may  rescind  the 
purchase  and  hold  them  personally  liable  therefor.^ 

It  may  be  fraudulent  for  the  directors  to  issue  to  themselves 
shares  of  the  company's  unissued  stock  in  order  to  control  elec- 
tions or  to  make  a  profit.^ 

An  agent  is  not  liable  for  misrepresentations  made  by  his  prin- 
cipal, but  it  may  be  a  question  of  fact  whether  the  vendor  is  a 
principal  or  agent."  A  contract  in  regard  to  stock  may  be  illegal 
in  itself,  as,  for  instance,  a  contract  to  use  stock  to  rob  a  railroad 
and  bribe  a  judge.*  Where  a  stockholder  receives  an  offer  for  his 
stock,  and  is  persuaded  not  to  sell  by  fraudulent  representations  of 
a,  director,  he  may  hold  the  latter  liable  in  damages.'^  False  repre- 
sentations made  by  a  committee  of  the  directors  inducing  parties 
to  purchase  a  majority  of  the  stock  are  not  bindmg  on  stockhold- 
ers and  directors  who  knew  nothing  about  such  representations. 
Representations  of  an  agent  do  not  bind  the  seller  unless  the  agent 
was  authorized  to  make  representations.*^  A  misrepresentation  by. 
an  agent  of  a  corporation  as  to  the  property  held  by  it,  made  to  a 
purchaser  of  stock,  not  from  the  corporation  but  from  a  stock- 
holder, does  not  render  the  vendor  of  the  stock  personally  liable.'^ 


as  such  a  sale  is  illegal.     Reid  v.  Cald- 
well, 110  Ga.  481  (1900);  189  U.  S.  260. 

1  See  §  651,  infra.  Thus  wliere  a  per- 
son purchases  property  for  the  sole  pur- 
pose of  creating  a  corporation  to  take 
it  over  from  him  and  to  pay  him  there- 
for an  excessive  price  in  cash  and 
stock,  netting  a  large  profit  to  him,  the 
stock  being  offered  to  the  public,  and 
he  causes  the  incorporation  to  be  made 
and  directors  to  be  named,  who  are  his 
dummies,  he  is  a  promoter  and  can  be 
held  liable  by  such  corporation  for  the 
profit  he  has  made,  unless  he  fully  dis- 
closed in  a  prospectus  the  fact  that  he 
had  formed  the  corporation  and  that 
he  had  made  such  profit.  Especially  is 
this  the  rule  where  the  prospectus  gave 
a  false  impression.  He  occupies  a 
fiduciary  relation  towards  the  purchas- 
ers of  the  stock.  It  is  immaterial  that 
the  directors  approved  of  the  trans- 
action with  full  knowledge.  Non-dis- 
closure in  such  a  case  is  a  misfeasance 
in  the  nature  of  a  breach  of  trust.  Re 
Leeds,  etc.  Co.,  87  L.  T.  Rep.  488  (1902). 

2  See  §  70,  supra. 

^  See  §  334,  supra. 


4  Tobey  v.  Robinson,  99  111.  223  (1881). 
Although  a  stockholder  has  transferred 
certain  stock  to  the  president  to  be  used 
to  bribe  governmental  oflicials  in  ob- 
taining a  renewal  of  governmental  con- 
tracts with  the  corporation,  yet  the 
stockholder  may  recover  back  the  stock, 
it  not  having  been  used  for  that  pur- 
pose. Mulvane  v.  O'Brien,  58  Kan.  463 
(1897).  See  also  §  39,  supra.  Although 
a  person  transfers  stock  to  another  in 
order  to  evade  a  statute  which  pro- 
hibits any  one  stockholder  from  voting 
on  any  more  than  one-eighth  of  the 
capital  stock,  yet  the  person  to  whom 
it  is  transferred  may  make  a  valid 
agreement  to  retransfer  the  same,  and 
the  court  will  enforce  this  agreement 
Scott  V.  Scott,  68  N.  H.  7  (1894). 

5Rothmiller  v.  Stein,  143  N.  Y.  581 
(1894).  See  also  §  355,  infra.  A  party 
making  a  false  representation  may  be 
liable  even  though  the  stock  was  pur- 
chased from  another.  Hindman  v. 
First  Nat.  Bank,  112  Fed.  Rep.  931  (1903). 

6  Garrett  Co.  v.  McComb,  58  N.  Y. 
App.  Div.  419  (1901). 

'  Boddy  V.  Henry,  113  Iowa,  463  (1901). 
■93 


§  350.]  CONTKACTS    TO    SELL  —  GAMBLING    SALES,  ETC.  [CH.  XX. 

A  director  selling  stock  cannot  be  defeated  in  his  action  for  the 
price  by  reason  of  fraudulent  representations  of  the  corporate  treas- 
urer inducing  defendant  to  purchase.^  Where  the  president  of  a 
bank  is  acting  as  the  agent  of  a  person  and  sells  to  the  latter  se- 
curities of  the  bank  by  means  of  false  representations,  the  bank  is 
liable,  even  though  the  purchaser  did  not  know  that  the  sale  was 
in  behalf  of  the  bank.^  Misrepresentations  made  to  others  to  in- 
duce them  to  buy  the  stock  are  immaterial  where  no  sale  had  re- 
sulted therefrom  and  no  fraud  actually  perpetrated.^  Where  the 
vendor  making  fraudulent  representations  as  to  the  financial  con- 
dition of  the  company  is  secretary  and  treasurer,  he  cannot  claim 
that  he  was  ignorant  of  the  facts.^  A  vendee  who  is  in  the  employ 
of  the  company  and  has  opportunity  to  know  all  about  it  cannot 
claim  that  he  was  deceived  as  to  the  value  of  the  stock.'^  Misrepre- 
sentations as  to  matters  w^hich  did  not  affect  the  purchaser's  judg- 
ment are  immaterial,  especially  where  the  purchaser  is  invited  to- 
look  at  all  the  books  and  papers.^  Although  a  statement  is  made 
that  a  certain  amount  of  money  had  been  paid  in,  yet  where  other 
statements  show  clearly  that  this  was  not  so,  no  cause  of  complaint 
exists.'^ 

Misrepresentations  as  to  the  amount  of  ore  in  sight,  and  its  value, 
where  the  party  has  full  opportunity  afterwards  to  inspect  the 
mine  and  visits  the  mine  and  buys  more  stock,  and,  after  know- 
ing all  the  facts,  negotiates  for  machinery  for  the  company,  are  no 
defense.^  A  purchaser  is  not  bound  to  investigate  the  truth  of  a 
representation  where  it  is  shown  that  even  if  he  had  investigated 
he  would  not  have  become  aware  of  the  facts.^  A  provision  in  a 
contract  of  subscription  to  the  stock  of  the  company,  whereby  the 
subscriber  waives  notice  of  all  contracts  between  the  promoters- 
and  the  company,  is  not  binding  on  the  stockholder,  if  such  waiver 
is  tricky  and  fraudulent.^"  Where  the  various  stockholders  of  a 
corporation  join  in  a  contract  for  the  sale  of  their  stock,  but  se- 
cretly one  of  them  receives  a  bonus  from  the  purchaser,  the  others- 
may  compel  him  to  account  therefor  proportionately.^^ 

1  Doane  v.  King,  30  Fed.  Rep.  106  (1887).  »  Weaver  v.  Shriver,  79  Md.  530  (1894). 

2Carr  v.  National  Bank  &  L.  Co.,  167  6  Garrison  v.  Technic,  etc.  Works,  59 

N.  Y.  375  (1901).    A  bank  may  be  liable  N.  J.  Eq.  440  (1900). 

for  falsely  representing  the  condition  7  McEacheran    v.    Western    Transp. 

of  a  company,  thereby  inducing  a  party  etc.  Co.,  97  Mich.  479  (1893). 

to  purchase  stock  in  the  latter.     Hind-  8  Eldridge    v.  Young    America,  etc. 

man  v.  First  Nat.  Bank,  112  Fed.  Rep.  Co.,  67  Fac.  Rep.  703  (Wash.  1902). 

931  (1902).  9  Dow  V.  Swain,  125  Cal.  674  (1899). 

3  Darling  v.  Klock,  33  N.  Y.  App.  Div.  lo  Greenwood  v.  Leather,  etc.  Co.,  Ltd., 

270  (1898a  [1900]  1  Ch.  421. 

*  Drake  v.  Holbrook,  66  S.  W.  Rep.  ^  Synnott  v.  Cummings,  116  Fed.  Rep.. 

512  (Kv.  1902).  40  (1902). 

794 


CH.  XX.]  CONTKACTS    TO    SELL  —  GAMBLING    SALES,  ETC. 


[§  351. 


§  351.  Fraudulent  sale  T)y  agent,  etc.,  in  breach  of  trust. —  A  bona 
fide  purchaser  for  value  and  without  notice  of  stock  from  a  vendor 
who  delivers  the  certificates  therefor  indorsed  in  blank  by  another, 
or  indorsed  by  the  vendor  himself,  is  protected  and  entitled  to  the 
stock,  although  it  afterwards  transpires  that  the  agent  was  selling 
as  agent  of  another  and  had  been  guilty  of  a  breach  of  trust.^  But 
the  transferee  is  not  protected  where  he  is  not  a  hona  fide  pur- 


1  McNeil  V.  Tenth  Nat.  Bank,  46  N.  Y. 
325  (1871).  This  is  not  only  the  leading 
case  on  the  estoppel  of  a  principal  from 
repudiating  the  sale  or  pledge  of  his 
stock  by  his  agent,  whom  he  intrusted 
with  the  certificates  indorsed  in  blank, 
but  it  is  one  of  the  leading  cases  on  the 
law  of  the  quasi-negotiability  of  stock. 
See  also  Honold  v.  Meyer,  36  La.  Ann. 
585  (1884);  Strange  v.  Houston,  etc.  R.  R, 

53  Tex.  163  (1880);  Dovey's  Appeal,  97 
Pa.  St.  153  (1881).  A  bona  fide  pledgee 
of  fraudulently  issued  warehouse  re- 
ceipts can  enforce  them  only  to  the 
extent  of  the  loan  and  interest.  Corn, 
etc.  Bank  v.  American,  etc.  Co.,  163  N. 
Y.  333  (1900).  A  bill  in  equity  filed  by 
a  partner  to  hold  his  copartners  and 
third  persons  liable  for  a  misappropria- 
tion of  stock  owned  by  the  firm  cannot 
be  sustained  where  it  is  not  alleged 
that  the  third  persons  knew  of  such 
misappropriation  at  the  time  of  such 
misappropriation.  Wall  v.  Old  Colony, 
etc.  Trust  Co.,  174  Mass.  340  (1899).  Even 
though  the  agent  of  a  corporation  rep- 
resents to  it  that  a  party  owns  certain 
pi'operty  and  will  sell  it  to  the  corpora- 
tion for  $7,500  in  bonds  and  $80,000  in 
stock,  and  the  purchase  is  made  on 
those  terms,  and  the  vendor  keeps  the 
bonds  and  gives  the  stock  to  such 
agent,  and  the  agent  sells  a  portion  of 
the  stock  to  a  bona  fide  purchaser,  yet 
the  latter  cannot  rescind  the  sale  on 
the  ground  of  fraud.  Foushee  v.  Snyder, 

54  S.  W.  Rep.  730  (Ky.  1900).  Where 
four  shares  of  stock  are  transferred  to 
a  person  by  the  corporation  to  qualify 
him  as  a  director,  and  he  agrees  to  re- 
turn the  same  to  the  corporation  when 
ceasing  to  be  a  director,  but  thereafter 


and  before  he  ceases  to  be  a  director  he 
agrees  with  the  indorsers  of  his  note 
that  they  shall  have  the  stock  as  col- 
lateral security,  they  are  protected, 
even  though  the  stock  was  actually  de- 
livei'ed  to  them  after  they  had  notice 
of  the  first  agreement,  it  being  shown, 
however,  that  they  had  no  notice  of 
such  agreement  at  the  time  they  be- 
came sureties.  Dueber,  etc.  Co.  v. 
Daugherty,62  Ohio  St.  589(1900).  Where 
a  stockholder  indorses  a  certificate  of 
stock  in  blank  and  delivers  it  to  an 
agent,  and  the  agent  pledges  it  for  his 
own  purposes,  the  pledgee,  if  he  took 
without  notice  of  the  breach  of  trust, 
is  protected.  The  court  held  also  that 
the  statute  of  1884  applied  to  such  a 
case.  Russell  v.  American,  etc.  Co.,  62^ 
N.  E.  Rep.  751  (Mass.  1902).  The  bona 
fide  purchaser  of  stock  from  an  agent 
without  knowledge  of  the  agency  is 
protected.  Garvin  v.  Pettee,  88  N.  W. 
573  (So.  Dak.  1901).  Where  certificates 
of  stock  are  deposited  with  the  broker, 
duly  transferred  in  blank,  a  bona  fide 
holder  of  such  certificates  from  the 
broker  is  not  protected  as  against  the 
real  owner,  where  the  facts  were  sufti- 
cient  to  give  him  notice.  Ryman  r. 
Gerlach,  153  Pa.  St.  197  (1893);  and  see 
many  cases  in  chapter  XXV,  infra, 
where  this  principle  of  law  is  often  in- 
volved. The  books  are  full  of  cases 
wherein  an  agent  has  committed  a 
breach  of  trust  in  the  sale  of  stock. 
For  many  instances  of  this  kind  of 
fraud  and  the  various  principles  of  law 
applicable  thereto,  see  ch.  XIX,  supra, 
and  chs.  XXII  and  XXIV,  infra.  An 
assignee  in  insolvency  of  the  agent  does 
not  take  the  stock.  See  §  330,  supra. 
95 


351.] 


CONTRACTS    TO    SELL 


GAMBLING    SALES,  ETC. 


CH.  XX. 


chaser.^  Where  forgery  is  involved  the  purchaser  takes  nothing.^ 
A  person  buying  stock  from  an  agent,  with  knowledge  that  the 
latter  is  acting  as  agent,  is  bound  to  inquire  into  the  scope  of  his 
authority,  and  if  the  agent  is  authorized  only  to  sell  for  cash  his 
agreement  to  sell  on  time  cannot  be  enforced  by  the  purchaser.^ 
Where  the  same  person  acts  as  agent  for  both  the  transferrer  and 
the  transferee,  and  absconds  with  the  purchase  price  after  the 
certificates  have  been  delivered,  but  before  registry  on  the  corpo- 
rate books,  the  transferee  is  protected.^  Where  the  corporation 
knows  that  the  vendor  is  selling  as  the  agent  of  the  stockholder, 


Moodie  v.  Seventh  Nat.  Bank,  3  W.  N. 
Cas.  118  (1876),  holds  that  if  the  pur- 
chase takes  partly  for  an  antecedent 
debt  he  is  not  a  bona  fide  holder  to 
that  extent.  See  also  Dovey's  Appeal, 
97  Pa.  St.  153  (1881).  An  agent  to  col- 
lect dividends  who  loans  the  stock  at  a 
profit  is  liable  for  its  loss,  even  though 
he  informed  the  owner  of  the  loan  and 
she  did  not  object.  Persch  v.  Quiggle, 
57  Pa.  St.  247  (1868).  A  bona  fide  pur- 
chaser from  the  agent  is  protected. 
State  Bank  v.  Cox,  11  Rich.  Eq.  (S.  C.) 
344  (1860);  West  Branch,  etc.  Co.'s  Ap- 
peal, *81  Pa.  St.  19  (1870);  Otis  v.  Gard- 
ner, 105  111.  436  (1883);  Zulick  v.  Mark- 
ham,  6  Daly,  129  (1875);  Martin  r.  Sedg- 
wick, 9  Beav.  333  (1846);  Linnard's 
Appeal,  6  East.  Rep.  877  (Pa.  1886).)  In 
England  certificates  of  stock  are  not 
negotiable  in  any  sense,  and  hence  the 
English  decisions  on  the  point  now 
under  consideration  have  no  weight  in 
America.  See  g§  377,  412,  infra,  and 
§  3:25.  supra. 

1  Talmage  v.  Third  Nat.  Bank,  91  N. 
Y.  531  (1883);  Crocker  v.  Crocker,  31  N. 
Y.  507  (1865);  Weavers  Barden,  49  N.  Y. 
286  (1872j,  where  the  agent  fraudulently 
bought  in  his  own  name  and  then  fraud- 
ulently sold;  Williamson  v.  Mason,  12 
Hun,  97  (1877).  A  purchaser  from  an 
agent  with  notice  of  the  fact  that  he 
held  as  agent,  and  that  he  had  sold  to 
himself,  is  not  protected.  Bank  of 
Louisville  v.  Gray,  84  Ky.  565  (1886). 
Where  a  person  holds  stock  under  an 
agreement  with  another  that  after  the 
profits  have  repaid  the  cost  of  the  stock 


the  further  profits  should  be  divided 
equally  between  them,  such  agreement 
is  binding  upon  a  person  who  buys  such 
stock  with  notice  of  the  agreement. 
Morris  v.  Shepard,  53  Atl.  Rep.  172 
(N.  J.  1902).  Where  a.  street  railway 
company  employs  a  person  as  its  agent 
to  purchase  a  majority  of  the  stock  of 
another  street  railway  company,  and  he 
does  so,  and  the  former  pays  him  for 
the  stock  and  for  his  services,  he  can- 
not refuse  to  deliver  the  stock  on  the 
ground  that  the  company  had  no  power 
to  purchase,  or  on  the  ground  that  it 
had  passed  no  resolutions  authorizing 
him  to  purchase,  and  the  former  may 
recover  the  stock  from  a  transferee 
with  notice  from  the  agent.  Manches- 
ter St.  Uy.  V.  Williams,  52  Atl.  Rep.  461 
(N.  H.  1902). 

2  See  §§  365-370,  infra.  Where  an 
agent  of  a  stockholder  forges  his  name 
to  the  certificates  of  stock  and  pledges 
them  with  a  party  to  secure  a  loan  to 
the  agent's  principal,  such  loan  cannot 
be  collected,  even  though  the  proceeds 
went  to  the  credit  of  the  principal  and 
were  afterwards  embezzled  by  the 
agent  under  a  power  of  attorney  to 
check  out  the  principal's  money,  the 
party  loaning  the  money  on  the  cer- 
tificates of  stock  not  having  any  knowl- 
edge of  such  power  of  attorney  at  the 
time.  Fay  v.  Slaughter,  194  111.  157 
(1901). 

3  Norton  v.  Nevills,  174  Mass.  243 
(1899). 

*  Ex  parte  Shaw,  L.  R.  2  Q.  B.  D.  463 
(1877). 


796 


CH.  XX.]  CONTKACTS    TO    SELL GAMBLING    SALES,  ETC.  [§351. 

who  has  given  to  the  agent  the  certificates  indorsed  in  blank,  it 
must  see  to  it  that  the  agent  has  full  power  to  sell  the  stock,  and  is 
liable  for  allowing  a  registry  where  the  agent  has  not  such  power.^ 
A  stockholder  whose  stock  has  been  wrongfuU}^  pledged  may  enjoin 
the  corporation  from  allowing  a  transfer  by  the  pledgee  who  has 
applied  for  the  same.^  If  the  principal  authorized  the  sale  or  rati- 
fied it,  he  of  course  cannot  afterwards  complain.'  Where  an  agent 
to  sell  is  able  to  sell  for  more  than  he  accounts  for  to  his  principal, 
the  latter  cannot  recover  the  difference  unless  the  sale  was  actually 
made.*  Even  though  the  seller's  broker  divides  a  secret  profit  with 
the  purchaser's  broker  without  the  purchaser  knowing  thereof,  yet 
the  purchaser  cannot  hold  the  seller's  broker  liable  for  his  profits. 
The  remedy  is  rescission.^  Where  a  stockholder  in  an  insolvent 
corporation  turns  over  his  stock  to  another  person  to  deposit  under 
a  reorganization  agreement,  the  latter  agreeing  to  pay  the  assess- 
ment on  the  stock  and  to  deliver  to  the  stockholder  the  new  securi- 
ties upon  repayment  of  such  assessment,  and  he  refuses  so  to  do 
thereafter,  he  is  guilty  of  a  conversion  and  of  a  fraud  upon  the 
stockholder.**  Where  a  customer  may  rescind  a  purchase  of  stock 
made  for  him  by  his  broker,  upon  discovering  that  the  broker  sold 
him  stock  owned  by  such  broker,  the  customer,  if  he  has  exchanged 
such  stock  for  reoro;'anization  stock,  mav  tender  back  old  stock 
which  he  borrows  for  that  purpose.'  In  England  the  courts  do 
not  protect  a  purchaser  of  certificates  of  stock  unless  the  latter  has 
not  only  purchased,  but  has  obtained  a  registry  on  the  corporate 
books.^ 

An  agent's  power  to  sell  stock  does  not  authorize  him  to  pledge 
it.^     A  person  who  knows,  or  has  the  means  of  knowing,  that  an- 

1  Wood  house  r.  Crescent  Mut.  Ins.  Co.,  and  retains  a  receipt  from  the  agent 

35  La.  Ann.  238  (1883),  holding  that  the  setting  forth  such  pledge.     Metcalf  v. 

transferee  who  is  charged  with  receiv-  Williams,  144  Mass.  453  (1887). 

ing  with   notice  may   be   joined  as  a  *  Edison  v.  Gilliland,  42  Fed.  Rep.  205 

party  defendant.   St.  Romes  v.  Levee,  (1890).    An  agent  may  of  course  be  held 

etc.  Co.,  127  U.  S.  614  (1888).  liable  for    misrepresenting    the    price 

-The  pledgor  need  not  allege  that  the  which  he  received  on  the  sale  of  stock 

pledgee  took  with  notice.     It  is  for  the  and  for  retaining  the  difference.  Horner 

pledgee  to  intervene  and  prove  that  the  v.  Perry,  112  Fed.  Rep.  906  (1901). 

pledge  was  bona  fide.     Reynolds  v.  Tou-  ^nungworth  v.  De  j\Iott,  59  N.  J.  Eq. 

zalin  Imp.  Co.,  62  Neb.  236  (1901).  8  (1900).     Cf.  120  Fed.  84;  93  N.  W.  722. 

3  As  to  the  admissibility  in  evidence  ^  Miller  v.  Miles,58  N.  Y.  App.  Div.  103 

of  a  receipt  showing  that  the  agent  was  (1901). 

authorized  to  sell  by  order  of  the  prin-  "  Mayo  v.  Knowlton,  134  N.   Y.  250 

cipal's  brother,  see  Dwyer  v.  Fuller,  144  (1892). 

Mass.  420  (1887).     A  pledge  of  stock  by  8  See  §  412,  infra. 

an  agent  is  not  a  conversion,  where  the  ^  Merchants'  Bank  v.  Livingston,  74 

principal  received  without    objection  N.  Y.  223  (1878).    See  §g  321,  326,  swpro. 

797 


'§  352.] 


CONTKACTS    TO    SELL  —  GAMBLING    SALES,  ETC.  [OH.  XX. 


Other  person  holds  stock  as  an  agent  to  sell  only,  cannot  take  such 
stock  in  pledge  from  the  agent,  although  the  latter  represents  that 
the  money  is  to  be  used  for  his  principal.  The  principal  may  re- 
cover the  stock  if  he  has  not  authorized  the  pledge.^  A  bona  fide 
purchaser  of  certificates  of  stock  from  a  pledgee  is  protected.^ 
Where  no  certificates  of  stock  have  been  issued,  a  purchaser  of  a 
subscriber's  right  to  the  stock  is  not  protected  as  a  purchaser  of  a 
certificate  of  stock  is  protected.^ 

§  352.  Fraud  may  he  ly  corporate  reports  or  prospectus.—  A  re- 
port of  corporate  oflQcers  to  the  stockholders,  setting  forth  the  con- 
dition of  the  affairs  of  the  corporation,  is  deemed  to  be  a  statement 
to  the  public  also,  and  it  may  be  relied  upon  by  any  one  in  purchas- 
ing shares.  This  principle  of  law  was  first  clearly  established  in 
England  in  1860,  in  the  case  of  Davidson  v.  TuUoch.''  It  Was  there 
held  that  there  need  be  no  privity  between  the  officers  issuing  the 
report  and  the  person  purchasingsharesof  stock  from  third  persons. 
If  such  purchaser  made  his  purchase  relying  upon  material  state- 
ments in  corporate  reports  which  were  false,  he  has  his  remedy 
against  all  persons  who  knowingly  made  or  issued  the  report.^    The 

1  Fisher  v.  Brown,  104  Mass.  259  (1870).  ^6  Jur.  (N.  S.)  543;  S.  C  3  Macq.  (H. 

V  bona  fide  pledgee  of  a  certificate  of  L.)  783. 

.-tock  from  an  agent  liaving  power  to  ^  gcott  v.  Dixon,  29  L.  J.  (Exch.)  62, 
':)ledge,   but  wlio  had   so  pledged  the  n.  (1859),  explained  in  Peek  v.  Gurney, 
stock  for  purposes  not  authorized  by  the  L.  R.  6  R  L.  398  (1873),  as  follows:  "  The 
owner,  is  nevertheless  protected,  and  report,  though  originally  made  to  the 
'iven   though  such    pledgee    sells  the  shareholders,  was  intended  for  the  in- 
stock  at  private  sale  without  notice  he  formation  of  all  persons  who  were  dis- 
cannot  be  held  liable  if  the  stock  was  posed  to  deal  in  shares;  and  the  repre- 
jaot  worth  more  than  the  debt  secured,  sentation  must  be  regarded  as  having 
Brittani-.Oakdale,etc.,124Cal.2S2(1899).  been  made  not  indirectly,  but  directly 
'■^See  i^  473,  infra.     A  bank  taking  a  to  each  person  who  obtained  the  report 
pledgeof  negotiable  bonds  in  good  faith  from  the  bank  where  it  was  publicly 
may  hold  them,  though  it  turn  out  that  announced  it  was  to  be  bought,  in  the 
the  pledger  was  not  the  owner  of  them,  same  manner  as  if  it  had  been  person- 
but  held  them  as  security  that  a  mort-  ally  delivered  to  him  by  the  director; " 
gage  would  be  canceled.     Saloy  v.  Hi-  Gerhard  v.  Bates,  20  Eng.  L.  &  Eq.  129 
hernia  Nat.  Bank, 39  La.  Ann.  90  (1887).  (1853);  Cullen  v.  Thomson,  6  L.  T.  Rep. 
Where  the  pledgee  of  stock  transfers  it  870  (1862),  holding  that,  where  directors 
into  his  own  name  on  the  books  of  the  of  a  joint-stock  company  issue  false  and 
company  and  takes  out  new  certificates,  fraudulent  reports  to  the  public,  and 
a  bona  fi.de  purchaser  or  pledgee  from  the  manager,  secretary,  and  other  offi- 
him  is  protected.  Westinghouse  v.  Ger-  cers  of  the  bank   supply  the  detailed 
man,  eta  Bank,  196  Pa.  St.  249  (1900).  statements  for  such   report,   knowing 
As  to  sales  by  trustees,  etc.,  see  ch.  XIX,  them  to  be  false  and  that  they  are  to 
supra.  be  used  for  purposes  of  deceit,  and  a 
3  Manchester  St.  Ry.  r.  Williams,  52  third   party,    acting  on   such   reports, 
Atl.  Rep.  461  (N.  H.  1902).     Cf.  %  373,  purcliases  shares  in  th©  company  and 
infra.  suffers  loss  thereby,  each  of  the  officers 

798 


€H.  XX.]  CONTKACTS   TO   SELL  —  GAMBLING    SALES,  ETC. 


[§  352. 


leading  case  in  this  country  on  the  liability  of  corporate  directors 
for  fraudulent  representation  as  to  the  condition  of  the  company, 
not  made  to  a  purchaser  of  stock  personally,  but  to  the  public 
generally,  is  Cross  v.  Sackett,^  decided  in  1858,  where  fraudulent 


of  the  company  who  knowingly  assisted 
in  the  fraud  is  personally  liable  to  such 
third  party  for  the  loss  caused  by  such 
misrepresentation  in  the  report,  though 
the  repprt  was  signed  only  by  the  di- 
rectors and  not  by  the  subordinate  offi- 
cers. 

1  2  Bosw.  617;  6  Abb.  Pr.  247;  16  How. 
Pr.  62,  the  court  saying:  "When  an  in- 
strument is  made  to  deceive  the  public 
generally,  and  is  adapted,  as  well  as  in- 
tended, to  deceive  some  portion  of  the 
public,  and  as  well  one  person  as  an- 
other, and  is  used  as  it  was  designed  it 
should  be,  and  fraudulently  induces 
some  one  to  act  to  his  prejudice  by  act- 
ing'in  the  mode  it  was  intended  to  in- 
fluence them  to  act  who  might  be 
deceived  by  it,  the  person  who  made 
the  instrument  and  caused  it  to  be  thus 
fraudulently  used  is  liable  to  the  per- 
son who  has  been  defrauded  by  it.  In 
such  a  case  the  person  injured  has  been 
subjected  to  damage  by  his  fraudulent 
acts,  and  the  fraudulent  wrong-doer  is 
liable  for  the  consequences.''  In  Ca- 
zeaux  V.  Mali,  25  Barb.  578  (1857),  the 
court  said:  "  It  is  not  essential  that  the 
.representation  should  be  addressed  di- 
rectly to  the  plaintiff;  if  it  were  made 
with  the  intent  of  its  influencing  every 
one  to  whom  it  might  be  communi- 
cated, or  who  might  read  or  hear  of  it, 
the  latter  class  of  persons  would  be  in 
the  same  position  as  those  to  whom  it 
was  directly  communicated,  but  thej' 
must  have  come  to  a  knowledge  of  it 
before  their  purchase."  In  Morse  v. 
Swits,  19  How.  Pr.  275  (1859),  a  bank 
officer  was  held  liable  for  false  state- 
ments in  a  report  published  in  accord- 
ance with  the  requirements  of  a  statute, 
the  court  saying:  "Being  published, 
the  public,  or  any  individual  of  the  pub- 
lic, has  a  right  to  believe  it.  .  .  .  And 
if,  believing  it,  any  one  of  the  public 


acts  on  that  belief,  the  makers  and  pub- 
lishers of  this  falsehood  are  to  be  held 
liable  for  the  consequences  they  have 
caused."    (See  cases  cited  in  Reporters 
note  to  the  foregoing.)  See  also  Salmon 
V.  Richardson,  30  Conn.  360  (1862);  Fenn 
V.  Curtis,  23  Hun,  384  (1881),  liolding 
the  secretary  liable  to  a  purchaser  of 
shares  from  an  individual,  the  secretary 
having  signed  the  certificate  of  stock 
and  also  a  circular  stating  that  the  cor- 
poration  was  a  corporation,  when  in 
fact   it  was  not.     And   see  ^§  40,  48, 
supra.     A  person  buying  stock  in  what 
was  supposed  to  be  a  corporation,  but 
is  a  partnership,  cannot  recover  back 
his  money  from  all  of  the  participants. 
Perry  v.  Hale,  143  Mass.  540  (1887).     A 
corporation  is  not  liable  for  misrepre- 
sentations of  the  president  in  selling 
"stock  belonging  to  himself.     Prosser  r. 
First  Nat.  Bank,   106  N.  Y.  677  (1887). 
Where  stockholders  in  an  apartment- 
house  corporation  are  entitled  to  rent 
apartments  at  a  rental  to  be  fixed  by  a 
majority  vote  of  the  stockholders,  an 
increased  rental  so  voted  is  legal.     The 
by-laws  providing  for  such  a  vote  over- 
ride a  general  statement  in  a  prospectus 
to  the  contrary,  the  stockholders  know- 
ing of  the  by-law.    Compton  v.  Chelsea, 
128  N.  Y.  537  (1891).     The  fact  that  the 
false  statements  as  to  the  condition  of 
the  corporation  are  made  to  a  director, 
who  is  acting  as  agent  for  the  vendee, 
is  not  fatal  to  the  suit  for  fraud.    Trim- 
ble V.  Ward,  97  Ky.  748  (1895).     A  per- 
son loaning  money  to  an  individual  and 
taking  bank  stock  as  collateral  security 
cannot  hold  the  bank  liable  in  an  ac- 
tion  for  damages    for  deceit,  on   the 
ground  that  its  published  statements 
were  false  and  fraudulent,  and  that  he 
relied  on  those  statements.   Merchants' 
Nat.  Bank  v.  Armstrong,  65  Fed.  Rep. 
932  (1895).     A  -vendor  who  sells  know- 


r99 


352.] 


CONTKACTS    TO    SELL GAMBLING    SALES,  ETC.  [CH.  XX, 


dividends  and  representations  based  thereon  were  made.  A  cor- 
poration ma}^  be  held  liable  for  false  represeijtations  in  a  prospec- 
tus issued  by  it  to  sell  stock  of  another  corporation.^  A  purchaser 
of  stock  in  an  insurance  company,  however,  cannot  hold  a  bank 
liable  on  a  misstatement  by  the  bank  to  the  insurance  commissioner 
as  to  the  cash  which  the  insurance  company  has  on  deposit  with 
it.-  An  officer  of  a  bank  is  personally  liable  to  a  purchaser  of 
its  stock  who  relied  on  the  published  statement  signed  by  the 
officers  in  which  overdrafts  are  described  as  loans  and  discounts.' 
Although  a  corporate  creditor  may  hold  the  incorporators  liable 
for  a  false  statement  in  their  sworn  statement  obtaining  incor- 
poration in  regard  to  the  amount  of  capital  stock  that  has  been 
paid  in,  yet  the  action  is  in  tort  and  an  assignee  of  the  claim  cannot 
maintain  it.^  The  president  is  liable  in  an  action  of  deceit  where 
he  sells  stock  after  referring  the  purchaser  to  a  published  statement 
of  the  corporation  signed  by  him,  which  statement  was  false. 
Where,  however,  the  sale  is  to  a  director,  such  a  director  is  bound 
to  show  that  he  did  not  know  the  statement  was  unti^ue,  and  he 
may  show  that  fact  although  he  also  signed  the  statement.^ 


ing  that  the  corporation  has  issued  a 
false  report  that  it  was  earning  two  per 
cent,  a  month,  and  that  the  vendee  re- 
lied on  this  report,  is  guilty  of  fraud, 
and  the  sale  may  be  rescinded.  Foley 
V.  Holtry,  43  Neb.  133  (1894).  A  person 
who  purchases  bank  stock  from  the 
bank  itself  may  hold  the  bank  liable 
for  damages  where  the  public  state- 
ment of  the  bank  which  he  relied  on  in 
purchasing  was  false.  The  measure  of 
damages  is  the  difference  between  the 
value  of  the  stock  if  the  statement  had 
been  true  and  its  actur.l  value.  Ex- 
change Bank  v.  Gaitskill,  37  S.  W.  Rep. 
160  (Ky.  1896),  A  stockholder  sued  by 
a  corporation  on  an  ordinary  debt,  and 
who  sets  up  in  defense  that  he  was  in- 
duced to  buy  stock  from  outside  par- 
ties by  fraudulent  statements  made  by 
the  company,  cannot  have  a  mandmmis 
to  compel  the  company  to  allow  him  to 
examine  its  books.  His  application  in 
such  a  case  is  as  a  creditor  and  not  as 
a  stockholder.  Investment  Co.  v.  Eld- 
ridge,  2  Pa.  Dist.  394  (1893). 

1  Such  a  cause  of  action  is  assignable 
under  the  New  York   statute.     Bene- 


dict V.  Guardian  T.  Co.,  58  N.  Y.  App. 
Div.  302  (1901). 

2  Hindman  v.  First  Nat.  Bank,  86  Fed. 
Rep.  1013  (1898). 

3  Gerner  v.  Yates,  61  Neb.  100  (1900). 
A  person  who  buys  stock  in  a  national 
bank  relying  on  a  report  of  the  condi- 
tion of  the  bank  signed  by  directors,  in 
accordance  with  the  acts  of  congress, 
may  hold  the  directors  so  signing  the 
report  personally  liable  in  damages  if 
it  transpire  that  the  report  was  abso 
lutely  false  and  that  the  stock  was 
worthless,  but  he  cannot  hold  liable  the 
directors  who  did  not  sign  the  report. 
Gerner  v.  Mosher,  58  Neb.  135  (1899). 
See  also  Stuart  v.  Bank  of  Staplehurst, 
57  Neb.  569  (1899).  Directors  of  a  bank 
are  not  liable  in  an  action  for  deceit  to 
a  purchaser  of  stock,  although  they 
signed  the  cashier's  annual  statement, 
which  was  false,  there  being  proof  that 
they  believed  it  to  be  true.  Foster  v. 
Gibson,  38  S.  W.  Rep.  144  (Ky.  1896). 

*  Haines  v.  Franklin,  87  Fed.  Rep.  139 
(1898). 

5  Ward  V.  Trimble,  44  S.  W.  Rep.  450 
(Ky.  1898),     The  president  is  liable  in 


800 


CH.  XX,] 


CONTRACTS    TO    SELL GAMBLING    SALES,  ETC. 


[§  353. 


§  353.  A  somewhat  different  rule  prevails  in  England  as  to  false 
statements  contained  in  a  prospectus  of  a  corporation.  A  prospec- 
tus is  issued  for  the  purpose  of  inducing  persons  to  subscribe  for 
stock.  Its  object  is  not  to  promote  the  sale  of  that  stock.  Accord- 
ingly it  was  decided  in  Peek  v.  Gurney,^  in  1873,  that  "the  pur- 
chaser of  shares  in  the  market,  upon  the  faith  of  a  prospectus 
which  he  has  not  received  from  those  who  are  answerable  for  it, 
cannot,  by  action  upon  it,  so  connect  himself  with  them  as  to  ren- 
der them  liable  to  him  for  the  misrepresentation  contained  in  it, 
as  if  it  had  been  addressed  personally  to  himself."  In  Kew^  York 
a  directly  opposite  rule  prevails.  In  the  case  of  Morgan  v.  Skiddy,^ 
in  1875,  the  court  of  appeals  held  that,  "if  the  plaintiff  purchased 
his  stock  relying  upon  the  truth  of  the  prospectus,  he  has  a  right 
of  action  for  deceit  against  the  persons  who,  with  knowledge  of 
the  fraud  and  with  intent  to  deceive,  put  it  in  circulation.  The 
representation  was  made  to  each  person  comprehended  within  the 
class  of  persons  who  were  designed  to  be  influenced  by  the  pros- 
pectus; and  when  a  prospectus  of  this  character  has  been  issued, 
no  other  relation  or  privity  between  the  parties  need  be  shown  ex- 
cept that  created  by  the  wrongful  and  fraudulent  act  of  the  de- 
fendants in  issuing  or  circulating  the  prospectus,  and  the  resulting 
injury  to  the  plaintiff."  It  has  recently  been  held  in  England  that 
where  a  person  purchases  stock  in  the  open  market,  being  induced 
to  do  so  by  a  prospectus  and  published  telegram,  both  of  which  are 
fraudulent,  he  may  hold  the  promoters  personally  responsible,  al- 
though the  stock  was  not  purchased  from  them  nor  from  the  cor- 
poration.* 


an  action  for  deceit  where  he  sells 
stock  of  the  bank  of  which  he  is  presi- 
dent, and  which  has  published  a  false 
tatement  of  its  condition  by  order  of 
lie  president  and  others.  Trimble  v. 
Jeid,  41  S.  W.  Rep.  319  (Ky.  1897).  In 
►n  action  at  law  the  directors  are  not 
lable  to  a  person  who  purchases  stock, 
i^elying  on  the  directors'  report,  unless 
raudulent  intent  is  proved.  Parker  v. 
[cQuesten,  33  Q.  B.  Rep.  (Can.)  273 
1872). 

»  IL.  R.  6  H.  L.  377,  overruling  Bag- 
tliavv  V.  Seymour,  IS  C.  B.  903  (1856),  and 
Bedford r.  Bagshaw,  4H.  &  N.  538  (1859); 
explaining  Scott  v.  Dixon,  29  L.  J. 
jExch.)  62,   n.   (1859),  and   Gerhard  v. 


Ch.  D.  503  (1878).  In  Bellairs  v.  Tucker, 
L.  R.  13  Q.  B.  D.  563  (1884).  the  court 
seems  to  have  assumed  a  different  posi- 
tion, and  to  have  treated  the  prospectus 
the  same  as  any  other  method  of  mis- 
representation. 

2  62  N.  Y.  319.  In  Kountze  v.  Ken- 
nedy, 147  N.  Y.  124  (1895),  it  was  held 
that  the  fact  that  an  officer,  in  a  state- 
ment of  the  liabilities  of  the  company 
omitted  a  claim  which  was  afterwards 
established,  was  not  guilty  of  such 
fraud  as  would  sustain  a  suit  at  law 
for  damages  for  deceit. 

3  Andrews  v.  Mockford,  73  L.  T.  Rep. 
726  (1896).  Where  a  party  purchases 
stock,  relying  on  a  prospectus  which 

Bates,  2  El.  &  Bl.  476  (1853),  and  itself  states  that  reports  had  been  "  prepared 
explained  in  Cargill  v.  Bower,  L.  R.  10  for  the  directors "  by  the  engineers 
(51)  80r 


§  354.] 


CONTRACTS    TO    SELL 


GAMBLING    SALES,  ETC. 


[CH,  XX. 


§  354.  Bemedies  for  the  fraud. —  There  are  three  methods  by 
which  a  person  who  has  been  fraudulently  induced  to  buy  or  sell 
stock  may  remedy  the  wrong.^  He  may  bring  an  action  at  law 
for  the  consideration,  or  an  action  at  law  for  damages  for  the  de- 
ceit, or  he  may  file  a  bill  in  equity  to  have  the  transaction  set 
aside.  The  second  remedy  is  the  most  difficult  and  the  last  the 
most  easy  to  maintain.  At  common  law  an  action  to  recover  back 
the  whole  of  the  purchase-money  upon  a  rescission  for  fraud  is 
virtually  a  suit  for  money  had  and  received.'- 

In  special  cases  other  remedies  are  open  to  the  purchaser.  He 
may  compel  the  defrauding  party  to  abide  by  the  statements  that 
were  made.  Thus,  where  the  vendor  represented  that  the  corpo- 
rate property  was  unincumbered,  equity  may,  at  the  instance  of  the 
purchaser  of  stock,  enjoin  the  vendor  from  enforcing  a  lien  which 
he  has  on  such  property.^     If  the  contract  is  executory  it  may  be 


and  giving  extracts  therefrom,  the  di- 
rectors are  not  personally  liable  in  an 
action  for  deceit,  even  if  it  is  shown 
that  the  reports  were  prepared  on  in- 
structions not  from  the  directors,  but 
from  the  vendors  of  the  property  to 
the  company.  It  is  necessary  to  prove 
that  the  reports  were  untrue.  Angus 
V.  Clifford,  [1891]  2  Ch.  449. 

1  "  A  person  who  has  been  induced  by 
fraudulent  representations  to  become 
the  purchaser  of  property  has,  upon 
discoveiy  of  the  fraud,  three  remedies 
open  to  him,  either  of  which  he  may 
elect.  He  may  rescind  the  contract 
absolutely  and  sue  in  an  action  at  law 
to  recover  the  consideration  parted 
with  upon  the  fraudulent  contract.  To 
maintain  such  action  he  must  first  re- 
store, or  offer  to  restore,  to  the  other 
party,  whatever  may  have  been  re- 
ceived by  him  by  virtue  of  the  con- 
tract. He  may  bring  an  action  in 
equity  to  rescind  the  contract,  and  in 
that  action  have  full  relief.  Such  an 
action  is  not  founded  upon  a  rescission, 
but  is  maintained  for  a  rescission,  and 
it  is  sufficient,  therefore,  for  the  plaintiff 
to  offer  in  his  complaint  to  return  what 
he  has  received  and  make  tender  of  it 
on  the  trial.  Lastly,  he  may  retain 
what  he  has  received  and  bring  an  ac- 
tion at  law  to  recover  the  damages  sus- 


tained. This  action  proceeds  upon  an 
affirmance  of  the  contract,  and  the 
measure  of  the  plaintiff's  recovery  is 
the  difference  between  the  article  sold 
and  what  it  should  be  according  to  the 
representations."  Vail  v.  Reynolds,  118 
N.  Y.  297  (1890).  Where  the  sale  of 
stock  has  been  induced  by  fraud,  the 
vendee  may  follow  the  money  paid  by 
him  and  recover  it  back  if  the  identity 
of  the  fund  can  be  shown.  Moore  v. 
Williams,  62  Hun  55(1891). 

2  Gassett  v.  Glazier,  165  Mass.  473 
(1896). 

3  Jones  V.  Bolles,  9  Wall.  364  (1869). 
See  also  g§  334,  354  and  771.  Where  a 
person  organizes  a  railroad  corporation 
and  takes  a  contract  for  its  construc- 
tion, and  causes  all  the  stock  and  a  large 
quantity  of  bonds  to  be  issued  to  him- 
self, and  then  sells  these  stocks  and 
bonds  and  has  knowledge  of  represen- 
tations made  by  corporate  officers  to 
his  vendee  that  the  company  owes  noth- 
ing except  the  bonds,  he  cannot  after- 
wards enforce  a  claim  for  doing  extra 
work  under  a  contract,  where  such  con- 
tract did  not  appear  on  the  books  of  the 
company.  The  transaction  is  a  fraud 
on  his  part.  Chicago,  etc.  Ry.  v.  Miller, 
91  Mich.  166  (1892).  Where  the  vendor 
of  a  majority  of  the  stock  of  a  corpora- 
tion agrees  that  the  company  owes  no 


80  ■; 


CH.  XX.]  CONTRACTS    TO    SELL  —  GAMBLING    SALES,  ETC. 


[§  355. 


canceled  by  mutual  agreement.'  A  purchaser  of  national  bank 
stock  from  the  bank  itself  cannot,  after  the  bank  has  passed  into 
the  hands  of  a  receiver,  defend  against  the  statutory  liability  on 
the  ground  of  fraud  inducing  him  to  purchase,  unless  he  proves 
acts  of  diligence  which  negative  any  charge  of  negligence,  and  also 
proves  that  no  debt  was  created  nor  credit  given  th.e  bank  after  he 
became  such  stockholder.-  The  pleadings  in  enforcing  the  remedies 
which  the  vendee  has,  vary,  of  course,  according  to  the  remedy 
which  is  pursued.* 

§  355.  Action  for  deceit.— Jn  order  to  sustain  an  action  for  dara- 
ao-es  for  deceit,  whereby  plaintiff  was  induced  to  buy  or  sell  shares 
of  stock,  it  is  necessary  for  the  plaintiff  to  prove  that  statements 


debts  except  certain  specific  ones,  the 
vendee  may  recover  back  any  excess  of 
debts  over  tliose  specified.     Wliere  the 
debts  of  one  class  were  not  to  exceed  a 
certain  sum,  but  did  exceed  that  sum, 
the  vendee  may  recover  the  difference, 
even  though  the  debts  of  another  class 
•were  less  than  a  sum  specified  in  the 
contract  of  sale,     Chicago,  etc.  Ry.  v. 
Hoyt,  89  Wis.  314  (1895).     See  German 
State  Bank  v.  Northwestern,  etc.   Co., 
104  Iowa,  717  (1898).     Although  a  pur- 
chaser of  stock  cannot  rescind,  he  hav- 
ing been  guilty  of  delay,  yet  he  may 
sue  the  vendor  upon  a  warranty  that 
the  stock  will  be  worth  more  than  what 
it  was  sold  for.     Maxted  v.  Fowler,  94 
Mich.  106  (1892).     Stockholders  cannot 
defeat  a  vendor's  lien  on  the  ground 
that  the   vendor,  before  they  bought 
their  stock,  represented  that  he  had  no 
lien,  where  they  do  not  set  up  that  de- 
fense in  a  suit  by  him  to  establish  his 
lien.     Wilson  v.  Seymour,  76  Fed.  Rep. 
678  (1896).     Where  a  person  owning  all 
the  stock  of  a  corporation  sells  it  under 
circumstances  which  induces  the  pur- 
chaser to  believe  that  the  former  has  no 
clahn  against  the  corporation,  he  may 
be  enjoined  from  enforcing  any  such 
claim.     Given  v.  Times-Republican,  etc. 
Co.,  114  Fed.  Rep.  92  (1902).     Where  the 
stockholders  in  a  power  company  sell 
their  stock  and  then  obtain  control  of 
water  rightson  which  the  company  had 
an  option,  which  option   has  expired, 
the  party  purchasing  the  stock  may  by 


a  suit  in  equity  compel  them  to  turn 
over  such  water  rights.  Valentine  v. 
Berrien,  etc.  Co.,  87  N.  W.  Rep.  370 
(Mich.  1901). 

1 A  subscription  may  be  canceled  by 
and  with  the  consent  of  the  directors 
when  fraud  is  involved.  Four  years 
afterwards  corporate  creditors  cannot 
attack  it.  McDermott  v.  Harrison,  9 
N.  Y.  Supp.  184  (1890).  See  ch.  X,  siqyra. 
If  there  has  been  a  mutual  mistake  in 
regard  to  what  the  stock  really  repre- 
sented in  property,  an  action  for  money 
had  and  received  or  a  suit  to  cancel  the 
sale  will  lie.  Norton  v.  Bohart,  105  Mo. 
615  (1891). 

2  Wallace  v.  Hood,  89  Fed.  Rep.  11 
(1898).  See  also  §  16S.  supra.  A  sub- 
scriber to  the  stock  of  a  national  bank 
cannot,  after  the  bank  has  become  in- 
solvent, avoid  his  statutory  liability 
on  the  stock  by  the  defense  that  be 
was  induced  by  fraudulent  representa- 
tions of  the  bank  and  its  officers  to  be- 
come a  stockholder.  Scott  v.  Deweese, 
181  U.  S.  202  (1901).  In  a  suit  at  law 
brouglit  by  the  receiver  of  a  national 
bank  against  a  stockholder  on  his  stat- 
utory liability,  he  cannot  set  up  fraud 
on  the  part  of  the  bank  in  inducing 
him  to  subscribe.  That  defense,  if  good 
at  all,  is  available  only  by  a  suit  in 
equity.  Neither  can  the  defendant  set 
up  a  counterclaim  for  the  money  so 
paid  by  him  for  the  stock.  Lantry  v. 
Wallace,  182  U.  S.  536  (1901). 

3  In  the  case  of  Smith  v.  Tracy,  36  N. 


803 


§  355.] 


CONTKACTS    TO    SELL GAMBLING    SALES,  ETC. 


[CH.  XX. 


were  made  or  acts  done  which  were  fraudulent,  that  the  person 
guilty  of  them  knew  that  they  were  fraudulent,  and  that  the  plaint- 
iff acted  on  such  statements  or  acts  in  buying  or  selling  the  stock. ^ 
In  England  a  statement  made  recklessly,  or  without  regard  as  to 
whether  it  is  true  or  untrue,  may  constitute  a  fraudulent  intent.^ 

Y.  79  (1867),  the  vendee  sued  the  vendor  ingly;  (2)  without  belief  in  its  truth; 
for  a  breach  of  warranty,  alleging  that    (3)  recklessly.      But  if  a  man  make  a 


the  vendor's  agent  made  certain  rep- 
resentations as  to  the  condition  of  the 
corporation.  The  action  failed  on  the 
ground  that  the  vendor  did  not  author- 
ize the  agent  to  make  a  warranty.  In 
Ayres  v.  French,  41  Conn.  143  (1874), 
the  court  held  that  fraud,  inducing  the 
owner  of  stock  to  part  with  it,  may  be 
remedied  by  the  action  of  trover,  with 
a  count  in  case  for  a  fraudulent  pro- 
curement and  conversion  of  the  stock. 
In  National  Exch.  Co.  v.  Drew,  2  Macq. 
(H.  L.)  103  (1855),  it  was  held  that  where 
a  person  is  induced  by  the  fraudulent 
reports  and  representations  of  corpo- 
rate officers  to  purchase  stock,  and  the 
corporation  loans  him  money  to  do  so, 
it  cannot  recover  back  the  money 
loaned.  See  Lightfoot  v.  Creed,  8 
Taunt.  268  (1818),  holding  that  the 
vendee  should  declare,  not  for  money 
paid,  but  specially  on  the  contract. 
Fraud  in  the  purchase  of  stock  is  not 
a  good  defense  'to  a  note  given  for 
such  stock  for  the  purchase  price,  unless 
it  is  averred  that  the  purchase  was  in- 
duced by  the  fraud  and  that  the  pur- 
chaser was  ignorant  of  the  truth  of  the 
misrepresentations  made.  Spencer  v. 
Johnston,  58  Neb.  44  (1899). 

1  Quoted  and  approved  in  Trimble  v. 
Reid,  97  Ky.  713  (1895);  aff'd,  41  S.  W. 
Rep.  319  (1897),  where  a  vendee  sued 
the  president  for  publishing  a  false 
statement  as  to  the  condition  of  a  bank. 

-  In  the  important  case  of  Derry  v. 
Peek,  L.  R.  14  App.  Cas.  337  (1889),  the 
House  of  Lords  decided  that  in  order 
to  sustain  an  action  of  deceit  there 
must  be  proof  of  fraud,  and  nothing 
short  of  that  will  suffice.  Fraud  is 
proved  when  it  is  shown  that  a  false 
statement   has   been    made  (1)  know- 


false  statement  honestly  believing  it  to 
be  true  it  is  not  sufficient,  to  support 
an  action  of  deceit,  to  show  that  he  had 
no  reasonable  grounds  for  his  belief. 
The  directors  of  a  tramway  company 
issued  a  prospectus  in  which  they 
stated  that  they  were  authorized  to  use 
steam  power,  and  that  by  this  means 
a  great  saving  in  working  would  be  af- 
fected. The  special  act  incorporating 
the  company  conferred  this  authority 
subject  to  the  consent  of  the  board  of 
trade,  but  at  the  time  of  making  the 
statement  they  had  not  in  fact  ob- 
tained consent  to  use  steam  power,  al- 
though they  honestly  believed  ;that 
they  would  obtain  it  as  a  matter  of 
course.  Held  (reversing  the  judgment 
of  the  court  below),  that  they  were  not 
liable  in  an  action  of  deceit  brought  by 
a  shareholder  who  had  been  induced  to 
apply  for  shares  by  the  statement  in 
the  prospectus.  In  an  action  for  de- 
ceit by  a  misrepresentation  in  a  pros- 
pectus as  to  the  net  profit  on  the  capi- 
tal employed,  the  action  being  against 
one  who  was  a  promoter  and  also  one 
of  the  vendors,  and  whose  name  ap- 
peared in  the  prospectus  and  who  be- 
came a  director,  the  plaintiff  must 
prove  (1)  that  the  defendant's  state- 
ment was  untrue;  (2)  that  it  was  dis- 
honest; (3)  that  he  believed  it  to  be  un- 
true. See  also  Glasier  ^'.  Rolls,  L.  R.  42 
Ch.  D.  436  (1889),  following  the  House 
of  Lords  in  Derry  v.  Peek,  L.  R.  14  App. 
Cas.  337.  In  Peek  v.  Gurney,  L.  R.  6 
H.  L.  377,  891  (1873),  the  court  said:  "It 
is  said  that  the  prospectus  is  true  as  far 
as  it  goes,  but  half  a  truth  will  some- 
times amount  to  a  real  falsehood."  See 
also  ch.  IX.  §  148,  supra.  In  Bellairsi'. 
Tucker,  L.  R.  13  Q.  B.  D.  562,  579  (1884)^ 


804 


CH.  XX.]  CONTRACTS    TO    SELL GAMBLING    SALES,  ETC. 


[§  355. 


In  New  York  the  rule  is  more  stringent.  The  case  of  "Wakeman 
V.  Dalley  ^  applies  to  this  class  of  cases  the  rule  that  "  an  action 
founded  upon  the  deceit  and  fraud  of  the  defendant  cannot  be 
maintained  in  the  absence  of  proof  that  he  believed,  or  had  reason 
to  believe,  at  the  time  he  made  them,  that  the  representations 
made  by  liira  were  false,  and  that  they  were  for  that  reason  fraud- 
ulently made,  or  that  he  assumed  or  intended  to  convey  the  im- 
pression that  he  had  actual  knowledge  of  their  truth,  though  con- 
scious that  he  had  no  such  knowledge."  This  case  held  that  a  di- 
rector is  not  liable  for  false  representations  on  the  company's 
printed  business  cards,  of  which  he  was  ignorant,  even  though  his 
name  was  attached  thereto.  The  same  rule  has  been  applied  in 
other  jurisdictions.-     In  New  York  a  vendee  of  stock  and  bonds 


however,  the  court  said:  "The  action 
is  one  for  deceit.  It  is  necessary  .  .  .  not 
only  to  prove  that  the.  statements  in  a 
prospectus  or  any  other  document  are 
not  true,  but  it  must  be  proved  that 
they  are  fraudulently  put  forward  with 
intent  to  deceive." 

151  N.  Y.  27,  35  (1873);  Nelson  v.  Lu- 
ling,  36  N.  Y.  Super.  Ct.  544  (1873);  aff' d, 
62  N.  Y.  645:  Schwenck  v.  Naylor,  102 
N.  Y.  683  (1886).  The  case  of  Holmes  v. 
Moffat,  120  N.  Y.  159  (1890),  was  an  ac- 
tion for  false  representations  and  deceit 
in  the  sale  of  stock,  but  the  decision 
turned  upon  technical  rules  relative  to 
the  trial.  The  action  for  deceit  does 
not  lie  against  the  corporation,  at  least 
where  no  fraudulent  intent  is  proved. 
Pinedo  v.  Gerraania,  etc.  Co.,  N.  Y.  D. 
Eeg.,  July  29,  1885  (Supreme  Ct).  See 
also  g  157,  supra, 

-In  an  action  of  tort  for  deceit 
against  a  director  for  inducing  a  person 
to  purchase  stock,  "  the  plaintiff  must 
prove  representations  of  material  facts 
which  are  false,  and  which  induce  him 
to  act;  and  either  fchat  the  defendant 
knew  them  to  be  false,  or  that,  the 
facts  being  facts  susceptible  of  knowl- 
edge, he  represented  as  of  his  own 
knowledge  that  they  were  true,  when 
in  fact  he  had  no  such  knowledge." 
Cole  V.  Cassidy,  138  Mass.  437  (1885).  In 
an  action  for  fraud  inducing  the  pur- 
chase of  stock  scienter  must  be  proved. 


It  is  sufficient  that  the  defendant  has 
no  good  reason  to  believe  that  material 
representations  made  by  him  were 
true.  A  statement  that  $1,500,000  worth 
of  ore  was  lying  on  the  ground  around 
the  mine  is  a  material  representation. 
Barndt  v.  Frederick,  78  Wis.  1  (1890).  In 
Wisconsin,  in  a  suit  by  a  vendee  of 
stock  against  the  vendor  for  damages 
for  obtaining  money  and  property  by 
false  and  fraudulent  representations, 
the  defendant  may  be  arrested.  War- 
ner V.  Bates,  75  Wi&  278  (1889),  giving 
the  complaint  and  affidavit.  See  also 
Clark  V.  Edgar,  84  Mo.  106  (1884);  Gee 
V.  Moss,  68  Iowa,  318  (1886). 

An  allegation  that  .the  plaintiff  was 
induced  by  the  false  and  fraudulent 
misrepresentations  of  the  defendant  to 
buy  from  the  latter  certain  stock  which 
was  valueless,  and  that  the  defendant 
knew  that  the  statements  were  untrue, 
and  that  the  plaintiff  relied  on  the 
statements  and  bought  the  stock,  con- 
stitutes a  cause  of  action  in  tort.  Free- 
man V.  Trickett,  6  Kan.  App.  83  (1897). 
A  person  who  makes  false  statements 
in  regard  to  a  corporation,  and  then  ad- 
vises the  party  to  whom  the  statements 
are  made  to  buy  the  stock,  is  liable,  in 
an  action  for  deceit  to  such  party. 
Heintz  v.  Mueller,  19  Ind.  App.  240 
(1898);  Arkwright  v.  Newbold,  L,  R.  17 
Ch.  D.  301  (1881);  Arthur  v.  Griswold, 
55  N.  Y.  400,  410  (1874),  the  court  say- 


805 


§  355.] 


CONTRACTS    TO    SELL GAMBLING    SALES,  ETC.  [CH.  XX. 


who  sues  at  law  to  recover  damages  for  fraud  and  deceit  indue-  ' 
ing-  the  purchase  of  the  stock,  the  fraud  and  deceit  consisting  of  a 
misstatement  by  an  officer  of  the  liabilities  of  the  company,  must 
prove  that  the  officer  did  not  believe  the  statement  to  be  a  true  ex-, 
hibit  of  the  company's  affairs  and  was  guilty  of  dishonesty.  It  is 
insufficient  to  prove  that  the  statement  was  grossly  inaccurate,  and 
largely  understated  the  actual  liabilities  of  the  company.  Actual 
fraud  must  be  proved.  It  must  be  shown  that  the  representation 
was  not  only  false  and  material,  but  was  known  by  the  defendant 
when  he  made  it  to  be  false,  or,  not  knowing  whether  it  was  true 
or  false,  and  not  caring  what  the  fact  might  be,  that  the  defendant 
made  it  recklessly,  paying  no  heed  to  the  injury  which  might  ensue. 
"Misjudgment  however  gross,  or  want  of  caution  however  marked, 
is  not  fraud.  Intentional  fraud,  as  distinguished  from  a  mere  breach 
of  duty  or  the  omission  to  use  due  care,  is  an  essential  factor  in  an 
action  for  deceit."  ^  When  a  stockholder  receives  an  offer  for  his 
stock,  and  is  persuaded  not  to  sell  by  fraudulent  representations  of 
a  director,  he  may  hold  the  latter  liable  in  damages.^  So  also  where 
the  principal  gives  an  order  to  the  broker  to  sell  certain  stock,  which 
the  principal  owns,  and  the  broker,  by  fraudulent  representations, 
dissuades  him  from  selling,  the  principal  may  hold  the  broker  liable 


ing:  "The  rules  of  law  require  a  rea- 
sonable degree  of  certainty  as  to  each 
requisite  necessary  to  constitute  the 
cause  of  action,  viz.,  representations, 
falsity,  scienter,  deception,  and  injury." 
In  a  sale  of  stock  by  a  director,  a 
misstatement  made  by  him  in  good 
faith,  as  to  the  property  owned  by  the 
corporation,  does  not  render  him  liable 
in  an  action  for  deceit.  Boddy  v.  Henry, 
113  Iowa.  462  (1901).  To  sustain  an  ac- 
tion for  deceit  it  must  be  proved  that 
the  representation  was  false  and  that 
the  i)arty  making  it  knew  it  to  be  false, 
but  if  such  party  had  means  of  knowl- 
edge, but  actually  had  no  knowledge, 
this  is  sufficient  to  hold  him  liable. 
Hindman  v.  First  Nat.  Bank,  112  Fed. 
Rep.  931  (1902).  A  bank,  which,  as 
pledgee,  causes  by  its  statements  a  party 
to  purchase  the  stock  held  in  pledge, 
may  be  held  liable  in  damages  if  sucii 
statements  were  false.  Hindman  v. 
First  Nat.  Bank,  etc.,  98  Fed.  Rep.  562 
(1899).  Wliere  a  purchaser  of  goods 
misrepresents  the  value  of  stock  which 


is  to  be  given  as  a  pledge  for  the  pur- 
chase price  and  refers  the  vendor  to  a 
bank,  which  bank  repeats  the  misrep- 
resentations, the  pledgee  may  sue  the 
bank  for  damages  and  may  show  that 
the  bank  at  that  time  held  such  stock 
in  pledge  and  that  the  goods  so  pur- 
chased were  substituted  for  the  stock 
of  the  bank  upon  the  transaction  being 
closed.  Am.  Nat.  Bank,  etc.  v.  Ham- 
mond, 25  Colo.  367  (1898).  In  an  action 
for  deceit  it  is  not  necessary  to  allege 
that  the  plaintiffs  would  not  have  pur- 
chased but  for  the  false  representa- 
tions. Drake  v.  Holbrook,  66  S.  W.  Rep. 
512  (Ky.  1902).  In  a  suit  by  a  subscriber 
against  persons  inducing  him  to  sub- 
scribe by  fraudulent  misrepresenta- 
tions, the  corporation  is  not  a  necessary 
party  defendant.  Austin  v.  Murdock, 
127  N.C.  454(1900). 

1  Kountze  v.  Kennedy,  147  N.  Y.  124 
(1895). 

-Rothmiller  v.  Stein,  143  N.  Y.  581 
(1894). 


806 


CH.  XX.]  CONTKACTS    TO    SELL GAMBLING    SALES,  ETC.  [§  355. 

in  damages.^  The  vendee  of  stock  may  sue  for  damages  for  deceit 
where  the  vendor  fraudulently  misrepresented  the  dividends  that 
had  been  paid  on  the  stock.^  Where  a  person  owns  a  majority  of  the 
stock  of  a  corporation,  and  sells  it,  and  agrees  with  the  purchaser 
to  obtain  the  stock  held  by  others  at  as  low  a  figure  as  possible,  and 
misstates  to  such  persons  the  price  which  he  obtained  for  his  own 
stock,  he  is  liable  in  an  action  for  deceit  to  parties  who  sell  their 
stock  reiving  on  such  statements.^ 

The  purchaser  of  stock  who  has  given  a  note  in  payment  cannot 
defeat  an  action  on  the  note  by  setting  up  that  the  purchase  was 
induced  by  fraud.  He  must  first  disaffirm  the  contract  and  return 
the  certificate,  and  such  return  must  be  made  before  the  trial.^  But 
where  the  purchaser  brings  an  action  for  deceit  he  need  not  return 
the  consideration  nor  rescind  the  contract.^  His  injury  is  to  be 
duly  measured,  and  credit  may  be  given  for  the  real  value  of 
the  stock.^  A  director  is  not  liable  for  the  misrepresentations  and 
frauds  of  his  co-directors,  unless  he  has  expressly  authorized  or 
tacitly  permitted  commission  thereof."^  The  mere  fact  of  being  a 
director  "  is  not  per  se  sufficient  to  hold  a  party  liable  for  the 
frauds  and  misrepresentations  of  the  active  managers  of  a  corpora- 
tion. Some  knowledge  of  and  participation  in  the  act  claimed  to 
be  fraudulent  must  be  brought  home  to  the  person  charged.'^ 
"Where,  however,  proof  is  given  tending  to  show  that  the  defend- 
ants were  jointly  engaged  in  a  common  scheme  to  defraud  the 
plaintiff,  the  acts  and  declarations  of  one  are  admissible  in  proof 
against  all;^  and  frauds  of  a  similar  nature,  at  or  near  the  same 
time  as  the  one  complained  of,  may  be  shown.^"^  The  fraud  prac- 
ticed need  not  have  been  the  sole  inducement  to  the  purchase.'^     A 

^Fottler  V.  Moseley,   179    Mass.   295  chase  of  stock,  the  defendant  may  show 

(1901).  that  the  stock  was  worth  as  much  as  it 

2  Handy  u  Waldron,  18  R.  I.  567(1894).  would  have  been  had  the  representa- 

3  Weaverr.  Cone,  174  Pa.  St,  104(1896).  tions  been   true.     Doran  v.  Eaton,  40 

4  GifEord  v.  Carvill,  29  Cal.  589  (1866).  Minn.  35  (1889). 

A  transferee  claiming  to  be  defrauded  "^  Weir  v.  Barnett,  L.  R.  3  Exch.  D.  33 

is  nevertlieless  liable  on  the  statutory  (1877). 

liability  where  he  brought  a  suit  for  ^Arthur  r.  Griswold,  55  N.  Y.  400,  406 

damages  for  the  fraud  and  recovered  (1874);  Morgan  v.  Skiddy,  62  N.  Y.  319 

judgment.     Such  a  suit  is  a  ratification  (1875). 

of  the  transfer.     Stuart  v.  Hayden,  73  9  Miller  v.  Barber,  66  N.  Y.  558,  567 

Fed.  Rep.  402  (1895).  (1876). 

5  Miller  v.  Barber,  66  N.  Y.  558,  564  lo  Miller  v.  Barber.  66  N.  Y.  558,  568 
(1876);  Newbery  27.  Garland,  31  Barb.  121  (1876).  See  also  note  6,  p.  340,  and  note 
(1860).     See  Parsons  r.  Johnson,  28  N.  Y.  1,  p.811. 

App.  Div.  1.  11  Morgan  v.  Skiddy,  63  N.  Y.  319,  328 

«See  §  586,  infra.     In  an  action  for    (1875);  Ex  parte  Carling,  56  L.  T.  Rep. 

false  representations  inducing  the  pur-     115  (1887).     Plaintiff    need   not   pro've 

807 


§  355,]  CONTRACTS    TO    SELL  —  GAMBLING    SALES,  ETC.  [CH.  XX. 

party  may  be  liable  herein  although  he  was  neither  a  corporate  of- 
ficer nor  the  vendor  of  the  stock.  If,  with  intent  to  cheat  and  de- 
fraud the  vendee,  he  induces  him,  by  fraudulent  means,  to  purchase 
for  value  stock  which  he  knows  to  be  worthless,  he  is  liable  for  the 
damage  sustained,  although  the  purchase  is  actually  made  from 
another.^  A  person  who  purchases  stock  induced  by  misrepresen- 
tations may  recover  full  damages  in  an  action  for  deceit,  even 
though  he  causes  a  portion  of  the  stock  to  be  transferred  to  mem- 
bers of  his  family.-  A  sale  of  stock  does  not  transfer  a  right  of 
action  for  damages  caused  by  false  representations  made  to  the 
vendor  by  the  party  from  whom  the  vendor  purchased.'  .In  an 
action  by  a  purchaser  of  stock  against  the  company  and  two  di- 
rectors for  deceit,  the  verdict  may  be  against  one  or  more  of  the 
defendants,  and  may  be  sustained  by  one  or  more  of  the  misrepre- 
sentations alleged.*  A  suit  to  hold  the  directors  liable  for  declar- 
ing a  dividend  out  of  the  capital  stock,  and  thereby  inducing  the 
plaintiff  to  purchase  the  stock,  cannot  at  the  same  time  seek  to  hold 
the  directors  liable  to  the  corporation  for  the  dividend  so  declared.^ 
Several  persons  defrauded  of  their  contract  whereby  they  were  to 
receive  stock  cannot  sue  jointly.  Each  must  sue  separately.^  In 
a  suit  for  damages  for  fraud  inducing  the  sale  of  stock  the  court 
will  be  liberal  in  admitting  evidence  showing  the  full  nature  of  the 
transaction,  and  it  is  for  the  jury  to  decide  whether  the  fraud  was 
intentional  and  whether  there  was  any  fraud."  The  measure  of 
damages  for  fraud  inducing  the  purchase  of  stock  "  is  the  differ- 
ence between  the  value  of  the  stock  at  the  time  it  was  purchased 
and  the  price  paid  for  it."^     An  agreement  by  which  a  suit  for 

that  he  relied  solely  upon  the  misrepre-  wrecks    the    corporation,  the    vendor 

sentations.     Hatch  v.  Spooner,  13  N.  Y.  may  hold  the  latter  liable  for  damages. 

Supp.  642  (1891):  Hindman  v.  First  Nat.  The  assignee  of  the  cause  of  action 

Bank,  112  Fed.  Rep.  931  (1902).  may  sue  in  trover  for  conversion,  but 

1  Hubbell  V.  Meigs,  ."50  N.  Y.  480,  490  cannot  sue  for  damages  for  fraudulent 
(1872).  Concerning  the  effect  of  false  representations,  inasmuch  as  the  latter 
and  fraudulent  representations  on  an  cause  of  action  is  not  assignable.  Smith 
action  for  damages,  see  Tockerson  v.  v.  Thompson,  94  Mich.  381  (1892). 
Chapin.  52  N.  Y.  Super.  Ct.  16  (1885).  It  *  Lare  v.  Westmoreland  Specialty  Co., 
is  no  defense  to  such  an  action  that  the  155  Pa.  St.  33  (1893),  holding  also  that 
original  conversion  was  by  some  one  the  party  purchasing  the  stock  may 
else.  Kuhn  r.  McAllister,  i  Utah,  273  I'escind  or  may  retain  the  stock  and  sue 
(1875);  s.  c.  suh  novi.  McAllister  v.  Kuhn,  for  damages. 

96  U.  S.  87  (1877).  See  also  §  350.  sujjra.        5  Stroud  v.  Lawson,  [1898]  2  Q.  B.  44. 

2  Boddy  u  Henry,  113  Iowa,  462  (1901).        ^  gummerlin  v.   Fronteriza,  etc.  Co., 
'  Kenedy  v.  Benson,  54  Fed.  Rep.  836    41  Fed.  Rep.  249  (1890). 

(1893).     Where  fraudulent  representa-        '  Townsend  v.  Felthousen,  156  N.  Y. 
t  ions  are  made  inducing  a  party  to  sell    618(1898). 
his    stock,   and    then    the    purchaser        8  gee  §  586,  in/ro. 

808 


■CH.  XX.]  CONTRACTS    TO    SELL 


GAMBLING    SALES,  ETC. 


[§  356. 


damages  for  fraud  inducing  the  purchase  of  stock  is  discontinued 
does  riot  prevent  a  subsequent  suit  on  the  same  cause  of  action.^ 

§  356.  Remedy  in  equity. —  A  court  of  equity  has  concurrent  ju- 
risdiction with  a  court  of  law  in  enabling  a  purchaser  of  stock  to 
recover  back  money  paid,  where  the  purchase  was  induced  by  fraud 
chargeable  to  the  vendor.-    The  remedy  in  equity,  for  a  sale  or 


them  from  disposing  of  the  assets  and 
for  discovery.  Edwards  v.  Michigan, 
etc.  Co.,  93  N.  W.  Rep.  491  (Mich.  190'2). 
Where  the  president  of  a  national  bank 
induces  a  person  who  lives  sevei'al 
hundred  miles  away  from  the  bank  to 
purchase  stock  in  the  bank  by  fraudu- 
lent representations,  and  within  thirty- 
six  days  the  bank  is  closed,  the  pur- 
chaser may  have  the  sale  rescinded. 
Stufflebeam  v.  De  Lashmutt,  101  Fed. 
Rep.  aC7  (1900). 

Wliere  the  president  sells  stock  for 
$120  per  share  after  he  has  indorsed 
a  false    statement  of    the  company's 
affairs,  the  stock  being  really   worth 
but  $70  per  share,  the  vendee  may  have 
the  sale  rescinded.    Prewitt  v.  Trimble, 
92  Ky.  176  (1891).     In  a  suit  to  rescind 
for  fraud  the  plaintiff  must  prove  that 
the  stock  was  not  worth  what  he  paid 
for  it  or  could  not  be  sold  for  that  sum. 
Aron  V.  De  Castro,  13  N.  Y.  Supp.  372 
(1891);  affirmed,  131  N.  Y.  648.     In  an 
action  in  equity  to  rescind  a  sale  of 
stock  for  fraud  the  corporation  is  not  a 
necessary  party.     The    value    of    the 
stock    need    not    be    shown,   and   the 
amount  paid  with  interest  may  be  re- 
covered.     But  six  years'  delay  after 
discovering  the  fraud  is  a  bar.    Higgins 
V.  Crouse,  63  Hun,  134  (1892).     In  an  ac- 
tion to  rescind  for  fraud  the  defrauded 
subscribers  need  not  join  as  plaintiffs, 
although    they  all    purchased  at  the 
same  time  and  on    the    same   terms. 
Moore  v.  Robertson,  11  N.  Y.  Supp.  798 
(1890).     Where   the  vendors  represent 
that  the  money  will  be  used  to  buy  a 
secret  process,  and  the  purchasers  pay 
vestment  business,  a  person  defrauded    over  the  money  to  the  company  for  that 
may  file  a  bill  in  equity  to  hold  the    purpose,  and  it  is  mingled  with  other 
corporation  and  its  officers  and  stock-    funds  and  is  not  used  to  pu7chase  the 
holders    personally   liable    and   enjoin     process  because  the  process  is  a  fraud. 

809 


1  Jacobs  V.  Marks,  182  U.  S.  583  (1901). 

^See  §  155,  supra.     Where  a  person 
is  induced  to  subscribe  for  stock  on 
the  fraudulent  representations  of  the 
president  that  the  company  is  in  a  pros- 
perous condition,  tlie  person  may  file  a 
bill  in  equity  to  recover  back  the  money, 
and    equity    has   jurisdiction    on    the 
grounds  of  discovery,  account,  fraud, 
misrepresentation,    and    concealment. 
Both  the  company  and  the  president 
individually  were  made  defendants  and 
held  liable.     Tyler  v.  Savage,  143  U.  S. 
79  (1892).     See  also  Hill  v.  Lane,  L.  R. 
11  Eq.  215  (1870),  where  the  court  said: 
"It  is  so  well  settled  that  this  court  will 
entertain  jurisdiction    in    such    cases 
that  it  would  be  a  misfortune  indeed 
to  tlie  public  if  there  were  any  sufficient 
ground  for  considering  that  the  juris- 
diction is  doubtful.    .    .    .     Although 
courts  of  common  law  may  have  juris- 
diction in   some  such  cases,   there  is 
clearly  concurrent  jurisdiction  in  this 
court,"  doubting  Ogilvie  v.  Currie,  37 
L.    J.    (Ch.)    541    (1868);    Campbell    v. 
Fleming,  1  Ad.  &  El.  40  (1834).     A  bill 
in  equity  is  a  proper  remedy  for  fraud 
inducing  a  sale  of  stock.     Andriessen's 
Appeal,  123  Pa.  St.  303  (1889).     A  bill  in 
equity  does  not  lie  at  the  instance  of  a 
purchaser  of  stock,  who  has  paid  for 
the  stock,  to  rescind  on  the  ground  that 
he  was  defrauded.     The  remedy  is  at 
law.     Moreover,  such  a  bill  is  multifari- 
ous if  it  asks  also  for  a  discovery.     Price 
V.  Hurley.  51   Atl.  Rep.  339  (Pa.  1902). 
Where  a  corporation  organized  to  do  a 
jewelry  business  is  really  a  scheme  to 

carry  on  an  illegal  and  fraudulent  in- 


§  356.] 


CONTRACTS    TO    SELL  —  GAMBLINa   SALES,  ETC. 


[CH.  XX. 


purchase  of  stock  induced  by  fraud,  is  by  a  bill  to  set  aside  the- 
whole  transaction.  This  remedy  follows  the  rules  usually  pre- 
scribed in  such  suits.  It  is  not  necessary  for  the  complainant  to 
prove  a  fraudulent  intent.     Innocent  acts  or  misrepresentations 


the   vendees    may   rescind   as    to    the 
vendors,  but  cannot  make  the  receiver 
of  the  company  pay  over  the  money. 
Moore  v.  Robertson,  11  N.  Y.  Supp.  798 
!1890).     The  vendor  may  tender   back 
the  stock  and  file  a  bill  in  equity  to 
cancel  the  sale  on  the  ground  that  he 
was  induced  to  purchase  by  false  state- 
ments that  the  corporation  owned  the 
secret  process;  that  a  patent  had  been 
applied  for;  that  it  was  ready  to  com- 
mence business,  and  that  complainant 
would  be  made  president  and  manager. 
Benton  v.  Ward,  47  Fed.  Rep.  253  (1891). 
To  same  effect,  Stainbank  v.  Fernley,  9 
Sim.  556  (1839),  where  a  sale  by  a  di- 
rector who  has  issued  false  reports  and 
declared  illegal  dividends  was  set  aside. 
The  corporation  is  a  proper  party  to 
such  actions,  if  a  registry  has  been  ob- 
tained by  the  person  who  has  obtained 
the  stock  by  fraud,  since  a  retransfer 
on  the  corporate  books  is  asked  for.    See 
also  Bradley  v.  Luce,  99  111.  234  (1881). 
A  judgment  creditor  of  a  foreign  cor- 
poration cannot  enjoin  it  from  trans- 
ferring stock  and  bonds  owned  by  it. 
The   remedy    sought "  must    be    some- 
thing in   addition   to  the    injunction. 
Rogers  v.  Michigan,  etc.  R.  R.,  28  Barb. 
539  (1858).     An  equitable  suit  does  not 
lie  to  rescind  a  sale  of  worthless  bonds. 
A  suit  at  law  is  the  proper  remedy'. 
U.  S.  Bank  v.  Lyon  County.  48  Fed.  Rep. 
632  (1892).     A  purchaser  of  stock  who 
was  induced  to  purchase  by  fraud  can- 
not maintain  a  suit  in  equity  when  he 
fails  to  show  more  than  a  right  to  pe- 
cuniary   damages    for    misi'epresenta- 
tions.     Whitney  v.  Fairbanks,  54  Fed. 
Rep.    985  (1893).     A  contract  between 
the  owner  of  property  and  a  promoter 
by  which  the  former  agrees  to  sell  his 
property  to  a  corporation  to  be  formed 
by  the  latter,  with  a  specified  capital 
stock,  cannot,  a  year  after  the  transac- 


tion has  been  carried  out,  be  made  the 
basis  of  a  suit  in  equity  to  compel  the 
promoter  to  cancel  excessive  stock 
which  was  issued  to  the  promoter,  tliere 
being  no  allegation  that  the  promoter 
still  had  the  stock.  The  remedy  of  the 
vendor  is  at  law.  Even  though  several 
vendors  to  the  corporation  had  a  simi- 
lar claim,  yet  one  of  them  cannot  file 
such  a  bill  in  equity  in  behalf  of  him- 
self and  others.  Brehm  v.  Sperry,  92 
Md.  378  (1901).  Where  both  the  pur- 
chaser and  seller  of  stock  in  a  mining 
company  know  at  the  time  that  there 
is  a  report  that  the  mine  has  been 
"salted,"  the  sale  cannot  be  rescinded, 
inasmuch  as  neither  party  has  clean 
hands.  Bearden  v.  Jones,  48  S.  W.  Rep. 
88  (Tenn.  1897).  A  creditor  holding  an 
unpaid  promissory  note  cannot  by  bill 
in  equity  bring  in  the  directors  to  hold 
them  liable  for  false  representations 
and  also  claim  that  the  company  was 
not  duly  incorporated;  and  further 
bring  in  a  subsequent  corporation  that 
took  all  the  assets  of  the  first,  and  also 
bring  in  those  persons  who  finally  ob- 
tained such  assets, —  all  in  one  bill 
brought  to  collect  the  debt.  Jefferson 
Nat.  Bank  v.  Texas  Inv.  Co.,  74  Tex.  421 
(1889).  See  to  the  effect  that  a  court  of 
equity  has  jurisdiction.  City,  etc.  Corp. 
V.  Central  Trust  Co.  (N.  Y.  L.  J.,  June 
12,  1891).  Where  bank  stock  is  sold  by 
fraudulent  and  false  representations, 
the  bank  being  aware  thereof  and  re- 
ceiving indirectly  the  money  paid  for 
the  stock,  the  sale  may  be  rescinded 
and  the  money  recovered  back  from  it, 
even  though  it  is  insolvent.  Florida, 
etc.  Co.  V.  Merrill,  52  Fed.  Rep.  77  (1892). 
Several  subscribers  who  have  been  in- 
duced by  the  same  misrepresentations 
contained  in  a  i)rospectus  to  subscribe 
for  stock  may  join  in  a  suit  in  equity 
for  the  benefit  of  themselves  and  others- 


810 


en. 


XX.] 


CONTRACTS    TO    SELL GAMBLING    SALES,  ETC. 


[§  356. 


suffice  for  this  purpose,  although  they  would  be  insufficient  to  sus- 
tain an  action  for  deceit.  A  vendee  may  often  have  relief  in  equity 
by  reason  of  misrepresentation  based  upon  mistake  or  innocent 
misstatements,  where  the  common-law  action  of  deceit  would  re- 
quire much  more  stringent  proof.^     Actual  fraud  need  not  be  proved 


similarly  deceived  to  set  aside  their 
subscriptions.  Bosher  v.  Richmond,  etc. 
Co.,  89  Va.  455  (1892).  See  also  i;  156. 
supra.  A  bill  in  equity  lies  to  rescind 
a  fi'audulent  sale  of  stock.  Merrill  v. 
Florida,  etc.  Co..  60  Fed.  Eep.  17  (1893j. 
A  stockholder  in  a  national  bank  who 
transfers  his  stock  in  order  to  avoid  the 
statutory  liability  may  be  held  liable, 
and  this  liability  may  be  enforced  bj' 
the  receiver  of  the  bank.  In  such  a 
suit  a  transferee  cannot  be  held  liable 
also,  nor  can  the  transferee's  claim  that 
he  was  defrauded  be  tried  in  that  suit. 
Stuart  V.  Hayden,  73  Fed.  Rep.  403 
(1895).  If  the  suit  is  in  equity  and  the 
money  went  to  the  corporation,  an  offi- 
cer cannot  be  held  personally  liable, 
inasmuch  as  rescission  is  the  essence  of 
the  suit.  Zimmele  v.  American,  etc. 
Co.,  1  N.  Y.  App.  Div.  327  (1896).  A 
promoter  who  lias  taken  a  contract  to 
purchase  a  property  at  a  certain  price, 
based  upon  reports  and  representations 
that  the  business  had  not  decreased 
since  the  reports,  may,  upon  discover- 
ing that  the  business  has  largely  de- 
creased, refuse  to  carry  out  the  con- 
tract, and  may  hold  the  party  liable  for 
his  disbursements,  but  not  for  profits 
which  he  would  have  made  if  his  plans 
had  been  carried  out.  Loewer  v.  Har- 
ris, 57  Fed.  Rep.  368  (1893).  Where  a 
pex'son  turns  over  stock  and  bonds  to 
another  in  order  that  the  latter  may 
act  for  the  former  in  carrying  out  a  re- 
organization, the  former  may  file  a  bill 
against  the  latter  for  an  account  and 
need  not  resort  to  an  action  at  law. 
Benedict  v.  Moore,  76  Fed.  Rep.  473 
(1896).  See  also  §  321,  supra.  The  ven- 
dee may  rescind  where  false  and  mate- 
rial representations  were  made  and  the 
plaintiff  relied  upon  them  and  was  in- 
jured, even  though  he  might  have  made 


investigations  which  would  have  shown 
their  falsity.  Olcott  v.  Bolton,  50  Neb. 
779  (1897).  Several  purchasers  of  stock 
may  contribute  to  the  bringing  of  a 
test  case  to  decide  whether  representa- 
tions inducing  the  purchase  were  fraud- 
ulent. Davies  v.  Stowell,  78  Wis.  384 
(1890). 

Where  negotiable  bonds  are  stolen 
from  the  owners  and  they  pass  into 
bona  fide  hands,  and  then  the  thief  ob- 
tains them  by  fraud  from  such  bona 
fide  hands  and  returns  th^n  to  the  first 
owners,  the  latter  are  entitled  to  keep 
them.  London,  etc.  Co.  v.  London,  etc. 
Bank,  L.  R.  21  Q.  B.  D.  535  (1888).  In 
England  this  remedy  by  bill  in  equity 
is  held  to  be  "  precisely  analogous  to  the 
common-law  action  for  deceit,"  in  that 
damages  may  be  awarded.  See  also 
Peek  V.  Gurney,  L.  R,  6  H.  L.  377,  390 
(1873),  the  court  saying:  "  There  can  be 
no  doubt  that  equity  exercises  a  con- 
current jurisdiction  in  cases  of  this  de- 
scription, and  the  same  principles  appli- 
cable to  them  must  prevail  both  at  law 
and  in  equity." 

1  Kountze  v.  Kennedy,  147  N.  Y.  124 
(1895);  Arkwriglit  v.  Newbold,  L.  R.  17 
Cb.  D.  301  (ISSl).  See  also  Boggs  i'. 
Wann,  58  Fed.  Rep.  681  (1893).  A  suit 
in  equity  lies  to  rescind  a  sale  of  stock 
induced  by  fraudulent  representations. 
Intent  to  defraud  need  not  be  proved. 
Martin  v.  Hill,  41  Minn.  337  (1889); 
Freer  v.  Denton.  61  N.  Y.  492  (1875). 
Actual  intent  to  defraud  need  not  be 
shown  in  a  suit  in  equijy  to  rescind. 
In  such  a  suit  similar  frauds  practiced 
on  others  cannot  be  shown  in  evidenca 
Johnson  v.  Gulick,  46  Neb.  817  (1896). 
The  rule  in  New  York  is  otherwise. 
Chisholm  v.  Eisenhuth,  69  N.  Y.  App. 
Div.  134  (1902).  Cf.  §  165,  note.  A 
court  of  equity  will   not   entertain  a 


811 


§  35(1.] 


C<»NTKACTS    TO    SELL — GAMBLING    SALKS,  ETO. 


[cu. 


XX. 


in  an  action  for  rescission  where  the  falsity  of  material  representa- 
tions is  clearly  proved.^  Moreover,  the  contract  of  sale  may  be 
canceled  by  a  court  of  equity  on  the  ground  of  a  mutual  mistake 
where  the  misrepresentations  were  innocently  made,- 

Although  the  buyer  of  stock  purchased  it  at  a  small  nominal 
price  by  reason  of  fraudulent  misrepresentations,  yet  the  seller  can- 
not maintain  a  bill  in  equity  to  rescind,  where  the  stock  has  no 
si)ecial  value  other  than  its  money  value,  and  the  latter  can  readily 
be  shown.'  The  fraud  may  be  waived  by  the  acts  of  the  vendee.* 
The  right  to  rescind  the  contract  for  fraud  is  waived  by  taking  a 
bond  of  indemnity  against  liability  on  the  stock,  such  bond  being 
taken  upon  discovery  of  the  fraud.*  A  party  cannot  rescind  a  pur- 
chase of  stock  on  the  ground  of  false  representations  as  to  the  com- 
pany's having  a  secret  process,  where  he  learned  about  the  process 
Ijefore  completing  his  purchase,  and  had  held  the  stock  a  year,  and 
endeavored  to  sell  the  process."  A  person  cannot  rescind  for  fraud 
a  purchase  of  stock  from  the  corporation  itself,  where,  subsequently 
to  discovering  the  fraud,  he  attended  a  stockholders'  meeting,  and 
voted  to  assess  the  stock,  and  afterwards  attended  another  stock- 
holders' meeting  and  paid  the  assessment.' 


suit  to  enforce  the  statutory  liability  of 
directors  for  paying  dividends  in  vio- 
lation of  the  statute,  even  though  there 
is  no  other  remedy  in  any  otlier  court, 
where  the  money  is  not  needed  to  pay 
the  company's  debts  and  a  judgment 
would  not  promote  justice,  but  would 
produce  inequitable  results.  A  stock- 
liolder  cannot  maintain  such  a  suit  in 
behalf  of  himself  or  other  stockholders, 
even  though  he  was  induced  to  pur- 
chase his  stock  by  reason  of  such  divi- 
dends. In  this  case  the  court  carefully 
reviewed  many  precedents.  Siegman 
V.  Maloney,  51  Atl.  Rep.  1003  (N.  J. 
1902). 

1  Carr  v.  Nat.  Bank,  etc.  Co.,  167  N.  Y. 
375  (1901).  If  rescission  is  sought  not 
on  the  ground  of  mistake,  but  of  fraud- 
ulent representations,  it  must  be  shown 
that  such  representations  were  made 
with  knowledge  of  their  falsity  and 
with  intent  to  deceive,  and  that  they 
had  that  effect;  in  other  words,  scienter 
must  be  proved.  Jones  v.  Allan,  35 
N.  Y.  Supp.  527  (1895);  Mason  v. 
Wheeler,  21  N.  Y.  Supp.  879  (1S93).     In 


815 


a  suit  by  a  vendee  to  rescind  a  sale  of 
stock  on  the  ground  of  fraud,  it  must 
be  alleged  that  the  misrepresentations 
were  known  to  the  vendor  to  be  false. 
Garrett  Ca  v.  Astor.  67  N.  Y.  App.  Div. 
595  (1902). 

2  Garrett  Co.  v.  Halsey,  38  N.  Y.  Misc. 
Rep.  4;j8  (1902). 

3  Edelman  v.  Latshaw,  159  Pa.  St  644 
(1894),  holding  also  that  the  bill  will  not 
lie  where  tiie  defendant  purchaser  has 
already  sold  the  stock  to  a  bona  fide 
purchaser.-  An  action  for  deceit  was 
afterwards  sustained.  See  180  Pa.  St. 
419  (1897). 

*  Kingman  &  Co.  v.  Stoddard,  85  Fed. 
Rep.  740(1898). 

^  Bridge  v.  Penniman,  51  N.  Y.  Super. 
Ct.  183  (1885). 

« Benton  v.  Ward,  59  Fed.  Rep.  411 
(1894). 

"  Marten  v.  Paul,  etc.  Co..  99  Cal.  355 
(1893).  Acting  as  a  shareholder  is  a 
waiver  of  the  right  to  rescind  for  pro- 
moter's misrepresentations.  Petrie  v. 
Guelph,  etc.  Co.,  11  S.  C.  Rep.  (Can.) 
450  (1885).     Where  a  corporation  issues 


CH.  XX.]  CONTRACTS    TO    SELL  —  GAMBLING    SALES,  ETC. 


[§  356. 


Where  a  party  has  a  right  to  return  the  stock  and  receive  back 
his  money,  he  may,  after  making  a  tender,  do  any  acts  in  regard 
to  the  stock  reasonably  necessary  to  protect  his  interest,  and  yet 
not  lose  his  right  to  rescind.  But  where  he  directs  a  sale  of  the 
stock  and  gives  a  proxy  thereon  and  attends  meetings,  he  waives 
his  right  to  rescind.^  Where  the  vendee  sues  to  obtain  the  stock 
after  he  knows  of  the  fraud,  he  ratifies  the  sale.^ 

Laches  is  a  bar.  And  yet  where  a  person  buys  stock  in  1865  on 
the  faith  of  false  representations,  and  discovers  in  1871  that  the 
stock  is  worthless,  and  is  told  by  one  of  the  conspirators  in  1889 
that  the  representations  were  false,  he  may  file  a  bill  in  equity  for 
rescission  of  the  sale  and  for  recovery  of  the  money  paid,'  Ordina- 
rily, however,  delay  is  fatal.* 


stock  and  thereafter  permits  a  transfer 
of  the  stock  and  sale  thereof  to  another 
person,  it  cannot  get  the  stock  back  on 
the  ground  of  fraud  on  the  part  of  the 
party  to  whom  it  first  issued  tlie  stock. 
Tecumseh,  eto»  Bank  v.  Russell.  50  Neb. 
277  (1897).  Delay  in  rescinding,  in  hopes 
that  tlie  stock  will  be  more  valuable,  is 
fatal.  Weisiger  v.  Richmond  Ice  Macli. 
Co.,  90  Va.  795  (1894).  Where  the  vendee 
of  stock  becomes  a  director  and  has  ac- 
cess to  the  books,  and  complains  of 
fraud  in  the  sale,  and  then  takes  a  sum 
of  money  from  the  vendor  in  settle- 
ment, he  cannot  agam  complain  upon 
the  failure  of  the  company.  Powell  v. 
xNdams,  98  Mo.  598  (1889).  A  vendee 
who.  after  the  purchase,  becomes  a  di- 
rector and  signs  statements  similar  to 
the  representations  made  to  him,  and 
waits  two  years  before  repudiating  the 
stock,  cannot  repudiate  Anderson  v. 
Black,  33  S.  W.  Rep.  468  (Ky.  1895),  A 
person  may  defeat  notes  given  for  stock 
which  he  was  induced  fraudulently  to 
purchase  from  the  corporation,  even 
tliough  he  became  and  remained  cash- 
ier for  the  corporation  for  over  a  year 
after  the  sale  and  before  he  set  up  the 
defense,  and  was  a  director  and  voted 
the  stock.  He  did  not  necessarily  learn 
the  facts  from  occupying  these  posi- 
tions, nor  from  the  fact  that  he  made 
official  reports  of  the  condition  of  the 
company.     He  was  not  bound  to  inves- 


tigate. He  tendered  the  stock  back  as 
soon  as  he  discovered  the  facts.  Espe 
cially  do  these  rules  apply  where  no 
creditors'  or  other  stockholders'  rights 
have  intervened.  Nat.  Bank  v.  Tay- 
lor, 5  S.  D.  99(1894). 

1  Jessop  V.  Ivory,  158  Pa.  St.  71  (1893). 
A  payment  after  repudiating  the  sub- 
scription for  fraud  is  not  a  waiver  if. 
made  expressly  to  save  money  already 
paid.  Fear  v.  Bartlett,  81  Md.  435 
(1895). 

2  Anderson  v.  Chicago,  etc.  Bank,  63 
N.  E.  Rep.  203  (III.  1902). 

SHiggins  v.  Grouse.  147  N.  Y.  411 
(1895).  rev'g  71  Hun,  615. 

*  A  year's  delay  by  the  vendor  of 
stock  after  being  advised  by  his  attor- 
ney that  he  had  a  good  case  of  fraud  is 
fatal.  Perry  u.  Pearson.  135  111.  218 
(1890).  A  delay  of  six  years  after 
knowledge  of  the  fraud  inducing  a  pur- 
chase of  stock  is  fatal.  Andriessen's 
Appeal,  123  Pa.  St.  303  (1889).  Three 
years'  delay  in  tendering  back  the 
bonds  is  not  fatal,  nor  is  the  fact  that 
the  vendee  resold  the  bonds  on  the 
same  terms,  and  the  sub-vendee  re- 
turned them  to  the  first  vendee. 
Wooster  v.  Sage,  67  N.  Y.  67  (1876),  aflf'g 
6  Hun,  285.  The  question  of  laches  may 
be  submitted  to  a  jury.  Mayo  v.  Knowl- 
ton.  134  N,  Y.  250  (1892).  See  also 
i;$  160-162,  supra.  Silence,  delay,  vacil- 
lation,  acquiescence,  or  the  retention 


813 


§'35\i.\ 


coNiuAcrs   ru  skll  —  gamhlino  sales,  etc. 


[en. 


XX. 


A  hill  in  e(|iHty  to  rescind  a  fraudulent  sale  of  stock  by  a  corpo- 
ration lies,  even  against  the  receiver  of  the  corporation.'  In  order 
to  rescind  a  fraudulent  sale  of  stock,  the  stock  and  also  all  other 

and  use  of  any  of  the  fruits  of  a  fraud-  resentations.  Such  niisrepre.«>entation8 
ulent  sale  or  trade  tliat  are  capable  of  may  consist  of  statements  as  to  what 
restoration,  for  any  considerable  length  will  be  done  in  the  way  of  improve- 
of  time  after  the  discovery  of  the  ments  out  of  the  bonds,  as  well  as 
fraud,  are  fatal  to  the  right  to  rescind 
the  same.  Stuart  v.  Ilaydeu,  72  Fed. 
Rep.  403  (1893).  Where,  six  months 
after  the  fraud,  the  purchaser  has 
€very  opportunity  to  investij^ate  the 
truth  of  the  statements  and  fails  to  do 
so,  he  cannot,  after  seventeen  years' 
delay,  complain,  even  though  lie  al- 
ieges  concealment,  no  dividends  hav- 
ing been  paid  in  the  meantime. 
McEacheran  v.  Western  Transp.  etc. 
Co.,  UT  Mich.  479  (1893).  Two  years'  de- 
lay in  disaffirming  is  fatal.  Zimmele 
V.  American,  etc.  Co.,  1  N.  Y.  A  pp.  Div. 
327  (189G).  A  delay  of  three  years  after 
discovery  of  the  false  statements,  and 
one  year  after  full  knowledge  of  all  the 


statements  as  to  the  current  net  profits. 
Old  Colony  Trust  Co.  v.  Dubuipie,  etc. 
Co..  80  Fed.  Rep.  794  (1898).  The  ques- 
tion of  what  constitutes  promptne.ss  in 
tenilering  back  the  stock  for  fraud 
may  be  a  question  of  fact  depending  on 
the  circumstances  and  condition.s  es- 
pecially where  the  stock  was  worth- 
less. Heintz  v.  Mueller,  59  N.  E.  Rep. 
414  (Ind.  1901).  A  suit  by  one  signer 
of  a  reorganization  agreement  to  en- 
force it  prevents  ladies  being  charged 
against  other  signers  who  do  not  com- 
mence suit  until  a  long  time  subse- 
quently. Cox  V.  Stokes,  156  N.  Y.  491 
(1898).  In  a  suit  by  a  stockholder  to 
hold  a  corporation  liable  for  his  stock 


facts,   is    fatal.     Byrd  v.  Rautman,  85    and  dividends,  by  reason  of.  its  allow 


U>1  414  (1897 J.  In  the  case  of  Krueger 
V.  Armitage.  58  N.  J.  Eq.  357  (1899),  the 
court  of  chancery  held  that  the  rem- 
edy of  a  stockholder  for  fraud  induc- 
ing him  to  buy  stock  was  at  law  alone, 
where  the  vendee  after  discovering  the 
fraud  instituted  insolvency  proceedings 
against  the  corporation    as    a    stock- 


ing a  transfer  by  an  unauthorized 
agent  of  the  stockholder,  the  subse- 
quent owners  of  the  stock  are  not  nec- 
essary parties.  The  defense  of  pre- 
scription may  prevail.  St  Romes  v. 
Levee,  etc.  Co.,  127  U.  S.  G14  (1888). 

1  Merrill  v.  Florida,  etc.  Co.,  CO  Fed. 
Rep.   17  (1893).     Even  after  the  corpo- 


holder  and  also  delayed  in  filing  his  ration  has  passed  into  the  hands  of  a  re- 
bill  for  rescission.  Where  a  creditor  of  ceiver,  a  subscriber  for  stock  may  re- 
an  insolvent  corporation  reorganizes  it,  scind  and  sue  for  money  paid,  fraudu- 
and  then  by  fraudulent  representations  lent  representations  having  been  made 
induces  anotiier  company  to  sell  its  as  to  the  condition  of  the  company,  the 
property  to  the  reorganized  company  subscription  being  for  increased  stock, 
in  exchange  for  stock  of  the  latter,  and  and  the  increase  not  having  been  made 


a  mortgage  is  at  the  same  time  placed 
upon  the  combined  properties  and  de- 
fault takes  place  and  foreclosure  is 
commenced,  the  parties  so  selhng  the 
property  in  the  said  mortgage  may 
still  rescind  unless  innocent  bondhold- 
ers' rights  have  intervened,  in  which 
case    money    damages     may    be    had 


until  some  time  after  tlie  subscription. 
New  begin  v.  Newton  Nat  Bank,  06  Fed. 
Rep.  701  (1895);  aflf'd,  Newton  Nat 
Bank  v.  Newbegin,  74  Fed.  Rep.  135 
(1896).  A  stockholder  in  a  national 
bank  who  was  induced  to  become  such 
by  fraud  may  have  his  name  taken 
from  the  list  of  stockholders,  except  as 


against  the  parties  bringing  about  the    against  creditors  of  the  bank  who  be 
reorganization  and  making  the  misrep-     came  such  after  he  became  a  stock 

814 


"Cn.  XX.]  CONTRACTS    TO    SELL GAMBLING    SALES,  ETC. 


[§  356. 


property  received  must  be  tendered  back.*  In  a  suit  in  equity  by 
a  purchaser  of  stock  to  cancel  a  sale  for  fraud  and  to  recover 
money  paid  back  on  account,  no  tender  prior  to  the  suit  need  be 


holder  and  without  notice  of  the  fraud. 
Stufflebeam  v.  De  Lash  mutt,  83  Fed. 
Rep.  449  (1897).  Eleven  months  after 
au  insolvent  bank  issues  new  st6ck, 
concealing  the  facts,  a  subscriber  or 
purchaser  cannot  repudiate  for  fraud, 
a  receiver  having  gone  in,  even  though 
the  subscriber  had  just  ascertained 
the  facts.  Dunn  v.  State  Bank,  59 
Minn.  221  (1894).  Even  after  the  ap- 
pointment of  a  receiver  of  a  bank,  a 
person  who  was  induced  to  buy  stock 
of  the  bank  by  fraudulent  statements 
that  the  stociv  was  worth  par  can  re- 
scind by  suit.  Robinson  v.  Dickey,  14 
Tex.  Civ.  App.  70(1896).  See  §lG4,swjora, 
and  Wallace  v.  Bacon,  80  Fed.  Rep.  053 
(1898).  No  rescission  can  be  had  after 
the  corporation  becomes  insolvent. 
Deppen  v.  German-American,  etc.  Co., 
70  S.  W.  Rep.  SG8  (Ky.  1902). 

1  Wainwright  v.  Weske,  82  Cal.  193 
(1889)';  Francis  r.  New  York,  etc.  R  R, 
108  N.  Y.  93  (1888);  17  Abb.  N.  Ca.s.  1, 
holding  also  that  where  the  vendee  has 
transferred  said  stock  to  another  his 
action  fails.  The  defrauded  vendee 
must  tender  back  the  stock  uncondition- 
ally. If  he  has  used  the  stock  in  an- 
other transaction,  even  with  the  ven- 
dor, his  right  to  rescind  for  fraudulent 
representations  is  barred.  Bridge  v. 
Penniman,  -105  N,  Y.  042  (1887).  But 
where  the  vendee  has  sold  part  of  the 
stock,  he  cannot  maintain  a  suit  in 
equity  to  collect  money  damages  for 
luss  occasioned  by  misrepresentations 
inducing  him  to  purchase.  His  remedy 
is  at  law.  No  cancellation  of  the  con- 
tract is  involved.  White  i\  Boyce,  21 
Fed.  Rep.  228  (1884).  Selling  some  of  the 
stock  before  repudiating  for  fraud  is  no 
bar  to  repudiation.  1  Ry.  &  Corp.  L.  J. 
434.  Rescission  is  not  barred  although 
the  vendee  has  lost  the  stock  by  for- 
feiture, the  vendor  having  knowledge 
thereof.     Maturin  v.  Tredinnick,  4  New 


Rep.  15  (1864).  If  the  party  selling  the 
stock  states  that  he  is  selling  stock 
owned  by  the  corporation,  when  as  a 
matter  of  fact  he  is  selling  his  own 
stock,  the  vendee,  upon  discovering  the 
fraud,  may  rescind  the  sale,  and  recover 
back  the  purchase  price  paid.  He  need 
not  tender  the  same  stock  which  he 
received,  inasmuch  as  stock  has  no 
"ear-mark."  If  lie  has  exchanged  the 
stock  for  the  stock  of  another  company 
into  which  his  company  has  been 
merged,  he  may  borrow  stock  of  the 
first  company  and  make  a  teuderof  that 
He  must,  however,  rescind  promptly 
upon  tlie  discovery  of  the  fraud. 
Although  he  does  not  discover  the  fraud 
for  four  years  he  may  then  rescind. 
Mayo  V.  Knowlton,  134  N.  Y.  250  (1892). 
A  suit  to  cancel  a  sale  of  stocks  and 
bonds, on  the  ground  of  fraud  on  the  part 
of  the  purchaser,  will  not  lie  where  the 
money  paid  at  the  sale  has  not  been 
returned  or  tendered,  even  though  the 
seller  spent  the  money  before  he  dis- 
covered tlie  alleged  fraud,  and  is  unable 
to  obtain  the  amount  of  money  neces- 
sary for  a  tender.  Such  is  the  rule 
even  though  the  amount  to  be  distrib- 
uted will  be  due  to  the  plaintiff  in  case 
he  succeeds  in  the  suit.  Rigdon  v.  Wal- 
cott,  141  III.  649  (1892).  A  stockholder 
who  has  been  induced  to  purchase 
stock  by  fraudulent  representations, 
the  stock  remaining  in  the  hands  of  the 
vendor,  may  file  a  bill  in  equity  to  re- 
scind. The  vendee's  offer  to  surrender 
all  claim  on  the  stock,  together  with  a 
demand  for  the  return  of  the  money,  is 
sufficient.  Zimmele  v.  American,  etc. 
Co.,  21  N.  Y.  Supp.  846  (1893).  Where 
part  of  the  consideration  in  the  sale  of 
stock  is  that  the  vendor  resign  an  office 
in  the  company  and  the  vendee  be 
elected  in  his  place,  and  this  has  been 
carried  out,  the  vendee  cannot  rescind 
for  fraud  unless  he  resigns  the  position 


815 


§  35f;.] 


CONTRACTS    TO    SELL  —  GAMBLING    SALES,  ETC.  [CH.   XX. 


made,  if  the  plaintifT  in  his  complaint  offers  to  return  the  stock, 
and  the  decree  requires  a  deposit  of  it  with  the  cleric  of  the  court 
for  the  benefit  of  the  defendants.'  The  vendee  must  alleire  that 
he  was  damaged  by  the  misrepresentations  and  was  ignorant  of  the 
falsity  of  the  same  when  made,  and  if  he  wishes  to  rescind  must 
offer  to  return  the  stock,  or  must  allege  that  it  is  worthless,  espe- 
cially where  he  is  sued  upon  a  note  given  in  payment.'-  After  the 
purchaser  of  stock  has  instituted  an  action  for  deceit  he  can  no 
longer  rescind.'  Two  vendors  of  stock  may  join  in  a  suit  to  rescind 
the  sale  for  fraud  where  false  representations  were  made  to  one  of 
them  with  the  view  of  influencing  both,  and  had  that  effect.^  The 
bill  is  not  multifarious,  el'en  though  it  asks  for  rescission  and  also 
for  damages  against  the  guilty  parties.*   But  a  suit  by  a  stockholder 

or  does  something  towards  restoring  all  the  stock,  but  he  must  allege  that 
the  vendor  to  his  former  position.  Gas-  he  sold  it  before  he  discovered  the  fraud> 
sett  I'.  Glazier,  IGo  Mass.  473  (18%).  In  and  set  forth  the  price  and  other  facts, 
rescinding  for  fraud  the  vendee  of  stock  Hill  v.  ilarriman,  93  Tenn.  300(180.1).  A 
must  return  or  tender  the  dividends  misrepresentation  that  large  dividends 
back  to  the  vendor,  but  cannot  demand  and  profits  are  being  made  by  a  coal 
repayment  of  assessments  i)aiil  after  company,  whereas  in  fact  they  were 
discovery  of  the  fraud.  ]\Iarten  v.  made  by  fraud  practiced  upon  a  rail- 
Paul,  etc.  Co.,  99  Cal.  355(1893).  Where  road  company,  is  good  ground  for  a  re- 
a  party  has  given  a  note  in  purchase  of  scission  of  the  sale.  No  tender  back  of 
stock  in  two  corporations  he  cannot  the  stock  need  be  made, if  the  property 
rescind  unless  he  tenders  back  the  stock  is  worthless.  If  there  was  a  partial 
in  both.  Rohrbacher  v.  Kleebauer,  119  failure  of  consideration,  the  defendant 
CaL  260  (1897).  Where,  according  to  could  reduce  the  recovery  pro  tanto. 
contract,  stock  sold  to  the  corporation  A  court  of  equity  may  set  aside  the  sale 
is  appraised  by  the  corporation  and  the  on  grounds  which  would  not  be  sufii- 
appraised  price  is  actually  paid  to  and  cient  at  law.  The  court  so  held  in  an 
received  by  the  stockholder,  he  cannot  action  at  law  for  the  purchase  price, 
maintain  a  bill  to  obtain  a  larger  price,  the  answer  setting  up  fraud  as  a  de- 
but must  either  rescind  or  sue  at  law.  fense.  Boggs  v.  Wann,  58  Fed.  Rep.  681 
Tuttlen  Batchelder,  etc.  Co.,  170  Mass.  (1893).  Where  a  corporation  sells  its 
315  (1898).  property  through  misrepresentations, 
1  Chisholm  y.  Eisenhuth,  69  N.  Y.  App.  and  in  deeding  the  property  causes  all 
Div.  134  (1903),  holding  also  that  even  its  outstanding  capital  stock  to  be  de- 
though  the  misrepresentations  were  livered  to  the  vendee,  the  vendee  in 
made  by  the  husband  in  selling  the  suing  to  recover  back  the  money  need 
wife's  stock,  yet  this  is  sufficient.  Re-  not  allege  that  the  stock  was  valueless, 
scission  can  only  be  had  where  an  offer  there  being  an  allegation  that  the  prop- 
to  return  the  property  has  been  made  erty  was  valueless.  Keener  v.  Baker,  93 
and  kept  good  and  the  offer  is  repeated  Fed.  Rep.  377  (1899). 
on  the  trial.   Currier  v.  Poor,  84  Hun,  45  3  Hanrahan  v.  National,  etc.  Assoc,  48 


(1895).     See  also  §  335,  supra, 

2  Long  V.  Johnson,  15  Ind.  App.  498 
(1896).  Where  the  vendee  has  disposed 
of  some  of  the  stock  before  he  discov- 
ered the  fraud,  he  need  not  tender  back 


816 


Atl.  Rep.  517  (N.  J.  1901). 

4  Bradley  v.  Bradley,  165  N.  Y.  183 
(1900). 

°  Subscribers  to  stock  may  rescind 
the  same  on  the  ground  that  promoters 


CH.  XX.] 


CONTRACTS    TO    SELL GAMBLING    SALES,   ETC. 


[§356 


af^ainst  a  promoter  ia  behalf  of  the  corporation,  to  require  hira  to 
pay  for  his  stoclv,  and  also  to  recover  damages  for  false  representa- 
tions inducing  the  plaintiff  to  purchase  stock,  and  also  to  enjoin  a 
proposed  sale  of  plaintiff's  stock,  in  order  to  pay  an  assessment, 
is  multifarious.^  If  the  person  fraudulently  obtaining  stock  has 
transferred  it  to  another  party,  or  is  about  to  transfer  it,  an  injunc- 
tion may  be  obtained.^  The  corporation  should  then  be  made  a 
party.' 

A  purchaser  of  "  watered  "  stock  has  various  remedies  if  he  has 
actually  been  defrauded.*  The  remedy  against  promoters  who 
have  absorbed  the  corporate  propert}^  is  considered  elsewhere.^ 

Where  the  fraud  is  chargeable  to  the  corporate  officers  or  third 
persons,  and  the  vendor  of  the  stock  is  innocent,  the  vendee  can- 
not rescind  the  sale  unless  such  corporate  officers  or  third  persons 


acted  as  agents  for  the  vendor.*^ 

who  sold  property  to  the  company  had 
uii-srepresented  the  character  of  the 
property.  Tliis  suit  may  be  in  equity 
and  is  not  multifarious,  although  the 
relief  demanded  is  a  cancellation  of  the 
sale  of  the  property  and  for  damages 
against  tlie  vendors  and  co-conspirators 
and  also  for  rescission  of  the  subscrip- 
tion. Such  a  suit  lies,  although  the  sub- 
scribers paid  in  only  §loO,000  of  cash 
for  $400,000  of  stock.  Rule  94  of  tlie 
federal  courts  does  not  apply  to  such  a 
case.  Barcus  v.  Gates,  89  Fed.  Rep.  783 
(1898). 

1  Pietsch  V.  Krause,  93  N.  W.  Rep.  9 
(Wis.  1903). 

2  See  §§  363,  364,  infra. 

3  Although  the  party  seeking  the 
stock  of  which  he  has  been  deprived 
by  fraud  makes  the  party  complained 
of  and  the  corporation  itself  parties  de- 
fendant, yet  if  the  certificates  are  not 
obtained  from  the  party  holding  them 
the  court  will  not  order  the  corpora- 
tion to  issue  new  certificates.  The  out- 
standing certificates  may  pass  into  tlie 
hands  of  a  bona  fide  purchaser.  Joslyn 
V.  St.  Paul  Distilling  Co.,  44  Minn.  183 
(1890).  Where  a  citizen  of  Wisconsin 
claims  stock  in  a  Wisconsin  corpora- 
tion as  against  a  citizen  of  Illinois,  in 
whose  name  the  stock  stands  on  the 
corporate  books,  the  corporation  is  a 
necessary    party    defendant,    and   the 


case  cannot  be  removed  to  the  federal 
courts.  Rogers  v.  Van  Nortwick,  43 
Fed.  Rep.  513  (1891).  See  also  §  338, 
sujrra,  and  §  579,  i7ifra.  Where  stock 
is  deposited  with  a  trustee  for  purposes 
of  reorganization,  and  transferable  cer- 
tificates are  issued  therefor  by  the  trus- 
tee, a  claimant  of  stock  which  another 
person  has  deposited,  and  for  whicb 
such  other  person- has  the  trustee's  cer- 
tificate, cannot  compel  the  trustee  tt> 
deliver  up  the  stock  until  the  trustee's 
certificate  is  returned,  even  though  the 
party  holding  it  is  a  party  defendant. 
Bean  v.  American  L.  &  T.  Co.,  122  h, 
Y.  622  (1890). 

*  See  ch.  Ill,  supra. 

*  See  §  651,  infra.  Where  a  promotei 
to  whom  nearly  the  entire  stock  has 
been  issued  sells  a  part  of  it  on  the 
fraudulent  representation  that  the 
stock  belongs  to  the  company,  and  then 
causes  the  company  to  be  wouiid  up, 
and  himself  to  be  released  from  certain 
subscriptions,  and  the  property  io  l»e 
sold  by  a  trustee  named  by  him,  tha 
court  will  appoint  a  receiver  at  tlie  in- 
stance of  the  party  so  defrauded,  for 
the  purpose  of  recovering  back  the 
property  of  the  company.  Du  I*uy  v. 
Transportation,  etc.  Co.,  82  Md.  408 
(1896). 

e  Mofifatv.  Winslow,  7Paige,  124  (1838). 
Benjamin  on  Sales  (Bennett's  ed..  1888), 


(52) 


817 


§  357.] 


CONTRACTS   TO    SELL  —  GAMBLING    SALES,  ETC.  [CH.  XX. 


Equity  will  sometimes  compel  tbe  vendor  to  make  good  his  rep- 
resentations.' 

§  3.57.  Fraud  in  scllinij  stock  may  amount  to  a  consinracij. —  A 
combination  of  persons  to  fraudulently  raise  the  price  of  a  stock 
by  misrepresentations  and  fraudulent  practices  may  amount  to  a 
criminal  conspiracy.  In  England,  in  1858,  the  directors  of  a  joint- 
stock  bank  were  found  guilty  of  a  conspiracy  to  defraud,  where, 
knowing  the  bank  to  be  insolvent,  they  issued  a  balance  sheet  show- 
ing a  profit,  and  declared  a  dividend,  and  issued  ailvertisements  in- 
viting the  public  to  invest  on  such  representations.-  Under  the 
Xew  York  statutes,  a  person  who  sells  stock  on  misrepresentations 
may  be  guilty  of  grand  larceny.' 


§  467a,  says  "the  only  remeily  of  a 
shareholder  in  a  joint-stock  corujiiiny. 
who  has  been  induced  to  i)urchase 
shares  by  the  fraud  of  the  ajrent  of  the 
company,  is  rescission  of  his  contract 
and  restitutio  in  integruytu" 

1  See  §;  354,  supra. 

2  Regina  v.  Brown,  7  Cox,  Cr.  Cas.  442 
(1858);  Regina  v.  Esdaile,  1  F.  &  F.  213 
(1858);  Regina  v.  Gurney,  11  Co.k,  Cr. 
Cas.  414.  See  Hurrell  &  Hyde  on  Di- 
rectors and  Officers,  3d  (Eug.)  ed.,  pp. 
176-182, citing  cases;  Burnes  v.  Pennell, 
2  H.  L.  Cas.  497  (1849).  There  cannot 
be  such  an  offense  against  the  United 


States  by  the  directors  of  a  national 
bank,  since  tlie  offense  is  not  recog- 
nized by  statute.  United  States  v.  Brit- 
ton.  108  U.  S.  199  (1883).  By  the  Na- 
tional Ban  k  Act  false  reports  by  national 
banks  constitute  a  criminal  offense  pun- 
ishable by  fine  and  imprisonment  It 
is  difficult  for  a  corporate  creditor  to 
seek  collection  by  making  out  a  con- 
spiracy. Brackett  v.  Griswold,  13  N.  Y. 
Supp.  192  (1891). 

3  People  V.  Garrahan,  19  N.  Y.  App^ 
Div.  847  (1897);  aff'd.  154  N.  Y.  769.  See 
88  L.  T.  Rep.  194  (1903). 


818 


CHAPTER  XXL 

SALES  OF  STOCK  — SALES  WHILE  SUITS  ARE  PENDING  AFFECTING 
THAT  STOCK;  FORGERY;  LOST  AND  STOLEN  CERTIFICATES  OF 
STOCK;  CONFISCATION  OF  STOCK. 


A-  STOLEN'  AND  LOST  CERTIFICATES.  AND 
PURCHASF.S  WITHOUT  A  CERTIFICATE 
OF  THE  STOCK. 

§  358.  Stolen  or  lost  certificates  of  stock 
indorsed  in  blank. 

359.  Owner  of  a   lost  certificate  of 

stock  may  obtain  a  new  cer- 
tificate. 

360.  Rights  of  a  purchaser  of  a  cer- 

tificate ot  stock  wiiere  the  cor- 
poration has  registered  a  trans- 
fer to  another  without  a  sur- 
render of  the  certificata 

361.  Liability    of    the     corporation 

herein. 
36'2.  Rights    of    purchaser    of   stock 
without  certificates. 

B.   SALES    OF    STOCK    WHILE    SUITS    ARE 
PENDINO  AFFECTING   THAT   STOCK. 

363.  Legal  proceedings  as  affecting 
a  sale  of  an  outstanding  cer- 
tificate of  stock. 


§  364.  Lis  pendens  as  affecting  a  pur- 
chase of  stock. 


C.   FORGERY. 


365. 


366. 


Forgery  as  affecting  a  sale  of 
stock. 

Rights  and  liability  of  trans- 
ferees of  forged  certificate  of 
stock,  there  being  no  interven- 
ing registry  on  corporate 
book& 
367-369.  Liability  of  corporation  to 
real  owner  of  stock  for  allow- 
ing registry  of  forged  trans- 
fer— Rights  of  the  corporation 
in  such  cases. 

Rights  of  transferees  who  pur- 
chase after  a  registry  has  been 
obtained. 


870. 


87L   n.   CONFISCATION  OF  STOCK. 


A.    STOLEN  AND   LOST    CERTIFICATES,  AND  PUK0HA8ES  WITHOUT  A  CERTIFI- 
CATE   OF   THE    STOCK. 

§  358.  Stolen  or  lost  certificates  of  stock  indorsed  in  IJanlc. —  One 
of  the  most  important  elements  of  the  negotiability  of  promissory 
notes  is  that,  if  the  holder  of  such  note  loses  it  or  it  is  stolen  from 
him  when  it  is  indorsed  in  blank,  a  subsequent  honajide  purchaser 
of  such  note  is  protected  as  against  the  person  who  lost  it.  A  dif- 
ferent rule  seems  to  prevail  as  regards  certificates  of  stock  indorsed 
in  i)lank  and  then  lost  or  stolen.  In  this  respect  certificates  of 
stock  are  not  negotiable.  It  has  been  clearly  held  that  a  purchaser 
from  a  thief  of  certificates  of  stock  indorsed  in  blank  is  not  pro- 
tected, nor  is  any  subsequent  purchaser  of  that  identical  certificate 
allowed  to  claim  the  stock,  unless  the  owner  has  been  guilty  of 
negligence.  The  real  owner  of  the  certificate  may  compel  the  cor- 
poration, which  has  refused  to  recognize  the  thief's  transferee's 
title,  to  register  the  stock  as  his,  or  he  may  have  damages  against 
a  honafide  transferee  of  the  thief  where  such  transferee  has  sold 

819 


§  358.] 


FORr.KRV 


STOLEN    ST«»CK. 


[Cll,  XXI. 


the  stock.'  Where  stock  in  a  bank  stands  in  the  name  of  a  person 
for  sixty-five  years  without  the  identity  of  the  stockholder  being 
known  and  without  dividends  being  chiimed  by  him,  although  the 
bank  annually  advertised  the  unclaimed  dividends,  clear  proof  of 
the  identity  of  such  stockholder  must  be  given  by  his  alleged  de- 
scendants, who  do  not  produce  the  certificate  of  stock.-  Where 
certificates  of  stock  indorsed  in  blank  are  deposited  in  a  bank,  and 
the  cashier  fraudulently  abstracts  and  disposes  of  them,  he  is  guilty 
of  embezzlement  at  common  law,  and  there  can  be  no  hona  ji^le 
purchaser  of  such  stock.'  In  Xevada  it  is  held  that  the  purchaser 
and  vendor  of  the  stolen  certificate  is  liable  in  damages  to  its  real 
owner,  although  the  former  acted  as  a  broker  and  without  notice.* 

•Anderson  V.Nicholas,  28  N.  Y.  600  in  wliose  possession  it  subsequently 
(1864),  wliere  the  purchaser  of  tlie  comes,  although  the  holder  may  have 
stolen  certificate  was  not  a  hona  fide  taken  it  in  good  faith  and  for  value." 
purcliaser.  The  court  said  that  even  if  .  .  .  "The  title  of  the  true  owner  of 
lie  had  been  a  hona  fide  purchaser  he  a  lost  or  stolen  certificate  may  be  as- 
would  not  be  protected.  Barstow  n  serted  against  any  one  subsequently 
Savage  Min.  Co..  64  Cal.  388  (1883).  sub-  obtaining  its  possession,  although  the 
stantially  overruling  Winters.  Belmont  holder  maybe  a.  hona  fide  purchaser." 
Min.  Co..  53  Cal.  428  (1^79).  Cf.  AuU  r>.  Even  though  a  stockholder  loses  two 
Colket,  33  Leg.  Int.  44  {Piv  1876),  where  certificates  of  stock  and  another  person 
the  question  of  negligence  was  submit-  finds  two  of  the  same  amount,  never- 
ted  to  the  jury.  The  mere  fact  of  losing  theless  it  is  for  a  jury  to  decide  whether 
it  is  no  proof  of  negligence.     Biddle  t\     it  is  the  same  stock.  McFadden  ?".  Goet- 

tert,  131  Cal.  333  (1901).  In  a  suit  against 
a  corporation  for  refusing  to  transfer 
stock,  the  fact  that  the  certificates  had 
been  lost  since  the  refusal  need  not  be 


Bayard,  13  Pa.  St-  150  (1850).  The  pur- 
chaser of  a  certificate  indorsed  in  blank 
and  stolen  is  not  protected.  Given's 
Appeal.  16  Atl.  Rep.  75  (PiU  1888).  The 
hona  fide  purchaser  of  a  certificate  of  alleged.  Blair  Ca  v.  Rose,  ~6  Ind.  App. 
stock  indorsed  in  blank,  but  which  was     487  (1901). 


stolen  from  the  owner,  is  not  protected. 
East  Birmingham  Land  Ca  v.  Dennis, 
85  Ala.  565  (1888).  A  stock  broker  is 
liable  to  the  owner  for  the  value  of 
mining  shares  received  for  sale  from 
one  who  had  stolen  them,  although  he 
acted  in  good  faith,  without  notice,  and 
paid  the  proceeds  to  the  thief,  relying 
on  his  representations  of  ownership. 
Swim  V.  Wilson,  90  Cal,  126  (1891).  Cf. 
g  452,  infra.  In  Knox  v.  Eden  Musee, 
etc.  Co.,  148  N.  Y.  441,  456  (1896),  the 
court  said  that  there  was  "  no  case  en- 


2  Moss  V.  Manhattan  Co.,  48  N.  Y.  App. 
Div.  561  (1900). 

3  0'Herron  v.  Gray,  168  Mass.  573 
(1897). 

*  Bercich  v.  Marye,  9  Nev.  312  (1874); 
Barstow  v.  Savage  Min.  Co.,  64  Cal.  388 
(1883).  According  to  the  California  de- 
cisions the  same  rule  would  be  applied 
to  negotiable  instruments.  In  another 
case,  where  a  broker  innocently  sold 
for  a  principal  a  stolen  negotiable  gov- 
ernment bond,  the  broker  was  held  lia- 
ble to  the  true  owner.    Kimball  v.  Bill- 


titled  to  be  regarded  as  authority  ings,  55  M&  147  (1867).  Tlie  court  ex- 
which  denies  to  the  owner  of  a  stock  pressly  refused,  in  this  case,  to  place 
certificate  which  has  been  lost  without  the  broker  in  the  same  position  as  an 
his  negligence,  or  stolen,  the  right  to  innocent  purchaser  for  value.  In  Zu- 
reclaim  it  from  the  hands  of  any  person    lick  v.  Markham,  6  Daly,  129(1875),  it 

820 


CH.  XXI.] 


FOKGERY 


STOLEN    STOCK. 


[§  358. 


The  lonajide  purchaser  of  a  stolen  certificate  of  stock  indorsed  in 
blank  cannot  compel  the  corporation  to  register  him  as  a  stock- 
holder.' The  person  stealing  certificates  of  stock  is  guilty  of  lar- 
ceny, and  may  be  convicted  for  the  same.-  The  corporation  can- 
not obtain  an  injunction  against  a  possible  action  by  the  purchaser 
of  stolen  certificates  who  has  applied  for  registry  and  been  refused 
it,'  although  doubtless  it  may  interplead  when  sued  for  refusing  a 
transfer.*  Where  an  agent  fraudulently  sells  stock  which  has  been 
intrusted  to  him,  the  purchaser,  if  honafide,  is  protected,  inasmuch 
as  this  is  not  a  theft,  but  a  breach  of  trust.'^ 

Where  certificates  of  stock  indorsed  in  blank  have  been  stolen, 
and  the  thief  or  his  transferee  has  obtained  a  registry  on  the  cor- 
porate books  and  obtained  new  certificates  of  stock,  and  these  new 
certificates  have  been  sold,  the  purchaser  is  protected  in  his  posses- 
sion of  the  stock.®  In  ^[ichigan  this  is  held  to  be  the  rule,  even 
though  such  purchaser  took  the  stock  with  full  knowledge  of  all 
the  facts.^     This  decision  may  have  gone  too  far,  but  it  is  in  ac- 


was  sought  to  extend  this  doctrine  to 
the  sale  of  certificates  of  stock  which 
liad  only  been  misapplied.  Here  de- 
fendant, a  broker,  had  innocently  sold 
for  a  fraudulent  principal  indorsed  cer- 
tificates of  stock,  wliich  had  not  been 
stolen  from  the  owner,  but  had  been 
delivered  by  him  to  defendant's  fraud- 
ulent principal,  who  had  sold  the  cer- 
tificates to  defendant  through  another 
innocent  broker.  The  New  York  court 
held  the  broker  in  this  case  to  stand  on 
the  same  footing  as  an  innocent  pur- 
chaser and  not  liable  to  the  owner  for 
tlie  proceeds;  but  no  opinion  was  ex- 
pressed as  to  the  rule  of  liability  if  the 
stock  had  been  stolen  instead  of  mis- 
applied. 

1  Sherwood  v.  Meadow  Valley  Min. 
Co.,  50  Cal.  412  (1S75).  Although  two 
persons  have  a  safety-deposit  box  in 
common,  and  one  of  them  steals  there- 
from a  certificate  of  stock  owned  by 
the  other  and  indorsed  in  blank  by  the 
latter,  yet  a  purchaser  even  in  good 
faith  of  such  stolen  certificate  is  not 
protected.  Bangor,  etc.  Ca  v.  Robin- 
son. 52  Fed.  Rep.  520  (1892).  See  also 
Knox  V.  Eden  Musee,  etc.  Co.,  148  N.  Y. 
441  (1896),  where  certificates  of  stock 
which  had  been  returned  to  the  corpo- 

821 


ration  were  stolen  before  they  had 
been  canceled.  This  case  came  before 
the  court  again  in  17  N.  Y.  App.  Div. 
365. 

2  People  V.  GrifBn,  38  How.  Pr.  475 
(1869).  A  criminal  statute  against 
fraudulently  issuing  stock  does  not  ap- 
ply to  a  transaction  where  the  treas- 
urer obtained  a  certificate  which  he  as 
an  individual  had  pledged,  and  after 
obtaining  it  canceled  it  as  treasurer 
and  issued  a  new  certificate  to  himself 
in  place  thereof.  State  v.  Moore,  69 
N.  H.  99  (1896). 

3  Buffalo  Grape  Sugar  Co.  v.  Alber- 
ger,  22  Hun,  349  (1880). 

«  See  §  387,  infra, 

6  See  §  351,  supra. 

« Approved  in  Scarlett  v.  Ward,  52 
N.  J.  Eq.  197  (1893);  Mandlebaum  v. 
North  Am.  Min.  Co.,  4  Mich.  465  (1857). 
A  purchaser  of  certificates  of  stock 
need  not  look  back  of  the  last  registry 
of  transfer  on  the  corporate  books.  A 
breach  of  trust  back  of  that  does  not 
invalidate  his  title.  Winter  v.  Mont- 
gomery Gaslight  Co.,  89  Ala.  544  (1889). 
See  also  note  9,  p.  839,  and  §  387,  infra. 

'  Mandlebaum  v.  North  Am.  Min.  Co., 
4  Mich.  465  (1857). 


§  350.] 


FORGERY  —  STOLEN    STOCK. 


[cn.  XXI. 


cordance  with  the  general  rule  that  the  rights  ami  equities  of  all 
holders  of  stock  back  of  the  registry  and  issue  of  the  certiiicates  in 
existence  are  not  allowed  to  affect  the  stockholdership  or  rights  of 
purchasers  of  these  new  certificates. 

§  359.  Oivner  of  a  lost  certificate  of  stocic  may  oh  fain  a  new  cer- 
tificate.—  An  owner  of  a  certificate  of  stock  who  has  lost  it  or  had 
it  stolen  from  him  may,  by  taking  proper  proceedings  or  by  giving 
proper  security  to  the  corporation,  have  new  certificates  issued  to 
him..  In  Louisiana  it  is  held  that,  upon  satisfactory  proof  of  the 
loss  of  certificates  of  stock,  a  writ  of  mandamus  will  issue  to  com- 
pel the  corporation  to  issue  new  certificates,  and  that  no  bond  of  in- 
demnity need  bo  given. ^  IJut  the  better  rule  is  that,  except  in 
cases  of  the  clearest  proof  of  loss,  the  corporation  shalUnot  be  re- 
quired to  issue  new  certificates  unless  a  l)ond  of  indemnity  against 
its  liability  to  possible  legal  holders  of  the  lost  certificate  begiven.^ 
In  New  York,  by  statute,  security  may  be  required  in  all  such 
cases.'  A  stockholder  may  file  a  bill  in  equity  to  compel  the  cor- 
poration to  issue  to  him  a  new  certificate  of  stock  in  place  of  one 


'  State  r.  New  Orleans  Gas  Light  Co., 
25  La.  Ann.  413  (1873).  Where  sixteen 
years  liave  ela[)sed  since  a  stockliolder 
lost  his  certificate  of  stock  and  gave 
notice  to  that  effect  to  the  corporation, 
the  court  may  grant  viandamus  for  the 
issue  of  a  new  certificate  in  lieu  there- 
of without  security  being  given.  State 
V.  New  Orleans,  etc.  R.  R,  51  La.  Ann. 
909  (1899). 

2  Galveston  City  Co.  v.  Sibley,  56  Tex. 
269  (1882),  where  one  who  became  a 
stockholder  in  1841  died  in  1865,  and 
his  heirs  applied  for  a  new  certificate 
in  1878.  Societe  Generale  v.  Walker, 
L.  R.  11  App.  Cas.  (H.  L.)  20  (1885).  af- 
firming Societe  Generale  v.  Tramways 
Union  Co.,  L.  R.  14  Q.  B.  D.  424:  Butler 
V.  Glen  Cove  Starch  Co.,  18  Hun,  47 
(1879).  A  corporation  need  not  issue 
new  certificates  of  stock  in  place  of 
those  which  are  lost  unless  a  bond  of 
indemnity  be  given.  Guilford  v.  West- 
ern U.  Tel.  Co.,  43  Minn.  434  (1890).  No 
bond  of  indemnity  will  be  required 
where  twelve  years  have  elapsed  since 
the  certificate  of  stock  was  lost.  A 
citizen  of  Minnesota  may  sue  in  its 
courts  to  compel  a  foreign  corporation 
to  issue  a  new  certificate  if  proper  serv- 


ice can  be  had.  The  fact  that  two 
prior  judgments  in  New  York  and  ^lin- 
nesota  required  an  indemnity  bond  to 
be  given  is  no  bar  to  a  tliird  suit  five 
years  later.  Guilford  v.  Western  U. 
Tel.  Co.,  59  Minn.  332  (1894).  Where  a 
person  buj'S  stock  at  a  bankrupt  sale, 
but  does  not  get  the  certificates,  and 
ten  years  elapse,  such  purchaser  is  en- 
titled to  a  mandamus  requiring  the 
corporation  to  issue  new  certificates  to 
him.  State  v.  Southern,  etc.  Co.,  32  S. 
Rep.  174  (La.  1902). 

3  Laws  1892,  ch.  688,  §§  50  et  seq. 
Where  an  application  is  made  under  the 
New  York  statute  for  a  new  certificate, 
in  place  of  one  that  has  been  lost  or  de- 
stroyed, and  there  is  no  direct  proof  of 
the  destruction,  the  court  should  re- 
quire publication  of  the  notice  of  the 
proceeding,  and  where  the  value  of  the 
stock  is  $20,000,  although  the  par  value 
is  but  $5,000,  a  bond  in  the  sum  of 
$2o,000  is  reasonable.  Matter  of  Speir, 
69  N.  Y.  App.  Div.  149  (1902).  Before 
proceedings  under  the  New  York  stat- 
ute to  obtain  a  new  certificate  for  a 
lost  certificate  of  stock  may  be  insti- 
tuted, a  demand  on  the  corporation 
must  be  made.     The  court  may  require 


822 


CH.  XXI.] 


FOEGERT  —  STOLEN    STOCK. 


[§  360. 


that  is  lost,  even  though  the  statute  gives  an  additional  remedy.* 
It  would  seem  reasonable  that  a  bond  of  indemnity  should  be 
given  to  the  corporation,  since,  in  case  the  old  certificate  has  not 
been  lost,  but  has  been  sold  by  its  owner,  the  corporation  is  liable 
in  damages  to  the  purchaser  for  issuing  new  certificates  without  a 
surrender  of  the  old,-  Where  certificates  of  stock  have  been  lost, 
and  a  party  turns  up  with  them  and  applies  for  transfer  on  the 
corporate  books,  the  real  owner  may  enjoin  a  transfer  of  the  cer- 
tificate, and  also  any  transfer  b\''  the  corporation  on  its  books,  pen- 
dente lite?  In  North  Carolina  there  is  a  statute  to  the  effect  that  an 
indemnity  bond  must  be  given  in  order  to  obtain  a  new  certifi- 
cate for  one  that  has  been  lost,  and  the  company's  treasurer  is  en- 
titled to  retain  the  new  certificate  for  five  years,^^ 

§  360.  liights  of  a  imrcliaser  of  a  certificate  of  stock  ivliere  the 
corporation  has  registered  a  transfer  to  another  ivithout  a  surrender 
of  the  certifirate. —  It  sometimes  happens  that  an  owner  of  stock, 
after  selling  his  stock  and  delivering  to  the  vendee  the  certificate 
therefor  indorsed  in  blank,  has  gone  to  the  corporation  before  such 
transfer  is  registered,  and  by  misrepresentation  or  other  fraudulent 
means  induced  the  corporation  to  issue  to  another  purchaser  a  new 
certificate  of  stock  without  a  surrender  of  the  old  one.     It  is  the 


publication  of  the  application  and  also 
the  giving  of  notice  to  the  stockholder 
of  record.  Matter  of  Coats,  75  N.  Y. 
App.  Div.  469  (1902).  This  statute  does 
not  give  a  remedy  to  a  purcliaser  of 
stock  at  a  receiver's  sale.  If  he  is  una- 
ble to  obtain  the  outstanding  certifi- 
cates his  remedy  is  different.     Re  Big- 


issue  by  a  corporation  of  new  certifi- 
cates of  stock  in  place  of  lost  certifi- 
cates does  not  constitute  an  overissue 
of  stock.  Kinnan  v.  Fortj'-second,  etc. 
R.  R.,  21  N.  Y.  Supp.  789  (1893);  aflf'd, 
140  N.  Y.  183. 

3  Sierra  Nevada,  etc.  Co.  v.  Sears,  10 
Nev.  346  (1875).     Where  the  treasurer 


lin  V.  Friendship  Assoc  46  Hun,  223  of  a  corporation  is  in  debt  to  it  and 

(1887).  pledges  his  stock  as  security  therefor, 

1  Kinnan  v.  Forty-second,  etc.  Ry.,  140  and  the  president  puts  it  away,  and 
N.  Y.  183  (1893).  afterwards     tiie    president    buys    the 

2  See  §^  360-362,  infra.  Persons  re-  stock  from  the  treasurer,  but  the  cer- 
ceiving  a  duplicate  certificate  on  the  tificate  cannot  be  found,  and  a  new 
ground  of  loss  of  the  original  may  be  certificate  is  issued  for  it  and  deliv- 
compelled  by  the  company  to  return  it  ered  to  the  president,  and  two  years 
where  the  original  turns  up  in  another  thereafter  the  treasurer  finds  the  old 
person's  hands,  the  certificate  having  certificate  of  stock  and  pledges  it,  the 
been  sold  to  the  latter  by  the  former  president  is  protected  in  his  purchase, 
owner.  New  York  Central,  eta  R.  R.  there  having  been  no  culpable  negli- 
V.  Stokes,  N.  Y.  K  J.,  Nov.  16,  1888,  gence  on  his  part.  Farmers'  Bank  v. 
p.  1091.  In  Keller  v.  Eureka,  etc.  Co.,  43  Diebold.  etc.  Co.,  64  N.  K  Rep.  518  (Ohio, 
Mo.  App.  84  (1890),  the  court  held  that  1902). 

the  corporation  need  not  issue  au  or-        *  Hendon  v.  North  Carolina  R.  R.,  125 

dinary  certificate  in  place  of  one  that  N.  C.  124  (1899).    See  s.  a,  127  N.  C.  110 

was  lost,  but  might  write  upon  the  new  (1900). 
certificate  the  word  "duplicata"    The 

823 


§301.]  FORGERY — STOLEN    STOCK.  [OU.   X\I, 

duty  of  the  corporation  to  refuse  to  register  a  transfer  unless  the 
okl  certificate  is  delivered  up.     The  outstanding  certificate  is  a  con- 
tinuing affirmation  by  the  corporation  that  no  registry  of  a  transfer 
of  the  stock  represented  by  tiiat  certificate  will  be  allowed  until  the 
certificate  itself  is  presented  and  surrendered.     This  allinuation  is 
sometimes  declared  in  a  by-law,'  and  sometimes  it  is  printed  on  the 
face  of  the  certificate  itself.-'     The  obligation  of  the  cor{)oration, 
however,  to  require  a  surrender  of  the  old  certificate  upon  obtain- 
ing a  registry  is  the  same  whether  there  is  a  by-law  or  a  statement 
on  the  certificate,  or  neither  of  these.     It  exists  without  any  ex- 
press declaration.*     Where  stock  is  transferred  without  a  transfer 
of  the  certificate,  and  the  transferrer  afterwards  transfers  the  cer- 
tificate to  another  party,  the  former  is  liable  to  the  first  transferee.* 
So  also  if  the  vendor  afterwards  obtains  the  certificates  and  sells 
them  again  to  others,  he  is  liable  to  the  first  person  to  whom  he 
sold  his  interest.*     Where  the  treasurer  of  a  corporation  is  in  debt 
to  it  and  pledges  his  stock  as  security  therefor,  and  the  president 
puts  it  away,  and  afterwards  the  president  buys  the  stock  from  the 
treasurer,  but  the  certificate  cannot  be  found,  and  a  new  certificate 
is  issued  for  it  and  delivered  to  the  president,  and  two  years  there- 
after the  treasurer  linds  the  old  certificate  of  stock  and  pledges  it, 
the  president  is  protected  in  his  purchase,  there  having  been  no 
culpable  negligence  on  his  part.^ 

§301.  LiahUUii  of  the  corporation  heniu.—  lt  is  the  duty  and 
right  of  a  corporation  to  refuse  to  allow  a  registry  of  a  transfer  of 
stock  unless  the  outstanding  certificate  representing  the  stock  is 
delivered  up  and  canceled.  If  it  allows  a  transfer  to  be  registered 
without  the  old  certificate  being  produced  and  surrendered,  it  is 
liable  to  any  person  who,  without  notice,  purchases  or  has  purchased 
the  outstanding  certificate,'  except  where  the  old  certificate  of  stock 

1  Bridgeport  Bank  v.  New  York,  etc.  vendor  even  if  the  company  is  forrued, 

R  R,  30  Conn.  231  (1861);  Strange  v.  Jackson  v.  Cocker,  4  Beav.  59  (1841). 

Houston,  etc.  R  R.  53  Tex.  162  (1880);  «  Farmers'  Bank  v.  Diebold,  etc.  Co., 

New  York,  etc.  R  R  v.  Schuyler,  34  64  N.  E.  Rep.  518  (Ohio,  1902). 

N.  Y.  30  (1865).  7  Factors',  etc  Ins.  Co.  v.  Marine,  etc 

2Cushman    v.   Thayer    Mfg.   Ca,   76  Co.,  31   La.  Ann.    149   (1879),  where  a 

N.  Y.  365  (1879).  pledgee  recovered  damages  against  the 

3  Factors',  etc.  Ins.  Co.  v.  Marine,  etc.  corporation  for  issuing  new  certificates 

Co.,  31  La.  Ann.  149  (1879).     As  regards  without  a  surrender  of  the  one  which 

the  English  rule  herein,  see  2  Ry.  &  the  plaintiff  held;  Smith  u  American 

Corp.  L.  J.  577  and  625.  Coal  Co..  7  Lans.  317  (1873),  where  an 

*  Mahaney  v.  Walsh,  16  N.  Y.  App.  unrecorded  transferee  recovered  dam- 

Div.  601  (1897).  ages  against  a  corporation  for  issuing  a 

SBeckitt  v.   Bilbrough,  8  Hare,  188  certificate  to  a  purchaser  at  execution 

(1850).     But  the  latter  is  not  liable  to  sale   on    an    attachment    against    the 

take  the  shares  nor  to  indemnify  his  transferrer.    See  also  §  486  et  seq.,  infra; 

824 


CH.  XXI.] 


FORGERY  —  STOLEN    STOCK, 


1  5i 


at;i. 


was  stolen  or  lost.  This  rule  is  well  established,  and  is  based  on 
the  usages  and  requirements  of  trade,  and  on  public  policy,  which 
favors  the  protection  of  those  who  invest  their  money  in  certifi- 
cates of  stock,  relying  upon  the  corporation  to  protect  the  holder 


Cushman  v.  Thayer  Mfg.  Co.,  76  N.  Y. 
365  (1879);  Bank  v.  Lanier.  11  Wall.  869 
(1870),  the  court  saying:  "It  is  equally 
clear  that  the  bank,  in  allowing  this 
stock  to  be  transferred  to  other  parties 
while  the  certificates  were  outstanding 
in  the  hands  of  bona  fide  holders,  was 
guilty  of  a  breach  of  corporate  duty." 
and  is  liable;  New  York,  etc.  R.  R.  r. 
Schuyler,  34  N.  Y.  30.  81  (1865);  Holbrook 
V.  New  Jersey  Zinc  Co.,  57  N.  Y.  616 
(1874),  the  court  saying:  "It  cannot  be 
denied  that,  if  a  corporation  having 
power  to  issue  stock  certificates  does  in 
fact  issue  such  a  certificate,  in  which  it 
affirms  that  a  designated  person  is  en- 
titled to  a  certain  number  of  shares  of 
stock,  it  thereby  holds  out  to  persons 
who  may  deal  in  good  faith  with  the 
person  named  in  the  certificate  that  he 
IS  an  owner  and  has  capacity  to  transfer 
the  shares.  This  proposition  does  not 
rest  on  any  view  of  the  negotiability  of 
stock,  but  on  general  principles  apper- 
taining to  the  la  w  of  estoppel ;"  Moores  v. 
Citizens"  Nat  Bank,  111  U.  S.  156  (1883), 
where  the  court  seemed  to  hold  that  the 
person  receiving  new  certificates  with- 
out requiring  a  surrender  of  the  old  ones 
is  not  such  a  bona  fide  transferee  of 
stock  as  may  hold  the  corporation  liable ; 
Brisbane  v.  Delaware,  etc.  R  R.,  94  N. 
Y.  204  (1883),  all'g  25  Hun,  438,  and 
holding  that,  until  the  purchaser  of  the 
outstanding  certificates  presents  them, 
th6  corporation  is  protected  in  paying 
dividends  to  the  transferee  without  the 
certificates.  If  no  certificate  has  been 
issued  tiie  rule  does  not  apply.  First 
Nat.  Bank  v.  Gifl"ord,  47  Iowa.  575  (1877). 
The  unregistered  holder  of  the  certifi- 
cates is  protected,  since,  if  he  were 
obliged  to  notify  the  corporation  at  the 
time  he  purchases  the  stock,  "  the  value 
of  these  certificates  as  a  basis  of  credit 
would  be  greatly  impaired,  particularly 


where  the  pledge  is  made  at  a.  distance 
from  the  domicile  of  the  corporation." 
Smith  V.  Crescent  City,  etc.  Co.,  30  La. 
Ann.  1378  (1878).  See  also  Bridgeport 
Bank  v.  New  York,  etc.  R  R,  30  Conn. 
231  (1861),  the  court  saying:  "The  bona 
fide  holders  of  such  certificates  had  a 
right  to  rely  upon  the  certificates, 
under  the  circumstances,  as  securing 
to  them  the  stock  which  they  repre- 
sented, against  all  transfers  to  other 
parties."  Strange  v.  Houston,  etc.  R 
R,  53  Tex.  162  (1880),  to  the  same  eflfect, 
on  the  ground  that  the  non-produc- 
tion of  the  original  certificate  "  is  no- 
tice to  the  company  that  a  superior 
title  may  be  in  a  third  party."  In  Cady 
V.  Potter,  55  Barb.  463  (1869),  a  corpo- 
ration sustained  its  bill  of  interpleader 
as  between  a  person  to  whom  it  had  is- 
sued stock  on  a  transfer  without  a  sur- 
render of  the  old  certificate  and  a  per- 
son to  whom  it  afterwards  Lssued  the 
stock  on  a  surrender  of  the  old  certifi- 
cate. If  a  corporation  allows  a  trans- 
fer to  be  made  on  its  books  without  the 
transfer  on  the  old  certificate  being 
signed,  it  is  liable  to  the  owner  of  the 
old  certificate,  even  though  the  old  cer- 
tificate is  delivered  up  and  the  attorney 
in  fact  of  the  owner  shows  his  power 
of  attorney  at  the  time  of  the  trans- 
fer on  the  books.  Tafift  v.  Presidio, 
etc.  R  R,  84  CaL  131  (1890);  Lee  v. 
Citizens'  Nat.  Bank,  2  Cin.  Super.  Ct. 
(Ohio),  298  (1872),  holding  that  the 
holder  of  the  old  certificates  is  entitled 
to  have  the  illegal  registry  canceled. 
In  England  there  seems  to  be  no  de- 
cision directly  in  point.  A  dictum, 
however,  in  Shropshire  Union,  etc.  Co. 
V.  Queen,  L.  R  7  H.  L.  496,  509  (1875), 
does  not  support  the  rule  which  pre- 
vails in  this  country.  The  court  said: 
Whether  a  transfer  of  shares  in  a  com- 
pany can  or  cannot  be  made  without 
25 


§  301.J 


FORGERY  —  STuLKN    STOCK. 


[CH.   XXI. 


of  such  certificates.'  Thus,  the  corporation  has  been  held  liable 
even  though  seventeen  years  have  elapsed  since  a  new  certificate 
was  obtained,  the  latter  having  been  obtained  on  the  ground  that 
the  outstanding  certificate  had  been  lost.'^  The  corporation  need 
not  assume  any  risk,  but  may  refuse  to  permit  a  registry  on  its 
books  of  the  transfer  unless  the  old  certificate  is  produced  and 
surrendered.^     Where,  however,  the  corporation  is   compelled  to 


the  production  of  the  certificates  of  the 
shares  is  "entirely  within  the  discre- 
tion of  the  directors    They  were  not 
bound  to  permit  a  transfer  without  tlie 
production    of    the    certificates;    but, 
though  not  bound  to  permit  a  transfer, 
I  apprehend  they  would  not  be  in  any 
way  answerable  if  the  transfer  should 
be  in  any  case  made  without  the  pro- 
duction of  the  certificates  of  the  shares." 
The  case  of  Hart  v.  Frontino,  etc.  Min. 
Co.,  L.  R  5  Exch.  Ill  (1870),  holds,  how- 
ever, that  where  the  corporation  can- 
cels the    stockholdership    of  one  who 
purchased  after  registry  without  a  sur- 
render of  the  old  certificates  having 
been  obtained,  he  may  hold  it  liable  in 
damages.    As  between  two  unrecorded 
transfers,  one   having  the  certificate, 
and    the    other  —  a    subsequent    pur- 
chaser—  not  having  it,  the  former  pre- 
vails.    Societe  Generale   v.  Tramways 
Union  Co.,  L.  R.  14  Q.  B.  D.  424  (1884). 
See  also  cases  in  §  412,  infra.     In  Can- 
ada the  outstanding  certificate  of  stock 
need  not  be    surrenderd   in    order    to 
transfer    the    stock    on  the  corporate 
books;  and  hence,  where  the  registered 
holder  makes  two  transfers  to  different 
persons,  the  company  is  not  liable  for 
allowing  transfer  to  the  one  who  first 
presents  his  transfer,  even  though  he 
has  not  the  old  certificate.     Smith  v. 
Walkerville,  etc.  Co.,  23  App.  Rep.  (Can.) 
95  (1896). 

1  Factors',  etc.  Ins.  Co.  v.  Marine,  etc. 
Co.,  31  La.  Ann.  149  (1879),  the  court 
saying:  "We  think  that,  by  thus 
making  stocks  transferable  by  mere 
delivery  of  the  certificate,  the  law  has 
intended  to  interdict  corporations  from 
transferring  stocks  on  their  books,  ex- 


cept upon  surrender  of  the  certificate  or 
upon  proof  of  its  loss  or  destruction. 
These  certificates  of  stock  have  become 
such  important  factors  in  trade  and 
credit  that  the  law  has  intended  to  sur- 
round those  who  take  them  with  the 
safeguards  it  accords  to  the  holders  of 
the  other  great  agencies  of  commerce — 
bills,  notes,  bills  of  lading,  etc." 

2  Cleveland,  etc.  R.  R.  v.  Robbins,  35 
Ohio  St.  483  (1880).  But  the  corpora- 
tion is  not  liable  for  dividends  paid  in 
the  meantime.  It  was  held,  further, 
that  a  by-law  allowing  such  issue  of 
new  certificates  in  case  of  loss  had  no 
etfect  as  regards  the  plaintiff,  and  that 
thestatute  of  limitations  ran  against  the 
plaintiff  only  from  the  time  he  had  no- 
tice of  the  new  certificate.  As  to  sub- 
rogation by  the  owner  of  a  certificate 
of  stock  to  a  bond  given  to  the  corpora- 
tion, see  Greenleaf  v.  Ludington,  15 
Wis.  558  (1862). 

•*  The  corporation  may  refuse  to  issue 
stock  to  the  heirs  of  a  stockholder  un- 
less they  surrender  the  old  certificates. 
State  V.  New  Orleans,  etc.  R.  R.,  30  La. 
Ann.   308  (1878);     New    London    Nat. 
Bank  v.  Lake  Shore,  etc.  Ry.,  21  Ohio 
St.  221    (1871),  where  the   corporation 
refused  to  allow  registry  by  a  purchaser 
at  an  execution  sale,  although  it  was 
quite  plain  that  the  judgment  debtor's 
sale  of  the  certificates  had    been    in 
fraud  of  creditors.     As    between   two 
unregistered  transferees,  the  one  with 
the  certificate  is  entitled  to  the  stock, 
especially   where   he  purchased    first. 
Maybin  v.  Kirby,  4  Rich.  Eq.  (S.  C.)  105 
(1851);  Sooiete  Generate  v.  Walker,  L. 
R,  11  App.  20  (1885),  aff'g  L.  R.  14  Q.  B. 
D.  424.    So,  also,  as  between  a  bona  fide 


826 


CU.  XXI.] 


FORGERY  —  STOLEN    STOCK. 


[§  3G2. 


make  the  registry  by  legal  proceedings,  it  cannot  be  held  liable  to 
the  holder  of  the  outstanding  certificate.^  And  where  the  certifi- 
cate which  is  surrendered  to  the  corporation  is  stolen  from  the 
corporation  before  its  cancellation,  the  purchaser  thereof  is  not  pro- 
tected.'^ 

§  3G2.  Bif/hts  of  purchaser  of  stock  witliout  certificates.—  A  pur- 
chaser of  stock  who  does  not  receive  the  certificates  of  the  stock 
he  has  purchased,  but  who  nevertheless  obtains  a  registry  on  the 
corporate  books,  and  receives  new  certificates  without  a  surrender 
of  the  old,  and  who  sells  the  new  certificates,  is  not  liable  in  dam- 
ages to  the  holder  of  the  old  certificates,*  unless  he  obtained  registry 
with  knowledge  that  his  vendor  had  already  sold  the  old  certificates 
to  another.^  The  remedy  of  the  latter  is  against  the  corporation^ 
or  he  may  sue  the  corporate  officer  who  allowed  the  transfer.'  The 
purchaser  of  the  stock  may  insist  on  the  old  certificate  being  pro- 
duced and  surrendered  at  the  time  of  registration,  but  if  he  waives 
this  right,  and  a  registry  is  made,  he  cannot  afterwards  refuse  to 
accept  the  stock  on  that  account.^     The  corporation  is  not  liable  to 


purchaser,  to  wliom  the  certificates  are 
transferred,  and  a  tliird  party,  to  whom 
the  vendor  had  given  the  stock  previous 
to  the  sale,  the  vendee  with  the  certifi- 
cates is  protected.  Crawford  v.  Dox,  5 
Hun,  507  (lb7.J).  In  Wilson  v.  Atlantic, 
etc  R  R,  2  Fed.  Rep.  459  (1880),  where 
an  assignee  in  bankruptcy  applied  for 
registry,  the  bankrupt  having  fled  with 
the  certificates,  it  was  held  that  the 
corporation  was  bound  to  allow  trans- 
fer and  to  issue  new  certificates  upon 
u  bond  of  indemnity  being  given. 
However,  a  sale  of  a  certificate  of 
stock  to  a  bona  fide  purchaser  is  to  be 
upheld,  even  as  against  a  receiver  who 
has  been  appointed  and  been  given 
legal  ownership  of  the  stock.  Dudley 
V.  Gould,  G  Hun,  97  (1875). 

1  Friedlander  v.  Slaughter-house  Co., 
31  La.  Ann.  523  (1879).  See  also  ch.  XXH, 
i;  388,  infra.  Where  stock  is  deposited 
with  a  trustee  for  purposes  of  reorgan- 
ization, and  transferable  certificates  are 
issued  therefor  by  the  trustee,  a  claim- 
ant of  stock  which  another  person  has 
deposited,  and  for  which  such  other 
person  has  the  trustee's  certificate,  can- 
not compel  the  trustee  to  deliver  up  the 
stock  until  the  trustee's  certificate  is 

82' 


returned,  even  though  the  party  hold- 
ing it  is  a  party  defendant.  Bean  v. 
American  Loan,  etc.  Co.,  122  N.  Y.  622 
(1890).     But  see  §  330,  supra. 

2  In  Knox  v.  Eden  Musee,  etc.  Co.,  148 
N.  Y.  441  (1896),  certificates  of  stock  liad 
been  delivered  to  the  corporation  for 
transfer  and  the  new  certificates  had 
been  duly  issued.  The  old  certificates 
were  put  in  a  safe  uncanceled,  and 
were  illegally  abstracted  by  an  em- 
ployee and  sold.  The  court  held  that 
the  company  was  not  liable  on  such 
certificates  to  a  person  who  took  them 
in  pledge  from  such  employee.  The 
court,  however,  based  its  decision,  not 
on  the  fact  that  the  pledgee  took  with 
notice,  but  on  the  principle  of  law  that 
no  one  could  acquire  title  to  stolen  cer- 
tificates of  stock.  A  transferee  who  re- 
ceives new  certificates  of  stock  is  not 
affected  by  the  fact  that  the  old  certifi- 
cates are  fraudulently  re-issued  by  a 
corporate  officer.     See  i:^  292,  supra. 

3  Baker  v.  Wasson,  53  Tex.  150  (1880). 
^  Scripture  v.  Fraucestown  Soapstone 

Co..  50  N.  H.  571  (1871). 

5  Baker  v.  Wasson.  59  Tex.  140  (1883j. 

6  Boatmen's  Ins.  etc.  Co.  v.  Able,  48  Mo. 
136  (1871).   A  bank  cashier  may  transfer 


§  303.]  FORGERY  —  STOLEN    STOCK.  [CH.   XXI. 

the  person  who  is  registered  as  a  stockholder  without  the  surrender 
of  the  old  certificate,  at  least  not  where  the  registry  is  by  the  sec- 
retary, without  special  authority  from  the  board  of  directors.* 
Where,  however,  the  purchaser  of  stock,  without  the  certificates, 
obtained  registry  on  the  corporate  book,  the  corporation  cannot 
afterwards  remove  his  name  in  favor  of  the  purchaser  of  the  old 
certificate.  The  former  may  compel  the  corporation  to  replace  his 
name."  Where  the  company  by  mistake  allows  a  transfer  and  issues 
new  stock  to  a  party  after  the  vendor  has  already  sold  the  stock  to 
another  party,  and  after  the  latter  has  obtained  a  transfer,  the  com- 
pany is  liable  to  the  second  purchaser.'  It  has  been  held  that  a 
pledge  made  by  a  separate  written  assignment  of  the  stock,  the  cer- 
tificates remaining  in  the  pledgor's  possession  and  continuing  to 
stand  in  his  name  on  the  corporate  books,  is  not  good  as  against 
the  pledgor's  receiver  who  takes  possession  of  the  certificates.* 
VV^here  no  certificates  of  stock  are  issued  and  a  stockholder  delivers 
an  assignment  of  her  stock  for  a  specified  sum,  delay  in  payingthe 
sum  does  not  enable  the  vendor  to  sell  the  stock  in  the  meantime 
to  some  one  else.* 

B.    SALES   OF   STOCK  WHILE    SUITS    ARE    PENDING  AFFECTING    THAT    STOCK. 

§  3(53.  Legal  proceediuf/s  as  affecting  sales  of  outstanding  certifi- 
cates of  stock. —  It  is  a  well  established  principle  of  law  that  shares 
of  stock  may,  for  certain  purposes,  have  a  situs  at  two   separate 

bank  stock  standing  in  his  name  in  the  cates,  a  regular  registry  with  a  surren- 

stock  register,  even  though  he  does  not  der  of    such  certificates    having  pre- 

turn    back    the    certificates.     Finn   v.  viously  been  obtained  by  another.     Cf. 

Brown,  143  U.  S.  5G  (1891).     In  Indiana.  Hart  v.  Frontino,  etc.  Co.,  L.  R.  5  Exch. 

where  an  administrator  cannot  sell  per-  111  (1870). 

sonal  property  except  in  a  certain  way,  2  Cady  v.  Potter,  55  Barb.  463  (18G!)). 
the  corporation  is  liable  to  the  estate  if  In  Piatt  v.  Birmingham  Axle  Co,  41 
it  allows  a  transfer  of  stock  on  its  books  Conn.  255  (1874),  the  corporation  was 
under  a  sale  by  the  administrator,  who  protected  by  its  lien,  and  the  fact  that 
has  not  complied  with  the  law.  The  it  bought  the  stock  without  the  cer- 
purchaser,  however,  who  does  not  see  tificates  was  not  the  essential  point  of 
tlie  old  certificates,  but  takes  new  cer-  the  case.  The  corporation  cannot  iu- 
tificates  issued  by  the  corporation,  is  terplead  after  it  has  allowed  the  trans- 
protected.  Citizens'  St.  Ry.  v.  Robbins,  fer,  but  it  may  interplead  if  it  has 
128  Ind.  449  (1891).  refused  to  transfer  to  any  one.  See  also 

1  Hall  V.  Rose  Hill,  etc.  Co.,  70  111.  673  g  387,  infra. 

(1873);  Houston   Ry.  v.  Van  Alstyne,  56  ^Balkis    Consol.    Co.    v.    Tomkinson. 

Tex.  439  (1882),  holding  that  the  corpo-  ^1893]  A.  C.  396. 

ration  is  not  bound  to  recognize  as  a  '  Atkinson  v.  Foster,  134  111.  472  (1890). 

stockholder  one  who  obtains  registry  ^  Jujson  v.  Stonnington  Min.  Co.,  87 

without  a  surrender  of  the  old  certifi-  N.  W.  Rep.  108  (Mich.  1901). 

828 


CH.  XXI.]  FORGERY — STOLEN    STUCK.  [g  3()3. 

places  at  the  same  time.  For  the  purposes  of  suits  concerning 
rights  to  its  title,  for  taxation,  and  for  a  few  other  purposes,  shares 
of  stock  follow  the  domicile  of  the  stockholder.^  On  the  other 
hand,  it  has  at  the  same  time  a  situs  where  the  corporation  exists, 
and  this  situs  may  be  for  the  purposes  of  suits  concerning  the  title 
to  the  stock,  for  attachment  and  execution,  and  for  various  other 
similar  purposes.  Great  difficulty  arises  in  many  instances  of  legal 
proceedings  aflfecting  the  title  to  stock,  b}''  reason  of  the  fact  that^ 
where  the  defendent  has  in  his  possession  the  certificates  of  stock, 
and  is  not  enjoined  from  transferring  them,  he  may  transfer 
them,  either  before  or  after  suit  has  been  commenced  against  him 
to  obtain  possession  of  the  stock  represented  by  such  certificates, 
or  to  subject  it  to  his  debts.  The  question  then  arises  whether 
the  ho7ia  fide  transferee  of  such  certificate  is  to  be  allowed  to  re- 
tain the  stock,  or  whether  the  successful  plaintiff  in  the  suit 
ngainst  the  defendant  who  has  transferred  the  stock  may  follow 
such  stock  and  take  it  from  the  transferee.  This  conflict  of  right 
between  the  purchaser  of  the  outstanding  certificates  and  the 
purchaser  whose  title  is  based  on  judicial  proceedings  arises  most 
often  in  cases  of  attachment  or  execution  issued  against  shares 
of  stock  at  the  domicile  of  the  corporation.  In  such  cases  tho 
better  rule  seems  to  be  that  transferees  of  the  certificate  held  by 
the  defendant  are  protected  and  entitled  to  protection  at  the 
hands  of  the  corporation,  if  their  purchase  was  made  before  the 
attachment  or  execution  was  levied;  but  that  transfers  made  after 
the  levy  are  not  binding  so  far  as  the  corporation  and  the  plaint- 
iffs to  the  suit  are  concerned,  provided  the  suit  itself  is  success- 
ful.- The  same  difficulty  and  conflict  of  rights  arise  in  suits  ta 
reclaim  stock  which  has  been  taken  from  the  plaintiff  by  fraud,  or 
by  the  torts  of  an  agent  or  pledgee,  or  by  the  breach  of  trust  of  an 
executor,  administrator,  guardian,  or  trustee.'  The  plaintiff  seek- 
incr  to  recover  his  stock,  certificates  for  which  are  in  the  hands  of 
the  defendant,  seems  to  have  but  two  modes  of  procedure  whereby 
he  may  prevent  the  defendant  from  transferring  the  certificates. 

1  It  is  important  here  to  distinguish  duties  of  the  corporation  herein  when, 

shares  of  stock   from   the   certificates  stock  is  sold  under  an  execution  or  is 

for  those  shares.     The  stock  itself  is  not  attached,  see  §  489,  infra. 

the  same  as  the  certificate  representing  2  Smith  r.  American  Coal  Co.,  7  Lans. 

it.     Wiuslow  V.  Fletcher,  53  Conn.  390  317  (1873);  Smith  v.  Crescent  City,  etc. 

(1886).      Though  prevented  by  injunc-  Co.,  30  La,  Ann.  1378  (1878);   and  ch. 

tion  from  transferring,  the  corporation  XXVII,  infra. 

must   preserve  the  rights  of  a   party  sHolbrook  v.  New  Jersey  Zinc  Co.,  57 

who  notifies  it  of  his  rights.     Purchase  N.  Y.  616  (1874);  Leitch  v.  Wells,  48  N, 

V.  New  York  Exch.  Bank,  3  Rob.  (N.  Y.)  Y.  585  (1872). 
164  (1865).     As  regards  the  rights  and 

829 


§  3C3.]  FORGERr  — STOLKN    SlOt'K.  [cil.   XXI. 

The  suit  should  be  l)rought  in  the  state  of  the  doinicile  of  the  cor- 
poration and  attachment  against  the  stock  issued,'  or  an  injunction 
obtained  against  any  transfer.-  The  court  will  enjoin  a  party  from 
voting  upon  or  disposing  of  his  stock  in  a  corponxiion  pendente  lite 
where  the  plaintiffs  show  that  they  transferred  the  stock  to  the  de- 
fendant on  the  hitter's  agreement  not  to  sell  the  same,  except  with 
the  consent  of  the  former,  and  that  when  he  did  sell  the  stock  three- 
fourths  of  the  proceeds  should  belong  to  the  former,  and  it  appear- 
ing further  that  the  defendant  had  given  the  stock  to  his  sister 
without  consideration.^  A  stockholder  whose  stock  has  been  wrons'- 
fully  pledged  may  enjoin  the  corporation  from  allowing  a  transfer 
by  the  pledgee  who  has  applied  for  the  same,  and  the  pledgor 
need  not  allege  that  the  pledgee  took  with  notice.  It  is  for  the 
pledgee  to  intervene  and  prove  that  the  pledge  was  bonajide.*  It 
is  true  that,  after  judgment  has  been  obtained  and  the  decree  of 
the  court  executed,  any  substjquent  transfer  of  the  certificates  by 
the  defendant  is  null  and  may  be  disregarded  by  the  plaintiff  and 
by  the  corporation.-^  But  while  the  suit  is  pending  the  defendant 
may  transfer  the  certificates,  and  the  bona  fide  transferee  takes  a 
good  title  to  the  stock.  The  latter  is  not  affected  by  or  bound  to 
take  notice  of  a  lis  pendens  in  that  suit.  If  no  temporary  injunc- 
tion is  obtained,  a  transfer  made  on  the  corporate  books  pendino- 
suit  is  good,  and  the  corporation  cannot  be  made  liable,  although  a 
party  defendant.®  Where  the  real  owner  of  stock  brings  suit  against 
a  transferee  of  that  stock  who  has  obtained  a  new  certificate  there- 
for and  succeeds  in  the  suit,  and  in  the  meantime  the  defendant  has 
assigned  the  stock  to  a  third  party,  the  corporation  may  institute 

1  Quarl  V.  Abbett,  102  Ind.  233  (1885).  a  party  claiming  to  be  the  real  owner 
By  a  statute  in  Rhode  Island  in  suits  in  of  stock  filed  a  bill  to  compel  the 
equity  a  writ  of  attachment  may  be-  holder  of  such  stock  to  deliver  up  the 
levied  upon  stock  the  same  as  in  suits  same,  but  it  appeared  that  the  defend- 
at  law.  Ladd  v.  Franklin,  etc.  Co.,  53  ant  had  already  disposed  of  the  stock 
Atl.  Rep.  59  (R.  I.  1902 1;  44  S.  R  Rep.  20.  before  the  commencement  of  the  suit, 

2  See  Sierra  Nevada,  etc.  Co.  v.  Sears,  the  court  refused  to  grant  relief,  even 
10  Nev.  346  (1875).  though  it  further  appeared  that  the  de- 

!*  Weston  V.  Goldstein,  39  N.  Y.  App.  fendant  had  other  stock  in  the  same 

Div.  661  (1899).  corporation    equal  in   amount  to    the 

<  Reynolds  v.  Touzalin  Imp.  Co.,  62  stock  in  issue.     A  stockholder  cannot 

Neb.  236  (1901).  maintain  a  suit  against  the  corporation 

sSprague    %\    Cocheco    Mfg.    Co.,    10  to  enjoin  other  stockholders  from  sell- 

Blatchf.  173  (1872);  s.  c,  22  Fed.  Cas.  960.  ing  their  stock  to  a  second  corporation, 

6  Hawes  v.  Gas  Consumers'  Ben.  Co.,  such  second  corporation  and  the  other 

12  N.  Y.  Supp.  924  (1891).     See  also  edi-  stockholders  not  being  parties  to  the 

torial  N.  Y.  L.  J..  March  29,  1890.     Cf.  suit.     Ingraham  u  National  Salt  Co., 

§  387,  infra.     In  the  case  of  Lamb,  etc.  36  N.  Y.  Misc.  Rep.  646  (1902);  aflf'd,  72 

-Co.  V.  Lamb,  119  Mich.  568  (1899),  where  N.  Y.  App.  Div.  583. 

830 


CH.  XXI.]  FORGERY — STOLEN    STOCK.  [§  3G3. 

suit  and  interplead  between  the  successful  claimant  of  the  stock  and 
the  transferee  of  the  stock  from  the  defendant.     The  defendant  in 
the  former  suit  need  not  be  joined  as  a  party  in  the  latter  suit.    The 
purchaser  of  the  certificate  may  be  enjoined  from  transferring  the 
same,  and  may  be  compelled  to  deposit  the  certificate  with  the  clerk 
of  the  court.^     The  purchaser  must  prove  that  he  is  a  bona  fide  pur- 
chaser.-    Although   the  party  seeking  the  stock  of  which  he  has 
been  deprived  by  fraud  makes  the  party  complained  of  and  the 
corporation  itself  parties  defendant,  yet,  if  the  certificates  are  not 
obtained  from  the  party  holding  them,  the  court  will  not  order  the 
corporation  to  issue  new  certificates.     The  outstanding  certificates 
may  pass  into  the  hands  of  a  lonafide  purchaser.'    A  claimant  of 
stock  in  a  corporation  may  institute  suit  at  the  place  where  the 
company  is  incorporated  for  the  purpose  of  obtaining  possession  of 
tlie  stock,  even  though  the  holders  of  the  stock  are  non-residents 
and  are  brought  into  the  case  only  by  publication  and  substituted 
service.     The  court  acquires  jurisdiction  over  the  defendants.*     Es- 
pecially if  the  certificates  of  stock  are  within  the  jurisdiction,  the 
court  may  obtain  jurisdiction  over  non-resident  defendants  by  pub- 
lication.*    A  citizen  of  Alabama  cannot  maintain  in  the  courts  of 
Alabama  a  suit  to  enjoin  non-residents  from  transferring  stock  in 
a  non-resident  corporation  where  the  defendants  are  not  personally 
served  within  the  state."     Where  a  decree  directs  the  transfer  of 
certain  stock  in  the  distribution  of  an  estate,  and  the  corporation 

1  American,  etc.  Assoc,  v.  Branting-  that  he  is  a  bona  fide  purchaser  and 
ham,   57  N.  Y.   App.   Div.   399   (1901).  that  he  purchased  before  final  judg- 
Where,  by  order  of  the  court,  the  cor-  ment.    American  Press  Assoc,  v.  Bran- 
poration  has  interpleaded  between  two  tingliam,  75  N.  Y.  App.  Div.  435  (1902). 
claimants  to  stock,  the  court  will  re-  Where  the   title  to  stock  has  been 
tain  jurisdiction   and   determine    the  litigated,  and  pending  the  litigation  a 
defendants'  rigiits.  and  where  in  an-  third  person  buys  the  stock,  such  third 
other  action  one  of  the  defendants  has  person  is  not  a  bona  fide  purchaser,  she 
been  decreed  to  be  the  owner  of  the  having  been  a  witness  in  the  suit.  Print- 
stock,  the   other  defendant,   although  ing,  etc.  Co.  v.  Brantingham,  77  N.  Y. 
not  a  party  to  that   action,  but  who  App.  Div.  280  (1902). 
claims  to  be  a  bona  fide  purchaser  of  ^  Joslyn  r.  St.  Paul  Dist.  Co.,  44  Minn, 
the    certificates,  must  establish  such  183(1890);  Beau  u  American  Loan,  etc. 
bona  fide  ownership  and  has  the  bur-  Co.,  122  N.  Y.  622  (1890). 
den  of  proof  to  that  extent     American,  *  Jellenik  v.  Huron,  etc.  Co.,  177  U.  S. 
etc.   Assoc.  V.  Brantingham,  37  N.  Y.  1  (1900),  rev'g  83  Fed.  Rep.  778. 
Misc.  Rep.  426  (1902).  *  Ryan  v.  Seaboard,  etc.  R.  R..  83  Fed. 
2  Where    I    claimant    of    stock    has  Rep.  889  (1897);  Merritt  v.   American, 
brought  suit  against  the  holder  of  the  etc.  Co.,  79  Fed.  Rep.  228  (1897).    See 
stock  and  obtains  judgment  that  the  also  §M 2,  13,  suiJra;  §§  475, 766c,  iw/ro. 
stock  be  transferred  to  such  claimant,  «Rucker    v.    Morgan,    122    Ala.    308 
a  person  claiming  to  have  purchased  (1899).     As  to  injunctions,  see  also  §  391, 

the  stock  in  the  meantime  must  prove    infra. 

831 


•§  304.]  FORGERY  —  !-TOLKN    STOCK.  [CH.   \Xl'. 

makes  such  transfer  and  thereafter  tlie  decree  is  reversed  on  a[)))cal, 
the  executors  may  bring  suit  to  have  the  transfer  canceled.  The 
suit  is  properly  in  equity.'  Where  stock  is  tied  up  by  an  injunction 
which  is  afterwards  vacated,  and  in  the  meantime  the  stock  de{)re- 
ciates  in  value,  the  loss  can  be  recovered  from  the  enjoining  party 
if  the  stocks  could  and  would  have  been  sold  before  the  deprecia- 
tion if  they  had  not  been  so  tied  up.  But  if  such  stocks  are  in 
pledge,  and  the  pledgor  does  not  pay  the  loan  while  the  stocks  are 
80  tied  up,  no  damages  can  be  recovered,'-  Under  the  statutes  of 
California,  even  though  stock  is  distributed  by  executors  in  accord- 
ance with  a  decree  of  distribution,  and  the  distributees  sell  the  stock, 
and  it  is  transferred  on  the  books  of  the  company,  nevertheless  if 
the  decree  is  reversed  on  appeal,  the  transfers  are  void  and  the 
company  is  liable  for  dividends  paid  in  the  meantime  to  such  pur- 
chasers. In  a  suit  by  the  executors  to  recover  such  dividends  the 
purohasers  need  not  be  made  parties.^ 

§  3(U.  Lis  pendens  as  ajfecting  a  purehase  ofstoclc. —  A  purchaser 
of  certificates  of  stock  is  not  chargeable  with  constructive  notice 
that  a  suit  is  pending  in  which  his  vendor  is  defenilant,  and  that 
the  plaintiff  is  endeavoring  to  obtain  possession  and  title  to  the 
stock  which  the  purchaser  is  buying.  The  doctrine  of  lis  pendens 
has  no  application  to  sales  of  shares  of  stock.  The  purchaser  is 
bound  to  know  that  a  judgment  or  decree  has  been  rendered  and 
executed  affecting  the  certificates  he  is  buying,  if  such  a  judgment 
or  decree  exists;  but  he  is  not  bound  to  know  that  a  suit  is  pending 
in  which  judgment  has  not  yet  been  rendered.  That  a  Us  pendens 
in  a  suit  involving  shares  of  stock  does  not  affect  a  purchaser  of 
the  certificate  representing  those  shares,  the  purchase  being  made 
while  the  suit  is  pending,  was  clearly  established  by  the  court  of 
appeals  of  New  York  in  the  case  of  IJol brook  v.  jS'ew  Jersey  Zinc 
Company/ 

C.    FORGERY. 

§  365.  Forgery  as  affecting  a  sale  of  stock. —  An  owner  of  shares 
of  stock  cannot  be  deprived  of  his  property  by  a  forgery,  through 

1  Ashton  V.  Heggerty,   130   Cal.   516  also  Bank  of  Virginia  v.  Craig,  6  Leigh 

(1900;.  (Va.).  399,  435  (1835),  holding  that  a  lis 

-Fourth  Nat.  Bank,  etc.  v.  Crescent,  _pejide?is  in  a  suit  by  sureties  to  restrain 

etc.  Co.,  52  S.  W.  Rep.  1021  (Tenn.  1897).  guardian    from    selling    stock    is    not 

See  also  §  579,  infra.  notice  to  the  corporation  to  refuse  to 

3  Ashton  V.  Zeila  Min.  Co.,  134  Cal.  allow  him  to  register  a  transfer.     The 

408  (1901).  equitable    doctrine    of    notice    by    lis 

*  57  N.  Y.  616  (1874),  following  Leitch  pendens  does  not  apply  to  certificates 
V.  Wells,  48  N.  Y.  586  (1872).  See  Dovey's  of  stock.  American  Press  Assoc,  v.  Bran- 
Appeal,  97  Pa.  St.  153  (1881),  where  the  tingham,  75  N.  Y.  App.  Div.  435  (1902). 
court  refused  to  pass  upon  this  question ; 

832 


CH.  XXI.]  FORGEKY  —  STOLEN    STOCK.  [|  366. 

which  his  certificates  of  stock  pass  into  the  hands  of  innocent 
purchasers.  He  may  be  deprived  of  his  stock,  but  has  in  lieu 
thereof  the  right  to  collect  the  value  of  that  stock,  either  from  the 
corporation,  if  it  has  permitted  a  transfer,  or  from  parties  who  have 
held  the  stock.  The  rights  and  remedies  of  the  stockholder  who 
has  lost  possession  of  certificates  of  stock  by  forgery  vary  accord- 
ing to  the  extent  to  which  his  certificate  has  been  transferred.  His 
remedy  may  be  against  the  transferees  of  the  certificate  before  a 
registry  has  been  obtained,  or  it  may  be  against  the  corporation  for 
allowing  a  registry,  or  it  may  be  against  the  person  obtaining  the 
registry.  The  forgery  itself  may  consist  of  any  writing  on  the  cer- 
tificate of  stock,  whereby,  with  intent  to  defraud,  it  is  falsely  and 
materially  so  made  or  altered  as  to  have  an  apparent  legality.^ 
Generally  the  forgery  is  of  the  name  of  the  stockholder  to  the 
transfer  on  the  back  of  the  certificate.-  The  forgery  may,  however, 
be  committed  by  changing  the  number  of  shares  of  stock  which 
the  transferrer  has  written  out  in  the  transfer,'  or  by  inserting  the 
numbers  of  shares  of  stock  of  one  corporation  in  a  blank  transfer 
duly  signed  by  the  stockholder,  but  signed  for  the  purpose  of  trans- 
ferring shares  of  stock  in  another  and  different  corporation.^ 

The  subject  of  forgery  by  one  or  more  corporate  officers,  whereby 
spurious  and  overissued  stock  is  issued,  there  being  no  old  certifi 
cates  returned  to  the  company  at  that  time,  is  considered  else 
where.^ 

The  subject  now  under  consideration  is  where  the  name  of  a  stock- 
holder is  forged  to  an  assignment  of  the  certificate,  or  the  certificate 
itself  is  modified. 

§  366.  Jxights  and  UaMlities  of  transferees  of  forged  certificates  of 
stock,  there  heUu/  no  intervening  registry  on  corporate  l)Oo1:s. —  The 
position  of  a  transferee  of  a  certificate  of  stock  which  is  invalid 
by  reason  of  forgery  depends  largely  on  whether  there  has  been  an 
intervening  registry  of  transfer  on  the  corporate  books  after  the 

iSee  1  Bouvier's  L.   Diet.,  p.  679;  2  (1862),  aff'g  Taylor  v.  Midland  Ey.,  29 

Bish.  Cr.  L.,  §  523.  L.  J.  (Ch.)  731  (1860). 

2  Nearly  all  of  the  cases  in  the  several  3j\jatthews  v.  Massachusetts  Nat 
following  sections  are  cases  of  a  forgery  Bank,  Holmes,  396  (1874);  s.  c,  16  Fed. 
of  the  stockholder's  name  to  a  transfer.  Cas.  1113;  Sewall  v.  Boston  Water- 
It  is  forgery  for  one  trustee  to  write  in  power  Co..  86  Mass.  277  (1862),  where  the 
the  names  of  the  other  trustees  without  alteration  was  treated  as  a  forgery  so 
authority.  Cottam  v.  Eastern  Counties  far  as  legal  rights  were  concerned, 
Ry.,  IJ.  &  H.  243(1860);  Sloman  v.  Bank  although  the  alteration  was  due  to  an 
of  England,  14  Sim.  475  (1845).  Or  for  innocent  misunderstanding  of  a  clerk, 
one  partner  to  write  in  the  name  of  the  *  Swan  v.  North  British,  etc.  Co.,  7  H. 
other  partner  without  authority,  where  &  N.  603  (1862),  practically  overruling 
the  stock  stood  in  their  joint  names.  Ex  parte  Swan,  7  C.  B.  (N.  S.)  AOO  (1859). 
Midland  Ry.  v.  Taylor.  8  H.  L.  Cas.  751  5  See  g§  291-298,  supra. 
(53)                                                833 


§  306.]  FORGERY  —  STOLEN    STOCK.  [CH.  XXI. 

former  owner  was  deprived  of  his  stock  by  the  forgery.  The  forger 
himself  is  of  course  liable,  not  only  to  the  real  stockholder,  but  also 
to  any  other  person  who  has  been  injured  by  the  forgery.  If  the 
purchaser  of  stock  from  one  who  has  forged  a  transfer  of  the  same 
sells  the  same  after  being  notified  by  the  real  owner  that  the  latter 
claims  the  stock  and  has  been  deprived  of  it  by  forgery,  the  real 
owner  may  recover  damages  in  trover  for  the  value  of  the  stock 
from  the  person  who  so  sells,  although  the  latter  purchased  in  good 
faith  and  without  notice  of  the  forgery.^  AVhere  an  agent  of  a 
stockholder  forges  his  name  to  the  certificates  of  stock  and  pledges 
them  with  a  party  to  secure  a  loan  to  the  agent's  principal,  such 
loan  cannot  be  collected,  even  though  the  proceeds  went  to  the 
credit  of  the  principal  and  were  afterwards  embezzled  by  the  ai^ent 
under  a  power  of  attorney  to  check  out  the  principal's  money,  the 
party  loaning  the  money  on  the  certificates  of  stock  not  having  any 
knowledge  of  such  power  of  attorney  at  the  time.'  If  the  forgery 
is  committed  by  a  member  of  a  firm,  the  real  owner  may  sue 
the  firm  for  money  had  and  received,  and  may  recover  the  value  of 
the  stock  and  dividends.'  Where  the  forger  has  sold  the  stock  to  a 
purchaser  without  notice,  and  the  latter  has  sold  to  another  pur- 
chaser without  notice,  and  the  latter  is  deprived  of  his  apparent 
ownership  on  account  of  the  forgery,  the  second  transferee  may  hold 
the  first  transferee  liable.^  This  principle  grows  out  of  the  well- 
established  rule  of  law  that,  in  a  sale  of  chattels,  there  is  an  implied 
warranty  of  title,  unless  the  circumstances  are  such  as  to  give  rise 
to  a  contrary  presumption.  A  person  who  signs  as  a  witness  a 
forged  transfer  of  stock  is  personally  liable,  even  though  he  did  so 
without  knowledge  of  the  fraud.^  The  broker  and  auctioneer  of 
stock  which  passes  through  their  hands  cannot,  it  seems,  be  held 
liable,  though  it  turns  out  that  on  account  of  a  forgery  there  was 

1  Monk  V.  Graham,  8  Mod.  9  (1721).  their  employee  in  delivering  spurious 

2  Fay  V.  Slaughter,  194  111.  157  (1901).  stock  to  a  customer,  see  Audrews  v. 

3  Marsh  u  Keating.  1  Bing.  N.  Cas.  Clark,  72  Md.  396  (1890).  See  § 452,  in/^a, 
198  (1834);  Stone  v.  Marsh,  6  B.  &  C.  Compare,  however,  §§296  and  358,  notes, 
551(1827).  supra.   A  purchaser  without  notice  of  a 

^Matthews  v.  Massachusetts  Nat.  forged  bond  may  recover  back  the  price 
Bank,  Holmes,  396  (1874);  s.  C,  16  Fed.  paid  by  him  to  the  vendor,  even  though 
Cas.  1113.  This  was  an  extremely  the  vendor  was  himself  a  bona ^de  pur- 
harsh  case,  involving  a  rigid  applica-  chaser  and  without  notice  of  the  ille- 
tion  of  the  principle,  since  the  defend-  gality  of  the  bond.  Thereis  an  implied 
ant's  name  appeared  on  the  back  of  warranty  of  identity  of  the  thing  sold, 
the  certificate  of  stock  as  a  transferrer  Meyer  v.  Richards,  163  U.  S.  385  (1896). 
when  in  fact  it  had  only  been  a  pledgee.  See  also  §  764,  infra. 
and  on  payment  of  the  pledge  had  5  Second  Nat.  Bank  v.  Curtiss,  2  N. 
retransf erred  the  stock.  As  to  the  lia-  Y.  App.  Div.  508  (1896);  aff'd,  153  N.  Y. 
bility  of   brokers    for  the  forgery  of  681. 

834 


«H.  XXI.] 


FORGERY  —  STOLEN   STOCK. 


[§  366. 


no  title  to  the  stock  in  the  party  whom  they  represented.^  The 
transferee  whose  title  is  based  on  a  forgery  has  no  rights  as  against 
the  corporation'  where  there  has  been  no  registry  on  the  corporate 
books  after  the  forger3^  He  cannot  compel  the  corporation  to 
allow  him  to  register  his  transfer.  If  the  corporation  has  already 
registered  him  as  transferee,  it  may  repudiate  its  registry  so  far  as 
he  is  concerned,  and  refuse  to  recognize  him  as  a  stockholder  or  as 
havino-  the  riffht  to  transfer  the  stock.^  Such  a  registered  transferee 
has  no  right  of  action  against  the  corporation  by  reason  of  its  re 
scission  of  his  registry,'  although  the  rule  may  be  different  if  he  pur- 
chased by  reason  of  the  fact  that  he  was  allowed  such  registry  on 
the  corporate  books."*  The  person  who  first  obtains  a  registry  after 
a  forgery  has  deprived  the  real  owner  of  his  stock  cannot  retain 
the  new  certificates  as  against  the  real  owner  of  the  old  ones.^  A 
transferee  of  stock,  the  transfer  of  which  has  been  forged,  is  liable 
to  the  corporation  upon  the  corporation  being  held  liable,  even 
thoufjh  such  transferee  acted  in  good  faith.^ 


1  Machinists'  Nat.  Bank  v.  Field.  126 
Mass.  o45  (1879).  See  also  Isliam  v. 
Post,  141  N.  Y.  100  (1894),  as  to  the  lia- 
bility of  a  trustee.  Where  stock  stands 
in  the  name  of  two  trustees  and  one 
signs  a  transfer  and  the  signature  of 
the  other  trustee  is  forged  thereto,  a 
stock  broker  who  causes  the  corpora- 
tion to  make  a  transfer  thereunder  is 
liable  to  the  corporation,  even  though 
he  acted  in  good  faith.  Oliver  v. 
Governor  &  Co.,  86  L.  T.  Rep.  248  (1902). 

■''Simm  V.  Anglo-American  Tel.  Co.,  L. 
R.  5  Q.  B.  D.  188  (1879);  Whitewright  v. 
American  TeL  etc.  Co.,  N.  Y.  Daily 
Reg.,  Aug.  6, 1886  (Superior  Ct);  Water- 
house  V.  London,  etc.  Ry.,  41  L.  T.  Rep. 
553  (1879);  Hambleton  v.  Central  Ohio 
R  R.,  44  Md.  551  (1876);  Brown  v.  How- 
ard F.  Ins.  Co.,  43  Md.  384  (1875);  Hild- 
yard  v.  South  Sea  Co.,  2  P.  Wms.  76 
(1722).  C/.  A.shby  v.  Blackwell,  2  Eden, 
299  (1765),  holding  the  corporation  lia- 
ble not  only  to  the  real  owner,  but  also 
to  the  transferee  obtaining  registry. 
See  §  358,  supra,  as  to  the  rights  of  the 
transferee  of  the  first  registered  holder. 
A  forged  transfer  conveys  no  title  to 
stock.  Richardson  v.  Emmett,  61  N.  Y. 
App.  Div.  205  (1901). 


3  See  §  358,  supra. 

*  Metropolitan  Sav.  Bank  v.  Balti- 
more. 63  Md.  6  (1884).  In  this  case  the 
plaintiff  took  the  forged  certificates  in 
pledge  from  the  forger.  Afterwards, 
upon  the  forger's  applying  for  a  further 
loan  on  the  same  pledge  of  stock,  the 
corporation  refused  unless  the  stock 
was  registered  in  its  name,  which  was 
accordingly  done.  Held,  that  the  bank 
lost  the  first  loan,  but  had  recourse  to 
the  corporation  for  the  second  loan, 

5  Johnston  v.  Renton,  L.  R.  9  Eq.  181 
(1870).  In  Scarlett  v.  Ward,  52  N.  J.  Eq. 
197,  210  (1893),  the  court  said,  in  regard 
to  the  exception  as  to  one  who  applies 
bona  fide  for  a  transfer  of  stock  that 
has  been  forged:  "This  exception,  I 
take  it,  is  founded  on  the  fact  that  the 
person  who  so  obtains  registry  has  had 
possession  of  the  certificate  and  forged 
indorsement,  and  has  thus  been  put  on 
inquiry  as  to  whether  it  is  genuine,  and 
has  used  it  without  such  inquiry,  and 
still  holds  the  fruit  of  the  fraud  affected 
by  the  forgery." 

<>  Corporation  of  SheflSeld  v.  Barclay, 
87  L.  T.  Rep.  479  (1902).  This  decision, 
however,  was  reversed  in  89  L.  T.  Rep. 


835 


§  307.] 


FORGKltY  —  STOLEN  STOCK. 


[CH. 


XXI. 


§  3G7.  LialUity  of  corporation  to  real  owner  of  stoch  for  allow- 
imj  reijistri)  of  forced  transfer  —  liif/hts  of  the  corporation  in  such 
cases. —  It  is  the  duty  of  a  corporation  to  prevent  and  refuse  a  reg- 
istry of  transfer  of  stock  where  that  transfer  has  been  forged.  If 
the  corporation  fails  to  detect  the  forgery  it  is  liable  to  the  real 
owner  of  the  stock  who  has  been  deprived  of  it  by  the  forgery.' 
The  owner  of  the  stock  may  compel  the  corporation  to  cancel  the 
illegal  registry  and  restore  the  name  of  the  plaintiU'.-     Inasmuch, 


1  Pratt  V.  Taunton  Copper  Mfg.  Co., 
123  Mass.  110  (1877);  Sevvell  v.  Boston 
Water-power  Co.,  86  Mass.  277  (1862); 
Pratt  V.  Boston,  etc.  .R  R,  126  Mass. 
44:^  (1879);  Johnston  v.  Ren  ton.  L.  R.  9 
Eq.  181  (1870);  Cottamr.  Eastern  Coun- 
ties Ry.,  IJ.  &  H.  243  (1860);  Midland 
Ry.  V.  Taylor,  8  H.  L.  Cas.  751  (1863), 
aff'g  Taylor  v.  Midland  Ry.,  29  L.  J. 
(Ch.)  731  (1860);  Davis  v.  Bank  of  Eng- 
land, 2  Bing.  393  (1824);  Swan  v.  North 
British,  etc.  Co.,  7  H.  &  N.  603  (1862), 
substantially  overruling  same  case  in 
court  of  law,  Ex  parte  Swan,  7  C.  B. 
(N.  S.)  400  (1859);  Pollock  v.  National 
Bank,  7  N.  Y.  274  (1852);  American  Tel. 
etc.  Co.  V.  Day,  52  N.  Y.  Super.  Ct.  128 
(1885);  Dalton  v.  Midland  Ry..  12  C.  B. 
458  (1852);  Baltimore  v  Ketchum,  57 
Md.  23  (1881);  Coates  v.  London,  etc. 
Ry.,  41  L.  T.  Rep.  553  (1879);  Blaisdell 
V.  Bohr,  68  Ga.  56  (1881);  Sloman  v. 
Bank  of  England,  14  Sim.  475  (1845). 
For  a  careful  anal3'sis  of  the  English 
cases  to  the  effect  that  the  corporation 
is  liable  to  a  person  who  actually  paj^s 
money  or  loses  money  in  reliance  upon 
the  "  certification  "  or  act  of  the  corpo- 
ration directly  with  the  purchaser  of  a 
certificate,  even  though  there  has  been 
no  intervening  transfer,  see  6  Judicial 
Review  (Eng.),  58.  See  also  Telegraph 
Co.  V.  Davenport,  97  U.  S.  369  (1878), 
where  the  court  said:  "Upon  the  facts 
stated  there  ought  to  be  no  question  as 
to  the  right  of  the  plaintiffs  to  have 
their  shares  replaced  on  the  books  of 
the  company  and  proper  certificates 
issued  to  them,  and  to  recover  the  divi- 
dends accrued  on  the  shares  after  the 
unauthorized  transfer;  or  to  have  al- 


ternative judgments  for  the  value  of 
the  shares  and  the  dividends.  Forgery 
can  confer  no  power  nor  transfer  any 
rights.  The  officers  of  the  company 
are  the  custodians  of  its  stock-l)ook3, 
and  it  is  their  duty  to  see  that  all  trans- 
fers of  shares  are  properly  made,  either 
by  the  stockholders  themselves  or  per- 
sons having  authority  from  them.  If 
upon  the  presentation  of  a  certificate 
for  transfer  they  are  at  all  doubtful  of 
the  identity  of  the  party  offering  it 
with  its  owner,  or  if  not  satisfied  of  the 
genuineness  of  a  power  of  attornej' 
produced,  they  can  require  the  identity 
of  the  party  in  the  one  case,  and  the 
genuineness  of  the  document  in  the 
other,  to  be  satisfactorily  established 
before  allowing  the  transfer  to  be  made. 
In  either  case  they  must  act  upon  their 
own  responsibility.  .  .  .  Neither  the 
absence  of  blame  on  the  part  of  the 
officers  of  the  company  in  allowing  an 
unauthorized  transfer  of  stock,  nor  the 
good  faith  of  the  purchaser  of  stolen 
property,  will  avail  as  an  answer  to  the 
demand  of  the  true  owner."  A  corpo- 
ration is  liable  to  the  owner  of  stock  if 
it  allows  a  transfer  of  the  stock  to  be 
made  to  a  transferee  who  forged  the 
owner's  name  to  the  transfer  on  the 
back  of  the  certificate  of  stock.  Penn- 
sylvania Co.  V.  Philadelphia,  etc.  R.  R., 
153  Pa.  St.  160  (1893). 

2  Johnston  v.  Renton,  L.  R.  9  Eq.  181 
(1870);  Cottam  v.  Eastern  Counties  Ry., 
1  J.  &  H.  243  (1860);  Sloman  v.  Bank  of 
England,  14  Sim.  475  (1845).  Where  a 
person's  stock  has  been  transferred  on 
the  corporate  books  on  a  forged  power 
of  attorney,  he  may  file  a  bill  to  com- 


836 


CII.  XXI.] 


FORGERY  —  STOLEN    STOCK. 


[§  367. 


however,  as  a  lonafide  transferee  of  the  illegally  registered  trans- 
ferrer is  entitled  to  retain  the  stock,  the  former  owner  of  the  stock, 
in  suing  the  corporation,  should  demand  relief  in  the  alternative, 
that  the  stock  be  restored  to  him,  or  that  he  be  given  damages  in 
lieu  thereof.^  Or  he  may  demand  that  the  corporation  replace 
the  stock  by  going  into  the  market,  if  necessary,  and  purchasing 
similar  stock.-  If  the  stockholder  sues  the  corporation  for  a  divi- 
dend on  stock  which  by  a  forged  assignment  has  been  registered 
in  the  name  of  another  person,  the  corporation  cannot  interplead.^ 
A  court  of  equity  has  concurrent  jurisdiction  with  law  in  remedy- 
ing a  forged  transfer  of  stock.*  The  corporation,  the  co-conspirators, 
and  the  transferees  of  the  forged  certificate  are  all  proper  parties 
to  the  suit;*  but  the  only  necessary  party  is  the  corporation  itself.^ 
On  the  other  hand,  it  is  the  transferee  obtaining  registry  who  war- 
rants the  validity  of  his  title  and  right  to  transfer;  and  if  the 
corporation  is  compelled  to  pay  damages  to  the  real  owner  on  ac- 
count of  allowing  such  registry,  it  may  have  recourse  to  and  collect 
the  same  damages  from  the  transferee  who  obtained  the  registry, 
however  innocent  the  latter  may  have  been."  Where  stock  stands 
in  the  name  of  two  trustees,  and  one  of  them  signs  a  transfer  and 


pel  the  corporation  to  cancel  the  trans- 
fer and  re-issue  the  stock  to  liim,  or  else 
to  pay  him  the  value  thereof.  The  court 
also  held  in  this  case  that  the  fact  that 
the  stockholder  gave  a  person  access  to 
the  safe-deposit  box  containing  such 
certificates  of  stock  was  no  defense  to 
the  corporation,  and  also  the  fact  that 
the  stockholder  had  authorized  such 
person  to  sign  the  stockholder's  name 
to  other  certificates  of  stock  was  no 
defense  to  the  corporation.  Pennsyl- 
vania Co.  V.  Franklin  Ins.  Co.,  181  Pa, 
St.  40(1897).  A  corporation  canceling 
a  certificate  of  stock  and  issuing  an- 
other certificate  to  the  assignee  under 
a  forged  assignment  will  be  required  to 
re-issue  to  the  original  owner  a  certifi- 
cate in  lieu  of  the  one  canceled.  The 
holder  of  the  certificate  which  was 
illegallj-  issued  is  not  a  necessary  party 
to  the  suit  unless  it  is  shown  that  the 
plaintiff  is  insolvent,  or  that  there  will 
be  an  overissue  by  the  corporation  if 
the  certificate  is  issued  to  the  plaintiff. 
Chicago  Edison  Co.  v.  Fay,  164  IlL  323 
(1896). 


1  This  is  the  usual  prayer  for  relief  in 
this  country. 

2  Pratt  r.  Boston,  etc.  R.  R,  126  Mass. 
443  (1879).    See  also  §  284,  mj>ra. 

SDalton  v.  Midland  Ry.,  12  C.  B.  4o8 
(1852). 

4  Blaisdell  v.  Bohr.  68  Ga.  56  (1881). 

5Blaisdell  v.  Bohr,  68  Ga.  56  (1881). 
As  to  a  statutory  criminal  liability  of 
an  officer  forging  and  issuing  stock,  see 
State  V.  Haven,  59  Vt.  399  (1887). 

«  Chicago  Edison  Co.  v.  Fay,  164  111. 
323  (1896);  Baltimore  v.  Ketchum,  57 
Md.  23  (1881);  Pratt  v.  Boston,  etc.  R  R, 
126  Mass.  443  (1879).  In  a  stockholders' 
action  to  compel  the  corporation  to  re- 
transfer  stock  to  thera  which  has  been 
transferred  on  the  corporate  books  by 
forgery,  the  holders  of  the  new  certifi- 
cates are  not  allowed  to  come  in  and 
defend.  Barton  v.  London,  etc.  Ry.,  L. 
R  38  Ch.  D.  144  (1888). 

"  Boston,  etc.  R  R.  v.  Richardson,  135 
Mass.  473  (1883),  the  court  saying  also 
in  a  dictum  that  the  defendant  has  a 
remedy  over  against  the  parties  that 
sold  to  him. 


837 


§§  368,  369.]  FORGERY STOLEN    STOCK.  [oH.  XXI, 

forges  the  name  of  the  other  trustee  and  sells  the  stock  through  a 
broker,  the  other  trustee  whose  name  was  forged  may  hold  the 
corporation  liable  for  the  stock,  if  it  has  allowed  a  transfer,  and 
the  corporation  may  hold  the  broker  liable.^  "Where  a  person 
forges  the  power  of  attorney  on  a  certificate  of  stock  and  transfers 
the  stock  to  himself,  and  the  corporation  issues  to  him  a  new  cer- 
tificate in  his  name,  and  he  pledges  the  same  to  iihonajide  pledgee, 
and  such  pledgee  afterwards  transfers  the  loan  and  stock  as  collat- 
eral to  the  corporation  itself,  the  corporation  cannot  hold  the 
pledgee  liable  in  regard  to  the  forgery.-  Where  the  corporation 
is  sued  by  the  real  owner  of  the  stock  for  allowing  the  registry  of 
a  transfer  based  on  forgery,  it  cannot  institute  an  independent 
action  bringing  in  all  the  parties  interested  and  enjoining  the  ac- 
tion of  the  owner  of  the  stock.^  The  liability  of  the  corporation 
on  stock  which  was  forged  by  corporate  officers  or  fraudulently 
issued  b}'  them  is  considered  elsewhere.*  Where  a  trust  company, 
as  registrar  of  stock,  allows  a  transfer  on  a  forged  assignment,  it  is 
liable  to  the  owner  for  the  value  of  the  stock,  less  any  amount 
which  he  may  have  recovered  from  other  parties.' 

§§  368,  369.  The  right  of  the  rightful  owner  of  the  stock  to  com- 
plain of  the  forgery  whereby  his  certificate  has  passed  into  the 
possession  of  another  may  be  barred  by  estoppel  or  ratification. 
Formerly  it  was  held  that  the  negligence  of  the  owner  of  the  stock 
would  be  a  bar  to  his  remedy.^  Later  decisions,  however,  have 
firmly  established  the  rule  that  "there  must  be  either  something 
that  amounts  to  an  estoppel,  or  something  that  amounts  to  a  ratifi- 
cation, in  order  to  make  the  negligence  a  good  answer."  '  Accord- 
ingly, the  rightful  owner  of  the  stock  is  held  not  to  be  barred  of 

J  Oliver  v.  Governor,  etc.,  [1901]  1  Ch.  created  by  the  by-laws  of  the  English 

652:  aff'd,  86  L.  T.  Rep.  248  (1902).  corporation.  The  rule  of  caveat  emptor 

2  Philadelphia  Nat.  Bank  x\  Smith,  has  been  relaxed  so  as  to  create  an  im- 
195  Pa.  St.  38  (1900).  plied  warranty  of  title  on  the  part  of 

3  American  Tel.  etc.  Co.  t'.  Day,  52  N.  the  seller.  Even  though  the  trustee 
Y.  Super.  Ct.  128  (1885).  acted  as  agent,  yet,  the  principal  not 

*  See  ^  293,  .swpra.  being  disclosed,  the  trustee  is  liable. 

5  Wiechers  v.  Central  Trust  Co.,  80  McClure  v.  Central  Trust  Co.,  165  N.  Y. 

Hun,  576  (1894).     Where  a  prospectus,  108  (1900). 

offering  for  sale  trustee's  transferable  <>  Coles  v.  Bank  of  England,  10  Ad.  & 
certificates,  states  that  such  certificates  K  437  (1839),  where  the  continuous  re- 
represent  stock  deposited  with  the  trus-  ceipt  of  dividends  on  a  less  quantity  of 
tee,  the  stock  being  in  an  English  corpo-  stock  than  she  was  entitled  to  was  held 
ration,  the  trustee  is  personally  liable  a  bar,  though  the  stockholder  was  old 
if  it  turns  out  that  the  English  corpora-  and  infirm. 

tion  had  a  prior  lien  on  the  stock  to  the  '  Bank  of  Ireland  v.  Evans  Charities,^ 

full  extent  of  its  value.    The  trustee  5  H.  L.  Cas.  389  (1855). 
was  bound  to  take  notice  of  the  lien 

838 


CH.  XXI.]  FOKGEKY  —  STOLEN    STOCK.  [§  370. 

his  remedy  by  the  fact  that  the  stockholder,  a  corporation,  allowed 
jts  corporate  seal  to  be  in  the  possession  of  its  secretary,  whereby 
he  sold  the  stock  owned  by  the  corporation,^  or  by  the  fact  that 
the  owner  delayed  several  months,  during  which  time  the  forger 
escaped,^  or  that  he  transferred  on  the  back  of  the  certificate  only 
part  of  the  shares  specified  in  the  certificate;*  or  that  he  gave  his 
address  wrong,  and  thereby  a  letter  of  inquiry  did  not  reach  him;  * 
or  that  he  allowed  his  clerk,  the  forger,  to  have  access  to  his  papers, 
and  gave  him  blank  transfers  duly  signed  to  use  in  transferring 
other  stock; 5  or  that  the  guardian  of  the  plaintiff  was  negligent.^ 
The  statute  of  limitations  in  behalf  of  the  corporation  begins  to  run 
against  a  cause  of  action  for  forged  transfer  only  from  the  time 
when  the  corporation  denies  its  liability  therefor. '^ 

§  370.  Eights  of  transferees  ivlio  imrcliase  after  a  registry  has 
heen  obtained.—  It  has  already  been  shown  that  the  transferees  of 
a  certificate  of  stock  which  has  been  put  in  circulation  by  forgery 
are  not  allowed  to  retain  such  stock  where  there  has  not  been,  at 
some  time  subsequent  to  the  forgery,  a  transfer  registered  on  the 
corporate  books.  It  has  also  been  shown  that  he  who  applies  to 
the  corporation  for  a  registry  of  transfer,  such  registry  being  the 
first  one  since  the  forgery  was  committed,  is  not  allow^ed  to  retain 
the  stock.  An  entirely  different  rule  prevails  as  regards  all  sub- 
sequent hona  fide  holders  of  the  new  certificate  obtained  by  the 
first  registry.  The  person  wiio  obtains  the  first  registry  has  no  rights 
except  as  against  his  transferrer.  But  all  subsequent  purchasers 
without  notice  are  fully  protected.  They  cannot  be  compelled  to 
give  up  the  stock,  either  to  the  corporation  or  to  the  person  who 
lost  it  by  forgery.8  This  rule  arises,  not  from  the  law  of  negligence, 
but  from  the  law  of  estoppel  operating  against  the  corporation.  It 
is  in  accord  with  the  demands  of  trade  and  the  constant  tendency 
of  the  law  to  protect  lonafide  purchasers  of  certificates  of  stock. 

1  Bank  of  Ireland  v.  Evans  Charities,        6  Telegraph  Co.  v.  Davenport,  97  U.  S. 

5  H.  L.  Cas.  389  (1855);  and  Merchants     3G9  (1878). 

of  the  Staple  v.  Bank  of  England,  56  ^  Barton  v.  North  Staflfordshire  Ry., 

L.  T.  Rep.  665  (1887),  where  the  preced-  L.  R.  38  Ch.  D.  458  (1888). 

ing  case  was  reluctantly  followed.  «  Machinists'  Nat.  Bank  v.  Field,  126 

2  Davis  V.  Bank  of  England,  2  Bing.  Mass.  345  (1879);  Re  Bahia,  etc.  Ry.,  L. 
393  (1824).  R.  3  Q.  B.  584  (1868),  where,  however, 

sSevvall  V.  Boston  Water-power  Co.,  the    corporation,   having  canceled  all 

86  Mass.  277  (1862).  the  registries  made  subsequent  to  the 

4  Johnston  u  Renton,  L.  R  9  Eq.  181  forgery,  was  held  liable  in  damages  to 
n8~0).  a    purcliaser    subsequent   to  the  first 

5  Swan  V.  North  British,  eta  Co.,  7  H.  registry.    The  court  said  that  the  giv- 

6  N.  603  (1862),  substantially  overruling  ing  of  a  certificate  "  is  a  declaration  by 
Ex  parte  Swan,  7  C.  B.  (N.  S.)  400  (1859).  the  company  to  all  the  world  that  the 

839 


§  C71.]  FORGERY  —  STOLEN   STOCK.  [CU.  XXI. 

D,    CONFISCATION    OF    STOCK. 

§  371.  During  the  late  Rebellion,  acts  of  confiscation  were  passed 
both  by  the  United  States  government  and  by  the  Confederate 
government,  and  shares  of  stock  owned  by  parties  in  one  section  of 
the  country  in  corporations  domiciled  in  the  other  section  were 
confiscated.  The  result  of  the  war  having  established  that  the 
Confederate  government  was  an  illegal  one,  all  its  acts  of  confisca- 
tion became  null  and  void,  and  all  transfers  and  registers  of  stock 
thereunder  were  held  to  be  void  utterly.  The  whole  line  of  trans- 
actions based  on  the  confiscation  fell  with  the  confiscation  itself.^ 
The  corporation  was  held  not  liable  to  purchasers  whose  title  was 
based  on  the  confiscation,  since  it  acted  under  compulsion  of  a  power 
temporarily  greater  than  the  law  itself.^  If  the  corporation  neglects 
to  remedy  the  confusion  and  claims  growing  out  of  the  illegal  con- 
fiscation of  stock,  anv  stockholder  mav  institute  an  action  in  its 
behalf  for  that  purpose.'  The  stock  is  to  be  restored  to  the  owner 
against  whom  the  confiscation  proceedings  were  had;  and  if  the 
corporation,  during  the  Rebellion,  voluntarily  paid  dividends  to  the 
illegal  holders  of  the  stock,  it  must  pay  the  same  to  the  plaintifi", 
even  though  it  would  have  been  compelled  to  pay  such  dividends 
to  the  Southern  holder  if  it  had  not  done  so  voluntarily.*  On  the 
other  hand,  proceedinirs  for  the  confiscation  of  stock  under  the  con- 
fiscation acts  of  the  United  States  government,  passed  by  reason  of 

person  in  whose  name  the  certificate  is  His  position  is  that  he  is  to  do  what  he 
made  out  and  to  whom  it  is  given  is  a  is  told,  and  no  person  can  assume  that 
shareholder  in  the  company,  and  it  is  he  has  any  authority  to  I'epresent  any- 
given  by  the  company  with  the  inten-  thing  at  all."  Hence  a  receipt  by  the 
tion  that  it  shall  be  so  used  by  the  per-  secretary  that  certificates  of  stock  had 
son  to  whom  it  is  given,  and  acted  upon  been  actually  lodged  in  the  corporate 
in  the  sale  and  transfers  of  shares."  A  office  for  transfer  does  not  bind  the 
purchaser  of  certificates  of  stock  need  corporation  where  they  were  not  act- 
not  look  back  of  the  last  registry  of  ually  lodged,  and  the  receipt  was  a 
transfer  on  the  corporate  books.  A  part  of  a  fraud.  George  Whitechurch, 
breach  of  trust  back  of  that  does  not  Ltd.  v.  Cavanagh,  85  L.  T.  Rep.  349 
invalidate  his  title.     Winter  v.   Mont-  (1901). 

gomery  Gaslight  Co.,  89  Ala.  544  (1889).        i  Dewing  v.  Perdicaries,  96  U.  S.  193 

See  also  §  358,  supra.     A  corporation  (1877). 

cannot  refuse  to  transfer  stock  on  the  2  Dewing  v.  Perdicaries,  96  U.  S.  193 
ground  that  the  vendor  fraudulently  (1877);  also  Central  R  R  etc.  Co.  v. 
induced  the  company  to  issue  the  stock  Ward,  37  Ga.  515  (1868). 
to  him,  where  the  company  had  been  3  Perdicaris  v.  Charleston  Gas-light 
guilty  of  laches  in  not  seeking  a  rem-  Co.,  Chase's  Dec.  435  (1869);  s.  c,  19 
edy  before  the  transfer.  The  vendee  Fed.  Cas.  217;  aflSrmed  sub  nom.  Dew- 
in  this  case  was  a  director.  American  ing  v.  Perdicaries,  96  U.  S.  193  (1877). 
Wire  Nail  Co.  v.  Bayless,  91  Ky.  94  *  Keppel  v.  Petersburg  R  R,  Chase's 
(1891).     *'A  secretary  is  a  mere  servant.  Dec.  167  (1868);  s.  C,  14  Fed.  Cas.  357. 

840 


€H.  XXI.]  FORGERY  —  STOLEN    STOCK.  [§  371. 

the  late  Rebellion,  are  held  to  have  been  effective  if  in  accordance 
with  established  rules  of  procedure.  "Where,  however,  no  notice  of 
the  proceedings  was  given  to  the  defendant,  and  her  name  and  the 
stock  were  not  accurately  described,  the  proceedings  were  void; 
and  the  corporation,  having  obeyed  the  illegal  judgment  of  con- 
fiscation, was  held  liable  in  damages  to  the  Southern  owner  of  the 
stock,^  Under  the  confiscation  acts  of  the  United  States  of  1861 
and  1862,  stock  owned  b/ a  rebel  in  a  Michigan  railroad  could  be 
condemned  by  giving  notice  of  seizure  to  the  railroad  corporation. 
This  amounted  to  an  attachment  or  garnishment.^ 

1  Chapman  v.  Phoenix  Nat.  Bank,  85    andria  Water  Co.,  1  Hughes,  408  (1877); 
N,  Y.  437  (1881),  reversing  &  C,  44  N.  Y.    s.  C  2  Fed.  Cas.  254. 
Super.  Ct  340.    See  also  Avil  v.  Alex-        2  Miller  v.  U.  S.,  11  Wall  268  (1870). 

841 


CHAPTER  XXII. 


SALES  OF  STOCK  — FORMAL  METHOD   OF  TRANSFERRING   CERTIFI- 
GATES  AND  REGISTRY  THEREOF. 


§  372.  Subject  treated  herein. 

373.  The  two  usual  steps  in  perfect- 

ing a  transfer  of  stock. 

374.  Omission  of  either  or  both  steps. 

A.  METHOD  OF  TRANSFERRING  THE  CER- 
TIFICATE. 

375.  Usual  forms  of  assignment  and 

powers  of  attorney  whereby 
the  transferrer  assigns  the  cer- 
tificate of  stock  to  his  trans- 
feree. 

376.  Questions  which  arise  herein. 

377.  A  Seal  is  not  necessary  to  a  trans- 

fer of  stock. 

378.  The  assignment  of  the  certifi- 

cate of  stock  estops  the  trans- 
ferrer from  claiming  any  fur- 
ther title  in  the  stock  as 
against  subsequent  bona  fide 
transferees,  altnough  such  as- 
signment be  not  registered. 

379.  Effect  of  charter  provision  re- 

quiring registry. 

380.  Certificate  of  stock  may  be  as- 

signed with  the  name  of  the 
transferee  left  blank. 

a  METHOD  OF  REGISTERING  A  TRANSFER 
OF  STOCK. 

381.  Registry  an  important  part  of  a 

transfer  of  stock. 


§  382.  Formalities  of  making  registry — 
Transfer  book  and  stock  ledger 
not  necessary. 

383.  Formalities  of"  registry  may  be 

waived  by  the  corporation. 

384.  Either    the    transferrer   or  the 

transferee  may  apply  to  the 
corporation  for  a  registry  of 
transfer. 

C  RIoriTS  AND  DUTIES  OF  THE  CORPO- 
RATION IN  ALLOWING  OR  REFUSING 
REGISTRY. 

385.  Corporation   may  require  proof 

of  identity;  also  of  genuine- 
ness of  signature,  etc. 

Corporation  cannot  refuse  regis- 
try on  account  of  the  motive 
of  the  transferrer  or  trans- 
feree in  the  transaction. 

Corporation  may  interplead  be- 
tween two  claimants  to  stock. 
388.  Corporation  must  obey  mandate 
of  court  ordering  registry  and 
issue  of  new  certificates. 

Remedies  of  a  transferee  of  stock 
against  the  corporation  for  re- 
fusal to  allow  registry. 

Remedy  by  mandamus. 

Remedy  by  suit  in  equity. 

Remedy  by  an  action  for  dam- 
ages. 


386. 


387. 


389. 


390. 
391. 
392. 


§  372.  Subject  treated  herein. —  Having  considered  the  compe- 
tency of  parties  to  enter  into  a  contract  of  sale  of  stock ;  ^  the  le- 
gality, enforceability,  and  character  of  that  contract ;  ^  and  the  rights 
of  third  parties  as  affecting  the  contract  between  the  transferrer 
and  transferee,' — it  is  now  necessary  to  discuss  certain  formalities 
whereby  the  title  to  stock  is  transferred.  These  formalities  are  pe- 
culiar to  sales  of  stock.  The  only  analogy  to  them  is  perhaps  that 
arising  from  the  making  of  a  deed  of  real  estate,  and  a  registry  of 
the  same  at  a  recorder's  office.  In  many  respects,  however,  this 
analogy  does  not  apply.  Thus,  the  corporation  itself  has  many 
rights  and  duties  herein  which  a  register  of  deeds  has  not.     The 


1  Ch.  XIX,  supra. 


2  See  oh.  XX,  supra. 

842 


»  Ch.  XXI,  supra. 


CH.  XXII.J  FORMALITIES    OF   TKANSFEK    AND   EEGISTRY.       [§§  373,  374. 

rnlos  given  herein  have  arisen  for  the  most  part  out  of  the  neces- 
sities and  usages  of  business  as  sanctioned  by  the  courts. 

§  373.  Tlie  two  usual  stejys  in  perfecting  a  transfer  of  stoch  — To 
transfer  a  share  of  stock  there  are  generally  two  distinct  steps  to 
be  taken:  First,  the  certificate  is  assigned  by  the  transferrer  to  the 
transferee;  and  second,  that  assignment  and  transfer  are  perfected 
and  completed  by  delivering  the  assigned  certificate  to  the  corpo- 
ration, obtaining  an  entry  on  the  corporate  transfer  book  to  the 
effect  that  the  transferee  has  acquired  the  stock  of  the  transferrer, 
and  taking  from  the  corporation  a  new  certificate  of  stock  certifying 
that  the  newly-recorded  stockholder  owns  a  specified  amount  of 
stock.  The  corporation  then  cancels  the  old  certificate  of  stock  * 
and  posts  the  transfer  into  the  stock  ledger.^ 

§  374.  Omission  of  either  or  loth  steps. —  Either  and  even  both  of 
these  two  steps  in  the  complete  transfer  of  stock  may  be  omitted; 
and  yet,  where  the  facts  estop  the  various  parties  from  denying 
that  a  transfer  has  been  made,  it  will  be  held  to  be  complete. 
Thus,  it  has  been  held  that  an  owner  of  stock  may  transfer  his 
stock  to  another  by  a  delivery  of  the  certificate  without  any  as- 
signment.' This  happens  when  a  registry  of  transfer  is  made  with- 
out any  surrender  of  tlie  old  certificate.'*  So  far  as  the  transferrer 
is  concerned  such  a  method  of  transfer  is  effectual.*  Such  cases  also 
arise  where  the  corporation  has  never  issued  certificates  of  stock. 
The  stockholder  may  then  transfer  his  stock  without  assigning  a 
certificate.^  Asubscrii)tion  of  stock  may  be  assigned,  even  though 
only  a  part  of  the  subscription  has  been  called  for  and  paid,  and 
even  though  no  certificate  of  stock  has  ever  been  issued.  Such  as- 
signment may  be  oral.**  Ko  certificate  of  stock  is  necessary  in  order 

1  In  Knox  v.  Eden  Musee,  etc.  Co.,        '  See  §g  308,  465. 
148  N.  Y.  441  (1896),  certificates  of  stock        *  See  g  361,  supra. 

had  been  delivered  to  the  corporation  *  Brigham  r.  Mead,  93  Mass.  245  (1865); 
for  transfer,  and  the  new  certificates  First  Nat  Bankn  Gifford,  47  Iowa,  575 
had  been  duly  issued.  The  old  certifi-  (1877).  See  also  §  382,  infra.  Although 
cates  were  put  in  a  safe  uncanceled,  the  charter  prescribes  that  stock  shall 
and  were  illegally  abstracted  by  an  em-  be  transferred  in  such  manner  as  the 
ployee  and  sold.  The  court  held  that  by-laws  direct,  yet,  if  the  by-laws  do 
the  company  was  not  liable  on  such  not  provide  for  transfers,  a  common- 
certificates  to  a  person  who  took  them  law  transfer  is  '  sufficient.  An  oral 
in  pledge  from  such  employea  The  transfer  is  sufficient  where  no  certifi- 
court,  however,  based  its  decision,  not  cates  have  been  issued,  and  where  such 
on  the  fact  that  the  pledgee  took  with  transferee  is  entered  on  the  corporate 
notice,  but  on  the  principle  of  law  that  books  as  a  stockholder.  Kiely  v.  Smyth, 
no  one  could  acquire  title  to  stolen  cer-  27  Grant's  Ch.  (Can.)  220  (1879). 
tificates  of  stock.  *  Manchester  St.  Ry.  v.  Williams,  52 

2  The  purposes  of  the  stock-ledger  are  Atl.  Rep.  461  (N.  H.  1902). 
explained  in  §  14,  supra. 

843 


§  375.]  FORMALITIES    OF   TRANSFER    AND    REGISTRY.  [CH.  XXII. 

to  transfer  title  to  the  stock.'  But,  where  no  cortificcites  of  stock 
have  been  issued,  a  purchaser  of  a  subscriber's  right  to  the  stock  is 
not  protected  as  a  purchaser  of  a  certificate  of  stock  is  protected.- 
Where  the  certificates  for  unpaid  stock  are  never  issued,  and  the 
stockholder  disposes  of  his  interest  to  another  person,  and  the  cor- 
poration recognizes  that  person  as  such  stockholder,  the  original 
subscriber  is  no  longer  liable.' 

A.    METHOD    OF   TRANSFERRING    THE    CERTIFICATE. 

§  375.  Usual  forms  of  assignment  and  powers  of  attorney  wlierel))/ 
the  transferrer  assiffns  the  certificate  of  stock  to  his  transferee. — 
A  certificate  of  stock  is  a  paper  issued  by  the  corporation  to  a  stock- 
holder, stating  that  the  person  specified  therein  is  the  owner  of  a 
certain  number  of  shares  of  its  capital  stock.  The  assignment  of 
this  certificate  is  made,  it  seems,  in  three  dilTerent  ways:  P'irst,  it 
has  been  held  that  it  may  be  made  by  a  simple  delivery  of  the  cer- 
tificate without  any  writing.*  Where  a  deed  of  trust  refers  to  cer- 
tain stock  and  transfers  the  same  to  the  trustee  and  authorizes  him 
to  transfer  the  stock  to  himself  on  the  books,  an  indorsement  of  the 
certificates  is  unnecessary  to  pass  title  to  the  trustee.^  Again,  it 
may  be  made  bj-'a  formal  instrument  of  assignment  duly  signed  by 
the  transferrer.  This  instrument  may  be  separate  from  the  certifi- 
cate of  stock  or  may  be  printed  in  blank  on  the  back  of  it.  In  either 
case,  in  order  to  make  the  transfer  complete  by  a  registry  of  it 
on  the  corporate  books,  it  is  necessary  for  the  transferrer  to  go  to 

1  May  V.  McQuillan,  89  N.  W.  Rep.  45  (1829).  If  a  corporation  allows  a  trans- 
(Mich.  1902).  fer  to  be  made  on  its  books  without  the 

2  Manchester  St.  Ry.  v.  Williams,  52  transfer  on  the  old  certificate  being 
Atl.  Rep.  461  (N.  H.  1902).  signed,  it  is  liable  to  the  owner  of  the 

3Dain,  etc.  Co.  v.  Trumbull,  etc.  Co.,  old  certificate,  even  though  the  oldcer- 

68  S.  W.  Rep.  951  (Mo.  1902).  tificate  is  delivered  up  and  the  attor- 

*  See  §  308,  supra,  where  a  delivery  of  ney  in  fact  of  4;he  owner  siiows  his 
a  certificate  of  stock  catisa  mortis  was  power  of  attorney  at  the  time  of  the 
held  good,  without  any  writing  assign-  transfer  on  the  books.  Taflft  v.  Presidio, 
ing  the  certificate;  and  §  465,  note,  etc.  Co.,  84  Cal.  131  (1890).  A  decision 
infra.  See  also  Masury  v.  Arkansas  of  a  state  court  that  a  donatio  causa 
National  Bank,  93  Fed.  Rep.  603  (1899);  viortis  of  bank  stock  was  effective, 
Fraser  v.  Charleston,  11  S.  C.  486  (1878).  although  the  donor  merely  delivered 
Cf.  Sitgreaves  v.  Farmers',  etc.  Bank,  49  the  certificates  of  stock  without  trans- 
Pa.  St.  359  (1865);  Davis  v.  Bank  of  ferring  the  same  on  the  back  thereof, 
England,  2  Bing.  393  (1824);  Burrall  v.  does  not  raise  a  federal  question,  even 
Bushwick  R.  R.,  75  N.  Y.  211  (1878);  though  the  stock  was  national-bank 
Dunn  V.  Commercial  Bank,  11  Barb.  580  stock.  Leyson  v.  Davis,  170  U.  S.  36 
(1852).     A  deed  of  release  of  shares,  of  (1898). 

stock  is  a  sufficient  transfer.     Hastings        5  Curtis  v.  Crossley,  59  N.  J.  Eq.  358 

V.  Blue  Hill  Turnp.  Corp.,  26  Mass.  SO  (1900). 

844 


CH.  XXII.]  FORMALITIES    OF   TKANSFEK    AND    REGISTKY.  [§  375. 

the  ofBce  of  the  corporation  and  sign  the  transfer  in  the  corporate 
transfer  book,  whereby  the  transfer  is  recorded.  The  third  and 
most  usual  method  of  assigning  a  certificate  of  stock  is  by  a  formal 
instrument  of  assignment,  similar  to  the  one  explained  above,  united 
with  a  power  of  attorney  authorizing  a  person,  whose  name  is  gen- 
erally left  blank,  to  be  subsequently  filled  in,  to  sign  the  corporate 
transfer  book,  whereby  the  transfer  is  recorded.  This  instrument 
of  transfer  and  the  power  of  attorney  are  generally  printed  in  blank 
on  the  back  of  the  certificate  of  stock.  It  enables  the  transferee 
to  obtain  a  registry  without  the  presence  of  the  transfei-rer,  pro- 
vided the  corporate  registry  agent  is  satisfied  with  the  signature 
antl  intent  of  the  transferrer  to  assign  the  stock.  Although  a 
transfer  is  on  a  separate  piece  of  paper,  and  is  not  acknowledged 
as  required  by  a  rule  of  the  stock  exchange,  nevertheless  a  pledgee 
may  be  a  hmafide  holder.^  A  person  who  signs  as  a  witness  a 
forged  transfer  of  stock  is  personally  liable,  even  though  he  did  so 
without  knowledge  of  the  fraud.'-  The  blank  power  of  attorney  is 
generally  filled  in  by  the  transfer  clerk,  who  inserts  his  own  name 
and  thereby  becomes  the  attorney.'  This  power  of  attorney  is  not 
revoked  by  the  death  of  the  transferrer  before  it  is  used.*  A  gen- 
eral power  of  attorney  to  sell  land  and  build  houses  does  not  justify 
a  sale  of  stock.'^  A  general  power  of  attorney  authorizing  an  agent 
to  sell  and  transfer  stocks,  etc.,  authorizes  him  to  sign  the  stock- 
holder's name  to  a  transfer,  but  not  a  transfer  to  himself.^  Per- 
mitting, without  inquiry,  a  transfer  under  a  power  of  attorney 
thirteen  years  old  is  not  proper  vigilance  on  the  part  of  a  corpora- 
tion.' An  agent's  written  authority  to  transfer  stock  is  revoked  by 
death.^    A  transferee  who  receives  new  certificates  of  stock  is  not 

1  Smith  V.  Savin,  141  N.  Y.  315  (1894X  did  not  sign  the  transfer  nor  authorize 

2 Second,  etc.  Bank  v.  Curtiss,  2  N.  Y.  another  to  transfer  it. 

App.  Div.  508  (1896);  aff'd,  153  N.  Y.  681.  «  Tafift  v.  Presidio,  etc  Co.,  84  Cal.  131 

3  The  fact  that  the  officer  of  the  cor-  (1890).  rev'g  22  Pac.  Rep.  485  (1889).    A 

poration  fills  in  his  own  name  as  agent  stockholder's  power  of  attorney  to  his 

to  transfer  does  not  make  him  the  agent  agent  "to  exchange  old  issues  or  cer- 

of  the  stockholder  as  regards  notice  of  tificates  [of  stock],  and  receive  new 

the  agent's  frauds.    Allen  v.  South  Bos-  issues  or  certificates  in  lieu  thereof," 

ton  R  R.,  150  Mass.  200  (1889).    See  also  does  not  authorize  the  agent  to  sell  or 

§  382,  infra.  pledge  the  stock.     The  corporation  is 

■   "  *Fraser  v.  Charleston,  11   S.  C.  486  liable  for  allowing  a  transfer  to  a  third 

(1878);  Leavitt  v.  Fisher,  4  Duer  (N.  Y.),  person   on   such    authority.      Quay  v. 

1  (1854);  United  States  r.  Cutts,  1  Sump.  Presidio,  etc.  R.  R.,  82  Cal.  1  (1889). 

133  (1832);  S.  C,  25  Fed.  Cas.  745.  ^  Pennsylvania  R,  R.'s  Appeal,  86  Pa, 

5  Camden  F.  Ins.  Assoc,  r.  Jones.  53  St.  80  (1878). 

X.  J.  L.  189  (1890),  holding  also  that  the  ^/n  re  Kern's  Estate,  170  Pa.  St.  373^ 

corporation    is   liable   for  allowing    a  (1896). 
transfer  of  stock  where  the  stockholder 

845 


g§  o7(),  377.]       FORMALITIKS   OF    TRANSFER    AND    Rr;»;ISTRr.  [CH.  XXII. 

afTected  by  the  fact  that  the  old  certificates  have  been  fraudulently 
reissued  by  a  corporate  ofRcer.* 

§  376.  Questions  which  arise  herein. —  The  assignment  of  a  certifi- 
cate of  stock  by  the  transferrer  to  the  transferee,  considered  apart 
from  the  actual  registr}*  of  such  assignment  on  the  corporate  books, 
involves  the  question  whether  such  an  assignment  should  be  under 
seal;  whether,  after  the  assignment  and  the  delivery  thereof,  the 
transferrer  can  chiim  any  rights  of  ownership  as  against  the  trans- 
feree, even  though  there  be  no  registry  of  the  transfer;  and 
whether  a  transfer  and  power  of  attorney  duly  signed  by  the  trans- 
ferrer, but  left  in  bhink  as  to  the  name  of  the  transferee  and  attor- 
ney, are  legal  and  may  pass  from  hand  to  hand  until  some  holder 
cares  to  lill  up  the  blanks.  These  and  incidental  questions  are 
discussed  in  the  following  sections. 

§  377.  A  seal  is  not  necessary  to  a  transfer  of  stoclt. —  In  America 
an  assiirnment  or  transfer  of  a  certificate  of  stock  need  not  be 
under  seal.-  Formerly  it  was  the  custom  to  have  all  such  transfers 
made  by  deed,  duly  sealed.  As  the  nature  of  stock  and  certificates 
of  stock,  however,  came  to  be  understood  more  clearly,  it  became  a 
rule  of  law  that  a  transfer  of  the  certificate,  like  the  transfer  of 
choses  in  action,  did  not  require  a  seal.  Not  even  the  presence  of 
the  seal  gives  the  transfer  the  character  of  a  sealed  instrument. 
The  seal  is  a  superfinity  and  is  disregarded.^ 

In  England,  on  the  other  hand,  transfers  of  railway  stocks  are 
generally  required  by  charter  to  be  under  seal.  This  is  held  to  give 
the  instrument  the  character  of  a  deed;  and  hence,  in  accordance 
with  the  ancient  technical  rule  of  law  that  a  deed  must  be  filled  out 
as  to  the  grantee  and  other  essential  particulars  before  it  is  sealed 
in  order  to  be  valid,  it  has  been  held  in  England  that  a  transfer  of 
a  certificate  of  stock,  duly  signed  and  sealed,  but  with  the  name  of 
the  transferee  in  blank,  is  void  absolutely.*     In  those  English  com- 

1  See §292,  supra.  Where  a  person,  also  that  the  word  "seal"  is  insuflfi- 
as  preliminary  to  making  a  loan  with    cient. 

stock  as  collateral,  indorses  his  stock  3  German  Union,  eta  Assoc,  v.  Send- 
over  to  the  lender  and  leaves  it  with  meyer,  50  Pa.  St.  67(1865):  Commercial 
the  corporate  secretary,  and  then  the  Bank  v.  Kortright,  22  Wend.  848(1839); 
loan  is  abandoned,  the  secretary  is  McNeil  v.  Tenth  Nat.  Bank,  46  N.  Y. 
bound  to  deliver  back  the  stock.  Gal-  325  (1871);  Bridgeport  Bank  n  New 
vin  V.  Mac  Mining,  etc.  Co.,  14  Mont.  York,  etc.  R.  R.,  30  Conn.  231,  274 
508  (1894).  (1861);  Easton  u  London  J.  S.  Bank,  L. 

2  Quiner  v.   Marblehead   Social    Ins.  R,  34  Ch.  D.  95  (1886). 

Co.,  10  Mass.  476  (1813);  Atkinson  v.  ,  ^Hibblewhite  u  McMorine,6  M.&  W. 
Atkinson,  90  Mass.  15(1864).  If,  how-  200  (1840),  per  Parke,  B.;  Re  Balkis 
ever,  the  by-laws  require  it.  the  trans-  Consol.  Co.,  58  L.  T.  Rep.  300  (1888); 
fer  must  be  under  seal.  Bishop  v.  Tayler  v.  Great  Indian,  etc.  Ry.,  4  De  G. 
Globe  Co.,  135  Mass.  132  (1883),  holding    &  J.  559  (1859);    Soci^t^  G6n^rale  v. 

846 


CH.  XXII.]  FORMALITIES    OF   TRANSFER   AND    REGISTRY. 


[§  378. 


panies,  however,  whose  charters  do  not  require  transfers  to  be  sealed, 
the  transfer  may  be  by  an  ordinary  instrument  in  writing,  and  the 
presence  of  a  seal  will  be  disregarded.^ 

§  378.  The  assignmetit  of  the  certificate  of  stock  estops  the  trans- 
ferrer from  claiming  any  further  title  in  the  stock  as  against  siih- 
sequent  hona  fide  transferees,  although  such  assignment  he  not 
registered.-  —  There  is  no  case  which  denies  this  principle  of  law. 
On  close  examination  of  the  cases  which  seem  to  militate  against 
it,  it  will  be  found  that  the  issue  involved  was  whether  the  un- 
reo-istered  transferee  was  protected  against  third  persons  who 
claimed  title  back  of  the  transferrer.  The  transferrer  himself  is 
not  allowed  to  impeach  his  unregistered  transferee's  title.  Even  in 
Connecticut,  where  at  an  early  day  the  court  held  that  the  registry 
was  the  origin  of  the  title  of  the  transferee,  the  court  was  consider- 
in"-  the  rights  of  third  persons,  and  not  the  rights  of  the  transferrer 


Tramways  Union  Ca,  L.  R.  14  Q.  B.  D. 
424  (1884),  where  transfer  was  to  be  by- 
deed;  aff'd,  Societe  Generale  v.  Walker, 
L.  R,  11  App.  20  (1885).  Cf.  g  325,  supra, 
and  §  412,  infra. 

1  Re  Tees  Bottle  Co..  33  L.  T.  Rep.  834 
(1876);  Walker  v.  Bartiett,  36  Eng.  L.  & 
Eq.  369  (1856);  Re  Barned's  Banking  Co., 
L.  R.  3  Ch.  App.  105  (1867);  Ex  parte 
Sargent.  L.  R.  17  Eq.  273  (1874);  Ortigosa 
V.  Brown.  47  L.  J.  (Ch.)  168  (1878).  The 
American  cases  incline  to  the  opinion 
that,  even  though  a  seal  were  required, 
the  sealed  transfer  would  not  be  void 
because  of  the  blanks  left  in  it.  Bridge- 
port Bank  v.  New  York,  etc.  R.  R,  30 
Conn.  231,274  (1861);  Commercial  Bank 
V.  Kortright,  22  Wend.  348  (1839);  Mat- 
thews V.  Massachusetts  Nat.  Bank,  1 
Holmes,  396.  407  (1874);  s.  c,  16  Fed.  Cas. 
1113,  1118;  McNeil  v.  Tenth  Nat.  Bank, 
46  N.  Y.  325  (1871). 

2Masury  v.  Arkansas  Nat.  Bank,  93 
Fed,  Rep.  603  (1899);  Scott  v.  Pequon- 
.  nock  Nat.  Bank,  15  Fed,  Rep.  494  (1883); 
Brown  v.  Smith,  122  Mass.  589  (1877); 
Fitchburg  Sav.  Bank  v.  Torrey.  134  Mass. 
239(1883);  Dukeu  Cahawba  Nav.  Co.,  10 
Ala.  82  (1846);  Chouteau  Spring  Co.  v. 
Harris.  20  Mo,  382  (1855);  St.  Louis  P. 
Ins.  Co.  V.  Goodfellow,  9  Mo.  149  (1845); 
Gilbert  v.  Manchester  Iron  Mfg,  Co.,  11 


Wend.  627  (1834);  Sargent  v.  Essex  Ma- 
rine Ry,  Corp.,  26  Mass.  202  (1829);  Ne- 
smith  V.  Washington  Bank,  23  Mass.  324 
(1828);  Sargent  V.  Franklin  Ins.  Co.,  25 
Mass.  90  (1829);  Conant  v.  Reed,  1  Ohio 
St.  298  (1853);  Baltimore,  etc.  Ry.  v. 
Sewell.  35  Md.  238  (1871);  Bank  of  Amer- 
ica V.  McNeil.  10  Bush  (Ky.),  54  (1873j; 
U.  S,  V.  Vaughan,  3  Binn.  (Pa.)  394 
(1811);  Beckwith  v.  Burrough,  13  R  I. 
294  (1881);  Farmers',  etc  Bank  v.  Was- 
son,  48  Iowa,  336  (1878);  Carroll  v.  Mul- 
lanphy  Sav.  Bank,  8  Mo.  App.  249  (1880); 
Broadway  Bank  v.  McElrath,  13  N.  J. 
Eq.  24  (1860);  Smith  v.  Crescent  City, 
etc.  Co,,  30  La.  Ann.  1378(1878);  People's 
Bank  v.  Gridley,  91  111.  457  (1879).  Nor 
can  the  transferrer  avoid  the  assign- 
ment before  registry  on  the  ground  that 
no  consideration  passed.  Hall  v.  U.  S. 
Ins.  Co.,  5  Gill  (Md.),  484  (1847);  Cush- 
man  v.  Thayer  Mfg.  Co.,  76  N.  Y.  365 
(1879),  Such  an  assignment  satisfies  a 
contract  to  sell  stock.  White  v.  Salis- 
bury, 33  Mo.  150  (1862);  Merchants' Nat. 
Bank  v.  Richards,  6  Mo.  App.  454  (1879). 
The  fact  that  the  corporation  subse- 
quently refuses  to  register  the  transfer 
does  not  prevent  title  passing,  as  be- 
tween transferrer  and  transferee.  Craw- 
ford V.  Provincial  Ins.  Co.,  8  Up.  Can. 
C.  P.  263  (1859). 


847 


§   37t).]  FOKMALITIES    OF    TRANSFER    AND    K  Ei.  ISTRY,  [cH.   XXII. 

himself.'  That  the  transferrer  cannot  question  the  completeness 
of  his  transfer  of  title  is  a  rule  binding  not  only  on  himself,  but  also 
upon  his  assignees  in  bankruptcy  or  insolvency.'^  The  transferee  is 
estopped  also  from  attacking  the  assignment  of  the  certificate  on 
the  ground  of  informalities  in  the  transfer.'  A  honafde  pledge  of 
stock  indorsed  in  blank  on  the  back  is  protected.*  In  Maryland, 
however,  a  distinction  is  drawn  between  the  rights  of  a  lona  Jide 
purchaser  and  a  hona  fide  pledgee.  It  is  held  that  the  usual  form 
of  transfer  on  the  back  of  certificates  of  stock,  signed  by  the  stock- 
holder, with  the  name  of  the  transferee  left  blank,  does  not  protect 
a  lona  fide  pledgee.  The  pledgee  is  chargeable  with  notice  of  all 
the  facts  and  equities.'  Where  no  certificates  of  stock  have  been 
issued,  a  purchaser  of  a  subscriber's  right  to  the  stock  is  not  pro- 
tected as  a  purchaser  of  a  certificate  of  stock  is  protected.*^  Where 
a  person  resident  in  England  purchases  certificates  of  stock  in  a 
French  corporation  and  fails  to  have  the  certificates  transferred  on 
the  books,  an  administration  on  such  certificates  may  be  taken  out 
in  England.^ 

§  379.  J^ffect  of  charter  provision  requiring  registry. —  The  same 
rules  prevail  even  though  the  certificate  or  by-laws,  or  charter  it- 
self, declares  that  a  transfer  shall  not  be  legal  or  complete  or  ef- 
fectual until  it  is  registered  on  the  corporate  books.^     As  between 

1  Northrop   v.  Newtown,  etc.  Co.,    3  and  form  of  the  usual  assignment  and 

Conn.  514.  553  (18"21);  Fisher  v.  Essex  power  of  attorney  on  tiie  back  of  cer- 

Bank,  71  Mass.  373  (1855).  the  rights  of  tificates  of  stock.     German  Sav.  Bank 

attaching  creditors  being  involved.  v.  Renshaw,  78  Md.  475  (1894),  a  case 

^  Ex  parte  Dobson.  2  Mont.,  D.  &  De  wherein  a  broker  holding  stock  on  a 

G.  685  (1842);  Dickinson  v.  Central  Nat.  margin  repledged  it  at  a  bank. 

Bank.  129  Mass.  279   (1880);   Morris  v.  «  Manchester  St.  Ry.  r.  "Williams,  52 

Cannan,  4  De  G.,  F.  &  J.  581  (1862);  Sib-  Atl.  Rep.  461  (N.  H.  1902). 

ley  V.   Quinsigamond  Nat.   Bank,   133  7  in  tlie  Goods  of  Agnese.  [1900]  P.  60. 

Mass.  515  (1S82).  8  Johnston  v.  Laflin,  103  U.  S.  800,  804 

SHolyoke  Bank  v.  Goodman  Paper  (18S0),  affirming  5  Dill.  65  (1878);  s.  c, 
Mfg.  Co.,  63  Mass.  576  (1852);  Maguire's  13  Fed.  Ca&  758;  Masury  v.  Arkansas 
Case,  3  De  G.  &  S.  31  (1849);  Sheffield,  Nat  Bank,  93  Fed.  Rep.  603  (1899); 
etc.  Ry.  V.  Woodcock,  7  M.  &  W.  574  Noyes  v.  Spaulding,  27  Vt  420  (1855), 
(1841);  Cheltenham,  etc.  Ry.  u  Daniel,  where  the  court  said:  "That  provision 
2  Q.  B.  281  (1841);  Home  Stock  Ins.  Co.  is  similar  to  the  statute  in  this  state  in 
V.  Sherwood,  72  Mo.  461  (1880).  The  relation  to  the  transfer  of  real  estate, 
legal  sufficiency  of  the  instrument  of  under  which  it  has  uniformly  been 
transfer  cannot  be  questioned  by  the  held  that  the  title  passes  to  the  grantee 
transferrer.  Chew  v.  Bank  of  Balti-  as  between  the  parties  to  the  convey- 
more,  14  Md.  299  (1859).  ance,  though  the  deed  is  unrecorded. 

*  Gilbert  v.  Erie  Bldg.  Assoc,  184  Pa.  .    .    .    The  object  of  having  the  trans- 

St.  554  (1898).  fer  recorded  on  the  books  of  the  cor- 

5  Under  this  decision  it  would  seem  poration  is  notice,  and  that  is  the  only 

to  be  necessary  to  enlarge  the  terms  object.     For  that  reason  the  transfer, 

848 


CH.  XXII.]  FORMALITIES    OF   TRANSFER    AND    REGISTRY. 


[§  380. 


the  transferrer  and  transferee,  the  unregistered  assignment  is  com- 
plete and  effectual  in  contradiction  of  such  declarations.  The  courts 
construe  these  provisions  of  the  certificate  or  by-laws  or  charter  to 
be  intended,  not  to  affect  the  rights  of  the  transferee  as  against  the 
transferrer,  but  to  affect  the  rights  of  the  transferee  as  against  at- 
taching creditors  of  his  tra"nsferrer  and  other  third  parties  claim- 
ing an  interest  in  the  stock,  and  also  to  affect  his  right  to  claim 
dividends,  the  privilege  of  voting,  and  other  rights  of  a  stock- 
holder.^ 

§  380,  Certificate  of  stock  may  he  assigned  with  the  name  of  the 
transferee  left  blank. —  By  a  commercial  usage,  which  has  been  re- 
peatedly recognized  as  valid  by  the  courts,  certificates  of  stock 
may  be  assigned  by  a  transfer  duly  signed  by  the  transferrer,  but 
with  the  name  of  the  transferee  left  blank.^  Generally  the  com- 
bined instrument  of  transfer  and  power  of  attorney  on  the  back  of 
the  certificate  is  signed  by  the  stockholder  and  delivered  to  the 

though  unrecorded,  is  good  against  the    Union,  etc.  Assoc,  v.  Sendmeyer,  50  Pa. 

■  St.  67(1865).  A  power  of  attorney  on 
the  back  of  a  certificate  of  stock  signed 
in  blank  is  sufficient  to  transfer  shares 
of  stock  in  a  corporation.  Andrews  v. 
Worcester,  etc.  R.  R,  159  Mass.  64  (1893). 
"  Even  in  the  absence  of  such  usage,  a 
blank  transfer  on  the  back  of  the  cer- 
tificate, to  which  the  holder  has  affixed 
his  name,  is  a  good  assignment;  and  a 
jiarty  to  whom  it  is  delivered  is  author- 
ized to  fill  it  up  by  writing  a  transfer 
and  power  of  attorney  over  the  signa- 
ture." McNeil  V.  Tenth  Nat.  Bank,  46 
N.  Y.  325,  331  (1871).  "There  is  no  force 
in  the  suggestion  that  the  power  of  at- 
torney in  the  present  case  was  incom- 
plete, because  there  were  blanks  for  the 
number  of  shares  and  for  the  name  of 
the  attorney.  Any  holder  might  fill 
up  the  blanks  and  constitute  himself 
the  attorney.  These  points  are  too  well 
settled  to  need  discussion."  Holbrook 
V.  New  Jersey  Zinc  Co.,  57  N.  Y.  616,  623 
(1874).  A  transfer  of  stock  by  signing 
the  transfer  on  the  back  of  the  certifi- 
cate need  not  be  dated,  nor  need  all 
the  blanks  be  filled  in  to  convey  com- 
plete title  at  law  and  in  equity.  Aspell 
V.  Campbell.  64  N.  Y.  App.  Div.  393 
(1901).  As  to  the  English  rule,  see  §  325, 
supra,  and  g  412,  infra. 


party  and  all  those  who  have  notice  in 
fact  of  the  transfer.*'  U.  S.  v.  Cutts.  1 
Sumn.  133  (1832);  s.  C,  25  Fed.  Cas.  745; 
First  Nat.  Bank  v.  Gilford,  47  Iowa,  575 
(1877).  The  same  provision  was  in- 
volved in  nearly  all  the  cases  cited  in 
preceding  sections.  See  also  Johnson 
V.  Underbill,  52  N.  Y.  203  (1873 1;  Bank 
of  Utica  V.  Smalley,  2  Cow.  770  (18-'4k 
Baldwin  v.  Canfield,  26  Minn.  43  (1879), 
where  the  court  said  that  charter  "pro- 
visions of  this  kind  are  intended  solely 
for  the  protection  and  benefit  of  the 
corporation;  they  do  not  incapacitate 
a  shareholder  from  transferring  his 
stock  without  any  entry  upon  the  cor- 
poration books."     .54  Atl.  Rep.  785. 

1  Continental  Nat.  Bank  v.  Eliot  Nat. 
Bank,  7  Fed.  Rep.  369  (1881);  Merchants', 
etc.  Bank  v.  Richards,  6  Ma  App.  454 
(1879);  and  cases  cited  supra,  and  §  465, 
infra.  As  between  the  transferrer  and 
transferee,  the  transfer  is  complete 
even  though  not  registered,  and  even 
though  the  charter  requires  registry. 
Bates-Farley,  etc.  Bank  v,  Dismukes, 
107  Ga.  212  (1899). 

2  Walker  v.  Detroit  Transit  Ry.,  47 
Mich.  338  (1882);  Pennsylvania  R.  R,'s 
Appeal,  86  Pa.  St.  80  (1878);  Cutting  v. 
Damerel,  88  N.  Y.  410  (1882);  German 


(54) 


849 


§  381.]  FORMALITIES    OF   TRANSFER    AND    RKOISTRY.  [CH.   XXII. 

purchaser,  with  the  names  of  the  transferee  and  the  attorney  left 
bhink.  Such  a  certilicate  of  stock,  transferred  in  blank,  may  be 
sold  and  passed  from  hand  to  hand.  Any  purchaser  of  the  certifi- 
cate, duly  sifj'ned  but  transferred  in  blank,  may  fill  up  the  ijlanks 
and  insert  his  own  name.'  lie  may  fill  in  his  own  name  as  trans- 
feree, and  the  name  of  an  af^ent  as  the  attornov  to  make  the  reir- 
istry,  or  lie  may  leave  the  latter  blank  and  allow  the  re<3nstry  clerk 
to  fill  in  his  own  name,  as  is  generally  done. 

B.    METHOD    OF    REGISTERING    A    TRANSFER    OF    STOCK. 

§381.  Begistry  an  important  part  of  a  tranHt'cr  of  stock. —  The 
effect  of  obtaininfi:  a  reo-istrv  or  neoflectins:  to  obtain  a  resristrv  of 
the  transfer  on  the  corporate  books,  immediately  after  purchasing 
a  certificate  of  stock,  has  given  rise  to  much  litigation  and  much 
apparent  confusion.  A  registry  of  the  transfer  is  important  in  two 
respects:  First,  as  regards  the  rights  of  the  purchaser  in  reference 
to  the  corporation;  second,  in  regard  to  the  rights  of  the  ])urchaser 
as  to  thirtl  persons  who  are  either  creditors  of  the  old  registered 
stockholders  or  have  claims  upon  the  stock  in  tiuestion.  So  far  as 
the  corporation  is  concerned,  it  is  bound  to  recognize  only  the  reg- 
istered stockholder."^  To  him  is  accorded  the  right  to  vote,  draw 
dividends,  and  exercise  the  general  right  of  stockholdership.  The 
unregistered  purchaser  of  stock  cannot  claim  such  rights.  All  the 
cases  ajxree  in  this  result  of  a  neolect  to  rejiister  a  transfer.  As  re- 
gards  tho  rights  of  third  persons,  however,  the  courts  of  the  differ- 
ent states  vary  widely  in  their  opinions,  (-ienerally  the  question 
arises  by  reason  of  an  attachment  or  execution  levied  by  a  creditor 
of  the  transferrer  against  the  stock  standing  on  the  corporate  books 
in  the  name  of  the  transferrer,  who  has  already  sold  and  assigned 
the  certificate  of  stock  to  another.  As  a  general  rule,  it  may  be 
said  that  a  purchaser  of  a  certificate  of  stock  is  usually  protected 
as  fully  without  a  registry  on  the  corporate  books  as  he  would  be 
by  a  registry,  so  far  as  subsequent  attachments  and  most  other  pos- 
sible equities  against  the  stock  are  concerned.^     This  is  the  rule  in 

1  Broadway  Bank  v.  McElrath,  13  N.  479  (1877);  Leavitt  v.  Fisher,  4  Duer,  1, 

J.  Eq.  24  (1860);  Matthews  u.  Massachu-  20  (1854). 

setts  Nat.  Bank,  1  Holmes,  396  (1874);  2  Registry  herein  means  not  only  an 

S.  C,  16  Fed.  Cas.  1113;  Bridgeport  Bank  actual  registry,   but  also  a  request  to 

V.  New  York  &  N.  H.  R.  R.,  30  Conn.  231  tlie  corporation  to  allow  registry,  where 

(1861);  Kortright  t\  Butfalo  Com.  Bank,  improperly  refused  by  it.     See  g  382, 

20  Wend.  91  (1838);  aff'd.  Commercial  infra. 

Bank  v.  Kortright,  22  Wend.  348  (1839);  3  These  various  questions  are  consid- 

Otis  V.   Gardner,   105    111.    436    (1883);  ered  in  chs.  XXI,  s^j^ra,  and  XXVII, 

Mount  Holly,  etc.  Co.  v.  Ferree,  17  N.  J.  infra. 
Eq.  117  (1864);  Prall  v.  Tilt,  28  N.  J.  Eq. 

850 


CH.  XXII.]  FORMALITIES    OF   TKANSFER    AND    REGISTRY.  [§  3S2. 

Xew  York  and  most  of  the  states.  In  some  other  states  a  contrary 
rule  prevails.  In  Massachusetts,  Illinois,  Xew  Hampshire,  and 
elsewhere,  statutes  have  changed  the  old  rule  so  that  it  now  accords 
with  that  of  Xew  York.^  It  is  to  be  borne  in  mind  also  that  a  lien 
in  behalf  of  the  corporation  may  attach  after  transfer  of  the  cer- 
tificate and  before  registration  thereof,- 

§  382.  Formalities  ofmaldnq  registry —  Transfer  hoolc  and  stock 
ledger  not  necessary. —  The  customary  method  of  registering  a  trans- 
fer of  stock  on  the  corporate  books  is  simple.  The  registered  stock- 
holder, or  his  attorney  in  fact,  whose  name  is  written  in  the  blank 
power  of  attorney,  applies  to  the  corporate  officer  having  charge 
of  the  transfer  books,  and  requests  a  registry  of  the  transfer  to  a 
person  designated  b}'  a  name  written  in  the  form  of  transfer.  Books 
of  transfer  are  kept  for  purposes  of  registering,  and  upon  such  an 
application  and  the  surrender  of  the  old  certificate  the  old  stock- 
holder or  his  attorney  makes  the  registry  and  a  new  certificate  is 
issued.^ 

Any  suitable  registry  or  stock  list,  or  formal  entry  on  the  corpo- 
rate books,  suffices.  Xo  special  book  need  be  kept  for  that  pur- 
pose.^ AVhcre  the  stock  book  of  the  corporation  is  locked  up  and 
cannot  be  reached,  the  directors  may  adopt  a  new  stock  book  and 
minute  book,  and  make  transfers  of  stock.^  Where  the  company 
does  not  keep  a  transfer  book,  the  transfer  of  stock  is  complete 
when  the  owner  of  stock  transfers  the  certificate  on  the  back  and 
delivers  it  to  the  secretary  in  order  that  a  new  certificate  may 
be  issued  to  the  transferee.**     In  fact  the  usefulness  of  a  transfer 

'This  statute  is  referred  to  in  g  488,  stock   list,  or  otherwise  formally  en- 

infra.  tared  upon  its  books.     For  this  purpose 

2  See  ch.  XXXI,  infra.  Inasmuch  as  the  account  in  a  stock  ledger,  showing 
by  the  laws  of  England  an  Englisli  cor-  the  names  of  the  stockholders,  the  nura- 
poration  may  amend  its  by-laws  so  as  ber  and  amount  of  the  shares  belong- 
to  give  it  a  lien  on  stock  which  will  be  ing  to  each,  and  the  sources  of  their 
priortoany  existing  unregistered  pledge  title,  whether  by  original  subscription 
or  assignment  of  the  certificates  of  and  payment  or  by  derivation  from 
stock,  an  American  pledgee  or  holder  others,  is  quite  suitable,  and  fully  rneets 
of  such  certificates  of  stock  is  bound  by  the  requirements  of  the  law."  National 
such  by-law.  Hudson,  etc.  Co.  v.  Warner  Bank  v.  Watsontown  Bank,  105  U.  S. 
&  Co..  99  Fed.  Rep.  187  (1900).  217  (1881). 

sBurrall  v.  Bush  wick  R.  R,  75  N.  Y.  5  Re  Argus  Co.,  138  N.  Y.  557  (1893). 

211   (1878);    Green  Mount,   etc.   Co.    v.  « Chemical  Nat.  Bank  r.  Col  well,  132 

Bulla.  45  Ind.  1  (1873).    See  also  §  375,  N.  Y.  250  (1892).     A  stockholder  is  lia- 

supra.  ble  by  statute  on  stock  where  he  has 

* "  All  that   is  necessary,  when  the  merely  transferred  the  certificate  and 

transfer  is  required  by  law  to  be  made  no  effort  has  been  made  to  complete 

upon  the  books  of  the  corporation,  is  the  transfer  on  the  corporate  books; 

that  the  fact  should  be  appropriately  but  where  there  is  no  transfer  book, 

recorded  in  some  suitable  register  or  and   the   certificates  are   merely  can- 
Sol 


§  382.] 


FOKMALITIKS    OF    TKANSFEU    AND    REGISTUy, 


[cii. 


XXII. 


book  may  well  be  doubted,  and  unless  the  statutes  require  it  there 
is  a  stronir  arc:ument  in  favor  of  abolishinf^  it.  Probably  the  trans- 
fer  book,  and  the  power  of  attorney  on  the  back  of  certificates  of 
stock,  and  the  provision  in  the  certificate  of  stock  that  it  can  bo 
transferred  on  the  books  of  the  company  only  in  person  or  by  duly 
authorized  attorney,  might  be  abolished  without  harm.  In  these 
days  a  sale  and  assignment  of  the  certificate  of  stock  should  be  suf- 
ficient to  warrant  a  corporation  making  a  transfer  on  its  corporate 
books  upon  the  presentation  of  the  old  certificate  so  assigned.  Tho 
fact  is  that  the  transfer  on  the  transfer  book  is  a  mere  repetition  of 
the  transfer  on  the  back  of  the  certificate  of  stock,  and  as  the  stock 
ledger  can  be  posted  directly  from  the  canceled  certificates  of  stock, 
the  transfer  book  might  well  be  abolished.  A  stock  journal  might 
be  convenient  to  show  the  daily  transfers.  The  certificate  of  stock 
book,  the  stock  journal  and  stock  ledger  would  then  correspond 
to  the  day-book,  journal  and  ledger  in  ordinary  book-keeping.  But 
in  these  days,   when  it  is    the  rule  to  issue  certificates  of  stock, 


celed  and  new  ones  issued,  this  is  suffi- 
cient to  etTect  a  transfer  on  the  corpo- 
rate books.  Plumb  u.  Bank  of  Enterprise, 
48  Kan.  484  (1892).  Where  the  corpo- 
ration keeps  a  stock-certificate  book  but 
no  transfer  book,  a  transfer  on  the  back 
of  a  certificate,  which  is  then  canceled 


fer  is  sufficiently  registered  when  the 
old  certificate  is  surrendered,  a  new 
one  issued,  and  the  new  name  entered 
on  the  subscription  list.  Stewart  v. 
Walla  Walla,  etc.  Co.,  1  Wash.  St.  521 
(1889).  Where  no  stock  or  transfer 
books  are  kept,  although  the  statute 


and  pasted  back  in  the  certificate  book,     requires  them,  and   the  certificate  of 


and  a  new  certificate  issued  to  the 
transferee,  is  a  sufficient  transfer  to 
constitute  a  transferee  a  stockholder. 
He  may  vote  at  elections,  and  an  as- 
signment by  the  corporation  on  the 
direction  of  officers  elected  by  such  a 
transferee  is  valid.  Such  a  transfer  is 
valid  also,  although  a  by  law  provided 
that  before  selling  his  stock  a  stock- 
holder must  offer  it  to  other  stockhold- 
ers for  purchase.  American  Nat.  Bank 
V.  Oriental  Mills,  17  R  I.  551  (1891).  A 
certificate-of-stock  book  is  sufficient  to 
show  stockholdership,  if  there  are  no 
transfer  or  stock  books,  even  though 
the  statute  requires  the  latter  to  be 
kept.  Knowles  v.  Sandercock,  107  Cal. 
629  (1895).  A  mere  memorandum  of  a 
sale  of  stock,  made  by  the  corporation 
in  the  certificate  book,  was  held  a  suf- 
ficient transfer  to  sustain  a  lien  in 
Bank  of  Commerce  v.  Bank  of  Newport, 
63  Fed.  Rep.  898  (1894).  Where  the  cor- 
poration keeps  no  stock  ledger,  a  trans- 


stock  is  so  kept  that  upon  a  transfer 
the  old  certificates  of  stock  are  not 
pasted  back  on  to  the  stubs  correspond- 
ing thereto,  the  transferrer  may  be  lia- 
ble for  subsec[uent  debts,  even  though 
a  new  certificate  was  issued  to  the 
transferee  and  the  stub  opposite  thereto 
stated  from  whom  the  stock  was  trans- 
ferred. Herrick  v.  Wardwell,  58  Ohio 
St.  294  (1898).  Under  the  New  York 
statute  a  holder  of  unpaid  stock  is  not 
relieved  from  liability  by  a  transfer  of 
the  same,  unless  such  transfer  is  reg- 
istered in  a  stock  book;  and  it  is  held 
that  even  though  no  stock  book  is  kept 
by  the  corporation,  yet,  if  the  trans- 
ferrer was  an  officer  of  the  company 
and  partially  responsible  for  not  hav- 
ing such  book  kept,  he  cannot  set  up 
the  defense  that  no  such  book  was 
kept,  especially  where  there  is  evidence 
of  bad  faith  in  the  transfer.  Beals  v. 
Buffalo,  etc.  Co.,  49  N.  Y.  App.  Div. 
589  (1900). 


853 


CII.  XXII.]  FORMALITIES    OF    TRANSFER   AND    REGISTRY.  [§  382. 

and  a  transfer  thereof  transfers  the  equitable  title  to  the  stock 
itself  in  all  the  states,  and  the  legal  title  in  most  of  the  states, 
every  legal  and  equitable  right  can  be  preserved  as  well  with- 
out a  transfer  book  and  power  of  attorney  as  with  them. 
The  practical  result  would  be  the  saving  of  transfer  books  and 
much  bookkeeping.  Many  small  corporations  in  these  days  do  not 
keep  any  transfer  book  at  all,  and  yet  they  experience  no  difficulty 
in  transferring  stock.  Of  course  where  the  statutes  of  a  state,  as 
in  New  Jersey,  require  the  keeping  of  a  transfer  book,  the  above 
suggestions  could  not  be  adopted.  A  demand  for  registry  of  a 
transfer  of  stock  should  be  made  upon  the  principal  officer  or  clerk 
at  the  office  of  the  corporation.  When  so  made  it  is  sufficient.* 
The  method  of  registry  may  be  regulated  by  the  by-laws  of  the 
corporation.  Thus,  a  by-law  that  the  stock  shall  be  transferable 
by  indorsement  in  writing,  made  in  the  presence  of  the  cashier  or 
two  other  witnesses,  has  been  sustained  as  valid,  and  is  complied 
with  only  by  the  presence  and  signature  of  the  cashier  or  of  the 
witnesses.^  So,  also,  of  a  by-law  requiring  registry  in  the  presence 
of  the  president  and  secretary  of  the  company.'  But  a  by-law  re- 
quiring the  assent  of  the  president  of  the  corporation  to  the  registry 
of  a  transfer  would  be  in  restraint  of  trade  and  void.^  It  is  legal 
for  a  corporation  to  enact  a  by-law  requiring  stockholders  to  pay  a 
small  fee  on  making  transfers  of  their  stock  upon  the  corporate 
books.*  A  delivery  of  certificates  to  the  corporation,  and  a  mere 
request  to  the  corporate  officers  to  make  the  transfer,  is  not  a  com- 

i"Itis  sufficient  for  liim  to  apply  at  Murrich  v.  Bond  Head  Harbor  Co.,  9 
the  bank  during  the  usual  hours  of  Up.  Can,  Q.  B.  333  (18o2),  where  the  ap- 
business  and  make  his  demand  upon  plication  was  to  the  secretary;  Good- 
the  officers  and  clerks  who  may  be  in  win  v.  Ottawa,  etc.  Ry.,  13  U.  C.  C.  P. 
attendance  there;  and,  in  case  they  are  254  (1863),  where  an  application  to  see- 
not  authorized  to  transact  that  partic-  retary  and  treasury  was  sustained; 
ular  business,  they  must  either  refer  Green  Mount,  etc.  Co.  v.  Bulla,  45  Ind. 
him  to  the  proper  officer  in  the  bank  1  (1873),  where  the  application  was  to 
or  procure  the  attendance  of  such  offi-  the  president.  Presentation  of  the  cer- 
cer.or  of  the  board  of  directors,  if  neces-  tificate  of  stock,  duly  indorsed,  to  the 
sary,  without  any  unreasonable  delay,  person  in  charge  of  the  office  of  the 
...  In  the  absence  of  any  proof  to  corporation  is  a  sufficient  demand  of 
the  contrary,  it  may  be  fairly  pre-  transfer.  Dunn  v.  Star  F.  Ins.  Co.,  19 
suraed  that  the  principal  officer  or  clerk  N.  Y.  Week.  Dig.  531  (1884). 
in  attendance  at  the  bank,  during  the  -'Dane  v.  Young,  61  Me.  160  (1872). 
usual  hours  of  business,  is  authorized  ^  Planters',  etc.  Ins.  Co.  v.  Selma  Sav. 
to  permit  such  a  transfer  when  proper."  Bank.  63  Ala.  585  (1879). 
Commercial  Bank  v.  Kortright.  22  <  Sargent  r.  Franklin  Ins.  Co.,  25  Mass. 
Wend.  848,  351  (1839):  Case  v.  Bank,  100  90  (1829).  See  also  §  622.  infra. 
U.  S.  446  (1879).  where  application  to  ^Giesen  v.  London,  etc.  Mortg.  Co., 
tlie  cashier  was  held  to  be  proper:  Mc-  102  Fed.  Rep.  584  (1900). 

853 


§  382.] 


FORMALITIES    OF   TRANSFER    AND    KELilSTRY.  [CH.   XXII. 


plete  registry  until  the  entry  is  actually  made/  excepting  as  to  lia- 
bility,-' attachments,'  and  liens.* 

The  fact  that  the  registry  clerk  marks  on  the  instrument  of 
transfer  the  words  "  received  for  record "  does  not  constitute  a 
registry.'  A  memorandum  on  the  stock  book  that  the  stock  has 
been  transferred  as  collateral  security  is  suliicient  to  give  the  trans- 
fer precedence  over  an  attachment.*  It  has  been  held  that,  where 
the  corporation  has  a  branch  registry  oilice  in  another  state,  a  reg- 
istry in  the  branch  office  is  not  an  elfectual  registry  until  it  has 
been  reported  and  entered  in  the  boolcs  of  the  main  office  of  the 
corporation.^  It  has  been  held  in  Iowa  that  where  an  Iowa  cor- 
poration keeps  its  stock  books  in  Boston,  a  transfer  on  such  books 
in  Boston  is  not  effective  as  against  subsequent  attachments  on  the 
stock  in  Iowa,  unless  a  book  is  kept  in  lowiv  showing  all  transfers 
as  required  by  the  statutes  of  lowa.^  If  the  corporation  does  not 
keep  books  for  the  registry  of  transfers  of  stock,  a  mere  notice 
to  the  corj)oration  that  a  transfer  has  been  made  constitutes  a  reg- 
istry.^ But  if  the  statute  or  charter  requires  a  transfer  to  be  made 
on  the  corporate  books,  no  registry  is  possible  until  such  books  are 
obtained  and  opened. '•*  If  the  corporation  never  issues  certificates  of 
stock,  the  stockholder  cannot  demand  them."  If  the  corporation 
cannot  allow  the  registry  on  account  of  an  injunction,  it  is  never- 


1  Brown  v.  Adams,  5  Biss.  181  (1870); 
S.  C  4  Fed-  Cas.  350.  Nor  will  a  mere 
entry  of  credit  to  the  transferee,  on  the 
treasurer's  books,  suffice.  Marlborough 
Mfg.  Co.  V.  Smith,  2  Conn.  579  (1818). 
.  2  See  §  258,  supra. 

■  3  See  §  490,  infra.  Under  the  Iowa  . 
statute  a  transfer  of  stock  is  not  ef- 
fective as  against  creditors,  even  though 
a  request  has  been  made  to  the  corpo- 
ration to  transfer  the  stock,  if  such 
transfer  has  not  been  made,  and. even 
though  the  corporation  attached  to  the 
stub  of  the  certificate  an  acknowledg- 
ment of  the  assignment  of  the  certifi- 
cate, and  even  though  the  attachmg 
creditor  knew  of  such  request.  Perkins 
r.  Lyons,  111  Iowa,  193  (1900). 

■*  See  §  532,  infra. 

'Northrop  v.  Newtown,  etc.  ,Co.,  3 
Conn.  544  (1821);  Northrop  u  Curtis,  5 
Conn.  246  (1824).  But  a  memorandum 
entered  on  the  stub  in  the  stock  book 
opposite  to  the  certificate  issued,  that 
that  certificate  has  been  transferred,  is 


a  sufficient  registry  as  against  attaching 
creditors  of  the  transferrer.  Fisher  i\ 
Jones,  82  Ala.  117  (1887).  A  mere  letter 
from  the  transferee  to  the  corporation 
that  he  has  purchased  the  certificate  is 
insufficient,  even  though  such  letter  is 
pinned  to  the  transfer  book.  Newell  v. 
Williston,  138  Mass.  240  (1885). 

''  Moore  v.  Marshalltown,  etc.  Co.,  81 
Iowa,  45  (1890). 

■^  Pinkerton  v.  Manchester,  etc.  R.  R., 
42  N.  H.  424(1861). 

8  Perkins  w  Lyons,  111  Iowa,  192  (1900). 

9  Crawford  v.  Provincial  Ins.  Co.,  8  U. 
C.  C.  P.  263(1859);  Agricultural  Bank  v. 
Wilson,  24  Me,  273  (1844),  holding  that 
a  transfer  on  the  books  of  a  corpora- 
tion of  stock  for  which  certificates  had 
not  been  issued  is  sufficient  to  pass  the 
property  in  the  stock,  and  a  valid  con- 
sideration for  a  note  given  in  payment. 

10  McCourry  v.  Doremus,  10  N.  J.  L. 
245  (1828). 

11  Thorp  V.  Woodhull,  1  Sandf.  Ch.  411 
(1844).     See  §g  61,  192,  supra. 


854 


CH. 


XXII.] 


FORM  A-LITIES    OF    TRANSFER    AND    REGISTRY. 


[§  382. 


theless  bound  to  respect  the  rights  of  a  transferee  who  gives  notice 
to  it  of  the  transfer.^  The  issue  of  a  new  certificate  of  stock  is  not 
essential  to  the  completeness  of  a  registry  of  the  transfer.^  If  the 
corporation  delays  unreasonably  in  allowing  a  registr}'-,  it  is  liable 
in  damages  to  the  applicant  for  registry.' 

The  instrument  of  transfer  must  be  in  proper  form.*  Unless  the 
old  stockholder,  or  his  duly  authorized  attorney,  otfers  to  make  the 
registry,  the  corporation  may  refuse  to  allow  it.^  The  power  of 
attorney  must  run  from  the  previous  registered  stockholder,  and 
not  from  an  intermediate  unregistered  transferee  of  the  certificate.* 
Transfers  under  bankruptcy  or  insolvent  laws  are  to  be  registered 
like  voluntary  transfers.^  In  England  a  written  acceptance  of  the 
stock  by  the  transferee  is  required.^ 

A  mere  notice  to  the  corporation  that  an  assignment  has  been 


1  Purchase  v.  New  York  Exch.  Bank, 
3  Rob.  (N.  Y.)  164  (186.J). 

2  First  Nat.  Bank  v.  Gifford,  47  Iowa, 
575  (1877);  Chouteau  Spring  Ca  v.  Har- 
ris, 20  Mo.  382  (1855). 

3  Sutton  V.  Bank  of  England,  1  Car.  & 
P.  198  (1824),  where  the  bank  delayed 
longer  than  one  day,  the  customary 
time,  and  refused  to  give  any  reason 
therefor;  Catchpole  v.  Ambergate,  etc. 
Ry.,  1  El.  &  B.  Ill  (1852),  where,  by 
reason  of  the  delay,  the  stock  was  for- 
feited, notice  of  forfeiture  going  to  the 
old  stockholder.  See  also  Healey.  Com- 
panies Law,  3d  ed.,  p.  93.  Although  the 
directors  are  entitled  to  reasonable  time 
to  decide  whether  to  make  a  transfer, 
yet.  if  they  had  already  made  up  their 
minds,  the  measure  of  damages  for 
refusal  is  the  price  of  the  stock  on  the 
day  when  the  application  was  made. 
Re  Ottos,  etc.  Mines,  [1893]  1  Ch.  618. 

*  Queen  v.  General  Cemetery  Co.,  6 
El.  &  B.  415  (1856),  holding  that  the 
deed  of  transfer,  where  a  deed  is  neces- 
sary, must  be  properly  drawn.  See 
also  Socidte  Generale  v.  Walker,  L.  R 
11  App.  20  (1885). 

5  Mechanics'  Banking  Assoc,  v.  Mari- 
posa Co.,  3  Rob.  (N.  Y.)  395  (1865). 

^  Dunn  I'.  Commercial  Bank,  11  Barb. 
580  (1852). 

7  Dutton    V.    Connecticut    Bank,    13 


Conn.    493    (1840);    State  v.  Ferris,  43 
Conn.  560  (1875). 

8  Ortigosa  v.  Brown,  47  L.  J.  (Ch.)  168 
(1878).   The  Joint-stock  Companies  Act 
of  1856  required  such  an  acceptance. 
The  act  of  1862.  repealing  the  act  of 
1856,  prescribed  that  transfers  should 
be  made  as  was  customary,  unless  the 
by-laws  prescribed  otherwise.    Hence, 
in  tiie  absence  of  by-laws,  the  written 
acceptance  is  held  to  be  customary  and 
necessaiy.    In  England,  where  a  trans- 
fer of  stock  is  made  by  first  applying 
to  the  company,  and  having  the  com- 
pany   certify    that  the   certificate   of 
stock  had  been  lodged  with  the  com- 
pany, and  then  the  money  is  paid,  it  is 
held   that  the    party  purchasing    the 
stock  on  the  faith  of  this  certificate  of 
the  company  cannot  hold  the  company 
liable,  although  it  turns  out  that  the 
vendor  was  not  entitled  to  the  stock, 
and    consequently,  the  whole    capital 
stock    being  already   issued,  that   the 
transfer  could  not  be  made.    The  court 
held  that  the  certification  was  ultra 
vires     and     hence     not     enforceable. 
Bishop  V.  Balkis  Consol.  Co.,  L.  R,  25  Q. 
B.  D.  77,  512  (1890),  the  court,  however, 
dissenting  from  the  view  that  the  cer- 
tification was  ultra  vires,  but  holding 
that  the  certification  did  not  warrant 
the  title  nor  the  validity  of  the  various 
documents. 


855 


§  3S3.] 


FORMALITIES    OF   TRANSFER    AND    REOISTRV.  [CH.   XXII. 


made  need  not  be  considered  by  the  corporation.'  Where,  how- 
ever, the  transferee  ffivino:  such  notice  does  not  obtain  re^jistrv  be- 
cause  the  corporation  refuses,  for  any  reason,  to  make  the  ref,Mstry, 
the  mere  notice  must  be  borne  in  mind  by  the  corporation,  and  the 
rights  of  the  applicant  preserved  by  it,  as  regards  future  registries.^ 
The  Arkansas  statute  reciuiring  transfers  of  stock  to  be  recorded 
with  the  county  clerk  does  not  apply  to  a  pledge  of  stock.' 

§  383.  Formalities  of  ri'i/istry  maij  he  waived  hij  the  eorporatiou. 
The  corporation  may  waive  the  formalities  connected  with  a  reg- 
istry of  transfer,  and  when  it  does  so  the  transferee  becomes  a 
stockholder  as  completely  as  though  registry  had  been  regularly 
made.''     Frequently  the  waiver  arises  by  placing  the  transferee's 


1  Stockwell  V.  St.  Louis  Mer.  C.  Co.,  9 
Mo.  App.  133  (1880).  A  mere  oral  notice 
by  a  third  party  that  a  stockholder  had 
transferred  his  stock  to  a  designated 
per.son  does  not  relieve  the  former  from 
his  liability  on  the  subscription,  no 
formal  transfer  having  been  made,  the 
stock  having  been  issued  at  twenty 
cents  on  a  dollar.  Vermont,  etc.  Co.  v. 
Declez,  etc.  Co.,  133  Cal.  579  (1902). 
Where  a  bank  knows  that  a  stock- 
holder has  pledged  his  certificate  of 
stock,  the  bank  cannot  claim  a  lien 
upon  such  stock  for  a  debt  incurred  to 
the  bank  subsequently  by  the  pledgor 
of  the  stock,  even  though  the  stock  is 
not  transferred  on  the  books,  and  even 
though  the  statute  requires  tliat  trans- 
fers should  be  made  only  on  tlie  books 
of  the  bank.  But  the  fact  that  the 
pledgor  was  the  cashier  of  the  bank  is 
not  notice  to  the  bank,  nor  is  the  fact 
that  the  president  knew  of  the  pledge 
notice  to  the  bank  where  he  took  no 
active  part  in  the  management  of  the 
bank  and  was  not  acting  for  the  bank 
when  he  learned  of  the  pledge.  Cur- 
tice V.  Crawford,  etc  Bank,  110  Fed. 
Rep.  830  (1901).    See  §  523,  infra. 

2  See  §  258,  supra,  and  g§  383,  490,  582, 
infra. 

3  Batesville.  etc.  Co.  v.  Myer,  etc.  Co., 
68  Ark.  115  (1900). 

*  Rictmondville  Mfg.  Co.  v.  Prall,  9 
Conn.  487  (1833);  Clowes  v.  Brettell,  11 
M.  &  W.  461  (1843);  Sadler's  Case,  3  De 
G.  &  S.  36  (1849);  Chambersburg  Ins. 


Co.  V.  Smith.  11  Pa.  St.  120  (1849); 
Walters's  Case,  3  De  G.  «&  S.  149  (1850): 
Bain  r.  Whitehaven,  etc.  Ry.,  3  II.  L. 
Cas.  1  (1850);  Wills  v.  Murray,  4  K.\cb, 
843  (1850);  Yelland's  Case,  5  De  G.  &  ^m. 
395  (1852);  Powis  v.  Harding,  1  C.  B. 
(N.  S.)  533  (1857);  Henderson  v.  Royal 
British  Bank,  7  El.  &  B.  350  (1857); 
Daniell  v.  Royal  British  Bank,  1  H.  & 
N.  085  and  note  (1857);  East  Gloucester- 
shire Ry.  V.  Bartholomew,  L.  R  3  Exch. 
15  (1867);  Ind's  Case,  L.  R  7  Ch.  App. 
485  (1872);  Weber  v.  Fickey,  52  Md.  500, 
516  (1879);  Home  Stock  Ins.  Ca  i".  Sher- 
wood, 72  Mo.  401  (1880);  Ishamu  Buck- 
ingham, 49  N.  Y.  216  (1872).  Where  a 
party  about  to  take  stock  m  pledge  in- 
quires of  thecori)oration  as  to  its  value, 
and  as  to  whether  there  was  an}'  lien 
upon  the  stock,  and  no  lien  is  claimed, 
and  he  then  takes  the  stock  in  pledge 
and  causes  an  indorsement  thereof  to 
be  made  on  the  stub  of  the  stock  book 
of  the  corporation,  the  corporation  can- 
not thereafter  claim  a  lien  as  against 
him;  and,  moreover,  a  subsequent 
transfer  of  the  stock  by  the  pledgor  to 
the  corporation  as  security  for  a  debt 
due  from  him  to  it  does  not  take  prece- 
dence over  the  first  pledge,  the  certifi- 
cates themselves  having  been  trans- 
ferred to  the  first  pledgee,  but  not 
transferred  on  the  books.  Des  Moines, 
etc.  Co.  V.  Des  Moines,  etc.  Bank,  97 
Iowa,  668  (1896).  See  also  i;§  258, 260, 262, 
382,  supiui,  and  gg  490,  532,  infra. 


856 


CH.  XXII,]  FORMALITIES    OF   TRANSFER    AND    REGISTRY 


[§  384. 


name  on  the  list  of  stockholders,  although  no  formal  reo-istry  has 
been  hatl.^  Even  a  charter  requirement  that  the  consent  of  the 
directors  to  a  registry  of  transfer  shall  be  obtained  may  be  waived 
by  the  corporation.^  The  corporation,  by  paying  dividends  to  an 
unregistered  transferee  of  stock,  thereby  waives  the  formalities  of 
registry.^  When  the  corporation  refuses  to  allow  a  registry  for 
reasons  other  than  those  connected  Avith  the  mere  formalities  of 
registry,  or  for  reasons  not  given  to  the  applicant,  it  waives  its 
right  to  insist  on  them,  and  cannot  afterwards  claim  that  the  ap- 
plicant did  not  conform  to  such  technicalities.*  A  failure,  however, 
on  the  part  of  the  corporation  to  notify  the  transferee  of  a  refusal 
to  allow  registry  is  no  waiver  of  such  registry.^ 

§  384.  Either  the  transferrer  or  the  transferee  may  apply  to  the 
corporation  for  a  reyistry  of  transfer. —  A  person  who  appears  on 
the  corporation  books  as  the  holder  of  stock,  but  who  in  fact  has 
sold  the  stock,  has  a  right  to  have  his  transfer  recorded  on  the  cor- 
porate books,  thereby  releasing  him  from  liability  on  the  stock.® 
The  vendor  may  request  the  corporation  to  register  the  transfer, 
and  the  corporation  may  make  it  at  his  request  upon  the  certificate 


1  Upton  V.  Burnliara,  3  Biss.  431,  520 
(1878);  S.  C,  28  Fed.  Cap.  831,  833;  Yel- 
land's  Case,  5  De  G.  «&  Sm.  395  (1852). 

2£'.u  parte  Walton.  26  L.  J.  (Cli.)  545 
(1857).  Likewise  where  the  by-laws  con- 
tain such  a  provision.  Chambersburg 
Ins.  Co.  V.  Smith,  11  Pa.  St.  120  (1849), 
holding  also  that  an  oversight,  whereby 
tlie  attorney  who  makes  the  registry 
omits  to  sign  the  registry,  is  immate- 
rial. 

3  Cutting  V.  Daraerel,  88  N.  Y.  410 
(1882).  Where  a  person  buys  certifi- 
cates of  stock  in  a  national  bank,  the 
certificates  being  indorsed  in  blank,  and 
the  bank  makes  a  memorandum  in  the 
certificate-of-stock  book  that  it  had 
been  transferred  to  him,  and  sends  him 
dividends,  he  is  liable  thereon,  although 
no  transfer  of  the  certificate  is  made 
on  the  corporate  books,  and  although 
he  bought  the  stock  for  the  cashier  of 
the  bank  and  was  merely  a  nominal 
holder.  He  is  not  such  a  trustee  as  is 
•exempt  from  liability  under  the  Na- 
tional Bank  Act  Horton  v.  Mercer,  71 
Fed.  Rep.  153  (1895). 

<  State  V.  Mclver,  2  S.  C.  25  (1870); 
Bond  V.  Mt.  Hope  Iron  Co.,  99  Mass.  505 

857 


(1868),  holding  that  the  corporation 
must  put  the  refusal  on  the  ground  of 
non-conformity  with  formalities  at  the 
time  of  the  application,  and  cannot  af- 
terward raise  such.  Chouteau  Spring 
Co.  V.  Harris.  20  Mo.  382  (1855):  Robin- 
son V.  New  Berne  Nat.  Bank,  95 'N.  Y. 
637  (1884),  where  the  court  said:  "The 
requirement  of  a  registry,  existing  only 
for  its  own  protection  and  convenience, 
must  be  deemed  waived  and  non-essen- 
tial wlien  it  wrongfully  refuses  to  obey 
its  own  rule." 

6  Gustard's  Case,  L.  R  8  Eq.  438  (1869). 

••"The  purchase  was  in  itself  author- 
ity to  the  vendor  to  make  the  trans- 
fer. ...  A  court  of  equity  will 
compel  a  transferee  of  stock  to  record 
the  transfer,  and  to  pay  all  calls  after 
tlie  transfer.  ...  If  so,  it  is  clear 
that  the  vendor  may  himself  request 
the  transfer  to  be  made."  Webster  v. 
Upton,  91  U.  S.  65, 71  (1875).  "  If  a  sub- 
sequent transfer  of  the  certificate  be 
refused  by  the  bank,  it  can  be  compelled 
at  the  instance  of  either  of  them." 
Johnston  v.  Laflin,  103  U.  S.  800,  804 
(1880). 


§  3S5.] 


FORMALITIES    OF   TRANSFER    AND    REGISTRY.  [CU.   XXII. 


of  Stock  being  delivered  up  for  cancellation.  If  the  vendee  refuses 
to  cause  registry  to  be  made,  the  vendor  may  bring  suit  in  a  court 
of  equity  to  compel  the  registry  of  the  transfer.'  It  has  been  hehl 
also  that  an  intermediate  vendor  of  the  stock,  whose  name  has  never 
appeared  on  the  corporate  books,  may  likewise  compel  a  registry  tc^ 
be  raade.2  After  an  ultimate  vendee  has  been  registered,  the  orig- 
inal vendor  cannot  have  an  intermediate  vendee  and  vendor  regis- 
tered as  the  stockholder.^*  The  corporation  may  register  the  transfer, 
even  against  the  wishes  of  the  transferee.*  The  transferee  also  has 
a  right  to  apply  for  and  compel  a  registry  of  the  transfer  of  stock 
to  himself.* 


C.       RIGHTS    AND    DUTIES    OF   THE    CORPORATION    IN    ALLOWING    OR  REFUS- 
ING   REGISTRY, 

§885.  Corporation  may  require  jiroof  of  identitij;  also  of  gen- 
uineness of  sif/natnre,  e/c— When  a  transfer  of  stock  is  presented  to 
the  corporation  for  registry,  if  the  corporation  is  in  doubt  as  to  the 
identity  of  the  person  presenting  it,  whether  he  be  the  stockholder 
already  registered  on  the  books  or  the  attorney  of  such,  the  cor- 
poration may  require  proof  of  such  identity.*^  The  officers  have  a 
reasonable  time,  after  a  transfer  has  been  recjuested,  in  which  to 
find  out  whether  the  transfer  is  in  order.'  If  they  are  in  doubt  as 
to  the  competency  of  the  transferrer  to  sell  the  stock,^  legal  proof 

1  Wynne  v.  Price,  3  De  G.  &  S.  310  averments.    Edwards  r.  Sonoma  Valley 

(1849).    See  also  Berminghara  v.  Sher-  Bank,  59  Cal.  136  (1881).    Where  a  con- 

idan,  33  Beav.  660  (1864);   Eustace  v.  tract  does  not  merely  pledge  stock,  but 

Dublin,  etc.  Ry.,  L.  R  6  Eq.  18.2  (1868).  gives  the  creditor  the  legal  title  and 

^  Paine  u  Hutchinson,  L.R.  3  Ch.  App.  unlimited    power    of    disposition,   the 

388  (1868).  creditor  may  by  suit  in  equity  compel 

3  Shaw  V.  Fisher,  5  De  G.,  M.  &  G.  596  the  company  to  allow  a  transfer,  and 

(1855).  the  transferrer  need  not  be  made  a  party 

*  Upton  V.  Burnham,  3  Biss.  530,  525  to  the  suit.     Skinner  v.  Fort  Wayne, 

(1873);  S.  C,  28  Fed.  Cas.  833,  835.  etc.  R.  R.,  58  Fed.  Rep.  55  (1893). 

5  Norris  u  Irish  Land  Co.,  8  EL  &  B.  6  Telegraph  Co.  v.  Davenport,  97  U.  & 

512  (1857);  Daly  v.  Thompson.  10  M.  &  369  (1878);    Davis  v.  Bank  of  England, 

W.  309  (1842);  Johnson  v.  Laflin,  5  Dill.  2  Bing,  393  (1824),  where  the  court  says 

65  (1878);  S.  c,  13  Fed.  Cas.  758;  s.  C,  103  the  corporation  "  may  take  reasonable 

U.  S.  800;  Hill  v.  Pine  River  Bank,  45  time  to  make   inquiries,  and  require 

N.  H.  300  (1864);  Presbyterian  Cong.  v.  proof  that  the  signature  to  a  power  of 

Carlisle  Bask,  5  Pa.  St.  345  (1847);  Me-  attorney  is  the  writing  of  the  person 

chanics'BankuSeton,l  Pet.  299(1828);  whose  signature  it  purports    to   be;" 

Arnold  v.  Suffolk  Bank,  27  Barb.  424  Bayard  v.  Farmers',  etc.  Bank,  52  Pa. 

(1857);  Sargent  v.  Franklin  Ins.  Co.,  25  St.  232  (1866). 

Mass.  90  (18291:  Cushman  r.  Thayer  Mfg.  7  Ireland  r.  Hart,  86  L.  T.  Rep.  S8^ 

Co.,  76  N.  Y.365  (1879).     But  the  com-  (1902). 

plaint  must  be  full  and  accurate  in  its  ^See  g§  318,  319.  suprcu 

858 


CH.  XXII.]  FORMALITIES    OF    TRANSFER   AND    REGISTRY. 


[§  386-. 


of  such  competency  must  be  given.  If  the  applicant  for  registry 
applies  as  the  attorney  of  the  registered  stockholder,  the  corpora- 
tion may  require  satisfactory  evidence  of  the  genuineness  of  the 
latter's  transfer,  or  may  require  the  presence  of  the  stockholder 
himself.^  A  corporation  cannot  refuse  to  transfer  stock  to  a  per- 
son on  the  ground  that  a  trustee  in  bankruptcy  has  been  appointed 
of  his  estate.- 

§  386.  Corporation  cannot  refuse  registry  on  account  oftlie  motive 
of  the  transferrer  or  transferee  in  the  transaction. — The  corpora- 
tion has  nothing  to  do  with  the  motive  or  purpose  of  the  vendor  or 
vendee  of  the  stock.'  It  can  refuse  a  registry  only  when  there  is 
doubt  as  to  the  legal  right  of  the  applicant  to  have  such  registry. 
It  cannot  refuse  on  the  ground  that  the  transfer  would  injure  the 
corporation,  nor  on  tbe  theory  that  the  object  of  the  transfer  is  to 
increase  the  votes  of  the  transferee.*  A  bank,  however,  may  rc: 
fuse  to  allow  a  transfer  of  its  stock  to  another  bank  where  the  latter 
has  purchased  the  same  in  violation  of  its  charter.**  In  England 
the  directors  are  by  charter  often  given  a  discretionary  power  to 
refuse  a  transfer.*^ 


1  See  notes,  p.  838,  supra;  and  i?^  365- 
370,  supra. 

2  Sutton  V.  English,  etc.  Co.,  87  L.  T. 
Rep.  438  (190-3). 

3 State  V.  Mclver,  2  S.  C.  25  (1870); 
People  V.  Paton,  5  N.  Y.  St.  Rep.  310 
(1887).  See  also  ^g  391,  736.  infra.  But 
atransfer,  merely  nominal,  to  obtain  for 
the  transferee  certain  special  privileges, 
such  as  free  admission  to  a  place  of 
amusement,  may  be  a  fraud  on  other 
stockholders  and  will  be  set  aside. 
Academy  of  Music's  Appeal,  108  Fa. 
St.  510  (1885).  Equity  will  not  compel 
a  corporation  to  register  a  transfer  of 
stock  when  the  purpose  of  the  transfer 
is  to  obtain  the  control  of  the  corpora- 
tion and  wreck  it.  Gould  v.  Head,  41 
Fed.  Rep.  240,  248  (1890).  In  an  action 
to  compel  the  unincorporated  Stan- 
dard Oil  "trust"  to  transfer  on  its 
books  trust  certificates  which  the 
plaintiff  has  purchased,  the  defendants, 
who  allege  tliat  the  plaintiff  is  a  com- 
petitor of  the  trust  and  purchased  the 
certificates  in  order  to  break  up  the 
trust  and  compel  it  to  buy  the  plaintiff 
out,  may  be  compelled  to  give  a  bill  of 
particulars.     Rice  v.  Rockefeller,  N.  Y. 


Daily  Reg.,  May  29, 1888.  The  plaintiff 
in  this  case  finally  succeeded.  (134  N. 
Y.  174  —  1892.)  Where  a  corporation  is 
sued  for  damages  for  a  refusal  to  trans- 
fer stock,  the  company  cannot  set  up 
that  the  plaintiff  acquired  his  stook  by 
an  illegal  gambling  contract,  there  be- 
ing nothing  to  show  that  the  prior 
owner  objected  or  made  any  claim 
upon  the  company ;  nor  is  it  any  defense 
that  the  stock  was  held  as  collateral 
security  for  a  debt  which  was  barred 
by  the  statute  of  limitations,  that  de- 
fense being  personal  to  the  debtor. 
Miller  v.  Houston,  etc.  Ry.,  55  Fed.  Rep. 
366  (1893). 

*  Motfatt  V.  Farquhar,  L.  R.  7  Ch.  D. 
.591  (1878). 

5  Franklin  Bank  r.  Commercial  Bank, 
36  Ohio  St.  350  (1881). 

«  See  Healey,  Companies  Law,  3d  ed., 
p.  90.  Where  the  directors  are  author- 
ized by  the  articles  of  incorporation  to 
reject  a  transfer  of  stock  on  the  ground 
that  they  do  not  approve  of  the  trans- 
feree, "  the  discretionary  power  is  of  a 
fiduciary  nature  and  must  be  exercised 
in  good  faith;  that  is,  legitimately  for 
the  purpose  for  which  it  is  conferred. 


859 


§  3ST.]  FORMALITIES   OF   TRANSFER    AND    REGISTRY.  [CH.   XXII. 

§  387.  Corporation  mat/  iuterpfcadhctirecn  two  claimants  to  stocl'. 
The  task  imposed  upon  a  corporation  in  determining^  whether  to 
refuse  or  to  allow  a  registry  of  stock  is  a  dillicult  and  dangerous 
one.     It  is  easy  to  avoid  the  risk  of  forgery  or  of  failure  of  the  ap- 
plicant to  identify  himself.     But  circumstances  frequently  are  such 
that  the  corporation  dare  not  allow  registry  to  either  of  two  par- 
ties, each  of  whom  claims  to  be  the  sole  and  absolute  owner  of  the 
stock,  and  each  of  whom  claims  the  right  of  registry  or  notifies  the 
corporation  not  to  register  the  other  claimant  as  a  stockholder. 
These  cases  arise  on  various  occasions,  but  most  often  where  the 
stock  has  been  attached  or  sold  on  execution  by  the  transferrer's 
creditors  before  the  transferee  has  obtained  registry;  or  where,  by 
the  fraud  of  the  old  stockholder's  agent,  the  certificate  has  passed 
into  the  hands  of  a  hona  fide  purchaser;  or  where,  by  a  breach  of 
trust,  an  executor  or  administrator,  or  trustee  or  guardian,  has  sold 
the  trust  stock  and  appropriated  the  proceeds;  or  under  other  states 
of  fact  wherein  there  are  two  claimants  of  the  stock,  each  having 
rights  which  can  be  clearly  ascertained  only  by  litigation.     It  is 
not  incumbent  on  the  corporation  to  decide  between  these  conflict- 
ing parties  and  rights.'     Such  a  requirement  would  expose  it  to 
unreasonable  risks  and  compel  it  to  assume  the  functions  of  a  court. 
Where  there  is  a  reasonable  doubt  as  to  the  facts  involved  or  as  to 
the  respective  rights  of  the  claimants  of  the  stock,  and  the  corpo- 
ration is  sued  by  one  of  the  claimants  for  refusing  to  allow  a  registry 
by  hira,  the  corporation  may  interplead,  and  thus  compel  the  claim- 
ants to  ascertain  their  rights  through  the  medium  of  a  court  of 
justice.2    A  similar  interpleader  may  be  made  where  the  corpora- 
It  must  not  be  exercised  corruptly,  or    given  under  cliapters  devoted  to  them, 
fraudulently,  or  arbitrarily,  or  capri-    See  also  §  o63,  supra. 
ciously,  or  wantonly.  It  may  not  be  exer-        2  Merchants'  Nat,  Bank  r.  Richards.  G 
cised  for  a  collateral  purpose.    In  exer-    Mo.  App.  454  (1879);  aff'd,  74  Mo.  77: 
cising  it  the  directors  must  act  in  good     State  Ins.  Co.  v,  Gennett,  3  Tenn.  Ch. 
faith  in  the  interest  of  the  company     100   (1874);   Leavitt  v.  Fisher,  4   Duer 
and  with  due  regard  to  the  sharehold-    (N.  Y.),  1  (1854).     In  Lovell  v.  Jacobs, 
er's  right  to  transfer  his  shares,  and     150  N.  Y,  84  (1896),  a  trust  company, 
theymustfairlyconsiderthequestionof    acting  as  depositary  for  stock  which 
tlie  transferee's  fitness  at  a  board  meet-     had   been  sold  on   certain   conditions, 
ing."     It  is  not  a  sufficient  reason  that    sustained   a   bill  of    interpleader,   the 
the  transferee  is  not  a  member  of  a  par-    vendor  having  claimed  that  the  stock 
ticular family,  and  the  directors  will  be    should  not  be  delivered  and  the  vendee 
ordered  to  make  the  transfer.     Re  Bell,     claiming  the  contrary.     In  Equity  Gas 
65  L.  T.  Rep.  245  (1891).     See  also  ij  632.     Light   Co.   v.  McKeige,  1:59  N.  Y.  2a7 
infra.  (1893),  where  a  bailee  of  stock  was  sued 

iThe  discussion  of  the  duty  of  the     by  one  of  the  claimants  for  the  return 
corporation  in  various  circumstances  is    of  tlie  stock,  tlie  court  said:    'Tlie  de- 

860 


CH.  XXII.]  FORMALITIES    OF   TKANSFER   AND   REGISTRY. 


[§  387. 


tion  is  sued  for  dividends  which  are  claimed  by  two  opposing  par- 
ties.^ 

There  is  some  doubt  and  considerable  difficulty  in  layino-  down 
rules  as  to  when  a  corporation  may  safely  claim  a  right  to  refuse 


fendant  may  ordinarily  protect  himself 
by  bringing  suit  in  the  nature  of  a  bill 
of  interpleader,  making  the  different 
claimants  parties."  A  corporation  in- 
terpleaded between  a  purchaser  of  bank 
stock  at  an  execution  sale  and  an 
alleged  bona  fide  purchaser  of  the  stock 
from  a  judgment  debtor,  in  the  case  of 
M'Donald  v.  First,  etc.  Bank,  116  Fed. 
Rep.  129  (1902).  In  the  case  of  Ameri- 
can Press  Assoc,  v.  Brantingliam,  75 
N.  Y.  App.  Div.  435  (1902),  the  corpora- 
tion interpleaded  between  two  claim- 
ants for  certain  stock.  Where  the  real 
owner  of  stock  brings  suit  against  a 
transferee  of  that  stock  who  has  ob- 
tained a  new  certificate  therefor  and 
succeeds  in  the  suit,  and  in  the  mean- 
time the  defendant  has  assigned  the 
stock  to  a  third  party,  the  corporation 
may  institute  suit  and  interplead  be- 
tween the  successful  claimant  of  the 
stock  and  the  transferee  of  the  stock 
from  the  defendant.  Tlie  defendant  in 
the  former  suit  need  not  be  joined  as  a 
party  in  the  latter  suit.  The  purchaser 
of  the  certificate  may  be  enjoined  from 
transferring  the  same,  and  may  be 
compelled  to  deposit  the  certificate 
with  the  clerk  of  the  court  American, 
etc.  Assoc.  V.  Brantingham,  57  N.  Y. 
App.  Div.  399  (1901).  If  the  court  de- 
cides that  the  interpleader  is  properly 
filed  by  the  corporation  herein,  it  gen- 
erally on  a  motion  dismisses  the  pro- 
ceeding with  costs  to  the  corporation, 
and  the  court  also  decides  between  the 
defendants  if  the  case  is  ready  as  be- 
tween them.  If  not  ready,  it  directs 
an  action  or  an  issue,  or  a  reference  to 


a  master,  to  ascertain  contested  facts, 
as  may  be  best  suited  to  the  nature  of 
the  case:  "or  the  court  may  leave  it  to 
the  defendants  to  prepare  the  case  be- 
tween them  as  they  may  be  advised, 
which  would  be  the  effect  of  a  general 
order  to  interplead."  State  Ins.  Co.  v. 
Gennett,  2  Tenn.  Ch.  100  (1874),  citing,, 
as  cases  on  above  rules  of  practice. 
East.  etc.  Co.  v.  Littledale,  7  Hare,  57, 
62  (1848);  Martinius  v.  Helmuth,  2  Ves. 
&  B.  412,  note  (1817);  Horton  v.  Baptist 
Church.  34  Vt.  309,  317  (1861):  Rowe  v. 
Matteson,  7  N.  J.  Eq.  131  (1848);  Craw- 
ford V.  Fisher,  1  Hare,  436,  441  (1842); 
Condict  n  King,  13  N.  J.  Eq.  375.  383 
(1801);  Hendrickson  v.  Shotwell,  1  N.  J. 
Eq.  595  (1802);  City  Bank  v.  Bangs,  2 
Paige,  570  (1831);  Angell  v.  Hadden,  16 
Ves.  Jr.  202  (1809). 

In  State  Ins.  Co.  v.  Gennett,  2  Tenn. 
Ch.  82  (1874),  the  court  also  said:  "The 
law  is  that  the  mere  pretext  of  a  con- 
flicting claim  is  not  sufficient;  the 
court  must  be  able  to  see  from  the  facts 
stated  that  there  is  a  question  to  be 
tried."'  In  England,  by  section  35  of 
the  Companies  Act,  1862  (25  &  26  Vict., 
c.  89).  a  corporation  may  interplead  be- 
tween two  claimants  of  stock,  and  need 
not  pay  costs.  Re  Kimberley,  etc.  Min. 
Co..  58  L.  T.  Rep.  305  (1888).  An  inter- 
pleader was  sustained  in  Bangor,  etc. 
Co.  V.  Robinson,  52  Fed.  Rep.  520  (1892).. 
Where  a  judgment  'creditor  levies  on 
stock  standing  in  the  name  of  a  dummy 
for  the  debtor,  the  corporation  may 
practically  interplead  between  such 
creditor  and  an  alleged  bona  fide  holder 
of  the  stock.     A  court  of  equity  has 


1  Salisbury  Mills  v.  Townsend,  109 
Mass.  115(1871);  Toddw  Diamond  State 
Iron  Co.,  8  Houst.  (Del.)  372  (1889). 
Quere,  as  to  whether  an  action  for  divi- 
dends can   be   maintained   before  the 


right  of  the  claimant  to  the  stock  is  es- 
tablished. Hughes  V.  Vermont  Copper 
Min.  Co..  72  N.  Y.  207  (1878).  See  also- 
§  538,  infra. 


stfil 


§  387.] 


FOKMALITIES    OF   TRANSFER    AND    REGISTRY.  [CH.  XXII. 


to  act,  and  to  compel  the  claimants  to  litigate  l)et\veen  themselves 
before  it  allows  a  registry  to  either.  The  policy  of  the  law  doul)t- 
less  is  to  go  very  far  in  allowing  the  corporation  to  refuse  to  incur 
responsibility  by  taking  action.  Where,  however,  the  rights  of  one 
claimant  are  reasonably  clear,  the  corporation  should  suspend  action 
for  a  reasonable  time  within  which  the  contesting  party  may  com- 
mence suit;  and  if  no  such  action  is  brought  it  should  allow  a  reg- 
istry by  the  first-named  claimant.^  Any  other  rule  would  enable 
any  person  to  practically  deprive  a  stockholder  of  the  possession  of 
his  stock  temporarily,  by  simply  notifying  the  corporation  that  he 
claims  the  stock.'     Where,  however,  the  corporation  has  allowed 


juriscliction  in  order  to  decree  a  trans- 
fer. Spencer  v.  James,  10  Tex.  Civ. 
App.  327(1895).  In  Langston  v.  Boylston, 
2  Vesey,  Jr.  101  (1793),  wliere  a  bailee  of 
bonds  was  sued'  by  the  bailor  for  con- 
version for  not  delivering  up  the  bonds 
to  the  latter,  although  attacliments  had 
been  levied  on  them,  the  bailee  sus- 
tained a  bill  of  interpleader.  In  Cady 
V.  Potter,  55  Barb.  463  (1869),  a  corpora- 
tion sustained  its  bill  of  interpleader  as 
between  a  person  to  whom  it  had  issued 
stock  on  a  transfer  without  a  surrender 
of  the  old  certificate  and  a  person  to 
whom  it  afterwards  issued  the  stock  on 
a  surrender  of  the  old  certificate.  The 
author  himself,  as  recently  as  1897,  has 
maintained,  in  the  New  York  supreme 
oourt,  a  suit  of  interpleader  by  a  cor- 
poration as  between  two  claimants  of 
stock,  together  with  an  injunction 
against  the  prosecution  of  a  suit  at  law 
commenced  by  one  of  the  claimants 
against  the  corporation  for  damages  for 
refusal  to  transfer  the  stock.  A  broker 
cannot  interplead  between  his  customer 
and  an  indorser  of  the  customer's  note, 
in  regard  to  stocks  deposited  with  the 
broker  by  the  customer,  even  though 
the  administrator  of  the  indorser 
claims  that  he  has  an  interest  in  such 
stock.  Post  V.  Emmett,  40  N.  Y.  App. 
Div.  477  (1899).  A  person  holding  stock 
in  escrow  under  an  option  agreement 
may  interplead  between  the  parties  in 
interest  if  they  make  conflicting  claims. 
Walker  v.  Bamberger,  17  Utah,  239 
<1898). 


1  State  V.  Mclver,  2  S.  C.  25  (1870).  A 
corporation  cannot  interplead  as  be- 
tween stockholders  for  the  purpose  of 
determining  the  ownership  of  stock, 
there  having  been  no  claim  made  upon 
it  in  regard  to  registry  or  in  regard  to 
dividends.  It  must  be  shown  also  that 
the  company  has  not  acted  in  a  partisan 
manner  as  between  the  dilTerent  claim- 
ants. Hinckley  t'.  Pfister,  83  Wis.  64 
(1892).  If  the  corporation  allows  a  trans- 
fer to  be  made  during  the  pendency  of 
a  suit  between  two  claimants  therefor, 
and  the  corporation  has  notice,  it  is  not 
liable  to  the  successful  party,  who  is 
thereby  deprived  of  the  stock,  there 
having  been  no  injunction  pendente  lite. 
Hawes  v.  Gas,  etc.  Co.,  12  N.  Y.  Supp. 
924  (1891).  An  interpleader  may  be 
proper  even  though  no  suit  has  been 
actually  commenced  against  the  corpo- 
ration. See  Story's  Eq.  Juris.,  §  808; 
Daniell,  Ch.  PI.  &  Pr.,  pp.  1561,  1564, 
notes.  In  New  York,  under  the  Code  of 
Civil  Procedure,  an  order  for  inter- 
pleader can  only  be  granted  after  a  suit 
has  been  commenced  against  the  cor- 
poration. Buffalo  Grape  Sugar  Co.  v. 
Alberger,  22  Hun,  349  (1880).  As  to  the 
proper  allegations,  see  Crane  v.  Mac- 
donald,  118  N.'  Y.  648  (1890),  involving  a 
suit.  A  corporation  cannot  refuse  to 
transfer  stock  to  a  person  on  the  ground 
that  a  trustee  in  bankruptcy  has  been 
appointed  of  his  estate.  Sutton  v.  En- 
glish, etc.  Co.,  87  L.  T.  Rep.  438  (1902). 

^Ex  parte  Sargent,  L.  R.  17  Eq.  273 
(1874). 


863 


CII. 


XXII.] 


FORMALITIES    OF    TRANSFER    AND    REGISTRY. 


[§  3S8. 


one  claimant  to  register  his  transfer,  or  has  recognized  him  as  a 
stockholder,  the  right  of  the  corporation  to  interplead  is  gone.^  It 
cannot  afterwards  remove  the  name  of  the  registered  stockholder, 
especially  where  such  stockholder  has  acted  in  reliance  upon  such 
registry,^  It  ma^",  however,  bring  a  suit  to  recover  back  the  stock.^ 
§  3SS.  Corporation  must  ol)ey  mandate  of  court  ordering  registry 
and  issue  of  new  certificates. —  The  authorities  on  this  proposition 
of  law  are  few  in  number,  but  they  are  decisive  in  protecting  the 
corporation  from  liability  where  it  proceeds  under  mandate  of  a 
court.  Thus,  where  a  decree  is  obtained  commanding  the  corpora- 
tion to  register  a  transfer,  the  corporation  is  protected  in  obeying 
the  decree,  even  though  it  is  reversed  on  appeal,  there  having  been 
no  stay  of  proceedings/  Under  the  statutes  of  California,  how- 
ever, even  though  stock  is  distributed  by  executors  in  accordance 
with  a  decree  of  distribution,  and  the  distributees  sell  the  stock 
and  it  is  transferred  on  the  books  of  the  company,  nevertheless,  if 
the  decree  is  reversed  on  appeal,  the  transfers  are  void  and  the 
company  is  liable  for  dividends  paid  in  the  meantime  to  such  pur- 


1  Dalton  V.  Midland  Ry.,  13  C.  B.  458 
(1832);  Mt.  Holly,  etc.  Co.  v.  Ferree,  17 
N.  J.  Eq.  117  (1864).  If  the  party  has 
favored  one  of  the  two  parties,  as  by 
voluntarily  agreeing  with  the  sheriff  to 
recognize  an  execution,  an  interpleader 
will  not  lie.  Cromwell  v.  American 
Loan,  etc.  Co.,  57  Hun,  149  (1890).  See 
also  American  Tel.  etc.  Co.  v.  Day,  20 
J.  &  S.  (N.  Y.)  128  (1885).  A  corporation 
cannot  refuse  to  transfer  stock  on  the 
ground  that  the  vendor  fraudulently 
induced  the  company  to  issue  the  stock 
to  him,  where  the  company  has  been 
guilty  of  laches  in  not  seeking  a  rem- 
edy before  the  transfer.  The  vendee  in 
this  case  was  a  director.  American,  etc. 
Co.  V.  Bayless,  91  Ky.  94  (1891). 

2  Ward  V.  Southeastern  Ry..  2  El.  & 
EL  812  (1860);  Hart  v.  Frontino,  etc.  Co., 
L.  R  5  Exch.  Ill  (1870);  Cohen  v. 
Gwynn,  4  Md.  Ch.  357  (1848).  Unless 
there  clearly  is  a  clerical  mistake  and 
the  issue  is  to  the  wrong  party.  Smith 
V.  North  Am.  Min.  Co.,  1  Nev.  423  (1865). 
The  corporation  is  liable  for  such  mis- 
takes. Harrison  v,  Pryse,  Barn.  Ch.  324 
.(1740). 

3  See  §  367,  supra.     Where  the  presi- 


dent claims  certain  unissued  stock  as 
assignee  of  a  contractor  who  was  en- 
titled to  it,  and  another  person  also 
claims  it  as  assignee  of  the  contractor, 
and  the  president  issues  the  stock  to 
himself  without  authority  of  the  board 
of  directors,  the  corporation  may  insti- 
tute a  suit  to  compel  him  to  give  it  up, 
and  in  such  suit  the  court  will  deter- 
mine who  is  entitled  to  such  stock. 
Lakewood  Gas  Co.  v.  Smith,  51  AtL  Rep. 
152  (N.  J.  1902). 

*  Chapman  v.  New  Orleans,  etc.  Co.,  4 
La.  Ann.  153  (1849).  See  also  Purchase 
V.  New  York  Excli.  Bank,  3  Rob.  (N.  Y.) 
164  (1865).  But  when  the  court  directs 
the  corporation  to  issue  a  certificate  to 
the  life  tenant  of  stock,  the  corporation 
is  still  bound  to  notify  a  purchaser  of 
that  certificate  that  it  represents  a  life 
interest  only;  otherwise  the  corpora- 
tion is  liable  to  the  remainderman. 
Caulkins  v.  Gaslight  Co.,  85  Tenn.  683 
(1887).  A  corporate  officer  is  guilty  of 
contempt  if  he  refuses  to  obey  an  order 
of  court  requiring  him  to  make  certain 
transfers  of  stock  upon  the  surrender  of 
the  old  certificates.  Kingu.  Barnes,  113 
N.  Y.  476,  655  (1889). 


863 


^jj  3S9,  390.]       FOKMALITIKS    OF    TRANSFER    AND    REGISTRY.  [CH.    XXIT. 

chasors.^  Cases  herein  may  arise  also  where  the  registered  stock- 
holder alleges  that  he  has  lost  his  certificate,  and  the  court  compels 
the  corporation  to  issue  to  him  a  new  one;'-  also  where  an  attach- 
ment or  execution  has  been  levied,  the  old  certificate  of  stock  being 
outstanding.^'  There  is  a  limit,  however,  to  the  power  of  courts  in 
these  matters.  If  the  whole  capital  stock  has  been  issued  and  the 
certificates  therefor  are  outstanding,  a  court  cannot  order  the  issue 
of  other  certificates,  unless  the  decree  at  the  same  time  practically 
nullifies  a  corresponding  outstanding  certificate.^ 

§  3S9.  Bemedks  of  a  transferee  of  stock  against  the  corporation 
for  refusal  to  allow  registry.— Where,  for  any  reason,  the  corj)©- 
ration  refuses  to  allow  the  registry  of  a  transfer  of  stock,  when  it 
is  the  duty  and  obligation  of  the  corporation  to  allow  it,  the  trans- 
ferrer or  the  transferee  who  applies  for  registry  may,  in  general, 
pu-rsue  one  of  three  remedies.  He  may  apply  to  a  court  of  law  for 
a  mcuidamus  to  the  corporation  to  compel  it  to  open  its  books  and 
allow  the  registry;  or  he  may  bring  a  suit  in  equity,  praying  that 
the  corporation  be  decreed  to  allow  the  registry,  or  to  pay  him 
damao-es  if  registry  is  impossible;  or  he  may  sue  the  corporation  at 
law  for  damages,  on  the  ground  that  by  its  refusal  it  has  been 
guilty  of  a  conversion  of  his  stock.^ 

§390.  Bemedy  ly  mandamus.— The  authorities  are  in  irrecon- 
cilable conflict  on  the  question  whether  a  manda7mis  lies  to  compel 
a  corporation  to  allow  a  registry  on  its  books  of  a  transfer  of  stock. 
The  weight  of  authority  holds  very  clearly  that  the  mandamus  will 
not  lie.«  °  This  rule  is  based  largely  on  the  historical  origin  of  the 

» In  a  suit  by  the  executors  to  recover  etc.  Bank  v.  Bank  of  Orland,  133  Cal. 

such  dividends  the  purcliasers  need  not  04  (1901),  and  in  Real  Estate,  etc.  Co.  v. 

be  made  parties.     Ashton  v.  Zeila  Min.  Bird,  90  Md.  229  (1899). 
Co.,  134  Cal.  408  (1901).   See  also  Ashton        6The  leading  case  in  this  country  is 

V.  Heggerty,  130  Cal.  516  (1900).  Shipley  v.  Meclmnics'  Bank,  10  Johns. 

-'See  §^  358-362,  supra.  484  (1813),  where  the  court  said:    "The 

3  See  §  489,  infra.  applicants  have  an  adequate  remedy, 

4  See  §  284,  supra.  Where  stock  is  by  a  special  action  on  the  case,  to  re- 
deposited  with  a  trustee  for  purposes  of  cover  the  value  of  the  stock  if  the  bank 
reorganization,  and  transferable  cer-  have  unduly  refused  to  transfer  it. 
tificates  are  issued  therefor  by  the  There  is  no  need  of  the  extraordinary 
trustee,  a  claimant  of  stock  which  an-  remedy  by  mandamus  in  so  ordinary  a 
other  person  has  deposited,  and  for  case.  It  might  as  well  be  required  in 
which  such  other  person  has  the  trus-  every  case  where  trover  would  lie.  It 
tee's  certificate,  cannot  compel  the  is  not  a  matter  of  public  concern,  as  in 
trustee  to  deliver  up  the  stock  until  the  case  of  public  records  and  docu- 
the  trustee's  certificate  is  returned,  ments;  and  there  cannot  be  any  neces- 
even  though  the  party  holding  it  is  a  sity,  or  even  a  desire,  of  possessing  the 
party  defendant.  Bean  v.  American  identical  shares  in  question."  Ex  parte 
Loan,  etc.  Co.,  122  N.  Y.  622  (1890).  Fireman's  Ins.  Co.,  6  Hill  (N.  Y.),  243 

5  Quoted  and  approved  in   Herbert,     (1843);  People  n  Parker  Vein  Coal  Co., 

864 


CH.  XXII.]  FORMALITIES    OF    TRANSFER   AND    REGISTRY. 


[§  390. 


writ  of  mandamus,  and  on  the  theory  that  the  stock  of  a  private 
corporation  has  no  peculiar  value,  and  may  be  readily  obtained  in 
open  market  or  fully  compensated  for  in  damages.     There  is  a 


10  How.  Pr.  543  (1854);  State  v.  Rom- 
bauer,  46  Mo.  155  (1870);  State  v.  St. 
Louis,  etc.  Co.,  21  Mo.  App.  526  (1886); 
Rex  V.  London  Assur.  Co.,  1  Dowl.  &  R 
510  (1822);  Stackpole  v.  Seymour,  127 
Mass.  104  (1879);  Rex  v.  Bank  of  Eng- 
land, 2  Doug.  524  (1780);  Curry  v.  Scott, 
54  Pa.  St.  270.  276(1867);  Gray  v.  Port- 
land Bank,  3  Mass.  364,381  (1807);  State 
V.  Guerrero,  12  Nev.  105  (1877);  People 
V.  Miller,  39  Hun,  557  (1886);  aff' d,  114 
N.  Y.  636;  Baker  v.  Marshall,  15  Minn. 
177  (1870),  where  the  stock  had  already 
been  issued  to  another;  Wilkinson  v. 
Providence  Bank,  3  R.  L  22  (1853);  Kim- 
ball V.  Union  Water  Co.,  44  Cal.  173 
(1872);  Birmingham  F.  Ins.  Co.  v.  Com- 
monwealth, 92  Pa.  St.  72  (1879),  where 
the  court  says  that,  even  if  the  courts 
"were  inclined  to  enlarge  the  remedy, 
it  could  not  be  done  in  a  case  where 
the  right  is  disputed,  where  no  public 
interest  is  involved,  where  no  reason  is 
shown  for  a  transfer  of  a  specific  and 
favorite  thing,  and  where  the  remedy 
by  action  is  fully  adequate;  "  Townes  v. 
Nichols,  73  Ma  515  (1882),  where  the 
court  vigorously  says:  "  All  the  author- 
ities declare  that  the  remedy  by  man- 
damus cannot  be  resorted  to  in  a  case 
like  this,  unless  the  legal  right  of  the 
petitioner  to  the  possession  of  the  thing 
sought  for  is  clear  and  unquestionable. 
If  there  be  doubt  as  to  what  his  legal 
right  may  be,  involving  the  necessity 
of  litigation  to  settle  it,  mandamus 
must  be  withheld.  Mandamus  is  the 
right  arm  of  the  law.  Its  principal 
office  is,  not  to  inquire  and  investigate, 
but  to  command  and  execute.  It  is 
not  designed  to  assume  a  part  in  ordi- 
nary law-suits  or  equitable  proceedings. 
It  is  properly  called  into  requisition  in 
cases  where  the  law  has  been  settled, 
or  in  cases  where  questions  of  law  or 
equity  cannot  properly  and  reasonably 
arise.    Its  very  nature  implies  that  the 


law,  although  plain  and  clear,  fails  to 
be  enforced  and  needs  its  assistance." 
See  also  Rex  v.  Worcester,  etc.  Nav.  Co., 
1  Man.  &  R  529  (1828);  Regina  v.  Liver- 
pool, etc.  Ry.,  21  L.  J.  (Q.  B.)  284  (1852); 
Murray  v.  Stevens,  110  Mass.  95  (1872), 
where  the  court  said,  in  refusing  a 
mandamus  to  compel  a  registry  of 
stock:  "Without  undertaking  to  lay 
down  an  invariable  rule  on  the  subject, 
we  think  it  must  be  said  that  this  pro- 
cess was  not  attended  and  is  not  well 
adapted  for  the  trial  of  mere  questions 
of  property;"  State  v.  Warren  Foundry, 
etc.  Co.,  32  N.  J.  L.  439  (1868),  where  a 
previous  transfer  had  been  registered, 
although  possibly  in  fraud  of  creditors; 
Freon  v.  Carriage  Co.,  42  Ohio  St.  30 
(1884),  refusing  a  mandamus,  although 
it  is  said  "that  this  stock  has  no  mar- 
ket value,  that  the  corporation  is  doing 
a  growing  and  profitable  business,  that 
its  good- will  enhances  the  value  of  the 
stock,  and  that  by  reason  of  these  things 
damages  will  not  be  an  adequate  rem- 
edy. These  facts  do  not  change  the 
rule.  They  are  elements  in  assessing 
damages  which  may  be  fully  ascertained 
in  an  action  at  law."  See  also  Pomeroy, 
Eq.  Jur.,  §  1412;  State  u  People's Bldg. 
etc.  Assoc,  43  N.  J.  L.  389  (1881);  State 
V.  Tim  kin.  48  N.  J.  L.  87  (1886):  Tobey 
V.  Hakes,  54  Conn.  274  (1886).  refusing  a 
mandamus  on  the  corporate  secretary; 
Bank  of  State  v.  Harrison,  66  Ga.  696' 
(1881).  See  also  Lindley,  Company  Law, 
pp.  79,  811,  812,  6th  ed.  Mandamus  does 
not  issue  to  compel  a  corporation  to 
transfer  stock  when  there  is  no  written 
transfer  of  the  certificate  and  another 
party  claims  it.  Burnsville  Turn  p.  Co.  v. 
State,  119  Ind.  382  (1889).  See  also  Dur- 
fee  V.  Harper,  22  Mont.  354  (1899).  Man- 
damus does  not  lie  to  compel  a  corpora- 
tion to  transfer  stock.  People  v.  Brandis 
Mfg.  Co.,  N.  Y.  L.  J.,  Dec.  11, 1889.  Man- 
damus does  not  lie  against  the  Bank  of 


(55) 


865 


§  391.] 


FOEMALITIES    OF   TRANSFER    AND    REGISTRY.  [CU.  XXII. 


Strong  line  of  decisions,  however,  which  holds  that  a  mandaimis 
does  fie  to  compel  a  corporation  to  allow  a  registry  of  a  transfer  of 
stock,  particularly  where  the  corporation  has  no  good  and  suffi- 
cient'reason  for  refusing  the  registry.'  Perhaps  the  strongest 
argument  against  granting  a  mandamus  for  this  purpose  lies  in  the 
fact  that  by  a  bill  in  equity  not  only  can  a  registry  be  specifically 
decreed  and  ordered  by  the  court,  but  the  rights  of  the  corporation 
and  of  all  of  the  claimants  may  be  fully  and  finally  heard  and  dis- 
posed of. 

§  391.  Remedy  ly  suit  in  equity.—  This  is  the  surest,  most  com- 
plete, and  most  just  remedy  for  compelling  a  corporation  to  reg- 


England  to  compel  it  to  register  a  trans- 
ferof  stock  to  an  individual  and  a  cor- 
poration jointly.     Law  Guarantee,  etc. 
Soc.  V.  Bank  of  England,  L.  R.  24  Q.  B. 
D.  406  (1890).     3Iandamtis  is  not   the 
proper  remedy  to  compel  the  issue  of  a 
certificate  of  stock.    State  v.  Carpenter, 
51  Ohio  St.  83  (1894).    Under  the  stat- 
utes of  Georgia  it  is  held  that  man- 
damus does  not  lie  to  compel  a  transfer 
of  stock,   unless  the  transfer  is   con- 
nected with  a  judicial  sale:  and  even 
though  a  sale  is  made  by  a  trustee  ap- 
pointed by  a  court  and  he   has  been 
authorized  to  sell  the  stock,  yet  this  is 
not    sufficient    to  sustain  mandamus. 
Terrell  v.  Georgia,  etc.  Ca,  41  S.  E.  Rep. 
262  (Ga.  1902).     Cf.  93  N.  W.  Rep.  1044. 
1  People  V.  Goss,  etc.  Co.,  99  111.  355 
(1881);  State  v.  First  Nat.  Bank,  89  Ind. 
302   (1883);  GreQ.n    Mount,  etc.   Co.  v. 
Bulla,    45    Ind.    1    (1873);     People    v. 
Crockett,  9  Cal.  112  (1858);  State  v.  Mc- 
Iver,  2  S.  C.  25  (1870);  State  v.  Cheraw, 
etc.  R.  R.,  16  S.  C.  524  (1881);  Cooper  v. 
Dismal    Swamp,   etc.     Co.,    2    Murph. 
(N.  C.)  195  (1812);  Norris  v.  Irish  Land 
Co.,  8  El.  &  Bl.  512  (1857):  Regina  v. 
Carnatic  Ry.,  L.  R.  8  Q.  B.  299  (1873); 
Crawford  v.  Provincial  Ins.  Co.,  8  U.  C. 
C.  P.  263   (1859);  Goodwin  v.  Ottawa, 
etc.  Ry.,  13  U.  C.  C.  P.  254  (1863),  hold- 
ing also  that  the  mandamus  may  run 
to  the  corporation  itself  without  speci- 
fying any  officers,  and  that*  an  evasive 
answer  by  them  is  equivalent  to  a  re- 
fusal to  register.     It  has  been  held  that 
mandamus  will  issue  to  aid  the  sheriff 


in  transferring  stock  sold  on  an  execu- 
tion sale.    This  rule,  however,  would 
work  harshly  in  states  where  the  pur- 
chaser of  the  outstanding  certificate 
may  have  some  rights.    Where  such  a 
possibility  exists  the  majirfamus  should 
be  denied.    State  v.  First  Nat.  Bank,  89 
Ind.  302  (1883);  Bailey  v.  Strohecker,  38 
Ga.  259  (1868):  Durham  v.  Monumental, 
etc.  Co.,  9  Oreg.  41  (1880).     Cy.  §  489, 
infra.    Mandamus  will  lie  to  compel 
the  corporation  to  transfer  the  stock 
on  its  books  where  any  otiier  record 
would  be  inadequate  because  there  is 
no  market  value  for  the  stock,  and  be- 
cause the  company  has   fraudulently 
transferred  its  property  for  the  purpose 
of  injuring  the  value  of  tlie  stock.  Tlve 
mandavius  will  lie  although  a  suit  is 
pending  in  equity  to  accomplish  the 
same    purpose.    Slemmons  v.  Thomp- 
son, 23  Oreg.  215  (1892).   Mandamus  lies 
to  compel  a  corporation    to  transfer 
stock  sold  under  levy  of  execution.     It 
may    be    granted    as   a    common-law 
remedy  or  as  a  remedy  ancillary  to  the 
suit.    Hair  v.  Burnell,  106  Fed.  Rep.  280 
(1900).     Where  the  purchaser  of  stock 
at  execution  sale  applies  for  a  man- 
damus  to  compel   the  corporation  tO' 
transfer  the    stock  to    him,   and  the 
owner  of    the    stock    intervenes    and 
claims  that  the    debt    on  which  the 
stock  was  sold  had  been  paid,  and  asks 
for  a  delivery  of  the  certificates  to  the 
owner,  the  case  may  be  tried  in  equity. 
Croft  V.  Colfax,  etc.  Co.,  113  Iowa,  455 
(1901X     Cf.  33  S.  Rep.  507. 


866 


CH.  XXII.]  FORMALITIES   OF   TRANSFER    AND    REGISTRY.  [§  391. 


ister  a  transfer  of  stock,  and  for  adjusting  the  various  conflicting 
rights  or  claims  of  other  parties.^  It  is  a  remedy  applicable  to  al- 
most all  cases  arising  under  a  refusal  of  the  corporation  to  allow 
a  registry  of  transfer.     The  case  will  be  decided  on  equitable  prin- 


1  Quoted  and  approved    in  Real-Es- 
tate, etc.  Co.  r.  Bird,  90  Md.  229  (1899); 
Cushman  v.  Thayer  Mfg.  Co.,  76  N.  Y. 
365  (1879);    Walker  v.  Detroit   Transit 
Ry.,  47  Mich.  338  (1882);  lasigi  u  Chi- 
cago, etc.   R.   R.,  129  Mass.  46  (1880); 
Mechanics'  Bank  v.  Seton,  1   Pet.  299 
(1828);  Wilson  u  Atlantic,  etc.  R  R.,  2 
Fed.   Rep.  459  (1880);   Middlebrook   v. 
Merchants'  Bank,  3  Abb.  App.  Dec.  295 
(1866);  Buckmaster  v.  Consumers'  Ice 
Co.,  5  Daly,  313  (1874).  In  Rice  v.  Rocke- 
feller. 134  N.  Y.  174  (1892,  reversing  9 
N.  Y.  Supp.  866),  a  court  of  equity  com- 
pelled the  trustees  of  a  trust  to  trans- 
fer  on    their    books  trust  certificates 
which  had   been    purchased   in    open 
market  by  a  person  who  then  applied 
to  the  trustees  for  a  transfer.  The  court 
based  its  decision  on  the  similarity  of 
such  trust  certificates  to  stock  certifi- 
cates, and  said:    "The  denial    of  the 
right  to  transfer  upon  the  books  is  not 
consistent  with  the  transferable  quality 
of  the  shares,  which  imports  that  tlie 
purchaser   taking    an   assignment    of 
them  in  a  duly  formal  manner  has  the 
right  to  become  a  transferee  witliin  the 
meaning  of  the  agreement  upon  which 
the  trust  was  formed.    ...    In  such 
case  it  is  within  the  equitable  power 
of  the  court  to  compel  such  transfer  to 
be  made.''    The  court  held  also  that  it 
was  immaterial  that  the  purchaser  who 
applied  for  the  transfer  was  hostile  to 
and  a  competitor  of  the  trust.  The  court 
said  that  although  it  would  have  been 
legal  in  the  beginning  to  have  vested 
a  discretion  in  the  trustees  as  to  allow- 
ing transfers,  yet  that,  such  discretion 
not  having  been  reserved,  it  could  not 
be  exercised  by  the  directors.     See  also 
White  V.  Price,  39  Hun,  395  (1886):  aflf'd, 
108  N.  Y.  661  (1888);  Iron  R.  R.  v.  Fink, 
41  Ohio  St.  321  (1884),  the  court  saying 
that  the  power  of  equity  to  decree  a 


registry  is  well  settled.  As  regards  the 
pleadings,  see  Burrall  v.  Bushwick  R, 
R.,  75  N.  Y.  211  (1878).  See  also  §  579, 
infra.  A  purchaser  of  stock  at  an  ex- 
ecution sale  may  file  a  bill  against  an 
alleged  transferee  of  the  stock  and  the 
corporation  to  have  the  conflicting 
rights  adjudicated.  Howard  v.  Corey, 
126  Ala.  283  (1900).  In  an  action  against 
the  secretary  of  a  corporation  to  com- 
pel him  to  register  a  transfer  of  stock, 
the  corporation  is  not  a  necessary  party. 
Gould  V.  Head,  41  Fed.  Rep.  240  (1890). 
The  federal  courts  have  jurisdiction 
of  a  suit  in  equity  brought  by  a  citizen 
of  one  state  to  compel  a  corporation  of 
another  state  to  transfer  on  its  books 
certain  shares  of  stock  which  the  com- 
plainant purchased  from  a  citizen  of 
the  same  state  as  the  defendant.  Jew- 
ett  V.  Bradford,  etc.  Co.,  45  Fed.  Rep. 
801  (1891).  If  the  holder  of  a  certificate 
of  stock  has  applied  for  transfer  and 
been  refused,  he  may  sue  for  the  divi- 
dend before  bringing  a  suit  in  equity 
to  obtain  a  transfer  of  his  stock.  Hill 
V.  Atoka,  etc.  Co.,  21  S.  W.  Rep.  508 
(Mo.  1893).  This  case  arose  again  in  124 
Mo.  153.  An  agreement  of  the  holder  of 
a  majority  of  the  stock  that  he  will  re- 
tain control  is  no  defense  by  the  corpo- 
ration to  an  action  by  the  receiver  of 
such  stockholder  to  transfer  the  stock 
on  the  corporate  books.  Weller  v.  Pace 
Tobacco  Co.,  25  N.  Y.  Week.  Dig.  531 
(1886).  A  pledgee  of  a  certificate  of 
stock  is  not  bound  by  an  agreement  of 
all  the  stockholders  to  surrender  to  the 
corporation  a  part  of  their  stock,  which 
part  is  to  be  then  considered  preferred 
stock,  and  is  to  be  sold  by  the  corpora- 
tion for  the  purpose  of  paying  corpo- 
rate debts.  Although  all  the  other 
stock  has  had  this  agreement  stamped 
on  the  certificates,  yet  the  corporation 
cannot  insist  that  the  purchaser  of  the 


867 


§  391.] 


FOKMALITIES    Vb'    TUANSFEU    AND    KEGISTliV. 


[CH. 


XXII. 


ciples,  however,  and  a  transfer  will  not  be  decreed  if  it  involves 
bad  faith. ^  In  a  suit  in  equity  by  the  claimant  of  stock  against 
other  parties,  claiming  the  stock,  the  corporation  is  a  proper  but 
not  a  necessar}''  party  defendant,  in  order  that  a  transfer  of  the 
stock  may  be  had  upon  the  corporate  books.-  A  somewhat  sim- 
ilar suit  in  equity  is  involved  where  the  purchaser  of  stock  files  a 
bill  in  equity  against  the  vendor  for  specific  performance  of  the 


stock  so  pledged  shall  allow  the  same 
agreement  to  be  stamped  on  the  new 
certificate  issued  to  such  purchaser. 
The  court  will  order  a  transfer  free 
from  the  agreement.  Campbell  v. 
American  Zylonite  Co.,  123  N.  Y.  455 
(1890).  Even  though  the  charter  of  an 
irregation  company  provides  that  no 
one  shall  hold  stock,  except  an  owner 
of  land  to  the  amount  of  one  acre  for 
each  share  of  stock  held  by  him,  yet 
where  the  stock  is  sold  for  non-payment 
of  assessments  the  purchaser  at  such 
sale  is  entitled  to  a  transfer  on  the  cor- 
porate books,  although  he  owns  no  land. 
The  purchaser  may  file  a  bill  in  equity 
to  determine  his  rights.  The  court 
found  it  unnecessary  to  pass  on  the 
question  as  to  whether  such  a  restric- 
tion as  to  the  stock  is  legal.  Spurgeon 
V.  Santa  Ana,  etc.  Co.,  120  CaL  71  (1898). 
A  bill  in  equity  lies  to  compel  a  corpo- 
ration which  has  declared  a  stock  divi- 
dend to  stockholders  of  record  on  July 
1st,  to  deliver  such  stock  dividend  to  a 
purchaser  on  July  6th  whose  purchase 
included  svich  dividend.  Rose  v.  Bar- 
clay. 191  Pa.  St.  594  (1899). 

1  Regina  v.  Liverpool,  etc.  Ry.,  21  L. 
J.  (Q.  B.)  284  (1852).  Cf.  Rice  v.  Rocke- 
feller, 134  N.  Y.  174  (1892).  See  also 
§  386,  supra,  and  g  736,  infra. 

2  See  §  338,  supra;  also  Tanner  v.  Greg- 
ory, 71  Wis.  490  (1888):  Ken  dig  v.  Dean, 
97  U.  S.  423  (1878);  Budd  v.  Munroe,  18 
Hun,  316  (1879),  the  latter  case  holding 
also  that  the  corporation  may  recover 
costs  against  a  co-defendant  who  is  de- 
feated in  the  suit;  Johnson  v.  Kirby,  65. 
Cal.  483  (1884).  In  such  cases  the  cor- 
poration is  but  nominally  concerned  in 
the  result  of  the  suit.     It  cannot  ap- 


peal from  the  judgment  when  both  of 
the  real  parties  in  interest  are  satisfied 
and  do  not  appeal.  Board  of  Liquidation 
V.  New  Orleans  Water-works  Co.,  39 
La,  Ann.  203  (1887).  If  the  complain- 
ant is  a  citizen  of  the  same  state  as  the 
corporation,  one  of  the  parties  defend- 
ant, another  defendant  cannot  remove 
the  case  into  a  United  States  court. 
Crump  V.  Thurber,  115  U.  S.  56  (1885). 
Where  a  corporation  has  not  yet  issued 
stock  as  called  for  by  a  contract,  a 
claimant  of  such  stock  may  bring  suit 
in  the  state  where  the  corporation  was 
organized  to  obtain  the  stock,  even 
though  the  other  claimant  is  a  non-resi- 
dent. Jennings  v.  Rocky  Bar,  etc.  Co., 
70  Pac.  Rep.  136  (Wash.  1902).  Where 
the  title  to  stock  is  litigated  in  a  suit 
in  equity  and  an  officer  of  the  corpora- 
tion is  a  party  defendant,  being  inter- 
ested in  the  transaction,  the  court  may 
compel  him  in  that  suit  to  transfer  the 
stock  on  the  corporate  books,  even 
though  the  corporation  is  not  a  party 
to  the  suit.  Durfee  v.  Harper,  22  Mont. 
354  (1899).  A  corporation  by  the  action 
of  its  board  of  directors  and  consent  of 
all  of  its  stockholders  may  agree  that  a 
certain  percentage  of  its  profits  shall 
be  paid  annually  to  a  person  for  serv- 
ices already  rendered  by  him.  In  a 
suit  by  him  to  enforce  such  agreement 
and  asking  an  injunction  against  any 
sales  of  stock,  except  with  notice  of 
such  agreement,  stockholders  are  nec- 
essary parties  defendant.  Such  an 
agreement  is  not  an  exclusion  of  future 
boards  of  directors  from  the  manage- 
ment of  the  company.  Dupignac  v. 
Bernstrom,  76  N.  Y.  App.  Div.  105  (1902). 


868 


Cil.  XXII. J  FORMALITIES    OF    TKANSFER    AND    REGISTRY. 


[§  391. 


contract.^  The  relief  usually  demanded  is  in  the  alternative,  being 
either  for  a  registry  of  the  transfer  or  damages  in  lieu  thereof.^  A 
preliminary  injunction  is  often  obtained  in  connection  with  such  a 
suit.*   If  all  the  stock  has  already  been  issued,  equity  has  no  power 


1  See  §§  337,  338,  supra. 

-  Quoted  and  approved  in  State  v.  Car- 
penter, 51  Ohio  St.  83  (1894).  »  A  bill  in 
equity  may  be  maintained  by  abona  fide 
purchaser  of  stock  against  the  corpora- 
tion to  compel  a  transfer  of  the  stock 
upoathe  corporate  books."  The  bill  may 
be  in  the  alternative  for  a  transfer  of 
the  stock  or  for  damages,  and,  if  the 
company  has  already  issued  its  whole 
capital  stock,  damages  will  be  granted. 
Birmingham  Nat.  Bank  v.  Roden,  97 
Ala.  40i  (1892).  In  a  suit  against  a  cor- 
poration to  compel  it  to  issue  stock  to 
the  plaintiff  or  else  pay  the  value  tliere- 
of,  the  proper  form  in  judgment  is  an 
order  to  issue  the  stock.  A  money  judg- 
ment should  be  entered  only  after 
proof  of  the  corporation's  failure  to 
comply  with  the  main  order.  Consol- 
idated, etc.  Co.  V.  Huff,  62  Kan.  405 
11901).  Where  a  corporation  refuses 
to  issue  the  stock  to  a  subscriber,  he 
ma}'  file  a  bill  in  the  alternative  to 
compel  the  issue  of  the  shares  or  the 
payment  of  their  value  with  damages. 
If  during  the  pendency  of  the  suit  the 
company  becomes  insolvent,  the  court 
can  give  him  damages  payable  prorata 
out  of  the  assets  of  the  corporation.  Re 
Reading  Iron  Works,  149  Pa.  St.  182 
(1892).    See  §  61,  supra. 

3  See  §  579,  infra,  and  §  363,  supra. 
Where  a  stockholder  has  delivered  his 
stock  to  the  directors  to  be  divided 
into  smaller  certificates,  and  the  direct- 
ors claim  that  it  was  agreed  that  a 
•  part  of  the  stock  should  be  sold  for  the 
benefit  of  the  corporation,  the  stock- 
holder may  have  a  preliminary  injunc- 
tion against  such  sale  pending  his  suit 
to  compel  delivery  of  the  stock.  Bed- 
ford V.  American,  etc.  Co..  51  N.  Y.  A  pp. 
Div.  587  (1900).  Where  a  corporation 
refuses  to  transfer  stock,  the  purchaser 


may  file  a  bill  in  equity  to  compel  such 
transfer,  and  may  make  the  vendor  a 
party  thereto,  an  injunction  against 
any  sale  by  him  being  asked.  Thornton 
r.  Martin,  42  S.  E.  Rep.  348  (Ga.  1902).  A 
court  will  enjoin  a  party  from  voting 
upon  or  disposing  of  his  stock  in  a  cor- 
poration pendente  lite,  where  the  plaint- 
iffs show  that  they  transferred  the 
stock  to  the  defendant  on  the  latter's 
agreement  not  to  sell  the  same,  except 
with  the  consent  of  the  former,  and 
that  when  he  did  sell  the  stock  three- 
fourths  of  the  proceeds  should  belong 
to  the  former,  and  it  appearing  further 
that  the  defendant  had  given  the  stock 
to  his  sister  without  consideration, 
Weston  V.  Goldstein,  39  N.  Y.  App.  Div. 
661  (1899).  Where  stock  is  tied  up 
by  an  injunction  which  is  afterwards 
vacated,  and  in  the  meantime  the  stock 
depreciates  in  value,  the  loss  can  be  re- 
covered from  the  enjoining  party  if 
the  stocks  could  and  would  have  been 
sold  before  ttie  depreciation  if  they  had 
not  been  so  tied  up.  But  if  such  stocks 
are  in  pledge,  and  the  pledgor  does  not 
pay  the  loan  while  the  stocks  are  so 
tied  up,  no  damages  can  be  recovered. 
Fourth  Nat.  Bank,  etc.  v.  Crescent,  etc. 
Co.,  52S. W.  Rep.  1021  (Tenn.  1897).  Under 
the  statutes  of  California,  even  though 
stock  IS  distributed  by  executors  in  ac- 
cordance with  a  decree  of  distribution, 
and  the  distributees  sell  the  stock  and 
it  is  transferred  on  the  books  of  the 
company,  nevertheless,  if  the  decree  is 
reversed  on  appeal,  the  transfers  are  void 
and  the  company  is  liable  for  dividends 
paid  in  the  meantime  to  such  purchas- 
ers. In  a  suit  by  the  executors  to  re- 
cover such  dividends  the  purchasers 
need  not  be  made  parties.  A.shton  v. 
Zeila  Min.  Co.,  134  Cal.  408  (1901),  See 
also  §  330,  supra. 


869 


§  392.J 


FORMALITIES    OF   TRANSFER   AND    REGISTRY, 


iCU. 


X  X  H , 


to  compel  a  further  issue.^  Laches  or  the  statute  of  limitations 
may  also  be  a  bar.-  A  citizen  of  Alabama  cannot  maintain  in  the 
courts  of  Alabama  a  suit  to  enjoin  non-residents  from  transferring 
stock  in  a  non-resident  corporation  where  the  tlefendants  are  not 
personally  served  within  the  state.*  Where  a  decree  directs  the 
transfer  of  certain  stock  in  the  distribution  of  an  estate  and  the 
corporation  makes  such  transfer,  and  thereafter  the  decree  is  re- 
versed on  appeal,  the  executors  may  bring  suit  to  have  the  trans- 
fer canceled.'* 

§  392.  Remechj  hij  an  action  for  dama/ffs.—  An  action  at  law  for 
damages  is  an  old  and  well-established  remedy  of  a  stockholder 
who  has  applied  to  the  corporation  for  a  registry  of  a  transfer  and 
has  been   refused.^     The  form  of  the  action   may  vary,  and  may 

1  Smith  V.  North  Am.  Min.  Co.,  1  Nev.    27  Mass.  415  (1830);  Helm  v.  Swigpett 


423  (1865);  and  see  §  284,  supra. 

2  In  New  York  the  ten-year  statute 
of    limitations  runs    against  an   equi- 
table   action    against  the  corporation 
for  a  transfer  of  the  certificates  on  its 
books  from   the  time   when   the  out- 
standing certificate  was  issued.    Ryder 
V.  Bushwick  R.   R.,  10  N.  Y.  Supp.  748 
(1890).     In  Ware  v.  Galveston  City  Co., 
146  U.  S.  103  (1892),  the  bill  of  a  claim- 
ant of  stock  against  the  company  to 
hold  it  liable  for  allowing  a  transfer  of 
the  stock  in  fraud  of  his  rights  was 
barred  by  laches,  the  suit  having  been 
brought    thirty-five     j'ears  after    the 
cause  of  action  had  accrued.  Cf.  %  392, 
infra.     The  holders  of  full-paid  stock 
cannot  be  assessed  on  such  stock  even 
under  a  reorganization  agreement  of 
the     majority     of    the    stockholders. 
Where,  however,  for    four   years  the 
stockholder  does  not  object,  and  then 
applies  for  a  transfer  of   his  stock,  a 
court  of  equity  may  refuse  to  grant  the 
transfer,  but  may  give  him  damages 
for  the  value  of  his  stock  at  the  time 
of    the  demand   of  transfer,   together 
with  interest,     Gresham  v.  Island  City 
Sav.  Bank,  2  Tex.  Civ.  App.  53  (1893). 

3  Rucker  v.  Morgan,  132  Ala.  308  (1899). 
See  also  note  2,  p.  761,  supra. 

4Ashton  n  Heggerty,  130  Cal.  516 
(1900).  See  also  Ashton  v.  Zeila  Min. 
Co.,  66  Pac.  Rep.  494  (CaL  1901). 

5  Hussey  v.  Manufacturers',  etc.  Bank, 


13   Ind.    194   (1859).     Cases   supporting 
tliis  rule  abound  in  all  the  states.    Tliey 
will  be  found  together  with  others  in 
ch.  XXXV,  infra.     If  the  corporation 
illegally  refuses  to  allow  a  registry,  but 
afterwards  does  allow  it,  the  corpora- 
tion is  not  liable  in  damages  for  the  de- 
cline of  the  market  value  of  the  stock 
in  the  meantime.     Skinner  v.  City  of 
London  M.  Ins.  Co.,  L.  R.  14  Q.  B.  D.  882 
(1885).     Even  in  England,  if  the  com- 
pany has  completed  a  transfer  upon  its 
books  and  then  repudiates  the  transfer 
on  the  ground  that  it  had  prior  to  that 
time  transferred  the  same  stock  to  oth- 
ers, the  company  is  liable  in  damages 
to  the  party  to  whom  the  last  transfer 
was  made.    Tomkinson  v.  Balkis  Consol. 
Co.,  [1891J  2  Q.   B.   614.     A  corporation 
is   liable  in  damages  for  refusing  to 
allow  a  transferof  the  stock  where  such 
refusal  is  unjustifiable.     Doty  r.  First 
Nat.   Bank   of  Larimore,   3  N.  Dak.  9 
(1892).     If  the  company  illegally  refuses 
to  transfer  stock  it  is  a  conversion.   Rio 
Grande  Cattle  Co.  v.  Burns,  82  Tex.  50 
(1891).     An  action    on    the    case    lies, 
wherein  the  measure  of  damages  is  the 
value  at  the  time  of  refusal  to  transfer. 
See  §  575,  infra.    In  a  suit  against  a 
corporation   for   refusing    to    transfer 
stock,  the  fact  that  the  certificates  had 
been  lost  since  the  refusal  need  not  be 
alleged.     Blair  Co.  v.  Rose,  26  Ind.  App. 
487  (1901). 


870 


CH.  XXII.]  FOKMALITIES    OF   TKANSFER    AND    EEGISTRY.  [§  392. 

sound  in  tort  or  contract.^  Conversion  lies  against  a  corporation 
at  the  instance  of  a  purchaser  of  certificates  of  stock  for  refusal  to 
transfer  the  stock  on  the  books  of  the  company.^  The  common-law 
action  of  trover  is  a  proper  remedy.^  Where  the  transferee  of 
certificates  of  stock  in  a  bank  presents  them  to  the  cashier  of  the 
bank  for  transfer,  and  the  cashier  and  a  director  delay  transfer  until 
a  debt  of  the  transferrer  to  the  bank  becomes  due,  and  then  in  be- 
half of  the  bank  levy  an  attachment  on  the  stock  for  such  debt,  the 
transferee  may  hold  the  bank  and  the  cashier  and  such  director 
liable  in  trover  for  conversion  of  the  stock,  and  it  is  no  defense 
that  the  transfer  of  the  certificate  was  made  to  defraud  creditors.* 
A  transferee's  action  upon  the  case  for  damages,  instead  of  in  tro- 
ver for  conversion,  against  the  corporation  for  refusal  to  register 
the  transfer,  entitles  him  to  nominal  damages  only,  unless  he  proves 
special  damage.*  Where  the  corporation  has  been  held  liable  for 
conversion,  it  cannot  then  tender  the  stock  back  to  the  stockholder 
and  avoid  the  payment  of  the  damages."  The  statute  of  limitations 
runs  only  from  the  time  when  a  demand  for  registry  was  made.^ 

1  See  ch.  XXXV,  infra.  XXXV,  infra.     In  a  suit  against  a  cor- 

2  See  cii.  XXXV,  infra.  Wliere  the  poration  for  refusal  to  transfer  stock  on 
purchaser  of  a  certificate  of  stock  sends  its  books,  "  the  rule  of  damages  is  the 
it  to  the  corporation  for  transfer  and  highest  intermediate  value  of  the  stock 
the  secretary  replies  that  the  corpora-  between  the  time  of  conversion  and  a 
tion  has  a  hen  on  the  stock,  the  corpo-  reasonable  time  after  the  owner  has  re- 
ration  is  not  liable  for  a  conversion  of  ceived  notice  of  the  conversion  to  enable 
the  stock,  no  demand  for  the  return  of  him  to  replace  the  stock."  A  general 
the  certificate  being  shown.  Cummins  allegation  of  damage  is  sufficient,  inas- 
■y.  Peoples',  etc.  Assoc,  86  N.  W.  Rep.  much  as  the  plaintiff  is  entitled  to  nom- 
474  (Neb.  1901).  inal   damages    anyway.      Blair  Co.  v. 

3  Ralston  v.    Bank  of  California,  112  Rose,  26  Ind.  App.  487  (1901). 

CaL  208  (1896).  *"  Carpenter  i\  American,  etc.  Assoc, 

♦Hine  v.  Commercial  Bank,  etc,  119    54  Minn.  403  (1893). 

Mich.  448  (1899).  "  Cleveland,  etc  R  R.  v.  Robbing,  35 

5  McLean  v.  Charles,  etc  Co.,  96  Mich.     Ohio  St.  483  (1880);  Iron  R  R.  v.  Fink, 

479    (1893).    On  this    subject,  see   ch.     41  Ohio  St.  321  (1884).     Cf.  §  391,  supra. 

871 


CHAPTER  XXIII. 


RULES  FOR  CORPORATIONS  IN  REGARD  TO   REFUSING  OR  ALLOW- 
ING REGISTRIES  OF  TRANSFERS  OF  STOCK. 


§  393.  Purpose  of  the  chapter. 

394.  Right  to  refuse  until  the  trans- 

ferrer pays   the   unpaid    sub- 
scription price. 

395.  Whether  the   corporation    may- 

refuse  to  register  a  transfer  to 
an  irresponsible  transferee. 
896.  Corporation  may  refuse  to  regis- 
ter as  transferees  persons  who 
are  incompetent  to  contract. 

397.  Trustees,    executors,   guardians, 

agents,  and  pledgees. 

398.  Sales  of  stock  by  executors  or 

administrators. 

399.  Sales  by  trustees. 

400.  Sales  by  guardians. 

401.  Forgery  of  transfer. 


§  402.  Corporation  must  require  a  sur- 
render of  the  outstanding  cer- 
tificate. 

403.  Alleged  loss  of  the  old  certifi- 

cate. 

404.  Attachment  or  execution. 

405.  Decree  of  a  court   that  certifi- 

cates be  issued. 
40G.  Theft  of  certificates  indorsed  in 
blank. 

407.  Interpleader  by  the  corporation. 

408.  Restrictions   by  corporation  on 

stockholder's  right  to  sell  or 
transfer. 

409.  Lien  of  the  corporation. 

410.  Formalities  of  registry  which  the 

corporation  may  insist  upon. 


§  393.  Purpose  of  the  chapter. —  It  is  proposed  in  this  chapter,  as 
a  continuation  of  the  last,  and  as  a  recapitulation  of  the  various 
rights,  liabilities,  and  duties  of  the  corporation  in  refusing  or 
allowing  a  registry  of  a  transfer  of  stock,  to  state  briefly  the  rules 
which  prevail  herein.  The  standpoint  taken  is  that  of  the  corpora- 
tion. The  minute  and  particular  application  of  the  general  rules 
governing  this  subject  are  not  stated  here  at  length ;  but  an  effort 
has  been  made  to  give,  in  systematic  order,  certain  directions 
which  will  enable  a  corporation,  when  in  doubt  as  to  whether  to 
allow  or  refuse  a  registry,  to  decide  the  question  intelligently  and 
safely. 

§  394.  Right  to  refuse  until  the  transferrer  j^ays  the  unpaid  sub- 
scription price} — A  corporation  cannot  refuse  to  register  a  transfer 
of  stock  merely  because  the  subscription  price  has  not  been  fully 
paid  in,  unless  the  charter  or  the  statutes  of  the  state  expressly  give 
that  right.  Xor  can  it  refuse  registry,  even  though  a  call  for  part 
of  the  subscription  price  has  been  made,  is  due,  and  remains 
unpaid.  It  must  allow  registry,  but  may  continue  to  hold  the 
transferrer  liable  for  the  call.  The  corporation  has  no  lien  on  the 
stock  for  the  subscription  price,  nor  has  it  a  right  to  restrict  trans- 
fers until  calls  or  parts  of  the  subscription  price  not  yet  called  are 
paid.     The  policy  of  the  law  is  to  favor  the  right  of  transfer,  and 


^  See  ch:  XV,  supra. 


<;H.  XXI II.]  RULES    REGULATING    REGISTRY.  [§§  395-397. 

no  impediments  by  the  corporation  are  allowed  to  restrict  that 
right.  As  regards  parts  of  the  subscription  not  yet  called  in,  the 
transferrer  is  released  from  and  the  transferee  assumes  the  liability. 
As  regards  calls  made  before  the  application  for  registry,  but  not 
yet  due,  the  transferrer  is  liable,  but,  it  seems,  not  the  transferee. 
As  regards  calls  made  before  the  application  and  due  before  such, 
the  transferrer  and  not  the  transferee  is  liable.  As  regards  calls 
made  after  the  application  the  transferee  alone  is  liable.  In  some 
states,  however,  a  different  rule  prevails,  and  by  statute  the  trans- 
ferrer, if  he  is  the  original  subscriber,  is  liable  until  the  whole  sub- 
scription is  paid. 

§  395.  Whether  tlie  corporation  may  refuse  to  register  a  transfer 
to  an  irres2)onsihle  transferee.^—  Greater  difficulty  is  experienced 
in  finding  a  working  rule  on  this  subject.  On  one  point,  however, 
all  the  authorities  agree.  If  the  corix)ration  is  insolvent,  or  in 
such  a  state  of  decline  that  insolvency  seems  inevitable,  the  cor- 
poration may  refuse  to  allow  a  registry  of  transfer  from  a  respon- 
sible to  an  irresponsible  insolvent  transferee.  The  policy  of  the 
law  is  to  protect  corporate  creditors,  even  at  the  expense  of 
restricting  the  right  of  transfer.  The  above  rule  applies  not  only 
where  the  subscription  is  unpaid,  but  also  where  it  has  been  paid 
and  only  a  statutory  liability  exists.  Where,  however,  the  corpo- 
ration is  solvent,  and  a  stockholder  applies  for  a  registry  of  transfer 
from  himself  to  an  irresponsible  transferee,  it  seems  that  the  cor- 
poration cannot  refuse  to  make  the  registry. 

§  39(1  Corporation  may  refuse  to  register  as  transferees  2)er sons 
ivho  are  incompetent  to  contract.'  — U  the  transferee  of  a  certificate 
of  stock  is  an  infant  or  person  of  unsound  mind,  the  corporation 
may  refuse  to  register  such  transferee  as  a  stockholder.  The  rea- 
son of  the  rule  is  that  such  persons  would  not  be  obliged  at  law  to 
respond  to  the  obligations  of  a  stockholder,  and  consequently  are 
not  entitled  to  its  privileges.  With  married  women  at  the  present 
day  the  law  is  different.  At  common  law  they  were  incompetent 
to  become  stockholders,  as  is  an  infant  at  the  present  time.  But 
the  statutes  of  all  the  states  have  substantially  removed  these  dis- 
abilities, and  enabled  a  married  woman  to  transact  business  as  a 
feme  sole,  so  far  as  her  separate  estate  is  concerned.  She  may  be- 
come a  stockholder  in  a  corporation,  but  cannot  bind  her  husband's 
estate  for  the  liabilities  of  such  stockholdership. 

§  39T.  Trustees,  executors,  guardians,  agents,  pledgees.^— In  reg- 
istering a  transfer  to  a  trustee,  executor,  or  guardian,  the  corpora- 
tion may  be  required  to  register  the  transferee  as  holder  in  his 
official  capacity.     A  trustee  who  purchases  or  receives  stock  to 

J  See  eh   /V  e>t^r^  '  See  ch.  XIV.  aupra.  ^  See  oh.  XIV,  srapra. 


§  398.]  RULES    KEGULATING    REGISTRY.  [CH.  XXIII. 

hold  in  trust  for  the  benefit  of  another  may,  it  seems,  require  the 
corporation  to  register  the  transfer  and  issue  new  certificates  ta 
himself  in  his  own  name  as  "  trustee."  In  England  the  rule  ap- 
pears to  be  different.  The  reason  of  this  rule  is  that  the  liability 
of  a  trustee  on  stock  is  in  many  of  the  states  different  from  that  of 
a  complete  owner  of  the  stock,  and  also  because,  where  stock  is 
held  by  a  trustee  as  such,  it  is  the  duty  of  the  corporation  to  refuse 
to  allow  the  trustee  to  sell  and  register  a  sale  of  the  stock  unless 
the  instrument  creating  the  trust  authorizes  such  sale.  So  also  an 
executor  or  administrator  or  guardian  may  compel  the  corporation 
to  place  his  official  title  after  his  name  in  the  stock  registry. 
Pledgees,  however,  and  agents  have  not  this  right.  The  corpora- 
tion may,  but  is  not  obliged  to,  write  the  word  "  pledgee  "  after 
the  transferee's  name  either  in  the  stock  registry  or  on  the  certifi- 
cate. Such  is  the  rule,  for  the  reason  that  the  corporation  is  not 
obliged  to  protect  the  rights  of  the  pledgor,  nor  to  recognize  the 
pledgeeship  of  the  transferee.  The  same  rule  applies  to  transferees 
who  take  as  agents  of  the  transferrer. 

§  398.  Sales  ofstocli  hy  executors  or  administrators} —  A  corpora- 
tion may  with  safety,  and  in  fact  is  obliged  to,  allow  a  domestic 
executor  or  administrator  to  register  a  transfer  of  the  sale  of  stQck 
belonging  to  the  estate  upon  presentation  by  the  executor  or  ad- 
ministrator of  the  letters  testamentary  or  letters  of  administration. 
The  executor  or  administrator  may  then  register  a  transfer  of  the 
stock  to  himself  as  executor  or  administrator,  or  directly  from  the 
name  of  the  deceased  co  a  purchaser  from  the  executor;  or  from 
the  deceased  to  the  executor,  and  then  from  the  executor  to  the 
purchaser.  One  executor  may  sell  and  register  a  transfer  of  the 
stock.  The  corporation  is  not  bound  to  inquire  whether  it  is  neces- 
sary that  the  sale  be  made  in  order  to  pay  the  debts  of  the  estate, 
nor  to  see  to  it  that  the  executor  actually  applies  the  proceeds  of 
the  sale  to  that  purpose.  Where,  howevei,  the  corporation  has 
actual  knowledge  through  its  officers  that  a  breach  of  trust  is  con- 
templated by  the  executor,  it  is  bound  to  refuse  registry,  and  will 
be  liable  to  the  estate  for  neglecting  so  to  do.  So,  also,  where.such 
a  long  time  has  elapsed  between  ihe  taking  out  of  the  letters  and 
the  sale  by  the  executor  that  the  latter  has  become  practically  a 
trustee,  the  corporation  must  use  the  same  precaution  as  in  sales  by 
a  trustee.  In  the  case  of  specific  legacies  of  stock,  the  corporation 
need  not  protect  them,  but  may  allow  the  executor  to  transfer  the 
stock  into  his  own  name  as  executor,  since  he  may  need  it  to  pay 
debts,  and  the  corporation  is  not  bound  to  investigate  such  ques- 
tions. In  England  it  is  held  that  the  corporation  is  liable  forallow- 

1  See  ch.  XIX,  suvra. 

874 


Cri.  XXIII.]  KULES    KEGUL.ATING    REGISTRY.  [§§  399-401. 

ing  a  transfer  by  foreign  executors  without  payment  of  an  inher- 
itance tax. 

§  399.  Sales  ly  trustees}—  A  trustee  who  holds  stock  belonging 
to  the  trust  estate  has  no  right  to  sell  and  transfer  such  stock  un- 
less he  is  expressly  authorized  so  to  do  by  the  instrument  creating 
the  trust.  Consequently  the  law  imposes  upon  the  corporation  the 
duty  of  refusing  to  allow  a  trustee  to  transfer  the  stock  unless  he 
clearly  has  a  right  so  to  do.  If  the  corporation  neglects  this  duty 
it  is  liable  to  the  trust  estate,  and,  in  case  of  a  breach  of  trust  by 
the  trustee,  may  be  compelled  to  replace  the  stock  or  pay  damages. 
If  the  trustee  has  an  express  power  given  to  him  to  sell,  the  corpo- 
ration may  allow  him  to  make  the  transfer.  If  no  such  power  is 
given,  the  corporation  must  refuse.  The  trustee  is  bound  to  rea- 
sonably satisfy  the  corporation  of  his  right,  but  the.  corporation 
cannot  permanently  retain  the  papers  submitted  to  it  for  that  pur- 
pose. 

§400.  Sales  hj  guardians:^— A  gimrdmn  has  a  right  to  change 
the  investment  of  the  funds  in  his  charge,  and  consequently  has  a 
right  to  sell  stock  held  by  him  in  his  official  capacity.  Accordingly, 
the  corporation  may  allow  him  to  register  a  transfer  of  stock  held 
by  him  as  guardian,  and  cannot  require  the  guardian  to  obtain  an 
order  or  decree  from  a  court  authorizing  such  transfer.  An  order 
or  decree  is  often  obtained  by  the  guardian,  however,  for  his  own 
protection,  and  is  to  be  commended.  In  Xew  York  the  rights  and 
duties  of  guardians  are  regulated  by  statute,  and  other  states  have 
similar  statutes. 

§401.  Forgery  of  transfer.^— A  cor iioratwn  is  bound  and  re- 
quired to  detect  a  forgery  whereby  the  name  of  the  owner  of  a  cer- 
tificate of  stock  is  signed  to  it  and  a  transfer  made  which  the 
corporation  is  requested  to  register.  The  stockholder  in  whose  name 
the  old  certificate  was  made  out,  and  whose  name  was  forged  to 
the  transfer,  may  hold  the  corporation  liable  if  it  fails  to  detect  the 
forgery  and  allows  a  registry  of  the  forged  transfer.  He  may  com- 
pel it  to  replace  the  stock  or  pay  damages.  This  rule  is  due  to  the 
fact  that  the  corporation  is  a  custodian  of  the  books  whereby  a 
stockholder  obtains  his  rights  of  stockholdership,  and  it  cannot  de- 
prive him  of  these  rights  by  allowing  others  to  take  them  from  him 
•  by  the  aid  of  the  corporation  and  without  his  consent.  It  is  in  the 
power  of  the  corporation  to  require  the  presence  of  the  transferrer 
at  the  time  of  registry,  or  at  least  clear  proof  that  the  signature  is 
genuine.  The  corporation,  however,  has  recourse  over  against  the 
person  who  applied  for  registry  on  the  forged  transfer,  however 

1  See  ch.  XIX,  supra.  2  See  ch.  XIX,  supra.  ^See  ch.  XSi.  supra, 

875 


§§  402-4U4.J  EULES    REGULATING    REGISTRY.  [OU.  Win.' 

innocent  the  latter  may  be.  He  is  held  to  have  impliedly  repre- 
sented that  the  transfer  was  genuine. 

§402.  Corporation  must  require  a  surrender  of  the  outstanding 
certificate} — If  a  corporation  permits  a  registry  of  a  transfer  of 
stock,  and  issues  new  certificates  to  the  transferrer  without  requir- 
ing a  surrender  of  the  old  certificate,  it  assumes  a  dangerous  posi- 
tion, and  one  which  it  is  not  obliged  to  assume.  If  the  certificate 
which  is  not  delivered  up  is  in  the  hands  of  a  lonafide  purchaser 
for  value  and  without  notice,  he  may  hold  the  corporation  liable 
for  allowing  a  registry  of  transfer  to  another  without  requiring  a 
delivery  of  the  certificates.  It  is  negligence  and  a  breach  of  duty 
on  the  part  of  the  corporation  to  allow  a  registry  without  a  sur- 
render of  the  old  certificate.  It  generally  refuses  to  do  so,  as  is  its 
duty,  and  is^sustained  by  the  law  in  its  refusal.  There  are  occa- 
sions, however,  where  the  law  compels  the  corporation  to  register 
the  transfer  without  a  surrender  of  the  old  certificate.  When  so 
compelled  to  do,  the  corporation  cannot  be  held  liable  by  the  pur- 
chaser of  the  outstanding  certificate,  but  he  must  seek  his  remedy 
against  others.  Such  compulsory  registry,  excusing  the  corpora- 
tion, may  exist  in  cases  of  alleged  loss  of  the  old  certificate,  a  decree 
of  a  court  compelling  the  registry,  and,  under  the  latter,  an  attach- 
ment or  execution  against  the  stock.^ 

§  403.  Allefjed  loss  of  the  old  certificate.^ — According  to  the  rule 
of  nearly  all  the  states,  a  corporation  is  not  obliged  to  issue  a  new 
certificate  of  stock  to  the  owner  of  an  old  one,  which  he  alleges  he 
has  lost,  unless  such  person  gives  to  the  corporation  a  sufficient 
bond  of  indemnity  to  protect  it  against  liability  in  case  it  turns  out 
that  the  old  certificate  was  not  lost  but  was  sold  and  passed  into 
bona  fide  hands.  In  New  York  this  rule  is  fixed  by  statute.  The 
corporation  is  liable  to  the  holder  of  the  outstanding  certificate,  if 
it  is  outstanding,  and  consequently  should  be  protected  against  that 
liability  by  a  bond  from  the  applicant  for  registry.  In  Louisiana  a 
statutory  advertisement  is  made  and  a  bond  of  indemnity  dispensed 
Avith.  But  in  the  other  states  the  court  compels  the  loser  to  give 
a  bond,  varying  in  amount  according  to  the  amount  of  the  stock  and 
the  clearness  of  the  proof  of  loss. 

§404.  Attacliment  or  execution.^ — Nearly  all  the  states  have 
laws  whereby  shares  of  stock  are  rendered  subject  to  levy  of  at- 
tachment and  to  sale  on  levy  of  execution.  When  an  execution 
sale,  or  an  attachment  followed  by  an  execution  sale,  takes  place 
in  the  state  where  the  corporation  exists,  the  purchaser  at  such  sale 
generally  has  not  the  outstanding  certificate,  but  nevertheless  de- 

•  See  ch.  XXI,  supra.  '  See  cli.  XXI,  supra. 

2  But  see  §  489,  infra.  *  See  ch.  XXVII.  infra. 

876 


CH.  XXIII.]  KULES    REGULATING    REGISTRY.  [§  405. 

mands  registry  of  himself  as  stockholder  in  accordance  with  the 
law  authorizing  the  attachment  and  execution.  In  the  meantime 
the  judgment  debtor  whose  stock  is  thus  attached  or  sold  under  an 
execution  generally  may  have  sold  his  certificate  of  stock  to  a  lona 
fide  purchaser  for  value.  If  it  happens  that  both  parties  claim 
the  stock,  the  duty  and  privilege  of  the  corporation  is  plain.  It 
may  refuse  to  decide  between  them,  and  w^hen  sued  by  either  may 
interplead  and  compel  the  claimants  to  settle  the  right  between 
them  in  the  courts.  But  frequently  it  happens  that  the  corpora- 
tion does  not  know  whether  the  judgment  debtor  has  sold  the  out- 
standing certificate  or  not.  By  the  law  of  most  of  the  states,  if 
such  certificate  was  sold  before  the  attachment  or  execution  was 
levied,  the  purchaser  would  be  protected,  and  the  corporation 
would  be  liable  to  him  for  registering  as  a  stockholder  the  pur- 
chaser at  the  execution  sale.  Accordino:lv,  in  that  case,  it  is  the 
duty  of  the  corporation  to  refuse  to  register  the  purchaser  at  the 
execution  sale.  It  cannot  afford  to  take  the  risk,  and  is  not  obliged 
to  take  it.  If  the  court  then  compels  it  to  make  the  registry  of 
transfer  to  the  execution  purchaser,  the  court  will  also,  probably, 
compel  such  purchaser  to  give  a  bond  of  indemnity  to  protect  the 
corporation.  If  such  a  bond  is  not  required  by  the  court,  the  cor- 
poration must  nevertheless  obey  the  decree.  What  rights  the  pur- 
chaser of  the  outstanding  certificate  would  then  have,  has  not  as 
yet  been  passed  upon  by  the  courts. 

§  405.  Decree  of  a  court  that  certificates  1)6  issued} — A  corpora- 
tion must  of  course  obey  the  decree  of  a  court  that  it  issue  a  cer- 
tificate of  stock  to  a  specified  person.  But  a  court  will  rarely  re- 
sort to  such  an  extreme  remedy  where  it  is  probable  or  possible 
that  there  may  be  an  outstanding  certificate  in  the  hands  of  an 
innocent  holder  representing  the  same  shares.  As  a  principle  of 
law  the  court  has  no  power  to  decree  such  an  issue  ordinarily, 
since  the  whole  capital  stock  has  been  issued,  and  its  decree 
amounts  practically  to  an  order  to  make  an  overissue  of  stock. 
Generally  the  court  decrees  damages  to  be  paid,  or  directs  the  cor- 
poration to  purchase  stock  for  the  purpose  of  reissuing  it  to  the 
specified  party.  This  occurs  frequently  where  the  corporation  has 
unjustly  deprived  a  person  of  his  stock.  A  different  class  of  cases 
arises  where  the  corporation  has  refused  to  allow  a  registry  be- 
cause the  outstanding  certificate  is  not  surrendered.  Such  cases 
include  those  of  alleged  loss  of  certificate,  an  execution  sale  of  the 
stock,  and,  possibly,  a  suit  in  equity  at  the  domicile  of  the  corpora- 
tion to  recover  from  another  stock  which  the  complainant  claims. 
A  decree  in  such  a  suit  in  most  states  would  be  ineffectual  to  de- 

^  See  ch.  XXII,  supra, 

877 


■§§  4()G,  407. j  RULES    KEGULATINO    REGISTRY.  [CH.   XXIIl. 

prive  of  his  rights  one  who  purchased  from  the  defendant  his  cer- 
tificate of  stock  before  the  decree  was  rendered.  It  would  accord- 
ingly be  a  harsh  decree  that  compelled  the  corporation  to  register 
the  successful  complainant  as  a  stockholder.  The  corporation 
should  not  be  compelled  to  assume  the  risk  of  being  sued  by  the 
purchaser  of  the  outstanding  certificate.  The  complainant  should 
be  compelled  to  give  a  bond  of  indemnity,  or  else  be  content  with 
a  personal  judgment  against  the  defendant.  The  demands  of  trade 
and  of  the  investing  public  require  that  the  safety  of  a  purchaser 
of  a  certificate  of  stock  should  be  assured,  except  against  attach- 
ments, execution  sales  or  decrees  duly  obtained  and  notified  to  the 
corporation  before  the  bona  fide  purchaser  received  the  certificate 
of  stock, 

§  406.  Theft  of  certificates  indorsed  in  llanlc}  —  The  corporation 
lias  a  duty  to  perform  as  regards  certificates  of  stock  which  have 
been  stolen  from  the  owner  who  held  them  indorsed  in  blank. 

If  the  owner  notified  the  corporation  of  the  theft  it  must  refuse 
to  register  a  transfer  to  a  purchaser  of  such  stolen  certificate. 
Since  the  owners  negligence  may  have  estopped  him  from  reclaim- 
ing the  stock,  the  corporation  may  refuse  to  recognize  either  party 
as  a  stockholder,  where  there  is  a  reasonable  question  of  negli- 
gence, and  when  sued  by  either  may  interplead.  If  the  corpora- 
tion allowed  a  registry  before  it  was  notified  of  the  theft,  it  is  dif- 
ficult to  see  on  what  principle  it  is  to  be  held  liable  to  the  owner. 
Such  a  case  seems  not  yet  to  have  arisen.  If  notified  of  the  theft 
before  anything  is  learned  concerning  the  whereabouts  of  the  cer- 
tificate, the  case  is  to  be  treated  the  same  as  when  the  certificate  is 
alleged  to  have  been  lost.  ' 

§  407.  Interpleader  hy  the  co7'2)oration.'^  — Whenever  there  are 
two  or  more  conflicting  claims  made  to  stock,  and  demands  are 
made  on  the  corporation  to  allow  registry,  it  is  the  privilege  of 
the  corporation,  if  there  is  a  reasonable  legal  doubt  as  to  the  rights 
•  of  the  parties,  to  refuse  to  register  either  party,  and,  when  sued  by 
one,  to  interplead  and  compel  the  parties  to  contest  the  matter  be- 
tween themselves  in  the  courts.  The  law  does  not  oblige  the  cor- 
poration to  turn  itself  into  a  court  of  justice  and  decide  the  rights 
of  the  parties.  The  corporation,  however,  cannot  interplead  if  it 
has  already  committed  itself  by  registering  one  of  the  claimants  as 
the  stockholder.  Nor  can  the  corporation  resort  to  an  interpleader 
where  one  of  the  claimants  is  clearly  wrong.  The  right  of  inter- 
pleader and  the  power  of  the  corporation  to  refuse  to  register  a 
transfer  until  compelled  to  do  so  by  the  courts,  where  an  outstand- 

l  See  ch.  XXI,  sicpra.  2  gee  ch.  XXII,  supra. 

878 


CH.  XXIII.]  KULES    REGULATING    REGISTKY.  [§§  40S-410. 

ino-  certificate  is  not  surrendered,  constitute  the  two  most  effective 
safeguards  of  the  corporation  in  allowing  or  refusing  registry. 

§  408.  Restrictions  by  corporation  on  stoclilwlder'' s  right  to  sell  or 
transfer} — The  law  has  uniformly  and  decisively  discountenanced 
and  overruled  all  attempts  of  a  corporation  to  prevent  the  sale 
and  transfer  of  its  stock  by  the  stockholder.  Such  attempted  re- 
strictions are  generally  made  by  means  of  by-laws.  Thus,  a  by-law 
requiring  the  consent  of  the  directors  or  other  corporate  officers  to 
a  transfer,  or  a  by-law  requiring  the  stockholder,  when  he  sells,  to 
sell  his  stock  to  specified  persons,  is  null  and  void.  Eestrictions 
may  be  created  by  a  contract  mutually  agreed  to  by  the  stock- 
holders, but  cannot  be  imposed  upon  them  by  the  majority  of  the 
stockholders  nor  by  the  board  of  directors.  When,  however,  such 
restrictions  are  created  by  the  charter,  they  are  valid,  since  they 
arise  with  the  corporation  and  stock  itself.  Thus,  in  England,  the 
charter  frequently  authorizes  the  directors  to  refuse  a  registry  un- 
less the  transferee  is  satisfactory  to  them.  Even  here,  however, 
the  directors  must  be  reasonable  in  the  use  of  their  discretion.  In 
this  country  the  most  frequent  restriction  created  by  charter  is 
that  of  a  lien  for  debts  due  to  the  corporation  from  the  transferrer. 

§  409.  Lien  of  (lie  corporation  J— The  charters  of  many  corpora- 
tions contain  an  express  provision  that  the  corporation  may  refuse 
to  allow  a  stockholder  to  register  a  transfer  of  his  stock  until  he 
has  paid  any  and  all  debts  which  he  may  at  that  time  owe  to  the 
corporation.  Such  a  lien  need  not  be  stated  in  the  certificate  of 
stock.  While  it  may  not  be  created  generally  by  a  by-law,  yet 
certain  phrases  in  charters  have  been  held  to  uphold  a  lien  that  is 
declared  and  made  effectual  by  a  by-law.  Where  the  lien  exists 
the  corporation  may  refuse  to  allow  a  registry  of  transfer  of  any 
stock  owned  by  the  debtor  until  all  debts  due  from  him  to  the  cor- 
poration are  paid,  whether  due  or  not  due,  including,  it  seems,  un- 
paid subscriptions.  It  does  not  apply,  however,  to  debts  due  from 
a  transferee  of  the  certificate  who  never  obtained  registry  or  ap- 
peared as  a  stockholder  on  the  corporate  books.  Nor  does  it  apply 
to  debts  due  from  the  registered  stockholder,  but  incurred  after  the 
corporation  was  given  notice  that  he  had  sold  his  stock  to  another. 
The  corporation  may  waive  its  lien  and  allow  registry  without  the 
debts  of  the  old  stockholder  being  paid.  A  registry  without  re- 
quiring payment  is  a  waiver  in  itself. 

§  410.  Formalities  of  registry  tchich  the  corporation  may  insist 
upon.^ — Where,  as  is  ordinarily  the  case,  the  owner  of  stock  has 
sold  it  by  signing  the  transfer  and  power  of  attorney  on  the  back 
of  the  certificate,  leaving  the  names  of  the  transferee  and  of  the  at- 

i  See  ch.  XXXVIl,  infra.  2  See  ch.  XXXI,  infra.  »  See  ch.  XXII,  supra, 

879 


t 

§  410.]  KULE8   REGULATING    REGISTRY.  [CH.   XXIII. 

torney  blank,  the  corporation  may  require  the  names  of  the  trans- 
feree and  of  the  attorney  to  be  filled  in  before  it  allows  a  registry. 
If  it  is  in  doubt  as  to  the  genuineness  of  the  signature  of  the  former 
owner  of  the  certificate,  it  may  require  his  presence  or  reasonal)le 
proof  that  he  actually  made  the  signature.  It  cannot  compel  the 
transferrer  to  be  present,  but  may  require  the  presence  of  the  at- 
torney authorized  to  make  the  registry.  The  registry  itself  is  gen- 
erally made  by  a  corporate  officer  as  attorney.  A  surrender  of  the 
old  certificate  is  required,  and  new  certificates.in  the  name  of  the 
transferee  are  issued.  The  by-laws  may  prescribe  that  the  registry 
shall  be  in  the  presence  of  certain  corporate  officers.  If  the  corpo- 
ration does  not  keep  a  transfer  book  or  stock  book,  a  surrender  of 
the  old  certificate  and  the  issue  of  a  new  one  is  sufficient  to  con- 
stitute a  transfer  and  registry.  The  applicant  may  inquire  of  the 
corporate  officer  in  charge  for  the  registry  clerk,  and  is  not  bound 
to  ascertain  the  individual  himself.  The  corporate  registry  may 
be  on  its  ledger  without  any  issue  of  certificate.  If  it  keeps  no 
registry  at  all,  mere  notice  to  it  of  a  transfer  constitutes  a  legal 
registry.  The  corporation  has  no  right  to  delay  registry  unreason- 
ably for  the  purpose  of  obtaining  advice  or  for  any  other  reasons. 
It  may  require  that  the  power  of  attorney  run  directly  from  the 
former  registered  stockholder  and  not  from  an  intermediate  one. 
A  written  acceptance  of  the  stock  by  the  transferee  cannot  be  in- 
sisted on  by  the  corporation.  The  formalities  of  registry  may  be 
waived  by  the  corporation,  and  any  act  which  indicates  that  it 
considers  a  transferee  to  be  a  stockholder  is  effectual  to  make  him 
such  so  far  as  the  corporation  is  concerned,  though  no  registry 
was  had. 

Either  the  transferrer  or  the  transferee  or  an  intermediate  un- 
registered transferee  may  apply  to  the  corporation  for  the  purpose 
of  obtaining  a  registry.  The  corporation  cannot  refuse  it  merely 
because  of  the  motive  of  the  transferrer  or  of  the  transferee  in 
making  the  sale  and  transfer.  Whenever  the  corporation  refuses 
to  allow  a  registry  the  applicant  may  sue  it  for  damages,  or  he 
may  go  into  a  court  of  equity  and  ask  that  the  corporation  be  de-  ' 
creed  to  allow  registry  or  to  pay  damages  in  lieu  thereof.  A  few 
cases  hold  that  he  may  compel  registry  by  a  mandamus  against 
the  corporation,  but  the  weight  of  authority  holds  otherwise.  In 
the  notes  below  are  given  the  rules  of  a  great  railroad  corporation 
on  this  subject,^  and  it  will  be  noticed  that  particular  attention  is 

il.  Give  the  name  of  the  transferee  3.  Prefixes  and  affixes,  such  as  Judge, 
in  full,  without  abbreviation  of  any  Major,  Hon.,  Rev.,  Doctor,  M.  D.,  LL.D., 
kind.  should  not  be  used. 

2.  If  the  transferee  be  a  woman,  give  4.  In  transferring  to  a  married  wo- 
her  title,  Mrs.  or  Miss.  man  use  her  own  christian  name,  not 

880 


CH. 


XXIII.] 


KULES    REGULATING    EEGISTKY. 


[§  410. 


called  to  transfers  by  or  to  married  women,  trustees,  executors, 
administrators  and  corporations. 


that  of  her  husband   with  Mrs.  pre- 
fixed. 

5.  Avoid  using  diminutives,  always 
give  full  christian  name. 

6.  If  the  transferee  be  a  minor,  so 
state  in  the  transfer,  thus:  "A.  B.,  a 
Minor,"  and  give  guardian's  name  and 
address.  Avoid,  if  possible,  transfer- 
ring to  minors. 

7.  Shares  of  a  minor  are  transferable 
only  by  the  guardian,  who  must  ex- 
hibit a  certificate  of  appointment. 

8.  Do  not  transfer  to  a  trustee,  agent 
or  attorney  who  is  not  appointed  by  an 
instrument  in  writing.  If  properly  ap- 
pointed, give  words  in  the  transfer 
briefly  descriptive  of  the  trust,  or  the 
nature  of  the  instrument  creating  it. 

9.  In  transferring  to  a  society  or  in- 
stitution, make  sure  that  it  has  author- 
ity to  hold  and  transfer  stock.  Trans- 
fers by  otficers  of  societies,  institutions 
or  corporations  must  be  accompanied 
by  proper  evidence  of  their  power  to 
act  in  the  premises. 

10.  In  transfers  by  trustees,  if  there 
be  more  tlian  one,  all  must  sign.    In 


all  cases  the  instrument  creating  the 
trust  must  be  exhibited. 

11.  Shares  of  an  intestate  are  trans- 
ferable by  the  administrator,  who  must 
exhibit  a  proper  certificate  of  appoint- 
ment. 

12.  Shares  of  a  testate  are  transfer- 
able by  the  executor,  who  must  exhibit 
a  certified  copy  of  the  will  and  certifi- 
cate of  appointments  Copies  of  wills 
will  be  returned  after  inspection. 

13.  Trustees,   attorneys,    agents,   ad- 
ministrators, executors  and  guardians 
should  not  transfer  directly  to  them 
selves. 

14.  Always  give  full  post-office  ad- 
dresses of  transferees,  with  post-office 
box,  or  street  and  number. 

15.  In  case  of  change  of  name  by 
marriage,  send  certificate  to  the  under- 
signed, having  made  transfer  on  the 
back  of  it  to  the  new  name,  signing  the 
transfer  thus:  — "A.  B.  C,  now  Mrs.  A. 
B.  D.,"  and  a  new  certificate  will  be  re- 
turned. 

l(j.  If  a  certificate  is  lost,  give  imme- 
diate notice  to  the  undersigned. 


(56) 


881 


CHAPTER  XXIV. 

NON-NEGOTIABILITY  OF  STOCK   AND   DANGERS   INCURRED  IN  THE 
PURCHASE  OF  CERTIFICATES  OF  STOCK. 


A.  NON-NEGOTIABILITY. 

§  411.  Nature  and  kinds  of  negotiable 
instruments. 

412.  Certificates  of  stock  are  not  ne- 

gotiable instruments,  but  have 
been  given  many  of  the  ele- 
ments of  negotiability  in 
America  —  In  England  they 
are  not  negotiable  in  any  sense. 

413.  The  term  -'quasi-negotiability," 

as  applied  to  certificates  of 
stock,  throws  little  ligiit  upon 
the  subject. 
414  The  distinction  between  the 
"legal"  and  the  "equitable" 
title  in  the  transfer  of  certifi- 
cates of  stock  is  unsatisfactory. 

415.  The  only  method  of  treatment 

of  the  subject  seems  to  be  by 
inquiring  under  what  facts  the 
holder  or  purchaser  is  pro- 
tected. 

416.  The  particular  rules  protecting  a 

bona  fide  purchaser  of  certifi- 
cates of  stock  are  based  on  es- 
toppel. 

R   DANGERS  INCURRED    IN    PURCHASING 
STOCK. 

417.  Liabilities,  risks,  and   rights  of 

one  who  owns  or  purchases  a 
certificate  of  stock. 

418.  Liability  on    unpaid   par  value, 

that  is,  the  unpaid  subscription 
price  of  the  stock. 

419.  Forfeiture   for  non-payment   of 

calls. 

420.  Statutory  liability. 

421.  Liability  where    the  purchaser 

has  the  transfer  made  to  a  nom- 
inal holder. 

422.  No  liability  for  assessments  after 

the  par  value  of  stock  has  been 
paid  in. 


§  423.  Liability  wl^n  stock  was  issued 
for  property. 

424.  Liability  as  partners  by  reason  of 

defective  incorporation  or  for 
other  reasons. 

425.  Danjier  of  corporate  lien. 

426.  Overissued  stock. 

427.  Danger  that  transferrer  or  pre- 

vious holder  is  an  infant,  mar- 
ried woman,  or  lunatic. 

428.  Purchase  of  stock  by  or  from  a 

corporation. 

429.  Purchase    from     joint    owners, 

partners,  and  agents. 

430.  Purchase  of  stock  at  sheriff's  ex- 

ecution sale,  or  from  assignee 
in  bankruptc}-,  or  for  benefitof 
creditors. 
4.31.  Purchase  from  a  pledgee. 

432.  Pledgee  is  protected  in  the  same 

way  as  purchaser  of  stock. 

433.  Danger  of  i)urchasing  from  an 

executor,     administrator,     or 
guardian. 

434.  Purchase  from  a  trustea 

435.  Sale  by  vendor  to  another  pur- 
chaser without  delivery  of  cer- 
tificates of  stock. 

436.  Danger  of  forgery. 

437.  Loss  or  theft  of  certificates  in- 
dorsed in  blank. 

438.  Danger  that  a  previous  holder 
has  been  deprived  of  that  same 
stock  by  fraud. 

439.  Statute  of  frauds. 

440.  Gambling  sales  of  stock. 

441.  Method  of  assigning  a  certificate 
of  stock. 

442.  Registry  of  transfer. 

443.  Purchaser  not  affected  by  rights 
of  holders  of  that  stock  back  of 
the  last  registry. 

444  Summary. 


A.     NON-NEGOTIABILITY. 

§411.  Nature  and  Mnds  of  negotiable  instruments. — l!^egotiable 
instruments  at  the  present  day  are  promissory  notes,  bills  of 
exchange,  checks,  bank-notes,  bonds  of  the  United  States,  of  states, 

of  foreign  governments,  of  cities  and  counties  and  municipalities 

882 


CH.  XXIV.]  EISK    IN    PCECHASING    STOCK.  [§  412. 

generally,'  certificates  of  deposit,  interest  coupons,  and  bonds  of 
corporations.-  Bills  of  lading  have  only  a  quasi-negotiability.^ 
These  different  instruments,  however,  are  not  necessarily  negoti- 
able, but  are  so  only  when  in  writing;  when  containing  an  uncondi- 
tional promise  or  order  to  pay;  when  the  payment  is  to  be  in 
monev  only;  when  the  amount  is  certain;  when  it  is  payable  to  a 
specific  person,  and  not  in  the  alternative;  when  it  is  payable  at  a 
certain  time ;  when  it  contains  words  such  as  "  to  A.  or  order,"  or  "  to 
bearer,"  or  their  equivalent;  and  when  deliver}''  has  been  duly  made. 
If  the  instrument  is  lacking  in  any  one  of  these  qualities,  it  falls  back 
into  the  category  of  non-negotiable — ^that,  is  merely  assignable  — 
instruments.  Again,  a  holder  of  one  of  the  above-named  negotiable 
instruments  can  have  the  benefit  of  its  negotiability  only  when  he 
has  purchased  it  in  good  faith,  for  value,  before  the  instrument  was 
due,  and  without  notice  of  the  equitable  rights  of  previous  holders 
or  makers;  that  is,  he  must  be  a  honafide  holder.'*  When  all  these 
elements  of  negotiability  and  ownership  co-exist,  the  advantage  of 
negotiability  over  non-negotiability  is  this:  that  the  holder  of  the 
instrument  is  entitled  to  the  face  value  thereof,  and  his  right  can- 
not be  affected,  decreased,  or  defeated  by  any  facts  or  equities 
b. 'tween  previous  holders  which  would  defeat  the  security  as 
between  them,  unless  it  be  void  for  usury  or  other  original  cause. 
§  412.  Certificates  of  stock  are  not  negotiahle  instruments,  hut 
have  heen  given  many  of  the  elements  of  negotiaMlity  in  America  — 
In  England  they  are  not  negotiahle  in  any  sense. — It  is  very  clear, 
and  it  is  well  established,  that  certificates  of  stock  are  not  negoti- 
able instruments.*    A  certificate  of  stock  is  not  a  promise  or  order 

^  Warrants  issued  by  a  municipality  are  not  securities   for  money  in  any 

are  transferable,  but  not  negotiable,  sense;  much  less  are  they  negotiable 

Watson  V.  City  of  Huron,  97  Fed.  Rep.  securities."    Mechanics'  Bank  v.  New 

449  (1899).  York,  etc.  R.  R.,  13  N.  Y.  599,  627  (1856); 

2  Daniel,  Neg.  Inst.,  3d  ed.,  book  VI;  Farmers'  Bank  v.  Diebold,  etc.  Co.,  64 
Dos  Passos  on  Stock  Brokers,  ch.  IX.  N.  E.  Rep.  518  (Ohio,  1902);  Barstow  v. 
As  to  bonds  of  corporations,  see  ch.  Savage  Min.  Co.,  64  Cal.  388  (1883); 
XLVI,  infra.  Clark  v.  American  Coal  Co.,  86  Iowa, 

3  Pollard  V.  Reardon,  65  Fed.  Rep.  436  (1892).  Weaver  v.  Barden,  49  N.  Y. 
848  (1895\  See  also  Bank  of  Batavia  v.  286.  288  (1872),  says  that  a  certificate  of 
New  York.  etc.  R  R.,  106  N.  Y.  195  stock  has  none  of  the  qualities  of  com- 
(1887).  In  Oregon  by  statute  warehouse  mercial  or  negotiable  paper.  Leitch 
receipts  are  made  negotiable.  Anderson  v.  Wells,  48  N.  Y.  585.  613  (1872),  says: 
r.  Portland,  etc.  Co.,  37  Oreg.  483  (1900).  *'  Since  the  decision  of  the  case  of  Mc- 

^  As  to  who  is  a  bona  fide  holder,  Neil  v.  Tenth  Nat  Bank,  .  .  .  cer- 
see  §  293,  supra,  and  §  767,  infra.  tificates  of  stock,  with  blank  assign- 

*  Certificates  of  stock  are  not  nego-  ments,  and  powers  of  attorney  attacher^, 
tiable.  Hammond  v.  Hastings,  134  must  be  nearly  as  negotiable  as  coni- 
U.  S.  401  U890),     "Certificates  of  stock     mercial  paper."    Weyer  v.  Second  Nat. 

883 


§  412.] 


KISK    IN    rURCUASING    STOCK. 


[oil.  XXIY. 


to  pay  money,  nor  has  it  any  of  the  essentials  of  a  negotiable  in- 
strument. Moreover,  it  has  been  repeatedly  decided  by  the  courts 
that  a  certificate  of  stock  is  not  negotiable,  and  no  custom  of  trade 
or  of  brokers  can  give  to  it  that  character.  Nevertheless  the  New 
York  court  of  appeals  has  well  said  that  while  certificates  of  stock 
are  not  negotiable  in  form  and  represent  no  debt  and  are  not  se- 
curities for  money,  yet  "the  courts  of  this  country,  in  view  of  the 
extensive  dealing  in  certificates  of  shares  in  corporate  enterprises, 
and  the  interest,  both  of  the  public  and  of  the  corporation  which 
issues  them,  in  making  them  readily  transferable  and  convertible, 
have  given  to  them  some  of  the  elements  of  negotiability.""  ^ 


Bank,  57  Ind.  198,  208  (1877),  says:  "The 
difference  between  a  promissory  note 
and  a  certificate  of  bank  stock  is  so 
wide  and  marked  that  a  rule  of  law 
governing  the  transfer  of  the  former  is 
by  no  means  applicable  to  the  latter." 
Sewall  V.  Boston  Water-power  Co.,  86 
Mass.  277(1862),  says:  "The  authorities 
cited  show  that  a  certificate  of  stock  is 
not  a  negotiable  instrument,  and  with- 
out any  authorities  it  is  apparent  that 
it  has  not  a  negotiable  chantcter."  To 
same  effect,  Mandelbaum  v.  North  Am. 
Min.  Co.,  4  Mich.  465,  473  (1857).  hold- 
ing, however,  that  by  statute  in  that 
state  certificates  of  stock  are  practi- 
cally negotiable.  Shaw  v.  Spencer,  100 
Mass.  382  (1868),  says:  "It  is  clear  that 
a  certificate  of  stock  transferred  in 
blank  is  not  a  negotiable  instrument. 
.  .  .  No  commercial  usage  can  give 
to  such  an  instrument  the  attributes  of 
negotiability."  Sherwood  n  Meadow 
Valley  Min.  Co.,  50  Cal.  412  (1875); 
Bridgeport  Bank  v.  New  York.  etc.  R.  R., 
30  Conn.  231,  275  (1871),  holding  that 
"the  certificate  accompanied  by  the 
assignment  and  power  of  attorney 
thus  executed  in  blank  has.  perhaps,  a 
species  of  negotiability,  although  of  a 
peculiar  character,  but  one  necessary 
to  the  public  convenience."  In  First 
Nat.  Bank  v.  Lanier,  11  Wall.  369,  377 
(1871),  the  court  said  that  although  cer- 
tificates of  stock  are  "  neither  in  form 
or  character  negotiable  paper,  they  ap- 
proximate to  it  as  nearly  as  practi- 
cable."    Brinkerhoflf-Farris,  etc.  Co.  v. 


Home  Lumber  Co..  118  Mo.  447  (1893). 
In  a  recent  case  in  Jlaryland  an  im- 
portant distinction  is  drawn  between 
the  rights  of  a  bona  fide  purchaser  and 
a  bona  fide  pledgee.  It  is  held  that  the 
usual  form  of  transfer  on  the  back  of 
certificates  of  stock  signed  by  the  stock- 
holder with  the  name  of  the  transferee 
left  blank  does  not  protect  a  bona  fide 
pledgee.  The  pledgee  is  chargeable 
with  notice  of  all  the  facts  and  equi- 
ties. Under  this  decision  it  would  seem 
to  be  necessary  to  enlarge  the  terms 
and  form  of  the  usual  assignment  and 
power  of  attorney  on  the  back  of  cer- 
tificates of  stock.  German  Sav.  Bank 
V.  Renshaw,  78  Md.  475  (1894),  a  case 
wherein  a  broker  holding  stock  on  a 
margin  repledged  it  at  a  bank.  Com- 
pare §  432,  infra.  In  Hampton,  etc.  R 
R.  V.  Bank,  48  S.  C.  120  (1897),  where  a 
railroad  had  issued  stock  and  bonds  to 
a  finance  company  for  money  to  be 
paid  in  the  future,  and  the  finance 
company  had  not  paid  the  money,  but 
on  the  contrary  had  pledged  some  of 
the  stock  to  a  bank,  the  court  held  that 
the  bank  was  bound  to  take  notice  of  a 
provision  in  the  charter  to  the  effect 
that  no  sale  of  stock  should  relieve  an 
original  owner  from  his  obligations  to 
the  company,  and  hence  was  not  pro- 
tected as  pledgee. 

1  Knox  V.  Eden  Musee  Co.,  148  N.  Y. 
441  (1896),  rev'g  74  Hun,  483.  The  New 
York  court  of  appeals  has  recently 
held  that  where  certificates  of  stock 
issued  by  a  New  Jersey  corporation  are 


884 


CH.  XXIV.] 


KISK    IN    PURCHASING    STOCK. 


[§  412. 


In  England  an  entirely  different  rule  prevails.  Certificates  of 
stock  in  that  country  are  merely  evidences  of  ownership  of  stock, 
and  this  muniment  of  title  is  not  negotiable  nor  quasi-negotiable. 
The  purchaser  of  it  is  not  protected  against  equities  involved  in  the 
title  of  prior  owners  of  the  certificate.  Only  a  transfer  on  the 
corporate  books  shuts  off  those  equities.  Indeed,  this  rule  is  in- 
sisted upon  in  England  so  rigidly  that  not  even  the  certificates  of 
stock  issued  by  American  corporations  and  held  by  Englishmen 
are  given  the  quasi-negotiability  of  the  American  law.^ 


within  the  state  of  New  York,  an  at- 
tachment may   be    levied  upon  them 
and    the    interest    of    the    owner    or 
pledgor  therein  sold,  such  certificates 
being  a  property  right  within  the  state. 
Simpson  r.  Jersey  City,  etc.  Co.,  165  N. 
Y.  193  (1900;,  the  court  distinguishing 
the  case  of  Plimpton  r.  Bigelow,  93  N. 
Y.  593  (1883),  on  the  ground   that  the 
certificates  of  stock  in  that  case  were 
not  within  the  stata     The  court  said: 
"Certificates  of  stock  are  treated   by 
business  men  as  property  for  all  practical 
purposes.     They  are  sold  in  the   mar- 
ket and  they  are  transferred  as  collat- 
eral security  for  loans,  and  they  are 
used  in  various  ways  as  property.  They 
pass  by   delivery  from  hand    to  hand 
and  they  are  the  subject  of  larceny." 
In  Masury  v.  Arkansas  National  Bank, 
93  Fed.  Rep.  603  (1899),  the  court  said: 
"  It  is  a  well  known  fact  that  stock  cer- 
tificates frequently  circulate  in  places 
far  remote  from  the  home  of  the  corpo- 
ration by  which  they  were  issued,  that 
in  all  commercial  centers  they  are  com- 
monly transferred  from  hand    to  hand 
like  negotiable  paper,  and  that   they 
are  hypothecated  for  temporary  loans 
by  a  simple  indorsement  and  delivery 
thereof,  the  latter  being  perhaps  the 
most  common  use  to  which  such  securi- 
ties are  put.     In  the  great  majority  of 
cases  when  stock  is  merely  pledged  for  a 
loan,  no  record  of  the  transfer  is  made 
on  the  books  of  ,the  corporation,  and  in 
the  judgment  of  laymen  the  making  of 
such  a  record  seems  to  be  a  needless 
formality.     The  trend  of  modern  de- 
cisions has  been  to  encourage  the  free 


circulation  of  stock  certificates  in  the 
mode  last  indicated,  on  the  theory  that 
they  are  a  valuable  aid  to  commercial 
transactions,  and  that  the  public  inter- 
est is  best  subserved  by  removing  all 
restrictions  against  their  circulation, 
and  by  placing  them  as  nearly  as  pos- 
sible on  the  plane  of  commercial  paper." 
Where  no  certificates  of  stock  have  been 
issued,  a  purchaser  of  a  subscriber's 
right  to  the  stock  is  not  protected  as  a 
purchaser  of  a  certificate  of  stock  is 
protected.  Manchester  St.  Ry.  v.  Will- 
iams. 52  AtL  Rep.  461  (N.  H.  1902).  See 
also  §  374,  supra. 

iThe  English  courts  refuse  to  follow 
the  American  rule  in  regard  to  the  prac- 
tical negotiability  of  certificates  of 
stock  transferred  in  blank,  although 
such  certificates  of  stock  are  issued  by 
an  American  corporation.  Hence 
where  the  English  owner  of  such  cer- 
tificates delivered  them  to  a  broker  to 
forward  to  America  for  a  transfer,  and 
the  broker  fraudulently  sold  them  for 
his  own  purposes  to  other  persons,  .it 
was  held  that  no  title  was  conveyed  to 
such  other  persons,  and  that  the  Ameri- 
can law  did  not  apply.  The  court  said, 
however,  that  there  was  suflBcient  in 
the  case  to  put  the  purchasing  party 
upon  notica  Colonial  Bank  v.  Cady, 
L.  R.  15  App.  Cas.  267  (1890);  Williams 
V.  Colonial  Bank,  L.  R.  38  Ch.  D.  388 
(1888);  Dodds  v.  Hills,  2  H.  &  M.  424 
(1865);  Roots  v.  Williamson,  L.  R.  38 
Ch.  D.  485  (1888).  In  England  certifi- 
cates of  stock  indorsed  in  blank  con- 
vey title  by  estoppel  to  a  bona  fide  pur- 
chaser when  the  transfer  need  not  be 


885 


§  413.] 


KISK    IN    rURCHASlNU    STOCK. 


[CU.  XXIV, 


§413.  The  term  "  quasi-imjotiahiUtu,''  as  applied  to  ccrlificatcs 
of  stock,  throws  little  light  upon  the  suhject?— it  is  little  satisfac- 
tion to  the  court,  the  practitioner,  the  student,  or  the  owner  of 


by  deed  under  seal.     Rumball  v.  Met- 
ropolitan Bank,  L.  R.  2  Q.   B.  D.  194 
(1877),  where    a   broker    committed  a 
breach  of  trust.     The  court  said   the 
stockholder  "  is  in  the  position  of  a  per- 
son who  has  made  a  representation,  on 
the  face  of  his  scrip,  that  it  would  pass 
with  a  good  title  to  any  one  on  his  tak- 
ing it  in  good  faith  and  for  value,  and 
who  has    put  it  in  the  power  of  his 
agent  to  hand  over  the  scrip  with  this 
representation    to  those   who  are  in- 
duced to  alter    their  position   on   the 
faith  of  the  representation  so  made." 
Ex  parte  Sargent,  L.  R.  17  Eq.  273  (1874); 
Re  Barned's  Banking  Co.,  L.  R.  3  Ch. 
App.  105  (1867).     But  this  is  generally 
not  the  case.    Ortigosa  v.  Brown,  47  L. 
J.  (Ch.)  168  (1877);  and  France  v.  Clark, 
L.  R  22  Ch.  D.  830  (1883),  gives  no  pro- 
tection to  the  bojia^ide  purchaser  until 
he  is  registered.     See  also  Shropshire, 
etc.  Co.  V.  Queen,  L.  R.  7  H.  L.  496  (1875) ; 
Briggs  V.  Massey,  42  L.  T.  49  (1880).  See 
also  §§  325,  361,  377.  sitpra.    See  Eas- 
ton  V.  London  J.  S.  Bank,  L.  R.  34  Ch. 
D.  95  (1886).      Even  in   England,  if  a 
broker    transfers   stock    in    breach  of 
trust  to  a  bank,  and  the  bank  after- 
wards,   at    his   request,   transfers  the 
stock  to  another  person,  the  bank  being 
ignorant  of  his  agency,  is  not  liable  to 
the  principal  for  the  value  of  the  stoclc 
Marshall  v.  National,  etc.  Bank,  66  L. 
T.  Rep.  525  (1892).  As  between  the  trus- 
tee in  bankruptcy  of  a  defaulter  and 
the  party  to  whom  the  defaulter  has 
transferred  shares  of  stock  without  a 
transfer  on  the  corporate  books,  the  lat- 
ter is  entitled  to  the  stock.    Re  Dodds, 
64  L.  T.  Rep.  476  (1891).     In  Moore  v. 
Northwestern  Bank,  [1891]  2  Ch.   599, 
the  rules  of  the  company  provided  that, 
when  certificates  were  sent  in  for  trans- 
fer, the  particulars  should  be  entered 
in  a  book  which  must  be  brought  before 
the  directors  for  approval  and  be  signed 


by  three  members  of  the  board,  after 
which  the  registry  of  transfer  was  com- 
pleted. The  real  owner  of  the  certifi- 
cates was  permitted  to  reclaim  them 
before  approval  by  the  directors,  the 
court  saying  that  the  notice  thus  given 
to  the  company  gave  the  court  seisin 
for  purposes  of  adjudication.  In  Sim- 
mons u  London  J.  S.  Bank.  [1891]  1  Ch. 
270.  the  court  held  that  a  bank  to  whom 
a  broker  had  pledged  stocks  belonging 
to  his  customer  was  not  a  bona  fide  pur- 
chaser under  the  facts  in  that  case,  and 
consequently  was  not  protected,  even 
though  a  bona  fide  purchaser  might 
have  been.  Although  in  England  an 
unregistered  transferee  of  stock  is  not 
protected  against  another  transfer 
which  is  registered,  yet  he  is  protected 
where  he  lodged  his  transfer  with  the 
corporate  secretary,  and  the  latter  ac- 
cepted it  for  transfer  before  the  second 
transfer  was  made.  Nanney  v.  Morgan, 
L.  R.  35  Ch.  D.  598  (1887).  In  the  case 
of  Donaldson  v.  Gillot,  L.  R.  3  Eq.  274 
(1866),  the  pledgee  of  one  who  held  the 
certificate  indorsed  to  himself  was  not 
protected,  since  the  pledgor  had  pur- 
chased as  agent  and  had  fraudulently 
taken  title  in  his  own  name.  This 
would  not  be  good  law  in  this  country, 
where  the  failure  to  have  the  transfer 
registered  has  no  effect  on  the  pledgee's 
rights  under  such  circumstances. 

1  Daniel,  Neg.  lusts.,  g  1708,  says: 
"The  phrase  'quasi-negotiable'  has 
been  termed  an  unhappy  one.  and  cer- 
tainly it  is  far  from  satisfactory,  as  it 
conveys  no  accurate,  well-defined 
meaning.  But  still  it  describes  better 
than  any  other  short-hand  expression 
the  nature  of  those  instruments  which, 
while  not  negotiable  in  the  sense  of  the 
law  merchant,  are  so  framed  and  so 
dealt  with  as  frequently  to  convey  as 
good  a  title  to  the  transferee  as  if  they 
were  negotiable." 


886 


CH.  XXIV.]  EISK    IN    PURCHASING    STOCK.  [|  414. 

stocks  to  be  told  that  certificates  of  stock  have  a  quasi-negotiability. 
This  term  has  been  coined  to  describe  the  character  of  certain 
things  which  can  be  understood  only  by  a  study  and  knowledge  of 
the  characteristics  of  the  thing  described.  Especially  is  this  true 
of  certificates  of  stock.  The  information  sought  is  not  whether  the 
certificate  is  quasi-negotiable,  but  Avhether  the  holder  of  it  is  pro- 
tected under  different  states  of  fact  and  circumstances.  He  who 
intends  to  purchase  such  certificates  wishes  to  know  what  dangers 
or  risks  he  incurs  by  the  purchase.  The  practitioner  is  interested, 
not  in  the  general  character  of  the  instrument,  but  in  the  law  as 
applicable  to  his  particular  case.  Many  of  the  cases  concede  to 
certificates  of  stock  a  quasi-negotiability;  but  it  is  extremely  doubt- 
ful whether  such  discussions  do  not  confuse  any  understanding  of 
the  character  of  such  an  instrument  more  than  they  explain  it. 

§414.  The  distinction 'between  tlie  '''"legaV  and  the  ^'' equitahJe''^ 
title  in  the  transfer  of  certificates  of  stocli  is  unsatisfactory. —  Many 
of  the  cases  involving  the  rights  of  a  transferee  of  stock  discuss  and 
treat  the  subject  from  the  point  of  view  that  the  transferee  is  pro- 
tected in  his  ownership  when  the  legal  title  passes  to  him,  but  is 
not  so  protected  when  only  the  equitable  title  passes.  Unfortu- 
nately it  happens  that,  under  the  same  state  of  facts,  one  court  will 
hold  that  only  the  equitable  title  passes;  another  that  the  legal 
title  passes;  and  a  third  court  will  hold  that  both  the  legal  and 
the  equitable  titles  pass.  The  result  is  confusion,  doubt,  and  dif- 
ficult}'-,  with  little  light  as  to  the  real  status  of  certificates  of  stock. ^ 

1"  In  reaching  this  conclusion  we  have  immaterial,  or,  rather,   it  is  material 

not  thought  it  necessary  to  consider  only  to  the  question  of  the  nature  of 

the  supposed  distinction  between  the  the  action,  whether  legal  or  equitable, 

legal  and  the  equitable  title,  or  to  de-  and  to  the  question  of  parties."    Ash- 

termine  whether  the  title  of  the  execu-  ton  v.  Zeila  Min.  Co.,  134  Cal.  408  (1901). 

tors  is  the  one  or  the  other.     The  dis-  Such  also  seems  to  be  the  view  taken 

tinction  belongs  appropriately  to  thelaw  in  Lowell  on  Transfer  of  Stock  (1884), 

of  real  estate;  and,  though  it  has  been  pp.  104,  105,  where  the  learned  author 

extended  to  personalty,  the  application  says:  "  It  is  often  supposed,  for  example, 

with  regard  thereto  has  been  less  ex-  that  the  right  of  a  creditor  to  seize 

tensive;   and   the  distinction   itself  is  stock  which  has  been  sold  before  it  is 

less  significant.  For  in  many  cases — as,  transferred  upon  the  books  depends  on 

for  example,  in  the  case  of  money  re-  the  passing  of  the  legal  title;  but  we 

ceived  in  trust  or  for  the  use  of  an-  shall  attempt  to  prove  that  the  legal 

other  —  courts  of    law    recognize    the  title  has  in  reality  no  effect  upon  the 

equitable  as  the  legal  title;  and,  even  matter."     The  same  authority  shows 

where  the  distinction  obtains,  the  equi-  the  confusion  resulting  from  this  dis- 

table  is  regarded  as  the  true  owner  by  tinction  of  the  legal  from  the  equitable 

courts  of  equity.     Hence,  in  this  state,  title  in  the  following  note  to  page  103: 

where  the  courts  exercise  both  juris-  "  That  the  legal  title  passes  before  the 

dictions,  the  question  as  to  the  nature  transfer  on  the  books.     In  the  follow- 

of    the    title   sued    upon   is   generally  ing  cases  this  is  made  part  of  the  7-atio 

887 


§  415.] 


EISK   IN    PURCHASING    STOCK. 


[CH.  XXIV. 


§  415.  The  only  mctliod  of  treatment  of  the  suhjcct  seems  to  Ir  hij 
inquiring  nnder  ichat  facts  the  holder  or  imr chaser  is  protected.— 
The  court,  the  practitioner,  the  purchaser,  or  the  holder  of  certifi- 
cates of  stock  wishes  to  know  what  liability  and  what  dangers  are 
incurred  by  the  purchase  and  ownership  of  a  certificate  of  stock. 
It  becomes  important  for  him  to  ascertain  whether  forgery  or 
theft;  or  improper  registry  by  the  corporation;  or  breach  of  trust 


decidendi:  Ross  v.  Southwestern  R.  R., 
53  Ga.  514,  532  (1874);  Merchants'  Nat. 
Bank  v.  Richards,  6  Mo.  App.  454,  463 
(1879);  s.  C,  74  Mo.  77  (1881);  Carroll  v. 
Mullanphy  Sav.  Bank,  8  Mo.  App.  249, 
252  (1880):  Scripture  v.  Francestown 
Soapstone  Co.,  50  N.  H.  571  (semble): 
McNeil  V.  Tenth  Nat.  Bank,  46  N.  Y. 
325  (1871);  Leitch  v.  Wells,  48  N.  Y.  585 
(1872);  Smith  v.  American  Coal  Co.,  7 
Lans.  317  (1873);  Noyes  v.  Spaulding,  27 
Vt  420  (1855);  Cherry  v.  Frost,  7  Lea 
(Tenn.),  1  (1881).  In  the  following  cases 
the  same  principle  was  laid  down  obiter: 
State  V.  Leete,  16  Nev.  242,  250  (1881); 
Eastman  v.  Fiske,  9  N.  H.  182  (1838); 
New  York,  etc.  R.  R  v.  Schuyler,  34  N. 
Y.  30,  80  (1865);  Grymes  v.  Hone,  49  N. 
Y.  17  (1872);  Johnson  v.  Underhill.  52 
N.  Y.  203  (1873);  Hoi  brook  v.  New  Jer- 
sey Zinc  Co.,  57  N.  Y.  616  (1874);  Cush- 
man  v.  Thayer  Mfg.  Co..  76  N.  Y.  365 
(1879);  and  see  Purchase  v.  Exchange 
Bank,  3  Rob.  (N.  Y.)  164  (1865).  .  .  . 
That  the  legal  title  does  not  pass  .until 
transfer  on  the  books.  In  the  follow- 
ing cases  this  principle  is  made  a  part 
of  the  ratio  decidendi:  Union  Bank  v. 
Laird,  2  Wheat  390  (1817);  Lowry  v. 
Commercial,  etc.  Bank,  Taney,  310 
(1848);  s.  c,  15  Fed.  Cas.  1043;  Brown  v. 
Adams,  5  Biss.  181  (1870);  s.  a,  4  Fed. 
Cas.  350;  Williams  v.  Mechanics'  Bank, 

5  Blatchf.  59  (1862);  s.  C,  29  Fed.  Cas. 
1376;  Becher  v.  Wells,  etc.  Co.,  1  Fed. 
Rep.  276  (1880);  Marlborough  Mfg.  Co. 
V.  Smith,  2  Conn.  579  (1818);  Northrop 
V.  Newtown,  etc.  Tump.  Co.,  3  Conn. 
544(1821);  Oxford  Turn  p.  Co.  v.  Bunnel, 

6  Conn.  552  (1827);  Dutton  v.  Connect- 
icut Bank,  13  Conn.  493  (1840);  Van- 
sauds  V.  Middlesex   County  Bank,   26 


Conn.  144  (1857);  Coleman  v.  Spencer,  5 
Blackf.  197  (1839);  Helmr.  Swiggett.  12 
Ind.  194  (semble)  (1859):  Weyer  v.  Second 
Nat.  Bank,  57  Ind.  198  (1877);  Fisher  v. 
Essex  Bank,  71  Mass.  373  (1855);  Boyd 
V.  Rockport  Steam  Cotton  Mills,  73 
Mass.  406  (1856);  Blanchard  v.  Dedham 
Gas  Light  Co..  78  Mass.  213  (1858);  Mc- 
Courry  v.  Suydam,  10  N.  J.  L.  245 
(1828);  .  .  .  Stebbins  v.  Phoenix  Ins. 
Co..  3  Paige,  350(1832);  Mechanics'  Bank 
V.  New  York,  etc  R.  R.,  13  N.  Y.  599 
(1856);  New  York,  etc.  R  R,  v.  Schuyler, 
38  Barb.  534  (1860);  Lockwood  v.  Me- 
chanics' Nat.  Bank,  9  R.  I.  308,  331,  335 
(1869).  In  the  following  cases  the  same 
doctrine  is  laid  down  obiter:  Black  v. 
Zacharie,  3  How.  (U.  S.)  483  (1845);  U.  S. 
V.  Cutts,  1  Sumn.  133  (1832);  S.  C,  25 
Fed.  Cas.  745  (this  was,  however,  a  case 
of  government  debt,  not  of  corporate 
stock);  Planters',  etc.  Ins.  Co.  v.  Selma 
Sav.  Bank,  63  Ala.  585  (1879);  Otis  v. 
Gardner,  105  III  436  (semble)  (1883); 
and  see  Kellogg  v,  Stockwell,  75  111.  68 
(1874);  People's  Bank  v.  Gridley,  91  III 
457  (1879);  Bruce  v.  Smith,  44  Ind.  1 
(1873):  State  v.  First  Nat.  Bank,  89  Ind. 
302(1883);  Shaw  u  Spencer,  100  Mass. 
382  (1868);  Sibley  v.  Quinsigamond  Nat. 
Bank,  133  Mass.  515  (1882):  White  v. 
Salisbury,  33  Mo.  150  (1862);  Boatmen's 
Ins.  Co.  V.  Able.  48 Mo.  136  (1871);  .  .  . 
Conant  v.  Seneca  County  Bank,  1  Ohio 
St.  298  (1853);  U.  S.  v.  Vaughan,  3  Binn. 
(Pa.)  394  (semble)  (1811);  Bank  of  Com- 
merce's Appeal,  73  Pa.  St.  59  (1873); 
Eraser  v.  Charleston,  11 S.  C.  486  (semble) 
(1878)."  As  to  the  reason  for  the  dis- 
tinction between  the  legal  and  equi- 
table title,  see  1  University  Law  Rev. 
218  (1894). 


888 


CH.  XXIV.l  KISK    IN    PUECHASING    STOCK.  fS  416. 

J  -^  uo 

I 

by  a  trustee,  executor,  or  agent  formerlj''  holding  that  particular 
stock;  or  fraud  whereby  a  former  owner  was  deprived  of  that  same 
stock;  or  legal  proceedings,  such  as  attachment,  execution,  man- 
■damus,  diiKX  decrees  of  the  court;  or  any  other  fact  or  equitable 
right  between  former  owners  of  the  stock  which  he  purchases,  can 
affect  him,  a  bona  fide  purchaser  for  value  and  without  notice  of 
those  rights.  These  questions  cannot  be  solved  or  answered  by 
finy  general  rules  or  theories,  since  certificates  of  stock  have  a  law, 
an  origin,  and  a  nature  different  from  other  kinds  of  securities. 
The  fact  that  a  registry  of  transfer  is  required  to  be  made  on  the 
corporate  books  adds  further  complication  to  the  rights  of  a  holder. 
General  rules  derived  from  and  applicable  to  other  instruments  or 
securities  cannot,  with  any  certainty,  clearness,  or  satisfactory  re- 
sults, be  applied  to  certificates  of  stock.  They  should  be  consid- 
ered by  themselves.  The  future  character  and  status  of  certificates 
of  stock  will  be  much  clearer,  better,  and  more  satisfactory  to  the 
investing  public  if  the  law  governing  them  be  formed  on  its  own 
basis. 

§  416.  The  'particular  rules  protecting  a  honafide  imrcliaser  of 
certificates  of  stoclc  are  hased  on  estoppel. —  Nearly  all  of  the  rules 
whereby  a  purchaser  of  stock  is  protected  against  the  rights  of  pre- 
vious holders  grow  out  of  the  fact  that  such  previous  holder  or 
hoklers  have  enabled  persons  to  sell  the  stock,  and  consequently 
are  estopped  from  claiming  that  they  did  not  intend  so  to  do.^  This 
law  of  estoppel  protects  the  purchaser  against  not  only  the  rights 
of  previous  holders,  but  against  the  claims  of  the  corporation  itself.^ 
Indeed,  to  such  an  extent  has  the  law  of  estoppel  been  applied  to 
protect  a  bona  fide  purchaser  of  stock,  that,  excepting  in  cases  of 
certificates  transferred  in  blank  and  lost  or  stolen  without  negli- 

1  Wood's  Appeal.  92  Pa.  St.  379,  390  Hill  v.  Atoka,  etc.  Co.,  21  S.  W.  Rep.  508 

(1880);  McNeil  v.  Tenth  Nat.   Bank,  46  (Mo.  1893).     Other  phases  of  this  case 

N.  Y.  325,  329  (1871);  Weaver  v.  Barden^  are  passed  on  in  124  Mo.  153. 

49  N.  Y.  286,  288  (1872);  Moore  v.  Metro-  ^Many  instances  of  the  liability  of 

politan  Nat.  Bank,  55  N.  Y.  41,  47  (1873);  the  corporation  on  certificates  of  stock 

Mount  Holly,  etc  Co.  v.  Ferree,  17  N.  J.  which  it  has  issued,  and  which  have 

Eq.  117(1864);  Walker  r.  Detroit  Transit  been  sold  or  pledged  to  an   innocent 

Ry.,  47  Mich.  338,  347(1882).     See  also  person  for  value,  are  given  in  chs.  XVII, 

Fat  man  v.  Lobach.  1   Duer,  354  (1852);  XIX,  XXI.    XXII,  XXIII,   supra,   and 

Moodie  v.  Seventh  Nat.  Bank,  3  W.  N.  ch.  XXVI,  infra.     The  purchaser,  how- 

•Cas.  118  (1876);  Matthews  r.  Massachu-  ever,  is  not  bona  fide,  unless  he  actually 

setts  Nat.  Bank,  Holmes.  396  (1884);  S.C.,  parted  with  the  consideration    before 

16  Fed.  Cas.  1113.     The  agreement  of  a  he  knew  of  defects  as  to  the  stock. 

stockholder  to  surrender  his  stock  in  See  s?  767,  infra,  as  to  bona  fides,  and 

liquidation  of  an  unpaid  assessment  is  Hayden  v.  Charter  Oak,  etc.  Park,  63 

without  consideration,   and   does    not  Conn.  142  (1893). 
.bind  a  purchaser    of  the    certificate. 

889 


§  41G.]  RISK    IN    PDRCnASING    STOCK.  [CH.  XXIV. 

gence  on  the  part  of  the  owner,  a  lona  fide  purchaser  is  protected 
now  in  almost  every  instance  where  he  would  be  protected  if  he 
were  purchasing  a  promissory  note  or  other  negotiable  instrument.' 
Thus  the  New  York  court  of  appeals  has  recently  held  that  where 
certificates  of  stock  issued  by  a  ^ew  Jersey  corporation  are  within 
the  state  of  New  York,  an  attachment  may  be  levied  upon  them 
and  the  interest  of  the  owner  or  pledgor  therein  sold,  such  certili- 
cates  being  a  property  right  within  the  state.^  Again,  even  though 
in  anticipation  of  an  increase  of  the  capital  stock  the  stockholders 
agree  among  themselves  to  waive  their  prior  right  to  subscribe  for 
such  increased  capital  stock,  yet  a  Ion  a  fide  purchaser  of  a  certifi- 
cate of  stock  prior  to  such  increase  is  not  bound  by  such  agreement 
and  may  claim  hisj^ro  rata  share  of  the  increased  capital  stock  at 
par.'  And  again,  where  four  shares  of  stock  are  transferred  to  a- 
person  by  the  corporation  to  qualify  him  as  a  director,  and  he  agrees 
to  return  the  same  to  the  corporation  when  ceasing  to  be  a  director, 
but  thereafter  and  before  he  ceases  to  be  a  director  he  agrees  with 
the  indorsers  of  his  note  that  they  shall  have  the  stock  as  collateral 
security,  they  are  protected,  even  though  the  stock  was  actually 
delivered  to  them  after  they  had  notice  of  the  first  agreement,  it 
being  shown,  however,  that  they  had  no  notice  of  such  agreement 
at  the  time  they  became  sureties.^  AVhere  no  certificates  of  stock 
have  been  issued,  a  purchaser  of  a  subscriber's  right  to  the  stock 
is  not  protected  as  a  purchaser  of  a  certificate  of  stock  is  pro- 
tected.^ 

1  Quoted  and  approved  in  Cincinnati,  sgjmpson  v.  Jersey  City,  etc.  Co.,  165 
etc.  Ry.  V.  Citizens'  Nat.  Bank,  56  Ohio  N.  Y.  193  (1900),  tlie  court  distinguish- 
St.  351  (1897).  The  supreme  court  of  ing  the  case  of  Plimpton  v.  Bigelow.  93 
Maryland  in  the  case  of  Real  Estate,  etc.  N.  Y.  593  (1883),  on  the  ground  that  the 
Co.  V.  Bird,  90  Md.  229  (1899),  after  quot-  certificates  of  stock  in  that  case  were 
ing  the  above,  commented  thereon  as  not  within  the  state.  The  court  said: 
follows:  "Without  intending  to  unite  in  "Certificates  of  stock  are  treated  by 
tlieprophecy  of  the  learned  author  as  to  businessmen  as  property  for  all  prac- 
wliat  may  yet  be  done,  tlie  fact  is  that  tical  purposes.  They  are  sold  in  the 
courts  have  felt  called  on,  ex  necessitate  market  and  they  are  transferred  as  col- 
ret,  to  free  certificates  of  stock  from  lateral  security  for  loans,  and  they  are 
many  of  the  burdens  that  most  non-  used  in  various  ways  as  property.  They 
negotiable  instruments  are  required  in  pass  by  delivery  from  hand  to  hand  and 
law  to  carry.  If  a  negotiable  instru-  they  are  the  subject  of  larceny." 
ment  is,  as  has  been  said  of  it  by  a  dis-  ^  Real  Estate,  etc.  Co.  v.  Bird.  90  Md. 
tinguished  jurist,  'a  courier  without  229  (1899). 

luggage,'  a  certificate  of  stock  in  the  *  Dueber,  etc.  Ca  v.  Daugherty,  62 

form   now  usually  followed  might  at  Ohio  St.  589  (1900). 

least  be  said  to  be  'a  courier  without  5 Manchester  St.   Ry.  u.  Williams,  52. 

much  luggage.'"  Atl.  Rep.  461  (N.  H.  1902). 

890 


CH.  XXIV.]  EI3K    IN    PUKCHASING    STOCK.  [§§  417-410. 

B.    DANGERS    INCDEEED    IN    PUECHASING    STOCK. 

§  417.  Liabilities,  rislcs,  and  rights  of  one  wlio  owns  or  purchases 
a  certificate  of  stock. —  It  is  proposed  to  state  separately  and  in  de- 
tail the  liabilities  on  the  subscription  price  and  by  statute  incurred 
by  one  who  owns  or  purchases  a  certificate  of  stock;  also  the  risks 
or  dangers  incurred  by  a  purchase  of  stock  as  affected  by  the  rights 
of  previous  holders  of  that  stock;  also  a  few  of  the  rights  of  an 
owner  or  purchaser  of  a  certificate  of  stock  as  regards  the  general 
incidents  appertaining  to  stockholdership.  These  subjects  are  dis- 
cussed in  full  in  other  parts  of  this  work,  and  consequently  the  au- 
thority for  rules  laid  down  herein  must  be  sought  for  in  those  parts. 
The  purpose  here  is  to  state  succinctly  and  in  language  free  from 
technical  phraseology  the  position  occupied  by  a  bona  fide  pur- 
chaser of  a  certificate  of  stock. 

j^  418.  LiabiliUj  on  unpaid  par  value,  that  is,  the  unpaid  subscrip- 
tion price  of  the  stock} —  In  general  the  purchaser  of  a  certificate 
of  stock  is  immediately  liable  on  the  subscription  price  of  the  stock  so 
far  as  it  has  not  been  paid  by  previous  holders  of  the  stock  purchased 
and  has  not  been  called  by  the  'corporation.  The  transferrer  is 
bound  to  pay  all  calls  made  before  the  transferee  purchases.  If  the 
transferee  does  not  immediately  register  his  transfer  on  the  corpo- 
rate books,  he  is  liable  to  pay  to  the  transferrer  such  calls  as  ar& 
made  after  the  transfer  and  which  the  corporation  compels  the 
latter  to  pay.  The  transferee  who  buys  stock  supposing  it  to  be 
full  paid  is  not  liable  for  uncalled  and  unpaid  parts  of  the  subscrip- 
tion, even  though  the  certificate  is  silent  as  to  whether  the  par  value 
of  the  stock  has  been  paid  in  or  not.  Especially  is  this  the  rule 
where  the  certificate  states  that  the  stock  is  paid-up  stock,  or  the 
transferee,  before  purchasing,  inquires  of  the  corporation  and  is 
told  that  the  stock  is  paid  up.  He  may  purchase  in  reliance  thereon, 
and  cannot  afterwards  be  held  liable,  even  though  the  stock  turns 
out  not  to  have  been  fully  paid  up. 

§419.  Forfeiture  for  non-yayment  of  calls. "^ — Where  the  corpo- 
ration is  given  by  its  charter  or  b}^  statute  the  right  to  forfeit  and 
sell  stock  for  non-payment  of  the  subscription  price  when  called 
in  by  the  corporation,  a  notice  to  the  stockholder  of  the  intended 
forfeiture  is  always  required.  This  notice,  however,  is  given  al- 
ways to  him  who  appears  by  the  corporate  registry  to  be  the  stock- 
holder. Accordinfflv,  a  transferee  or  owner  of  stock  who  has  not 
obtained  a  registry  of  his  transfer  on  the  corporate  books  is  liable 
to  lose  his  stock  by  a  forfeiture  for  non-payment  of  calls,  and  may 
lose  it  without  knowledge  of  the  call  or  forfeiture,  unless  he  ap- 
pears on  the  registry  of  the  corporation  as  the  owner  of  the  stock. 

1  See  ch.  XV,  surpra.  -  See  ch.  VIII.  supra. 

891 


§3  420-423.]  RISK    IN    PURCHASING    STOCK.  [ciI.  !XXIV. 

§  420.  Statutory  liahilily}  —  The  liability  b}' statute  of  a  pur- 
chaser of  certificates  of  stock  to  corporate  creditors,  in  addition  to 
the  subscription  price  which  is  treated  of  above,  exists  in  a  great 
many  cases.  In  the  first  place  this  liability  may  not  exist  at  all 
against  any  one,  either  transferrer  or  transferee.  It  rarely  exists 
in  the  case  of  railroad  corporations.  AVhere  the  statutor}'  liability 
exists,  the  liability  of  a  purchaser  of  stock  is  as  follows:  If  the 
transferee  immediately  registers  his  transfer  on  the  corporate 
books,  he  becomes  at  once  liable  by  statute  for  debts  of  the  corpo- 
ration contracted  after  such  ref^^istrv,  and  the  transferrer  is  not 
liable  thereon.  The  transferee  may  or  may  not  be  liable  on  cor- 
porate debts  contracted  before  he  purchased,  according  to  the 
words  of  the  statute  creating  the  liability.  The  transferrer  is  lia- 
ble on  corporate  debts  contracted  after  he  sold  the  stock  but  be- 
fore the  transfer  was  registered.  In  the  latter  case  the  transferrer 
has  recourse  to  the  transferee. 

§  421.  LiahUity  when;  tlie  inir chaser  has  the  transfer  made  to  a 
nominal  holder.-  —  Where  a  person  purchases  stock  and  takes  it  in 
the  name  of  a  "dummv,"  the  stock  never  bavin":  been  ref^ristered 
in  the  name  of  the  real  owner,  the  latter  is  not  liable  on  such  stock, 
according  to  the  English  rule.  In  America  a  contrary  rule  pre- 
vails, and  the  courts  hold  him  liable  on  the  ground  that  he  is  a 
principal,  and  as  such  is  liable  as  an  undisclosed  principal  for  the 
acts  of  his  agent,  the  "dummy." 

§  422.  No  liahility  for  assessments  after  the  par  value  of  the  stoclc 
has  heen  j)aid  in.^  —  By  well-established  principles  of  law  stock- 
holders are  liable  on  their  stock  only  to  the  extent  of  the  unpaid 
par  value  of  the  stock,  unless  the  statute  expressly  provides  other- 
wise. Keither  the  directors,  nor  all  the  other  stockholders  com- 
bined, in  corporate  meeting  assembled  or  otherwise,  can  compel  a 
dissenting  stockholder  to  pay  any  more  money  into  the  corpora- 
tion or  subject  him  to  further  liability  on  his  stock.  iS^or  can  the 
legislature,  subsequently  to  his  purchase  of  the  stock,  pass  a  law 
increasing  his  liability,  unless  the  power  to  alter  or  amend  the 
charter  is  reserved  to  it,  in  which  case  such  a  law  would  be  con- 
stitutional. 

§  423.  LiaMlity  when  stock  was  issued  for  iwoperty} — Shares  of 
stock  may  be  issued  under  an  agreement  that  payment  is  to  be 
made  in  labor,  services,  material,  or  contract  work.  If  so  issued, 
and  the  labor  or  material  received  by  the  corporation  is  fairly  equal 
in  value  to  the  par  value  of  the  stock,  both  the  original  holder 
and  the  transferee  of  such  stock  take  it  as  full-paid  stock,  and 

1  See  ch.  XII,  supra,  3  See  ch.  XIII,  supra. 

2  See  §!^  253.  2G.j,  supra,  <See  clis.  II  and  III,  supra. 

893 


CH.  XXIV.]  KISK    IN    PURCHASING    STOCK.  [§§  424,  425, 

cannot  be  held  liable  for  any  further  amount,  even  though  the 
value  of  the  property  turns  out  subsequently  to  have  been  overesti- 
mated but  was  made  in  good  faith.  Where,  however,  the  property 
is  intentionally  overvalued  and  stock  is  issued  for  it,  the  persons 
originally  receiving  the  stock  are  liable  to  have  the  transaction  set 
aside,  the  value  of  the  property  or  work  done  credited  to  them,  and 
the  real  value  of  the  stock,  not  necessarily  the  par  value,  charged 
to  them,  or  be  compelled  to  return  the  stock.  As  to  the  trans- 
ferees the  case  may  be  different.  If  they  purchased  with  notice  of 
the  fraud  they  are  not  protected ;  but  if  they  purchased  without 
notice  or  knowledge  that  the  property  was  intentionally  overvalued, 
but  supposed  that  the  stock  was  issued  as  paid  up  by  payment  in 
property  or  work  taken  at  a  lonajide  value,  or  if  tliey  have  no 
knowledge  of  how  the  stock  was  paid  for,  but  take  it  as  paid-up 
stock,  they  may  retain  the  stock,  a:nd  are  not  liable  for  any  further 
amount  thereon. 

§  424.  Liahilitij  an  partners  hj  reason  of  defective  incorporation 
or  for  other  reasons.^ — Where  a  supposed  corporation  has  not  been 
duly  incorporated,  or  where  a  corporation  for  that  business  is  not 
provided  for,  the  supposed  corporation  has  been  held  to  be  but  a 
partnership,  and  all  the  stockholders  held  liable  as  partners.  But 
a  failure  to  file  the  articles  of  association,  or  to  sign  and  publish 
them,  or  the  omission  from  them  of  any  of  the  essential  facts 
required  to  be  stated,  does  not  ordinarily  defeat  the  attempted 
incorporation  and  render  the  stockholders  liable  as  partners. 
Again,  the  stockholders  are,  in  some  jurisdictions,  liable  to  be  held 
to  be  partners,  as  regards  creditors  of  the  enterprise,  where  the 
corporation  organizes  in  one  place  and  proceeds  to  do  all  its  busi- 
ness in  another  place.  In  most  such  cases,  however,  the  corpora- 
tion has  been  recognized  and  upheld,  and  the  stockholders  pro- 
tected in  their  limited  liability.  The  latter  class  of  decisions  is  the 
stronger,  and  certainly  more  to  be  commended  and  followed.  In 
any  case  a  transferee  is  not  liable  for  all  precedent  debts  of  the 
concern,  but  only  for  those  incurred  subsequently  to  the  registry 
of  his  transfer. 

§425.  Danger  of  corporate  lien.^— Frequently  corporations  are 
given  by  charter  or  statute  a  lien  on  a  stockholder's  stock  for  debts 
due  from  him  to  the  corporation.  When  such  lien  exists,  a  pur- 
chaser of  the  certificate  in  open  market  buys  subject  to  the  risk 
that  the  one  from  whom  he  buys  owes  the  corporation  a  debt,  and 
that  the  corporation  will  not  allow  the  transferee  of  the  certificate 
to  obtain  a  registry  until  such  debt  is  paid.  In  many  of  the  states 
the  lien  of  the  corporation  cannot  be  created  by  by-law.  Generally 

1  See  ch.  XIII,  supra.  -  See  ch.  XXXI,  infra, 

893 


§§  426,  427.]  RISK  IN  ruKciiAsiNo  stock.  [cii.  XXIV. 

it  exists  by  reason  of  a  provision  of  the  charter.  When  it  floes  le- 
gally exist  it  extends  to  all  debts  owed  by  the  last  registered  stock- 
hokler,  whether  the  debt  be  due  or  not  due,  and  includes  uncalled 
parts  of  the  subscription  price  of  the  stock.  It  does  not,  however, 
apply  to  debts  due  from  one  who  has  bought  and  sold  the  certifi- 
cate without  appearing  on  the  registry  as  a  stockholder.  The  cor- 
poration may  waive  the  lien,  and  a  registry  without  insisting  on 
the  lien  is  such  a  waiver.  The  lien  of  the  corporation  extends  to 
debts  incurred  by  the  transferrer  after  the  transfer,  but  before  the 
corporation  is  notitied  thereof. 

§  42fi.  Overissued  stoch^ — The  capital  stock  of  a  corporation  is 
fixed  by  statute.  There  is  no  power  in  the  corporation  itself  to 
increase  that  amount.  It  can  be  done  only  by  a  legish^tive  enact- 
ment. Accordingly,  if  the  corporation  issues  certificates  of  stock 
when  the  whole  capital  stock  has  already  been  issued,  the  new  is- 
sue, if  an  equivalent  amount  of  outstanding  certificates  is  not  sur- 
rendered, is  an  overissue,  and  is  void.  Any  issue  of  stock  in  excess 
of  the  amount  of  the  capital  stock  as  fixed  by  the  charter  is  null 
and  void.  The  purchaser  of  such  certificates,  however,  is  not  with- 
out his  remedy.  His  certificate  is  so  much  waste  paper,  and  he  is 
not  a  stockholder;  but  he  may  sue  the  corporation  for  damages, 
and  recover  to  the  extent  of  his  injury.  The  purchaser  may  also 
sue  the  corporate  officers  who  participated  in  the  issue  of  the  spuri- 
ous stock,  and  may  recover  damages.  lie  cannot,  however,  hold 
an  innocent  transferrer  liable.  The  latter,  if  he  knew  nothing  of 
the  overissue,  is  not  to  be  held  as  a  guarantor  of  the  validity  of 
the  stock  which  he  sells. 

§  427.  Danqer  that  transferrer  or  previous  holder  is  an  infant, 
married  woman,  or  hniatic.^ — A  purchase  of  stock  from  an  infant 
is  a  daniz-erous  investment.  When  the  infant  comes  of  age  he  mav 
elect  to  disaffirm,  and  may  hold  the  transferee  liable  for  the  stock. 
There  is  less  danger,  however,  in  accepting  a  transfer  of  stock  from 
an  infant  who  has  previously  purchased  the  stock  which  he  sells. 
This  previous  purchase,  and  also  his  sale  of  the  stock,  are  technically 
voidable  acts;  but  after  the  stock  has  passed  from  his  control  the 
law  disregards  the  doubtful  medium  of  title,  and  considers  the  pur- 
chaser from  the  infant  as  the  legal  stockholder.  As  regards  mar- 
ried women,  the  common  law  allowed  the  husband  to  sell  her  stock 
after  he  had  reduced  it  to  possession  by  registering  it  in  his  own 
name  on  the  corporate  books.  In  modern  times,  however,  the  right 
of  a  married  woman  to  hold  and  convey  personal  property  as  though 
unmarried  has  been  established  in  most  states  by  statute.  Her 
right  to  sell  shares  of  stock  owned  by  herself  exists  where  she  may 

1  See  ch.  XVII.  S7i.pra.  2  Sep  ^  66,  67,  250,  308,  310,  318,  319,  supra. 

894 


•CH.  XXIV.]  KISK    IN    PURCHASING    STOCK.  [§§  428-430. 

sell  other  personal  property  similarly  owned,  and  this  right  depends 
upon  the  law  and  statutes  of  her  domicile.  A  purchase  of  stock 
from  a  lunatic  is  void. 

§  428.  Purchase  of  stoclc  l)y  or  from  a  corimration} — In  England 
a  corporation  cannot  purchase  shares  of  its  own  capital  stock.  In 
this  country  there  is  a  difference  of  opinion  as  to  the  law.  The 
statutes  governing  the  corporation,  however,  sometimes  prohibit 
such  purchases.  Such  is  the  case  with  national  banks.  In  any 
case,  however,  whether  the  corporation  purchased  the  stock  legally 
or  illegally,  a  purchaser  of  the  same  stock  from  the  corporation 
itself  is  not  affected  by  the  invalidity  of  the  title  of  the  corporation. 
Again,  it  is  a  general  rule,  both  in  England  and  America,  that  one 
corporation  has  no  right  to  purchase  stock  in  another  corporation. 
Sometimes  the  statutes  allow  such  purchases,  but  more  often  ex- 
pressly provide  to  the  contrary  by  prohibiting  them.  Neverthe- 
less, whatever  rule  applies  to  a  purchase  by  a  corporation  of  stock 
in  another  corporation,  the  law  is  very  clear  that  a  purchaser  of 
such  stock  from  the  corporation  is  protected  in  his  purchase.  The 
unauthorized  act  of  the  corporation  in  purchasing  has  no  effect 
upon  the  legality  of  its  sale  of  the  stock. 

§  429.  Purchase  from  joint  owners,  2)artners,  and  agents.'^ — One 
joint  owner  cannot  sell  stock  standing  in  the  name  of  two  or  more 
as  joint  owners.  One  partner  may  sell  and  convey  stock  standing 
in  the  partnership  name.  As  regards  purchases  of  stock  from 
agents,  greater  difficulty  occurs.  If  the  purchaser  does  not  know 
that  the  vendor  is  selling  as  an  agent,  but  supposes  he  is  buying 
stock  owned  by  the  person  with  whom  he  is  dealing,  the  purchaser 
is  always  protected.  The  same  rule,  after  considerable  doubt  and 
discussion,  has  been  established,  even  though  the  purchaser  knows 
that  the  agent  is  selling  as  agent.  The  sale  is  valid,  and  the  pur- 
chaser is  protected,  provided  he  has  no  reason  to  suspect  that  the 
agent  is  selling  in  fraud  of  the  owner's  rights  or  in  contradiction  of 
his  orders. 

§  430.  Purchase  ofstoch  at  sheriffs  execution  sale,  or  from  as- 
signee in  hankruptcy,  or  for  benefit  of  creditors.^— A  purchase  of 
stock  at  an  execution  sale  by  the  sheriff  is  a  dangerous  investment. 
Almost  always  the  judgment  debtor  has  already  sold  and  transferred 
his  certificates  of  stock  to  a  hona  fide  purchaser.  If  such  bona  fide 
purchaser  has  registered  the  transfer  on  the  corporate  books  before 
the  attachment  or  execution  is  levied,  the  purchaser  at  the  execu- 
tion sale  gets  nothing.  If  no  such  registry  has  been  made,  but  the 
judgment  debtor  sold  and  transferred  the  certificate  before  the  levy 
of  attachment  or  execution,  in  most  of  the  states,  including  New 

•I  See  ch.  XIX,  supra.  2  See  ch.  XIX,  supra.  ^  See  ch.  XXVII,  infra. 

895 


§§  431,  432.]  RISK    IN    I'LRCIIASING    STOCK.  [CU.   XXIV, 

York,  such  a  purchaser  takes  title  and  the  execution  purchaser  none. 
In  Connecticut  and  a  few  other  states  a  contrary  rule  prevails.  If, 
however,  the  judgment  debtor  sells  the  certificate  after  the  attach- 
ment or  execution  is  levied,  the  purchaser  takes  no  title  —  the  ex- 
ecution purchaser  is  entitled  to  the  stock.  A  purchaser  of  stock 
from  an  assignee  in  bankruptcy  or  insolvency,  or  for  the  benefit  of 
creditors,  takes  a  good  title  if  he  obtains  the  certificates  of  stock. 
If,  howev^er,  the  insolvent  has  sold  such  certificates  to  another,  the 
latter  is  entitled  to  the  stock. 

§  431.  Purchase  from  a  pledgee.^ —  A  pledgee  of  stock  has  no  right 
to  sell  or  repledge  the  stock  held  as  collateral  by  him,  unless  the 
pledgor  agreed  that  he  might  do  so.  If,  however,  the  pledgee  sells 
or  repledges  the  stock  to  one  who  takes  it  in  good  faith,  for  value, 
and  without  notice  of  the  fact  that  he  is  dealing  with  a  pledgee  of 
the  stock,  such  a  houajide  purchaser  is  protected.  He  is  protected 
absolutely,  and  can  keep  the  stock  if  he  purchased  it.  If,  however, 
he  merely  took  it  in  pledge  from  the  pledgee,  he  is  obliged  to  give- 
up  the  stock  to  the  real  owner,  where  the  latter  tenders  to  the  re- 
pledgee  the  amount  of  the  debt  owed  by  the  pledgee  to  the 
repledgee,  for  which  the  stock  was  given  as  security.  Where,  how- 
ever, a  person  buys  or  takes  in  pledge  stock  from  one  who  makes 
known  the  fact  that  he  is  holding  the  stock  as  pledgee,  the  former 
is  not  a  bona  fide  purchaser.  Moreover,  he  is  not  a  honafide  holder 
where  he  would  not  be  a  honafide  holder  of  a  promissory  note 
transferred  under  similar  circumstances,  as,  for  instance,  where  he 
loans  the  money  at  an  usurious  rate  of  interest;  or  where  he  knows 
that  the  person  with  whom  he  is  dealing  is  but  an  agent,  and  is 
pledging  his  principal's  stock.  In  all  these  cases,  where  the  pur- 
chaser or  pledgee  of  stock  is  not  a  honafide  holder,  the  real  owner 
and  original  pledgor  of  the  stock  may  reclaim  his  stock  from  the 
repledgee,  or  purchaser  from  the  pledgee,  where  the  original 
pledgor  could  recover  it  from  the  first  pledgee.  The  repledgee  or 
purchaser  from  the  pledgee  in  such  a  case  stands  in  the  shoes  of 
the  first  pledgee,  and  has  no  better  rights  than  the  latter. 

§  432.  Pledgee  is  protected  in  the  same  wag  as  imrchaser  of  stock? 
The  rules  contained  in  this  chapter  explain  the  rights,  dangers,  and 
liabilities  incurred  by  the  purchaser  of  stock.  The  same  rules  pre- 
vail for  the  most  part  in  favor  of  one  who  receives  stock  in  pledge. 
A  purchaser  and  a  pledgee  are  treated  in  the  cases  as  being  simi- 
larl}'^  protected  or  similarly  not  protected.  There  is,  however,  one 
important  exception  to  this  rule.  If  a  person  who  is  about  to  take 
stock  from  another  knows  that  the  latter  is  disposing  of  the  stock 

1  See  ch.  XIX,  mpra,  and  ch.  XXVI,        2  See    chs.  XIX,  supra,  and    XXVI,. 
infra.  infra. 

896 


CH.  XXIV.]  KISK    IN    PURCHASING    STOCK.  [§§  433-435. 

as  an  agent,  the  former  may  purchase  the  stock  and  be  protected, 
but  cannot  take  it  in  pledge  and  be  similarly  protected.  An  agent 
to  sell  is  not  an  agent  to  pledge.  Another  exception  to  the  simi- 
larity of  position  of  the  vendee  and  pledgee  of  stock  is  that  by 
statute,  frequently,  the  latter  is  not  liable  on  stock  where  the 
former  is  liable. 

§  433.  Danger  of  purchasing  from  an  executor,  administrator^  or 
guardian} —  There  is  practically  little  danger  incurred  in  purchas- 
ing stock  from  any  one  of  these.  It  is  the  duty  and  right  of  the 
executors  or  administrators  to  sell  the  personal  property  and  convert 
it  into  money.  As  regards  guardians,  they  have  the  right  to  change 
the  funds  from  one  investment  to  another,  unless  a  statute  pre- 
scribes otherwise.  Accordingly,  a  purchaser  of  stock  from  any  one 
of  those  is  protected  in  his  purchase,  even  though  he  knows  that 
his  vendor  is  selling  in  his  official  capacity.  If,  however,  the 
vendee  knows  that  a  breach  of  trust  is  involved  or  contemplated, 
he  is  not  a  hona  fide  purchaser  and  is  not  protected.  All  the  ex- 
ecutors or  administrators  need  not  join  in  a  sale  of  the  stock  owned 
by  the  estate.     A  sale  and  transfer  by  one  is  sufficient. 

§  434.  Purchase  from  a  trustee.' — An  entirely  different  rule  pre- 
vails as  regards  stock  held  by  a  trustee  as  trustee.  A  purchaser  of 
stock  which  he  knows  the  vendor  holds  as  belonging  to  a  trust  es- 
tate is  bound  to  ascertain  whether,  by  the  instrument  creating  the 
trust,  the  trustee  has  a  power  to  sell.  If  he  has  no  such  power,  and 
the  vendee  knows  that  he  is  buying  trust-estate  stock,  the  latter  is 
not  protected,  but  is  a  party  to  any  breach  of  trust  that  may  be 
involved  by  the  sale.  If,  however,  the  purchaser  has  no  notice  or 
knowledge  that  his  vendor  is  selling  trust  stock,  the  former  is  a 
hona  fide  purchaser  to  that  extent.  He  is  not  bound  to  know  that 
the  stock  is  trust-estate  stock,  and  consequently  he  is  protected  in 
his  purchase.  Any  facts  that  would  put  an  ordinarily  intelligent 
man  on  inquiry  as  to  whether  the  stock  belongs  to  a  trust  estate  is 
notice,  and  prevents  the  purchaser  from  claiming  to  be  a  hona  fide 
purchaser.  Thus,  such  a  notice  is  held  to  be  given  by  the  fact  that. 
on  the  face  of  the  certificate  of  stock,  and  following  the  name  of 
the  stockholder,  the  word  "  trustee  "  or  equivalent  words  are  writ- 
ten. 

§  435.  Sale  hy  vendor  to  another  imrchaser  ivithout  delivery  of 
certificate  of  stoclz? —  A  purchaser  of  certificates  of  stock  has  no 
reason  to  fear  that  the  vendor  can  sell  the  stock  to  another  person 
and  thereby  defeat  the  rights  of  the  purchaser  with  the  certificates. 
If  the  purchaser  without  certificates  does  not  obtain  registry  on 
the  corporate  books,  he  obtains  nothing  as  against  a  hona  fide  pur- 

1  See  ch  XIX,  supra.  2  See  ch.  XIX,  supra.  3  See  ch.  XXI,  supra. 

(57j  897 


§§  436,  437.]  KISK    IN    PURCHASING    STOCK.  [CH.  XXIV. 

chaser  of  the  certificates,  even  though  the  lattcr's  transaction  was 
subsequent  in  time  to  the  former.  If,  however,  the  former  obtains 
re«^istry  on  the  corporate  books,  the  corporation  is  at  fault,  and  is 
liable  to  the  purchaser  with  the  certificates.  The  corporation  must 
either  issue  new  certificates  to  the  latter  or  pay  damages. 

§  436.  Danger  of  forgery} — Forgery  cannot  be  the  source  of  a 
good  title  to  any  chose  in  action,  whether  a  promissory  note,  bond 
and  mortgage,  or  a  certificate  of  stock.  Consequently  a  purchaser 
of  stock  takes  the  risk  that  some  previous  owner  of  the  stock,  whose 
name  appears  on  the  certificate  either  as  the  registered  owner  or 
as  transferee,  was  deprived  of  his  title  by  forgery.  If  the  forgery 
has  been  made,  the  purchaser  cannot  claim  or  hold  the  stock,  al- 
though he  had  no  actual  knowledge  of  the  forgery.  He,  however, 
has  recourse  to  his  vendor,  and  may  compel  him  to  repay  the 
amount  paid  for  the  stock.  Where,  however,  the  forgery  was  com- 
mitted prior  to  the  last  registered  transfer  of  that  stock,  a  bona  fide 
purchaser  from  or  subse(|uent  to  the  last  registered  holder  of  that 
stock  is  protected.  All  rights  and  equities  to  particular  shares  of 
stock  are  cut  oft"  by  a  registry  and  sale  of  the  new  certificates.  The 
party  whose  name  was  forged  has  recourse  then  only  to  the  corpo- 
ration, or  to  the  party  obtaining  registry,  or  to  previous  holders. 
This  limitation  to  the  dangers  incident  to  the  purchase  of  stock 
extends  to  other  rights  and  wrongs  as  well  as  to  a  case  of  for- 
gery, and  is  of  great  importance  in  protecting  a  Jona/fZe  purchaser 
of  stock. 

§437.  Loss  or  tlieft  of  certificates  indorsed  in  Hank? — It  is  ex- 
tremely doubtful  whether  a  purchaser  of  a  certificate  of  stock  which 
was  indorsed  in  blank,  and  which  has  been  lost  by  the  owner  and 
found  by  another  who  sells  it,  or  which  has  been  stolen  by  the  lat- 
ter, would  be  protected  in  his  purchase,  even  though  he  buys  in 
good  faith.  In  a  case  of  negotiable  paper,  such  a  purchaser  would, 
of  course,  be  protected.  But  probably  the  purchaser  of  the  certifi- 
cate of  stock  would  not  be.  No  case  holds  that  he  would  be  pro- 
tected, while  many  hold  that  he  would  not.  If  the  real  owner  was 
guilty  of  gross  negligence,  perhaps  the  purchaser  from  the  thief  or 
finder  of  the  certificate  indorsed  in  blank  would  be  protected.  In 
one  case  this  question  of  negligence  was  submittted  to  the  jury. 
Again,  sometimes  a  person  sells  stock  without  delivering  the  cer- 
tificate, the  vendor  telling  the  vendee  that  the  certificates  have  been 
lost.  Such  a  title  is  very  precarious.  The  purchaser  should  refuse 
to  buy  until  new  certificates  are  issued  by  the  corporation  to  the 
vendor, —  an  issue  which  the  corporation  will  make  upon  a  suitable 
bond  of  indemnity  being  given  to  it  by  the  person  who  alleges  a 

1  See  ch.  XXI,  mpra.  2  See  ch.  XXI,  supra. 

898 


•CH.  XXIV.]  RISK    IN    PURCHASING    STOCK.  [§§  438-440. 

loss.  If  the  purchaser  does  not  take  this  precaution  he  buys  sub- 
ject to  having  his  title  defeated  by  another  purchaser  who  obtained 
the  certificates  which  are  alleged  to  have  been  lost. 

§  438.  Danger  that  a  lirevious  liolder  has  heen  deprived  of  that 
same  stoclihy  fraud} —  Shares  of  stock  are  the  same  as  other  kinds 
of  property,  in  that  a  person  who  has  been  deprived  of  his  stock  by 
fraud  cannot  follow  the  stock  and  take  it  from  the  hands  of  a  hona 
fide  purchaser  for  value.  The  remedy  of  the  defrauded  person  is 
for  damages  against  the  person  defrauding  him,  or  for  a  retransfer 
of  the  stock,  if  the  latter  still  holds  it,  together  with  an  injunction 
against  the  transfer  of  the  latter.  But  if  the  person  obtaining  the 
stock  by  fFaud  sells  it,  even  in  violation  of  an  injunction,  the  ho7ia 
fide  purchaser  for  value  and  without  notice  is  protected.  The  de- 
frauded party  may,  however,  sue  the  person  defrauding  him  in  the 
state  of  the  corporation,  and,  by  an  attachment  or  execution,  obtain 
the  stock  if  it  has  not  passed  into  honafide  hands.  Such  a  danger, 
however,  is  the  ordinary  danger  of  an  attachment  or  execution.  A 
lis  pendens  oi  a  suit  involving  stock  never  charges  the  vendor  of  the 
stock  with  notice,  as  is  the  case  of  a  lis  pendens  affecting  real  es- 
tate. Cases  of  fraud  in  the  sale  of  stock  frequently  arise  in  cases 
of  sales  by  agents  and  an  appropriation  of  the  proceeds;  also  when 
fraudulent  representations  are  made  to  the  vendor. 

§  439.  Statute  of  frauds}—  The  statute  of  frauds  requires  that 
sales  of  personal  property  exceeding  in  value  a  certain  amount, 
generally  fifty  dollars,  shall  be  valid  and  enforceable  only  when 
the  property  is  partly  or  wholly  delivered,  or  partly  or  wholly  paid 
for  at  the  time  of  the  sale,  or  the  terms  of  the  sale  are  reduced  to 
writing.  In  this  country  a  sale  of  stock  must  conform  to  this  stat- 
ute. Generally  the  sale  is  made  by  a  delivery  of  the  certificate  in- 
dorsed in  blank.  Such  a  sale  constitutes  a  delivery,  and  is  legal, 
and  is  not  void  by  the  statute  of  frauds.  The  statute  applies  both 
to  sales  of  stock  which  are  considered  as  completed  and  to  sales 
which  are  to  be  completed  in  the  future. 

§  440.  GamUing  sales  of  stock.^—  A  gambling  sale  or  contract  to 
sell  stock  is  void  absolutely,  and  cannot  be  enforced.  As  a  matter 
of  practical  experience,  however,  it  is  difficult  to  prove  that  a  stock 
sale  is  a  gambling  sale.  It  is  such  only  when  both  the  vendor  and 
vendee  intend,  not  to  actually  have  a  delivery  of  the  stock,  but  to 
wait  and  see  whether  the  stock  rises  or  falls  in  the  market,  and 
then  to  settle  the  contract  by  the  loser  paying  the  loss.  An  intent 
by  one  of  the  parties  that  there  shall  be  no  delivery  will  not  make 
the  sale  a  gambling  one.     It  must  be  the  intent  of  both. 

1  See  ch.  XX,  supra.  *  See  ch.  XX,  supra, 

899 


^,^441-444]  lasiv  in  1'UUciia.:^inu  stock.  [cir.  xxiv. 

§  441.  Mciliod  of  assif/nhuj  a  certificate  of  stocli}—  K  certificate 
of  stock  is  generally  assigned  by  the  owners  signing  the  blank 
transfer  and  power  of  attorney  on  the  back  of  the  certificate.  The 
transfer  gives  title  to  him  whose  name  is  afterwards  filled  into  the 
blank  transfer  thus  signed.  The  blank  power  of  attorney  is  for  an 
entirely  different  purpose.  It  enables  the  person  whose  name  is 
filled  in  to  register  the  transferee  as  a  stockholder  in  the  corporate 
books.  Generally  the  power  of  attorney  is  filled  in  with  the  name 
of  a  clerk  or  agent  of  the  transferee,  or  a  clerk  of  the  corporation 
who  has  charge  of  the  registry  books.  After  the  registered  holder 
has  signed  the  transfer,  leaving  the  transferee's  name  in  blank,  the 
certificate  passes  from  hand  to  band  until  some  holder  cares  to  fill 
his  name  into  the  blank,  lie  may  then  obtain  registry,  or  he  may 
execute  another  transfer  and  sell  the  certificate.  Transfers  need 
not  be  under  seal  in  this  country.  In  England,  by  statute,  they 
generally  are  required  so  to  be. 

§  442."  Bef/istry  of  transfer}— A  registry  of  transfer  is  made 
by  surrendering  an  old  certificate  of  stock  to  the  corporation,  mak- 
ing an  entry  of  the  transfer  on  the  corporate  registry  and  taking 
from  the  corporation  a  new  certificate  issued  in  the  name  of  the 
transferee.  The  object  of  obtaining  the  registry  is  to  obtain  a 
right  to  vote,  to  receive  dividends,  and  various  other  incidental 
stockholders'  rights;  also  to  cut  off  corporate  liens  and  the  rights 
of  third  parties  who  may  attach  or  claim  the  stock.  If  there  is  a 
reasonable  legal  doubt  as  to  the  right  of  the  applicant  to  obtain 
registry,  the  corporation  may  refuse  it,  and  thus  obtain  the  protec- 
tion of  being  compelled  to  make  it  by  legal  proceedings.  If  two 
parties  claim  the  stock,  each  denying  the  right  of  the  other,  the 
corporation  may  interplead,  provided  there  is  a  reasonable  legal 
doubt  as  to  who  is  entitled  to  the  stock.  If  the  corporation  im- 
properly refuses  to  register  a  transfer  when  requested,  the  applicant 
may  have  his  remedy  in  damages,  but  in  most  states  cannot  have  a 
ma?ida7nus. 

§  443.  Purchaser  not  affected  hy  rights  of  holders  of  that  stock 
hack  of  the  last  registry.'^—  This  rule  is  peculiar  to  stock  certifi- 
cates, and  cuts  off  rights  even  of  a  former  owner  who  has  been  de- 
prived of  the  stock  by  forgery.  The  person  who  obtains  a  registry 
first,  after  the  illegal  act  has  been  done,  is  not  protected  by  this 
rule.  But  his  ho7ia  Jlde  purchaser  of  the  new^  certificates  and  all 
subsequent  purchasers  are  protected,  and  cannot  be  compelled  to 
give  up  the  stock  to  the  prior  owner  who  was  deprived  of  it  illegally. 

§  444.  Siimmary.—  It  will  be  seen  by  a  review  of  the  sections  of 
this  chapter,  that  the  dangers  of  loss  incurred  by  the  purchase  of  a 

1  See  ch.  XXII,  supra.  2  See  §§  367,  369,  supra. 

900 


CH.  XXlV.j  RISK    IN    PCRCHASING   STOCK.  [§  4-14:. 

certificate  of  stocli;are  not  serious  or  numerous;  and  it  is  well  that 
such  is  the  result.  Perhaps  the  most  striking  industrial  feature  of 
modern  times  is  the  accumulation  of  personal  property,  and  the  in- 
vestment of  that  property,  not  in  landed  estates,  but  in  the  stocks 
and  bonds  of  corporations.  Such  investments  are  made  not  alone 
by  capitalists,  but  by  thousands  whose  savings  have  no  other  satis- 
factory mode  of  disposition.  In  fact,  it  is  curious  to  note  how  the 
different  kinds  of  property  have  a  different  relative  importance  in 
the  course  of  time.  Five  hundred  years  ago  real  estate  was  the 
only  property  that  brought  wealth  and  standing  to  its  owner.  Per- 
sonal property  was  of  little  consequence,  and  not  much  of  it  was  in 
existence.  But  during  the  past  two  hundred  years  personal  prop- 
erty has  risen  to  the  ascendenc}'-.  The  banker,  merchant,  manu- 
facturer, and  capitalist  have  become  wealthier  than  the  land-owner. 
The  banker  millionaire  is  greater  and  more  powerful  than  the  no- 
bility. Land,  the  old  source  of  centralized  wealth,  inordinate  power, 
caste  privileges  and  hereditary  rights,  no  longer  maintains  its  pre- 
eminent importance. 

And  it  is  not  alone  the  capitalist  and  banker  that  purchases  and 
holds  stock  in  corporations.     The  surplus  wealth  of  the  people  at 
large  is  being  invested  in  corporate  stocks  and  bonds.     Consolida- 
tions of  railroad  and  manufacturing  institutions  are  taking  place  on 
a  colossal  scale,  and  each  consolidation  involves  the  issue  of  new 
securities.     A  single  company,  The  United  States  Steel  Corpora- 
tion, has  issued  bonds  and  stock  aggregating  over  one  and  a  half 
billions  of  dollars.     The  great  railroad  systems  are  annually  in- 
creasing their  capitalization.     Street  railways,  gas  companies,  elec- 
tric-light companies  and  water- works  companies  are  continually 
adding  to  the  list  of  these  securities.     In  the  course  of  time  all 
these  securities  pass  into  the  hands  of  investors,  honafide  holders. 
It  would  hardly  be  an  exaggeration  to  say  that  the  law  governing 
stocks  and  bonds,  in  the  magnitude  of  the  interests,  the  number  of 
persons  affected,  and  the  variety  of  legal  principles  involved,  is 
more  important  than  all  other  branches  of  law  combined.     Even 
real  estate,  so  far  as  the  cities  are  concerned,  is  being  absorbed  by 
corporations,  which  issue  stock  to  represent  it.     In  the  great  mon- 
eyed centres  stock  constitutes  the  chief  basis  of  credit,  as  collateral 
for  loans  at  banks  and  trust  companies.     Hundreds  of  millions  of 
dollars  are  loaned  with  no  other  security  than  certificates  of  stock 
transferred  in  blank  with  no  registry  whatsoever  on  the  corporate 
books.     Hence  it  is  with  reason  that  the  constant  tendency  of  the 
courts  is  to  protect  the  honafide  purchasers  of  certificates  of  stock. 
It  is  fitting,  in  these  days  of  the  formative  period  of  the  law  gov- 
erning corporations  and  stock,  that  the  principles  governing  the 
transfer  of  certificates  should  favor  the  protection  and  security  of 

901 


^  444.]  KISK8    IN    PURCHASING    STOCK.  [CH.  XXIV 

the  investing  public,  and  should  be  against  secret  liens,  attach- 
ments, claims,  and  negligence  of  both  the  corporation  and  third 
persons.  The  circuit  court  of  appeals  of  the  United  States  has  well 
said:  "In  the  great  majority  of  cases  when  stock  is  merely  pledged 
for  a  loan,  no  record  of  the  transfer  is  made  on  the  books  of  the 
corporation,  and  in  the  judgment  of  laymen  the  making  of  such  a 
record  seems  to  be  a  needless  formality.  The  trend  of  modern  de- 
cisions has  been  to  encourage  the  free  circulation  of  stock  certificates 
in  the  mode  last  indicated,  on  the  theory  that  they  are  a  valuable 
aid  to  commercial  transactions,  and  that  the  public  interest  is  best 
subserved  by  removing  all  restrictions  against  their  circulation,  and 
by  placing  them  as  nearly  as  possible  on  the  plane  of  commercial 


paper."  * 


iMasury  v.  Arkansas  Nat  Bank,  93  Fed.  Rep.  603  (1899). 

903 


PART  III. 
MISCELLANEOUS  RIGHTS  OF  STOCKHOLDERS. 


CHAPTER  XXV. 

STOCK-BROKERS  AND  THEIR  CONTRACTS. 


Definitions  and  scope  of  the  sub- 
ject. 

Who  may  be  a  broker  and  cus- 
tomer. 

Facts  making  person  a  broker  or 
customer  unintentionally. 

Broker  must  obey  specific  orders 
of  customer. 

Must   act  in  good  faith  and  in 
reasonable  time. 
450.  Cannot  purchase  from  or  sell  to 
himself. 

Duties    and   liabilities    of    cus- 
tomer towards  broker. 

Duties  and  liabilities  of  a  broker 
towards  customer. 
453.  Broker's  customs  and  usages. 


445. 
446. 
447. 
448. 
449, 


451 

452 


454.  Privity    of    contract    between 

broker  and  opposite  parties. 

455.  Privity  of  contract  between  the 

opposite  customers. 

456.  Intervening     sub-brokers     and 

sub-customers. 

457.  Purchases  or  sales  on  margins  — 

Broker  as  a  pledgee — Distri- 
bution of  assets  on  failure  of 
broker. 

458.  Broker's    rights  and  duties  on 

failure  of  margin. 

459.  "What  will  excuse  notice  and  de- 

mand for  more  margin. 

460.  Customer's  remedies  and  dam- 

ages herein. 

461.  463.  Broker's  remedies  and  dam- 

ages herein. 


§  445.  Definitions  and  scope  of  the  suT)ject.— By  far  the  greater 
part  of  purchases  and  sales  of  stock  is  made,  both  in  this  country 
and  in  England,  through  organizations  specially  formed  for  that 
purpose  and  called  stock  exchanges.  A  stock  exchange  is  a  place 
of  business  where  those  who  make  up  the  membership  of  the  ex- 
change buy  and  sell  stocks  and  bonds.  These  persons  are  called 
stock°brokers.  A  stock-broker  is  one  who  buys  and  sells  stock  as 
the  agent  of  another,  the  latter  being  called  a  customer  of  the 
stock-broker.i  Accordingly,  in  an  ordinary  purchase  of  stock 
through  stock-brokers,  there  are  generally  four  persons  involved  — 
the  two  brokers  and  their  respective  customers.  Stock-brokers 
have  a  language  of  their  own.     They  have  coined  and  put  into 


1  In  Sibbald  v.  Bethlehem  Iron  Co.,  83 
N.  Y.  378  (1881).  Finch,  J.,  favors  the 
definition  from  Pott  v.  Turner,  6  Bing. 
702, 706  1,1830),  where  a  broker  is  defined 
as  "one  who  makes  bargains  for  an 


says:  "The  true  definition  of  a  broker 
seems  to  be  that  he  is  an  agent  em- 
ployed to  make  bargains  and  contracts 
between  other  persons  in  matters  of 
trade,  commerce,  or  navigation,  for  a 


other  and  receives  a  commission  for  so    compensation  commonly  called  brokei- 
doing."   Story  on  Agency,  §  28  (9th  ed.),    age." 

903 


§  445.] 


BROKERS    AND    THEIR    CONTRACTS. 


[CH. 


XXV. 


general 
business 
subject 
defined 
tions  of 
''call,"  ' 
below,' 
title  in 


circulation  certain  phrases  and  terms  descriptive  of  their 
These  terms  have  become  so  closely  identilied  with  the 
of  stock  and  transactions  in  stock  that  the  courts  have 
their  meaning  and  explained  their  application.  Defini- 
a  "  bull,"  "bear,"  " short  ^'  sale,  "long"  purchase,  "  put," 
'  straddle,"  "  margin,"  and  "  corner,"  are  given  in  the  notes 
A  "loan  "of  stock  returnable  on  demand  transfers  the 
one  sense,  inasmuch  as  the  borrower  may  return  similar 


^  A  "  bull "  is  a  dealer  who  endeavors 
to  make  the  price  of  stocks  go  higher. 
A  "  bear"  is  a  dealer  who  endeavors  to 
make  the  price  of  stocks  go  lower.     A 
"short"  sale  is  a  sale  of  stocks  which 
the  seller  does  not  pos.sess,  but  which 
he  expects  to  purcliase  later  on   at  a 
lower  figure,  thus  fulfilling  his  contract 
and  making  a  profit  by  the  decline.     In 
the  meantime    the    broker    generally 
borrows  the  stock  from  other  parties  to 
deliver  to  the  vendee,  and  to  be  re- 
turned to  the  person  loaning  the  stock 
at  the  end  of  the   transaction.      The 
customer  deposits   with  the  broker  a 
small  amount  of  money  as  security, 
called  a  "margin,"  and  he  is  bound  to 
keep  the  margin  good.     Hess  v.  Rau,  95 
N.  Y.  359  (1884);  White  v.  Smith,  54  N. 
Y.  522  (1874);  Knowlton    v.  Fitch,   52 
N.  Y.  288  (1873);  Appleman  v.  Fisher,  34 
Md.  540(1871);  Sistarer.  Best,  88  N.  Y.  527, 
533  (1882).     A  sale  for  future  delivery, 
although  a  "  short  "  sale,  is  not  a  gam- 
bling contract  per  se.    Clews  v.  Jamie- 
son,  182  U.  S.  461,  489  (1901).     A  margin 
"means,  in  the  broker's  lexicon,  addi- 
tional collateral  security  against  loss 
to  the  broker   while    .    .    .     carrying 
stock   for  his  employer."      McNeil   v. 
Tenth  Nat  Bank,   55   Barb.    59   (1869). 
A  "  long  "  purchase  of  stock  is  a  pur- 
chase in  the  expectation  that  the  stock 
will  rise  in  value. 

Stock  options  are  of  three  kinds — 
puts,  calls,  and  straddles.  A  "  put " 
is  a  contract  whereby  a  person  has  the 
privilege  of  requiring  another  person 
to  take  from  the  former  certain  speci- 
fied stock  at  a  specified  price  at  any 
time  within  a  specified  period  of  time. 


904 


the   former  not   being  bound   to  sell. 
See  Bigelow  v.  Benedict,  70  N.  Y.  202 
(1877).     A  "  call  "  is  a  contract  wliereby 
a  person  has  the  privilege  of  requiring 
another  person   to  sell  and  deliver  to 
the  former  certain  specified  stock  at  a 
specified  price  at  any  time  within  a 
certain  specified  period,  the  former  not 
being  bound  to  purchase.     A  "call"  is 
an  agreement  to  sell.    Treat  v.  White, 
181  U.  S.  2G4  (1901),    A   "straddle"  or 
"spread-eagle"  is  a  combination  of  a 
put  and  a  call.     It  gives  a  person  the 
double  privilege  of  delivering  to  or  de- 
manding from  another  person  certain 
stock  at  a  certain  price  within  a  speci- 
fied  tima      Harris    v.   Tum bridge,  83 
N.   Y.  92  (1880);  Story  v.  Salomon,  71 
N.   Y.   420  (1877).     A   "  corner "  exists 
where  the  "bears"  have  sold  a  large 
quantity  of  stock  "short,"  and  cannot 
borrow  the  stock  to  fill  their  contracts, 
but  must  buy  it  from  those  who  have 
cornered   the  market  on    that   stock. 
See  Cameron    v.   Durkheim,  55   N.  Y. 
425,  438  (1874).      As  to  the  legality  of 
these  various  transactions,  and.  as   to 
whether  they  are  gambling  contracts, 
see  §§  341-348,  supra,  especially  §  344, 
n.     It  is  not  fraud  for  the  owner  of  the 
larger  part  of  the  capital  stock  of  a  cor- 
poration to  "corner  "  the  market,  that 
is,  to  enter  into  contracts  with  various 
parties  to  purchase  stock  of  the  corpo- 
ration,  although   he  knew  that  such 
contracts  could  not  be  fulfilled  by  such 
parties  by  reason   of  the  fact  that  he 
himself  held  such  stock,  and  it  could 
not  be  obtained  elsewhere.     The  same 
rule    prevails    although    such    person 
offered  the  stock  for  public  subscrip- 


-CH.  XXV.] 


BROKEKS    AND    THEIR    CONTRACTS. 


[§  M6. 


:stock  of  the  same  amount,  in  place  of  returning  the  identical  stock 
which  was  loaned  tohira.^ 

Tliis  chapter  treats  of  the  rights,  duties,  and  liabilities  of  stock- 
brokers'.^ There  are  various  incidental  subjects,  however,  which 
enter  largely  into  brokers'  contracts,  such  as  pledges  of  stock^  and 
gambling  sales  of  stock.*  These  subjects  are  fully  treated  else- 
where. 

§  446.  Wlio  may  le  a  'brolier  and  customer. —  Any  person  may 
be  a  stock-broker  who  may  make  a  contract,  but  it  is  beyond  the 
power  of  a  national  bank  to  act  as  a  broker.^  Strict  rules  prevail 
as  to  who  may  be  a  customer.  An  infant  is  not  bound  by  his  con- 
tracts with  or  through  a  stock-broker,  any  more  than  he  is  bound 
by  his  other  contracts.  Moreover,  if  the  broker  carries  on  stock 
■transactions  for  an  infant  he  is  liable  to  the  latter  for  all  moneys 
lost  thereby.®  Again,  a  broker  who  sells  or  buys  stock  in  the  name 
•of  an  infant  is  himself  liable  to  the  other  party  in  case  the  con- 
tract is  not  completed  by  reason  of  such  infancy.''  On  the  other 
hand,  if  the  broker's  customer  hands  in  the  name  of  a  third  person, 


tion  and  purchased  the  greater  part 
himself.  Salaman  v.  Warner.  64  L.  T. 
Rep.  598  (1891);  aff'd,  65  L.  T.  Rep.  132 
(1891). 

1  Fosdick  V.  Greene,  27  Ohio  St.  484 
(1875):  Dykers  v.  Allen,  7  Hill.  497 
(1844).  See  also  §  469,  infra.  When  a 
man  sells  stock  on  the  exchange  he 
must  deliver  it,  and  if  he  does  not  own 
any  he  must  borrow  it  of  some  one  who 
does.  When  he  borrows  the  stock  he 
advances  the  market  price  of  it  to  the 
lender,  who  pays  interest  on  this  money. 
The  transaction  is  really  a  call  loan. 
The  lender  of  the  stock  can  call  for  his 
stock  at  any  time,  and  the  borrower 
can  call  for  his  money.  A  contract  to 
return  borrowed  money  or  pay  for  it  is 
a  debt.  Dibble  v.  Richardson,  171  N.  Y. 
lal  (1902). 

■-  See  also,  on  this  subject,  Lindley  on 
■Companies,  6th  ed.,  pp.  688-709. 

3  Ch.  XXVI,  infra. 

*  See  ch.  XX,  supra, 

s  First  Nat.  Bank  v.  Hoch,  89  Pa.  St. 
324  (1879);  Weckler  v.  First  Nat.  Bank, 
42  Md.  581  (1875).  But  Williamson  v. 
Mason,  12  Hun,  97  (1877),  holds  that  a 


bank  has  power  to  take  stock  from  a 
customer  and  agree  to  sell  it  and  credit 
the  customer  with  the  proceeds,  and 
that  the  bank  is  liable  for  the  conver- 
sion of  such  stock  by  its  cashier. 

6  Ruchizky  v.  De  Haven,  97  Pa.  St. 
202  (1881).  The  transactions  in  this 
case  were  held  to  be  gambling  con- 
tracts. Heath  v.  Mahoney,  12  Week. 
Dig.  404  (1881).  The  broker  himself 
may  be  an  infant  and  may  repudiate 
his  obligations.     See  4  Law  Notes,  314. 

7  Nickalls  v.  Merry,  L.  R,  7  H.  L.  530 
(1875);  Heritage  v.  Paine,  L.  R.  2  Ch.  D. 
594  (1876).  The  first  case  holds  him 
liable  although  ignorant  of  the  infancy 
of  his  customer.  See  same  case.  Merry 
V.  Nickalls,  L.  R  7  Ch.  App.  738  (1872). 
The  broker  is  liable  although  the  name 
of  the  infant  was  passed  to  him  by  an- 
other broker.  Dent  v.  Nickalls,  29  L. 
T.  Rep.  536  (1873);  aflf'd,  30  L.  T.  Rep. 
644  (1874).  It  is  no  defense  to  the 
broker  that  the  infant's  father  was  the 
real  customer.  Nickalls  t\  Eaton,  23 
L.  T.  Rep.  689  (1871).  See  also  §  250, 
supra,  as  to  the  liability  to  the  corpora- 
tion itself. 


905 


§§  447,  448.]  BROKERS    AND   THEIR    CONTRACTS. 


[CH.  XXT. 


an  infant,  as  the  seller  or  purchaser,  such  customer  is  liable  to  the 
broker  for  liabilities  thereby  incurred  by  the  latter.' 

§  447.  Facts  maldiu/ person  a  hrolcer or customeruniutcutionally. 
The  relationship  of  broker  and  customer  may  be  established  and 
exist  although  one  of  the  parties  is  personally  ignorant  of  such  a 
relationship.'^  A  broker  also  may  be  liable  as  such  in  transactions 
where  he  had  no  intention  of  incurring  any  liability.'  A  broker 
is  nothing  more  nor  less  than  an  agent  for  a  special  purpose.  The 
agency  may  arise  by  the  acts  of  the  parties  without  any  specific 
agreement. 

§  448.  Brolcer  must  oley  specific  orders  of  customer. —  A  broker 
is  bound  to  obey  and  carry  out  strictly  the  orders  of  his  customer 
in  the  purchase  or  sale  of  stock.  This  rule  is  rigidly  insisted  upon 
by  the  courts.  The  orders  of  the  customer  may  be  such  as  he  wishes 
to  give,  and  when  given  the}'  must  be  obeyed,  or  liability  will  be 
incurred  by  the  broker.^  When  the  customer  fixes  a  limit  at  which 
the  broker  may  purchase,  the  latter  cannot  bind  the  customer  by 
a  purchase  at  a  higher  figure.'     Frequently  the  customer  gives  to 

1  Peppercorne  v.  Clench,  26  L.  T.  Rep.  promptly.  Galigher  v.  Jones,  129  U.  S. 
656  (1872). 

■^  Where  the  firm  does  a  broker  busi- 
ness tlirough  its  agents,  the  trans- 
actions by  the  agents  on  their  own 
private  accounts,  but  ostensibly  for  the 
firm,  will  bind  the  firm.  Wells,  etc. 
Co.  V.  Welter,  15  Nev.  276(1880).  Cf. 
Masterton  v.  Boyce,  6  N.  Y.  Supp.  65 
(1889).  A  customer's  statement  that  he 
would  like  to  make  a  dollar  if  he  could 
is  not  sufficient  authority  for  a  broker 
to  buy  stocks  for  him.  Hopkins  r.  Clark, 
7  N.  Y.  App.  Div.  207  (1896);  afiE'd,  158 
N.  Y.  299  (1899),  holding  also  that  the 
customer  is  not  liable  for  an  unreason- 
able use  of  discretion  by  the  broker. 

3  As  where  he  continues  to  allow  his 
name  to  remain  in  the  firm  name  after 
its  dissolution.  Hixon  v.  Pixley,  15 
Nev.  475  (1880).  Also  where  one  of  the 
firm  is  a  trustee  and  defaults  therein, 
the  firm  having  charge  of  the  trust  es- 
tate's stocks.  De  Ribeyre  v.  Barclay.  23 
Beav.  107  (1857).  As  a  silent  partner  he 
cannot  prevent  a  customer  from  set- 
ting off  against  a  liability  a  debt  per- 
sonal to  the  ostensible  sole  broker.  Read 
V.  Jaudon,  35  How.  Pr.  303  (1868).  A 
stock-broker    is  bound  to  obey  orders 


193  (1889). 

*  Parsons u.  Martin,  77  Mass.  Ill  (1858). 
Thus,  where  the  customer  authorizes  a 
sale  if  the  stock  goes  down  to  51,  but 
the  broker  sells  when  it  goes  down  to 
52,  he  is  liable  for  an  unauthorized  sale. 
Clarke  v.  Meigs,  10  Bosw.  337  (1863).  Cf. 
Whelan  v.  Lynch,  60  N.  Y.  469  (1875); 
Jones  V.  Marks.  40  HI.  313  (1866).  But 
the  broker  may  correct  a  palpable  erroi' 
in  the  order  given  him  by  his  customer. 
Luflfman  v.  Hoy,  13  N.  Y.  Week.  Dig. 

324  (1881).  Where  the  customer  tells 
the  broker  that  unless  he  sells  at  once 
he  must  bear  any  further  loss,  the  cus- 
tomer is  not  liable  for  further  losses. 
Zimmerman  r.  Heil.  86  Hun,  114  (1895). 

5  Whether  a  limit  was  fixed  is  a  ques- 
tion for  the  jury,  if  the  facts  are  dis- 
puted.    Cf.  Smith  V.  Bouvier,  70  Pa.  St. 

325  (1872).  The  customer  may  ratify 
the  unauthorized  purchase.  Gen  in  v, 
Isaacson,  6  N.  Y.  Leg.  Obs.  213  (1848).  If 
the  power  to  sell  depends  on  the  con- 
struction of  writings,  it  is  a  question  of 
law  only.  Davis  v.  Gwynne,  57  N.  Y. 
676  (1874);  s.  C,  4  Daly,  218  (1871).  But 
the  written  order  may  be  subsequently 
modified  by  parol.  Burkitt  v.  Taylor,  13- 


906 


CH.  XXV.] 


BKOKESS    AND    THEIR    CONTRACTS. 


[§  449. 


the  broker  a  "stop  order,"  which  is  an  order  to  sell  or  buy,  as  the 
case  may  be,  at  a  certain  specified  figure,  or  upon  a  specified  con- 
tingency. Under  this  order  the  broker  must  sell  or  buy  when  the 
price  or  contingency  occurs,  but  not  until  after  it  occurs.  If  the 
market  changes  too  quickl}^  for  him,  he  must  sell  or  buy  at  the 
market  price  immediately  after  the  fixed  price  or  contingency 
arises.^  The  customer  may  leave  it  in  the  discretion  of  the  broker 
as  to  the  best  time  for  buying  or  selling.^  When  this  is  done  the 
broker  must  exercise  such  discretion  in  good  faith  and  with  reason- 
ably good  judgment  and  care.'  A  stock-broker  is  not  liable  for  con- 
tracts which  he  knew  nothing  about,  and  which  were  agreed  to  in 
his  name  by  an  assistant  of  one  of  his  employees,  especially  where 
the  customer  knew  such  to  be  the  fact.'* 

§  449.  Must  act  in  good  faith  and  in  rcasonalle  time.—  The  broker 
must  make  the  purchase  or  sale  in  good  faith  on  the  best  terms  pos- 
sible, and  must  give  the  customer  the  advantage  of  the  transaction 
as  actually  made.  Any  material  failure  to  do  this,  or  to  make  the 
sale  or  purchase  as  directed,  will  release  the  customer  from  the 
transaction,  although  it  was  reported  to  him  as  made  in  accordance 
with  orders.^     The  broker  is  allowed  a  reasonable  time  within 


N.  Y.  Week.  Dig.  75  (1881);  Clarke  v, 
Meigs,  10  Bosw.  337  (1863).  Or  be  waived. 
Hope  V.  Lawrence,  50  Barb.  258  (1867). 
1  Porter  v.  W6rmser,  94  N.  Y.  431 
(1884);  Bertram  v.  God  fray,  1  Knapp 
P.   C.   381   (1830).    The  latter  case  in- 


(1880);  Hopkins  v.  Clark,  158  N.  Y.  299 
(1899). 

^Timpson  v.  Allen,  149  N.  Y.  513 
(1896).  The  customer  may  be  bound  by 
the  acts  of  his  clerk.  Webb  v.  Challouer, 
2  Fost.  &  F.  120  (1860).     As  to  dealings 


volved  an  absolute  order  to  sell  should  with  a  stock-broker's  clerk,  see  Spooner 
the  stock  reach  a  certain  prica  Where  v.  Browning,  78  L.  T.  Rep.  98  (1898). 
a  broker  is  carrying  a  "short  "  sale  on  a  »  Where  the  broker  buys  in  his  own 
"  stop  order,"  and  purchases  before  the  name  at  a  price  less  than  the  price  re- 
price of  the ''stop  order"  is  reached,  ported  to  the  customer,  sells  without 
and  the  customer,  a  week  later,  then  notice,  and  subsequently  pretends  t» 
orders  the  broker  to  purchase,  the  pur-  sell  again,  the  whole  transaction  is 
chaser  may  recover  the  profit  that  a  void  as  to  the  customer.  Levy  v.  Loeb, 
purchase  at  the  latter  date  would  have  85  N.  Y.  365  (1881);  89  N.  Y.  386.  So, 
netted.  Campbell  v.  Wright,  118  N.  Y.  likewise,  where  he  purchases  an  option 
594  (1890).  Brokers  cannot  disregard  a  instead  of  cash  purchase,  and  reports  a 
"  stop  order,"  and  act  before  that  price  higher  price  than  that  paid.  Voris  v. 
is  reached,  even  though  prices  are  McCredy,  16  How.  Pr.  87  (1856).  So, 
fluctuating  rapidly.  Campbell  w  Wright,  likewise,  where  the  broker  varies  the 
118  N.  Y.  594  (1890).  See  also  §  459,  order  from  a  cash  purchase  to  an  op- 
infrcu  tio°'  '^^  himself  taking  the  risk  of  the 

2  Such  discretion,  when  eiven,  is  re-  option.  Day  v.  Holmes,  103  Mass.  306 
voked  only  by  clear  notice  of  revoca.  (1869):  Pickering  v.  Demerritt,  100 
tion.  Davis  v.  Gwynne,  4  Daly,  218  Mass.  416  (1868).  A  broker  who  sells 
/J871).  bonds,   and  then  reports  no  sale,   but 

3  Harris  v.  Tumbridge,   83  N.  Y.  92  loans   money  to  the  customer  on  the 

907 


'§  450.] 


KROKERS    AND   TUEIE    CONTRACTS. 


[Cn,  XXV. 


which  to  make  the  sale  or  purchase.*  AYhere  the  principal  gives 
an  order  to  the  broker  to  sell  certain  stock  which  the  principal 
owns,  and  the  broker,  by  fraudulent  representations,  dissuades  him 
from  selling,  the  principal  may  hold  the  broker  liable  in  damages.- 
An  ao-reement  with  brokers  by  which  a  person  is  to  cause  a  legis- 
lative investigation,  and,  in  case  certain  stock  decline,  such  person 
was  to  share  in  the  profits  of  short  sales,  is  illegal  and  not  en  forci- 
ble.' 

§  450.  Cannot  purchase  from  or  sell  to  him  self.— A  broker 
cannot,  in  behalf  of  his  customer,  buy  from  or  sell  to  himself  as  the 
other  principal.  The  law  will  not  allow  him  to  act  both  as  agent 
and  as  principal  at  the  same  time.  Such  an  act  is  a  constructive 
fraud  on  account  of  his  fiduciary  relation,  and  will  be  set  aside.* 


bonds  as  collateral,  may  be  held  liable  to 
account  for  the  sale.  BischoflFsheim  v. 
Brown,  34  Fed.  Rep.  156  (1888).  Where 
an  agent  or  broker  is  employed  to  buy 
stock  for  a  "  pool,"  and  agrees  to  do  so 
for  a  compensation  consisting  of  a  jjart 
of  the  profits,  he  is  liable  in  damages 
for  fraud  if  he  charges  the  "  i^ool "  more 
than  the  stock  cost  him.  Manville  t>. 
Lawton,  19  N.  Y.  Supp.  587  (1892). 

1  Fletcher  v.  Marshall,  15  M.  &  W.  755 
(1846).  Cf.  Dickenson  v.  Lilwal,  1 
Starkie,  128  (1815),  which  holds  that  the 
transaction  must  be  carried  out  on  the 
day  of  the  order.  The  broker  is  en- 
titled to  his  commission  although  his 
customer  fails  before  the  transaction  is 
made.  Inchbald  v.  Western,  etc.  Co., 
34  L.  J.  (C.  P.)  15  (1864).  The  contract 
is  to  be  carried  out  within  a  reasonable 
time.  A  broker's  custom  is  evidence 
as  to  what  is  reasonable  time.  Stewart 
V.  Cauty,  8  M.  &  W.  160  (1841).  A  few 
hours'  notice  held  insufficient.  John- 
son V.  Mulvy,  51  N.  Y.  634  (1872).  "Usu- 
ally the  broker  is  entitled  to  a  fair  and 
reasonable  opportunity  to  perform  his 
obligation,  subject  of  course  to  the  right 
of  the  seller  to  sell  independently.  But 
that  having  been  granted  him,  the 
right  of  the  principal  to  terminate  his 
authority  is  absolute  and  unrestricted, 
except  only  that  he  may  not  do  it  in 
bad  faith  and  as  a  mere  device  to  es- 
•capp  ^be  payment  of  the  broker's  com- 


missions." Sibbald  v.  Bethlehem  Iron 
Co.,  83  N.  Y.  378.  384  (1881).  A  cus- 
tomer is  under  no  obligation,  when  he 
learns  that  his  broker  has  not  sold 
stock  as  ordered,  to  notify  the  broker 
that  he  abandoned  any  claim  to  the 
stock  and  held  the  broker  responsible 
for  their  value.  Nor  is  he  obliged  to 
redeem  the  stock  from  the  sub-broker. 
Allen  V.  McConihe,  124  N.  Y.  342  (1890). 
In  this  case  the  court  allowed  as  dam- 
ages against  a  broker  who  delayed  sell- 
ing when  ordered  to  sell,  the  difference 
between  the  price  when  the  order  was 
given  and  the  price  when  the  sale  was 
actually  made.  Where  for  four  years 
both  the  broker  and  the  customer  have 
apparently  abandoned  an  alleged  pur- 
chase of  stock  on  a  margin,  it  is  a  ques- 
tion for  the  jury  whether  there  was  an 
abandonment  or  whether  the  customer 
continued  to  be  liable.  Seligman  v. 
Rogers,  113  Mo.  642  (1893).  A  broker 
ordered  to  purchase  stock  on  a  margin 
need  not  actually  purchase  at  once.  It 
is  sufficient  if  he  is  ready  to  fulfill 
when  called  upon  so  to  do  at  the  price 
on  the  day  of  the  giving  of  the  order. 
Ingraham  v.  Taylor,  58  Conn.  503  (1889). 

^Fottler  V.  Moseley,   179    Mass.   295 
(1901). 

sVeazey   v.    Allen,   173    N.    Y.    359 
(1903). 

4  Mayo  V.  Knowlton,  134  N.  Y.  250 
(1892):  Conkey  v.  Bond,  36  N.  Y.  427 


908 


CH.  XXV.] 


BEOKERS    AMD    THEIK    CONTRACTS. 


[§  451.. 


Custom  or  usage  cannot  legalize  such  a  transaction.^  The  broker 
may,  however,  show  by  parol  evidence  that  he  did  not  deal  with 
himself,  though  writings  indicate  otherwise.-  And  there  is  no  rule 
which  prevents  the  broker  from  acting  as  agent  both  for  the  sell- 
ing and  the  buying  customer.^  Where  the  broker  turns  over  his  own 
stock  to  the  client's  account  instead  of  buying,  and  sells  the  client's 
stocks  without  orders  so  to  do,  and  afterwards  buys  them  back,  all 
without  his  client's  knowledge,  he  cannot  recover  commissions.* 

§  451.  Duties  and  liabilities  of  customer  toivards  hroker. —  A 
stock-broker  is  but  the  agent  of  his  customer.  As  such  he  may 
bind  his  customer  by  acts  within  the  scope  of  his  authority,  and 
compel  the  customer  to  respond  to  his  liability.  Thus,  the  broker 
may  proceed  to  close  the  transaction,  paying  out  his  own  money  as 

broker  to  purchase  on  the  exchange 
when  the  sale  is  made.  Terry  v.  Birm- 
ingham, etc.  Bank,  99  Ala,  566  (1893). 
Even  though,  in  closing  an  account  on 
the  death  of  the  customer,  the  broker 
sells  to  a  jobber  and  agrees  to  repur- 
chase at  the  same  price  later  on.  yet  if 
the  price  is  the  fair  market  price  the 
broker  may  recover  from  the  customer 
the  loss.  Macoun  v.  Erskine,  etc.  Co., 
[1901J  2  K.  B.  493.  But  where  the 
broker  immediately  repurchases  and 
obtains  the  stock  at  a  less  price  than 
the  price  at  which  he  sold,  he  must  ac- 
count to  his  customer  for  the  profit. 
Erskine,  etc.  Co.  v.  Sachs,  etc.,  [1901]  2 
K.  B.  50-4. 

1  Commonwealth  v.  Cooper,  180  Mass. 
2S5  (1881).  The  custom  of  brokers  to 
buy  in  large  quantities  and  sell  in  small 
quantities  is  illegal.  Robinson  v.  Mol- 
lett,  L.  R.  7  H.  L.  803  (1875). 

2  Porter  v.  Wormser,  94  N.  Y.  431 
(1884). 

sKnowlton  v.  Fitch,  52  N.  Y.  288 
(1873). 

4  Skelton  v.  Wood,  71  L.  T.  Rep.  616 
(1894).  Where  a  broker,  instead  of  sell- 
ing directly  to  a  purchaser,  sells  through 
another  person  at  a  less  figure  in  order 
to  cheat  his  customer,  he  cannot  col- 
lect commissions  unless  the  customer 
knew  of  the  fraud  at  the  time  he  closed 
the  transaction.  Hafner  v.  Herron,  165 
111.  242  (1896). 


(1867);  Brookman  v.  Rothschild,  3  Sim, 
153  (1829);  Marye  i',  Strouse,  5  Fed.  Rep, 
483  (1880);  Robinson  v.  MoUett,  L,  R.  7 
H,  L.  802,  818,  826  (1875),     Even  though 
the  purchase  was  in  good  faith  and  at 
a  lower  figure  than  the  market  price, 
Taussig  V.  Hart,  58  N.  Y,  425   (1874); 
Giliettu  Peppercorne,  3  Beav.  78  (1840). 
In  Bryan  v.  Baldwin.  52  N.  Y.  232  (1873), 
the  court  said:    "The  plaintiflf,   being 
pledgee  of  the  stock,  and  in  that  char- 
acter exposing  it  for  sale,  could  not  be- 
come the  purchaser  unless  the  defend- 
ant assented  to  such  purchase.     Story 
on  Bailments,  i^  319;  Torrey  v.  Bank  of 
Orleans,  9  Paige,  649  (1842);  Hawley  v. 
Cramer,  4  Cow.  717,  736  (1825).     This 
sale  to  the  plaintiflf  was  not  void,  but 
voidable  at  the  election  of  the  defend- 
ant.    Edwards  on  Bailments.  260,  261. 
The  defendant  was  at  liberty  to  ratify 
the  sale,  and  had  he  done  so  it  would 
have  been  valid  for  all  purposes.     The 
ratification  would  have  made  it  lawful, 
and  relieved  it  from  any  imputation  of 
being  tortious  as  to  him.     .     .     .     But 
the  defendant  has  not  done  this,  but 
has  elected   to  treat  the  purchase  by 
the  plaintiff  as  illegal.     This  avoids  the 
sale,  and,  that  being  avoided  by  the  de- 
fendant, the    parties   are   remitted  to 
their  rights  the  same  as  though  no  sale 
had  been  attempted."     It  seems  that 
where  a  broker    has  an  order  to  sell 
from  one  customer  and  an  order  to  buy 
from  another,  he  may  employ  a  fellow- 

^  909 


§  451.] 


BKOKLRS    AND   TDEIR   CONTKACTS. 


[CII.   XXV. 


though  it  was  his  own  business,  and  may  then  compel  the  cus- 
tomer to  repay  to  him  the  money  so  expended  in  the  customer's  be- 
half.' Or,  if  his  customer  refuses  to  carry  out  the  transaction,  the 
broker  may  settle  with  the  opposite  party  by  paying  the  loss  in- 
curred by  buying  or  selling  the  stock  elsewhere,  and  may  then  sue 
his  customer  for  the  differences  thus  paid.^  He  may  also  recover 
his  disbursements,  commissions,  and  interest.'  The  customer  is  lia- 
ble to  the  broker  for  stock  purchased,  although  the  stock  turns  out 
to  be  spurious  or  unauthorized.*  If  the  broker  seeks  to  recover  the  full 
value  of  stock  which  he  has  purchased  for  his  customer,  he  must 
first  tender  the  stock  to  the  customer,*  or  he  must  sell  it  after  due 
notice  to  the  customer,  and  thus  accurately  ascertain  the  loss.^  If 
he  is  seeking  to  recover  for  differences  paid  the  opposite  broker  in 
settlement,  assumpsit  is  his  remedy."  He  must  clearly  prove  that 
the  customer  authorized  the  order.^      The  broker  has  a  lien  on 


1  Bayley  r.  Wilkins,  7  C.  B.  886  (1849); 
Whitehouse  r.  Moore,  13  Abb.  Pr.  142 
(1861);  Bails  v.  Lloyd,  12  Q.  B.  531  (1848). 
Cf.  Ex  parte  Neilson,  3  De  G.,  M.  &  G. 
556  (1853).     See  also  §  461,  infra. 

'•^Durant  v.  Burt,  98  Mass.  161  (1867); 
Bayliffe  v.  Butterworth,  5  Railw.  Cas. 
283,  per  Parke,  B.  (1847);  Marten  v.  Gib- 
bon. 33  L.  T.  Rep.  561  (1876);  Bieder- 
man  v.  Stone,  L.  R.  2  C.  P.  504  (1867). 

3  Where  the  commissions  and  inter- 
est were  paid  to  other  brokers,  they 
may  be  charged  to  the  customer.  Rob- 
inson V.  Norris,  51  How.  Pr.  442  (1874). 
Even  though  the  interest  was  usurious. 
Smith  V.  Heath,  4  Daly,  123  (1871).  On 
commissions,  see  Inchbald  v.  Western, 
etc.  Co.,  34  L.  J.  (C.  P.)  15  (1864).  Ex- 
cessive expenses  will  not  be  allowed, 
although  customary.  Marye  v.  Strouse, 
5  Fed.  Rep.  483  (1880).  The  broker  is  en- 
titled to  commissions  only  when  he  has 
rendered  some  service  to  the  customer. 
Sibbald  v.  Bethlehem  Iron  Co.,  83  N.  Y. 
378  (1881);  Hoffman  v.  Livingston,  46  N. 
Y.  Super.  Ct.  553  (1880).  The  case  of 
Hatch  V.  Douglas,  48  Conn.  116  (1880), 
holds  that  the  broker's  customary 
monthly  charges  and  interest  thereon 
are  not  usurious.  Cf.  Robinson  v.  Nor- 
ris, 6  Hun,  233  (1875).  The  broker  may 
recover  from  the  principal  the  pur- 
chase price  of  stocks   bought   by  the 


broker,  but  not  delivered,  before  the 
corporation  became  insolvent.  Chap- 
man V.  Shepherd,  L.  R.  2  C.  P.  228  (1867). 
Members  of  a  syndicate  are  jointly  lia- 
ble to  a  broker  employed  by  them. 
Sternberger  v.  Bernheimer,  121  N.  Y. 
194  (1890). 

*  See  Adamson  v.  Jarvis,  4  Bing.  66 
(1827);  Peckham  v.  Ketchum,  5  Bosw. 
506  (1859).  So,  also,  for  spurious  stock 
innocently  given  to  the  broker  to  sell. 
Westropp  V.  Solomon,  8  C.  B.  345  (1849). 
See  also  §  452,  infra. 

SMerwin  v.  Hamilton,  6  Duer,  244 
(1856);  Bowlby  v.  Bell,  3  C.  B.  284(1846). 
But  after  once  tendering  it  he  need  not 
continually  keep  it  on  hand.  Wynkoop 
V.  Seal,  64  Pa.  St.  361  (1870). 

«  Monroe  v.  Peck,  3  Daly,  128  (1869). 
In  Rosenstock  v.  Tormey,  32  Md.  169 
(1869),  the  necessary  allegations  were 
held  to  be  a  purchase  of  stock  accord- 
ing to  an  order,  at  fair  market  price, 
which  was  paid,  and  thfe  customer  noti- 
fied and  payment  demanded;  willing- 
ness to  deliver  the  stock;  refusal  of 
customer  to  pay;  notice  of  sale;  a 
proper  sale;  and  loss. 

7  Pollock  V.  Stables,  12  Q.  B.  765  (1848). 
Contra,  Child  v.  Morley,  8  T.  R.  610 
(1800). 

8  Ward  V.  Van  Duser,  2  Hall  (N.  Y.), 
162  (1829).     In  White  v.  Baxter,  71  N.  Y. 


910 


OH.  XXV.] 


BROKERS    AND    THEIR    CONTRACTS. 


[§  452. 


the  customer's  property  in  his  hands  for  all  debts  due  to  the  for- 
mer.^ 

§  452.  Duties  and  liahUUies  of  a  Tyrolcer  towards  customer. —  The 
broker  also  owes  certain  duties  and  incurs  certain  liabilities  in  bis 
relations  with  his  customer.  It  is  said  that  he  cannot  sell  on  credit, 
since  that  is  not  the  usual  course  of  his  business.^  He  is  liable  in 
damages  for  failure  to  buy  or  sell  in  accordance  with  his  express 
orders.*  Where  the  customer  fails  to  carry  out  the  transaction,  but 
the  broker  does  carry  it  out  at  a  profit,  the  profit  belongs  to  the 
customer.*  But  the  customer  is  not  entitled  to  stock  held  for  him 
by  the  broker  until  he  pays  the  broker  all  his  reasonable  disburse- 
ments thereon.^  The  broker  may  deposit  a  margin  with  the  oppo- 
site broker,  according  to  custom,  and  not  be  responsible  to  his 
customer  if  it  is  lost,^  although  the  rule  may  be  otherwise  as  to  a 
delivery  of  the  stocks  themselves.'  The  broker  is  required  to  exer- 
cise reasonable  diligence  and  care,  and  no  more.^  But  he  has  no 
such  lien  if  he  knows  that  the  customer  is  acting  as  agent  for  an- 
other.^ It  is  a  question  of  doubt  whether  a  broker  who  has  re- 
ceived in  good  faith  commissions  from  a  person  guilty  of  embezzle- 
ment is  liable  to  pay  over  to  the  persons  injured  by  his  customer 
commissions  so  received.^"     Where  a  broker  has  with  notice  dealt 


254  (1877),  the  court  held  that  a  cus- 
tomer's contract  with  his  broker  to  pro- 
tect the  latter  against  loss  by  expulsion 
from  the  stock  exchange  for  non-com- 
pliance with  its  rules  is  a  valid  and  en- 
forceable contract. 

1  Jones  V.  Peppercorne,  Johns.  (V.-C.) 
(1858).  Brokers  have  a  general  lien  upon 
-all  securities  of  their  customers  which 
come  into  their  hands  in  the  ordinary- 
course  of  business  for  all  suras  due  to 
them  from  such  customers.  Re  Lon- 
don, etc.  Corp.,  87  L.  T.  Rep.  49  (1902). 

2  2  Kent,  Com.  622  (b),  14th  ed. 
sSpeyer  v.  Colgate,  4  Hun,  622  (1875); 

Whelan  v.  Lynch,  60  N.  Y.  469  (1875), 
the  case  of  a*  wool-broker.  See  also 
Jones  V.  Marks,  40  III  313  (1866).  The 
damages  may  sound  in  tort,  thus  pre- 
venting a  release  in  bankruptcy  from 
barring  the  action.  Parker  v.  Crole,  5 
Bing.  63  (182.S).  Under  the  New  York 
code  he  may  be  arrested  if  he  does  not 
use  the  money  for  the  purpose  desig- 
nated. Dubois  V.  Thompson,  1  Daly,  309 
.(1863;.      And   in  England  he  is  liable 


criminally.   Regina  v.  Cronmire,  54  L.  T. 
Rep.  580  (1886). 

♦Fowler  v.  New  York  Gold  Exch. 
Bank,  67  N.  Y.  138  (1876). 

5  See  McEwen  v.  Woods,  11  Q.  B.  13 
(1847),  where  the  broker  paid  calls  made 
on  the  stock  after  its  sale. 

6  Gheen  v.  Johnson,  90  Pa.  St.  38  (1879). 
■'Brown   v.  Boorman,   11  CI.  &  F.  1 

(1844). 

8  Phillips  V.  Moir,  69  111.  155  (1873); 
Gheen  v.  Johnson,  90  Pa.  St.  38  (1879). 
As  to  the  construction  of  a  contract 
wherein  the  broker  invests  the  cus- 
tomer's money  as  the  broker  sees  fit, 
and  the  broker  guarantees  the  return 
of  the  capital  and  interest  and  all  prof- 
its made,  see  Vermilye's  Case,  43  N.  J. 
Eq.  146  (1887).  As  to  the  liability  of 
stock-brokers  and  jobbers  and  vendees 
towards  the  vendors,  see  also  1  White 
&  T.  Lead.  Cas.,  6th  Eng.  ed.,  pp.  922-929. 

9  Fisher  v.  Brown,  104  Mass.  259  (1870): 
Pearson  v.  Scott,  L.  R.  9  Ch.  D.  198 
(1878). 

10  See  Butler  v.   Finck,  21   Hun,   210 


911 


I 


§  453.]  BROKERS    AND   THEIR    CONTRACTS.  [CH.  XXV. 

with  a  trustee  who  was  using  trust  securities  illegally,  the  broker 
may  be  held  liable  at  law  for  conversion,  or  in  equity  to  reach  the 
securities  and  account  for  the  dividends  and  their  value.*  A  bro- 
ker may,  by  bill  of  discovery,  be  compelled  to  disclose  acts  amount- 
ing to  misconduct.2  Where  the  brokers  do  not  make  actual  pur- 
chases and  sales  as  ordered,  but  carry  the  same  on  their  books  and 
report  fictitious  transactions,  they  are  guilty  of  fraud,  and  the  cus- 
tomer may  recover  back  money  paid,  even  though,  if  the  transac- 
tions had  been  carried  out,  the  customer  would  have  lost  his  money. 
The  records  of  the  stock-exchange  clearing-house  may  be  compe- 
tent evidence.*  A  broker  is  not  responsible  where  he  in  good  faith 
loans  his  customer  s  money,  in  compliance  with  his  authority,  on 
certificates  of  stock  as  collateral,  even  though  they  turn  out  to  be 
forged,  provided  he  was  not  guilty  of  negligence.  The  latter  is  a 
question  for  the  jury,  and  the  burden  of  proof  is  on  the  broker. 
The  broker  is  not  bound  to  present  the  certificates  to  the  company 
for  verification.'*  Where  the  broker  deposits  money  in  a  bank,  the 
bank  has  a  banker's  lien  on  it,  although  the  money  really  belongs  to 
the  broker's  client.'  After  a  broker  has  purchased  according  to  order, 
but  his  customer  dies  before  the  stock  is  paid  for,  it  is  the  duty  of 
the  broker  to  sell  immediately  upon  the  death  of  his  client,  and 
not  to  carry  the  transaction  along  and  afterwards  sell.^ 

§  453.  Brolicrs'  customs  and  us(fges.—  lt  has  been  a  greatly  dis- 
puted question  as  to  how  far  and  when  a  custom  or  usage  among 
stock-brokers  or  at  stock  exchanges  may  enter  into  and  govern 

(1880).  The  case  of  Taft  v.  Chapman,  50  in  payment  of  losses  by  an  individual, 

N.  Y.  445  (1872),  seems  to  hold  that  the  checks  drawn  by  him  as  an  officer  of  a 

broker  Is  not    liable  where   he  acted  corporation,  must  refund  the  money. 

without  knowledge  of   his  customer's  Huie  v.  Allen,  87  Hun,  516  (1895). 

acts.    See  also  S.  C.  sub  nom.  Brown-  i  English  v.  Mclntyre,  29  N.  Y.  App. 

son  V.  Chapman,  63  N.  Y.  625  (1875).  Div.  439  (1898). 

See  also  Porter  v.  Parks.  49  N.  Y.   561  -'Green  v.  Weaver,  1  Sim.  404  (1827). 

(1872);   §  350,  n.,  supra.    The  case  of  See  Rawlings  v.  Hall,  1  Car.  &  P.  11 

Kissam  v.  Anderson,  145  U.  S.  435  (1892),  (1823). 

reversed  the  decision  below  (Anderson  3  Prout  v.  Chisolm,  21  N.  Y.  App.  Div. 

V.  Kissam,  35  Fed.  Rep.  699,  holding  the  54  (1897). 

broker  liable)  on  the    ground  that  it  Usham  v.  Post,  141  N.  Y.  100  (1894) 

was  for  the  jury  to  say  whether  the  See  also  §§  296,  369,  451,  supra,   and 

bank,  whose  funds  were  used  by  the  g  454,  infra,  and  Andrews  v.  Clark,  73 

president  to  pay  the  broker,  had  notice  Md.  396  (1890).     As  to  a  broker's  liabil- 

of  payment  by  the  broker  to  the  presi-  ity  on  stolen  and  lost   certificates  of 

dent.     A  broker  who  takes  money  as  stock,  see  §  358,  supra. 

a  margin,   knowing    that  the  money  ^  Thomson  v.  Clydesdale  Bank,  [1893] 

comes  from  a  trustee  and  is  trust-es-  A.  C.  282. 

tate  money,  is  liable  to  the  estate  for  6  j^g  Overweg,  [1900]  1   Ch.  209.     Cf.. 

money  lost  thereby.     Leake  v.  Watson,  §  459,  infra. 

58  Conn.  332  (1890).     A  broker  taking, 

912 


OH.  XXV.] 


BEOKEKS   AND   THEIR    CONTEACTS. 


[§  453. 


stock-brokers'  contracts.  At  an  early  day  the  rule  was  laid  doAvn 
by  the  English  courts  that  he  who  buys  or  sells  stock  through  a 
stock-broker  must  be  considered  as  dealino:  with  him  accordino-  to 
the  usages  of  the  market  in  which  he  deals,  and  the  customs  which 
prevail  in  relation  to  that  species  of  business.^  A  late  decision, 
however,  seems  to  hold  that  a  stock-exchange  custom  does  not  bind 
the  customer  unless  he  knew  of  it  and  agreed  to  it.^  The  Ameri- 
can rule  allows  usages  of  brokers  to  interpret  the  lano-uao-e  of 
the  contract,  and  where  it  is  obscure  to  ascertain  its  nature  and 
extent,  but  not  to  vary  its  terms,  introduce  new  conditions,  or 
authorize   acts   contrary  to   its  provisions.*     The   customer  may, 


1  In  Biederman  v.  Stone,  L.  R.  2  C.  P. 
504  (1867),  the  court  said:  "It  has  been 
held  in  a  great  number  of  cases  that 
persons  buying  or  selling  stock  or  shares 
through  members  of  the  stock  exchange 
are  bound  by  the  rules  which  govern 
the  transactions  of  that  body."  To  the 
same  effect,  see  Bayliffe  v.  Butterworth, 

5  Railw.  Cas.  283  (1847),  per  Parke,  B.; 
Mitchell  V.  Newhall,  15  M.  &  W.  308 
(1846);  Maxted  v.  Paine,  L.  R,  6  Exch. 
132  (1871);  Grissell  v.  Bristovve,  L.  R.  4 
C.  P.  36,  47  (1868);  Appleman  v.  Fisher, 
34  Md.  540  (1871);  Coles  v.  Bristowe,  L. 
R.  4  Ch.  App.  3  (1868);  Stray  v.  Russell, 
1  El.  &  El.  888  (1859);  Davis  r.  Haycock, 
L.  R  4  Exch.  373  (1869);  Nickalls  v. 
Merry,  K  R  7  H.  L.  530  (1875).  Cf.  Pol- 
lock V.  Stables,  12  Q.  B.  765  (1848);  Tay- 
lor V.  Stray,  2  C.  B.  (N.  S.)  175  (1857); 
Morrice  v.  Hunter,  14  L.  T.  Rep.  897 
(1866);  Kingsbury  v.  Kirvvin,  43  N.  Y. 
Super.  Ct.  451  (1878);  aff'd,  77  N.  Y.  612. 
But  the  usage  must  not  be  illegal.  Rob- 
inson V.  MoUett,  L.  R  7  H.  L.  802.  818, 
826  (1875);  Hodgkinson  v.  Kelly,  L.  R 

6  Eq.  496  (1868);  Tayler  v.  Great  Indian, 
etc.  Ry.,  4  De  G.  &  J.  559,  573  (1859). 
Nor  may  the  custom  be  established  by 
that  one  transaction.  Westropp  v.  Solo- 
mon, 8  C.  B.  345  (1849).  It  must  be  rea- 
sonable. Goldschmidt  v.  Jones,  22  L.  T. 
Rep.  220  (1870).  A  usage  that  is  con- 
trary to  an  act  of  parliament,  requiring 
the  broker  to  notify  his  customer  of  the 
particular  numbers  of  the  shares  pur- 
chased on  his  account,  is  void.  Perry 
V.  Barnett,  L.  R  15  Q.  B.   D.  388  (1885). 


Cf.  Seymour  v.  Bridge,  L.  R  14  Q.  B.  D. 
460  (1885).  Thus,  a  usage  by  which  the 
ultimate  purchaser's  name  is  handed 
to  the  seller  for  the  purpose  of  having 
the  latter  execute  a  transfer  to  the 
former  is  upheld.  Sheppard  v.  Murphy, 
16  W.  R  948  (1868). 

2  Blackburn  v.  Mason,  68  L.  T.  Rep. 
510  (1893). 

3  "  Usage  can  be  admitted  to  inter- 
pret the  language  of  a  contract  where 
it  is  obscure,  but  not  to  change  its  legal 
character,  or  derogate  from  the  rights 
of  parties,  or  authorize  acts  contraiy  to 
its  provisions."  German  Sav.  Bank  v. 
Renshaw.  78  Md.  475  (1894);  Parsons  v. 
Martin,  77  Mass.  Ill  (1858);  Hopper  v. 
Sage,  112  N.  Y.  530  (1889);  Lombardo  v. 
Case,  30  How.  Pr.  117  (1865);  1  Addison,. 
Contracts  (8th  Eng.  ed.,  1883),  *p.  60;  21 
Am.  L.  Reg.  (N.  S.)  176,  note;  Marye  v.. 
Strouse,  5  Fed.  Rep.  483  (1880),  Cf. 
Winans  v.  Hassey,  48  Cal.  634  (1874).. 
The  case  of  Baker  v.  Drake,  66  N.  Y. 
518  (1876),  holds  that  stock-brokers' 
usage  cannot  add  to  or  make  part  of 
the  contract.  Cf.  Horton  v.  Morgan, 
19  N.  Y.  170  (1859);  Peckham  v.  Ket- 
chum,  5  Bosw.  506  (1859);  Whitehouse 
V.  Moore,  13  Abb.  Pr.  142  (1861).  If 
there  is  doubt  as  to  the  existence  of  the 
usage  the  question  is  for  the  jury. 
Dent  V.  Nickalls,  29  L.  T.  Rep.  536  (1873); 
aff'd,  30  L.  T.  Rep.  644  (1874).  The 
usage  may  be  introduced  in  evidence 
to  show  how  the  business  is  to  be  trans- 
acted, but  it  must  not  be  unreasonable.. 
Rosenstock  v.  Torraey,  32  Md.  169  (1869)^ 


(■58) 


913 


§  454.] 


BROKERS    AND   THEIR    C0XTRACT3. 


[cn. 


XXV. 


however,  by  express  agreement,  waive  his  common-law  rights  and 
allow  usaire  to  govern  the  transaction.^  A  customer  directing  a 
purchase  of  stock  in  the  New  York  Stock  Exchange  is  bound  by 
the  usages  and  customs  of  that  exchange.^  Although  a  transfer  of 
stock  is  on  a  separate  piece  of  paper,  and  is  not  acknowledged  as 
required  by  a  rule  of  the  stock  exchange,  nevertheless  the  pledgee 
may  be  a  honajide  holder.' 

§  454.  Privity  of  contract  hettveni  hroler  and  opposite  parties. — 
A  broker  who  buys  or  sells  stock  does  so  subject  to  certain  liabilities 
towards  the  parties  to  whom  he  sells  or  from  whom  he  buys.  If  he 
does  not  send  in  the  name  of  his  customer,  he  is  liable  on  the  trans- 


holding  also  that  the  broker's  corre- 
spondence with  his  city  broker  is  not 
competent  to  prove  purchases  and  sales. 
Upon  the  effect  of  usage  in  other  trans- 
actions, see  Corn  E.xchange  Bank  v.  Nas- 
sau Bank,  91  N.  Y.  74  (1883);  Richmond 
V.  Union  Steamboat  Co.,  87  N.  Y.  240 
(1881);  Walls  v.  Bailey,  41)  N.  Y.  464 
(1872);  Vail  v.  Rice,.  5  N.  Y.  155  (1851); 
Delafield  v.  Illinois,  26  Wend.  192  (1841); 
Dawson  v.  Kittle,  4  Hill,  107  (1843); 
Boardman  v.  Gaillard,  1  Hun, 217  (1874); 
Minnesota  Cent.  Ry.  v.  Morgan,  52 
Barb.  217  (1868);  Sipperly  v.  Stewart, 
50  Barb.  62,  68  (1867);  Duguid  v. 
Edwards,  50  Barb.  288  (1867);  Haskins 
V,  Warren,  115  Mass.  514,  636  (1874); 
Dickinson  v.  Gay,  89  Mass.  29  (1863); 
Parrott  v.  Thacher,  26  Mass.  426  (1830); 
Greenieaf  v.  Moody,  95  Mass.  363  (1866); 
Tilleyu  Cook  County,  103  U.S.  155  (1880); 
National  Bank  v.  Burkhardt,  100  U.  S. 
686(1879);  Vermilyev.  Adams  Exp.  Co., 
21  Wall.  138  (1874);  Forrestier  v.  Bord- 
man,  1  Story,  43  (1839);  s.  C.  9  Fed. 
Cas.  459;  Oelricks  v.  Ford,  23  How.  49 
(1859);  Renner  v.  Bank  of  Columbia,  9 
Wheat.  581  (1824);  Cope  v.  Dodd,  13  Pa. 
St.  33  (1850);  Corbett  v.  Underwood,  83 
•  111.  324  (1876);  Phillips  v.  Moir,  69  111. 
155  (1873);  Bissell  v.  Ryan,  23  111.  566 
(1860);  Williams  v.  Gilman,  3  Me.  276 
(1825);  Partridge  v.  Forsyth,  29  Ala. 
200  (1856):  Halwerson  v.  Cole,  1  Spears 
(S.  C),  321  (1843);  Hogg  v.  Snaith,  1 
Taunt.  346  (1808);  Gibson  v.  Crick,  1 
Hurlst.  &  C.  142  (1862);  Fleet  v.  Murton, 


L.  R.  7  Q.  B.  126  (1871).  Brokers'  usages 
cannot  vary  fixed  principles  of  law. 
Hopper  V.  Sage,  112  N.  Y.  530  (1889). 
The  custom  (in  tiie  oil  trade)  of  giving 
the  seller  time  to  investigate  and  object 
to  a  purchaser  may  be  insisted  on  by 
the  seller.  Sumner  v.  Stewart,  69  Pa. 
St.  321  (1871). 

1  In  Robinson  v.  Norris,  51  How.  Pr. 
442  (1874),  the  court  said:  "  It  has  been 
settled  by  our  court  of  appeals  that  no 
custom  among  brokers  can  deprive 
parties  of  rights  which  the  law  gives 
them,  but  they  have  not  decided  that 
those  rights  may  not  be  waived  by 
agreement.  I  think  it  perfectly  clear 
that  if  the  broker  informs  his  customer 
of  the  terms  upon  which  he  will  act 
for  him  as  his  broker,  and  in  view  of 
that  notice  the  customer  gives  an  order, 
he  is  bound  by  the  terms  on  which  the 
broker  proposed  to  act  for  him."  See 
also  Baker  v.  Drake,  66  N.  Y.  518  (1876). 
See,  in  general,  Colket  v.  Ellis,  10  Phila. 
375  (1875);  Sutton  v.  Tatham,  10  Ad.  & 
El.  27  (1839);  Bayleyu.  Wilkins,  7  C.  B. 
886  (1849);  Duncan  v.  Hill,  L.  R.  6  Exch. 
255  (1871);  Sheppard  v.  Murphy,  Ir. 
Rep.  2  Eq.  544  (1868);  Bowring  v.  Shep- 
herd, L.  R.  6  Q.  B.  309  (1871);  Evans  v. 
Wain,  71  Pa.  St.  69  (1872);  Sweeting  v. 
Pearce,  7  C.  B.  (N.  S.)  449  (1859);  Shaw 
V.  Spencer,  100  Mass.  382  (1868);  Day  v. 
Holmes,  103  Mass.  306  (1869).  See  also 
g  477,  infra;  121  Fed.  Rep.  376. 

2  Taylor  v.  Bailey,  169  111.  181  (1897). 

3  Smith  V.  Savin,  141  N.  Y.  315  (1891). 


914 


CH,  XXV.] 


BKOKERS    AND    THEIR    CONTRACTS. 


[§  454. 


action  as  though  he  were  the  principal  himself.'  He  has  been 
held  liable  for  a  forgery  perpetrated  by  his  customer.^  Where 
stock  stands  in  the  name  of  two  trustees  and  one  of  them  signs  a 
transfer  and  forges  the  name  of  the  other  trustee  and  sells  the 
stock  through  a  broker,  the  other  trustee  whose  name  was  forged 
may  hold  the  corporation  liable  for  the  stock,  if  it  has  allowed  a 
transfer,  and  the  corporation  may  hold  the  broker  liable.^  Where 
the  broker  hands  in  the  name  of  his  customer,  and  that  name  is  ac- 
cepted, the  broker  is  thereby  discharged,*  unless,  of  course,  the 
name  is  unauthorized,  or  is  that  of  an  infant."*  Upon  the  disclosure 
by  the  broker  of  his  customer's  name,  the  opposite  party  has  the 
•option  of  holding  either  the  broker  or  his  customer  responsible,  but 
cannot  hold  both.**  A  broker  who  claims  to  be  acting  for  an  undis- 
closed principal  in  contracting  for  the  purchase  of  bonds,  and  who 
stipulates  that  he  shall  not  be  personally  liable,  cannot  enforce 
such  contract,  if  in  fact  he  was  the  principal  himself.'^  Where  the 
broker  buying  stock  does  not  have  it  transferred  on  the  books,  and 
does  not  divulge  the  name  of  his  principal,  and  the  vendor  is  obliged 
to  pay  a  statutory  liability  on  the  stock,  the  broker  is  personally 


1  Wynne  u  Price,  3  De  G.  &  Sm.  310 
(1849).  Where  a  prospectus,  offering  for 
sale  trustee's  transferable  certificates, 
states  that  such  certificates  represent 
stock  deposited  with  the  trustee,  the 
stock  being  in  an  English  corporation, 
tbe.trustee  is  personally  liable  if  it  turns 
out  that  the  English  corporation  had  a 
prior  lien  on  the  stock  to  the  full  ex- 
tent of  its  value.  The  trustee  was 
bound  to  take  notice  of  the  lien  created 
by  the  by-laws  of  the  English  corpora- 
tion. The  rule  of  caveat  emptor  has 
been  relaxed  so  as  to  create  an  implied 
warranty  of  title  on  the  part  of  the 
seller.  Even  though  the  trustee  acted 
as  agent,  yet,  the  principal  not  being 
disclosed,  the  trustee  is  liable.  McClure 
V.  Central  Trust  Ca,  165  N.  Y.  108  (1900). 

2  Royal  Exch.  Ins.  Co.  v.  Moore,  11  W. 
R  592  (1863).  The  broker  herein  sold 
in  his  own  name,  but  the  opposite  party 
knew  he  acted  as  a  broker.  See  also 
§  452,  supra. 

3  Oliver  v.  Governor,  etc.,  [1901]  1  Ch. 
652;  aff'd,  Oliver  v.  Governor,  etc.,  86 
L.  T.  Rep.  248  (1902). 

<Maxted  v.  Paine,  L.  R.  6  Exch.  133 
(1871),  holding  that  the  broker  does  not 

915 


guarantee  his  customer's  responsibility, 
nor  that  he  is  the  real  purchaser.  So 
also  of  the  stock-jobber.  Grissell  v. 
Bristovve,  L.  R,  4  C.  P.  36  (1868).  Contra, 
Cruse  V.  Paine,  L.  R  6  Eq.  641  (18G8). 

5  See  g  446,  supra.  A  broker  hand- 
ing in  the  name  of  a  customer  without 
authority  is  himself  liable.  Maxsted  v. 
Morris,  21  L.  T.  Rep.  535  (1869).  Cf. 
Shepherd  v.  Gillespie,  L.  R.  5  Eq.  293 
(1867). 

«  Watson  V.  Miller,  11 W.  N.  18  (1876). 
A  custom  or  usage  releasing  the  broker 
from  this  liability  is  void.  Magee  v. 
Atkinson,  2  M.  &  W.  440  (1837).  Cf. 
Jones  V.  Littledale,  1  Nev.  &  P.  677 
(1837),  the  sale  being  of  hemp.  Also 
Thomson  v.  Davenport,  9  B.  &  C.  78 
(1829),  holding  that  the  purchaser's 
option  remains  open  until  the  name  of 
the  undisclosed  principal  is  given.  It 
is  for  the  jury  to  say  which  one  the 
opposite  customer  gave  credit  to,  irre- 
spective of  a  stock-exchange  custom. 
Mortimer  v.  McCallan,  6  M.  &  W.  58 
(1840). 

7  Paine  v.  Loeb,  96  Fed.  Rep.  164 
(1899). 


§  455.] 


BKOKEKS    AND    TUEIE    CONTRACTS. 


[CH.  XXV. 


liable  to  him.^  A  stock-broker  is  liable  to  the  owner  for  the  value 
of  niiainfj  shares  received  for  sale  from  one  who  had  stolen  them, 
although  he  acted  in  good  faith,  without  notice,  and  paid  the  pro- 
ceeds to  the  thief,  relying  on  his  representations  of  ownership.- 
Where  a  person  secretl}'  speculates  in  stock  in  the  name  of  another 
person,  the  latter  having  accounts  with  brokers,  in  some  of  which 
accounts  the  former  is  not  interested,  the  former  cannot  maintain  a 
bill  for  accounting  against  the  brokers.' 

§  455.  Privity  of  contract  between  the  opposite  customers. — "When 
the  broker  of  one  customer  has  agreed  with  the  broker  of  another 
customer  on  the  terms  of  a  purchase  and  sale  of  stock,  there  im- 
mediately arises  a  privity  of  contract  between  the  two  customers. 
A  customer  may  be  sued  b}''  a  dealer  from  whom  his  broker  has 
purchased  specific  stock,  and  the  dealer  may  sell  the  stock  after  no- 
tice, and  recover  the  loss.*  The  purchasing  customer  is  liable  to  the 
selling  customer  for  all  calls  and  liabilities  arising  on  the  stock 
after  the  broker's  contract  is  made,  if  the  selling  customer  is  obliged 
to  pay  such  liabilities  by  reason  of  his  being  the  registered  stock- 
holder.^ So  also  the  purchasmg  customer  ma}'  hold  the  selling  cus- 
tomer responsible  for  the  carrying  out   of  the  contract."     It  has 


1  Boultbee  v.  Gzowski,  29  Canada  S.  C. 
Rep.  54  (1898). 

2  Swim  V.  Wilson,  90  Cal.  126  (1891). 
SMacKay  v.   Hudson,  118  Fed.  Rep. 

919  (1902). 

*  Anderson  v.  Beard,  [1900]  2  Q.  B.  260. 
A  brokers  client  is  not  liable  to  a 
stock-jobber  of  whom  the  broker  has 
purchased  stock,  a  portion  of  such  stock 
to  go  to  the  broker's  client.  No  usage 
of  the  stock  exchange  can  create  such 
liability.  Beckhusonu.  Hamblet,  [1900] 
2  Q.  B.  18 ;  aff'd,  [1901]  2KB.  73.  Where 
a  client  buys  stock  on  the  stock  ex- 
change through  his  broker,  and  the 
broker  fails  before  the  delivery  of  the 
stock,  the  jobber  selling  the  stock  may 
hold  the  client  liable  for  any  loss  due 
to  the  client  refusing  to  accept  the 
stock.  Levitt  v.  Hamblet,  [1901]  2  K 
B.  53;  compare  Beckhuson  v.  Hamblet, 
[1901]  2KB.  73,  aflf'g  [1900]  2  Q.  B.  18. 

5  Hawkins  v.  Maltby,  L.  R.  4  Ch.  App. 
200  (1869).  aflf'g  6.  c,  L.  R  6  Eq.  505; 
Evans  v.  Wood,  L.  R,  5  Eq.  9  (1867); 
Hodgkinson  v.  Kelly,  L.  R  6  Eq.  496 
(1868);  Remfrey  v.  Butler,  1  R,  B.  &  E. 
887  (1858);  Allan  v.  Graves,  L.  R  5  Q.  B. 


478  (1870X  A  stock-exchange  custom 
making  the  broker  a  principal  does  not 
prevent  the  customer  suing  as  principal. 
Langton  v.  Waite,  L.  R  6  Eq.  165  (1868). 
The  refusal  of  the  directors  to  register 
the  sale  does  not  enable  the  purchasing 
customer  to  recover  back  the  purchase 
price.  Stray  v.  Russell,  1  EL  &  El.  888 
(1859).  The  purchaser  may  be  com- 
pelled, by  a  bill  in  equity,  to  register 
the  transfer  made  through  brokers. 
Paine  v.  Hutchinson,  L.  R  8  Eq.  257 
(1866).  Where  a  broker  by  instructions 
from  his  customer  arranges  with  an- 
other party  to  carry  the  customer's 
stocks  and  also  other  stocks  of  the  same 
kind  carried  by  the  broker,  and  the 
broker  fails  and  the  customer  refuses  to 
protect  his  own  stock,  the  party  carrying 
the  same  may  hold  him  liable  for  the 
loss  on  his  part.  Scott,  etc.  v.  Godfrey-, 
[1901]  2  K  B.  726. 

*>  Even  though  the  selling  customer 
did  not  authorize  the  use  of  his  name, 
but  knew  of  it  and  did  not  object. 
Shepherd  v.  Gillespie,  L.  R  5  Eq.  293 
(1867). 


916 


CH.  XXV.]  BKOKEKS    AND    THEIR    CONTRACTS.  [§  456. 

been  held  that  the  remedy  may  be  an  action  at  law  ^  or  in  equity.^ 
Even  though  brokers  on  the  stock  exchange  are  acting  for  undis- 
closed principals,  yet  one  of  the  principals  can  sue  the  other  prin- 
cipal for  breach  of  the  contract.^  The  right  of  set-off  for  other  debts 
applies  as  between  the  two  customers,*  but  not  for  debts  due  from 
one  of  the  brokers  to  the  opposite  customer.* 

§  456.  Intervening  sub-brokers  and  sub-customers. —  Where  a  cus- 
tomer's broker  employs  another  broker  to  transact  the  business, 
the  customer  cannot  compel  the  second  broker  to  complete  the 
contract  as  he  might  compel  the  first  broker.^  The  second  broker 
cannot  claim  a  lien  on  the  stock  for  debts  due  him  from  the  first 
broker.''  The  broker  cannot  offset  against  the  customer  of  the  sub- 
broker  a  debt  due  the  broker  from  the  sub-broker.  Xot  even  a 
custom  of  the  stock  exchange  to  that  effect  binds  the  customer  un- 
less he  agreed  to  it.^  If  the  first  broker  merely  introduces  the  par- 
ties he  cannot  charge  a  commission  therefor,  although  custom 
allows  it.^  The  real  customer  may  hold  an  intermediate  customer 
liable.  A  sub-broker  or  correspondent  broker  is  not  obliged  to 
ascertain  the  relations  and  agreements  between  the  chief  broker 
and  the  customer.  The  sub-broker  may  hold  all  stocks  as  security 
for  all  accounts  between  himself  and  the  chief  broker,  there  beiner 
no  notice  given  of  the  customer's  rights.  If  there  is  any  surplus 
after  the  sub-broker's  debt  is  paid,  a  customer  who  placed  his  own 
stock  in  the  chief  broker's  hands  to  sell  is  preferred  to  another  cus- 
tomer who  had  purchased  on  a  margin  and  left  the  stock  as  secu- 
rity.^" Where  the  customer  orders  his  broker  to  buy  stock,  and  the 
broker  does  buy  it  through  a  sub-broker,  and  the  broker  then  noti- 
fies the  customer  that  the  stock  has  been  bought,  the  broker's  title 

1  Street  v.  Morgan,  L.  R.  4  Exch.  384  8  Blackburn  v.  Mason,  68  L.  T.  Rep. 

(1869),  cited  in  Davis  v.  Haycock,  L.  R.  510  (1893).     He  may  hold  an  intermedi- 

4  Exch.  373  (1869).  ate  customer  or  agent  liable  for  set-off 

-  Sheppard  v.  Murphy,  16  W.  R  948  due  from  the  latter  to  the  broker.  Jay- 

(1868).  cox  V.  Cameron,  49  N.  Y.  645  (1872), 

3  Clews  V.   Jamieson,   183  U.  S.   461  9  Gibson  v.  Crick,  1  Hurl.  &  C.  142 

(1901).  (1863). 

*  Carr  v.  Hinchliff,  4  B.  &  C.  547  (1825).  lo  Willard  r.  White,  56  Hun,  581  (1890). 

5  Fish  V.  Kempton,  7  C.  B.  687  (1849).  See  also  g§  460, 473,  w/^-a.   A  sub-broker 

See  also  Sweeting  v.  Pearce,  7  C.  B.  (N.  who  knows  that  the  stock  deposited  as 

S.)  449  (1859).     Unless,  possibly,  where  collateral  with  the  chief  broker  belongs 

the    customer    supposed   the  opposite  to  the  customer  is  liable  in  damages  for 

broker  was  the  principal.     See  Kelley  conversion  where  he  receives  such  stock 

V.  Munson,  7  Mass.  319  (1811),  and  g  456,  on  further  orders,  and  it  transpires  that 

infra.  such  use  of  the  stock  was  unauthor- 

e  Booth  V.  Fielding,  1  W.  N.  245  (1866).  ized.     Ryman  v.  Gerlach,  153  Pa.  St  197 

■?  Fisher  v.  Brown,  104  Mass.  259  (1870).  (1893). 
See  also  §  455,  supra. 

917 


g  457.]  BROKERS    AND   THEIR    CONTRACTS.  [CH.   XXV. 

to  the  stock  thereby  passes  to  the  customer,  subject  to  any  amount 
due  from  the  customer  to  the  broker  and  to  any  lien  of  the  sub- 
broker.  The  subsequent  insolvency  of  the  broker  does  not  prevent 
a  customer  notifying  the  sub-broker  not  to  sell  out  the  stock  with- 
out notifying  him,  the  customer;  and  the  customer  may  insist  that 
the  sub-broker  resort  to  other  stocks  belonging  to  the  broker  and 
remaining  in  the  sub-broker's  hands  to  pay  the  broker's  debts  to 
the  sub-broker  before  resorting  to  the  above  stock. •  If  brokers  in 
New  York  take  orders  through  a  local  broker  in  another  place, 
they  are  liable  for  false  and  fictitious  orders  given  to  them  by  him 
in  the  name  of  a  customer.^ 

§457.  Purchases  or  sales  on  man/ins  — Broiler  as  a  pledjee  — 
Distribution  of  assets  on  failure  of  hro];cr.— By  far  the  larger  part 
of  a  stock-broker's  business  consists  of  purchases  and  sales  of  stock 
on  what  is  called  a  "  margin." »  The  customer  deposits  with  the 
broker,  as  security,  a  sum  of  money  equal  to  but  a  small  part  of 
the  value  of  the  stock  involved.  This  sum  of  money  is  the  "  mar- 
gin." If  the  customer's  order  is  to  purchase,  then  the  broker  keeps 
both  the  margin  and  the  purchased  stock  as  security  against  loss 
in  the  final  closing  of  the  transaction.  If  the  customer's  order  is 
to  sell,  then  the  broker  sells;  but,  having  no  stock  to  deliver,  he 
borrows  the  same  from  other  parties  and  delivers  it  to  the  pur- 
chaser, the  broker  still  keeping  the  margin  as  security.  Frequently 
no  stock  passes,  nor  is  intended  to  pass,  but  merely  the  ultimate 
profit  or  loss,  called  " differences,"  is  paid;  the  losing  customer 
loses  the  whole  or  part  of  his  margin,  the  winning  customer  get- 
ting back  his  margin  and  also  the  profits,  less  commissions.  This 
in  some  of  the  states  is  held  to  be  a  gambling  contract,  and,  like 
all  gambling  contracts,  not  enforceable.*  But  a  purchase  or  sale 
of  stock  on  margins,  where  there  is  no  proof  of  an  intent  not  to 
actually  deliver  the  stock,  is  legal'  The  relation  between  a  cus- 
tomer and  his  broker,  in   cases   where  the  broker  buys  for  his 

1  Le  Marohant  v.  Moore,  150  N.  Y.  209  gambling  and  intended  so  to  be  by  both. 
(1896).  Harvey  v.  Merrill,  150  Mass.  1  (1889). 

2  Caswell  V.  Putnam,  130  N.  Y.  153  *  See  ch.  XX,  supra,  where  the  char- 
(1890).  acter,  effect  and  non-enforceability  of 

3  A  margin  "means,  in  the  broker's  a  broker's  gambling  contracts  are  fully 
lexicon,  additional  collateral  security  treated.  A"  margin  "  transaction  is  not 
against  loss  to  the  broker  while  .  .  .  necessarily  gambling  and  invalid.  See 
carrying  stock  for  his  employer."  Mc-  ^  344,  supra.  The  important  case  of 
Neil  V.  Tenth  Nat.  Bank,  55  Barb.  59  Hatch  v.  Douglas,  48  Conn.  116  (1880), 
(1869).  clearly  sets  out  the  legality  of  such  con- 

4McBurney  u.  Martin,  6  Rob.  (N.  Y.)  tracts.  The  court  said:  "It  is  pretty 
503  (1866).  A  broker  cannot  recover  evident  that  the  parties  did  not  contem- 
commissions  or  disbursements  from  his  plate  that  the  stock  should  be  actually 
customer,  where  the  transactions  were    transferred  to  the  defendant.    .    .    . 

918 


CH.  XXV.] 


BEOKEKS    AND    THEIK    CONTRACTS. 


[§  457. 


cnstoraer  and  retains  the  stock  as  security,  is  in  most  jurisdictions 
held  to  be  that  of  a  pledgor  towards  a  pledgee,  the  customer  being 
the  pledgor,  the  broker  being  the  pledgee,  and  the  stock  being  the 
article  pledged.^  In  Massachusetts,  however,  a  different  rule  pre- 
vails, and  the  rule  is  clearly  laid  down  that  a  broker  is  not  a 
pledgee  of  stocks  which  he  buys  for  his  customer  on  a  margin,  but 
that,  on  the  contrary,  the  broker  is  the  owner  of  the  stock,  and 
that  he  is  not  bound  to  keep  the  stock  of  one  customer  distinct 
from  that  of  another,  but  may  take  a  single  certificate  in  his  own 
name  for  several  customers  and  may  pledge  the  stock  for  advances 
made  to  himself,  and  that  he  is  the  person  to  be  taxed  on  such 
stock.2 


The  defendant  [customer],  through  his 
agents,  the  plaintiffs,  actually  purcliased 
the  stock,  and  there  was  an  actual  de- 
livery —  not  to  the  principal,  but  to  the 
agents  for  the  principal."  The  brokers 
"  knew  that  the  defendant  was  specu- 
lating, and  that  they  advanced  him 
money  for  that  purpose.  But  that  was 
neither  illegal  nor  immoral  .  .  .  No 
case  has  been  cited  which  declares  such 
a  contract  illegal  If  we  should  so  hold, 
it  would  be  difficult,  if  not  impossible, 
to  draw  the  line  between  legal  and 
illegal  transactions."  The  California 
constitution  renders  void  a  transaction 
wherein  a  broker  buys  stock  for  the 
customer  with  the  broker's  money  and 
holds  the  stock  as  security  and  charges 
the  customer  interest  and  commissions. 
Cashman  v.  Root,  89  Cal.  373  (1891). 

1  Approved  in  Skiff  v.  Stoddard,  63 
Conn.  198  (1893);  Markham  v.  Jaudon, 
41  N.  Y.  235  (1869);  Baker  v.  Drake,  66 
N.  Y.  518  (1876).  The  broker  is  bound 
to  keep  constantly  on  hand  the  amount 
of  stock  so  held  on  margin,  t.  e.,  pledged. 
Taussig  V.  Hart,  58  N.  Y.  425  (1874); 
Roger.s  v.  Gould,  6  Hun,  229  (1875).  See 
also  §  469,  infra.  In  fact,  the  broker  is 
obliged  to  conform  to  the  rules  govern- 
ing pledges  of  stock  —  a  subject  treated 
in  ch.  XXVI,  infra.  The  broker  is  a 
pledgee,  and  without  express  contract 
has  a  lien  on  the  stock  for  the  balance 
due  under  a  purchase,  but  not  for  any 
general  balance  due.  Leahy  v.  Lobdell, 
etc.  Co.,  80  Fed.  Rep.  665  (1897).    The 


customer  as  pledgor  may  claim  his 
stock  from  the  broker's  assignee  for  the 
benefit  of  creditors  if  the  customer  can 
identify  it.  Chamberlain  v.  Green  leaf, 
4  Abb.  N.  Cas.  178  (1878).  See  Boylan  v. 
Huguet.  8  Nev.  345  (1873).  A  broker 
holding  as  pledgee  stock  purchased  for 
a  customer  on  margin  need  not  keep 
that  identical  stock  on  hand,  and  it  is 
sufficient  if  he  keeps  an  equal  quantity 
on  hand  over  and  above  stock  of  the 
same  kind  held  by  him  for  other  cus- 
tomers. Caswell  V.  Putnam,  120  N.  Y. 
153  (1890).  A  broker  holding  stock  as 
collateral  security  on  a  margin  does 
not  hold  the  stock  in  a  fiduciary  ca- 
pacity. McBurney  v.  Martin,  6  Rob. 
(N.  Y.)  502  (1866);  Lambertson  v.  Van 
Boskerk,  49  How.  Pr.  266,  4  Hun,  628 
(1875). 

2  The  court  realized,  however,  that 
its  decision  was  not  in  accord  with  the 
current  of  authority,  and  said:  "The 
English  doctrine  seems  to  be  the  same 
as  that  of  this  commonwealth,  so  that 
we  are  not  left  quite  alone  in  a  desert 
of  logic."  Chase  v.  City  of  Boston,  62 
N.  E.  Rep.  1059  (Mass.  1902).  In  Massa- 
chusetts it  is  held  that  a  broker  carry- 
ing stocks  on  a  margin  is  not  a  pledgee. 
Co  veil  V.  Loud.  135  Mass.  41  (1883).  A 
broker  who  purchases  stock  for  a  cus- 
tomer on  a  margin  is  not  a  pledgee, 
but  is  merely  under  contract  to  deliver 
the  stock  on  payment  of  the  balance, 
and  hence  he  may  pledge  the  stock  or 
sell  it,  and  is  not  in  default  until  the 


919 


§  457.]  BROKERS    AND   THEIR    CONTRACTS.  [CH.   XXr. 

In  England  a  customer,  by  employing  a  broker  to  do  business 
on  the  s^ock  exchange,  is  presumed  to  have  authorized  him  to  do 
business  on  the  terms  of  such  exchange.     Hence  the  broker  may 
have  the  right  to  sell  his  customer's  stock  upon  the  customer's 
failure  to  pay  therefor,  without  observing  the  rules  applicable  to 
pledgees  of  stock.'     In  England,  also,  wiiere  certificates  of  stock 
have  not  the  quasi-negotiability  thutthey  have  in  America,  a  mort- 
gage of  stock  is  common  and  is  enforced  as  a  mortgage,  and  the 
mortn-agee  after  a  reasonable  time  may  sell  without  notice  to  the 
mortgagor,  the  law  being  laid  down  as  follows:  "Exj^rcss  powers 
were  not  formerly  necessary  on  mortgages  of  stock,  or  in  the  in- 
struments of  defeasance  executed  by  the  transferee;  nor  need  a 
mortgagee  of  stock  now  rely  on  his  statutory  power  in  order  to 
realize  his  security  by  sale.     If  stock  is  itself  made  the  security  for 
money,  and  the  day  appointed  for  payment  is  passed,  the  mort- 
gagee may  at  once  proceed  to  sell  the  stock,  and  repay  himself 
principal  and  interest,  without  any  authority  from  the  mortgagor, 
and  without  commencing  an  action  of  foreclosure."  ^     Some  of  the 
most  important  questions  connected  with  brokers'  contracts  arise 
out  of  this  pledgee  relationship.     This  subject,  however,  is  fully 
treated  in  the  following  chapter.     Like  an  ordinary  pledgee  of 
stock,  the  broker  may  have  the  stock  transferred  into  his  own 
name;'  he  is  not  allowed  to  replcdge  the  stock;*  and  he  can  put 
his  customer  in  default  only  by  tendering  the  stock  and  demand- 
customer  has  tendered  the  balance  and       1  Forget  V.  Baxter,  [1900]  A.  G.  467. 
demanded  the  stock.     If  the  broker  is    In  England  the  carrying  of  stock  by  a 
adjudicated  a  bankrupt  the  customer    broker  on   a   margin  is  called   "con- 
may  treat  this  as  a  breach  of  contract    tango,"  and  the  broker  is  held  to  be  the 
and  prove  his  claim.    In  re  Swift,  105    owner  of  the  stock.   In  the  case  of  Ben- 
Fed.  Rep.  493  (1900).     In  a  bankruptcy    tinck  v.  London,  etc.  Bank,  [1893]  2  Ch. 
court  sitting  in  Massachusetts  the  rela-     120,  the  court  said:  "  In  all  these  trans- 
tion  between  a  broker  and  a  customer    actions,  therefore,  when  money  is  bor- 
was  defined  to  be  that  of  debtor  and     rowed    from    a    stock-broker    in    this 
creditor.     In  re  Topliff,  114  Fed.  Rep.     way   on   'contango'  or   continuation. 
333  (1903).    The  relation  between  a  bro-    whether  the  money  is  obtained  from 
ker  and  his  customer  in  a  purchase  of    the  dealer  or  from  other  stock-brokers, 
stock  on  margin  is  not  that  of  a  pledgee    or  from  bankers,  the  result  is  the  same: 
and  pledgor,  but  of  parties  to  an  exec-    the  arrangement  is  one  by  which  the 
iitory  contract  for  the  sale  and  pur-    broker  becomes,  as  between    himself 
chase  of  stock,  whenever  demand  and     and  his  client,  the  owner  of  the  shares 
payment  is  made  by  the  purchaser,  or    in  question,  although  he  is  under  a  con- 
after  the  broker  has  tendered  the  stock    tract  to  provide  an  equal  amount  of 
and  made  demand  for  payment  after    similar  shares  at  a  future  date." 
reasonable  notice.    The  bankruptcy  of        2Devergesu.  Sandeman.etc.  Co.,  [1901J 
the  broker  is  a  breach  of  the  contract    1  Ch.  70;  aff'd,  86  L.  T.  Rep.  269  (1903). 
by  him.    In  re  Todd,  113  Fed.  Rep.  315        3  Horton  v.  Morgan,  19  N.  Y.  170  (1859). 
(1901).  ■*  See  §  471,  infra. 

920 


€H.  XXV.] 


BROKERS    AXD    THEIR    CONTRACTS. 


[§  457. 


ing  payment  for  their  whole  value  less  the  margin.^  A  broker  or 
pledgee  need  not  sell  the  stock  held  as  collateral  before  bringino- 
an  action  against  the  pledgor  for  the  amount  due,  and  a  brokers' 
custom  cannot  compel  it.-  Such  stock  may  be  redeemed  from  the 
assignee  of  the  broker,  provided  the  stock  can  be  identified.*  A  cus- 
tomer who  owns  particular  certificates  of  stock  and  pledges  them 
with  his  broker  may  reclaim  such  certificates  from  the  broker's  as- 
sets upon  the  insolvency  of  the  latter,  but  he  cannot  claim  any  par- 
ticular stocks  which  the  broker  has  p^irchased  for  him,  even  thouo-h 
he  is  able  to  identify  them  as  being  the  ones  which  were  purchased 
for  him,  inasmuch  as  his  equities  are  no  better  than  the  equities  of 
other  customers.*    Where  a  broker,  by  custom  and  authority  im- 


1  Read  v.  Lambert,  10  Abb.  Pr.  (N.  S.) 
428  (1871). 

2  De  Cordova  v.  Barnum,  130  N.  Y.  615 
(1892). 

3  Skiflf  V.  Stoddard,  63  Conn.  198  (1893). 
Even  though  a  broker  repledges  the 
stocks  of  various  customers  without 
authority  from  them,  the  pledgee  is 
protected  if  he  had  no  knowledge  of  the 
fact  that  the  broker  did  not  own  the 
stocks;  and  if  the  pledgee,  after  selling 
out  the  stocks  on  notice,  has  a  balance 
remaining  both  of  money  and  stocks, 
the  customers  prorate  as  to  such  bal- 
ance, even  though  the  stocks  of  some 
of  them  were  not  sold  b}^  tlie  pledgee. 
This  rule  is  based  on  the  principle  that 
if  they  all  had  united  in  redeeming 
from  the  pledgee  they  would  have  borne 
the  loss  pro  rata,  Whitlock  v.  Seaboard 
Nat.  Bank,  29  N.  Y.  Misc.  Rep.  84  (1899). 

4  Sillcocks  V.  Gallaudet,  66  Hun,  522 
(1893).  Where  the  bank  in  which  stock- 
brokers deposit  their  funds  is  a  bona 
fide  holder  of  cash  so  deposited  and  also 
of  securities  deposited  by  the  brokers  as 
security,  and  the  brokers  fail,  and  the 
bank  applies  the  cash  to  the  brokers' 
debts  and  then  sells  the  securities  to 
pay  the  balance,  leaving  a  surplus,  a 
customer  of  the  brokers  whose  cash 
was  deposited  by  the  brokers  in  the 
bank  may  reclaim  the  same,  even  as 
■against  the  owners  of  the  securities. 
Mutton  V.  Peat,  [1900]  2  Ch.  79.  The 
rule  that  a  customer  who  pays  money 
■to  a  broker  to  buy  stocks  or  gives  him 


securities  to  sell  is  a  special  creditor 
does  not  apply  where  the  customer 
bought  and  sold  stocks  through  the 
broker  and  kept  merely  a  general  ac- 
count. King  V.  Hutton,  [1900]  2  Q.  B. 
504.  The  right  of  a  stock  exchange,  in 
accordance  with  its  rules,  to  apply  the 
assets  on  the  exchange  of  an  insolvent 
member  to  his  obligations  on  the  ex- 
change is  not  affected  by  the  bank- 
ruptcy act  in  England.  Re  Woodd,  82 
L.  T.  Rep.  504  (1900).  Where  a  broker 
purchases  stock  for  a  customer  through 
another  broker  and  then  fails,  and  the 
sub-broker  sells  out  all  his  securities  to 
pay  a  debt  and  has  a  surplus,  the  cus 
tomer  may  reach  such  surplus  in  prefer- 
ence to  other  creditors  of  his  bi'oker, 
In  re  Graflf,  117  Fed.  Rep.  343  (1902), 
Where  a  broker  at  the  time  of  his  fail 
ure  has  on  hand  a  larger  amount  of 
a  certain  stock  than  he  holds  for  a  cus- 
tomer, the  customer  may  claim  that 
part  of  such  stock  is  his  own.  In  re 
Graflf,  117  Fed.  Rep.  343  (1902).  A  cred- 
itor of  a  defaulter  on  the  stock  ex- 
change who  has  taken  the  benefit  of 
tlie  private  distribution  of  stock  ex- 
change assets,  made  by  the  ofiBcial  as- 
signee of  the  stock  exchange  under  its 
rules,  is  not  precluded  from  afterwards 
taking  ordinary  legal  proceedings  for 
the  recovery  of  his  debt,  though  he 
must  give  credit  for  what  he  has  re- 
ceived from  tlie  official  assignee.  Rat- 
cliflf  V.  Mendelssohn.  87  L.  T.  Rep.  422 
(1902).  As  to  sub-brokers  or  correspond- 
921 


§  458.]  BROKERS    AND    THEIR    CONTRACTS.  [CH.   XXT. 

plicdl}'  given,  rcpledgos  stock  carried  by  him  on  a  margin,  the  cus- 
tomer cannot,  upon  the  failure  of  the  broker,  have  all  the  broker's 
stock  of  that  class  first  applied  in  discharge  of  his  claim.*  AVhere  a 
customer  delivers  stock  to  a  broker,  and  the  broker  without  his  con- 
sent transfers  it  into  his  own  name,  the  customer  may  claim  the 
new  certificate  upon  satisfactorily  identifying  the. stock.-  These 
questions,  however,  relative  to  marshaling  the  assets  and  contro- 
versies between  various  customers  claiming  the  same  securities  are 
considered  elsewhere.'  A  broker  who  wrongfully  pledges  his  cus- 
tomer's stock  is  guilty  of  conversion  and  may  be  arrested  therefor.* 
§  458.  Broiler's  rights  and  duties  on  failure  of  margin. —  When 
the  "  margin  "  which  the  customer  deposits  with  his  broker  hap- 
pens to  become  exhausted  by  the  fluctuations  of  the  market  ad- 
versely to  the  customer,  difficult  questions  arise  as  to  the  several 
rifjhts  and  duties  of  the  broker  and  of  the  customer.  If  the  broker 
is  under  orders  to  close  the  transaction  when  the  margin  becomes 
exhausted,  he  of  course  is  obliged  to  do  so.*  But,  otherwist*,  the 
rule  is  that  the  broker  cannot  summarilv  close  the  transaction,  even 
though  he  has  fear  of  greater  loss,  involving  a  loss  by  himself.  Ho 
is  obliged  to  demand  further  margin  from  his  customer,  at  the 
same  time  notifying  him  that  the  previous  margin  is  exhausted; 
also  that,  in  case  the  margin  is  not  made  good,  he  will  close  the 
transaction,  holding  the  customer  liable  for  the  loss;  also  stating 
the  time  and  place  of  such  threatened  sale.^     The  notice  must  be 

ent  brokers,  see  §  456,  sw^"'^*    See  also  until  plaintiff  directed  them  to  close  the 

g  473,  infra.  transaction,  so  long  as  he  complied  with 

» Skiff  V.  Stoddard,  63  Conn.  198  (1893).  the  terms  of  the  contract  on  his  part. 

2  Mould  V.   Importers',  etc.  Bank,  73  and  to  give  the  plaintiff  reasonable  no- 

N.  Y.  App.  Div.  30  (1902).  tice  of  the  want  of  sufficient  margin, 

'  See  g  473,  «?/ra.  and  of  their  intention  to  buy  in  the 

*  Oregon,  etc,  Co.  v.  Hilmers,  20  Fed.  stock  and  cover  his  short  account  if 
Rep.  717(1884);  Barry  v.  Calder.  48  Hun,  the  margin  was  not  made  good,  in  ac- 
449  (1888);  aff'd.  111  N.  Y.  684.  See  also  cordance  with  the  terms  of  the  notice." 
§  576,  infra.  Brokers  holding  a  certifi-  Rogers  v.  Wiley,  131  N.  Y.  527  (1892). 
cateof  stock  as  security  for  the  balance  Where  a  customer  who  is  selling  on  a 
of  the  purchase  price  due  from  the  cus-  margin  desires  to  close  the  transaction, 
tomer  are  pledgees,  and  if  the  broker,  but  his  broker  dissuades  him  by  prom- 
in  violation  of  the  express  contract,  re-  ising  to  carry  the  stock,  the  broker  can- 
pledges  or  sells  such  stock  without  au-  not  close  the  transaction  without  no- 
thorily  from  the  customer,  he  is  guilty  tice.  Rogers  v.  Wiley,  131  N.  Y.  527 
of  a  conversion  for  which  trover  will  (1892).  Brokers,  before  selling  a'cus- 
lia  Chew  v.  Louchheim,  80  Fed.  Rep.  tomer's  stock  which  they  hold  as 
500(1897).  pledgees,   the  stock  having  been  pur- 

5  See  ^  448,  supra.  chased  on  a  margin,  are  bound  to  de- 

6  In  the  usual  short  sale  of  stock  mand  further  margin  and  give  notice 
through  a  broker  on  a  margin,  the  of  intent  and  time  and  place  of  sale.  If 
brokers  "  were  bound  to  carry  the  stock  they  fail  to  do  so,  but  sell  and  then  sue 

923 


CH. 


XXV.] 


BROKERS   AND    THEIR   CONTRACTS. 


[§  459.. 


given  a  reasonable  time  before  such  closing  of  the  transaction,  and 
notice  sent  by  mail  is  sufficient  if  actually  received.^  If  the  broker 
fails  to  comply  with  these  rules,  and  sells,  he  is  guilty  of  conversion 
of  the  stock,2  Where  the  broker  is  merely  authorized  to  sell  he  is 
not  bound  to  sell.' 

§  459.  What  will  excuse  notice  and  demand  for  more  margin. 
All  these  rights  of  the  customer  to  notice  of  failure  of  margin,  de- 
mand  of  more  margin,  notice  of  intent  to  sell,  and  of  time  and 
place  of  sale,  may  be  waived;  and  brokers  generally  require  their 
customers  to  sign  written  contracts  to  that  effect.*   Where  the  cus- 

the  customer  for  the  loss,  they  cannot    N.  Y.  449  (1871).     See  also,  in  general. 


recover  anything.  They  cannot  claim 
that  their  loss  has  been  greater  than 
defendant's  loss  due  to  their  conversion. 
Gillett  V.  Whiting,  120  N.  Y.  402  (1890): 
Marliham  v.  Jaudon,  41  N.  Y.  235  (1869), 
overruling  Hanks  v.  Drake,  49  Barb.  186 
(1867),  and  Sterling  v.  Jaudon,  48  Barb. 
459  (1867).  See  also  Kenfield  v.  Latham, 
2  Cal.  Leg.  Rec.  235  (1879),  and  §  461, 
infra.  Cf.  Worth ington  v.  Tormey,  34 
Md.  183  (1870);  and  see  ch.  XXVI.  infra. 
A  formal  demand  for  further  margin  is 
insuflScient  wliere,  subsequently  to  that 
demand,  the  broker  negotiates  with  the 
customer  and  tells  him  that  he  will 
consider  what  to  do.  McGinnis  v. 
Smythe,  1  Silvern.  23  (1886).  The 
broker's  telegrams  and  conversations 
with  his  customers  may  amount  to  a 
waiver  of  his  right  to  demand  further 
margin.  Rogers  v.  Wiley,  14  N.  Y.  Supp. 
622  (1891);  aff'd,  131  N.  Y.  527  (1892). 
When  called  upon  for  further  margin, 
a  customer  may  make  a  "stop-order," 
the  price  fixed  in  such  order  being 
within  the  margin  already  furnished. 
Campbell  v.  Wright,  118  N.  Y.  594 
(1890).  The  giving  of  a  note  to  a  broker 
pledgee  does  not  extend  the  time 
within  which  the  pledgor  was  to  de- 
posit further  margin.  Gould  v.  Trask, 
10  N.  Y.  Supp.  619  (1890);  121  Fed.  376. 
1  Worthington  v.  Tormey,  34  Md.  183 
(1870).  Leaving  a  notice  at  the  office 
was  held  insufficient  where  it  did  not 
reach  the  customer.  Bryan  v,  Baldwin 
53  N.  Y.  232  (1873).  Two  days'  notice 
held  sufficient.    Stewart  v.  Drake,  46 


§  477,  infra.  A  notice  after  the  sale  is 
insufficient,  and  the  question  of  whether 
a  notice  was  given  is  for  the  jury  if  it 
is  denied.  Gillett  v.  Whiting,  120  N.  Y. 
402  (1890).  The  broker  is  bound  to  give 
the  customer  reasonable  notice  to  fur- 
nish more  margin.  Lazare  v.  Allen,  20 
N.  Y.  App.  Div.  616  (1897). 

2  Baker  v.  Drake,  66  N.  Y.  518  (1876). 
Cf.  Gregory  v.  Wendell,  40  Mich.  433 
(1879),  involving  a  purchase  of  corn.  It 
is  only  in  stock  transactions  that  the 
relation  of  pledgor  and  pledgee  arises. 
Where  the  broker  closes  the  transac- 
tion without  notice,  and  later  the  cus- 
tomer gives  an  order  which,  if  the 
transaction  had  not  been  closed,  would 
have  yielded  a  profit,  the  customer  may 
recover  damages  to  the  amount  of  that 
profit.  Rogers  v.  Wiley,  131  N.  Y.  527 
(1892). 

3  Robinson  v.  Norris,  51  How.  Pr.  443 
(1874);  Esser  v.  Linderman,  71  Pa.  St.76- 
(1872).  Cf  Harris  v.  Tum bridge,  83  N. 
Y.  92  (1880;.  On  a  short  sale  of  grain 
the  broker  is  not  bound  to  sell  as  soon 
as  the  principal  refuses  to  advance 
more  margin.  Perin  v.  Parkei%  126  111. 
201  (1888). 

*  Thus  a  written  authority  to  the  bro- 
kers "  to  sell  in  their  discretion,  at  pub- 
lie  or  private  sale,  .  .  .  without  any 
notice  whatever,  the  stocks,  bonds,  or 
gold  which  they  might  be  carrying  [for 
the  plaintiff]  whenever  my  margin 
shall  fall  below "  a  certain  figure, 
waives  all  the  customer's  rights  herein. 
Wicks  V.  Hatch,  62  N.  Y.  535  (1875).  Se& 


923 


§  460.] 


BKOKEKS    AND    TUEIE    CuNTKACra. 


[cn.  XXV. 


tomer,  upon  beinf^  presented  with  his  account,  does  not  object,  l)Ut 
promises  to  pay  tlie  amount,  he  thereby  waives  his  right  to  object 
to  a  sale  as  beinir  without  notice.'  It  is  doubtful  whether  the  deatii 
of  the  customer  will  authorize  the  broker  to  close  the  transaction 
without  notice.^  After  a  broker  has  purchaser  according  to  order, 
but  his  customer  dies  before  the  stock  is  paid  for,  it  is  the  duty  of 
the  broker  to  sell  immediately  upon  the  death  of  his  client,  and 
not  to  carry  the  transaction  along  and  afterwards  sell.'  A  custom 
of  brokers  to  dispense  with  these  notices  is  void,  and  not  binding 
on  the  customer.^  The  fact  that  a  panic  occurs,  or  unusual  fluctu- 
ations of  the  market  happen,  does  not  excuse  a  broker  from  giving 
such  notice.* 

§400.  Customer's  remedies  and  damages  herein. —  For  an  un- 
authorized sale  by  a  broker  of  stock  held  upon  a  margin,  the  cus- 
tomer has  ample  remedies.  lie  may  claim  the  benefit  of  the  sale, 
or  may  claim  the  value  of  the  stock.''   Or  the  customer  may  require 


also  Cameron  v.  Durklieim,  5.'5  N.  Y.  425 
(1874).  See  also  g  477,  infra.  The  cus- 
tomer may  waive  his  rights  after  the 
broker  has  made  the  unauthorized  sale. 
Stewart  v.  Drake,  4G  N.  Y.  449  (1871); 
Milliken  v.  Dehon,  27  N.  Y.  3G4  (1863). 
But  authority  "to  close  the  account 
without  notice,  by  purciiase  or  sale,  at 
public  or  private  sale  "  does  not  waive 
right  to  notice  of  failure  of  margin  and 
demand  for  more.  Stenton  v.  Jerome, 
54  N.  Y.  480  (1873);  Kenfield  v.  Latham, 
2  Cal.  Leg.  Rec.  235  (1879).  The  demand 
for  further  margin  may  be  waived,  and 
waiver  may  be  inferred  from  the  ne- 
gotiations and  proposition.  Harris  v. 
Pryor,  18  N.  Y.  Supp.  128  (1892).  A  com- 
mon form  of  the  contract  which  the 
broker  requires  the  customer  to  sign  is 
the  following: 

" hereby  agrees  to  maintain  with  you  at 

all  times  a  margin  of per  centum  of  the  par 

value  of  all  stocks  and  bonds  against  which  you 
have  made  or  may  hereafter  make  advances 

to ,  and  a  like  margin  on  stocks  or  bonds 

which have  borrowed  or  may  hereafter  bor- 
row through  you  to  make  deliveries  on  sales 
made  for account  or  otherwise. 

"  In  case margin  should  become  impaired 

and  the  same  is  not  promptly  made  good  in  re- 
sponse to  personal  notice  or  notice  sent  by  wire 

or  letter  and  directed  to usual  address,  you 

are  authorized  in  your  discretion  to  buy  or  sell  at 
the  New  York  Stock  Exchange  or  at  public  or  pri- 


vate sale,  without  further  notice,  such  securi- 
ties as  may  be  necessary  to  place  the  account  in 
condition  satisfactory  to  you,  or  to  close  the 
same  entirely,  as  you  may  prefer. 

*•  In  case  of  my  decease  you  are  hereby  au- 
thorized to  close  my  account  by  purchase  or 
sale  of  securities, as  thesame  may  require. ." 

iGillett  V.  Whiting.  141  N.  Y.  71 
(1894). 

'-^The  broker  will  be  protected  in  con- 
tinuing the  transaction  until  personal 
representatives  are  appointed.  Hess  v. 
Ran,  95  N.  Y.  359  (1884).  Cf.  Lacey  v. 
Hill.  L.  R.  8  Ch.  App.  921  (1873). 

3i?e  Overweg,  [1900]  1  Ch.  209. 

*  Markham  v.  Jaudon,  41  N.  Y.  235 
(1869);  Taylor  v.  Ketchum,  35  How.  Pr. 
289  (1867);  S.  C,  5  Rob.  (N.  Y.)507.  Con- 
tra, Appleman  v.  Fisher,  34  Md.  .540 
(1871).  a  case  of  a  gold-broker;  also 
Colket  V.  Ellis,  10  Phila.  375  (1875), 
where  both  parties  were  brokers  and 
knew  the  custom.  If  the  customs  are 
expressly  made  a  part  of  the  contract, 
insolvency  of  the  customer  authorizes 
sale  without  notice,  such  being  the 
custom.  Lacey  v.  Hill,  L.  R.  18  Eq.  182 
(1874). 

5  Markham  v.  Jaudon,  41  N.  Y.  235 
(1869);  Brass  v.  Worth,  40  Barb.  648 
(1863);  Ritter  v.  Cushman,  7  Rob.  (N. 
Y.)  294  (18671.     See  also  §  448.  SJipra. 

6  Taussig  V.  Hart,  58  N.  Y.  425  (1874r, 
924 


CH.  XXV.] 


BROKERS    AND    THEIR    CONTRACTS. 


[§  i60. 


the  broker  to  replace  the  stock,  and,  upon  his  failure  so  to  do,  the 
customer  may  replace  it  himself  and  charge  the  broker  with  the 
loss.'  Or  the  customer  may  recover  the  advance  in  the  market 
price  from  the  time  of  the  sale  up  to  a  reasonable  time  to  replace 
the  stock  after  notice  of  the  sale.-  The  unauthorized  sale  by  the 
broker  herein  is  not  necessarily  a  fraudulent  sale.^  The  customer  can- 
not enjoin  the  broker  unless  the  latter  is  insolvent.*  The  suit  should 
be  at  law,'^  and  demand  and  tender  need  not  be  alleged.®  A  cus- 
tomer who  has  notified  his  broker  that  a  sale  was  unauthorized 
does  not  waive  the  objection  by  retaining  the  account  of  the  sale 
subsequently  sent  to  him  by  the  broker.'  An  illegal  sale  of  the 
pledge  by  the  pledgee  is  a  conversion,  and  a  complaint  for  such 
conversion  will  not  be  construed  as  a  complaint  for  breach  of  con- 
tract.^ 

Where  a  broker  buvs  or  sells  stock  on  his  customer's  account  in. 


Strong  I'.  National,  etc.  Assoc,  45  N.  Y. 
718  (1871). 

1  Baker  v.  Drake,  53  N.  Y.  211,  217 
(1873):  Colt  V.  Owens.  90  N.  Y.  368  (1882). 

2  Colt  V.  Owens,  90  N.  Y.  868  (1882), 
holding  that  prices  within  thirty  days 
after  the  sale  is  a  reasonable  rule.  See 
also  Gruman  v.  Smith,  81  N.  Y.  25  (1880); 
Capron  v.  Thompson,  86  N.  Y.  418  (1881). 
Cf.  Andrews  v.  Gierke,  3  Bosw.  585 
(1858).  The  measure  of  damages  in  a 
suit  by  a  customer  against  a  broker  for 
an  unauthorized  sale  of  stock  is  the 
difference  between  the  price  at  which 
it  was  sold  and  the  highest  price  within 
a  reasonable  time  thereafter,  which,  in 
this  case,  the  court  fixed  at  thirty  days. 
Burhorn  v.  Lockwood,  71  N.  Y.  App. 
Div.  301  (1902).  Where  a  broker  sells 
his  client's  stock  illegally,  the  measure 
of  damages  in  a  suit  by  the  client  is  the 
difference  between  the  price  at  which 
the  stock  was  sold  and  the  highest 
market  price  within  a  reasonable  time 
thereafter.  Wolff  v.  Lockwood,  70  N.  Y. 
App,  Div.  569  (1902).  The  measure  of 
damages  to  a  customer  by  reason  of  a 
broker  illegally  selling  his  stock,  the 
broker  having  become  bankrupt,  is  the 
value  of  the  stock  on  the  day  of  filing 
the  petition  in  bankruptcy,  the  exact 
time  of  the  sale  not  being  ascertainable. 
In  re  Graff.  117  Fed.  Rep.  343  (1902). 


3  Stratford  r.  Jones,  97  N.  Y.  586  (1885). 

*  Park  V.  Musgrave,  2  Thomp.  &  C.  571 
(1874). 

*  Delevan  v.  Simonson,  35  N.  Y.  Super. 
Ct.  243  (1873).  lu  Butts  v.  Burnett,  6 
Abb.  Pr.  (N.  S.)  302  (1869),  involving  the 
arrest  of  a  broker  who  had  sold  the 
pledge  before  the  note  was  due,  the  court 
said:  "It  is  very  questionable,  I  thinks 
whether  a  demand  after  default  in  pay- 
ment of  the  debt  for  which  property  is 
pledged  as  security  will  render  a  re- 
fusal to  deliver  the  pledged  property  a 
tortious  conversion  of  it.  No  doubt  the 
])ledgor  can  redeem  upon  a  tender  of 
the  debt,  or  he  may  recover  the  dif- 
ference between  the  value  of  the  pledge 
and  the  debt.  But  to  lay  the  founda- 
tion for  an  action  for  conversion,  I  am 
of  opinion  that  an  offer  and  demand 
must  be  made  on  the  day,  and  is  not 
suflScient  if  made  after  the  day  on  which 
the  debt  has  become  payable." 

e  Clarke  v.  Meigs,  22  How.  Pr.  340,  13 
Abb.  Pr.  467  (1861). 

'  Burhorn  v.  Lockwood,  71  N.  Y.  App. 
Div.  301  (1902).  A  customer  after  learn- 
ing of  an  illegal  sale  cannot  object  if 
for  six  months  he  does  not  tender  the 
amount  due  the  broker  and  demand  the 
stock.  Swann  v.  Baxter,  36  N.  Y.  Misc. 
Rep.  233  (1901). 

8  Smith  V.  Hall,  67  N.  Y.  48  (1876),  dis- 


925 


§  400.] 


BROKERS    AND   THEIR    CONTRACTS. 


[CH.  XXV. 


violation  of  tbo  terms  of  his  contract,  and  tlioreby  makes  a  ])rofit, 
the  customer  has  his  option  either  to  repudiate  the  transaction 
altogether  and  sue  for  damages,  or  he  may  adopt  it  and  claim  for 
himself  the  benefit  made  by  his  agent. ^  It  has  been  held  that, 
where  the  broker  fails  to  bu}'  according  to  the  instructions  of  his 
customer,  and  the  customer  suffers  a  loss  by  reason  of  the  failure, 
the  object  of  the  purchase  being  to  cover  a  short  sale,  the  measure' 
of  damages  is  the  difference  between  the  price  at  which  the  stock 
was  sold  short  and  the  market  price  upon  the  day  when  the  order 
was  given  to  the  broker  to  buy  in.  In  other  words,  the  plaintiff 
may  in  such  a  case  recover  the  profits  which  he  would  have  made 
had  his  order  been  properly  executed.'-  And  the  rule  is  the  same 
when  the  loss  to  the  customer  results  from  the  failure  of  the  broker 
to  sell  as  instructed,  or  where  the  broker  sells  at  an  improper  or 
manifestly  unfavorable  time.*      "Where  a  broker  agrees  to  carry 


tinguifihing  Austin  v.  Rawdon,  44  N.  Y. 
63  (1870). 

1  Kimber  v.  Barber,  L.  R  8  Ch.  App. 
56  (1872);  Marsh  v.  Keating,  1  Bing.  N. 
C.  198  (1834);  Taussig  v.  Hart.  49  N.  Y. 
301  (1872);  s.  C,  58  N.  Y.  425  (l'^74);  Pick- 
ering V.  Demerntt.  100  Mass.  416  (1868); 
Day  V.  Holmes,  103  Mass.  306  (1869).  In 
the  case  of  Clews  ?'.  Jamieson,  89  Fed. 
Rep.  63  (1898),  where  the  broker  was 
authorized  to  sell  at  229  and  actually 
did  sell  at  221,  the  court  held  that  the 
principal  could  not  adopt  and  enforce 
the  contract,  inasmuch  as  the  broker 
was  not  authorized  to  sell  at  that  price, 
and  the  contract  not  binding  the  prin- 
cipal when  made  did  not  bind  the 
other  parties.  For  the  measure  of  dam- 
ages where  a  broker  converts  his  cus- 
tomer's securities,  and  then  is  unable 
by  reason  of  his  insolvency  to  replace 
them,  see  Chamberlain  v.  Greenleaf,  4 
Abb.  N.  Cas.  178  (1878).  Sometimes  an 
advance  in  the  price  of  the  stock, 
within  a  reasonable  time  after  notice  of 
the  conversion  is  received,  is  allowed. 
Gruman  v.  Smith,  81  N.  Y.  25  (1880). 
See  §  475.  And  what  is  a  reasonable 
time  in  such  a  case  is  a  question  for  the 
jury.  Baker  v.  Drake,  66  N.  Y.  518 
(1876):  Stevens  v.  Hurlbut  Bank,  31 
Conn.  146  (1862);  Stewart  v.  Cauty,8M. 
^  W.  160  (1841);  Field  v.  Lelean,  6  H.  & 


N.  017  (1861).  Cf.  Allen  v.  Dykers.  3 
Hill,  593  (1842).  As  to  the  measure  of 
damages  in  an  action  against  a  broker 
for  fraud,  inducing  the  plaintiff  to  in- 
vest in  "Grant  and  Ward  "  securities, 
see  James  v.  Work,  70  Hun,  296  (1893). 

2  In  an  action  to  recover  damages, 
where  a  firm  of  stock-brokers  sold  for 
a  customer,  upon  his  order  and  for  his 
account,  three  hundred  shares  of  stock, 
short,  at  186,  and  subsequently,  without 
the  customer's  order  or  knowledge, 
bought  in  stock  to  cover  the  sale,  and 
then  a  few  days  later,  the  stock  having 
declined  several  points,  the  customer 
ordered  them  to  cover  their  sale,  to 
which  order  no  attention  was  paid,  it 
was  held  that  the  proper  measure  of 
damages  was  the  difference  between 
the  price  at  which  the  stock  was  sold 
short  and  the  market  price  upon  the 
day  when  the  order  was  received  to 
purchase,  with  interest,  deducting  com- 
missions, etc.  White  v.  Smith,  54  N.  Y. 
522  (1874).  See  Magee  v.  Atkinson,  2  M. 
&  W.  440  (1837).  In  Allen  v.  McConihe, 
124  N.  Y.  342  (1891),  the  court  allowed 
as  damages  against  a  broker  who  de- 
layed selling  when  ordered  to  sell,  the 
difference  between  the  price  when  the 
order  was  given  and  the  price  when 
the  sale  was  actually  mada 

3  In  Harris  v.  Tumbridge,  83  N.  Y.  92 


926 


CH.  XXV.] 


BROKERS    AND    THEIR   CONTRACTS. 


[§  460. 


stocks  to  a  certain  time,  but  he  sells  them  before  that  time,  the 
damage  is  based  upon  the  prices  at  the  time  to  which  he  agreed 
to  carry  the  stocks.^ 

Where  a  party  telegraphs  to  sell  a  certain  stock,  the  sale  to  be 
"  short "  and  speculative,  the  damages  for  failure  of  the  telegraph 
company  to  deliver  the  message  are  too  remote  and  speculative, 
even  though  the  stock  goes  down  on  the  market.^    The  question 


(1880),  it  appears  that  the  plaintiff  pur- 
chased through  the  agency  of  the  de- 
fendant a    stock    option,    a    privilege 
known  as  a  "  straddle,"  upon  which  the 
defendant  guaranteed    that   the  fluc- 
tuations in  the  stock  during  the  peud- 
ency  of  the   contract  should  amount 
to  eight  per  cent.    On  the  next  day 
after  the  purchase  defendant  sold  the 
stock  short,  which  resulted  in  a  loss  to 
the  plaintiff,  who  liad  at  the  time  of 
the  purchase  authorized  defendant,  as 
her  agent,  to  exercise  the  option.     As 
to  the  measure  of  damages  the  court 
said:  "An    objection  is  taken    to  the 
rule  of  damages.     It  is  insisted  that,  as 
plaintiff  never  gave  any  directions  to 
*  put '  or  *  call '  the  stock,  she  should  not 
have  recovered  as  if  she  had.     But  in 
the  absence  of  such  directions  it  was 
defendant's  duty,   under  the  circum- 
stances of  this  case,  as  we  have  already 
said,  to  have  closed  the  *  straddle  '  con- 
tract by  exercising  the  option  at  the 
most  favorable  time,  and  to  have  acted 
for  her  in  that  respect  with  reasonable 
care  and  skill     As  he  did  not  do  so,  she 
is  entitled  to  recover  what  she  has  lost 
by    his  neglect;  and  the  price  of  the 
stock  from  day  to  day  during  the  run- 
ning of  the  option  having  been  shown, 
it  was  for  the  jury  to  determine  that 
amount."  Cf.  Speyer  v.  Colgate,  4  Hun, 
623  (1875).     Where  a  broker  sold  stock 
for  his  customer  without  authority  and 
in  violation  of  an  agreement  not  to  sell, 
and  it  appeared  that  for  thirty  days 
after  notice  was  given  to  the  customer 
of  the  sale  the  stock  could  have  been 
purchased  in  the  market  for  the  price 
at  which  it  was  sold  or  even  for  less. 


it  was  held,  in  an  action  to  recover 
damages,  that  the  customer,  having 
had  a  reasonable  time  after  he  was 
notified  of  the  sale  of  his  stock  to  re- 
place it  at  the  same  or  a  lower  price, 
was  entitled  only  to  nominal  damages. 
Colt  V.  Owens.  90  N.  Y.  368  (1882).  Cf. 
Randall  v.  Albany  City  Nat.  Bank,  1  N. 
Y.  St.  Rep.  593  (1886).  See  also  Mc- 
Arthur  v.  Seaforth,  3  Taunt.  257  (1810). 
But  when  the  action  of  the  broker  is 
fraudulent  the  customer  may,  upon  ob- 
taining knowledge  of  the  facts,  repudi- 
ate the  whole  transaction  and  recover 
back  the  money  paid.  .Levy  v.  Loeb, 
89  N.  Y.  386  (1883),  reversing  S.  c,  47 
N.  Y.  Super.  Ct.  61.  Cf.  Stewart  v. 
Drake,  46  N.  Y.  449  (1871).  In  Baker  v. 
Drake,  66  N.  Y.  518  (1876),  where  a 
broker,  unauthorized  to  do  so,  sold 
stock  which  he  was  carrying  for  his 
customer,  it  was  held,  in  an  action  for 
damages,  that  the  measure  of  damages 
was  the  advance  in  the  market  price 
from  the  time  of  the  sale  up  to  a  reason 
able  time  to  replace  it  after  notice  of 
sale. 

1  Michael  v.  Hart  &  Co.,  86  L.  T.  Rep. 
474  (1903). 

2  Cahn  V.  Western  U.  Tel.  Co.,  48  Fed. 
Rep.  810  (1891),  46  Fed.  Rep.  40.  The 
measure  of  damages  for  error  in  the 
delivery  of  telegraph  messages  to  buy 
stock  "is  the  difference  between  the 
market  value  of  the  shares  at  the  time 
when  the  dispatch  should  have  been 
delivered  and  the  sum  paid  for  them 
in  the  market  on  the  receipt  of  the 
message."  Pearsall  v.  Western  U.  Tel. 
Co.,  134  N.  Y.  356  (1891). 


937 


§§  4G1,  4G2.]  BROKEKS    A.NU     illKli:    CoMUACTS. 


[ 


CU.  XXV. 


of  the  customer's  rights,  where  the  broker  has  repledged  the  stock 
and  then  failed,  is  considered  elsewhere.^ 

§§  461,  462.  Broliers  remedies  and  damages  herein. —  If  a  broker 
sells  out  his  customer's  stock  without  notice,  he  may  recover  any 
loss  from  the  customer,  where  the  broker's  loss  is  greater  than  the 
customer's  damages  for  the  conversion.-  But  where  the  broker  s 
act  is  strictly  according  to  law,  he  is  of  course  entitled  to  recover 
from  his  customer  any  loss  that  has  been  sustained  in  excess  of  the 
margin.'  And  where  a  broker  purchases  stock  on  an  order  and 
demands  payment  of  the  price,  the  broker  may  sell  the  stock  for 
non-payment,  after  waiting  a  reasonable  time,  such  being  the  cus- 
tom of  the  market.*  Where  the  customer  fails  to  deliver  to  the 
broker  stock  which  the  former  has  ordered  the  latter  to  sell,  the 
broker  may  purchase  in  the  open  market  in  order  to  fulfill  the  con- 
tract, and  may  hold  the  customer  liable  for  the  loss.* 

It  is  a  well-settled  rule  that  if  a  broker,  acting  in  good  faith  and 
without  default,  incurs  personal  loss  or  damage  in  the  course  of 
transacting  the  business  of  his  agency,  or  in  following  the  instruc- 
tions of  his  principal,  he  may  recover  from  the  principal  full  com- 
pensation therefor.^     Accordingly,  where  a  broker  buys  stock  upon 


1  See  §§  471-473,  infra. 

2  Minor  v.  Beveridse,  141  N.  Y.  399 
(1894),  practically  overruling  Gillett  v. 
Whiting.  120  N.  Y.  402,  and  holding 
that  the  broker  may  sue  the  customer 
for  losses,  even  though  he  sold  without 
notice,  and  that  the  customer  is  enti- 
tled to  a  counter-claim  only.  To  same 
effect,  see  Gruman  v.  Smith,  81  N.  Y. 
85  (1880).  See  also  Capron  v.  Thomp- 
son, 86  N.  Y.  418  (1881);  §458,  supra; 
and  §  475,  infra.  Where  the  customer 
sues  the  broker  for  selling  the  stock 
illegally  the  broker  may  set  up  the 
amount  due  from  the  customer,  not  by 
way  of  recoupment,  but  by  way  of  a 
lien  on  the  stock.  Farrar  v.  Paine,  173 
Mass.  58  (1899).  In  Ellis  v.  Pond,  78  L. 
T.  Rep.  125  (1897),  the  court  held  that 
even  though  a  broker  sold  his  princi- 
pal's stock,  which  the  broker  held  as 
pledgee,  prior  to  the  time  to  which  the 
broker  had  agreed  to  carry  the  stock, 
yet  that  the  broker  might  recover  from 
his  principal  any  loss  in  such  sale  as 
compared  with  the  price  at  which  the 
•broker  originally  bought  the  stock,  but 


that  the  client  could  counter-claim  for 
the  damage  due  to  the  sale  being  made 
prior  to  the  agreed  time.  The  court 
held,  however,  that  where  by  the  con- 
tract the  broker  was  to  accept  delivery 
of  certain  stock  at  a  certain  time  for 
his  principal,  but  before  tliat  time  the 
broker  sold  such  stock,  contrary  to  his 
agreement  with  his  principal,  the  bro- 
ker could  not  recover  any  damages  for 
the  loss. 
3Schepeler  v.  Eisner,  3  Daly,  11  (1869). 

4  Taylor  v.  Bailey,  169  111.  181  (1897). 

5  Baily  v.  Cardnuff,  14  Colo.  App.  169 
(1899). 

♦'Sedgwick  on  Damages  (7thed.),  86; 
Lindley  on  Companies  (5th  ed.),  pp.  512- 
516;  Sutton  v.  Tatham,  10  Ad.  &  E.  27 
(1839);  Bayliffe  v.  Butterworth,  1  Exch. 
425  (1847);  Bowlby  u.  Bell,  3  C.  B.  284 
(1846);  Bayley  v.  Wilkins,  7  C.  B.  886 
(1849);  McEwen  v.  Woods,  2  Car.  &  K. 
330  (1846);  Taylor  v.  Stray,  2  C.  B.  (N. 
S.)  175  (1857);  Stray  v.  Russell,  1  El.  & 
El.  888  (1859);  Chapman  v.  Shepherd,  L. 
R.  2  C.  P.  228  (1867);  Biederman  v. 
Stone,  L.  R.  2  C.  P.  504  (1867);  Robinson 


928 


CH.  XXV.]  BROKEES    AND    THEIR    CONTRACTS.  [§§  461,  462. 

his  customer's  order  and  pays  for  it,  and  upon  a  decline  in  value 
the  customer  refuses  to  accept  it,  the  broker  may  recover  the  price 
paid  by  him,  and  not  merely  the  difference  between  that  price  and 
the  market  value  on  the  day  of  his  demand.'  The  guaranty  by  a 
third  party  of  the  customer's  account  may  be  enforced.^  A  broker 
cannot  interplead  between  his  customer  and  an  indorser  of  the 
customer's  note,  in  regard  to  stocks  deposited  with  the  broker  by 
the  customer,  even  though  the  administrator  of  the  indorser  claims 
that  he  has  an  interest  in  such  stock.^ 

V.   MoUett,   L.  R  7   H.  L.   802  (1875);  measure  of  the  damages  is  the  value  of 

.  s.  C,  L.  R.  7  C.  P.  84;  L.  R.  5  C.  P.  646;  the  stock  at  the  time  and  place  of  the 

Pollock  Z7.  Stables,  13  Q.  B.  765  (1848);  proposed  delivery.    White  u  Salisbury, 

Lacey  v.  Hill,   L.  R.  8   Ch.  App.   921  33  Mo.  150  (1862);  Vance  v.  Tourne,  13 

(1873).     See  also  Dos  Passos  on  Stock-  La.  225  (1839). 

brokers,  pp.  123, 802;80N.Y.App.Div.  115.  2  0ppenheim  u.  Water  bury,  86  Hun, 

iGiddings    v.   Sears,    103    Mass.   311  122(1895). 

(1869).    Cf.  Field  v.  Kinnear,  4  Kan.  476  3  Post  u  Emmett,  40  N.  T.  App.  Div. 

(1868',    Where  there  is  a  rescission  of  477  (1899). 
a  contract  for  the  sale  of  stock,  the 

(59)  929 


CHAPTER  XXVL 

PLEDGES  AND  MORTGAGES  OF  STOCK. 


§  463.  Definitions  of  pledge,  mortgage, 
and  lien. 

464.  Mortgages  and  pledges  of  stock. 

Trust  mortgages  covering 
stocks. 

465.  How  a  pledge  of  stock  arises  or 

is  made  —  Pledge,  by  the  cor- 
poration itself,  of  its  own 
stock. 

466.  Pledgee    may    have    the    stock 

registered  in  Ins  own  name  or 
in  the  name  of  another. 

467.  Stock-broker    purchasing  stock 

for  a  customer  on  a  margin  is 
a  pledgee. 

468.  Miscellaneous  rights  of  pledgee 

and  i)ledgor  —  Dividends  — 
Reorganizations  —  The  equity 
of  redemption. 

46y.  Pledgee  need  not  retain  or  re- 
turn to  the  pledgor  the  identi- 
cal certificates  or  shares  of 
stock  which  were  pledged,  but 
must  have  equal  quantity  al- 
ways on  hand. 

470.  Pledgee's  liability  on  subscrip- 
tion and  statutory  liability  on 
stock. 


§  471.  Pledgee  has  no  right  to  sell  or 
repledge  the  stock,  even  tem- 
porarily, except  upon  notice, 
unless  the  debt  is  assigned 
with  the  stock. 

472.  Purchasers  or  pledgees  of  stock 

from  pledgee  with  notice  are 
not  protected. 

473.  Dona  fide    repledgees   or    pur- 

chasers of  pledged  stock  are 
protected  —  Pledgor's  remedies 
—  Marshaling  the  assets. 

474.  Pledges  by  agents,  trustees,  ex- 

ecutors, etc.,  legally  and  in 
breach  of  trust. 

475.  Pledgor's  remedies 

476.  Pledgee's  remedies  when    debt 

secured  is  not  paid  —  Sale  and 
deficiency. 

477.  Notice  of  sale  of  stock  by  pledgee 

to  apply  to  debt  secured  — 
Waiver  of  notice. 

478.  J'ormalities  of  sale. 

479.  If  the  pledgee  himself  purchases 

at  the  sale,  then  the  sale  is 
voidabla 


§  463.  Definition  of2)^e(hfe,  mortr/age,  and  lien. —  A  pledge  may 
be  defined  to  be  a  delivery  of  personal  property  as  a  security  for 
some  debt  or  engagement.  A  mortgage  of  personalty,  on  the 
other  hand,  is  a  sale  with  the  condition  attached  that,  if  the  mort- 
gagor performs  some  act,  the  sale  shall  be  void.  In  a  pledge  the 
title  remains  in  the  pledgor,  and  the  pledgee  has  a  special  property 
in  the  thing  pledged.^  In  a  mortgage  the  title  passes  to  the  mort- 
gagee, subject  to  being  revested  in  the  mortgagor  upon  payment  of 
the  debt.  In  pledges  the  thing  pledged  must  be  delivered  to  the 
pledgee.  In  mortgages,  generally,  the  possession  of  the  thing 
mortgaged  remains  with  the  mortgagor.  A  mortgage  of  stock  is 
the  same  as  a  pledge  of  stock  in  that  the  mortgagee  may  sell  the 
stock  upon  default  and  after  proper  notice.'^     In  England  a  deposit 


iSee  Pars.  Cont.,  I,  p.  569;  II,  p.  113; 
III,  p.  273.  Where  an  employee  is  by 
contract  entitled  to  a  certain  salary  so 
long  as  he  should  own  certain  stock,  he 
does  not  break  the  contract  by  pledging 


his  stock.     McMullan  v.  Dickinson  Co., 
63  Minn.  405  (1896). 

2  Deverges  v.  Sandeman,  etc.  Co.,  86 
L.  T.  Rep.  269  (1902);  afif'g  [1901]  1  Ch.  70. 


930 


CH.  XXVI.] 


PLEDGE    OF    STOCK. 


[§  464. 


of  certificates  of  stock  is  an  equitable  mortgage  and  not  a  pledge, 
and  hence  while  foreclosure  would  not  lie  as  regards  a  pledge,  it  does 
lie  as  regards  such  an  equitable  mortgage.^ 

A  pledge  differs  also  from  a  lien.  A  pledge,  by  implication, 
gives  the  pledgee  a  power  to  sell  on  due  notice,  in  case  the  debt  is 
not  paid  at  maturity,  while  a  lien  gives  merely  the  power  of  deten- 
tion until  the  debt  is  paid.^ 

Where  a  corporation  is  in  financial  difiiculties  and  its  mortgage 
is  due,  and  the  stockholders  make  an  agreement  with  the  mortgagee 
whereby  they  turn  over  to  him  a  majority  of  the  stock  to  become 
his  absolute  property  if  the  debts  of  the  corporation  are  not  then 
■paid,  in  consideration  of  which  he  agrees  to  advance  further  addi- 
tional moneys,  such  a  contract  is  a  conditional  sale  of  the  stock 
and  is  not  a  pledge.^  A  contract  to  return  borrowed  stock  or  pay 
fox  it  is  a  debt.* 

§464.  Mortgages  and  pledges  of  stock  —  Trust  mortgages  cover- 
ing stocls.—  Shares  of  stock  may  be  the  subject  of  a  mortgage  or 
pledge.'^  A  mortgage  of  stock,  however,  is  not  often  made;  and, 
unless  there  is  a  clear  intent  to  the  contrary,  the  courts  will  treat 
the  transaction  as  a  pledge  rather  than  a  mortgage.®  In  fact  it  is 
difficult  to  ascertain  from  the  cases  how  shares  of  stock  may  be 


1  Harold  u  Plenty,  85  L.T.  Rep.  45(1901). 

2  Donald  v.  Suckling,  L.  R.  1  Q.  B.  585, 
604  (1866).  "  A  simple  lien  —that  is  to 
say,  a  right  to  detain  chattel  property 
until  a  given  debt  be  paid,  but  without 
any  right  to  sell  and  apply  the  proceeds 
in  payment  — is  one  thing;  a  pledge, 
since  it  implies  the  right  in  the  depos- 
itary to  sell  the  deposit  and  apply  the 
proceeds  to  the  debt  it  was  given  to 
secure,  is  another.  Shares  of  stock  put 
up  as  collateral  security  constitute  a 
pledge."  First  Nat.  Bank  v.  Illinois  T. 
&  S.  Bank,  84  Fed.  Rep.  34  (1897). 

3  Ware  v.  Hooper,  98  Fed.  Rep.  160 
(1899). 

4  Dibble  v.  Richardson,  171  N.  Y.  131 
(1902).  A  contract  whereby  a  person 
receives  stock  and  agrees  to  return  it 
within  a  specified  time  or  else  pay  a 
specified  sum  is  not  a  bailment,  and 
hence  if  the  stock  is  not  returned  at 
the  specified  time  the  specified  price 
may  be  recovered,  even  though  the 
party  at  a  later  time  desires  to  return 
the  stock.    Haskins  v.  Dem,  19  Utah, 


89  (1899).  See  also  §  445,  supra,  and  §  469, 
infra. 

5  "  Nothing  is  better  settled  than  that 
shares  in  the  capital  stock  of  a  corpo- 
ration are  the  subject  of  pledge."  Day- 
ton Nat.  Bank  v.  Merchants'  Nat.  Bank, 
37  Ohio  St.  203  (1881).  "It  was  for- 
merly doubted  whether  it  [stock]  could 
be  the  subject  of  a  pledge,  but  it  is  now 
held  that  it  can  be."  Newton  v.  Fay, 
92  Mass.  505  (1865).  As  to  pledges  to 
secure  parties  who  advance  money  to 
the  company,  see  ch.  XX  and  §  76,  supra. 

6  Newton  v.  Fay,  92  Mass.  505  (1865): 
Nabring  v.  Bank  of  Mobile,  58  Ala.  204 
(1877);  Merchants'  Bank  v.  Cook,  21 
Mass.  405  (1826);  Mechanics',  etc.  Assoc. 
V.  Conover,  14  N.  J.  Eq.  219  (1862);  Doak 
V.  Bank  of  the  State,  6  Ired.  L.  (N.  C.) 
309  (1846).  In  England  security  is  given 
by  a  process  called  a  sale  with  a  con- 
tract of  repurchase.  The  court  holds  that 
this  is  not  a  pledge.  "An  essential 
term  of  a  pledge  is  that  on  fulfillment  by 
the  pledgor  of  the  conditions  of  the  bar- 
gain, commonly  called  redemption,  the 


931 


§  ^04.] 


TLEDCilC    OF    STOCK. 


[CH.  XXVI. 


mortgaged;  and  transactions  which,  in  a  few  early  decisions,  were 
held  to°be  mortgages,  would  to-day  be  held  to  l)e  pledges.'  There 
are  but  few  clear  cases  of  a  mortgage  of  stock  to  be  found.  It 
seems  that  a  formal  instrument  of  chattel  mortgage  of  stock,  duly 
executed  and  registered  at  the  municipal  clerk's  olHce,  as  required 
bylaw  in  case  of  chattel  mortgages,  would  not  constitute  an  effect- 
ual mortgage  of  stock,  and  the  mortgagee  would  not  be  protected 


pledgee  is  bound  to  hand  back  to  the 
pledgor  tlie  very  thing  deposited  with 
with  him,"  whereas  in  a  sale  and  con- 
tract of  repurchase,  the  identical  prop- 
erty in  numbers,  etc.,  need  not  be  re- 
turned, Simmons  v.  London  J.  S.  Bank, 
[1891]  1  Ch.  270. 

1  Quoted  and  approved  in"  Irving,  etc, 
Assoc.  V.  Watson,  67  Pac.  Rep.  945  (Oreg. 
1903).   Thus,  in  Huntington  v.  Mather,  2 
Barb.  5:38  (1848). the  court  said:  "There 
are  two  leading  considerations  to  be 
regarded  in  determining  whether  the 
transaction  is  a  pledge  or  a  mortgage: 
namely,  the  title  and  the  possession.  If 
it  is  a  mortgage,  the  legal  title  passes 
to  and  is  vested  in  the  creditor.     With 
a  pledge  it  is  different;  the  legal  title, 
until  a  sale  on  default  of  payment  or 
redemption,  continuing  in  the  pledgor. 
.     .    .     The  essential   difference  as  to 
matter  of  right  is  that  in  one  the  title 
passes  and  in  the  other  it  does  not.  But 
the  difference  in  substance  and  fact  is 
that,  in  the  case  of  a  pawn  or  pledge, 
the  possession   must  pass  out  of  the 
pawner,  but  in  the  case  of  a  mortgage 
it  need  not."    The  court,  however,  in- 
fluenced probably  by  the  equities  of  the 
case,  held  the  transaction  to  be  a  mort- 
gage, and  that  the  right  of  the  debtor 
to  redeem  was  barred  by  the  ten-year 
statute  of  limitations.     In  the  case  of 
Smith    V.    Forty-nine    and     Fifty-six 
Quartz  Min.  Co.,  14  Cal.  242  (1859),  the 
court  held  the  transaction  to  be  a  mort- 
gage rather  than  a  conditional  sale  of 
the  stock.  •  The  question  of  pledge  was 
not  considered.      Manns  r.  Brookville 
Nat.  Bank,  73  Ind.  243  (1881),  speaks  of 
the  transaction  as    a    mortgage;  and 
Williamson  v.  New  Jersey,  etc.  R  R., 


26  N.  J.  Eq.  398  (1875),  says  that  such  a 
mortgage  neeil  not  be  recorded  in  the 
municipal  clerk's  office,  as  required  by 
the    chattel-mortgage    act      In    both 
cases  the  transaction  might  better  have 
been  treated  as  a  pledge.     In  Adderly 
V.  Storm,  6  Hill  (N.  Y.),  624  (1844),  the 
court  said :  "  I  have  already  said  that 
this  was  not  a  pawn  or  pledge  of  the 
stock;  neither  was  it  strictly  a  mort- 
gage."    At  the  present  day  it  would  be 
held  to  be  a  pledge.    Wilson  v.  Little,  2 
N.  Y.  443  (1849);  Hasbrouck  v.  Vander- 
voort.  4  Sandf.  74  (1850).  In  Brewster  v. 
Hartley,  37  Cal.  15  (1869).  the  court  said: 
"The  transfer  in  writing  of  shares  of 
stock  not  only  does  not  prove  that  the 
transaction  is  not  a  pledge,   but   the 
stock,  unless  it  is  expressly  made  as- 
signable by  the  delivery  of  the  certifi- 
cates, cannot  be  pledged  in  any  other 
manner."    In   Thompson  v.  Holladay. 
15  Oreg.  34  (1887),  a  chattel  mortgage 
on  shares  of   stock   was  involved.     It 
was  declared  void  because  it  was  given 
to  a  receiver  who  previously  held  the 
stock  as  receiver.    Sometimes  a  chat- 
tel mortgage  of  stock  arises  where  a 
railroad  mortgage  covers  not  only  real 
estate,  but  also  all  personal  property, 
bonds,  and  stock  which  are  or  shall  be 
owned  by  the   mortgagor  corporation. 
A  deposit  of  bonds  as  security  for  the 
payment  for  rolling  stock,  but  to  be 
used  only  to  pay  any  deficiency  after 
the  rolling  stock  had  been  sold  and  the 
proceeds  credited,  is  a  pledge  and  not  a 
mortgage,  and  hence    if    the  pledgee 
takes  back   the  rolling  stock  without 
selling  it  the  pledge  ceases.     Herrmann 
V.   Central,  etc  Co.,  101    Fed.   Rep.  41 
(1900). 


932 


en.  XXVI.] 


PLEDGE    OF    STOCK. 


[§  464. 


where  he  does  not  receive  the  certificate  of  stock  from  the  mort- 
o-ao-or,  or  does  not  obtain  a  registry  of  transfer  on  the  corporate 
books.^  Where  a  railroad  company  owns  shares  of  stock  in  an 
elevator  company,  such  stock  is  not  subject  to  the  general  mort- 
gage executed  by  the  railroad  company.-   A  pledge  of  stock  without 


iThe  clearest  and  most  satisfactory- 
case  is  Spalding  v.  Paine,  81  Ky.  416 
(1883),  where  a  chattel  mortgage  of  a 
share  of  stock  was  duly  recorded  in  the 
proper  county,  the  mortgagor  retaining 
the  certificate    of    stock.     The    mort- 
•gagor  subsequently  sold  and  transferred 
the  certificate  of  stock  to  a  bona  fide 
purchaser.     The  court  held  that  the  re- 
cording of    the   mortgage  was   of  no 
avail;  that  there  could  be  no  mortgage 
of  choses  in  action,  and  that  the  bona 
pie  transferee  took  the  stock.  Pryor,  J., 
well  said:  "  Much  of  the  business  of  the 
country  is  conducted  on  the  faith  of  the 
pledge  of  such  stock  as  collaterals:  and 
to  adjudge  that  the  holder  of  the  stock 
by  transfer  on  the  books  of  the  corpora- 
tion, or  by  indorsement  and  delivery  by 
the  owner,  is  subordinate  in  his  claim 
to  the  mortgagee,  upon  the  doctrine  of 
constructive    notice,    would    paralyze 
trade   and  open   a  wide  field  for   the 
fraudulent  disposition  of  such  valuable 
interests  at  the  expense  of  honest  and 
confiding  purchasers."    Inasmuch  as  a 
mortgage  on  shares  of  stock  is  not  a  re- 
cordable instrument,  the  record  thereof 
does  not  operate  as  constructive  notice. 
Shuster  r.  Jones,  58  S.  W.  Rep.  595  (Ky. 
1900).    Stocks  are  not  goods  and  chat- 
tels within  the  meaning  of  the  act  con- 
cerning   chattel    mortgages.     State  v. 
King  County  Super.  Ct.,  13  Wash.  607 
(1896).     The  right  of  a  subscriber  to  de- 
mand a  certificate  of  stock  may  be  at- 
tached before  such  certificate  is  issued 
and    delivered,   and    such  attachment 
has  precedence  over  a  mortgage  even 
though  the  mortgage  is  recorded  with 
the  register  of  deeds,  no  notice,  how- 
ever, of  such  mortgage  being  given  to 
the  corporation  itself.     Gates  v.  Baxter, 
97  Tenn.  443  (1896).  Cf.  Manns  v.  Brook- 


ville  Nat.  Bank,  73  Ind.  243  (1881);  Fos- 
ter V.  Potter,  37  Mo.  525  (1866);  Vowell 
V.  Thompson,  3  Cranch,  428  (1829);  s.  C, 
28  Fed.  Cas.  1308.    See  also  Holyoke  v. 
McMurtry,  33  Neb.  548  (1891).     A  mort- 
gage of  stock  is  valid  as  between  mort- 
gagor and  mortgagee  without  a  trans- 
fer of  certificates.  The  mortgagee  after 
foreclosure  may  compel  the  corporation 
to  transfer  without  making  the  trans- 
feree a  party.    Tregear    v.   Etiwanda 
Water  Co.,  76  Cal.   537   (1888).     Stock 
may  be  mortgaged  and  no  delivery  of 
the  certificates  need  be  made.    Though 
a  foreclosure  is  made  irregularly  the 
mortgagor  may   ratify   it,  or  may  be 
barred  by  the  six-year  statute  of  limita- 
tions. Campbell  v.  Woodstock  Iron  Co., 
83  Ala.  351  (1887).    The  pledgor  may,  by 
an    instrument  in   writing,  assign  his 
equity  of  redemption  to  one  of  his  cred- 
itors.    Such  assignment  need  not  be  re- 
corded as  a  chattel  mortgage  and  is  not 
fraudulent,   even    though    it    be  kept 
secret  from  the  other  creditors  of  the 
pledgor.     National  H.  R.  Bank  v.  Chas- 
kin,   28   N.    Y.   App.    Div.    311   (1898). 
Where  an  unincorporated  partnership 
issues  so-called  certificates  of  stock  rep- 
resenting a  specified  interest  in  such 
partnership,  and  one  of  the  partners  as- 
signs his  certificates  as  collateral  se- 
curity, and  afterwards  sells  them,  the 
purchaser  is  entitled  to  his  share  of  the 
partnership  property  and  to  demand  an 
accounting,even  though  the  certificates 
provided  that  they  were  not  transfer- 
able.    The  transfer  of  such  certificates 
as  security  need  not  be  recorded  as  a 
chattel  mortgage.  Rommerdahl  v.  Jack- 
son. 102  Wis.  444  (1899). 

2  Humphreys  v.  McKissock,  140  U.  S. 
304  (1891).  A  chattel  mortgage  does 
not  include  shares  of  stock,  although 


933 


§  ^64.] 


PLEDGE    OF    STOCK. 


[cri.  XXVI. 


a  delivery  is  not  strictly  and  legally  a  pledge.'  It  "may  have 
amounted  to  a  mortgage,  but  it  could  amount  to  nothing  more;  and 
if  a  mortgage,  it  did  not  place  the  mortgagee  in  possession,  but 
gave  him  merely  a  naked  right  to  have  the  property  appropriated 
and  applied  to  the  payment  of  his  debt."^ 

Where,  on  the  other  hand,  the  certificate  of  stock  is  delivered  to 
the  creditor  as  security,  it  is  evident  that  possession  of  the  property 
is  o-iven  to  the  creditor,  but  that  the  debtor  still  considers  the  stock 
to  be  his.  Such  a  transaction  is  a  pledge  and  not  a  mortgage;  and 
consequently,  since  the  giving  of  stock  certificates  as  security  is 
almost  invariably  effected  by  a  delivery  of  the  certificates,  a  mort- 
gage of  stock  may  be  said  to  be  jiossible,  but  is  not  technically  a 
correct  use  of  the  word.  The  delivery  of  a  certificate  of  stock  with 
a  blank  power  of  attorney,  as  collateral  security,  constitutes  a 
pledge  and  not  a  mortgage;'  and  the  same  rule  prevails  even  though 
an  absolute  transfer  or  registry  is  made  on  the  corporate  books.*  A 
mortgage  on  shares  of  stock  is  sometimes  made  by  transferring  the 
stock  to  the  trustee  of  the  mortgage.*  The  rights  and  duties  of  the 
trustee  in  such  cases  are  considered  elsewhere.®  A  mortgage  on 
shares  of  stock  does  not  prevent  the  corporation  controlled  by  such 
stock  from  issuing  a  mortgage  on  its  property;  and  it  is  no  breach 
of  trust  for  the  trustee  of  the  first  mortgage  to  be  the  trustee  of  the 

broad  enough   in  its  terms  to  do  so,  Super.  Ct.  385  (1890),  finally  decided  in 

where  both  parties  testify  that  it  was  158  N.  Y.  1  (1899), 

not  the  intent  to  include  the  stock,  and  5  See  §  317,  supra,  and  §j?  777, 852,  infrcu 

the  mortgagee  allowed  the  mortgagor's  Where  stock  is  mortgaged  and  delivered 

assignee  to  take  away  the  stock.    Youn-  to  the  trustee  of  the  mortgage,  this  is  a 

kin  V.  Collier,  47  Fed.  Rep.  571  (1891).  mortgage  and  not  a  pledge.    Toler  v. 

See  also  t^  317,  supra.  East  Tennessee,  etc.  Ry.,  67  Fed.  Rep. 

1  See  §  465,  infra.  168,  178  (1894). 

2  Christian  v.  Atlantic,  etc  R.  R,  133  «See  §  317,  supra.  Where  stock  is  de- 
U.  S.  233,  242  (1890).  posited    with    one    trust  company  as 

3  Mechanics',  etc.  Assoc,  v.  Conover,  additional  security  for  a  mortgage 
14  N.  J.  Eq.  219(1862);  Lewis  u.  Graham,  given  to  another  trust  company,  and 
4  Abb.  Pr.  106  (1857);  Irving,  etc.  Assoc,  upon  default  the  former  company  re- 
V.  Watson.  67  Pac.  Rep.  945  (Oreg.  1902).  fuses  to  deliver  the  stock,  and  the  latter 
But  see  Greene  v.  Dispeau,  14  R.  I.  575  trust  company  then  commences  a  suit 
(1884).  A  delivery  of  the  certificates  as  in  equity  to  compel  the  former  trust 
security  is  a  pledge  and  not  a  mortgage,  company  to  deliver  the  stock,  and  dur- 
George,  etc.  Co.  v.  Range,  etc.  Co.,  16  ing  that  suit  the  stock  declines  in  value, 
Utah,  59  (1897).  a  bondholder  secured  by  such  mortgage 

*Nabring  v.  Bank  of  Mobile,  58  Ala.  cannot  hold  liable  the  trust  company 
204(1877);  Wilson  v.  Little,  2  N.  Y.  443  holding  the  stock,  on  account  of  the 
(1849).  The  question  of  whether  a  sale  decline  in  value,  inasmuch  as  the  suit 
or  pledge  was  involved  in  the  relations  in  equity  determined  all  questions,  in- 
between  a  contractor  and  the  party  eluding  the  amount  of  damage.  Bracken 
who  financed  the  matter  for  him  was  v.  Atlantic  T.  Co.,  167  N.  Y.  510  (1901). 
discussed  in  Griggs  v.  Day,  58  N.  Y. 

934 


CH,  XXVI.]  PLEDGE    OF    STOCK.  [§  465. 

second  mortgage,  where  the  first  mortgage  does  not  prohibit  such 
second  mortgage,  the  stock,  by  the  terms  of  the  mortgage,  remain- 
ing in  the  name  of  the  mortgagor.^  A  contract  whereby  a  stock- 
holder delivers  certain  stock  for  money  to  be  paid  to  the  corpora- 
tion, the  money  to  be  repaid  out  of  dividends  and  in  other  ways 
and  the  stock  then  to  be  returned,  is  a  conditional  sale,  and  not  a 
loan  to  the  corporation.-  It  seems  that  a  stockholder  may  lease  his 
stock.  He  may  for  a  certain  sum  assign  to  another  all  dividends 
during  the  specified  time,  and  give  to  the  lessee  the  right  to  vote 
the  stock  during  that  time.' 

In  England,  where  certificates  of  stock  have  not  the  quasi-negotia- 
.  bility  that  they  have  in  America,  a  mortgage  of  stock  is  common 
and  is  enforced  as  a  mortgage,  and  the  mortgagee  after  a  reason- 
able time  may  sell  without  notice  to  the  mortgagor.* 

§  465.  JSoiv  a  pledge  of  stock  arises  or  is  made — Pledge,  hy  the 
corjwration  itself,  of  its  own  stoclz. —  A  pledge  of  stock  is  generally 
made  by  a  delivery  of  the  certificates  of  stock  indorsed  in  blank  to 
the  pledgee,  and  a  memorandum  in  writing  to  the  effect  that  the 
stock  is  held  in  pledge  is  generally  signed  and  given  by  the  pledgor 
to  the  pledgee.  The  pledge  may  be  to  a  third  person  for  the  bene- 
fit of  the  creditor.^  A  mere  direction  to  the  corporation  cannot 
constitute  a  pledge.^    But  where  no  certificate  has  been  issued  to 

1  Gasquet  v.  Fidelity,  etc  Co.,  75  Fed.  merely  because  he  places  in  a  tin  box 
Rep.  343  (1896).  in  a  safe-deposit  company  a  declaration 

2  Crimp  V.  MeCormick  Const.  Co.,  71  that  certain  securities  owned  by  him 
Fed.  Rep.  356  (1896).  are  held  as  collateral  security  therefor, 

3Zachry  v.  Nolan,  66  Fed.  Rep.  467  create  a  pledge  for  the  benefit  of  the 

(1895).  corporation  to  secure  the  paying  over 

*"  Express  powers  were  not  formerly  of  such  subscriptions  to  the  corpora- 
necessary  on  mortgages  of  stock,  or  in  tion.  Gii-ard  Trust  Co.  v,  Mellor,  156  Pa, 
the  instruments  of  defeasance  executed  St.  579  (1893). 

by  the  transferee;   nor  need  a  mort-        ^Gumming  v.    Prescott,  2  Y.  &  C. 

gagee  of  stock  now  rely  on  his  statutory  Exch.  488  (1837);  Lallande  v.  Ingram,  19 

power  in  order  to  realize  his  security  La,  Ann.  364  (1867),  the  court  saying: 

by  sale.     If  stock  is  itself  made  the  se-  "In  all  cases  of  pledges  the  pledgee 

curity  for  money,  and  the  day  appointed  must  be  put  in  possession  of  the  thing 

for  payment  is  passed,  the  mortgagee  pledged;  and,  if  it  be  a  claim,  the  evi- 

may  at  once  proceed  to  sell  the  stock,  dence  of  the  obligation  must  be  trans- 

and  repay  himself  principal  and  inter-  ferred  and  delivered.    Shares  in  stock 

est.  without  any  authority  from   the  cannot  be  pledged  unless  they  be  evi- 

mortgagor,  and  without  commencing  denced  by  certificates,  which  must  be 

an  action  for  foreclosure."    Deverges  v.  transferred     and     delivered     to     the 

Sanderman,  etc.  Co.,  [1901]  1  Chu  70.  pledgee."    If  the  certificates  of  stock 

•'»  See  §  317,  supra,  also  §  476,  infra,  are  not  delivered  to  the  pledgee  nor  to 

as  to  stock  placed  under  a  mortgage  any  one  for  him    there  is  no  pledge, 

deed  of  trust.  A  party  receiving  money  Succession  of  Lanaux,  46  La.  Ann.  1036 

paid  on  subscriptions  for  stock  does  not,  (1894). 

935 


§  465.] 


PLEDGE    OF    STOCK. 


[on. 


XXVI. 


the  stockholder  he  may  pledge  the  stock  by  an  instrument  in  writ- 
Actual  deliver}''  is  necessary  to  constitute  a  pledge.-   It  does  not 


ing. 


exist  although  the  president  of  a  railroad  company  has  its  bonds  in  his 
possession  and  states  that  he  holds  them  in  i)ledge  for  a  syndicate 
of  which  he  is  a  member.  An  equitable  pledge  may  be  enforced 
by  the  court,  but  only  where  there  is  a  contract  by  the  pledgor 
corporation  applying  to  specific  property.'  A  pledgee  does  not 
waive  his  pledge  although  he  returns  the  stock  to  the  pledgor  to 
be  sold.'*     A  mere  delivery  of  the  certificate  without  a  written 


1  First  Nat.  Bank  v.  Gifford.  47  Iowa. 
575  (1877),  where  such  a  pledgee  was 
protected  against  a  third  person  who 
had  advanced  the  money  to  the  pledgor 
to  purchase  the  stock.  See  also  Brig- 
ham  V.  Mead,  92  Mass.  24o  (ISC"));  Thorp 
V.  WoodhuU,  1  Sandf.  Ch.  411  (1844),  and 
§  3G0.  siqjra.  Unissued  stock  may  be 
pledged  by  the  person  entitled  to  it. 
When  issued,  it  at  once  becomes  a 
pledge.  Harris's  Appeal,  12  Atl.  Rep. 
743  (Pa.  1S88). 

2  Christian  v.  Atlantic,  etc.  R.  R,,  133 
U.S.  233  (1890),  the  court  saying:  "A 
pledge,  in  the  legal  sense,  requires  to 
be  delivered  to  the  pledgee.  He  must 
have  the  possession  of  it.  He  may  then, 
in  default  of  payment  of  the  debt  for 
which  the  thing  is  pledged,  sell  it  for 
the  purpose  of  raising  the  amount,  by 
merely  giving  proper  notice  to  the 
pledgor.  In  the  case  of  stocks  and  other 
choses  in  action,  the  pledgee  must  have 
possession  of  the  certificate  or  other 
documentary  title,  with  a  transfer  exe- 
cuted to  himself,  or  in  blank  (unless 
payable  to  bearer),  so  as  to  give  him 
the  control  and  power  of  disposal  of  it. 
Such  things  are  then  called  pledges,  but 
more  generally  collaterals,  and  they 
may  be  used  in  the  same  manner  as 
pledges  properly  so  called.  If  there  is 
no  transfer  attached  to  or  accompany- 
ing the  document,  it  is  imperfect  as  a 
pledge,  and  requires  a  resort  to  a  court 
of  equity  to  give  it  effect."  An  agree- 
ment that  certain  bonds  in  the  posses- 
sion of  a  third  party  shall  be  held  in 
pledge  is  not  a  good  pledge.  Actual 
delivery  is  necessary  to  constitute  a 


pledge.  Seymour  v.  Hendee,  54  Fed. 
Rep.  503  (Vt.  1893).  Where  stock  is 
placed  in  a  trustee's  hands,  and  a 
trustee's  certificate  is  taken  therefor,  a 
pledge  of  the  trustees's  certificate  is  not 
a  pledge  of  the  stock  sufficient  to  cut  off 
subsequent  attachments  of  the  stock. 
Bidstrup  v.  Thompson,  4."}  Fed.  Rep.  453 
(1891).  Where  one  party  loans  money 
to  another  party  to  buy  stock  in  a  cer- 
tain company,  such  stock  to  be  de- 
livered to  the  former  party  in  pledge, 
and  the  latter  party  uses  the  stock  for 
another  purpose,  the  loan  of  the  money 
is  not  a  mere  loan,  but  the  money  is 
impressed  with  a  trust,  and  this  trust 
follows  the  stock  except  as  against 
bona  fide  holders,  Barnard  v.  Hawks, 
111  N.  C.  333  (1892).  A  pledge  made  by 
a  separate  written  assignment  of  the 
stock,  the  certificates  remaining  in  the 
pledgor's  possession  and  continuing  to 
stand  in  his  name  on  the  corporate 
books,  is  not  good  as  against  the  pledg- 
or's receiver  who  takes  possession  of 
the  certificates.  Atkinson  v.  Foster,  134 
111.  472  (1890). 

3  Hook  V.  Ayers,  80  Fed.  Rep.  978 
(1897).  On  the  question  of  the  necessity 
of  a  delivery  in  order  to  constitute  a 
pledge,  see  also  Fidelity,  etc.  T.  Co.  v. 
Roanoke,  etc.  Co.,  81  Fed.  Rep.  439  (1896). 

*  Winslow  V.  Harriman  Iron  Co.,  43 
S.  W.  Rep.  698  (Tenn.  1897).  Even 
though  a  pledgee  who  holds  the  certifi- 
cates indorsed  in  blank  sends  them  to 
the  pledgor  to  be  executed  for  new  cer- 
tificates in  a  consolidated  company, 
and  even  though  the  pledgor  takes  out 
such  new  certificates  in  his  own  name, 


936 


CH.  XXVI.] 


PLEDGE    OF    STOCK. 


[§  465. 


transfer  is  sufficient  to  constitute  a  pledge,  but  such  a  pledge  is  im- 
perfect, and  to  enforce  it  a  suit  in  equity  is  necessary.^  A  delivery 
of  the  certificate  of  stock  indorsed  in  blank  is  sufficient  to  consti- 
tute a  pledge,  without  any  memorandum  in  writing  to  that  effect 
and  without  a  registry  of  the  same  being  made  on  the  corporate 
books.-    Koteven  a  provision  of  the  charter  or  a  by-law  of  the  cor- 


yet  this  is  not  a  waiver  of  the  pledge 
entitling  attaching  creditors  of  the 
pledo;or  to  precedence  over  the  pledgee. 
McClung  V.  Cohvell,  107  Tenn.  592 
(1901).  A  transaction  whereby  a  debtor 
delivers  certificates  of  stock  to  its 
creditor  in  pledge,  and  the  creditor  im- 
mediately returns  them  to  the  debtor, 
is  not  a  valid  pledge,  even  though 
the  debtor  told  the  corporate  officers 
of  the  pledge,  but  said  he  did  not  want 
the  transaction  to  appear  on  the  books, 
!ind  even  though  the  secretary  makes 
a  note  of  the  fact  on  the  stubs  of  the 
certificate  of  stock  book.  An  execu- 
tion subsequently  levied  upon  the  stock 
as  the  property  of  the  debtor  takes  pre- 
cedence over  the  alleged  pledge.  Mc- 
Fall  V.  Buckeye,  etc.  Assoc,  122  Ca!. 
468  (1898).  A  pledge  to  secure  the  debt 
of  another  is  not  waived  by  tempora- 
rily allowing  that  other  to  have  the 
.pledge  for  a  short  time.  Wing  v.  Hol- 
land T.  Co.,  5  N.  Y.  Supp.  384  (1889). 

1  See  Brewster  v.  Hartley,  37  Cal.  15 
(1869);  Robinson  v.  Hurley,  11  Iowa,  410 
(1860);  Christian  v.  Atlantic,  etc.  R  R.' 
133  U.  S.  238, 242  (1898).  See  also  g  476, 
infra:  but  see  Lallander.  Ingram,  19  La. 
Ann.  364  (1867).  Conf m,  Nisbit  r.  Macon, 
«tc.  Co.,  12  Fed.  Rep.  686  (1882).  See  also 
§  375,  supra.  A  pledge  of  the  certificates 
of  stock  is  effective  without  notice  to  the 
corporation.  Crescent  City,  etc.  Co.  v. 
Deblieux,  40  La,  Ann.  155  (1888).  A 
pledge  without  a  transfer  confers  no 
legal  title.  Wagner  v.  Marple,  10  Tex. 
Civ.  App.  505  (1895).  A  decision  of  a 
state  court  that  a  donatio  causa  mortis 
of  bank  stock  was  eflfective,  although 
the  donor  merely  delivered  the  certifi- 
cates of  stock  without  transferring  tiie 
same  on  the  back  thereof,  does  not  raise 


a  federal  question,  even  though  the 
stock  was  national-bank  stock.  Ley- 
son  V.  Davis,  170  U.  S.  36  (1898).  In  a 
suit  by  the  pledgee  to  have  a  judicial 
sale  of  the  stock,  an  assignee  of  the 
pledgor's  interest  is  a  necessary  party, 
where  the  pledgee  knows  of  such  as- 
signment, and  the  pledge  was  made 
merely  by  delivery  of  the  certificate 
without  any  transfer  on  the  back 
thereof.  Brown  v.  Hotel  Assoc,  88  N. 
W.  Rep.  175  (Neb.  1901).  A  pledge  of 
policies  of  fire  insurance  may  be  made 
by  delivery.  In  re  Little  River,  etc.  Co., 
92  Fed.  Rep.  585  (1899). 

2Spreckels  v.  Nevada  Bank,  113  Cal. 
272  (1896);  Masury  v.  Arkansas  Na- 
tional Bank,  93  Fed.  Rep.  603  (1899); 
Mount  Holly,  etc.  Co.  v.  Ferree,  17  N. 
J.  Eq.  117  (1864);  Finney's  Appeal,  59 
Pa.  St.  398  (1868);  Jarvis  v.  Rogers,  13 
Mass.  105  (1816);  Blouin  v.  Hart,  30  La. 
Ann.  714  (1878);  Merchants'  Nat.  Bank 
V.  Richards,  6  Mo.  App.  454  (1879);  aff' d, 
74  Mo.  77;  Broadway  Bank  v.  McEIrath, 
13  N.  J,  Eq.  24  (1860) ;  Cornick  v.  Richards, 
3  Lea  (Tenn.),  1  (1879);  Baldwin  v.  Can- 
field,  26  Minn.  43  (1879j;  Bitot  t\  John- 
son, 33  La.  Ann.  1286  (1881);  New  Or- 
leans, etc.  Assoc.  V.  Wiltz,  10  Fed.  Rep.  , 
330  (1881);  Continental  Nat.  Bank  v. 
Eliot  Nat.  Bank,  7  Fed.  Rep.  369  (1881); 
U.  S.  V.  Cutts,  I  Sumner,  133  (1832);  s.  C, 
25  Fed.  Cas.  745.  Cf.  State  v.  Jeffer- 
sonville  Nat.  Bank,  89  Ind.  302  (1883). 
A  pledge  may  be  made  by  signing  in 
blank  on  the  back  of  the  certificate  and 
pinning  the  certificate  to  the  note.  Mc- 
Clintock  V.  Central  Bank,  120  Mo.  127 
(1894).  As  to  how  a  pledge  may  be 
made,  see  also  Winslow  v.  Harriman 
Iron  Co.,  42  S.  W.  Rep.  698  (Tenn.  1897). 
The  pledgor  may.  by  word  of  mouth, 


937 


§  4C5.] 


PLEDGE  OF  STOCK. 


[CU.  XXVI. 


poration  to  the  effect  that  transfers  are  not  valid  until  registered 
on  the  corporate  books  can  prevent  a  pledge  of  stock  being  made 
by  a  mere  delivery  of  the  certificates  indorsed  in  bhxnk,  or  in- 
dorsed to  the  pledgee,  without  such  registry.'  The  provision  re- 
quiring such  registry  would  seem  not  to  concern  the  pled'-'ee  in 
an\'  way,  except  that  without  the  registry  he  could  not  claim  the 
dividends  from  the  corporation;-  and  in  a  few  states,  where  an  at- 
tachment of  the  stock  for  the  pleilgor's  debts  would  cut  off  a  pre- 
vious unregistered  vendee's  or  pledgee's  rights,  he  by  not  registering 
encounters  that  risk.'  Although  a  transfer  is  on  a  separate  piece 
of  paper,  and  is  not  acknowledged  as  required  by  a  rule  of  the  stock 

extend  stock  already  pledged  to  further    secure   a   previously  existing  debt   is 

void  if  made  within  tliree  months  of 
insolvency.  Ilackett  v.  Leominster, 
etc.  Bank,  68  N.  H.  274  (1895). 

2  See  g  408,  infra. 

3  Tlius,  in  states  where  an  attachment 
has  precedence  over  not  only  transfers 
without  registry  made  after  the  attach- 
ment is  levied,  but  over  unregistered 
transfers  made  before  the  levy  of  at- 
tachment, a  pledge,  like  a  sale  of  stock, 
is  protected  against  attachment  on  the 
jjledgor's  debts  only  by  registry.  Weston 
V.  Bear  River,  etc.  Co.,  5  Ca'.  18G  (1855); 
Williams  v.  Mechanics'  Bank,  5  Blatchf. 
59  (1802);  s.  C,  29  Fed.  Cas.  1370;  State 
Ins.  Co.  V.  Sax,  2  Tenn.  Ch.  507  (1875); 
State  V.  First  Nat.  Bank,  89  Ind.  303 
(1883);  Shipman  v.  ^tna  Ins.  Co.,  29^ 
Conn.  245  (1860);  Pinkerton  v.  Man- 
chester, etc.  R  R.,  42  N.  H.  424  (1861); 
Oxford  Turn  p.  Co.  v.  Bunnell,  6  Conn. 
552  (1827).  Cf.  Strout  v.  Natotna  W.  & 
M.  Co.,  9  Cal.  78  (1858).  But  the  pur- 
chaser at  the  execution  sale  is  not  pro- 
tected agamst  the  pledgee,  if  he  pur- 
chased with  notice.  Weston  v.  Bear 
River,  etc.  Co.,  6  Cal.  425  (1856).  And  if 
notice  of  the  pledge  is  given  to  the 
corporation,  the  pledgee  is  protected 
against  attachments,  although  no  reg- 
istry is  had.  State  Ins.  Co.  v.  Gennett, 
2  Tenn.  Ch.  100  (1874).  See  also  §  486 
et  seq.,  infra.  As  to  the  dividends,  the 
pledgee  is  entitled  to  them  as  against 
the  pledgor,  but  of  course  can  obtain 
them  from  the  corporation  only  by  ob- 
taining registry. 


advancements  by  the  pledgee.      Van 
Biarcom  v.  Broadway  Bank,  9  Bosw. 

532  (1862). 

I  McNeil  V.  Tenth  Nat.  Bank,  46  N.  Y. 
325  (1871);  Dickinson  v.  Central  Nat. 
Bank,  129  Mass.  279  (1880);  Fraser  v. 
Charleston,  11  S.  C.  486  (1878);  Factors', 
etc.  Ins.  Co.  v.  Marine,  etc.  Co.,  31  La. 
Ann.  149  (1879);  Pitot  v.  Johnson,  33  Lii. 
Ann.  1286  (1881);  Continental  Nat. 
Bank  v.  Eliot  Nat.  Bank,  12  Rep.  35 
(1881);  s.  C,  7  Fed.  Rep.  309:  Lowry  v. 
Commercial,  etc.  Bank,  Taney,  310 
(1848);  s.  C,  15  Fed.  Cas.  1040;  Blouin 
V.  Hart,  30  La.  Ann.  71-4  (1878);  Light- 
ner's  Appeal,  82  Pa.  St.  301  (1876);  U.  S. 
V.  Cutts,  1  Sumner,  133  (1832);  s.  C, 
25  Fed.  Cas.  745;  Leitch  v.  Wells,  48  N. 
Y.  585  (1872);  Commercial  Bank  v.  Kort- 
right,  22  Wend.  348  (1839),  aCf'g  20 
Wend.  91;  Otis  v.  Gardner,  105  111.  436 
(1883).  As  regards  such  provisions  re- 
quiring registry,  a  pledge  of  stock 
stands  on  the  same  footing  as  a  sale  of 
stock.  See  also  §§  379, 432,  si;_pra.  Where 
a  person,  as  preliminary  to  making  a 
loan  with  stock  as  collateral,  indorses 
his  stock  over  to  the  lender  and  leaves  it 
with  the  corporate  secretary,  and  then 
the  loan  is  abandoned,  the  secretary  is 
bound  to  deliver  back  the  stock.  Gal- 
vin  V.  Mac  Mining,  etc.  Co.,  14  Mont. 
508  (1894).  The  unregistered  pledge  is 
protected  against  the  pledgor's  assignee 
in  bankruptcy.  Re  Shelley,  34  L.  J. 
(Bankr.)  6  (1864).  Under  the  New 
Hampshire  statute  a  pledge  of  stock  to 


938 


CII. 


-XXVI.] 


PLEDGE   OF    STOCK. 


465. 


exchange,  nevertheless  the  pledgee  may  be  a  honafide  holder.^  An 
apparently  absolute  transfer  of  stock,  whether  registered  on  the 
corporate  books  or  not,  may  be  shown  to  be  a  pledge,  and  parol 
evidence  is  admissible  to  prove  that  fact.'' 

1  Smith  V.  Savin,  141  N.  Y.  315  (1894).    of  plaintiff,  contradicted  by  defendant, 

2  Brick  V.  Brick.  98  U.  S.  514  (1878);    when  the  full  value  of  the  stock  was 


Wilson   u.   Little,   2  N.   Y.  443  (1849); 
Ginz  V.  Stumph,  73  Ind.  209  (1880);  New- 
ton V.  Fay,  92  Mass.  505  (1865);  McMa- 
hou  V.  Macy,  51  N.  Y.  155(1872);  Becher 
V.  Wells,  etc.  Co.,  1  Fed.  Rep.  276  (1880j; 
Burgess  v.  Seligman,  107  U.  8.20(1882): 
Pinkerton  v.  Manchester,  etc.  R.  R,  42 
N.  H.  424  (1861);  Butman  v.  Howell,  144 
Mass.  66  (1887);  Ayer  v.  Seymour,  5  N. 
Y.  Supp.  650  (1889).    An  absolute  trans- 
fer of  stock  may  be  shown  to  have  been 
in  trust  only,  the  stock  to  be  returned 
upon  the  termination  of  a  lease.    Town 
of  Mt.  Morris  v.  Thomas,  158  N.  Y.  450 
(1899).     A  depositor  in  a  bank  who  has 
been  induced  to  take  from  the  bank  its 
stock  as  security  may  show  by  parol 
evidence  that  he  took  sucli  stock  as 
collateral  security,  and  not  in  liquida- 
tion of  his  deposit,     Williams  v.  Ameri- 
can Nat.  Bank,  85  Fed.  Rep.  376  (1898); 
aff'd,  101  Fed.  Rep.  943  (1900).     A  cer- 
tificate of  stock  indorsed  in  blank  may 
be  shown  to  have   been   delivered  in 
pledge.     Riley  v.   Hampshire   County 
Nat.  Bank,  164  Mass.  483  (1895).    It  may 
be  a  question  of  fact  whether  the  deliv- 
ery of  certificates  of  stock  is  made  as  a 
sale  or  as  collateral  security.     The  pre- 
sumption is  that  it  is  collateral  secu- 
rity wliere  the  facts  show  a  prior  debt, 
and  there  is  no  proof  as  to  the  purpose 
of    the  transfer.     Borland  v.    Nevada 
Bank,  99  Cal.  89  (1893).     This  subject  is 
somewhat  similar  to  the   claim  of  a 
.  person  that  another  person  purchasing 
stock  did  so  as  agent  for  the  former. 
"Loose,  vague,and  indefinite  expressions 
are  insufficient  to  create  such  a  trust. 
The   intention   must  be  evinced  with 
clearness  and  certainty."  Levi  v.  Evans, 
57   Fed.  Rep.   677   (1893).      See  §  321, 
supra^    An  apparent  sale  of  stock  is  not 
proven  to  be  a  pledge  on  the  evidence 


paid  and  a  receipt  therefor  given  by 
the  plaintiff.  Travers  v.  Leopold,  124 
111.  431  (1888).  A  pledgor  may  bring  a 
suit  for  an  accounting  and  to  establish 
the  fact  that  the  transfer  of  stock  was- 
a  pledge,  and  he  may  restrain  a  suit  by 
the  pledgee  against  the  corporation  for 
the  stock.  McDowell's  Appeal,  123  Pa» 
St.  381  (1889).  What  appears  to  be  an  ab- 
solute sale  may  be  shown  to  be  a  pledge, 
but  the  proof  must  be  clear  and  con- 
clusive. McLeod  r.  Weldon,  1  New 
Brunswick  Eq.  Rep.  181  (1895).  The 
relation  of  pledgor  and  pledgee  may  be 
proved  by  oral  testimony  of  the  pledgee 
that  he  bought  the  stock  in  the  name 
of  the  pledgor,  and  became  surety  on 
money  borrowed  for  that  purpose,  and 
that  the  stock  was  deposited  in  a  cer- 
tain way  as  security.  Schwind  v. 
Boyce,  51  Atl.  Rep.  45  (Md.  1902).  Where 
a  written  contract  constitutes  a  sale  of 
stock  it  cannot  be  shown  to  be  a  pledge 
unless  a  mutual  mistake  or  fraud  or 
other  inequitable  conduct  is  shown. 
Miller  v.  Carpenter,  68  N.  Y.  App.  Div. 
346  (1902).  An  apparently  absolute  sale 
of  stock  cannot  be  shown  to  be  merely 
a  pledge,  unless  the  proof  is  clear,  plain 
and  convincing.  Wilson  v.  Cunning- 
ham, 67  Pac.  Rep.  118  (Utah,  1901). 
Where  the  owner  of  stock  has  pledged 
all  of  it  to  different  parties,  and  ar- 
ranges with  one  of  them  to  take  up  all 
the  stock  and  the  latter  does  so,  and  for 
several  years  treats  it  as  his  own,  and 
the  lower  court  finds  that  the  agree- 
ment was  that  the  pledgee  should  own 
it,  the  upper  court  will  not  disturb  the 
decision,  especially  where  the  pledgor 
claims  that  he  transferred  the  stock  to 
avoid  paying  other  creditors.  Hukill 
V.  Yoder,  189  Pa.  St.  233  (1899).  See  also 
79  N.  Y.  App.  Div.  130. 


939 


§  4G5.] 


rLKDGE    OF    STOCK. 


[cii.  xxvr. 


A  corporation  may  pledge  its  unissued  stock/  and  the  pledgee 
is  not  liable  as  an  absolute  stockholder  on  such  stock.^  The  ques- 
tion of  usury  in  the  note  secured  by  a  pledge  of  stock  may  affect 
the  pledge  itself.'     A  pledge  is  not  illegal  though  it  secures  a  greater 


'Burgess  v.  Seligman,  107  U.  S.  20 
(1882);  Combination  Trust  Co.  v.  Weed, 
2  Fed.  Rep.  24  (1880);  Melvin  v.  Lamar 
Ins.  Co.,  80  111.  446  (1875);  Protection 
Life  Ins.  Co.  v.  Osgood,  93  III.  69  (1879); 
Re  City  Terminus  Hotel  Co.,  14  Eq.  10 
(1872);  Union  Sav.  Assoc,  v.  Seligman. 
t)2  Ma  635  (1884),  overruling  Griswold  v. 
Seligman,  72  Mo.  116.  Contra,  Brewster 
V.  Hartley.  37  Cal.  15  (1869).  See  ^  247, 
supru,  p.  533,  note  2.  Where  a  corpora- 
tion pledges  its  own  stock,  the  pledgee 
may  sell  that  stock  for  non-payment  of 
the  debt  at  less  than  par.  This  rule 
prevails  even  though  the  charter  pro- 
vides that  the  stock  shall  not  be  sold 
below  par.  Peterborough  R  R  v. 
Nashua,  etc.  R  R,  59  N.  H.  385  (1879). 
Unissued  stock  may  be  issued  by  the 
corporation  as  a  pledge  ko  secure  a  loan, 
and  the  corporation  cannot  set  up  that 
it  was  issued  at  less  than  par  in  viola- 
tion of  the  constitution.  The  issue  is 
good  in  the  hands  of  the  pledgee  to  the 
extent  of  the  loan.  Gasquet  v.  Crescent 
City  B.  Co.,  49  Fed.  Rep.  496  (1892). 
Where  the  company  issues  its  stock  as 
collateral  security  to  notes  given  to  it 
by  its  subscribers  in  payment  for  such 
stock,  and  then  sells  the  notes,  the 
stock  follows  the  notes  and  may  be 
subjected  to  the  payment  of  judgments 
on  the  notes.  If  the  corporation  has 
issued  the  stock  to  others  it  must  pay 
the  judgments.  Houston,  etc.  Ry.  x\ 
Bremond,  66  Tex.  159  (1886).  A  mort- 
gage is  valid  as  against  the  corpora- 
tion giving  it,  although  the  officers 
give  to  the  mortgagee  their  individual 
notes  as  additional  security  and  cause 
the  corporation  to  issue  stock  to  them- 
selves without  payment,  vi'hich  they 
deposit  also  as  collateral  with  the  mort- 
gagee. The  giving  of  the  mortgage  is 
not  an  increase  of  indebtedness  such  as 
is  prohibited  by  the  Pennsylvania  con- 


stitution. Powell  V.  Blair,  133  Pa.  St  5.50 
(1890).  The  unissued  stock  of  the  corpo- 
ration may  be  issued  to  one  of  its  cred- 
itors as  collateral  security.  Parberry  v. 
Woodson  Sheep  Co.,  18  Mont,  317  (1896). 
The  appointment  of  a  receiver  does  not 
affect  the  rights  of  a  pledgee  from  the 
cor|)oration  prior  to  such  appointment. 
The  jtledgee  may  selL  National,  etc. 
Bank  v.  Benbrook,  etc.  Co.,  27  S.  W. 
Rep.  297  (Tex..  1894).  A  corporation 
may  j)ledge  treasury  stock  to  a  director. 
Where  treasury  stock,  instead  of  being 
given  to  the  corporation,  is  placed  in  the 
hands  of  trustees  under  a  trust  agree- 
ment, such  agreement  may  be  modi- 
fied by  a  new  agreement,  and  the  stock 
turned  over  to  the  corporation.  Kins- 
man V.  Fisk,  83  Hun,  494  (1895).  Ques- 
tions relative  to  the  pledge  by  a  com- 
pany of  its  own  bonds  are  considered 
elsewhere.  See  §  763,  infra.  A  corpo- 
ration may  pledge  its  bonds  at  less  than 
par.  Duncomb  v.  N.  Y.  etc.  R  R,  84 
N.  Y.  190  (1881).  In  this  case  $34,000  of 
bonds  were  pledged  to  secure  an  over- 
due note  for  $5,000  and  interest.  The 
court  said  (p.  202)  that  the  pledgee  "  had 
unquestionably  the  right  to  take  as 
large  a  'margin'  for  his  loan  as  the 
borrower  was  willing  to  grant.  Nor 
can  we  discern  any  valid  reason  why 
a  railroad  corporation  may  not  dispose 
of  its  bonds  by  way  of  pledge  as  well 
as  of  sale;  and  in  the  absence  of  proof 
that  the  proceeds  of  the  loan  were,  with 
the  knowledge  of  both  parties,  to  be 
applied  to  some  purpose  not  authorized 
b}'  the  statute  permitting  their  issue, 
we  can  see  no  reason,  as  has  already 
been  said,  why  they  might  not  be  used 
as  a  pledge  to  secure  an  indebtedness 
already  existing.'' 

2See§§  247,  309-313,  supra. 

3  See  Little  v.  Barker,  1  Hoffm.  Ch. 
487  (1840);  and  see  Frost  v.  Stokes,  55 


940 


CH.  XXVI.]  PLEDGE    OF    STOCK.  [§  46G. 

amount  than  the  pledgee  bank  is  entitled  to  loan  to  one  person.^ 
A  lonafide  pledgee  of  stock  is  protected  against  claims  of  former 
owners  of  that  stock  to  the  same  extent  that  an  absolute  purchaser 
of  the  stock  would  be  protected,  with  the  single  exception  that  the 
power  of  a  trustee  or  agent  to  sell  stock  does  not  give  him  power 
to  pledge  it.^  The  quasi-negotiability  of  certificates  of  stock  pro- 
tects a  pledgee  and  a  vendee  alike.^  The  negotiability  of  a  note  is 
not  destroyed  by  a  provision  that  certain  bonds  are  given  as  collat- 
eral security  for  its  payment.*  Where  a  trust  company  has  orally 
agreed  to  hold  certain  bonds  for  delivery  in  accordance  with  cer- 
tificates issued  by  another  company,.and  subsequently  the  trustcora- 
pany  ioans  money  to  such  other  company  and  takes  such  bonds  as 
security,  the  holders  of  the  certificates  may  hold  the  trust  company 
liable  for  not  protecting  the  certificates.^ 

\yhere  a  pledge  is  made  by  depositing  stock  in  the  hands  of  a 
third  party,  or  where  stock  is  delivered  to  a  trustee  of  a  mortgage 
deed  of  trust,  various  questions  arise,  which  are  considered  else- 
where.^ 

§  466.  Pledgee  may  liave  the  stocl:  registered  In  Ins  own  name  or 
the  name  of  another. —  Where  certificates  of  stock  indorsed  in  blank 
are  delivered  to  a  person  in  pledge  as  collateral  security  for  a  debt 
or  for  any  other  purpose,  the  pledgee  has  a  right  to  fill  in  the  blanks 
and  have  the  stock  registered  in  his  own  name  on  the  corporate 
books;'  or  the  pledgee  may  have  the  stock  registered  in  the  name 

N.  Y.  Super.  Ct.  76  (1887),  holding  that  sory  note  negotiable  in   form  recites 
the  New  York  statute  of  1883  allows  that  it  is  secured  by  collateral  and  that 
any  interest  if  the  debt  is  on  demand  the  latter  maybe  sold  does  not  destroy 
and  is  over  $5,000,  and  stock  is  pledged,  the  negotiability  of  the  note.  *1  Daniel 
The  New  York  statute  of  1882.  as  to  Neg.  Inst.,  4th  ed.,  j-g  1774-1784. 
bankers  loaning  on  collateral,  was  ap-  5  Hubbard  v.  Manhattan  Trust  Co.,  87 
plied  in  Thomas  v.  Coffin.  62  Fed.  Rep.  Fed.  Rep.  51  (1898). 
665  (1894),  a  case  in  which  the  taking  «  See  §  317,  supra. 
of  commissions  was  also  involved.     If  '  Skiff  v.  Stoddard,  63  Conn.  198  (1893); 
stock  is  pledged  to  secure  an  usurious  Hubbell  v.   Drexel,   11    Fed.    Rep.   US- 
note,  the  pledgor  may,  under  the  New  (1882);  Re  Angelo,   5   De  G.  &  S.  278 
York  statute,  sue  to  recover  back  the  (1852);  Horton  v.  Morgan,  19  N.  Y.  170 
stock  without  paying  the  debt.     Dick-  (1859);  Union,  etc.  Bank  v.  Farrington. 
son  V.   Valentine,   6  N.   Y.   Supp.   540  13  Lea  (Tenn.),  333(1884);  Heath  u.  Gris- 
(1889);  Cousland  v.  Davis,   4  Bosw.  619  wold,  5  Fed.  Rep.  573(1881),  holding  also 
(1859).     See  also  Birdseye's  Statutes,  2d  that  a-  surety  is  not  thereby  discharged ; 
ed.,  p.  1696.  Smith  v.  Traders'  Nat.  Bank,  82  Tex. 
iMcClintock  v.  Central   Bank,   etc.,  368(1891);  Day  u  Holmes,  103  Mass.  306 
120  Mo.  127  (1894).  (1869);  Fitchburg  Sav.  Bank  v.  Torrey, 

2  See  g§  326,  351,  supra.  134  Mass.  239  (1883).  also  holding  that  a 

3  See  ^  432,  supra.  release  of  the  stock  by  the  pledgee  re- 

4  Valley  Nat.  Bank  v.  Crowell,  148  Pa.  leases  a  surety;  Fay  v.  Gray,  124  Mass. 
St  284  (1892).    The  fact  that  a  promis-  500  (1878).     Cf.  State  v.  Smith,  15  Greg. 

941 


^  407.]  PLEDGE    OF   STOCK.  [CH.  XXVI. 

•of  another  person,  in  order  that  he  may  protect  his  special  prop- 
erty in  the  stock  and  at  the  same  time  not  be  liable  thereon.'  It 
is  proper  and  legal  for  a  corporation  to  add  to  the  name  appearing 
on  the  stock  certificate  the  words  "as  pledgee,"  or  "as  collateral 
security,"  or  similar  words.^  In  some  states  there  are  statutes  as 
well  as  decisions  to  the  effect  that  notice  to  the  corporation  that  a 
person  holds  as  pledgee  certain  certificates  of  stock,  which  stand 
on  the  books  of  the  company  in  the  pledgor's  name,  prevents  an  at- 
tachment against  the  pledgor  from  reaching  more  than  the  equity 
of  redemption  in  such  stock.' 

§  407.  Stoclc-hrokcr  2)un'hasing  stocli  for  a  customer  on  a  margin 
is  a  pJt'ihjee  of  the  stock. —  It  has  been  well  established  that,  where 
a  stock-broker  purchases  stock  on  an  order  from  his  customer,  and 
the  customer  does  not  pay  for  the  stock,  but  deposits  with  the  bro- 
ker a  sum  of  money  called  a  "  margin,"  to  protect  the  broker  against 
loss,  the  broker  is  bound  to  have  on  hand  the  stock  so  purchased 
during  the  entire  time  of  the  contract,  and  has  the  rights,  duties, 
and  liabilities  of  a  pledgee,  with  the  customer  as  a  pledgor.*  The 
broker  under  such  circumstances  must  conform  to  all  the  rules 
governing  a  pledgee's  attitude  towards  a  pledgor.  He  cannot  re- 
pledge,  nor  can  he  sell  without  due  notice,  unless  such  rights  are 
given  by  the  customer,  the  pledgor.     A  broker  has  no  right  to  re- 

98,   114  (but  see    p.   133)   (1887).     The  447(1898).   A  pledgee  has  power  to  have 

pledgee  may  sue  to  have  the  pledge  the  stock  transferred  on  the  corporate 

transferred  to  himself  and  determine  books,  and  if  it  has  agreed  to  hold  cer- 

the  rights  of  other  claimants.     New-  tain  stock  as  security  for  a  third  per- 

combe  v.  Lottiraer,  12  N.  Y.  Supp.  381  son's  note  and  fails  to  obtain  a  proper 

(1890).    The  corporation  must  allow  the  transfer,  it  is  liabla    First  Nat.  Bank  v. 

registry.     Cornick  v.  Richards,  3  Lea  Park,  91  N.  W.  Rep.  826  (Iowa,  1902). 

(Tenn.),  1  (1879).   Where  a  contract  does  i  Day  v.  Holmes,  103  Mass.  306  (1869); 

not  merely  pledge  stock,  but  gives  the  Heath  v.  Griswold,  5  Fed.  Rep.  573  (1881); 

creditor  the  legal  title  and  unlimited  Anderson   v.  Philadelphia  Warehouse 

power  of  disposition,  the  creditor  may,  Co.,  Ill  U.  S.  479  (1884).    See  also  g  470, 

by  suit  in  equity,  compel  the  company  infra. 

to  allow  a  transfer,  and  the  transferrer  2  See  §  247,  supra,  and  ch.  XXVH, 
need  not  be  made  a  party  to  the  suit,  infra. 
Skinner  v.  Fort  Wayne,  etc.  R.  R,  58  3  Seech.  XXVII,  tn/ra. 
Fed.   Rep.   55   (1893).     In    California  a  < Baker  v.  Drake.  66  N.  Y.  518  (1876); 
pledgor  may  enjoin    a  pledgee   from  Markham  r.  Jaudon,  41  N.  Y.  235  (1869); 
transferring  stock  into  his  name  for  the  and  see  §  457,  oh.  XXV,  supra.  A  broker 
purposeof  controlling  an  election,  which  holding  stock  as  collateral  security  on 
otherwise   the  pledgor  would  control,  a  margin  does  not  hold  the  stock  in  a 
where  the  statutes  of  the  state  provide  fiduciary  capacity.     McBurney  v.  Mar- 
for  recording  such  a  pledge  without  a  tin,  6  Rob.  (N.  Y.)  502  (1866);  Lambert- 
transfer  of  the  stock  itself.     Spreckels  son  v.  Van  Boskerk,  49  How.  266,  4  Hun, 
V.  Nevada  Bank,  113   Cal.  272  (1896);  628(1875). 
Tom,  etc.  Ca  v.  Green,  11  Colo.  A  pp. 

942 


CH.  XXVI.] 


PLEDGE   OF    STOCK. 


[§  467. 


pledge  his  customer's  stocks  or  bonds,  carried  by  the  broker  as  col- 
lateral or  on  a  margin,  unless  the  debt  is  transferred  at  the  same 
time,  or  unless  an  express  contract  authorizes  such  repledge.* 


1  Dykers  v.  Allen,  7  Hill,  497  (1844).  A 
broker  has  no  right  to  repledge  stock 
held  by  him  for  a  customer  to  secure 
margins,  and,  even  if  the  customer  au- 
thorizes him  to  repledge,  this  author- 
ity sustains  a  repledge  only  to  the  ex- 
tent of  the  amount  due  from  the  cus- 
tomer, and  the  broker  must  be  ready 
at  all  times  to  return  the  stock  to  the 
customer  upon  the  latter  paying  the 
debt.    The  repledgee,  under  the  usual 
transfer  in  blank  on  the  back  of  the 
certificate,  is  not  a  bona  fide  pledgee. 
German  Sav.  Bank  v.  Renshaw,  78  Md. 
475  (1894).    Where  it  was  understood 
between  a  firm  of  brokers  and  its  cus- 
tomers, for  whom  and  on  whose  order 
it  bought  stocks  on  the  security  of  a 
margin,  that  the  firm  might,  according 
to  the  usual  course  of  business,  pledge 
or  hypotlieoate  as  security  for  loans  to 
the    firm  the  stocks    thus    bought,   it 
was  held  that  a  mere  pledge  of  such 
stocks  would  not  be  of  itself  a  conver- 
sion. Chamberlain  v.  Greenleaf,  4  Abb, 
N.  Cas.  178  (1878).    See  also  Lawrence 
V.  Maxwell,  58  Barb.  511  (1871);  G  Lans. 
469;  53  N.  Y.  19.     In  Wood  v.  Hayes, 
81  Mass.  375  (1860),  it  was  held  that  "  a 
broker  who  advanced   money  to  buy 
Hock  for  another,  and  held  it  in  his  own 
name,  might,  so  long  as  he  had  not  been 
paid  or  tendered  the  amount  of  his  ad- 
vances, pledge  it    as  security  for  his 
own  debt  to  a  third  person,  without 
making  himself  liable  to  an  action  by 
his  employer;  and  this  upon  the  ground 
that  the  contract  was  conditional  to 
•deliver  the  shares  upon  the  payment 
of  the  money."    Approved  in  Covell  v. 
Loud,  135  Mass.  41  (1883),  where  it  was 
held  that,  where  the  customer  is   un- 
able to  advance  further  margin,  and 
tells  the  broker  to  do  the  best  he  can, 
he  may  sell  without  notice.    The  de- 
cided weight    of   authority,  however, 
holds   that,   unless    the  power  is  ex- 


pressly given  to  the  broker  to  repledge 
the  stock,  he  cannot  legally  repledge  it. 
A  broker  has  no  right  to  repledge  the 
stocks  held  by  him  as  collateral  to  ad- 
vances to  a    customer,  especially    so 
after  the  customer  has  repaid  the  ad- 
vances.    Van  Voorhis  v.  Rea,  153  Pa, 
St.  19  (1893).    Where  a  broker,  a  gra- 
tuitous bailee  of  corporate  stock,  de- 
livers the  same  to  the  company  with- 
out authority,  and  the  stock  is  converted 
to  the  use  of  the  company,  the  bailee  is 
liable  for  its  value,  irrespective  of  what 
his    intentions  were    in  the  premises. 
In  such  case  the  bailor  may  recover  the 
value  of  the  stock  at  the  time  of  con- 
version, with  all  dividends  paid  from 
the  time  of  delivery,  together  with  in- 
terest on  the  value  of  the  stock  from 
date  of  conversion,  and  on   the   divi- 
dends from  date  of  respective  payments. 
Hubbell  V.  Blandy,87Mich.  209(1891).   A 
broker  has  no  implied  power  to  repledge. 
Skiflf  V.  Stoddard,  63  Conn.  198  (1893). 
Where  a  broker  repledges  stock  carried 
by  him  on  a  margin,  the  customer  can- 
not, upon  the  failure  of  the  broker, 
have  all  the  broker's  stock  of  that  class 
first  applied  in  discharge  of  the  claim. 
Skiff  V.  Stoddard,  63  Conn.  198  (1893); 
Jamison's  Assigned  Estate,  3  Pa.  Dist. 
217  (1894).  Where  the  pledgee  converts 
the  pledge  by  selling  it,  and  then  as- 
signs for  the  benefit  of  creditors,  the 
pledgor  comes  in  as  any  other  creditor, 
and  not  as  a  preferred  creditor.      Re 
Jamison's  Estate,  163  Pa.  St.  143  (1894), 
holding  also  that  the  debt  due  from  the 
pledgor  to  the  pledgee  may  be  set  off. 
Where  the  pledgee,  without  the  knowl- 
edge of  the  pledgor,  sells  one  of  the 
notes,  and  gives  with  it  a  part  of  the 
collateral  as  security,  the  pledgor  may 
pay  that  note  and  take  all  the  security 
so  given  to  the  repledgee.     The  first 
pledgee  cannot  claim  any  lien  on  the 
part  so  repledged.    McDonald  v.  Grant, 


943 


§  4CS.] 


PLEDGE    OF    STOCK. 


[cn. 


XXVI. 


In  Massachusetts  different  rules  prevail.  In  that  state  the  rule 
is  clearly  laid  down  that  a  broker  is  not  a  pledgee  of  stocks  which 
he  buys  for  his  customer  on  a  margin,  but  that,  on  the  contrary, 
the  broker  is  the  owner  of  the  stock  and  that  he  is  not  bound  to 
keep  the  stock  of  one  customer  distinct  from  that  of  another,  but 
mav  take  a  sinfrle  certificate  in  his  own  name  for  several  customers, 
and  may  pledge  the  stock  for  advances  made  to  himself,  and  that 
he  is  the  person  to  be  taxed  on  such  stock.'  "Where  a  broker  sells 
his  client's  stock  illegally,  the  measure  of  damages  in  a  suit  by  the 
client  is  the  difference  between  the  price  at  which  the  stock  was 
sold  and  the  highest  market  price  within  a  reasonable  time  there- 
after.2 

§  4G8.  Miscf'lJaneous  rif/hts  ofphdf/re  and phdffor  —  Dividruds  — 
Hcoff/aui-ations  —  The  cquiti/  of  redemption. —  Dividends  declared 
during  the  continuance  of  the  pledge  belong  to  the  pledgee,^  and 
even  though  the  latter  is  not  registered  as  owner  on  the  corporate 
books,  yet,  if  the  corporation  has  notice  of  the  pledge,  it  must  pay 
the  dividends  to  the  pledgee.^     AVhere  a  certificate  of  stock  ha& 


N.  Y.  L.  J.,  July  16,  1895,  Supr.  Ct.  Sp.  T. 
A  broker  may  pledge  his  customer's 
securities  for  an  amount  not  exceed- 
ing the  amount  due  from  tiie  cus- 
tomer, but  the  broker  must  not  put 
the  securities  beyond  the  reach  of  the 
customer,  nor  mingle  such  securities 
with  others  and  hypothecate  all  of 
them  for  a  large  amount;  the  reason  of 
this  decision  being  that,  so  long  as  the 
customer  could  go  to  the  pledgee  and 
redeem  the  securities  without  loss,  he, 
the  customer,  was  not  injured.  Doug- 
las r.  Carpenter,  17  N.  Y.  App.  Div.  329 
(1897).  On  this  subject,  see  also  §  471, 
infra,  and  §  457,  supra. 

iThe  court  realized,  however,  that  its 
decision  was  not  in  accord  with  the 
current  of  authority  and  said,  "  the  Eng- 
lish doctrine  seems  to  be  the  same  as 
that  of  this  commonwealth,  so  that  we 
are  not  left  quite  alone  in  a  desert  of 
logic."  Chase  v.  City  of  Boston,  62  N. 
E.  Rep.  1059  (Mass.  1902).  In  Massa- 
chusetts a  broker  who  purchases  stock 
for  a  customer  on  a  margin  is  not  a 
pledgee,  but  is  merely  under  contract 
to  deliver  the  stock  on  payment  of  the 
balance,  and  hence  he  may  pledge  the 
stock  or  sell  it,  and  is  not  in  default 


until  the  customer  has  tendered  the 
balance  and  demanded  the  stock.  If 
the  broker  is  adjudicated  a  bankrupt 
the  customer  may  treat  this  as  a  breach 
of  contract  and  prove  his  claim.  In  re 
Swift.  105  Fed.  Rep.  493  (1900).  See  also 
g  457,  supra. 

2  Wolff  V.  Lockwood.  70  N.  Y.  App. 
Div.  569  (1902).  The  measure  of  dam- 
ages in  a  suit  by  a  customer  against  a 
broker  for  an  unauthorized  sale  of  stock 
is  the  difference  between  the  price  at 
which  it  was  sold  and  the  highest  price 
within  a  reasonable  time  thereafter, 
which,  in  this  case,  the  court  fixed  at 
thirty  days.  Burhorn  v.  Lockwood,  71 
N.  Y.  App.  Div.  301  (1902). 

3  Herrman  v.  Maxwell,  47  N.  Y.  Super. 
Ct.  347  (1881).  And  the  pledgor  who 
collects  them  holds  them  in  trust  for 
the  pledgee.  Hill  v.  Newichawanick 
Co..  8  Hun,  459;  affirmed,  71  N.  Y.  593 
(1877).  Where  a  pledge  of  stock  is  re- 
newed and  a  new  note  giten,  dividends 
accruing  before  the  renewal  go  to  the 
pledgor.  Fairbank  v.  Merchants'  Nat. 
Bank,  132  111.  120  (1889). 

4  In  Central,  etc.  Bank  v.  Wilder,  32 
Neb.  454  (1891),  it  was  held  that  not 
only  was  the  pledgee  entitled  to  the 


944 


CH.  XXVI.] 


PLEDGE    OF    STOCK. 


[§  468. 


been  pledged,  but  no  transfer  has  been  made  on  the  corporate 
books,  and  a  dividend  is  paid  to  the  pledgor,  the  pledgee  may  bring 


dividends,  but  was  entitled  to  them  al- 
tiiough  the  stock  stood  on  the  corporate 
books  in  thenameof  the  pledgor,  wliere 
the  officers  knew  all  about  the  pledge. 
A  pledgee  is  entitled  to  collect  the  div- 
idends, and  in  some  instances  may  do 
so  even  though  the  stock  is  not  trans- 
ferred to  him  on  the  books,  it  being 
shown  that  the  officers  knew  of  the 
pledge.     Guarantee  Co.  v.  East  Rome 
Town  Co.,  96  Ga.  511  (1895).     A  pledgee 
of  stock,  even  though  not  recorded  as  a 
stockholder,  is  entitled  to  dividends  de- 
clared after  the  pledge  was  made,  as 
against   a    claim    of    the    corporation 
against  the  pledgor  as  an  offset.    Gem- 
mell  V.  Davis,  75  Md.  546  (1892).   Where 
a  stockholder  of  record  pledges  his  cer- 
tificates of  stock,  and  no  transfer  is 
made  on  the  books,  and  subsequently  a 
dividend   is   declared,  and   after  such 
dividend   is  payable,  but  before  it  is 
actually  paid,  the  pledgee  presents  to 
the   company  the  stock   for  transfer, 
with  a  written  request  of  the  pledgor 
to  the  same  effect,  together  with  an  as- 
signment by  the  pledgor  to  the  pledgee 
of  the  dividend,  it  is  no  defense  to  the 
company  that  it  has  a  claim  against  the 
pledgor  for  a  personal  debt,  or  for  a 
debt  of  a  firm  in  which  he  is  interested. 
American,  etc.  Bank  v.  Nashville,  etc. 
Co.,  36  S.  W.  Rep.  960  (Tenn.  1896).   The 
corporation  is  liable  to  a  pledgee,  to 
whom  the  stock  has  been  transferred 
on  the  books,  for  dividends  paid  to  the 
pledgor.     The  acceptance  of  part  pay- 
ment, etc.,  by  the  pledgee  from  the 
pledgor  does  not  waive  his  cause  of  ac- 
tion against  the  company.      Boyd  v. 
Conshohocken  Worsted  Mills,  149  Pa, 
St.  363  (1892).  In  Maine  it  has  been  held 
that  while  a  corporation  may  pay  an 
ordinary  dividend  to  a  stockholder  of 
record,  yet  that  a  dividend  paid  in  the 
liquidation  and  winding  up  of  the  cor- 
poration must  be  paid  to  the  holder  of 
the  certificate,  even  though  such  holder 


be  a  transferee  who  has  not  been  re- 
corded as  such  on  the  books  of  the  com- 
pany, and  that  the  company  is  liable  to 
him  for  dividends  in  liquidation,  even, 
though  it  has  paid  them  to  the  regis- 
tered stockholder,  and  that  this  rule 
applies  to  a  pledgee  of  a  certificate  of 
stock  as  well  as  a  purchaser  of  a  certifi- 
cate of  stock.  Bath  Sav.  Inst.  ??.  Sagad- 
ahoc Nat  Bank,  89  Me.  500  (1897).  Where 
a  certificate  is  issued  by  the  corporation 
to  the  pledgee  as  pledgee,  on  the  face 
of  the  certificate,  the  dividends  must  be 
paid  to  him,  and  if  the  corporation  pays 
the  dividends  to  the  pledgor  it  is  liable 
therefor  to  the  pledgee.  Hunt  v.  La- 
conia.  ej:c.  Ry.,  68  N.  H.  561  (1896).  In 
insolvency  proceedings  a  pledgee  is  en- 
titled to  dividends  without  giving  up 
his  security,  and  the  federal  court  will 
not  follow  the  state  decisions  on  this 
point  in  receivership  cases.  London, 
etc.  Bank  v.  Willamette,  etc.  Co.,  80 
Fed.  Rep.  226  (1897).  See  §  763,  infra,  on 
this  point.  The  pledgee  is  entitled  to 
the  dividends,  even  though  the  stock 
stands  in  the  name  of  the  pledgor  on 
the  books  of  the  company.  George,  eta 
Co.  V.  Range,  etc.  Co.,  16  Utah,  .59  (1897). 
Where  stock  still  stands  in  the  name  of 
the  pledgor  and  an  attachment  is  levied* 
upon  it,  dividends  that  accrue  there- 
after belong  to  the  pledgee,  both  as 
against  the  pledgor  and  his  creditors. 
Farmers,'  etc.  Bank  v.  Mosher,  88  N.  W. 
Rep.  552  (Neb.  1901).  Where  the  stock 
still  stands  in  the  name  of  the  pledgor 
there  is  no  duty  imposed  on  the  pledgee 
to  collect  the  dividends  declared 
thereon.  McAulay  v.  Moody,  128  Cal. 
202  (1900).  A  pledgee  is  not  entitled  to 
past-due  coupons  which  were  detached' 
from  the  bonds  before  they  were  pledged,, 
even  though  such  coupons  are  entitled 
to  payment  in  priority  to  the  bonds 
themselves.  Rhawn  v.  Edge  Hill,  etc 
Co.,  201  Pa.  St  637  (1902). 


(60) 


945 


§  468.]  PLEDGE    OF    STOCK.  [CU.  XXVI. 

suit  against  the  pledgor  for  such  dividend.'  The  pledgee,  how- 
ever, must  account  for  dividends  when  the  pledge  is  redeemed.-  A 
pledgee  has  a  legal  right  to  surrender  the  certificate  to  the  corpo- 
ration and  take  a  new  certificate  therefor,  running  either  to  him- 
self or  to  any  other  person  whom  he  may  designate.' 

Where  the  pledgor  has  pledged  stock  to  secure  the  debts  of  an- 
other at  a  bank,  and  renewals  thereof,  the  pledge  continues  though 
the  pledgor  dies.*  But  a  pledge  of  stock  to  secure  another  person's 
debt  is  released  by  an  extension  of  that  debt.'^  If  a  note  is  secured 
bv  collateral,  an  accommodation  indorser  is  not  liable  if  the  collat- 
eral  is  released  from  its  deposit  as  security  for  the  note.**  An  in- 
dorser,  however,  is  not  released  by  a  change  in  the  securit}',  except 
to  the  extent  that  the  security  is  decreased.'^  If  a  note  secureil  by 
collateral  has  been  paid  by  a  surety,  and  the  surety  claims  the  col- 
lateral, and  the  collateral  is  also  claimed  by  another  person,  the 
pledgee  may  interplead.^  Where  the  pledgor  delivers  to  the  pledgee 
a  certificate  of  stock  in  order  that  a  part  thereof  may  be  trans- 
ferred to  the  pledgee,  and  the  latter  endeavors  to  keep  all  of  the 
stock  and  sues  the  corporation  for  not  transferring  the  same  to  him, 
the  corporation  may  bring  the  pledgor  into  the  suit  and  have  all 
rights  adjudicated.^  Where  a  pledge  is  deposited  in  third  parties' 
hands  for  the  benefit  of  both  parties,  the  creditor  is  not  bound  to 
see  to  the  return  of  the  pledge.'"  A  pledge  to  secure  indebted- 
ness of  specified  parties  is  not  security  for  their  individual  debts.'' 
A  pledge  to  secure  the  note  of  another  person,  past  due,  is  not  bind- 
ing, where  there  is  no  extension  of  the  time  of  payment.'^  If  a  per- 

1  Meredith,  etc.  Bank  r.  Marshall,  68  for  stock  in  a  reorganized  company  with 

N.  H.  417  (189G).  the  consent  of  the  owner  of  the  stock, 

'^  Hasbrouck  v.  Vandervoort,  4  Sandf.  but  without  the  consent  of  the  debtor 

74  (1850);  Edw.  Bailm.,  §  300.  or  its  receiver.  McKusick  v.  O'Gorraan, 

3  See  §  247,  mpra;  Donnell  v.  Wyck-  G9  N.  W.  Rep.  317  (Minn.  1896). 

off,  49  N.  J.  L.  48  (1887).     A  pledgee  of  sgioux  Falls,  etc.  Bank  v.  Lien,  85  N. 

bonds  has  a  right  to  have  them  regis-  W.  Rep.  924  (So.  Dak.  1901). 

tered  in  his    own    name.      Ritchie  v.  ^Tom  Boy,  etc.  Co.  v.  Green,  11  Colo. 

Burke,  109  Fed.  Rep.  16  (1901).  App.  447(1898). 

<  Cotton  V.  Atlas  Nat  Bank,  145  Mass.  lo  Robertson  v.  Sully,  2  N.  Y.  App.  Div. 

43  (1887).  152  (1896),  reversed  on  another  point  in 

5  Price  V.  Dime  Sav.  Bank,  124  111.  317  157  N.  Y.  624. 

(1888).  11  Haldeman  v.  German,  etc.  Bank,  44 

6  Smith  V.  Traders'  Nat.  Bank,  82  Tex.  S.  W.  Rep.  883  (Ky.  1898).  Where  one 
368  (1891).  of  the  makers  of  a  joint  note  gives  col- 

■^  Nelson  v.  First  Nat.  Bank,  69  Fed.  lateral  as  security  for  that  note,  such 

Rep.  798  (1895).  A  pledgee  may  enforce  collateral  cannot  be  applied  to  another 

his  claim  against  the  principal  debtor,  individual  note  given    by  him.     First 

although   the    stock,  which    had  been  Nat.  Bank  u  Finck,  100  Wis.  446  (1898). 
pledged  by  a  third  person  to  the  pledgee       12  Haldeman  v.  German,  etc.  Bank,  44 

to  sec\ire  the  debt,  has  been  exchanged  S.  W.  Rep.  383  (Ky.  1898). 

946 


CH.  XXVI.]  PLEDGE    OF    STOCK.  [§  468. 

son  agrees  to  deposit  stock  to  secure  the  debt  of  another,  and  fails 
to  do  so,  he  is  liable,  not  for  the  debt,  but  for  the  value  of  the  stock.^ 
The  pledge  may  be  for  a  running  liability,  and  is  not  released  by  an 
extension  of  any  particular  debt.-  Stock  may  be  given  by  the 
debtor  to  his  creditor  to  sell  for  the  benefit  of  the  creditor,  and  the 
surplus  to  be  returned  to  the  debtor.'  A  deposit  of  bonds  as  se- 
curity for  the  payment  for  rolling  stock,  but  to  be  used  only  to 
pay  any  deficiency  after  the  rolling  stock  has  been  sold  and  the 
proceeds  credited,  is  a  pledge  and  not  a  mortgage,  and  hence  if  the 
pledgee  takes  back  the  rolling  stock  without  selling  it  the  pledge 
ceases.*  The  pledge  may  be  to  secure  the  carrying  out  of  a  con- 
•tract.^  The  agreement  of  the  pledgor  that  the  pledgee,  a  broker, 
should  always  thereafter  have  the  brokerage  business  of  the  com- 
pany, is  enforcible,  even  after  the  pledge  ceases,  and  for  breach  the 
pledgee  may  recover  damages.^  The  pledge  of  stock  may  provide 
that,  for  part  payments  of  the  debt,  the  pledgor  may  withdraw  part 
of  the  stock  pledged.''  A  pledge,  to  secure  a  certain  note  and  all 
other  present  or  future  demands  of  any  kind,  due  or  not  due,  is 
good  as  a  pledge  for  the  note  specified,  but  does  not  apply  as  a 
pledge  to  another  note  due  five  years  later,  the  payment  of  which 
is  secured  by  real  estate.  Upon  payment  of  the  first  note  the 
pledgor  may  file  a  bill  in  equity  to  obtain  the  stock.^  A  person 
taking  stock  or  bonds  in  pledge,  with  knowledge  of  the  fact  that 
the  pledgor  is  under  contract  to  deliver  them  to  another  person, 
may  not  be  protected.^  B3'"  a  custom  of  banks  in  a  particular  local- 

1  Hite  Nat.  Gas  Ca's  Appeal,  118  Pa,  to  such  advances  being  made  and  the 
St.  436(1888).  bonds  received,  the  pledgor  has  con- 

2  Merchants'  Nat.  Bank  v.  Hall,  83  tracted  with  another  party  to  deliver 
N.  Y.  338  (1881).  to  the  latter  said  bonds,  the  latter  is 

3  Beckwith  v.  Burrough,  13  R  I.  294  entitled  to  the  bonds  as  against  the 
(1881 ).  Such  action  would  probably  first-named  party  who  makes  such  ad- 
make  the  creditor  the  agent  of  the  vances  subsequently  and  received  the 
debtor.  bonds  with  notice  of  such  intervening 

*  Herrmann  v.  Central,  etc.  Co.,  101  contract.  Columbia,  etc.  Co.  v.  Mercer, 

Fed.  hep.  41  (1900).  57  S.  W.  Rep.  787  (Ky.  1900).     Where  a 

5  Vaupell  V.  Woodward,  2  Sandf.  Ch.  mortgage  covers  bonds  to  be  thereafter 

143  (1844).  delivered,  and  instead  of  such  delivery 

^  Carritt    v.    Bradley    and    another,  the  mortgagor  deposits  the  bonds  as  se- 

[1901]  2  K  B.  550.  curity  with  the  United  States  govern- 

'  First  Nat.  Bank  v.  Root,  107  Ind.  224  ment,  and  then   makes  another  mort- 

(1886).  gage   covering    such   bonds,   the    first 

8  First  Nat.  Bank  v.  Illinois  T.  &  S.  mortgagee  is  entitled  to  the  bonds  upon 
Bank,  84  Fed.  Rep.  34  (1897).  their    being    released    by  the  United 

9  See  §§  317,  766c,  852.  Even  though  States  government,  even  though  such 
a  party  agrees  to  make  future  ad-  bonds  are  delivered  under  the  second 
vances  of  money  and  is  to  receive  mortgage,  unless  the  bonds  or  the  notes 
bonds  as  security  therefor,  yet  if,  prior  secured    by  them  under    the    second 

947 


§  4G8.J  I'LEDGE    OF    STOCK.  [cn.   XXVI. 

ity,  stock  held  by  the  bank  against  the  pledgor  as  collateral  forono 
loan  may  be  held  as  collateral  for  all  loans.'  The  statute  of  limita- 
tions may  be  a  bar  to  the  debt  and  yet  not  to  the  pledge.^ 

A  pletlgee  has  a  right  to  vote  on  the  pledged  stock  where  he  is 
registered  as  a  stockholder,'  but  the  pledgor  may  com])el  him,  by 
legal  proceedings,  to  give  a  proxy  for  voting  purposes  where  there 
are  equitable  reasons  for  so  doing.*  A  pledgee  is  not  bound  to  pro- 
tect the  stock  from  forfeiture  for  non-payment  of  calls.^  A  pledgee 
may,  however,  pay  assessments  levied  upon  the  stock,  such  assess- 
ments being  a  lien  prior  to  his  lien,  and  may  charge  such  payments 
as  expenses  in  preserving  and  protecting  the  title  and  making  the 
security  available  on  maturity.^  A  pledgee  of  certificates  of  stock 
is  protected  against  further  sales  or  pledges  of  the  same  stock  by 
the  pledgor,  such  other  sales  or  pledges  being  without  the  delivery 
of  any  certificate,  the  same  as  the  vendee  of  a  certificate  of  stock 
is  protected  against  another  sale  of  the  stock  to  a  purchaser  who 
takes  without  any  certificate.'^  The  possession  of  the  certificate 
protects  the  pledgee  herein.  The  pledgee  is  not  liable  for  a  loss 
of  the  pledge  by  theft,  there  being  no  negligence  on  his  part.^  But 
where  the  pledgee  is  a  corporation,  and  the  president,  who  has  en- 
tire charge  of  its  affairs,  steals  the  securities,  the  corporation  is 
liable  to  the  pledgor  for  the  value  thereof,  on  the  principle  that  a 
bailee  for  hire  is  liable  for  negligence  in  regard  to  the  pledge.^ 

A  pledgee  of  a  certificate  of  stock  is  not  bound  by  an  agreement 
of  all  the  stockholders  to  surrender  to  the  corporation  a  part  of 

» 

mortgage  have  passed  into  bona  fide  etc.  Co.  v.  Knoxville,  eta  Co.,  53  S.  W 

hands.    Central  T.  Co.  v.  West  India,  Rep.  1111  (Tenn.  1899). 

etc.  Co.,  169  N.  Y.  314  (1901).  «  Wells,  etc.  Ca  v.  Walker,  9    New 

1  Bacon's  AdniT  v.  Bacon's  Trustees,  Mex.  456  (1898). 

94  Va.  686  (1897).  ''  Maybin  v.  Kirby,  4  Rich.  Eq.  (S.  C.)  105 

2  See  §  476,  infra,  (1851).   See  §§  321,  360,  supra.    The  cases 

3  See  ^  612,  infra.  therein  cited  are  partly  cases  of  pledge 
*  See  §  612,  iiifra,  and  partly  of  sale  of  certificates  of 
5  Southwestern  R.  R  Bank  v.  Doug-     stock.    The  rule  applies  equally  to  both. 

las,  3  Spears  (S.  C),  329  (1844).  It  has  A  person  to  whom  a  pledgor  fraudu- 
been  held  that  where  stock  is  only  partly  lently  transfers  his  equity,  and  who  re- 
paid, and  the  corporation  issues  a  cer-  deems  the  stock  and  then  sells  it,  is 
tificate  reciting  on  its  face  how  much  liable  only  for  its  actual  value  less  the 
is  still  due,  and  the  holder  pledges  it,  amount  paid  to  so  redeem.  Hamilton 
and  no  transfer  to  the  pledgee  is  made  Nat.  Bank  v.  Halsted,  134  N.  Y.  520 
on  the  corporate  books,  the  corporation  (1892). 

can  have  a  sale  of  the  stock  for  non-  « Flemings,  Northampton  Nat.  Bank, 

payment  of  the  balance  remaining  due,  9  Fed.  Cas.  264  (1881). 

but  such  proportion    of   the  proceeds  ^  Cutting  v.  Marlor,  78  N.  Y.  454  (1879). 

will  be  paid  to   the  pledgee    as    the  See  also  Ouderkirk  v.  Central  National 

amount  already  paid  on  the  stock  bears  Bank,  119  N.  Y.  203  (1890). 
to  the  par  value  of  the  stock.    Ingles, 

948 


CH.  XXVI.] 


PLEDGE    OF    stock:. 


[§  ^68. 


their  stock,  which  part  is  to  be  then  considered  preferred  stock  and 
is  to  be  sold  b}'-  the  corporation  for  the  purpose  of  paying  cor- 
porate debts.^  The  stockholders  of  a  corporation  may,  together 
with  the  directors,  cause  the  corporate  property  to  be  sold  to  a  new 
corporation  in  exchange  for  the  stock  of  the  latter.  A  pledgee  of 
stock  in  the  former  corporation  can  not  after  the  sale  undo  it,  nor  hold 
the  latter  corporation  liable.  His  remedy  is  against  the  pledgor 
and  the  first  corporation.^  Although  the  pledgor  of  stock  votes 
the  stock  in  favor  of  a  lease  of  the  corporate  property  on  such 
terms  that  no  dividends  on  the  stock  are  possible,  yet,  in  the  absence 
of  fraud,  the  pledgee  is  bound. ^  A  pledgor  of  bonds  may  take 
part  in  the  purchase  at  the  reorganization  without  any  obligations 


1  Although  all  the  other  stock  has 
had  this  agreement  stamped  on  the 
certificates,  yet  the  corporation  cannot 
insist  that  the  purchaser  of  the  stock 
so  pledged  shall  allow  the  same  agree- 
ment to  be  stamped  on  the  new  certifi- 
cates issued  to  such  purchaser.  The 
court  will  order  a  transfer  free  from  the 
agreement.  Campbell  t\  American 
Zylonite  Co.,  122  N.  Y.  455  (1890).  "A 
stockholder  of  a  corporation  is  so  far  a 
privy  to  a  judgment  against  the  corpo- 
ration that  he  cannot  attack  the  judg- 
ment in  any  collateral  proceeding." 
National  Foundry,  etc.  Works  v.  ©conto 
Water  Co.,  68  Fed.  Rep.  1006  (1895),  ap- 
plying the  rule  to  pledgees  also.  See 
also  §  209,  supra. 

2  Quoted  and  approved  in  Elyea  v. 
Lehigh,  etc.  Co.,  45  N.  Y.  App.  Div.  231 
(1899),  holding  that  an  unregistered 
pledgee  of  stock  in  a  New  Jersey  cor- 
poration cannot  prevent  the  stock- 
holders, by  unanimous  consent,  selling 
the  entire  assets  of  the  company  to  a 
competing  company  in  good  faith,  the 
business  being  unprofitable. 

Where  by  the  written  consent  of 
all  the  stockholders  of  a  New  Jersey 
corporation,  and  the  action  of  its  board 
of  directors,  a  corporation  sells  all  its 
property  for  stock  and  bonds  of  a  new 
company  to  be  distributed  among  the  old 
stockholders,  a  pledgee  of  one  of  the 
old  stockholders  cannot  object,  espe- 
cially where  the  statute  authorizes  the 

949 


pledgor  of  stock  to  represent  the  stock 
and  no  notice  had   been  given  of  the 
pledga     Elyea  v.  Lehigh,  etc.  Co.,  169 
N.  Y.  29  (1901);  Leathers  v.  Janney,  41 
La.  Ann.  1120  (1889).  A  pledgee  of  com- 
mon stock  cannot  object  to  the  merg- 
ing of  preferred  stock  into  mortgage 
bonds.     Havemeyer  v.  Bordeaux  Co.,  8 
Nat.  Corp.  Rep.  127  (IlL  C.  C,  1894).    In 
Allis  V.  Jones,  45  Fed.  Rep.  148  (1891), 
it  is  intimated  that  a  pledgee  has  not 
the  same  right  to  attack  an  ultra  vires 
corporate  debt  that  the  pledgor  has, 
especially  where  the  stock  is  worthless. 
Cf.  §  735,  infra.    In  McCaleb  v.  Good- 
win, 114  Ala.  615  (1897),  one  street  rail- 
way purchased  all  the  stock  of  another 
street  railway  and  paid  the  stockholders 
therefor  by  issuing  the  mortgage  bonds 
of  the  latter  street  railway  company. 
The  former  then  placed  the  stock  under 
its  own  mortgage,  and,  this  mortgage 
having  been  foreclosed,  the  purchaser 
attacked  the  validity  of  the  first-men- 
tioned mortgage.     The  court  sustained 
the  mortgage,  however,  on  the  ground 
that  all  the  stock  had  voted  therefor. 
Where  the  pledgor  of  stock  votes  at  a 
corporate  meeting  in  favor  of  selling 
the  property  the  pledgee  is  bound,  the 
corporation    having  had  no  notice  of 
the  pledge.  City  of  Spokane  v.  Amster- 
damsch,  etc.,  22  Wash.  172  (1900). 

3  Gibson  v.  Richmond,  etc.  R  R,  37 
Fed.  Rep.  743  (1889). 


§  4G8.]  PLEDGE   OF   STOCK.  [CH.  XXVI. 

towards  the  pledgee  as  to  such  purchase.'  After  default  by  the 
pledgor  the  pledgee  may  put  the  bonds  which  he  holds  as  collat- 
eral under  a  reorganization  plan,  and  may  agree  that  part  of  the 
expense  of  foreclosure  shall  be  a  lien  on  the  bonds,  but  he  cannot 
do  so  where  he  is  to  receive  new  securities  instead  of  cash  on  the 
reorganization.^  The  pledgee  of  securities,  who  turns  them  in  to  a 
reorganization  and  takes  new  securities  without  the  consent  of  the 
pledgor,  is  liable  to  the  pledgor,  but  the  pledgor  can  recover  only 
the  actual  value  of  the  securities  so  turned  in.  The  pledgee  is  not 
bound  to  aid  the  pledgor  in  using  the  pledge  in  a  reorganization, 
nor  is  the  pledgee  bound  to  delay  the  reorganization  on  account  of 
any  demand  of  the  pledgor.^  Where  a  pledgee's  debt  has  really 
been  paid  and  yet  he  retains  the  stock,  and  by  reason  thereof  the 
pledgor  is  unable  to  enter  a  reorganization,  the  pledgor  can  recover 
for  the  actual  damaj^es  sustained,  but  such  value  must  be  shown  bv 
him;  otherwise  it  will  be  inferred  that  it  had  little  or  no  value.* 
Even  though  a  pledgee  of  bonds  accepts  common  stock  in  are- 
organized  company  in  place  of  the  bonds,  yet,  if  both  the  bonds  and 
the  common  stock  are  worthless,  the  pledgor  is  not  released  from 
his  debt,  and  even  if  the  common  stock  had  value  it  would  be  merely 
a  substituted  collateral.^  Where  the  maker  of  a  note  secured  by 
bonds  as  collateral  causes  the  pledgee  to  exchange  the  bonds  for 
bonds  in  a  reorganized  company,  it  is  for  the  jury  to  say  whether 
that  amounts  to  an  acknowledgment  of  the  debt  postponing  the 
statute  of  limitations.^  A  pledgor  of  stock  may  enforce  a  claim 
against  the  corporation,  even  though  thereby  the  corporation  will 
become  insolvent  and  the  stock  be  rendered  worthless.  Although 
the  pledgor  has  made  an  assignment  for  the  benefit  of  creditors, 
yet  his  assignee  cannot  be  enjoined  by  the  pledgee  from  enforcing 
the  claim  against  the  corporation.'' 

The  fact  that  the  pledgee,  a  corporation,  gave  through  its  presi- 
dent incorrect  information  to  the  pledgor,  whereby  the  pledgor 
did  not  sell  the  stock  in  pledge  and  liquidate  the  debt,  is  no  defense 
to  an  action  on  the  debt.*  A  person  loaning  money  to  an  individ- 
ual and  taking  bank  stock  as  collateral  security  cannot  hold  the 

1  Brown  v.  Anderson,  104  Ga.  30  (1898).    on  the  security  of  stock  and  corporate 

2  Field  V.  Sibley,  74  N.  Y.  App.  Div.  81    notes. 

(1902).  s  In  re  Lorillard,  107  Fed.  Rep.   677 

3  Griggs  V.  Day,  136   N.  Y.  153,   162    (1901). 

(1892).  6  Becker  v.  Oliver,  111  Fed.  Rep.  672 

<  Griggs  V.   Day,  158  N.  Y.  1   (1899).  (1901). 

This  case  arose  out  of  a  controversy  be-  '^  Janney  v.  Merchants',  etc.  Bank,  98 

tween  a  contractor  in  the  construction  Ala.  515  (1893). 

of  a  railroad  and  the  chief  stockholder  ^  investment  Ca  v,  Eldridge,  175  Pa. 

and   promoter,  who  advanced   money  St.  287  (1896). 

950 


CH.  XXVI.] 


PLEDGE   OF    STOCK. 


[§  4G8. 


bank  liable,  in  an  action  for  damages  for  deceit,  on  the  ground 
that  its  published  statements  were  false  and' fraudulent  and  tliat  he 
relied  on  those  statements.^  Where  stock  has  been  pledged,  and 
the  pledgor  makes  a  contract  with  a  third  person,  by  which  the 
latter  agrees  to  pay  the  debt  and  take  the  stock,  the  pledgor  may 
enforce  this  contract  without  tendering  the  stock.^  Where  a  bank 
states  to  a  pledgee  that  it  holds  certain  negotiable  bonds  in  pledge 
to  secure  the  debt,  and  the  bonds  are  produced,  shown,  and  handed 
back  to  the  bank,  the  latter  cannot  afterwards  claim  that  it  held 
these  bonds  subject  to  a  prior  pledge  by  the  same  pledgor  to 
another  person.*  Pledgees  of  a  majority  of  the  corporate  stock, 
who  by  voting  their  stock  cause  men  of  their  choice  to  be  elected 
directors,  are  not  liable  for  the  misconduct  of  such  directors.*  ISTever- 
theless  "  the  bailee  owes  a  direct  duty  to  the  pledgor  to  be  reason- 
ably careful  that  no  harm  shall  come  through  bis  custody  to  the 
subject-matter  of  the  pledge."^ 


1  Merchants'  Nat.  Bank  v.  Armstrong, 
65  Fed.  Rep.  933  (1895).  But  see  §g  353- 
355,  supra.  A  bank  which  as  pledgee 
causes  by  its  statements  a  party  to  pur- 
chase the  stock  held  in  pledge  may  be 
held  liable  in  damages  if  such  state- 
ments were  false.  Hindman  v.  First 
Nat.  Bank,  etc.,  98  Fed.  Rep.  563  (1899). 
Where  a  purchaser  of  goods  misrepre- 
sents the  value  of  stock  which  is  to  be 
given  as  a  pledge  for  the  purchase 
price  and  refers  the  vendor  to  a  bank, 
which  bank  repeats  the  misrepresenta- 
tions, the  pledgee  may  sue  the  bank  for 
damages,  and  may  show  that  the  bank 
at  that  time  held  stock  in  pledge  and 
that  the  goods  so  purchased  were  sub- 
stituted for  the  stock  of  the  bank  upon 
the  transaction  being  closed.  Am.  Nat. 
Bank,  etc.  v.  Hammond,  35  Colo.  367 
(1898). 

2  Gilbert  v.  Adams,  99  Iowa,  519 
(1896). 

3  Gibson  v.  Lenhart,  111  Pa.  St.  624 
(1886).  Where  a  corporation  guaran- 
tees certain  bonds,  and  a  person  hold- 
ing stock  of  the  company  indorses  on 
the  guaranty  that  he  holds  stock  to  se- 
cure the  performance  of  the  guaranty, 
he  cannot  afterwards  claim  that  he  has 
a  prior  lien  as  pledgee  of  the  stock. 
Mercantile  Trust  Co.  v.  Atlantic  Trust 


Co.,  86  Hun,  213  (1895).  For  subsequent 
phases  of  this  litigation,  see  Bracken 
V.  Atlantic  Trust  Co.,  167  N.  Y.  510 
(1901). 

<  Higgins  V.  Lansingh,  154  111.  301 
(1895).  Where  stock  is  pledged  and  the 
pledgee  is  in  control  of  the  company, 
and  instead  of  declaring  dividends  he 
honestly  and  intelligently  applies  the 
profits  to  improvements,  the  pledgor 
cannot  hold  him  liable  for  not  declaring 
dividends,  and  for  not  thus  decreasing 
the  debt  for  which  the  stock  was  given 
in  pledge.  Zellerbach  v.  Allenberg,  99 
Cal.  57  (1893).  A  pledgor  of  stock  can- 
not, in  a  suit  brought  by  his  creditor  to 
reach  the  equity  in  a  pledge,  raise  an 
issue  as  to  the  mismanagement  of  the 
corporation.  McMullen  v.  Ritchie,  57 
Fed.  Rep.  104  (1893).  It  is  no  defense 
to  a  note  secured  by  stock  that  the 
pledgee,  by  means  of  the  stock,  con- 
trolled the  company  and  managed  it 
so  badly  that  the  stock  became  worth- 
less. Dunham  v.  Boyd,  64  Conn.  397 
(1894). 

5  Ritchie  V.  McMullen,  79  Fed.  Rep. 
522,  533  (1897).  In  this  case  the  court 
held  that  if  a  pledgee,  being  in  control 
of  the  corporation,  refuses  to  develop 
the  property  and  to  accept  subsidies 
which  are  offered,  and  to  accept  profits 


951 


§  468.] 


PLEDGE   OF    STOCK. 


[cH.  xxvr. 


The  pledgor  may  by  an  instrument  in  writing  assign  his  equity 
of  redemption  to  one  of  his  creditors.  Such  assignment  need  not 
be  recorded  as  a  chattel  mortgage,  and  is  not  fraudulent  even  though 
it  be  kept  secret  from  the  other  creditors  of  the  pledgor.'  A  judg- 
ment creditor  of  the  pledgor  may  file  a  bill  to  reach  the  equity  of 
redemption  in  a  pledge  of  stock,^  or  may  levy  an  attachment  or 
execution  upon  it.' 


under  a  contract  which  are  possible, 
and  to  sell  the  property  at  a  large  price, 
all  for  the  purpose  of  depreciating  the 
pledged  stock  and  thus  obtain  the  stock 
himself,the  pledgomiay  call  the  pledgee 
to  account  for  the  loss  suffered  from 
this  conspiracy  and  wrong.  The  court 
lield  also  that  although  the  damage  was 
directly  to  the  corporation,  yet  that  in- 
directly it  was  a  damage  to  the  pledgor, 
and  that  hence  the  pledgor  could  sue 
in  his  own  behalf  alone,  and  that  the 
measure  of  damage  is  the  difference 
between  the  market  value  at  the  time 
of  suit  and  what  it  would  have  been  if 
the  conspiracy  had  not  been  set  on  foot. 
The  court  held,  however,  in  the  case 
before  it,  that  the  proofs  did  not  sustain 
the  allegations. 

1  National  H.  R.  Bank  v.  Chaskin,  28 
N.  Y.  App.  Div.  311  (1898).  An  assign- 
ment by  a  pledgor  of  stock  of  his  inter- 
est in  the  equity  of  redemption  may  be 
assigned  by  the  assignee  by  mei'elj' 
writing  his  name  on  the  back  of  the 
same,  the  entire  transaction  being  in 
connection  with  the  discounting  of  a 
note.  Twelfth  Ward  Bank  v.  Samuels, 
71  N.  Y.  App.  Div.  168  (1902). 

2  Ritchie  v.  McMuUen,  79  Fed.  Rep. 
522  (1897).  Where  a  judgment  creditor 
of  a  person  files  a  bill  in  equity  to  reach 
the  equity  of  that  person  in  a  pledge  of 
stock  which  he  has  made  to  other  par- 
ties, and  the  pledgees  are  joined  as  par- 
ties defendant,  the  accounts  and  claims 
between  the  pledgor  and  pledgees  may 
be  adjusted  in  the  same  suit.  Ritchie 
V.  McMullen,  79  Fed.  Rep.  522  (1897). 
The  equity  of  redemption  of  the  pledgor 
may  be  reached  by  garnishee  process, 
and  the  property  sold  by  a  receiver  to 


pay  the  pledgee,  and  the  balance  to  the 
other  creditor,  where  the  pledgee  con- 
sents and  his  debt  is  past  due.  Kim- 
brough  V.  Orr  Shoe  Co.,  98  Ga,  537  (1896). 
An  attaching  creditor  cannot  comitlain 
that  the  pledgee,  who  has  prior  rights, 
settled  with  the  pledgor  after  the  at- 
tachment and  then  sold  the  stock.  The 
creditor  must  offer  to  redeem  or  have  a 
sale  subject  to  the  pledge.  IMcClintock 
V.  Central  Bank,  etc.,  120  Mo.  127(1894). 
Where  a  worthless  equity  of  redemp- 
tion in  land  is  turned  in  for  stock,  and 
then  the  stock  is  pledged  with  the  mort- 
gagee of  the  land,  and  tiien  "scrip'"  is 
taken  from  the  corporation  by  the  par- 
ties pledging  the  stock,  this  scrip  recit- 
ing that  it  represents  the  equity  of  the 
right  to  the  certificates  of  stock  after 
the  mortgage  is  paid  off,  such  scrip  is 
valid  and  may  be  sold,  it  having  been 
treated  as  valid  for  twenty  years,  even 
though  it  was  issued  without  considera- 
tion. Iliggins  V.  Lansingh,  154  111.  301 
(1895).  In  Michigan  garnishee  process 
lies  against  the  pledgee  of  stock  in  be- 
half of  a  creditor  of  the  pledgor,  and 
enables  such  creditor  to  reach  the  equitj' 
in  the  stock.  Old  Second  Nat.  Bank  v. 
Williams,  112  Mich.  564  (1897).  Where 
stock  is  placed  in  escrow,  to  become  the 
property  of  a  person  in  case  he  is  obliged 
to  pay  a  certain  obligation,  and  he  is  so 
obliged  to  pay,  the  creditors  of  the 
party  placing  the  stock  in  escrow  can- 
not reach  the  stbck  nor  redeem  it. 
Pabst,  etc.  Co.  v.  Montana,  etc.  Co.,  19 
Mont.  294  (1897). 

3  See  §  484,  infra.  The  equity  of  re- 
demption which  a  pledgor  has  in  stocks 
which  he  has  pledged  to  a  national 
bank  may  be  reached  by  garnishment 


952 


OH.  XXVI.]*  PLEDGE    OF    STOCK.  [§  468. 

In  a  suit  by  the  pledgee  to  have  a  judicial  sale  of  the  stock,  an 
assignee  of  the  pledgor's  interest  is  a  necessary  party,  where 
the  pledgee  knows  of  such  assignment,  and  the  pledge  was  made 
merely  by  delivery  of  the  certificate  without  any  transfer  on  the 
back  thereof.^  Where  the  pledgee  is  notified  by  a  person  that  the 
latter  is  entitled  to  the  collateral,  subject  to  the  pledge,  and  the 
pledgee  upon  payment  of  the  debt  returns  the  collateral  to  the 
pledgor,  the  pledgee  is  liable  to  such  third  person.-  Where  stock 
is  tied  up  by  attachment  which  is  afterwards  vacated,  and  in  the 
meantime  the  stock  depreciates  in  value,  the  loss  can  be  recovered 
from  the  attaching  party  if  the  stocks  could  and  would  have  been 
sold  before  the  depreciation,  if  they  had  not  been  so  tied  up.  But 
if  such  stocks  are  in  pledge,  and  the  pledgor  does  not  pay  the  loan 
while  the  stocks  are  so  tied  up,  no  damages  can  be  recovered.' 

Where  the  pledgee  allows  the  pledgor  to  take  the  pledge  and 
pledge  it  for  another  loan,  and  then  the  second  pledgee  allows  the 
same  thing  to  be  done  for  a  third  loan,  and  the  third  pledgee  sells 
out  the  pledge,  and  the  second  pledgee  buys,  the  first  pledgee  may 
redeem  from  the  second  by  paying  both  loans.*  A  pledgee  may 
■deduct  from  the  proceeds  of  a  sale  reasonable  expenses  in  keeping 
and  caring  for  the  pledge,  paying  taxes  and  liens,  preserving  title, 
^or  rendering  it  available.^     The  pledgee  cannot  set  up  the  title  of  a 

served  on  the  bank  after  judgment  not  set  up  that  the  pledgor  has  sold  his 
against  the  debtor.  The  national  bank  interest  in  the  pledge  to  another  party, 
act  does  not  forbid  such  process.  Com-  and  that  another  suit  is  pending 
raonwealth  v.  Chestnut,  etc.  Bank,  brought  by  that  other  party  for  spe- 
189  Pa,  St.  606  (1899).  Garnishee  pro-  cific  performance,  and  that  in  such 
ceedings  against  a  stockholder's  inter-  suit  the  pledgee  is  a  party  defendant, 
est  in  stock  which  has  been  pooled  and  no  proof  being  given  of  such  sale, 
has  also  been  pledged  does  not  affect  Houston,  etc.  R.  R.  v.  Conner,  67  S.  W. 
such  pool  or  pledge,  but  is  made  sub-  Rep.  773  (Tex.  1902). 
ject  to  them  if  they  are  legal.  Hardin  »  Fourth  Nat.  Bank,  etc.  v.  Crescent, 
V.  White,  etc.  Co.,  26  Wash.  583  (1901).  etc.  Co..  52  S.  W.  Rep.  1021  (Tenn.  1897). 
Cf.  §  491,  infra.  The  interest  of  the  *  Manliattan  Trust  Co.  v.  Sioux  City, 
pledgor  of  stock  may  be  levied  upon  etc.  R.  R,  65  Fed.  Rep.  559  (1895).  See 
under  execution,  and  thereupon  the  S.  C,  171  U.  S.  474  (1898). 
officer  will  sell  the  pledge  free  from  *  Furness  v.  Union  Nat.  Banlr,  147  111. 
claims,  and  the  court  will  direct  the  570  (1893).  While  the  pledgee  is  en- 
payment  of  the  pledgee  and  the  balance  titled  to  defend  his  title,  yet  in  his  suit 
.to  the  creditors,  under  the  Georgia  to  foreclose  the  pledge  he  cannot  be 
statute.  People's  Nat.  Bank  tJ.Wheedon,  allowed  disbursements  made  to  counsel 
42  S.  E.  Rep.  91  (Ga.  1902).  in  defending  his  title  in  another  suit 

1  Brown   v.   Hotel   Assoc,   88  N.  W.  brought  by  the  real  owner  of  the  stock, 
Hep.  175  (Neb.  1901).  the  pledge  being  in  fraud  of  such  own- 

2  Hughes  V.  Settle,  36  S.  W.  Rep.  577  er's  rights,  but  the  pledgee  being  bona 
(Tenn.    1895).      In  a  suit  in  equity  by  flde.      Work  r.   Tibbits,   87   Hun,   352 

.the  pledgor  to  redeem,  the  pledgee  can-    (1895).    A  pledgee  of  bonds  is  bound  to 

953 


§  469.]  PLEDGE    OF    STOCK.  [CH.  XXVI» 

third  person  as  against  the  pledgor,  however  tortious  the  possession 
of  the  latter,  unless  the  owner  has  claimed  the  pledge  and  the 
pledgee  has  yielded  to  the  claim. ^  A  pledgee  is  not  bound  to  pros- 
ecute suits  to  protect  the  pledge,  nor  to  sell,  and  a  provision  that 
the  pledgee  may  claim  repayment  of  any  sums  expended  in  the 
prosecution  of  claims  is  not  an  agreement  of  the  pledgee  to  pros- 
ecute.^ The  pledgee  need  not  defend  against  a  replevin  suit  brought 
by  a  person  who  claims  to  be  owner  of  the  stock,  where  the  pledg- 
ee's attorney  advises  him  that  there  is  no  defense.'  A  pledge  for 
any  "  note  or  claim  against  me  "  applies  to  a  claim  against  the 
pledgor's  firm.''  The  pledgee  cannot  be  taxed  on  the  stock.'^  Ques- 
tions relative  to  the  right  of  pledgees  to  maintain  suits  the  same 
as  stockholders  are  considered  else\vhere.® 

§  469.  Pledgee  need  not  reteiin  or  return  to  tlie  pledfjor  the  iden- 
tical certificates  or  shares  of  stock  ivhich  were  pledged^  hut  must  have 
equal  quantitu  ahvays  on  hand. —  (3ne  share  of  stock  does  not  differ 
from  another  share  of  the  same  capital  stock.  Each  is  but  an  un- 
divided interest  in  the  corporate  rights,  privileges,  and  property. 
Accordingly,  it  is  held  that  a  pledgee  of  stock  need  not  retain  in 
his  possession  the  identical  shares  of  stock  which  were  pledged  to 
him,  but  that  the  rights  of  the  pledgor  are  fully  preserved  if  simi- 
lar stock  is  retained  by  the  pledgee  until  the  termination  of  the 
pledge.^    The  pledgee  must  have  on  hand  at  all  times  the  full 

exercise  due  diligence  in  collecting  the  subject  of  the  pledge.     Cridges  Appeal, 

same  and  is  entitled  to  be  reimbursed  18  Atl.  Rep.  1010  (Pa.  1890). 

for  his  expense,   including  attorney's  ^  Loomisu.  Reimers,  93  N.  W.  Rep.  O'} 

fees.     Hanover,  etc.  Bank  v.  Brown,  53  (Iowa,  1903). 

S.  W.  Rep.  206  (Tenn.  1899).     An  attor-  *Hallowell  v.  Blackstone  Nat  Bank, 
ney  who  represents  pledgors  of  stock  in  154  Mass.  359  (1891).     A  pledge  of  stock 
winding  up  the  affairs  of  the  company  to  secure    future    liabilities    does  not 
may  have  a  lien  on  the  fund  realized  apply  to  past  liabilities.    Franklin  Bank 
on  such  stock  prior  to  the  lien  of  the  v.  Harris,  77  Md.  423  (1S93> 
pledgee.     Shirk  v.   Sheridan,   10  Kan.  » See  g  564,  note,  infrcu 
App.  463  (1900).    The  expenses  of  a  re-  «See  §  735,  infra. 
ceiver  appointed  at  the  instance  of  a  'Caswell  v.   Putnam,   120  N.  Y.  153- 
pledgee  of   pig   iron  may  be  prorated  (1890);  Skiff  v.  Stoddard,  63  Conn.  198 
between  the  insolvent  company  and  (1893);  Nourse  r.  Prime,  4  Johns.  Ch.  490^ 
the  pledgee.     American,  etc.  Co.  v.  Ger-  (1820);  s.  C,  7  Johns.  Ch.  69  (1823);  Her- 
man, 126  Ala.  194  (1900);  88  L.  T.  Rep.  39a  ton  v.  Morgan,  19  N.  Y.  170  (1859);  Bar- 

» Sedgwick  v.  Macy,  24  N.  Y.   App.  clay  n  Culver,  30  Hun.  1  (1883);  Noyes 

Div.  1  (1897),  the  court  refusing  to  fol-  v.  Spaulding,  27  Vt.  420  (1855);  Atkins 

low  the  English  rule  on  this  subject.  v.   Gamble,  42  Cal.  86  (1871);  Price  v. 

2  Culver  V.  Wilkinson,  145  U.  S.  205  Grover,  40  Md.  102(1874);  Gilpin  r.  How- 
(1892).  The  pledgee  may  claim  credits  ell,  5  Pa.  St.  41  (1847);  Harden bergh  v. 
for  defending  the  pledge  against  at-  Bacon,  33  Cal.  356  (1867);  Taylor  r. 
tacks  by  lawsuits,  and  in  some  cases  Ketchum,35How.  Pr.  289(1867);Thomp- 
for  adding  to  its  value  by  aiding  the  son  v.  toland,  48  Cal.  99  (1874);  LeCroy 

954 


CF.  XXVI.] 


PLEDGE    OF    STOCK. 


[§  469. 


amount  of  the  stock  pledged,  whether  the  debt  secured  is  due  or 
not,  since  the  law  will  not  allow  the  pledgee  to  speculate  or  deal 
with  the  stock  of  another  as  though  it  were  his  own.^  It  is  not 
enough  that  he  can  at  once  procure  the  stock  from  one  to  whom  it 
is  loaned,^  or  that  he  had  sufficient  on  hand  for  the  plaintiff 
pledgor,  but  not  enough  for  all  the  pledgors  whom  he  had  at  any 


r.  Eastman,  10  Mod.  499(1722);  Harding 
V.  Field,  1  N.  Y.  App.  Div.  391  (1896): 
Douglas  V.   Carpenter,  17  N.   Y.  App. 
Div.  329  (1897);  Hubbell  v.   Drexel.  11 
Fed.  Rep.  115  (1882);  Boylann  Huguet, 
8  Nev.  345  (1878).     Cf.  Langton  v.  Waite, 
L.  R  6  Eq.  165  (1868).     In  the  case  of 
Dykers  v.   Allen,  7  Hill,  497  (1844),  the 
pledgee  atone  time  seemed  to  have  had 
no  stock  on  hand.  In  selling  the  pledgor's 
stock  on  notice  for  non-payment  of  the 
debt,  the  pledgee  need  not  sell  the  iden- 
tical stock  pledged.     Berlin  v.  Eddy,  33 
Mo.  426  (1863).     Where  a  depository  of 
stock  to  vote  the  same  for  five  years 
agrees  to  return  the  stock  at  the  end 
of  that  time,  or  an  equal  amount  of 
stock,  together  with  dividends,  any  fu- 
ture assessments  on   the  stock   to  be 
paid  by  the  person  making  the  deposit, 
and,  if  not  paid,  then  the  depository,  in 
case  he  pays  the  assessment,  to  be  en- 
titled to  repayment  from  the  dividends, 
with  interest,  and  the  assessments  are 
not  paid  and  the  stock  is  sold,  and  at 
the  end   of  five  years  the  depository 
tenders  back  other  stock  with  assess- 
ments paid,  the  depository  is  entitled 
to    repayment    of    such     assessments. 
Moore  v.  Bank  of  British  Columbia,  106 
Fed.  Rep.  574  (1901).    Where  an  agent 
with   whom   stock  is   deposited  trans- 
ferred in  blank  causes  the  same  to  be 
transferred  to  himself  on  the  books  of 
the  company   and  then   hypothecates 
the  same,  and  afterwards  dies,  the  real 
owner  of  the  stock  may  claim  other 
stock  in  the   same  corporation   which 
such  agent  had  at  the  time  of  his  death. 
The  identity  of  the  certificates  is  im- 
material.    Marshall  v.  Marshall,  11  Colo. 
App.  505  (1898).     In  Mayo  v.  Knowlton, 
134  N.Y.  250  (1892),  the  court  said:  "The 


stock  had  no  ear-mark:  one  share  was 
the  same  as  another,  and  could  not  be 
identified  or  distinguished  therefrom." 
Where  a  customer  knows  that  the  bro- 
ker is  insolvent,  and  lias  not  kept  on 
hand  the  stock  which  the  customer  had 
deposited  on  margin,  and  the  broker 
purchases  stock  in  order  to  satisfy  the 
demand  of  the  customer,  the  transac- 
tion is  a  preference,  in  violation  of  the 
statutes  of  Massachusetts.  Weston  v. 
Jordan,  168  Mass.  401  (1897).  In  Allen 
V.  Dubois,  117  Mich.  115(1898),  it  is  held 
that  a  pledgee  is  bound  to  return  to  the 
pledgor  the  identical  shares  which  are 
pledged,  and  is  liable  for  conversion  if 
he  has  sold  them,  and  that  it  is  imma- 
terial that  he  had  on  hand  at  all  times 
and  tendered  back  an  equal  number  of 
shares.  So  also  in  the  case  of  Lamb,  etc. 
Co.  V.  Lamb,  119  Mich.  568  (1899).  where 
a  party  claiming  to  be  the  real  owfier  of 
stock  filed  a  bill  to  compel  the  holder 
of  such  stock  to  deliver  up  the  same, 
but  it  appeared  that  the  defendant  had 
already  disposed  of  the  stock  before  the 
commencement  of  the  suit,  the  court 
refused  to  grant  relief,  even  though  it 
further  appeared  that  the  defendant 
had  other  stock  in  the  same  corporation 
equal  in  amount  to  the  stock  in  issue. 

1  Ex  parte  Dennison,  3  Ves.  Jr.  553 
(1797);  Taussig  v.  Hart,  58  N.  Y.  425 
(1874);  Thompson  v.  Toland,  48  Cal.  99 
(1874);  Hubbell  v.  Drexel,  11  Fed.  Rep. 
115  (1882).  The  pledgor  may  waive 
this  restriction  by  express  agreement. 
Ogden  V.  Lathrop,  65  N.  Y.  158  (1875). 

2 Allen  V.  Dykers,  3  Hill,  593  (1842); 
aff'd,  Dykers  v.  Allen,  7  Hill,  497(1844); 
Ex  parte  Dennison,  3  Ves.  Jr.  552 
(1797). 


955 


§§  470,  471.]  PLEDGE    OF   STOCK.  [CH.  XXVI, 

particular  time'  The  law  requires  him  to  set  aside  as  much  stock 
as  has  been  pledged  to  him.  A  "loan  "  of  stock  returnable  on  de- 
mand transfers  the  title  in  one  sense,  inasmuch  as  the  borrower 
may  return  similar  stock  of  the  same  amount,  in  place  of  returning 
the  identical  stock  which  was  loaned  to  him.'-^ 

§  470.  Pledgee's  Udbility  on  siihscription  and  statutory  lialiU/iJ 
Oil  stoclc.^ — A  pledgee  who  has  obtained  registry  on  the  corporate 
books  appears  to  third  parties  as  a  full  stockholder.  Accordingly, 
in  case  the  corporation  becomes  insolvent,  the  registered  pledgee 
is  held  liable  on  his  stock,  as  though  he  were  an  absolute  stock- 
holder. In  order  to  avoid  this  danger,  the  law  allows  the  pledgee 
to  have  the  pledged  stock  registered  on  the  corporate  books  in  tiie 
name  of  a  nominee  of  the  pledgee.*  Where  such  a  registr}'  is  ob- 
tained, the  pledgee  has  the  advantage  of  the  control  of  the  stock, 
and  at  the  same  time  escapes  the  danger  of  liability  as  a  stock- 
holder. 

§  471.  Pledgee  has  no  right  to  sell  or  rejdedge  the  stock  even  tem- 
porarily, except  upon  notice,  unless  the  debt  is  assigned  with  ike 
stock. —  "Equity  will  not  tolerate  a  separation  of  the  pledge  from 
the  debt,  and  they  must  stand  together,  and  will  force  upon  a 
wrong-doer  the  character  of  a  trustee,  and  thus  compel  him  to  do 
justice."  Such  is  the  language  of  the  Xew  York  court  of  appeals.' 
The  pledgee  of  stock  cannot  legally  part  with  the  possession  of  the 
stock  by  a  sale  or  repledge  of  it,  except  as  he  transfers  the  debt 
which  the  stock  secures.     If  he  does  so  he  isguilty  of  a  conversion,® 

1  Fay  V.  Gray,  124  Mass.  500  (1878).  parte  Sargent,  L.  R.  17  Eq.  273  (1874), 

2Fosdick  V.  Greene,  27  Ohio  St.  484  contained  a  dictum  giving  a  contrary 

(1875);  Dykers  v.  Allen,  7  Hill  497  (1844).  rule;  but  France  v.  Clark,  L.  R  22  Ch. 

See  also  §  445,  suprcu  D.  830  (1883),  disapproves  such  dictum 

3  See  g  247,  supra,  and  says:  "  As  a  general  rule  the  paw- 

*  Newry,  etc.  Ry.  v.  Moss,  14  Beav.  64  nee  of  chattels  has  no  right  to  sell 

(1851).    See  i^  466,  supra.  them,  unless  a  time  was  originally  fixed 

5  Bennett  v.  Austin,  81  N.  Y.  308,  322  for  their  redemption,   and  that  time 

(1880).     Cf.  Easton  v.  Hodges,  18  Fed.  has  expired,  or  unless  he  has  made  a 

Rep.  677  (1883).  demand  upon  the  pawnor  for  the  pay- 

**  Oregon,  etc.  Co.  v.  Hilmers,  20  Fed.  ment  of  what  is  due  him."     Fay  v. 

Rep.  717  (1884);  Gass  v.    Hampton,    16  Gray,  124  Mass.  500  (1878),  holds  that 

Nev.  185  (1881).     Brokers  holding  a  cer-  the  pledgee  has  no  right  to  sell,  lend, 

tificate  of  stock  as  security  for  the  bal-  or  repledge  the  stock.     In  the  notes  in 

ance  of  the  purchase  price  due  from  21  Am.  Law  Reg.  (N.  S.)  454-461,  a  con- 

the  customer  are  pledgees,  and  if  the  tention  is  made  that  the  pledgee  should 

broker,  in  violation  of  the  express  con-  be  allowed  to  repledge,  but  it  is  admit- 

tract,    repledges    or    sells   such    stock  ted  that  the  weiglit  of  authority  holds 

without  authority  from  the  customer,  otherwise.      The    following   cases   are 

he  is  guilty  of  a  conversion,  for  which  cited:  Merchants'  Nat.  Bank  v.  Tren- 

trover  will   lie.     Chew  v.   Louchheim,  holm,    12    Heisk.    (Tenn.)    520    (1873); 

80  Fed.  Rep.  500  (1897).     The  case  of  Ex  First  Nat.  Bank  v.  Bryce,  19  Am.  L.  Reg. 

956 


CH.  XXYI.] 


PLEDGE    OF    STOCK. 


[§  471. 


and  in  Xcav  York  state  may  be  arrested,^  In  Pennsylvania  it  is  a 
penal  offense  for  the  pledgee  to  repledge  the  stock.-  Even  where, 
apparently,  the  pledgor  would  not  be  injured  by  the  pledgee's 
separating  the  stock  from  the  debt  and  transferring  the  stock 
pledged  as  collateral  security,  yet  the  law  rigidly  protects  the  in- 
terests of  the  debtor  and  pledgor,  and  will  not  compel  him  to  sub- 
mit to  the  danger  of  such  transfers  by  the  pledgee.  There  may, 
of  course,  be  an  express  agreement  or  understanding  to  the  con- 
trary.^ Where  an  agent  has  wrongfully  pledged  his  principal's 
stock,  and  the  pledgee  then  wrongfully  converts  the  pledge,  the 


(X.  S.)  503  (1880);  Work  v.  Bennett,  70 
Pa,  St.  484  (1873);  Wood  v.  Hayes,   81 
Mass.  375  (1860);  Thompson  v,  Patrick, 
4  Watts  (Pa.),  414  (1835);  and  see  §  469, 
supra.     In  Lawrence  v.  Maxwell,  53 
N.  Y.  19  (1863;,  the  court  said:  "Ordi- 
narily, and  in  the  absence  of  an  agree- 
ment or    assent  by  the  pledgor,   the 
pledgee  would  have  no  right  to  use  the 
thing  pledged,  and  a  use  of  it  would  be 
illegal.      But,    under    special    circum- 
stances depending  somewhat  upon  the 
nature  of  the  pledge,  and  in  all  cases 
with  the  assent  of  the  pledgor,  express 
or  implied,  the  property  pledged  may 
be  used  by  the  pledgee  in  any  way  con- 
sistent with  the  general  ownership  and 
the  ultimate  rights   of  the   pledgor." 
Where  the  pledgee  has  an  option  to 
purchase  the  stock,  but,  instead  of  pur- 
chasing, he  repledges  it  illegally,  the 
pledgor  may  consider  this  as  an  exer- 
cise of  the  option.     Upham  v.  Barbour. 
65  Minn.  364  (1896).     Where  the  pledgee 
transfers  the  stock  to  another  person 
as  security  that  a   proposed  contract 
between  the  corporation  and  another 
corporation  will  be  ratified  at  a  stock- 
holders' meeting,  and  such  other  person 
votes  said  stock  at  such  stockholders' 
meeting,  the  pledgee  is  guilty  of  con- 
version of  the  stock.     Upham  v.  Bar- 
bour,  65  Minn.    364   (1896).     Where  a 
pledge  is  made  to  secure  the  return  of 
certain    stock    and    bonds  to  a  third 
party,  and  the  pledgor  dies,  the  pledgee 
may    pledge    the    securities    to   bring 
about  the  return  of  such  stock  and 


bonds.     M'Cartney  v.   Earle,    115  Fed. 
Rep.  462  (1902). 

1  Oregon,  etc.  Ca  v.  Hilmers,  20  Fed.. 
Rep.  717  (1884);  Barry  v.  Calder,  48  Hun, 
449  (1888);  aflf'd,  111  N.  Y.  684.  See  also 
§  457,  supra,  and  §  576,  infra.  A  pledgee 
of  bonds  may  maintain  an  action  for 
conversion  thereof  and  may  cause  the 
arrest  of  a  repledgee  who  has  disposed 
of  such  bonds.  Blanck  v.  Nelson,  39  N. 
Y.  App.  Div.  21  (1899). 

2  Act  of  May  25,  1878,  modified  as  to 
purchases  by  broker  on  margin  by  act 
of  June  10,  1881  (P.  L.  1881,  107).  Sec- 
tion 1784  of  the  code  of  Alabama  for- 
bids an  assignment  of  a  pledge  without 
an  assignment  of  the  debt  it  secures. 
Dexter  v.  McClellan,  116  Ala.  37  (1897). 

3  Chouteau  v.  Allen,  70  Mo.  290  (1879). 
A  broker  has  no  right  to  repledge  stock 
held  by  him  for  a  customer  to  secure 
margins,  and,  even  if  the  customer  au- 
thorizes him  to  repledge,  this  authority 
sustains  a  repledge  only  to  the  extent 
of  the  amount  due  from  the  customer, 
and  the  broker  must  be  ready  at  all 
times  to  return  the  stock  to  the  cus- 
tomer upon  the  latter  paying  the  debt. 
In  this  case  it  was  held  also  that  the 
repledgee,  under  the  usual  transfer  in 
blank  on  the  back  of  the  certificate,  Is 
not  a  bona  fide  pledgee.  German  Sav. 
Bank  v.  Reushaw,  78  Md.  475  (1894). 
The  right  of  the  pledgee  to  repledge 
may  exist  by  force  of  a  custom  under- 
stood by  both  parties.  Chamberlain  v^ 
Cxreenleaf,  4  Abb.  N.  Cas.  178  (1878). 


957 


§471.] 


I'LEDGK    OF    STOCK. 


[CH.  XXVI. 


principal  may  ratify  the  act  of  his  agent  and  sue  the  pledgee  for 
conversion.  The  pledgee  may  offset  the  amount  actually  due  him.* 
A  pledgee  may  assign  the  principal  debt  to  a  third  person  and 
"give  him  the  benefit  of  the  collateral  securities  to  secure  the  pay- 
ment of  the  principal  debt.  So  long  as  nothing  is  done  to  deprive 
the  pledgor  of  the  right  to  redeem  on  payment  of  the  amount  due 
on  the  principal  debt,  the  pledgor  is  not  injured." ^  "Nothing  is 
better  settled  than  the  right  of  a  transferee  of  a  pledge  to  hold  it 
until  the  debt  for  which  it  was  given  is  paid."'  Where  a  pledgee 
repledges  both  the  note  and  the  stock,  an  agreement  between  the 
original  -pledgor  and  the  second  pledgee,  whereby  the  second 
pledgee  sells  the  stock  and  takes  in  payment  notes  of  the  purchaser, 
is  illegal  as  regards  the  rights  of  the  first  pledgee.  As  against  the 
second  pledgee  the  first  pledgee  is  entitled  to  be  credited  with  the 
value  of  the  stock  at  the  time  of  the  sale.*  A  broker  has  no  right 
to  pledge  his  customers'  securities  unless  expressly  authorized  so 
to  do.* 


1  Smith  V.  Savin,  141  N.  Y.  315  (1894). 

2  Cliapman  v.  Brooks,  31  N.  Y.  75,  84 
<186.));  Duncomb  v.  New  York,  etc.  R. 
R.  84  N.  Y.  190,  208  (1881).  The  pledgee 
may  assign  his  interest  in  the  pledge 
and  transfer  the  pledge  to  such  as- 
signee. Overton,  Liens,  §§  1G8,  172; 
Schoul.  Bailra.  (2d  ed.),  §  218,  etc.  Story, 
Bailm.,  §  324.  says  the  pawnee  '•  may 
sell  or  assign  all  his  interest  in  the 
pawn,  or  he  may  convey  the  same  in- 
terest conditionally,  by  way  of  pawn 
to  another  person,  without  in  either 
case  destroying  or  invalidating  his  se- 
curity." See  also  Talty  v.  Freedman's 
Sav.  etc.  Co.,  93  U.  S.  321  (1876);  2  Kent, 
Com.  579;  Jarvis  v.  Rogers,  13  Mass.  105 
(1816),  15  Mass.  389,  408;  Mores  v.  Con- 
ham,  Owen,  123  (1610);  Ratcliffe  v. 
Davis,  1  Bulst.  29  (1611);  Anon.,  2  Salk. 
522  (1694).  In  Lewis  v.  Mott,  36  N.  Y. 
394  (1867),  where,  after  the  debt  was 
due  and  unpaid,  the  pledgee  turned 
over  the  debt  and  security  to  another 
without  a  foreclosure  or  sale  on  notice, 
the  court  held  that  the  latter  could 
hold  the  collateral  stock  until  the 
pledgor  tendered  the  amount  of  the 
debt.  The  latest  English  cases  hold 
that,  although  the  repledge  may  be 
■wrong,  yet  that  the  pledgor  cannot  re- 


claim the  stock  from  the  repledgee 
until  the  former  pays  the  debt  for 
wliich  the  pledge  was  made.  Donald  v. 
Suckling,  L.  R.  1  Q.  B.  585  (1866);  Hal- 
liday  v.  Holgate,  L.  R.  3  Exch.  299  (1868). 
Where  a  broker,  holding  stock  in  pledge 
on  a  margin,  repledges  it  without  the 
consent  of  his  customer,  it  has  been 
held  that  he  cannot  recover  the  value 
of  the  stock  from  the  customer  on  a 
tender  of  the  certificate.  Clarkson  v. 
Snider,  5  Can.  L.  T.  587  (1885).  In  Lang- 
ton  V.  Waite,  L.  R.  6  Eq.  165  (1868),  the 
court  said  that  the  law  was  clear  that, 
in  the  absence  of  express  contract  to 
the  contrary,  a  pawnee  cannot  sell 
without  tlie  express  permission  of  the 
owner,  and  that  if  he  does,  the  owner  can 
charge  him  with  the  excess  of  the  price 
over  the  loan.  The  court,  however, 
seemed  to  think  that  the  pledgee  could 
repledge  the  stock.  In  Gould  v.  Farmers' 
L.  &  T.  Co.,  23  Hun,  322  (1880),  the  court 
said  that  the  pledgee  might  repledge 
the  stock  so  far  as  he  had  an  interest 
in  it. 

sphilleru  Yardley,  62  Fed.  Rep.  645, 
649  (1894). 

4Pauly  V.  Wilson,  57  Fed.  Rep.  548 
(1893). 

•>  See  §  467,  supra. 


958 


<!H.  XXVI.] 


PLEDGE    OF    STOCK. 


[§  472. 


The  liability  of  a  pledgee  who  turns  in  the  pledge  on  a  reorganiza- 
tion is  considered  elsewhere.^ 

§  472.  Purchasers  or  jjledgees  of  stools  from  'pledgee  tvith  notice 
ure  not  lyrotected. —  A  person  who  purchases  or  takes  in  pledge  stock 
which  he  knows  is  held  in  pledge  by  the  person  from  whom  he 
takes  it  is  not  a  honafide  holder  of  such  stock,  and  is  not  entitled 
to  the  rights  of  such.  At  the  best  he  stands  merely  in  the  place  of 
the  pledgee  from  whom  he  receives  the  stock.  He  must  restore  the 
stock  to  the  owner  in  case  the  pledgee  would  be  obliged  to  restore 
it,  had  no  second  sale  or  pledge  been  made.^  The  second  pledgee 
or  vendee,  with  notice  that  he  was  taking  pledged  stock,  has  no 
rights  which  the  first  pledgee  has  not.  He  is  but  an  equitable  as- 
signee of  the  latter,  and  can  be  compelled  by  tlie  owner  to  deliver 
the  stock  in  any  case  where  the  first  pledgee  could  be  so  compelled.' 
The  same  rule  applies  whether  the  pledgee  assigns  both  the  debt 
and  the  stock,  or  repledges  the  stock  alone."  Where  a  pledgee  has 
been  fraudulently  induced  to  sell  the  stock  to  a  person,  the  pledgor 
may  file  a  bill  in  equity  against  such  person  to  obtain  a  retransfer 
of  the  stock  to  himself  and  also  the  dividends  which  have  been 


1  See  §  468,  supra. 

2  Quoted  and  approved  in  German 
Sav.  Bank  v.  Renshaw,  78  Md.  475 
(1894). 

3  Any  fact,  such  as  usury  in  the  sec- 
ond transaction,  which  prevents  the 
second  pledgee  or  purchaser  from  being 
a  bona  fide  purchaser,  applies  to  a  re- 
pledgee  of  stock.  The  repledgee  is  not 
protected.  Felt  v.  Heye,  23  How.  Pr. 
359(1862);  Little  u.  Barker,  1  Hoffm.  Ch. 
487  (1840).  So  also  in  Pennsylvania, 
where  the  repledgee  takes  in  considera- 
tion of  a  pre-existing  indebtedness. 
Ashton's  Appeal,  73  Pa.  St.  153  (1873). 
In  general,  see  also  Duncan  v.  Jaudon, 
15  Wall.  165  (1872);  Shaw  v.  Spencer,  100 
Mass.  382  (1868);  Ellis's  Appeal,  8  W.  N. 
Cas.  (Pa.)  538  (1880);  Porter  v.  Parks,  49 
N.  Y.  564  (1872);  Chouteau  v.  Allen,  70 
Mo.  290  (1879).  A  pledgee  taking  with 
notice  that  the  pledge  is  in  breach  of 
trust  is  not  protected.  Kern's  Estate, 
176  Pa.  St.  373  (1896).  Even  though  it 
be  illegal  for  an  irrigation  company  to 
subscribe  for  the  stock  of  a  land  com- 
pany, yet  where  it  does  so  subscribe 
and  turns  in  property  in  payment,  and 


the  stock  is  taken  in  the  name  of  its 
secretary,  individually  and  not  as  sec- 
retary, the  company  may  compel  him 
to  turn  over  the  stock,  even  though  he 
has  pledged  it  for  his  personal  debt,  the 
pledgee  having  taken  with  knowledge 
of  all  the  facts.  Bear  River,  etc.  Co.  v. 
Hanley,  15  Utah,  506  (1897).  In  Hamp- 
ton, etc.  R.  R.  V.  Bank,  48  S.  C.  120  (1897), 
where  a  railroad  had  issued  stock  and 
bonds  to  a  finance  company  for  money 
to  be  paid  in  the  future,  and  the  finance 
company  had  not  paid  the  money,  but 
on  the  contrary  had  pledged  some  of 
the  stock  to  a  bank,  the  court  held  that 
the  bank  was  bound  to  take  notice  of  a 
provision  in  the  charter  to  the  effect 
that  no  sale  of  stock  should  relieve  an 
original  owner  from  his  obligations  to 
the  company,  and  hence  was  not  pro- 
tected as  pledgee. 

4  Felt  V.  Heye,  23  How.  Pr.  359  (1862). 
The  repledgee  cannot  claim  the  benefit 
of  the  debt  not  assigned  to  him.  Felt 
V.  Heye,  23  How.  Pr.  359  (1862).  See  also 
Talty  V.  Freedman's,  etc.  Co.,  93  U.  S. 
331  (1876). 


959 


§  473.]  PLEDGE    OF    STOCK.  [cil.  XXVI, 

paid,  and  need  not  join  tlie  pledgee  as  a  party.'  A  person  who  re- 
ceives stock  with  notice  that  the  holder  is  under  contract  obliga- 
tions to  deliver  it  to  another  may  not  be  protected.^ 

Where  a  bank  takes  in  pledge  from  a  broker  stock  which  the 
bank  knows  belongs  to  a  customer  of  the  broker,  the  bank  cannot 
hold  such  stock  as  against  the  customer,  even  though  the  stock  was 
indorsed  in  blank  on  the  back  of  the  certificates.'  A  pledgee  who 
knows  that  the  pledgor  is  acting  as  agent,  or  that  the  pledgor  holds 
the  stock  in  pledge,  must  take  notice  of  the  powers  of  such  pledgor.* 
Where  the  pledgee  sells  the  debt  and  stock  to  another  person,  and 
the  latter  sells  the  stock  without  the  debt,  and  the  purchaser  sells 
the  stock  to  still  another  person,  the  various  sales  being  a  conspir- 
acy, the  pledgor  may  sue  the  various  purchasers  for  conversion,  and 
need  not  tender  the  debt  or  make  any  demand  before  commencino: 
suit.'^  Where  the  owner  of  stock  and  bonds  turns  them  over  to  a 
trust  company  to  sell  as  it  should  deem  best  and  return  one-half 
of  the  proceeds,  and  the  trust  company  in  violation  of  the  trust 
pledges  them  for  a  past-due  debt,  the  remedy  of  the  owner  against 
the  pledgee  is  not  for  conversion,  but  for  an  accounting.^ 

§  473.  Bona  fide  rephih/ces  or'  imrchasers  of  pledged  stock  are  pro- 
tected —  Pledgor'' s  remedies  —  Marshaling  the  assets. —  Where,  how- 
ever, a  pledgee  of  certificates  of  stock  indorsed  in  blank  takes  the 
certificates  and  sells  or  pledges  them  to  another,  who  takes  such 
certificates  in  good  faith  and  for  value,  and  without  notice  that  his 
vendor  or  pledgor  held  them  as  a  pledge,  the  purchaser  or  pledgee 
from  the  pledgee  is  as  fully  protected  in  his  rights  as  though  the 
person  with  whom  he  dealt  was  the  absolute  owner  of  the  stock.^ 

» Smith  V.  Lee.  77  Fed.  Rep.  779  (1896).  Ferree.  17  N.  J.  Eq.  117  (1864);  Otis  v. 

2Seei;§766c,852,tn/^a,anfl§317,sr<j9ra.  Gardner,  105  111.  436  (1883i;  Ex  parte 

s  Westinghouseu  German  Nat.  Bank,  Sargent,  L.  R,  17  Eq.  273  (1874);  Cherry 

etc.,  188  Pa.  St.  630  (1898).  v.  Frost.  7  Lea  (Tenn.),  1  (1881),  the  court 

^Matteson    v.    Dent,   113    Iowa,   551  saying  that  in  general  a  pledgee  of  per- 

(1900).     See  also  g  321,  supra.  sonal  property  cannot  convey  a  good 

5  Usher  v.  Van  Vranken,  48  N.  Y.  App.  title  to  another;  but  "if  the  owner  in- 

Div.  413  (1900).  trusts  to  another  not  merely  the  posses- 

^  Smith  V.  American  Nat  Bank,  89  sion  of  the  property,  but  also  written 

Fed.  Rep.  832  (1898).  evidence  over  his  own  signature  of  title 

''The    important  case  of  McNeil  v.  thereto  and  of  unconditional  power  of 

Tenth  Nat.  Bank,  46  N.  Y.  325  (1871),  disposition  over  it,  the  case  is  vastly 

was  on  the  rights  of  a  bona  fide  re-  different."     Thus,  a  pledgee,  without 

pledgee  of  stock,  and  fully  sustains  the  notice,  of  bonds  from  a  pledgor,  who 

general  rule.     See  also  Fatman  v.  Lo-  turns  out  to  have  held  the  bonds  as  se- 

bach.  1  Duer,  354(1852);  Nelson  v.  Owen,  curities  for  the  cancellation  of  a  mort- 

113  Ala.  372  (1896);  Wood's  Appeal,  92  gage,  is  protected  in  his  pledge.     Saloy 

Pa.  St.  379  (1880);  Gass  v.  Hampton,  16  v.  Hibernia  Nat.  Bank,  39  La.  Ann.  90 

Nev.  185  (1881);  Mount  Holly,  etc.  Co.  r.  (1887>     Where   the   pledgee    of  stock 

9C0 


CH.  XXVI.] 


PLEDGE    OF    STOCK. 


[§  473. 


This  rule  arises,  not  on  the  ground  that  the  certificate  of  stock  is 
negotiable,  but  for  the  reason  that  the  owner  is  held  to  have  en- 
abled his  pledgee  to  sell  the  stock  as  the  pledgee's  own,  and  that  as 
between  the  owner  and  the  honafide  purchaser  or  pledgee  from  the 
pledgee  the  owner  must  bear  the  loss.  The  law  of  estoppel  pre- 
vents his  denying  the  right  of  his  pledgee  to  sell  or  pledge,  as 
against  a  lona  fide  purchaser  or  pledgee  from  the  pledgee.  So, 
also,  this  principle  arises  under  the  well-established  rule  that,  where 
one  of  two  innocent  parties  must  suffer  from  the  fraud  of  a  third, 
the  loss  must  fall  upon  him  who  enabled  the  third  party  to  perpe- 
trate the  fraud.     In  Nebraska  it  has  been  held   that  a  stockholder 


transfers  them  into  his  own  name  on 
the  books  of  the  company  and  takes  out 
new  certificates,  a  bona  _/ide  purchaser  or 
pledgee  from  him  is  protected.  West- 
inghouse  v.  German,  etc.  Bank,  196  Pa. 
St.  249  C1900).  A  bona  fide  pledgee  of  a 
certificate  of  stock  from  an  agent  hav- 
ing power  to  pledge,  but  who  had  so 
pledged  the  stock  for  purposes  not  au- 
thorized by  the  owner,  is  nevertheless 
protected,  and  even  though  such  pledgee 
sells  the  stock  at  private  sale  without 
notice  he  cannot  be  held  liable  if  the 
stock  was  not  worth  more  than  the  debt 
secured.  Brittan  v.  Oakdale,  etc.,  124 
Cal.  282  (1899).  A  honafide  pledgee  of 
fraudulently  issued  warehouse  receipts 
can  enforce  them  only  to  the  extent  of 
the  loan  and  interest.  Corn,  etc.  Bank 
V.  American,  etc.  Co.,  163  N.  Y.  332 
(1900).  In  Ortigosa  v.  Brown,  47  L.  J. 
(Ch.)  168  (1878),  the  court,  following  the 
English  doctrine  that  an  unregistered 
transferee  of  certificates  of  railway 
stock  has  no  more  rights  than  his  trans- 
ferrer, refused  to  protect  the  uni-eg-is- 
tered  repledgee  of  stock.  A  bona  fide 
purchaser  of  pledged  stock  is  protected 
in  his  title.  Krouse  v.  Woodward,  110 
CaL  638  (1895).  Where  stock  is  pledged 
as  collateral,  and  the  pledgee  sells  to  a 
honafide  purchaser  without  notice,  such 
purchaser  is  protected,  even  though  he 
at  the  same  time  purchases  the  note  for 
which  the  stock  is  collateral.  Strick- 
land V.  Leggett,  21  N.  Y.  Supp.  356 
(1892).  A  bona  fide  transferee,  abso- 
lutely or  in  pledge  from  a  broker,  hold- 


ing his  customer's  stock  in  pledge,  is 
protected  to  the  extent  of  the  transfer, 
the  transferee  having  no  notice  of  the 
fact  that  the  stock  was  held  in  pledge 
by  the  broker.  Thompson  v.  Toland,  48 
Cal.  99  (1874);  Zulick  v.  Markham,  6 
Daly,  129  (1875);  and  see  many  cases  in 
§  321,  supra.  These  cases  apply  equally 
whether  the  person  transferring  con- 
trary to  law  is  an  agent  or  a  pledgee, 
and  equally,  also,  whether  he  sells  or 
only  repledges.  In  a  decision  iu 
Maryland  an  important  distinction  is 
drawn  between  the  rights  of  a  bona 
fide  purchaser  and  a  honafide  pledgee. 
It  is  held  that  the  usual  form  of  trans- 
fer on  the  back  of  certificates  of  stock, 
signed  by  the  stockholder,  with  the 
name  of  the  transferee  left  blank,  does 
not  protect  a  bona  fide  pledgee.  The 
pledgee  is  chargeable  with  notice  of  all 
the  facts  and  equities.  Underthis  de- 
cision it  would  seem  to  be  necessary  in 
Maryland  to  enlarge  the  terms  and  form 
of  the  usual  assignment  and  power  of 
attorney  on  the  back  of  certificates  of 
stock.  German  Sav.  Bank  v.  Renshaw, 
78  Md.  475  (1894),  a  case  wherein  a  brc^ 
ker  holding  stock  on  a  margin  re- 
pledged  it  at  a  bank.  Where  the 
pledgee  repledges  stock  to  a  honafide 
pledgee,  and  'the  original  pledgor  sues 
the  first  pledgee  for  conversion,  the 
original  pledgor  cannot  then  sue  the 
repledgee  on  the  theory  that  the  re- 
pledge  was  not  properly  made.  Colton 
V.  Oakland  Bank,  etc.,  70  Pac.  Rep.  225- 
(Cal.  1902) ;  54  Atl.  Rep.  785. 


(61) 


961 


§  473.] 


PLEDGE    OF    STOCK. 


[cn.  XXVI. 


whose  stock  has  been  wrongfully  pledged  may  enjoin  the  corpora- 
tion from  allowing  a  transfer  by  the  pledgee  who  has  applied  for 
the  same,  and  the  pledgor  need  not  allege  that  the  pledgee  took 
with  notice.  It  is  for  the  pledgee  to  intervene  and  prove  that  the 
pledge  was  honafide}  If  the  pledgee  has  repledged  the  stock,  the 
owner  can  obtain  the  stock  only  by  paying  to  the  repledgee  the 
amount  of  the  latter's  advancement  to  the  first  pledgee.'-  In  case 
of  a  wrongful  repledge  the  pledgor  may  claim  the  proceeds  or  re- 
deem the  stock  from  the  second  pledgee.'*  "Where  the  second 
pledgee  has  sold  the  stock  for  non-payment  of  his  debt,  the  first 
pledgor  may  claim  the  excess,  the  amount  retained  by  the  repledgee 
being  more  than  the  first  pledgor's  debt.*  The  pledgor  of  stock, 
under  these  rules,  has  practically  no  protection  as  to  his  stock  ex- 
cept the  honesty  and  responsibility  of  his  pledgee.  The  hona  fide 
purchaser  or  pledgee  from  the  pledgee  is  equally  protected  whether 


1  Reynolds  v.  Touzalin  Imp.  Co.,  63 
Neb.  236  (1901). 

2  Wood's  Appeal,  92  Pa.  St.  379  (1880); 
Fatman  v.  Lobach,  1  Duer,  354  (1852); 
Ex  parte  Sargent,  L.  K,  17  Eq.  273 
(1874);  Cherry  v.  Frost,  7  Lea  (Tenn.),  1 
(1881),  holding,  however,  that  payments 
on  the  subscription  by  the  owner  sub- 
sequently to  the  repledge  do  not  inure 
to  the  benefit  of  the  repledgee.  See,  in 
general,  Donald  r.  Suckling,  L.  R  1  Q. 
B.  585  (1866);  Moore  v.  Conham,  Owen, 
123  (1610);  Ratcliff  v.  Davis,  Yelv.  178 
(1611);  Jarvis  v.  Rogers,  15  Mass.  389 
(1819). 

3  Chamberlain  v.  Greenleaf.  4  Abb.  N. 
Cas.  178  (1878). 

4  Re  Bonner,  8  Daly,  75  (1878).  See  also 
Fowle  V.  Ward,  113  Mass.  548  (1873). 
Where  a  broker  repledges  stock  held  by 
him  in  pledge  and  then  becomes  insolv- 
ent, the  original  pledgors  may  claim  a 
surplus  remaining  after  a  sale  of  the 
stock  by  the  repledgee.  Such  surplus 
does  not  belong  to  the  estate  of  the  bro- 
ker. Even  though  the  broker  had  also 
pledged  with  such  stock  certain  secu- 
rities which  had  been  deposited  with 
him,  not  in  pledge,  but  to  sell,  the 
owner  of  such  securities  can  share  pro- 
portionately in  such  surplus,  but  has  no 
right  superior  to  the  pledgor's.  Rhine- 
lander  V.  National  City  Bank,  36  N.  Y. 


App.  Di%-.  11  (1899).  Where  the  pledgee 
repledges  the  stock  to  a  bank  and  then 
goes  into  bankruptcy,  and  the  bank 
after  selling  all  the  securities  held  by 
it  as  pledgee  of  the  bankrupt  has  a  sur- 
plus equal  to  the  amount  of  the  stock 
so  repledged,  the  original  pledgor  is 
entitled  to  such  excess.  In  re  Swift, 
108  Fed.  Rep.  212  (1901).  Where  the 
pledgee  repledges  the  stock  in  breach 
of  trust,  the  original  pledgor  is  entitled 
to  the  surplus  after  the  repledgee  has 
sold  his  stock  and  paid  his  debt,  even 
though  the  original  pledgee  is  in  bank- 
ruptcy, Hutchinson  v.  Le  Roy,  113 
Fed.  Repi  202  (1902).  Even  though  a 
broker  repledges  the  stocks  of  various 
customers  without  authority  from  them, 
the  pledgee  is  protected  if  he  had  no 
knowledge  of  the  fact  that  the  broker 
did  not  own  the  stocks;  and  if  the 
pledgee,  after  selling  out  the  stocks  on 
notice,  has  a  balance  remaining  both  of 
money  and  stocks,  the  customers  pro- 
rate as  to  such  balance,  even  though 
the  stocks  of  some  of  them  were  not 
sold  by  the  pledgee.  This  rule  is  based 
on  the  principle  that  if  they  all  had 
united  in  redeeming  from  the  pledgee 
they  would  have  borne  the  \o?,s  prorata. 
Whitlock  V.  Seaboard  Nat.  Bank,  29 
N.  Y.  Misc.  Rep.  84  (1899). 


962 


CH.  XXVI.] 


PLEDGE    OF    STOCK. 


[§  473. 


the  certificates  of  stock  are  indorsed  by  the  pledgor  or  vendor,  or 
are  indorsed  in  blank  by  some  previous  holder.^  The  repledgee  or 
vendee  is  held  to  be  a  hona  fide  holder,  however,  only  where  he 
would  be  held  so  to  be  in  cases  of  promissory  notes  and  other  simi- 
lar cases.- 

The  general  rule  of  law  is  that  a  pledgee  holding  various  secu- 
rities may  resort  to  any  one  security  which  he  chooses.  He  is 
not  bound  to  resort  to  those  securities  upon  which  other  creditors 
have  no  claim.^  Under  such  circumstances,  however,  as  give  a 
court  of  equity  power  so  to  do,  especially  where  a  repledgee  has 
other  collateral  for  his  debt,  a  court  of  equity  may  marshal  the  as- 
sets and  compel  resort  to  such  other  collateral  firsf     Where  the 


1  Gass  V.  Hampton,  16  Nev.  185  (1881). 

2  See  §  293,  supra.  The  word  '•  trustee  " 
•on  the  face  of  the  certificate  is  notice, 
and  deprives  the  pledgee  of  his  charac- 
ter of  being  a  hona  fide  holder.  See 
§  325,  supra.  In  New  York  a  pledgee 
is  not  bona  fide  when  he  takes  bonds  in 
pledge  for  a  precedent  debt.  Duncomb 
V.  N.  Y.  etc.  R.  R.,  84  N.  Y.  190,  204 
(1881);  Gould  v.  Farmers'  L.  &  T.  Co.. 
23  Hun,  322  (1880).  A  pledgee  of  stock 
for  an  antecedent  debt  is  not  a  bona 
fide  holder.  Shuster  v.  Jones,  58  S.  W. 
Rep.  595  (Ky.  1900).  A  pledgee  is  not 
bona  fide  when  the  name  of  another 
pledgee  in  the  certificate  is  erased  and 
his  own  inserted.  Denny  v.  Lyon,  38 
Pa.  St.  98  (1860).  Where  a  party  re- 
ceives from  his  debtor  certain  stock  as 
security  for  the  purchase  of  other  stock 
and  holds  it  for  the  old  debt,  and  sells 
it  after  being  notified  that  it  belongs  to 
another  party,  he  is  liable  to  the  latter 
party  for  conversion.  Niles  v.  Edwards, 
90  Gal.  10  (1891).  A  registered  munici- 
pal bond  with  coupons  attached  is  nego- 
tiable, where  the  name  of  the  payee  is 
left  blank  on  the  face  of  the  bond,  even 
though  in  books  kept  lor  that  purpose 
the  name  of  the  registered  owner  is 
entered.  Hence  a  purchaser  in  good 
faith,  of  such  a  bond  is  protected,  al- 
though the  bond  was  stolen.  A  hona 
fide  pledgee  is  likewise  protected.  Man- 
hattan Sav.  Inst.  V.  N.  Y.  etc.  Bank, 
170  N.  Y.  58  (1902).  A  bank  may  be  a 
bona  fide  pledgee  of   stock  from   its 


cashier,  even  though  such  stock  is  in 
the  name  of  a  third  person  and  is  in- 
dorsed by  the  latter.  Brady  v.  Mount 
Morris  Bank.  65  N.  Y.  App.  Div.  212 
(1901).      See  94  N.  W.  Rep.  200. 

3  Jennings  v.  Loeffler,  184  Pa.  St.  818 
(1898).  Where  stock  is  pledged  to  se- 
cure several  debts,  some  of  which  are 
secured  in  other  ways,  the  pledgee  may 
apply  the  proceeds  of  the  pledge  to 
those  debts  which  are  not  secured  by 
indorsements.  Fall  River  Nat.  Bank 
V.  Slade,  153  Mass.  415  (1891).  Where 
the  pledgor  gives  the  pledgee  the  right 
to  say  w'hich  debt  or  liability  the 
pledge  should  be  applied  to,  this  right 
cannot  be  controlled  by  the  court.  Don- 
nally  v.  Hearndon,  41  W.  Va.  519  (1895). 
In  a  suit  to  foreclose  a  pledge  of  stock 
where  the  pledgee  has  other  securities 
also,  the  court  will  not  compel  the 
pledgee  to  sell  the  other  securities  first. 
Work  V.  Ogden,  N.  Y.  L.  J.,  May  20, 
1890.  In  a  suit  by  the  pledgee  to  have 
the  pledge  sold,  it  is  no  defense  that  he 
also  has  real-estate  security;  nor  is  it  a 
defense  that  he  has  been  given  control 
of  the  company.  Weiscopt  v.  Newman, 
65  S.  W.  Rep.  808  (Ky.  1901).  In  New  Jer- 
sey  it  has  been  held,  however,  that  if  the 
pledgee  has  also  other  security,  an  un- 
secured creditor  of  the  pledgor  may 
compel  the  pledgee  to  resort  to  such 
other  security  first.  Bishop,  etc.  Assoc. 
V.  Kennedy,  12  Atl.  Rep.  141  (N.  J.  1887). 

4  Gould  V.  Farmers'  L.  &  T.  Co.,  23 
Hun,  322  (1880);  Herbert  v.  Mechanics' 


963 


§  4T3.J 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


pledgee  has  repledged  the  stock  illegally  to  hona  fide  holders,  the 
latter,  upon  being  informed  of  the  fact  by  the  first  pledgor,  are 
bound  to  apply  the  proceeds  of  the  other  securities  held  by  them 


before 


resorting 


to  the  stock  owned  by  him,  the  first  pledgor 


Bldg.  etc.  Assoc,  17  N.  J.  Eq.  497  (1864). 
reversing,  on  this  point,  Mechanics', 
etc.  Assoc.  V.  Conover,  14  N.  J.  Eq.  219 
(1862).  Where  the  pledgee  repledges 
the  stock  illegally  with  other  stock,  the 
first  pledgor  may  enjoin  the  second 
pledgee  from  selling  the  stock  until 
the  other  stock  of  the  pledgee  is  sold, 
and  an  account  rendered,  and  notice  of 
intent  to  sell  the  remainder  given. 
Myers  v.  Merchants'  Nat.  Bank,  16  N. 
Y.  Supp.  58  (1891).  The  pledgor  himself 
cannot  enjoin  a  sale  by  the  pledgee,  un- 
less the  pledgee  is  insolvent.  The  pledg- 
or's remedy  is  at  law.  Park  v.  Mus- 
grave,  3  Thomp.  &  C.  (N.  Y.)  571  (1874). 
Where  a  broker  pledgee,  with  the  assent 
of  the  pledgor,  has  repledged  the  stock, 
the  second  pledgor  having  no  notice  of 
who  the  first  pledgor  is,  may  hold  all 
stocks  until  all  the  debts  from  the 
second  pledgor  to  him  are  paid.  A  per- 
son who  gave  stock  to  the  first  broker 
to  sell  is  preferred  to  one  who  pur- 
chased stock  on  a  margin.  Willard  v. 
White,  56  Hun,  581  (1890).  Where 
pledged  stock  is  repledged  and  sold  out 
by  the  repledgee,  together  with  various 
other  stock  held  as  collateral  by  the  re- 
pledgee,  a  court  of  equity  will  marshal 
the  assets.  Smith  v.  Savin,  9  N.  Y. 
Supp.  106  (1890);  afif'd,  69  Hun,  311,  and 
141  N.  Y.  315  (1894).  Where  the  pledgee 
sells  the  securities  and  has  a  surplus,  he 
cannot  interplead  between  two  claim- 
ants where  he  is  sued  by  one  of  them 
for  more  than  he  admits  the  surplus 
amounts  to.  Dodge  v.  Lawson,  N.  Y.  L. 
J.,  April  20,  1892.  A  pledgee  need  not 
resort  to  the  pledge  in  order  to  obtain 
payment,  but  if  the  pledgor  becomes 
insolvent  the  court  will  marshal  the  as- 
sets. Chemical  Nat.  Bankr.  Armstrong, 
50  Fed.  Rep.  798  (1892).  See  also  §g  476, 
763,  infra,  and  §§  456,  460,  supra. 
1  The  latter  cannot  object  to  the  mode 


of  selling  the  other  securities.  Smith 
V.  Savin,  141  N.  Y.  315  (1894>»  holding, 
moreover,  that  the  first  pledgor  may 
hold  such  second  pledgee  liable  for  a 
sale  without  notice,  there  being  no 
waiver  of  notice.  Where  the  pledgee 
wrongfully  rehypothecates  the  pledge, 
together  with  other  securities,  the 
pledgor  may  pay  the  debt  due  to  the 
repledgee  and  take  all  the  securities 
and  sell  them  all  out,  and  may  also  sue 
the  pledgee  for  conversion.  The  court 
will  require  the  pledgor  to  indorse  upon 
the  judgment  for  conversion  a  suitable 
credit  for  the  amount  realized  out  of 
such  sale  of  the  securities  by  the  pledgor. 
The  court  said  that  if  a  hona  fide  re- 
pledgee is  informed  of  the  conversion 
by  the  original  pledgee,  the  repledgee 
is  then  bound,  in  case  he  sells  out  the 
securities,  to  turn  over  the  surplus  to 
the  pledgor.  The  court  also  held  that 
the  repledgee,  upon  receiving  notice, 
was  bound  to  resort  to  other  collateral 
before  selling  the  collateral  wrongfully 
repledged  by  the  pledgee  to  the  re- 
pledgee. A  receiver  of  the  pledgee  has 
no  greater  rights  than  the  pledgee  him- 
self. Union  Pac.  Ry.  v.  Schiff,  78  Fed. 
Rep.  216  (1897).  Where  the  pledgee 
wrongfully  repledges  the  securities,  and 
the  original  pledgor  takes  up  the  se- 
curities from  the  repledgee  and  agrees 
to  protect  the  repledgee,  the  original 
pledgor  cannot  subsequently  repudiate 
the  transaction  and  hold  the  repledgee 
liable  for  the  securities  originallj^  re- 
pledged. Union  Pac.  Ry.  v.  Schiff,  74 
Fed.  Rep.  674  (1896).  Where  the  pledgor 
sues  the  pledgee  for  conversion,  in  that 
the  pledgee  repledged  the  collateral, 
and  the  pledgor  obtains  judgment  for 
the  difference  between  the  value  of  the 
stock  and  the  amount  due  from  the 
pledgor,  and  subsequently  the  pledgee 
or  his  receiver  recovers  back  some  of 


964 


CH.  XXVI.]  PLEDGE    OF    STOCK.  [§  473. 

Where,  by  custom,  a  broker  repledges  the  stock  of  his  customer, 
together  with  other  stock,  the  customer  cannot  insist  that  the  bro- 
ker's stock  be  first  applied  to  the  debt.  Where,  however,  the  cus- 
tomer had  not  authorized  the  broker  to  repledge  the  stock,  then 
the  stock  owned  by  the  broker  and  pledged  together  with  the  stock 
of  the  customer  wiil  first  be  applied  to  the  debt.^  Where  a  customer 
delivers  stock  to  a  broker  and  the  broker  without  his  consent  trans- 
fers it  into  his  own  name,  the  customer  may  claim  the  new  certifi- 
cate upon  satisfactorily  identifying  the  stock."^  Where  a  customer 
pledges  his  stock  with  the  broker,  and  the  latter  wrongfully  re- 
pledges  it  and  fails,  and  the  customer  notifies  the  repledgee  of  his 
claim  and  demands  notice  of  any  sale,  the  repledgee  is  liable  if  he 
•sells  without  notice  to  the  former  and  turns  the  surplus  over  to  the 
assignee  of  the  broker.^ 

Where  a  pledgor  becomes  insolvent  the  question  often  arises  as 
to  whether  the  pledgee  may  prove  his  entire  claim  against  the  es- 
tate, or  whether  the  pledgee  must  first  realize  what  he  can  from 
the  pledge  and  then  present  a  claim  for  the  deficiency  only.  The 
rule  is  now  well  established,  however,  that  the  pledgee  may  prove 
his  entire  claim  against  the  insolvent  estate  of  the  pledgor,  and 
may  demand  his  proportionate  part  of  such  estate,  the  same  as 
though   he    had  no   collateral  security  whatsoever.*     A  creditor 

the  stock  so  repledged,  the  pledgor  can-  made  therefrom  after  such  declaration, 

not  reclaim  such  stock.     Deitz  v.  Field,  subject  always  to  the  proviso  that  divi- 

10  N.  Y.  App.  Div.  425  (1896).  dends  must  cease  when,  from  them  and 

1  Skiff  V.  Stoddard,  63  Conn.  198  (1893),  from  collaterals  realized,  the  claim  has 
holding  also  that  a  customer  who  de-  been  paid  in  full.  Merrill  v.  National 
posits  stock  with  a  broker  to  secure  a  Bank,  etc.,  173  U.  S.  131  (1899).  A  holder 
marginal  contract  may  i-edeem  the  same  of  collateral  may  enforce  his  claim  in 
from  the  assignee  of  the  broker  for  the  the  ordinary  way  by  judgment  and 
benefit  of  the  creditors,  but  the  identity  execution  against  the  debtor,  without 
of  the  stock  must  be  established,  and  any  deduction  for  his  collateral.  Chem- 
that  if  there  is  not  sufficient  stock  to  ical  Nat.  Bank  v.  Armstrong,  59  Fed. 
satisfy  all  claims  on  that  class  of  stock,  Rep.  373  (1893);  Lewis  v.  United  States, 
the  stock  is  prorated  among  all  claim-  92  U.  S.  618  (1875).  A  creditor  of  a  cor- 
ants.  poration  who  holds  collateral  secui'ity 

2  Mould  V.   Importers',  etc.  Bank,  72  for  his  debt  cannot  be  compelled  to  qx- • 
N.  Y.  App.  Div.  30  (1902).  haust  such  security  before  resorting  to 

3  Le  Marchant  v.  Moore,  79  Hun,  352  the  general  assets  of  the  corporation 
(1894);  afif'd,  150  N.  Y.  209.  for    payment.     Doe    v.    Northwestern 

4  People  V.  Remington,  121  N.  Y.  328  Coal,  etc.  Co.,  78  Fed.  Rep.  62  (1896). 
(1890).  A  secured  creditor  of  an  in-  The  pledgee  may  prove  his  entire  claim 
solvent  national  bank  may  prove  and  against  the  insolvent  pledgor's  estate 
receive  dividends  upon  the  face  of  his  without  first  resorting  to,  surrender- 
claim  as  it  stood  at  the  time  of  the  dec-  ing,  or  accounting  for  the  pledge.  Re 
laration  of  insolvency,  without  credit-  Ives,  UN.  Y.  Supp.  655  (1890).  See  also 
ing  either  his  collaterals  or  collections  §  763,  infra,     A  pledgee  is  entitled  to 

965 


§  ^T^-] 


PLEDGE    OF    STOCK. 


[CII.  XXVI. 


holding  collateral  must  first  exhaust  that  before  holding  the  stock- 
holders liable  on  their  subscription  liability,  there  being  other 
creditors.^ 

§  474.  Fledges  ly  agents,  trustees,  executors,  etc.,  legally  and  in 
breach  of  trust— It  is  within  the  power  of  an  executor  or  admin- 
istrator to  pledge  shares  of  stock  belonging  to  the  estate,  and  the 
pledgee  is  protected  even  though  he  knew  that  the  executor  pledged 
it  as  an  executor.^     The  fact  that  stock  is  specifically  bequeathed 


a  dividend  from  the  pledgor's  estate 
without  resorting  to  his  pledge  and 
without  delivering  it  up  to  the  estate. 
Wheeler  v.  Walton,  etc.  Co.,  73  Fed. 
Rep.  966  (1896).  See  also  S  476,  infra. 
The  fact  that  a  creditor's  claim  is  se- 
cured by  mortgage  or  otherwise  does 
not  affect  his  right  to  prove  for  the  full 
amount  of  the  claim,  nor  does  the  fact 
that  he  has  realized  part  thereof  out  of 
the  collateral  since  the  date  of  the  re- 
ceivership; but  in  the  latter  case  he  is 
entitled  to  dividends  only  until  the 
balance  of  his  debt  is  satisfied.  New 
York  Security,  etc.  Co.  v.  Lombard  Inv. 
Co.,  73  Fed.  Rep.  537  (1896).  The  pledgee 
may  file  his  claim  in  the  probate  court 
against  the  pledgor's  estate,  and  may 
then  sell  the  pledge,  and  will  be  en- 
titled to  participate  in  the  estate  with- 
out deduction  of  the  amount  realized 
on  the  sale,  unless  he  would  thereby 
receive  more  than  the  whole  debt. 
Furness  ii.  Union  Nat.  Bank,  147  111. 
570(1893).  Where  a  pledgee  has  real- 
ized on  his  security,  he  participates  in 
the  insolvent  estate  of  the  pledgor  on 
only  the  balance  remaining  due  to 
him.  Philadelphia  Warehouse  Co.  v. 
Anniston  Pipe  Works,  106  Ala.  357 
(1895).  In  Nebraska,  the  court,  after 
reviewing  the  conflicting  rules  in  the 
different  states,  held  that  where  a  cred- 
itor held  collateral  he  must  deduct 
from  his  claim  all  that  he  realizes  from 
the  collateral,  before  he  can  get  a  divi- 
dend, and  must  also  deliver  up  his  col- 
lateral to  the  receiver.  State  v.  Ne- 
braska Sav.  Bank,  40  Neb.  343  (1894). 

Where  a  corporation  assumes  a  mort- 
gage and  then  becomes  insolvent,  the 


mortgagor  is  entitled  to  a  dividend 
from  its  assets  on  the  whole  mortgage 
debt  existing  at  the  time  of  such  as- 
sumption, even  though  the  mortgagor 
has  foreclosed  and  realized  a  part  of 
the  debt.  Matter  of  Simpson,  36  N.  Y. 
App.  Div.  563  (1899).  Collateral  secu- 
rity furnished  by  the  stockholders  to  a 
corporate  creditor  is  not  to  be  deducted 
before  the  claim  participates  in  the  as- 
sets of  the  insolvent  corporation,  al- 
though the  rule  is  different  in  Mary- 
land where  the  security  was  furnished 
to  the  corporation  itself.  Rogers  v. 
Citizens',  etc.  Bank,  93  Md.  613  (1901). 
Where  the  stockholder  has  died  and  his 
estate  is  being  distributed,  the  portion 
going  to  the  corporation  by  reason  of 
its  lien  will  not  be  decreased  by  the 
amount  of  dividends.  In  re  Hovey's 
Estate,  198  Pa.  St.  385  (1901).  Under 
the  New  Hampshire  statutes  the  holder 
of  a  mortgage  as  security  for  a  note 
cannot  prove  the  full  amount  of  the 
note  in  insolvency  proceedings,  but 
must  first  deduct  the  value  of  the  se- 
curity; but  the  rule  is  otherwise  as  to 
an  indorsement  made  by  the  insolvent 
party.  Bank  Com'rs  v.  Security,  etc. 
Co..  70  N.  H.  536  (1901). 

1  Welch  V.  Sargent,  127  Cal.  73  (1899). 
Even  though  a  corporate  creditor  has 
realized  a  part  of  his  debt  under  the 
stockholders'  statutory  liability,  yet  he 
may  participate  in  the  assets  of  the 
corporation  as  though  no  part  of  his 
debt  had  been  paid.  Sacramento  Bank 
V.  Pacific  Bank,  134  Cal.  147  (1899). 

-  Goodwin  v.  American  Nat.  Bank,  48 
Conn.   550  (1881);   Wood's   Appeal,   93 
Pa.  St.  379  (1880);  Carter  v.  Manufact- 
966 


OH.  XXVI.]  PLEDGE    OF    STOCK.  [§  474. 

to  the  executors  as  trustees  does  not  prevent  the  executors  selling 
or  pledging  such  stock,  and  the  pledgee  or  purchaser  is  protected 
and  need  not  inquire  into  the  necessity  of  the  sale  or  pledge.^ 
Where  stock  is  specifically  bequeathed  to  an  executor  as  trustee, 
and  five  vears  thereafter  the  executor  is  discharged,  but  continues 
as  trustee,  and  two  years  thereafter  he  fraudulently  pledges  the 
stock  as  executor,  the  pledgee  is  not  protected,  since  the  lapse  of 
time  was  sufficient  to  put  him  on  inquiry .^  Where  an  executor 
pledges,  for  his  personal  debt,  stock  belonging  to  the  estate,  in 
breach  of  trust,  the  pledgee  is  not  protected,  even  though  the  cor- 
poration issued  a  new  certificate  to  the  pledgee,  by  mistake,  as  ab- 
solute owner,  and  he  cannot  hold  the  corporation  liable  for  retain- 
ing the  new  certificate,  upon  its  being  delivered  for  transfer  to  a 
purchaser  with  notice.^  A  trustee,  on  the  other  hand,  has  no  im- 
plied power  to  pledge  or  sell  corporate  stock  belonging  to  the 
trust.*  Express  power  to  a  trustee  to  sell  and  reinvest  does  not 
give  him  power  to  pledge.^  An  agent's  pledges  of  his  principal's 
stock,  in  breach  of  his  duty  as  agent,  follow  the  same  rules  as 
where  a  pledgee  repledges  the  stock  given  to  him  in  pledge.  A 
honajide  holder  for  value  and  without  notice  is  protected,  while 
one  who  takes  with  notice  is  not  protected.  Where,  however,  the 
one  taking  stock  in  pledge  from  an  agent  knows  that  the  latter  is 
acting  as  agent,  he  is  bound  to  inquire  whether  the  principal  has 
authorized  his  agent  to  pledge  the  stock,  since  a  power  to  pledge 
cannot  be  presumed  from  a  power  to  sell.^  The  express  power  of 
an  agent  to  sell  securities  is  revoked  by  the  death  of  the  principal, 
and  if  he  sells  thereafter  he  is  liable  for  damages  in  conversion.'' 

urers'  Nat.  Bank,  71  Me.  448  (1880);  2Schell  u.  Deperven,  198  Pa.  St.  591 
§  329,  supra;  Manhattan  Bank  v.  (1901).  See  also  g  329,  supra. 
Walker,  130  U.  S.  267  (1889).  A  pledgee  3  Davis  v.  National,  etc.  Bank,  50  Atl. 
from  an  executor  is  protected.  Gott-  Rep.  530  (R.  I.  1901).  Where  an  execu- 
berg  V.  U.  S.  Nat.  Bank,  13  N.  Y.  Supp.  tor  pledges  stock  for  his  own  debt,  the 
841  (1890).  If  a  pledge  of  stock  by  an  pledgee  knowing  the  fact  so  to  be,  the 
executor  is  illegal,  the  pledgee  is  not  latter  becomes  trustee,  and  the  statute 
protected  where,  not  trusting  to  the  of  limitations  does  not  run  against  re- 
executor's  power  as  executor,  he  causes  demption  until  after  the  pledgee  has 
the  stock  to  be  transferred  first  to  a  notified  the  cestui  que  trust  of  the  es- 
legatee.  Moore  v.  American  L.  &  T.  tate  that  he  holds  the  stock  adverselj-. 
Co.,  115  N.  Y.  65  (1889).  Pledgees  from  Marshall's  Estate,  138  Pa.  St.  285  (1890). 
the  trustee  for  antecedent  debts  are  As  to  who  is  a  hona  fide  holder,  see 
not  hona  fide  holders  without  notice,  §  293,  supra. 
even  though  the  form  of  a  public  sale  *  See  §g  323-327,  supra. 
was  gone  througli.  Darling  v.  Potts,  5  First  Nat.  Bank  v.  Nat.  Broadway 
118  Mo.  506  (1893).  Bank,  156  N.  Y.  459  (1898). 

iSchell  V.  Deperven,  198  Pa.  St.  600  « Seech.  XIX,  §  321,  supra. 

(1901);  Schell  v.  Deperven,  198  Pa.  St.  flatter  of  Mitchell,  36  N.  Y.  App. 

591  (1901).    See  also  §  329,  supra.  Div.  542  (1899). 

967 


§  475.]  PLEDGE    OF    STOCK.  [CH.  XXVI. 

Where  an  agent  wrongfullj^repledges  the  stock  belonging  to  his  prin- 
cipal and  then  assigns  for  the  benefit  of  creditors,  and  his  assignee 
obtains  repossession  of  the  stock  by  realizing  on  other  securities 
which  were  pledged  with  it,  the  original  owner  of  the  stock  may 
reclaim  it.^  The  right  of  corporations  and  persons  to  give  and  take 
stock  in  pledge  is  considered  elsewhere.^  The  authority  of  a 
guardian  given  by  the  court  to  sell  stock  does  not  authorize  him  to 
pledge  the  stock.''  Power  of  an  agent  to  sell  does  not  give  him 
power  to  pledge  for  his  own  use,  and  where  the  corporation  with 
knowledge  of  the  facts  allows  a  transfer  it  is  liable  to  the  owner.* 
The  power  of  a  corporate  agent  to  sell  bonds  does  not  give  him 
power  to  pledge  them  even  to  secure  corporate  debts.  Holders  not 
'bona  fide  are  not  protected.^  A  honafide  pledgee  of  stock  indorsed 
in  blank  on  the  back  is  protected.^ 

§  ^"lo.  Pledgor's  remedies. —  The  pledgor  cannot  enjoin  a  sale  of 
the  pledge  by  the  pledgee  or  by  a  repledgee,  unless  the  pledgee  is 
insohent.  The  pledgor's  remedy  is  at  law.''  The  fact  that  a  pledgor 
claims  that  the  pledgee  owes  him  more  money  than  he  owes 
the  pledgee  is  not  sufficient  to  sustain  a  bill  in  equity  to  enjoin  the 
pledgee  from  selling  the  stock  in  order  to  pay  the  amount  due. 
Some  other  ground  of  equitable  jurisdiction  must  be  set  forth.^ 
"Where  the  pledgee  of  stock  has  been  guilty  of  a  conversion  of  it,  the 
pledgor's  remedy  CLgainst  him  is  generally  by  an  action  at  law  for 

iWoodside   v.   Grafflin,  91  Md.   432  is  insolvent.     Sy^ncuse,  etc.  Ry.  u  Salt 

(1900).  Springs,  etc.  Bank,  28  N.  Y.  Misc.  Rep. 

2  See  ch.  XIX,  supra.  619  (1899). 

8  O'Herron    v.  Gray,  168    Mass.    573  8  Elliott  v.  Sibley.  101  Ala.  344  (1893). 

(1897).  In  a  suit  in  equity  by  a  stockholder  to 

*  Read  v.  Cumberland  Tel.  etc.  Co.,  enjoin  a  sale  of  his  stock  by  the  corpo- 

93  Tenn.  482  (1894).  ration  for  a  debt  due  the  corporation, 

5  Shaw  V.  Saranac,  etc.  Co.,  144  N.  Y.  the  corporation  is  a  necessary  party 
220  (1894).  Where  one  party  author-  defendant.  The  complainant  must 
izes  another  party  to  pledge  the  for-  aver  a  readiness  to  pay  vphatever  may 
mer's  stock  for  a  certain  purpose,  and  be  found  due.  Elliott  v.  Sibley,  101  Ala. 
the  latter  pledges  it  for  a  different  pur-  344  (1893).  In  a  sale  by  a  bank  as 
pose,  the  pledgee  is  not  protected  if  he  pledgee,  the  bank  cannot  be  enjoined 
took  the  stock  with  notice.  Bowen  v.  on  the  ground  that  the  president  had 
Cleary,  35  S.  W.  Rep.  281  (Ky.  1896).  secretly    agreed    that    the    collateral 

6  Gilbert  v.  Erie  Bldg.  Assoc,  184  Pa.  would  not  be  resorted  to.  Breyfogle  v. 
St.  554  (1898).  Walsh,  71  Fed.  Rep.  898  (1894).     Where 

7  Park  V.  Musgrave,  2  Thomp.  &  C-  the  pledgee  illegally  includes  another 
(N.  Y.)  571  (1874).  Cf.  note  3,  p.  971,  infra,  debt  in  his  claims  and  advertises  the 
Even  though  the  pledgee  of  bonds  has  stock  for  sale,  and  a  bill  is  then  filed  to 
repledged  the  bonds  illegally,  yet  the  enjoin  the  sale  and  to  redeem,  and  the 
pledgor  cannot  enjoin  the  repledgee  pledgee  then  offers  to  take  the  amount 
from  selling  the  bonds  where  there  is  justly  due,  but  does  not  give  the  pledgor 
no  allegation  that  the  original  pledgee  reasonable  time  in  which  to  pay,  and 

96S 


ca.  xxYi.] 


PLEDGE    OF    STOCK. 


[§  -^ro. 


•damages.  He  need  not  tender  to  the  pledgee  the  amount  of  the 
debt  secured  by  the  pledge,  since  the  pledgee  may  recoup  to  that 
■extent  and  thus  decrease  the  damages  of  the  pledgor.^  Where  the 
pledgee  sells  the  debt  and  stock  to  another  person  and  the  latter 
sells  the  stock  without  the  debt,  and  the  purchaser  sells  the  stock 
to  still  another  person,  the  various  sales  being  a  conspiracy, 
the  pledgor  may  sue  the  various  purchasers  for  conversion,  and 
need  not  tender  the  debt  or  make  any  demand  before  commencing 


the  sale  tabes  place,  and  the  pledgee 
buys  the  stock  and  then  sells  a  part  of  it. 
the  pledgor  in  the  bill  so  filed  may  have 
damages  for  the  value  of  all  the  stock 
with  interest,  less  the  amount  justly 
due.  Blood  v.  Erie,  etc.  Loan  Co.,  164 
Pa.  St.  95  (1894).  An  injunction  against 
a  pledgee  disposing  of  stock  owned 
by  a  certain  party,  or  an  attachment 
upon  the  interest  of  that  party,  does 
not  prevent  the  pledgee  selling  the 
stock  if  such  stock  really  belonged  to 
the  wife  of  tliat  party.  Fourth  Nat. 
Bank,  etc.  v.  Crescent,  etc.  Co.,  53  S.  W. 
Rep,  1021  (Tenn.  1897). 

1  Allen  V.  Dykers,  3  Hill  (N.  Y.),  593 
(1842);  aflf'd,  Dykers  v.  Allen,  7  Hill 
(N.  Y.),  497;  New  York,  etc.  E.  R.  v.  Da- 
vies,  38  Hun,  477  (1886);  Work  v.  Benr 
nett,  70  Pa.  St.  484  (1872);  Neiler  v. 
Kelley,  69  Pa.  St.  403  (1871);  Langton 
V.  Waite,  L.  R  6  Eq.  165  (1868);  Felt  v. 
Heye,  23  How.  Pr.  359  (1862);  Lewis  r. 
Oraham,  4Abb.  Pr.  106  (1857);  Cortel- 
you  V.  Lansing.  2  Caines'  Cas.  200  (1805); 
Fisher  v.  Brown,  104  Mass.  259  (1870). 
However,  a  later  case  in  Massachu- 
setts —  Cumnock  v.  Newburyport  Sav. 
Inst.,  142  Mass.  342  (1886)  — holds  that 
a  tender  of  payment  of  a  debt  is  neces- 
sary to  enable  a  pledgor  to  maintain 
trover  for  a  conversion  of  property 
pledged,  unless  the  lien  created  by  the 
.  pledge  has  been  otherwise  discharged. 
'•After  the  sale  by  the  pledgee,  the 
pledgor  need  not  make  a  tender  of  the 
amount  due  nor  a  demand  of  the  se- 
curities before  bringing  his  action.  .  .  . 
A  formal  tender  of  the  amount  of  the 
•notes  would  have  been  a  useless  cere- 


mony, such  as  the  law  never  requires." 
Fletcher  v.  Dickinson,  89  Mass.  23  (1863). 
Where  the  customer  sues  the  broker 
for  selling  the  stock  illegally,  the  broker 
may  set  up  the  amount  due  from  the 
customer,  not  by  way  of  recoupment, 
but  by  way  of  a  lien  on  the  stock.  Far- 
rar  v.  Paine,  173  Mass.  58  (1899).  A  sale 
by  a  pledgee  without  notice  is  a  con- 
version, and  the  pledgor  may  sue  for 
the  value  of  the  stock  without  tender- 
ing the  debt,  but  the  pledgee  may  re- 
coup to  the  extent  of  a  debt.  Feige  v, 
Burt,  118  Mich.  243  (1898).  A  pledgor's 
vendee  may  tender  the  amount  of  the 
debt  and  demand  the  stock  as  a  condi- 
tion of  payment.  Trover  lies  for  a  re- 
fusal of  pledgee  to  deliver.  The  pledgee 
is  liable  for  depreciations  of  stock  after 
such  tender.  An  attachment  of  stock 
against  the  pledgor,  but  after  sale  by 
him,  is  no  defense  to  the  pledgee.  Ten- 
der is  sufficient  without  paying  the 
money  into  court  Loughborough  v. 
McNevin,  74  Cal.  250  (1887).  See  also 
Thompson  v.  St  Nicholas  Nat.  Bank,  113 
N.  Y.  325  (1889),  and  §  461.  siqjra.  The 
pledgee  sued  for  conversion  may  set  off 
the  debt  due  him.  Van  Shaick  v.  Ram- 
sey, 90  Hun,  550  (1895).  Where  the 
pledgee  buys  the  security  at  the  public 
sale  and  then  sells  it,  and  then  sues  the 
pledgor  for  the  deficiency  on  the  first 
sale,  the  pledgor  may  claim  a  set-oflf 
for  the  full  value  of  the  securities 
wrongfully  resold,  and  need  not  make  a 
tender.  Rush  v.  First  Nat.  Bank,  71 
Fed.  Rep.  102  (1895),  reviewing  the  au- 
thorities on  tender  in  such  cases. 


969 


§  475.] 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


suit.^  The  pledgor's  damages  are  measured  by  the  market  value 
of  the  stock  at  the  time  of  the  conversion,  together  with  interest 
and  subsequent  damages.-  The  pledgor  may  be  barred  from  his 
action  for  damages  by  a  waiver  of  the  particular  act  of  conversion 
by  the  pledgee.^  He  has  the  option  of  ratifying  the  transaction 
and  claiming  the  proceeds,  or  he  may  repudiate  the  sale  and  sue  for 
conversion,*  and  in  New  York  state  may  arrest  the  pledgee.^  The 
remedy  at  law  may  be  on  contract  or  in  tort.^     An  illegal  sale  of  the 


1  Usher  v.  Van  Vranken,  48  N.  Y.  A  pp. 
Div.  413  (1900). 

^  See  ch.  XXXV,  infra.  In  Fowle  v. 
Ward,  113  Mass.  548  (1873),  the  court 
said  the  damages  should  be  "  a  sum  of 
money  which  would  enable  him  to  pur- 
chase seventeen  new  shares  to  replace 
those  which  have  been  taken  from  him, 
with  such  additional  sum  as  would  in- 
demnify him  for  the  dividends  which 
he  has  lost  since  the  sale,  and  also 
an  equitable  allowance  for  interest" 
Where  the  pledgee  refuses  to  deliver 
up  the  stock  upon  a  tender  of  the  debt 
he  is  liable  in  damages  for  the  value  of 
the  stock  on  the  day  of  the  tender  and 
demand,  less  the  amount  tendered. 
Franklin  Bank  v.  Harris,  77  Md.  423 
(1893). 

3  See  cases  in  note  1,  p.  974,  infra. 

4  Atkins  V.  Gamble,  42  Cal.  86, 91  (1871). 
If  there  are  several  pledgors,  and  the 
pledge  is  redeemed,  and  the  pledgee,  at 
the  request  of  one  of  the  pledgors,  trans- 
fers the  stock  to  third  parties,  the 
pledgee  is  liable  to  the  other  pledgors 
for  the  loss  incurred  thereby.  Magnus 
V.  Queensland  Nat.  Bank,  L.  R  36  Ch. 
D.  35  (1887). 

5  See  §  471.  supra. 

B  The  form  of  a  complaint  or  declara- 
tion in  an  action  by  a  pledgor  against  a 
pledgee  for  the  conversion  of  the  stock 
held  in  pledge  may  be  in  tort  or  in  as- 
siim2)sit,  but  not  in  both.  Stevens  v. 
Hurlbut  Bank,  31  Conn.  146  (1862).  It  is 
a  conversion  for  the  pledgee  to  retain 
the  stock  after  the  principal  of  the 
debt  is  paid,  nothing  being  said  about 
interest.  Kullman  v.  Greenebaum,  93 
CaL   403   (1891).     A  complaint   which, 

9 


after  stating  that  shares  of  stock  had 
been  pledged  to  defendant,  avers  that 
"defendant,  in  consideration  of  the 
premises,  then  and  there  undertook  and 
promised  to  plaintiff  "  to  hold  the  stock 
only  as  pledgee,  but  that,  in  violation 
of  its  promise,  defendant  sold  and  con- 
verted the  stock  to  its  own  use,  without 
giving  plaintiff  notice  of  the  sale,  and 
in  which  plaintiff  seeks  to  recover  as 
damages  the  full  value  of  the  shares 
alleged  to  have  been  converted,  though 
informal,  is  good  as  a  complaint  in  case. 
Sharpen  Birmingham  Nat.  Bank,  87  Ala. 
644  (1888).  This  case  discussed  also 
the  difference  between  assuvijjsit  and 
case  in  such  an  action.  In  Butts  v.  Bur- 
nett. 6  Abb.  Pr.  (N.  S.)  303  (1869),  involv- 
ing the  arrest  of  a  broker  who  had  sold 
the  pledge  before  the  note  was  due,  the 
court  said:  "It  is  very  questionable,  I 
think,  whether  a  demand  after  default 
in  payment  of  the  debt  for  which  prop- 
erty is  pledged  as  security  will  render 
a  refusal  to  deliver  the  pledged  prop- 
erty a  tortious  conversion  of  it.  No 
doubt  the  pledgor  can  redeem  upon  a, 
tender  of  the  debt,  or  he  may  recover 
the  difference  between  the  value  of  the 
pledge  and  the  debt.  But  to  lay  the 
foundation  for  an  action  for  conversion^ 
I  am  of  opinion  that  an  offer  and  de- 
mand must  be  made  on  the  day,  and  is 
not  sufficient  if  made  after  the  day  on 
which  the  debt  has  become  payable." 
As  to  the  complaint  in  an  action  by  a 
pledgor  against  the  pledgee  for  not  re- 
turning goods  pledged,  see  3  Chitty.  PI. 
69:  Stanton  v.  Collier,  3  El.  &  Bl.  374 
(1854).  An  answer  is  not  good  where  it 
merely  denies  the  conversion  and  does 
70 


en.  XXVI.] 


PLEDGE    OF    STOCK. 


[§  475. 


pledge  by  the  pledgee  is  a  conversion,  and  a  complaint  for  such 
conversion  will  not  be  construed  as  a  complaint  for  breach  of  con- 
tract.^ The  pledgor  may,  if  he  prefers,  begin  suit  in  a  court  of 
equity,  when  the  pledgee  has  converted  the  stock,  and  compel  him 
either  to  replace  the  stock  or  give  compensation  in  damages.  The 
jurisdiction  of  a  court  of  equity  in  such  a  case  has  been  denied,-  but 
in  certain  cases  ma.y  be  sustained  on  the  ground  that  only  a  court 
of  equity  can  compel  a  retransfer  of  the  stock  or  an  accounting  of 
the  dividends  declared  while  the  pledge  was  running,  or  an  account- 
ing by  third  persons  to  whom  the  pledgee  has  assigned  the  debt 
and  pledge,  or  enjoin  an  illegal  transfer  of  the  stock.^    A  pledgor 


not  deny  the  possession  by  the  defend- 
ant of  certain  stocks  belonging  to  the 
plaintiff,  nor  the  tender  of  the  balance 
due,  nor  the  demand  for  such  stocks, 
nor  the  non-delivery  of  the  same.  Du- 
bois V.  Sistare,  N.  Y.  L.  J..  Dec.  9,  1890. 
See  Smith  v.  Savin,  141  N.  Y.  315  (1894). 
Where  the  repledgee  converts  the  stock 
the  remedy  for  conversion  is  with  the 
first  pledgee,  not  with  the  first  pledgor. 
Thompson  v.  Toland,  48  Cal.  99  (1874). 
Contra,  Smith  v.  Savin,  69  Hun,  311 
(1893).  See  s.  a,  9  N.  Y.  Supp.  106,  and 
141  N.  Y.  315.  A  pledge  of  stock  to  se- 
cure future  liabilities  does  not  secure 
past  liabilities.  If  the  pledgee  refuses 
to  surrender  the  stock  on  demand  and 
tender,  the  pledgor  may  recover  the 
value  of  the  stock  on  that  day,  less  the 
amount  tendered.  Franklin  Bank  v. 
Harris.  77  Md.  423  (1893).  Where  the 
pledgor  learns  of  the  illegality  of  the 
sale  after  he  has  commenced  suit  for 
the  surplus,  he  will  be  allowed  to  amend 
and  sue  for  conversion.  Smith  v.  Savin, 
141  N.  Y.  315  (1894). 

1  Smith  V.  Hall,  67  N.  Y.  48  (1876),  dis- 
tinguishing Austin  V.  Rawdon,  44  N.  Y. 
63  (1870). 

2  Lacombe  v.  Forstall's  Sons,  123  U.  S. 
562  (1887):  Genet  v.  Rowland,  45  Barb. 
560  (1866).  The  remedy  of  the  pledgor 
is  at  law  after  a  tender,  not  by  bill  in 
equity  to  redeem.  Doak  v.  Bank  of  the 
State,  6  Ired.  L.  (N.  C.)  309  (1846).  Where 
the  pledgee  has  sold  the  stock,  the 
pledgor  cannot  compel  him  to  restore 
it  by  a  bill  in  equity,  even  though  he 

97 


alleges  that  the  sale  was  to  a  person 
who  holds  the  stock  as  trustee  for  the 
pledgee.  The  pledgor's  remedy  is  at  law. 
Hinckley  v.  Pfister,  83  Wis.  64  (1892).  A 
bill  in  equity  does  not  lie  for  damages 
due  to  an  illegal  sale  of  stock  by  a 
pledgee.  Henry  v.  Travelers'  Ins.  Co., 
45  Fed.  Rep.  299  (1891).  A  pledgor  can- 
not file  a  bill  in  equity  to  hold  tlie 
pledgee  liable  for  selling  the  stock  in 
violation  of  the  pledge,  there  being  no 
disputed  accounts.  Roland  v.  Lancas- 
ter, etc.  Bank,  135  Pa.  St.  598  (1890); 
Angus  V.  Robinson.  62  Vt.  60  (1890).  It 
is  well  settled  that  a  bill  in  equity  will 
not  ordinarily  lie  to  redeem  property 
from  a  pledge.  Kemp  v.  Westbrook.  1 
Ves.  Sr.  278  (1749);  Story,  Eq.  Jur., 
^  1032.  The  reason  is  obvious.  The  legal 
title  to  the  thing  pledged  does  not  pass 
to  the  pledgee,  as  it  does  to  a  mortgagee 
in  possession  in  the  case  of  a  mortgage. 
The  pledgor  retains  the  legal  title  and 
parts  only  with  possession  and  a  special 
property.  Jones,  Pledges,  §  552.  He 
has  therefore  a  legal  right  to  redeem, 
and  upon  tendering  the  amount  due  to 
the  pledgee  he  may  bring  replevin  for 
the  collateral  or  an  action  to  recover  its 
value.  It  is  only  when  his  legal  reme- 
dies are  insufficient  that  the  pledgor 
can  come  into  equity.  Jones,  Pledges, 
§  556,  and  cases  cited. 

SBryson  v.  Rayner,  25  Md.  424  (1866); 
Conyngham's  Appeal,  57  Pa.  St.  474 
(1868);  Hasbrouck  v.  Vandervoort,  4 
Sandf.  74  (1850);  Koons  v.  Jeffersonville 
Nat.  Bank,  89  Ind.  178  (1883);  Smith  v. 


§  475.] 


PLEDGE    OF    STOCK. 


[CII.  XXVI. 


may  by  suit  in  equity  compel  the  pledgee  to  deliver  up  the  stock  in 
pledge,  and  if  the  pledgee  has  sold  the  pledged  stock,  but  has  sini- 


Anderson,  8  Tex.  Civ.  App.  188  (1894); 
Maynard  v.  Tilden,  28  Fed,  Rep.  688 
(1886).  An  action  to  redeem  may  be 
sustained  in  equity  where  the  transac- 
tion is  a  complicated  one.  Higgins  v. 
Lansingh,  154  III.  301  (1895).  Where  the 
pledgee  has  transferred  the  stock  held 
in  pledge,  and  is  insolvent,  the  pledgor 
may  file  a  bill  in  equity,  and  bring  in 
all  parties  interested.  Nelson  v.  Owen, 
113  Ala.  372  (1896).  Where  the  pledgor 
borrows  the  money  from  a  third  party 
to  pay  a  debt,  and  the  lender  does  pay 
the  debt,  but  takes  the  collateral  with- 
out authority  and  pledges  it  for  its  own 
debt,  the  original  pledgor  may  file  a 
bill  to  obtain  the  possession  of  the 
stock  and  also  obtain  the  dividends 
that  have  been  paid.  If  the  second 
pledgee  claims  to  be  a  bona  fide  holder 
of  the  stock,  those  facts  must  be  spe- 
ciall}''  pleaded  in  defense.  Maxwell  v. 
Foster,  41  S.  E.  Rep.  776  (S.  C.  1902),  In 
a  suit  in  equity  by  the  pledgor  to  re- 
deem, the  pledgee  cannot  set  up  that 
the  pledgor  has  sold  his  interest  in  the 
pledge  to  another  party,  and  that  an- 
other suit  is  pending  brought  by  that 
other  party  for  specific  performance, 
and  that  in  such  suit  the  pledgee  is  a 
party  defendant,  no  proof  being  given 
of  such  sale,  Houston,  etc.  R.  R.  v. 
Conner,  67  S.  W.  Rep,  773  (Tex.  1903). 
Where  the  pledge  has  been  sold  by  the 
pledgee  and  the  amount  due  is  in  dis- 
pute, the  pledgor  may  file  a  bill  in 
equity  against  the  pledgee  and  the  pur- 
chaser with  notice  and  the  corporation 
to  redeem  it,  and  he  need  not  make  any 
tender  of  the  amount  due,  provided  he 
offers  in  his  complaint  to  pay  any 
amount  found  due.  Treadwell  v.  Clark, 
73  N.  Y.  App.  Div,  473  (1903),  Where  a 
transaction  is  adjudged  to  be  a  loan 
and  not  a  sale,  and  the  defendant  is 
ordered  to  return  the  stock,  it  is  error 
to  add  an  alternative  money  judgment 
for  the    value    of    the  stock.     Fanny 


RawlingsMin,  Co.  v.  Tribe,  68Pac,  Rep, 
284  (Colo.  1902),  A  pledgor  in  contract- 
ing with  the  pledgee  to  obtain  a  re- 
lease of  the  stock  on  a  settlement  of  the 
debt  for  less  than  the  full  sum  is  not 
bound  to  disclose  the  fact  that  the  cor- 
poration was  about  to  be  sold  out  at  a 
high  price  which  would  have  paid  the 
whole  debt.  The  pledgor  may  file  a 
bill  in  equity  to  redeem  the  stock  on 
the  payment  of  the  sum  agreed  upon, 
Chicora,  etc,  Co,  v.  Dunan,  91  Md.  144 
(1900),  A  cross-bill  in  equity  by  a 
pledgee  to  have  the  debt  determined 
and  have  a  sale  made  was  involved  in 
Troendle  v.  Van  Nortwick,  98  Fed. 
Rep.  785  (1900).  Where  a  pledge  of 
stock  is  deposited  with  a  third  party, 
according  to  the  contract  of  pledge, 
such  third  party  need  not  be  joined  in 
a  suit  by  the  pledgor  against  the 
pledgee  to  redeem.  Baeck  v.  Meinken, 
33  N.  Y.  Misc.  Rep.  371  (1900).  A  broker 
cannot  interplead  between  his-customer 
and  an  indorser  of  the  customer's  note, 
in  regard  to  stocks  deposited  with  the 
broker  by  the  customer,  even  though 
the  administrator  of  the  indorser 
claims  that  he  has  an  interest  in  such 
stock.  Post  V.  Emmett,  40  N,  Y.  App. 
Div.  477  (1899),  Where  the  pledgor  files 
a  bill  to  redeem  and  the  pledgee  claims 
that  the  stock  is  sold  and  not  pledged, 
and  the  court  decides  that  the  transac- 
tion was  a  pledge  and  decrees  the 
amount  to  be  paid  by  the  pledgor  to 
redeem,  and  the  pledgee  then  appeals 
and  pays  assessments  on  the  stock 
pending  the  appeal,  the  pledgee  may 
recover  back  such  assessments  from 
the  pledgor,  even  though  the  judgment 
was  affirmed  on  appeal.  Irvine  v, 
Angus,  93  Fed.  Rep.  629  (1899).  The 
question  of  the  ownership  of  bonds  as 
between  a  pledgor  and  pledgee  and 
subsequent  holders  cannot  be  contested 
in  the  foreclosure  of  the  mortgage  se- 
curing the  same,  prior  to  the  decree, 


9^ 


CH.  XXVI.] 


PLEDGE    OF    STOCK. 


[§  4T5. 


ilar  stock,  he  may  be  compelled  to  transfer  the  latter.'     An  un- 
reasonable delay  or  laches  on  the  part  of  the  pledgor  will  bar  hi& 


but  on  the  distribution  of  the  proceeds 
of  the  foreclosure  sale  that  question 
can  then  be  litigated.  Sioux  City,  etc. 
Ey.  V.  Manhattan  T,  Co.,  92  Fed.  Rep. 
428  (1899).  The  pledgor  may  file  a  bill 
to  reach  the  excess  realized  by  the 
pledgee  on  a  sale  of  the  collateral,  and 
in  such  suit  may  enjoin  the  assignee  of 
the  pledgee  from  using  such  excess  to 
pay  other  debts  of  the  pledgee.  Adams 
V.  Ball,  24  N.  Y.  App.  Div.  69  (1897).  A 
pledgor  may  maintain  a  suit  in  equity 
to  redeem  his  stock,  and  the  judgment 
may  order  the  pledgee  to  deposit  the 
certificate  of  stock  in  court.  Colburn 
V.  Riley,  11  Colo.  App.  184  (1898).  The 
pledgee  must  return  the  stock  and 
stock  dividends  and  account  for  money 
dividends.  Vaughan  v.  Wood,  1  M. 
&  K.  403  (1838).  A  court  of  equity 
has  power  to  decree  the  return  of 
pledged  stock  and  money  deposited  as 
collateral.  Post  v.  Simmons,  9  N.  Y. 
Supp.  112  (1890);  Brown  v.  Runals.  14 
Wis.  693  (1861).  A  pledgor  may  file  a 
bill  in  equity  to  have  a  surplus  deliv- 
ered up  and  the  notes  for  which  the 
collateral  was  given  delivered  up  also. 
Cahoon  v.  Bank  of  Utica,  7  N.  Y.  486 
(1852),  rev'g  7  How.  Pr.  134.  In  Eng- 
land an  action  to  redeem  a  pledge  of 
stock  is  to  be  tried  without  a  jury,  even 
though  the  defendant  sets  up  a  counter- 
claim of  false  representations.  Lynch 
V.  Macdonald,  L.  R.  37  Ch.  D.  227(1887). 
Where  the  pledgee  is  about  to  sell  the 
stock  and  denies  the  pledge,  the  pledgor 
may  enjoin  the  sale.  Thielens  v.  Dia- 
logue. 19  Atl.  Rep.  970  (N.  J.  1890).  For 
other  cases  sustaining  the  jurisdiction 


on  the  ground  that  an  injunction  was 
proper,  see  Hower  v.  Weiss,  etc.  Co.,  55 
Fed.  Rep.  356  (1893);  Myers  v.  Merchants' 
Nat.  Bank,  16  N.  Y.  Supp.  58  (1891). 
The  pledgor  cannot  enjoin  a  sale  by  the 
pledgee  on  the  ground  that  the  sale  will 
be  at  a  sacrifice.  Park  v.  Musgrave,  2 
Thomp.  &  C.  (N.  Y.)  571  (1874).  Where 
a  purchaser  of  stock  agrees  to  give  a 
long-time  note  with  the  stock  as  secu- 
rity, and  subsequently,  for  the  accom- 
modation of  the  vendor,  a  short-time 
note  with  the  stock  as  security  is  de- 
livered to  a  third  person  named  by  the 
vendor,  and  the  vendor  then  obtains 
possession  of  the  stock  and  note,  and, 
after  the  short-time  note  becomes  due, 
proposes  to  collect  the  note  and  sell  out 
the  stock,  the  pledgor  may  enjoin  the 
sale  of  the  stock.  In  this  case  the  stock 
was  of  uncertain  value,  and  represented 
a  controlling  interest  in  the  company, 
and  damages  for  its  conversion  would 
not  have  been  an  adequate  remedy. 
The  court  held  that  an  action  for  re- 
plevin was  not  adequate,  inasmuch  as,, 
in  order  to  bring  replevin,  the  pledgor 
would  have  to  tender  the  debt,  which, 
according  to  the  original  agreement, 
was  not  yet  due.  Hower  v.  Weiss,  etc. 
Co.,  55  Fed.  Rep.  356  (1893).  "  If,  for  in- 
stance, the  collaterals  consist  of  shares 
of  stock  which  have  been  transferred 
into  the  pledgees  name  upon  the  books 
of  a  corporation,  an  action  in  equity 
will  lie,  for  the  reason  that  such  an  ac- 
tion is  necessary  to  secure  the  retrans- 
fer  of  the  shares.  So  equity  may  be 
invoked  where  an  accounting  or  a  dis- 
covery is  needed  or  where  the  pledgee 


1  Krouse  v.  Woodward,  110  Cal.  638 
(1895).  Where  an  agent  with  whom 
stock  is  deposited  transferred  in  blank 
causes  the  same  to  be  transferred  to 
him-self  on  the  books  of  the  company 
and  then  hypothecates  the  same,  and 
afterwards  dies,  the  real  owner  of  the 


stock  may  claim  other  stock  in  the 
same  corporation  which  such  agent 
had  at  the  time  of  his  death.  The 
identityof  the  certificates  is  immaterial. 
Marshall  v.  Marshall,  11  Colo.  App.  505 
(1898).     See  also  §  469,  supra. 


973 


§  ^T5.] 


PLEDGE    OF    STOCK. 


[CH.  XXVI. 


remedy  against  the  pledgee.^  But  delay  ia  bringing  suit  to  redeem 
pledged  property  does  not  constitute  laches,  when  the  debt  is  kept 
alive  until  the  suit  is  begun.^ 


has  assigned  the  pledge."  Stokes  v. 
Stokes,  N.  Y.  L.  J.,  Nov.  15,  1893,  p.  375. 
See  also  cases  in  note  1  below.  A.  pur- 
chasei"  of  stock  who  makes  a  partial 
payment  and  gives  back  the  stock  as 
collateral  security  cannot  abandon  the 
contract  and  claim  such  part  of  the 
stock  as  the  payment  already  made 
would  pay  for,  on  the  ground  that  the 
seller  has  obtained  control  of  the  corpo- 
ration and  is  guilty  of  a  breach  of  trust. 
The  fact  that  the  seller  as  pledgee  has 
sold  the  stock  and  bought  it  in  himself 
is  immaterial,  inasmuch  as  such  sale  is 
illegal.  Keid  v.  Caldwell,  110  Ga,  481 
(1900);  s.  c,  114  Ga.  676  (1903). 

1  Eight  years'  delay  by  the  pledgor  in 
complaining  of  the  refusal  of  the  pledgee 
to    deliver    up    the    stock    on    tender 
of  the  debt,  the  stock   having  subse- 
quently declined  in  value,  was  held  to 
be  fatal   in   Merriam  v.  Childs,  93  Mo. 
131  (1887).     Where  the  pledgor's  exec- 
utor, for  value  received,  sells  the  pledg- 
or's interest  to  the  pledgee,  long  lapse 
of  time  after  full   knowledge  of  the 
facts   by  all  parties  will  raise   a   pre- 
sumption in    favor    of    the    pledgee's 
complete    ownership.      Lock  wood     v. 
Brantly.  1  Silvern.  187  (1886);  S.  c,  103 
N.  Y.  680.     As  to  the  statute  of  limit- 
ations, see  Maynard  v.  Tilden,  28  Fed. 
Rep.  688,  703  (1886);  Child  v.  Hugg,  41 
Cal.  519  (1891),  where  long  delay  was 
held  to  be  a  bar.     In  Greene  v.  Dispeau, 
14  R.  I.  575  (1884),  a  pledge  of  stock  was 
treated  as  a  mortgage,  and  the  right  to 
redeem  was  held  to  be  barred  six  years 
after  the  date  of  the  mortgage.      A 
pledgor  waives  informality  of  the  no- 
tice, where,  after  the  sale,  he,  as  an  of- 
ficer of  the  corporation,  enters  a  trans- 
fer of  the  stock  to  the  one  who  pur- 
chased at  the  sale.    Downer  v.  Whittier, 
144  Mass.  448  (1887).    Four  years'  delay 


in  complaining  is  fatal.     Receiving  the 
benefit  of  the  sale  is  a  waiver  of  objec- 
tions.     McDowell    V,    Chicago    Steel 
-Works,  134  111.  491   (1888).      Although 
the  pledgee  gives  no  public  notice  of  the 
sale,   and   although   he  purchases  the 
stock  at  the  sale,  yet  the  pledgor  rat- 
ifies the  sale  by  acquiescing  and  by  nego- 
tiating to  buy  the  stock.  Hill  v.  Finigan, 
77  Cal.  367  (1888).     The  statute  of  lim- 
itations is  no  bar  to  an  action  to  redeem 
a  pledge  of  stock,  unless  the  statute 
was  set  running  by  demand  of  payment 
and  notice  of  intent  to  sell.     Gilmer  v. 
Morris,  35  Fed.  Rep.  683  (1888).    See  s.  c, 
80  Ala.  78.    In  the  case  of  a  pledge  of 
stock  to  secure  future  advances,  the 
statute    of    limitations   begins  to  run 
against  the  right  of  the  pledgor  to  re- 
deem from  the  time  when  the  pledgee, 
by  some   positive   act,  repudiates  the 
pledge  and  claims  the  proj^erty  as  his 
own,  or  improperly  disposes  of  it.     Gil- 
mer V.  Morris,  43  Fed.  Rep.  456  (1890). 
If  the  pledge  is  recognized  by  extension 
to  other  debts,  the  statute  of  limita- 
tions runs  from  the  latter  date.    Gilmer 
V.  Morris,  46  Fed.  Rep.  333  (1891).     This 
case,  Gilmer  v.  Morris,  80  Ala.  78,  arose 
again  in  Billing  v.  Gilmer,  60  Fed.  Rep. 
333  (1894),  rev'g  Gilmer  v.  Billings,  55 
Fed.    Rep.   775.     The  statute  of  limit- 
ations runs  against  a  receipt  reciting  a 
first  payment  on   stock  "standing  in 
my  name  but  owned  by  him,  and  he 
remaining  responsible  for  the  balance 
of    the   instalments  when   called   in," 
there  being  no  agreement  as  to  the 
future  disposition  of  the  stock  and  of 
dividends.     Cone  v.  Dunham,  59  Conn. 
145  (1890).     A  pledge  is  not  legally  aban- 
doned although  no  demand  is  made  for 
it  during  a  long  lapse  of  time.     Cridge's 
Appeal,  18  Atl.  Rep.  1010  (Pa.  1890).     As 
to  redemption,  laches,  etc.,  see  Schouler, 


2  Higgins  V.  Lansingh,  154  111.  301  (1895). 
974 


■CII. 


XXVI.] 


PLEDGE    OF    STOCK. 


[§  4'^'^. 


Tender  of  the  debt  when  or  after  it  becomes  due  releases  the 
pledge.^  Where  the  pledgor  makes  tender  of  the  amount  which 
he  considers  due  and  demands  the  pledge,  and  the  pledgee  refuses 
the  tender  and  does  not  state  that  the  amount  is  too  small,  the 
pledgee  is  guilty  of  a  conversion.^  A  pledgor  cannot  compel  his 
pledgee  to  sell  the  stock  and  apply  the  proceeds  to  the  debt  by  a 
notice  to  make  such  a  sale.*  When  the  pledgee  causes  the  stock 
to  be  sold,  the  pledgor  is  entitled  to  the  surplus  proceeds  of  the  sale 
remaining  after  the  debt  and  the  expenses  of  the  sale  have  been 
paid,  andsuch  surplus  cannot  be  applied  by  the  pledgee  to  another 
debt,"  except  possibly  by  way  of  set-off.  If  the  officers  of  a  pledgee 
bank  refuse  to  deliver  back  the  pledged  stock  upon  a  tender  of  the 
debt,  they  are  liable  personally  in  damages  to  the  pledgor.^  A 
pledgor  cannot  defeat  an  action  by  the  pledgee  on  the  debt  by 


Bailm.  (2d  ed.),  §  250.  As  to  the  rule  in 
New  York,  see  Bailey  v.  Chamberlain, 
N.  Y.  D.  Reg.,  July  23,  1888,  and  Miner 
V.  Beekman,  50  N.  Y.  337  (1872).  Tlie 
pledgee  cannot  claim  that  he  has  held 
the  stock,  adverseUy  to  the  pledgor,  for 
a"  time  more  than  sufificient  to  give  him 
title  to  it  under  the  statute  of  limit- 
ations. He  is  not  allowed  to  assert 
tiiat  he  holds  the  stock  adversely. 
Cross  u  Eureka  Lake,  etc.  Co.,  73  Cal.  302 
(1887).  The  ten  years'  statute  of  limit- 
ations applies  and  does  not  commence 
to  run  until  the  pledgor  has  demanded 
the  stock,  where  the  amount  due  is  in 
dispute.  Tread  well  v.  Clark,  73  N.  Y. 
App.  Div.  473  (1902). 

1  A  tender  of  the  amount  due  before 
eale  redeems  pledged  stock  and  stops 
the  sale.  Winkler  v.  Magdeburg,  100 
Wis.  421  (1898).  An  unconditional  ten- 
der of  the  amount  due  the  pledgee  re- 
leases the  pledge  and  entitles  the 
pledgor  to  the  stock.  Tom  Boy,  etc. 
Co.  V.  Green,  11  Colo.  App.  447  (1898); 
Hyams  v.  Bamberger,  10  Utah,  3  (1894). 

2  Latta  V.  Tutton,  122  Cal.  279  (1898). 

3  Lawrence  v.  Maxwell,  53  N.  Y.  19 
<1873);  Robinson  v.  Hurley,  11  Iowa,  410 
(1860);  O'Neill  v.  Whigham,  87  Pa.  St. 
394  (1878);  Rozet  v.  McClellan,  48  111. 
345  (1868);  Smouse  v.  Bail,  1  Grant 
(Pa.),  397  (1856);  Taggard  v.  Curtenius, 


15  Wend.  155  (1836);  Fisher  v.  Fisher,  98 
Mass.  303  (1867);  Napier  v.  Central,  etc. 
Bank,  68  Ga.  637  (1882),  holding,  how- 
ever, that  where  the  pledgee  does  not 
sell,  because  he  and  others  were  "bear- 
ing" the  market,  there  may  be  an  ele- 
ment of  fraud  which  gives  a  cause  of 
action.  The  pledgor  cannot  by  request 
compel  the  pledgee  to  sell.  Minneap- 
olis, etc.  Co.  V.  Betcher,  42  Minn.  210 
(1889).  If  there  is  no  agreement  so  to 
do!  the  pledgee  is  not  bound  to  sell,  al- 
though requested  to  do  so  by  the 
pledgor.  Furne.ss  v.  Union  Nat.  Bank, 
147  111.  570  (1893). 

*  And  the  pledgor's  assignee  for  the 
benefit  of  creditors  may  claim  it.  The 
pledgee  bank  has  no  banker's  lien  on  the 
surplus  for  other  debts.  Brown  v.  New 
Bedford  Sav.  Inst,  137  Mass.  262  (1884). 
A  pledgee  bank  cannot  refuse  to  de- 
liver back  the  stock  to  pledgor  wha 
tenders  the  amount  due,  on  the  ground 
that  the  pledgee  owes  it  still  another 
debt.  Mclntire  v.  Blakeley,  13  AtL 
Rep.  325  (Pa.  1888). 

6  Mclntire  v.  Blakeley,  12  AtL  Rep. 
325  (Pa.  1888).  A  pledgee  cannot,  on 
sale  of  the  pledge,  apply  the  excess  to 
another  debt  due  him  from  the  pledgor, 
who  died  before  the  sale  was  made. 
Peters  v.  Nashville  Sav.  Bank,  86  Tenn. 
224  (1887). 


975 


475.] 


PLEDGE    OF    STOCK. 


[CH.  XXVI. 


remedy  against  the  pledgee.^  But  delay  in  bringing  suit  to  redeem 
pledged  property  does  not  constitute  laches,  when  the  debt  is  kept 
alive  until  the  suit  is  begun.^ 


has  assigned  the  pledge."  Stokes  v. 
Stokes,  N.  Y.  L.  J.,  Nov.  15,  1892,  p.  375. 
See  also  cases  in  note  1  below.  A.  pur- 
chaser of  stock  who  makes  a  partial 
payment  and  gives  back  the  stock  as 
collateral  security  cannot  abandon  the 
contract  and  claim  such  part  of  the 
stock  as  the  payment  already  made 
would  pay  for,  on  the  ground  that  the 
seller  has  obtained  control  of  the  corpo- 
ration and  is  guilty  of  a  breach  of  trust. 
Tlie  fact  that  the  seller  as  pledgee  has 
sold  the  stock  and  bought  it  in  himself 
is  immaterial,  inasmuch  as  such  sale  is 
illegal.  Reid  v.  Caldwell,  110  Ga,  481 
(1900);  S.  c.  114  Ga.  676  (1903). 

1  Eight  years'  delay  by  the  pledgor  in 
complaining  of  the  refusal  of  the  pledgee 
to    deliver    up    the    stock    on    tender 
of  the  debt,  the  stock   having  subse- 
quently declined  in  value,  was  held  to 
be  fatal   in   Merriara  v.  Childs,  93  Mo. 
131  (1887).     Where  tiie  pledgor's  exec- 
utor, for  value  received,  sells  the  pledg- 
or's interest  to  the  pledgee,  long  lapse 
of  time  after  full   knowledge  of  the 
facts   by  all  parties  will  raise   a   pre- 
sumption in    favor    of    the    pledgee's 
complete    ownership.      Lockwood     v. 
Brantly,  1  Silvern.  187  (1886);  S.  c,  103 
N.  Y.  680.     As  to  the  statute  of  limit- 
ations, see  Maynard  v.  Tilden,  28  Fed. 
Rep.  688,  703  (1886);  Child  v.  Hugg,  41 
Cal.  519  (1891),  where  long  delay  was 
held  to  be  a  bar.     In  Greene  v.  Dispeau, 
14  R.  I.  575  (1884),  a  pledge  of  stock  was 
treated  as  a  mortgage,  and  the  right  to 
redeem  was  held  to  be  barred  six  years 
after  the  date  of  the  mortgage.      A 
pledgor  waives  informality  of  the  no- 
tice, where,  after  the  sale,  he,  as  an  of- 
ficer of  the  corporation,  enters  a  trans- 
fer of  the  stock  to  the  one  who  pur- 
chased at  the  sale.    Downer  v.  Whittier, 
144  Mass.  448  (1887).    Four  years'  delay 


in  com[)lainihg  is  fatal.     Receiving  the 
benefit  of  the  sale  is  a  waiver  of  objec- 
tions.     McDowell    V.    Chicago    Steel 
Works,  124  111.  491   (1888).      Although 
the  pledgee  gives  no  public  notice  of  the 
sale,   and   although   he  purchases  the 
stock  at  the  sale,  yet  the  pledgor  rat- 
ifies the  sale  by  acquiescing  and  by  nego- 
tiating to  buy  the  stock.  Hill  v.  Finigan, 
77  Cal.  267  (1888).     The  statute  of  lim- 
itations is  no  bar  to  an  action  to  redeem 
a  pledge  of  stock,  unless  the  statute 
was  set  running  by  demand  of  payment 
and  notice  of  intent  to  sell.     Gilmer  v. 
Morris,  35  Fed.  Rep.  682  (1888).    See  s.  c, 
80  Ala.  78.     In  the  case  of  a  pledge  of 
stock  to  secure  future  advances,  the 
statute    of    limitations   begins  to  run 
against  the  right  of  the  pledgor  to  re- 
deem from  the  time  when  the  pledgee, 
by  some   positive   act,  repudiates  the 
pledge  and  claims  the  property  as  his 
own,  or  improperly  disposes  of  it.     Gil- 
mer V.  Morris,  43  Fed.  Rep.  456  (1890). 
If  the  pledge  is  recognized  by  extension 
to  other  debts,  the  statute  of  limita- 
tions runs  from  the  latter  date.    Gilmer 
V.  Morris,  46  Fed.  Rep.  333  (1891).     This 
case.  Gilmer  v.  Morris,  80  Ala.  78,  arose 
again  in  Billing  v.  Gilmer,  60  Fed.  Rep. 
332  (1894),  rev'g  Gilmer  v.  Billings,  55 
Fed.    Rep.   775.     The  statute  of  limit- 
ations runs  against  a  receipt  reciting  a 
first  payment  on  stock   "standing  in 
my  name  but  owned  by  him,  and  he 
remaining  responsible  for  the  balance 
of    the   instalments  when   called   in," 
there  being  no  agreement  as  to  the 
future  disposition  of  the  stock  and  of 
dividends.     Cone  v.  Dunham,  59  Conn. 
145  (1890).     A  pledge  is  not  legally  aban- 
doned although  no  demand  is  made  for 
it  during  a  long  lapse  of  time.    Cridge's 
Appeal,  18  Atl.  Rep.  1010  (Pa.  1890).     As 
to  redemption,  laches,  etc.,  see  Schouler, 


2  Higgins  V,  Lansingh,  154  111.  301  (1895). 
974 


CII.  XXVI.] 


PLEDGE    OF    STOCK. 


[§  475. 


Tender  of  the  debt  when  or  after  it  becomes  due  releases  the 
pledge.!  Where  the  pledgor  makes  tender  of  the  amount  which 
he  considers  due  and  demands  the  pledge,  and  the  pledgee  refuses 
the  tender  and  does  not  state  that  the  amount  is  too  small,  the 
pledgee  is  guilty  of  a  conversion.^  A  pledgor  cannot  compel  his 
pledgee  to  sell  the  stock  and  apply  the  proceeds  to  the  debt  by  a 
notice  to  make  such  a  sale.^  When  the  pledgee  causes  the  stock 
to  be  sold,  the  pledgor  is  entitled  to  the  surplus  proceeds  of  the  sale 
remaining  after  the  debt  and  the  expenses  of  the  sale  have  been 
paid,  andsuch  surplus  cannot  be  applied  by  the  pledgee  to  another 
debt,*  except  possibly  by  way  of  set-off.  If  the  officers  of  a  pledgee 
bank  refuse  to  deliver  back  the  pledged  stock  upon  a  tender  of  the 
debt,  they  are  liable  personally  in  damages  to  the  pledgor.*  A 
pledgor  cannot  defeat  an  action  by  the  pledgee  on  the  debt  by 


Bailm.  (2d  ed.),  §  250.  As  to  the  rule  in 
New  York,  see  Bailey  v.  Chamberlain, 
N.  Y.  D.  Reg.,  July  23,  1888,  and  Miner 
V.  Beekman,  50  N.  Y.  337  (1872).  Tlie 
pledgee  cannot  claim  that  he  has  held 
the  stock,  adversei»y  to  the  pledgor,  for 
a' time  more  than  sufficient  to  give  him 
title  to  it  under  the  statute  of  limit- 
ations. He  is  not  allowed  to  assert 
that  he  holds  the  stock  adversely. 
Cross  V.  Eureka  Lake,  etc.  Co.,  73  Cal.  302 
<1887).  The  ten  years'  statute  of  limit- 
ations applies  and  does  not  commence 
to  run  until  the  pledgor  has  demanded 
the  stock,  where  the  amount  due  is  in 
disputa  Treadwell  v.  Clark,  73  N.  Y. 
App.  Div.  473  (1902). 

1  A  tender  of  the  amount  due  before 
sale  redeems  pledged  stock  and  stops 
the  sale.  Winkler  v.  Magdeburg,  100 
Wis.  421  (1898).  An  unconditional  ten- 
der of  the  amount  due  the  pledgee  re- 
leases the  pledge  and  entitles  the 
pledgor  to  the  stock.  Tom  Boy,  etc. 
Co.  V.  Green.  11  Colo.  App.  447  (1898); 
Hyams  v.  Bamberger,  10  Utah,  3  (1894). 

2  Latta  V.  Tutton,  122  Cal.  279  (1898). 

3  Lawrence  v.  Maxwell,  53  N.  Y.  19 
<1873);  Robinson  v.  Hurley,  11  Iowa,  410 
(1860);  O'Neill  v.  Whigham,  87  Pa.  St. 
394  (1878);  Rozet  v.  McClellan,  48  111. 
345  (1868);  Smouse  v.  Bail,  1  Grant 
(Pa.),  397  (1856);  Taggard  v.  Curtenius 


15  Wend.  155  (1836);  Fisher  v.  Fisher,  98 
Mass.  303  (1867);  Napier  v.  Central,  etc. 
Bank,  68  Ga.  637  (1882),  holding,  how- 
ever, that  where  the  pledgee  does  not 
sell,  because  he  and  others  were  "bear- 
ing" the  market,  there  may  be  an  ele- 
ment of  fraud  which  gives  a  cause  of 
action.  The  pledgor  cannot  by  request 
compel  the  pledgee  to  sell.  Minneap- 
olis, etc.  Co.  V.  Betcher,  42  Minn.  210 
(1889).  If  there  is  no  agreement  so  to 
do!  the  pledgee  is  not  bound  to  sell,  al- 
though requested  to  do  so  by  the 
pledgor.  Furness  v.  Union  Nat.  Bank, 
147  111.  570  (1893). 

*  And  the  pledgor's  assignee  for  the 
benefit  of  creditors  may  claim  it.  The 
pledgee  bank  has  no  banker's  lien  on  the 
surplus  for  other  debts.  Brown  v.  New 
Bedford  Sav.  Inst.,  137  Mass.  262  (1884). 
A  pledgee  bank  cannot  refuse  to  de- 
liver back  the  stock  to  pledgor  who 
tenders  the  amount  due,  ou  the  ground 
that  the  pledgee  owes  it  still  another 
debt.  Mclntire  v.  Blakeley,  12  AtL 
Rep.  325  (Pa.  1888). 

6  Mclntire  v.  Blakeley,  12  Atl.  Rep. 
325  (Pa.  1888).  A  pledgee  cannot,  on 
sale  of  the  pledge,  apply  the  excess  to 
another  debt  due  him  from  the  pledgor, 
who  died  before  the  sale  was  made. 
Peters  v.  Nashville  Sav.  Bank,  86  Tenn. 
224  (1887). 


975 


§  470.] 


PLEDGE    OF    STOCK. 


[CH.  XXVI.. 


showing  that  the  pledgee  has  converted  the  pledge.'  The  measure 
of  damages  on  an  illegal  sale  is  considered  elsevvhere.- 

§  476.  Pledgee's  remedies  u'lien  deht  secured  is  not  lyaid  —  Sale 
and  deficienci/.—  ^ here  shares  of  stock  are  pledged  as  collateral 
security  for  a  debt,  and  the  debt  is  not  paid,  and  the  pledgee  wishes 
to  apply  the  stock  to  the  payment  of  the  debt,  he  has  the  right  to 
pursue  either  one  of  two  remedies. 

First.  He  may  file  a  bill  in  equity  for  the  foreclosure  and  sale 
of  the  pledge."     A  suit  to  foreclose  a  pledge  of  stock  need  not  be 


1  See  ?§  461 ,  475,  458,  note,  supra.  In  an 
action  by  the  pledgee  for  the  debt,  the 
pledgor  may  set  up  a  conversion  of  the 
stock  pledged.  Donnell  v.  Wyckoff,  49 
N.  J.  L,  48  (1886). 

2 Seech.  XXXV,  infra. 

3  The  pledge  may  be  made  to  secure 
the  carrying  out  of  a  conti'act,  and  a 
court    of    equity  will    foreclose   it  al- 
though the  damages  are  unliquidated. 
Vaupell  V.  Woodward,  2  Sandf.  Ch.  143 
(1844).     A  person  holding  and  carrying 
stock  for  himself  and  others  may  file  a 
bill  in  equity  to  bring  about  a  sale  and 
an  adjustment  of  the  accounts.     Evans 
V.  Goodwin,  133  Pa.  St.  136  (1890).     A 
suit  to  foreclose  a  pledge  of  stock  may 
be  in  equity,  and  after  judgment  a  suit 
cannot  be  maintained  aj;  law  on  the 
debt  secured.     Brigel  v.  Creed,  65  Ohio 
St.  40  (1901).     In  a  suit  by  an  attaching 
creditor  to    determine   the  priority  of 
his  riglitsover  an  unregistered  pledgee, 
the  court  has  no  power  to  decree  a  sale 
of  the  pledge  and  the  distribution  of 
the  assets.  McClungu  Col  well,  64  S.  W. 
Rep.  890  (Tenn.  1901).     In  a  suit  to  fore- 
close a  pledge  of  stock,  a  judgment  for 
deficiency  cannot  be  asked  against  a 
part  of  the  defendants.     Plankinton  v. 
Hildebrand,   89  Wis.   209   (1895).     In  a 
suit   by  a  corporation   to   foreclose   a 
pledge  of  stock  made  to  it  to  secure  the 
payment  of  a   call  on    the  stock,  the 
pledgor  cannot  set  up  in  defense  that 
secret  commissions    had  been  paid  to 
some  of  the  stockholders  upon  the  pur- 
chase of  property  by  the  corporation. 
Irving,  etc.  Assoc  v.  Watson,  67  Pac. 
Rep.  945  (Oreg.  1902).  A  contractor  can- 


not by  a  bill  in  equity  compel  the  com- 
pany to  allow  him  to  complete  his  con- 
tract, even  though  the  company  is  in- 
solvent and  is  about  to  make  a  contract 
with  other  parties  and  to  dispose  of  se- 
curities pledged  to  the  first  contractor, 
Strang  v.  Richmond  R.  R.,  93  Fed.  Rep. 
71  (1899).    In  a  suit  by   a   pledgee  to- 
have  a  sale  of  bonds  held  in  pledge,  a 
defendant  may  file  a  cross-bill  setting 
forth   that  the    bonds    were    illegally 
issued  and  that  the  complainant  is  not 
a   bona  fide   holder.      Alessandro   Irr. 
Dist.  V.   Savings  &  Trust  Co.,  88  Fed. 
Rep.   928    (1898).     Where    a    firm    has 
pledged  stock  and  afterwards  passes 
into  the  hands  of  a  receiver,  an  ac- 
tion subsequently  commenced   by  the 
pledgee  to  foreclose  his  lien  must  make 
the  assignee  a  party  defendant.  Denny 
V.   Cole,   22  Wash.  372  (1900).     A   suit 
lies  for  judgment  on  a  note,  and  for  a 
sale  of  the  collateral  and  the  applica- 
tion to  the  judgment  of  the  amount 
realized  on  such  sale.     Farmers',  etc. 
Bank  v.  Rogers,  1  N.  Y.  Supp.  757  (1888). 
There  is  a  dictum  in  Ritchie  v.  McMul- 
len,  79  Fed.  Rep.  522,  535  (1897),  to  the- 
effect  that  where  a  pledgee  enters  into- 
a  conspiracy  to  depreciate  the  pledged 
stock  the  pledgee  cannot  maintain  a 
bill  to  foreclose  the  pledge.     A  mort- 
gage given  in  pledge  may  be  foreclosed 
by  bill  in  equity.     Andersons.  Olin,  145 
111.  168  (1893).     In  a  suit  between  the 
pledgor  and  the  pledgee,  each  side  de- 
manding   affirmative  relief,  the  court 
may  decree  that  stock  is  held  as  col- 
lateral and  order  a  sale  to  satisfy  the 
claim.    Zellerbach  v.  AUenberg,  99  CaL 
76 


CH.  XXVI.] 


PLEDGE    OF    STOCK. 


[§  476, 


brought  at  the  domicile  of  the  corporation,  but  may  be  brought  at 
the  domicile  of  the  pledgor,^  or  wherever  the  certificates  of  stock 
are  held  in  pledge.  Certificates  of  stock  represent  the  stock  itself 
sufficiently  to  sustain  a  suit  commenced  by  substituted  service  for 
the  purpose  of  establishing  and  foreclosing  a  pledgee's  lien,  even 
though  the  corporation  is  located  in  another  state.^  In  an  action 
to  foreclose  a  pledge  of  stock,  persons  claiming  a  lien  thereon  are 
proper  parties  defendant,  and  it  is  sufficient  to  allege  that  they 
claim  some  lien.^ 

Second.  The  pledgee  may  give  notice  to  the  pledgor  of  an  intent 
to  sell  the  stock,  and  may  so  sell  it  without  any  judicial  proceed- 
ings, and  apply  the  proceeds  to  the  payment  of  the  debt.^     No  ex- 


■  57  (1893).  Where  the  pledge  was  made 
without  a  written  transfer  of  the  cer- 
tificate a  suit  in  equity  is  the  only- 
remedy.  Robinson  v.  Hurley,  11  Iowa, 
410  (I860);  Merchants'  Nat.  Bank  v. 
Hall,  83  N.  Y.  338  (1881);  Smith  v.  Coale, 
34  Leg.  Int.  58  (1877);  Blouin  v.  Hart.  30 
La.  Ann.  714  (1878);  Johnson  v.  Dexter, 
2  MacArthur,  530  (1876),  and  §  465, 
supra.  In  England  a  deposit  of  a  cer- 
tificate of  stock  is  an  equitable  mort- 
gage and  not  a  pledge,  and  hence  while 
foreclosure  would  not  lie  as  regards  a 
pledge,  it  does  lie  as  regards  such  an 
equitable  mortgage.  Harrold  v.  Plenty, 
85  L.  T.  Rep.  45  (1901). 

1  State  V.  King  County  Super.  Ct.,  13 
Wash.  607  (1896). 

'-  Merritt  v.  American  Steel  Barge  Co., 
79  Fed.  Rep.  228  (1897).  See  also  §  363, 
supra. 

spiankinton  v.  Hildebrand,  89  Wis. 
209  (1895). 

^Guinzburgu.  H.  W.  Downs  Co.,  165 
Mass.  467  (1896);  Story,  Bailm.,  9th  ed. 
.  (1877),  §  310,  saying:  "The  law  as  at 
present  established  leaves  an  election 
to  the  pawnee.  He  may  file  a  bill  in 
equity  against  the  pawnor  for  a  fore- 
closure and  sale;  or  he  may  proceed  to 
sell  ex  mero  motu,  upon  giving  due  no- 
tice of  his  intention  to  the  pledgor.  In 
the  latter  case,  if  the  sale  is  bona  fide 
and  reasonably  made,  it  will  be  equallj' 
obligatory  as  in  the  first  case."  The 
leading  case,  allowing  this  remedy  of 
the    pledgee    against    the    pledge,    is 


Tucker  v.  Wilson,  5  Bro.  Pari.  Cas.  193 
(1714),  rev'g  1  P.  Wms.  261.     In  Brown 
V.  Ward,  3  Duer.  660  (1854),  the  court 
said:  "Since  the  time  of  the  case  of 
Hart  V.  Ten  Eyck  [2  Johns.  Ch.  62  — 
1816],  before  Chancellor  Kent,  the  right 
of  the  pledgee  to  sell  after  the  debt  is 
due,  upon  reasonable  notice,  has  been 
unquestioned,  and  a  custom  has  grown 
up,  and   has   been   sanctioned  by  the 
courts,  of  selling  stocks  at  the  Mer- 
chants'  Exchange."    To  same    effect, 
Dilleru  Brubaker,  52  Pa.  St.  498  (1866); 
Finney's  Appeal,  59  Pa.  St.  398  (1868); 
Easton  v.  German-American  Bank,  127 
U.  S.  532  (1888);  Mount  Holly,  etc.  Co. 
V.  Ferree,  17  N.  J.  Eq.  117  (1864),  where 
the  court  said:  "A  sale  of  a  pledge  by 
the  pawnee,  where  reasonably  and  bona 
fide  made,   and  after    notice    to    the 
pawnor,   is    equally   obligatory    as    if 
made  by  judicial   process;"  2   Kent's 
Com.    582,    saying    that    the    pledgee 
"  may  file  a  bill  in  chancery  and  have 
a  judicial  sale  under  a  regular  decree 
of  foreclosure,    .    .    .    and  he  may  sell 
without  judicial  process,  upon  giving 
reasonable  notice  to  the  debtor  to  re- 
deem;"   Sitgreaves    v.   Farmers',   etc. 
Bank,  49  Pa.  St.  359  (1865);  Stearns  v.. 
Marsh,  4  Denio,  227  (1847);  Mark  ham  v. 
Jaudon,  41  N.  Y.  235,  241  (1869);  Drury 
V.  Cross.  7  Wall.  299  (1868).    The  parties 
may  provide  for  any  manner  of  dis- 
posing of   the    pledge   to    satisfy  the 
claim  upon  it  which  is  not  in  contra- 
vention of  statute,  against  public  pol- 


(63) 


977 


§  476.J 


PLEDGE    OF    STOCK. 


[Cir.  XXVI. 


press  power  to  sell  need  be  contained  in  the  memorandum  of  pledge 
in  order  to  authorize  the  latter  remedy.  It  exists  by  force  of  law. 
The  pledgee,  however,  is  not  bound  to  pursue  either  remedy 
merely  because  the  debt  is  due  and  unpaid.^  He  need  not  sell  the 
stock  upon  the  maturity  of  the  note  secured,  nor  is  he  liable  be- 
cause the  stock  declines  in  value.^  He  may  sue  on  the  debt  with- 
out tendering  back  the  stock.^    The  pledgor  cannot  compel  him 


icy,  or  fraudulent.     In  McNeil  v.  Tenth 
Nat.  Bank,  46  N.  Y.  325,  334  (1871),  it  is 
said:  "The  distinction  between  a  lien 
and  a  pledge  is  said  to  be  that  a  mere 
lien  cannot  be  enforced  by  sale  by  the 
act  of  the  party,  but  that  a  pledge  is  a 
lien  with  a  power  of  sale  superadded." 
The  pledgee's  power  of  attorney  to  sell 
is  coupled  with  an  interest  and  is  not 
revocable.    Renshaw   v.   Creditors,   40 
La.  Ann.  37  (1888).     A  person  secured 
by  a  pledge  of  stock  in  another's  name 
may  sue  the  latter  for  the  amount  re- 
ceived' by  the  latter  on  a  sale  of  the 
stock."   Maynard  v.  Lumberman's  Nat. 
Bank,  11  Atl.  Rep.  529  (Pa.  1887).     Al- 
though the  pledgee  has  not  advanced 
all  that  he  agreed  to,  yet,  where  he 
ceased  advances  after  the  pledgor's  de- 
fault in  paying  the   part  already  ad- 
vanced,  the   pledgee  may  proceed  to 
sell  the  pledge  after  notice.     Midland 
Ry.  V.  Loan,  etc.  Co.,  N.  Y.  L.  J.,  May 
24,  1890.     The  pledgee   cannot  be  en- 
joined from  selling  the  pledge  on  no- 
tice, merely  because  by  legal  proceed- 
ings he  has  injured  the  value  of  the 
pledge.    Midland  Ry.  v.  Loan,  etc.  Co., 
N.  Y.  L.  J.,  May  24,  1890.     A  pledgee 
who  has  brought  an  action  to  foreclose 
his  pledge  may  nevertheless  abandon 
the  suit  and  resort  to  his  remedy  of  a 
sale  after  notice.    Midland  Ry.  v.  Loan, 
etc.  Co.,  N.  Y.  L.  J.,   May  24,  1890.     A 
sale  by  a  pledgee  will  not  be  enjoined 
merely  because  the  corporation  is  in 
insolvency  proceedings  in  another  state 
and   the    sale    has    been    enjoined    by 
courts  of  that  state.     Union  Cattle  Co. 
r.  International  Trust  Co.,  149  Mass.  492 
(1889).  A  mortgage  of  stock  is  the  same 
as  a  pledge  of  stock  in  that  the  mort- 

9 


gagee  may  sell  the  stock  upon  default 
and  after  proper  notica  Deverges  v. 
Sandeman,  etc.  Co.,  86  L  T.  Rep.  269 
( 1902).  The  agreement  of  the  pledgee 
not  to  dispose  of  the  pledge  does  not 
prevent  a  sale  after  default.  Kelley  v. 
Root,  74  N.  Y.  App.  Div.  499  (.1902). 
Even  though  the  pledgee,  after  the 
note  was  due,  told  the  pledgor  that  he 
wished  payment  within  a  few  days, 
and  the  pledgor  said  he  would  pay 
whenever  the  pledgee  wished,  this  is 
not  a  legal  agreement  to  postpone  the 
sale.  Thornton  v.  Martin,  42  S.  E.  Rep. 
348  (Ga.  1902). 

1  O'Neill  V.  Whigham,  87  Pa.  St.  394 
(1878);  Rozet  v.  McClellan,  48  III  345 
(1868);  Palmer  v.  Hawes,  73  Wis.  46 
(1888). 

2Simonton  v.  Sibley,  122  U.  S.  220 
(1887);  Palmer  v.  Hawes,  73  Wis.  46 
(1888).  Where  one  company  buys  out 
another  and  assumes  the  debts  of  the 
latter,  a  creditor  of  the  latter  company 
may  assign  his  claim  as  collateral  se- 
curity, but  the  pledgee  is  not  bound  to 
institute  suit  to  collect  such  claim,  and 
is  not  liable  for  failure  so  to  do,  even 
though  the  claim  is  finally  lost.  Samp- 
son V.  Fox,  109  Ala.  662  (189.;).  The 
pledgee  is  not  liable  for  not  selling  the 
collateral,  even  though  the  collateral 
declines  in  value,  especially  where  the 
pledgor  made  no  request  that  such  sale 
be  made.  Henry,  etc.  Co.  v.  Shseffer, 
173  Mass.  443  (1899). 

3  Taylor  v.  Cheever,  72  Mass.  146 
(1856);  Butraan  v.  Howell,  144  Mass.  66 
(1887).  A  broker  or  pledgee  need  not 
sell  the  stock  held  as  collateral  before 
bringing  an  action  against  the  pledgor 
for  the  amount  due,  nor  does  a  broker '.^ 
78 


CH.  XXVI,] 


PLEDGE    OF    STOCK. 


[§  476. 


to  sell  by  merely  giving  hira  notice  so  to  do.^  Nor  is  the  pledgee 
bound  to  sell  on  non-payment  of  the  debt,  although  the  memoran- 
dum of  pledge  expressly  authorizes  a  sale,  but  he  may  file  a  bill  in 
equity  to  foreclose  instead  of  pursuing  the  other  remedy.-  In  an 
action  at  law  against  a  pledgor  on  a  debt,  the  judgment  need  not 
provide  for  a  return  of  the  pledge  upon  payment  of  the  debt.*  The 
pledgee's  remedy  by  attaching  the  stock  and  selling  it  at  an  execution 
sale  is  his  remedy  as  a  creditor  and  not  as  a  pledgee  of  the  person 
indebted  to  him.^  Where  the  pledgee  obtains  judgment  on  a  note 
which  is  secured  by  the  stock  and  then  causes  the  stock  to  be  sold 
out  by  the  sheriff  under  levy  of  execution,  such  sale,  however,  not 
being  made  in  accordance  with  the  statutes,  this  is  the  same  as  selling 
the  stock  without  notice  and  amounts  to  a  conversion  thereof.^    A 


custom  compel  it.  De  Cordova  v.  Bar- 
num,  130  N.  Y.  615  (1892).  A  pledgee 
having  sold  the  stock,  and  there  still 
being  a  balance  due  him  from  the 
pledgor,  may  sue  for  such  balance,  and 
need  not  allege  that  tlie  sale  was 
on  due  notice  and  demand.  Wallace 
V.  Berdell,  24  Hun,  379  (1881).  Where 
stock  pledged  to  secure  a  note  is  to  be 
transferred  as  payment  in  case  the 
note  is  not  paid,  the  pledgee  may  sue 
on  the  note  if  the  pledgor  has  not  trans- 
ferred the  stock.  FuUerton  v.  Mobley, 
15  Atl.  Rep.  856  (Pa.  1888).  The  pledgee 
may  sue  on  the  debt  before  selling  the 
collateral.  Sinclair  v.  Weekes,  41  S.  W. 
Rep.  107  (Tex.  1897).  As  to  the  duties 
of  the  pledgee  towards  an  indorser  of 
the  note,  see  Payne  v.  Commercial 
Bank,  14  Miss.  24  (1846).  Misrepresenta- 
tions by  a  pledgee  of  stock  as  to  the 
value  of  the  stock,  made  after  its  pledge, 
are  no  defense  for  the  pledgor  when 
sued  on  the  debt.  Palmer  v.  Hawes,  73 
Wis.  46  (1888).  The  maker  of  a  note  is 
liable  personally,  although  it  recites 
that  it  is  secured  by  stock  as  collateral 
"  without  recourse."  Rathburn  v. 
'  Jones,  47  S.  C.  206  (1896). 

1  See  §  475,  supra. 

2Cornick  v.  Richards,  3  Lea  (Tenn.), 
1  (1879);  Coffin  v.  Chicago,  etc.  Co.,  4 
Hun,  625  (1875). 

3  Robertson  r.  Sully,  2  N.  Y.  App.  Div. 
152  (1896  ,  reversed  on  another  point  in 


157  N.  Y.  624.  The  pledgee  may  sue  on 
the  debt  and  obtain  a  judgment  and 
need  not  tender  the  stock  held  in 
pledge,  and  the  judgment  need  not  con- 
tain a  provision  that  the  stock  should 
be  .surrendered  on  payment  of  the  judg- 
ment. French  v.  McCarthy,  125  Cal. 
508  (1899).  The  purchaser  of  a  note  may 
enforce  the  same  without  producing 
collateral  which  is  recited  in  the  note 
itself,  where  it  is  shown  that  such  col- 
lateral was  to  secure  several  notes  and 
had  been  returned  to  the  payor  in  con- 
nection with  the  other  notes  and  new 
collateral  substituted  therefor.  Haskell 
V.  Africa,  68  N.  H.  421  (1896).   See  g  335. 

*  Lee  V.  Citizens'  Nat.  Bank,  2  Cin. 
Super.  Ct.  (Ohio),  298  (1872).  His  rem- 
edies  as  a  pledgee  are  not  released  or  af- 
fected by  his  pursuit  of  other  remedies. 
See  Sickles  v.  Richardson,  23  Hun,  559 
(1881).  Judgment  on  the  debt  does  not 
release  the  stock  pledged.  "Until  the 
debt  is  paid,  the  pledgor,  under  the 
terms  of  the  bailment,  has  no  right  to  ' 
have  the  pledge  given  up  to  him."  Don- 
nell  V.  Wyckoff,  49  N.  J.  L.  48  (1887). 
See  also  Hill  v.  Beebe,  13  N.  Y.  556,  563, 
567  (1856). 

sPeige  V.  Burt,  118  Mich.  243  (1898). 
Where  the  pledgee  causes  the  sheriff 
to  sell  the  pledge  on  a  judgment  ob- 
tained upon  the  debt,  the  pledge  rela- 
tionship ceases  to  exist,  even  though  it 
turn  out  that  the  sale  was  illegal  and 


979 


§  476.] 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


pledgee  cannot,  by  obtaining  judgment  on  his  claim,  reach  the 
pledge  by  a  judgment  creditor's  bill.^  A  i)ledgee  may  prove  his 
entire  claim  against  the  insolvent  estate  of  the  pledgor,  and  obtain 
his  proportionate  part  thereof.^  Or  the  pledgee  may  sell  out  the 
collateral  in  accordance  with  law  and  then  sue  for  the  deficiency.' 
A  pledgee  may  sell  at  public  sale  on  notice,  even  though  a  receiver 
of  the  pledgor  has  been  appointed.^  Even  though  bankruptcy  pro- 
ceedings are  instituted  against  the  pledgor,  yet  the  bankruptcy 
court  has  no  power  to  enjoin  the  pledgee  from  selling  the  pledge 
in  accordance  with  the  terms  of  the  pledge  itself.^  The  death  of 
the  pledgor  does  not  entitle  his  administrator  to  take  the  stock 
from  the  pledgee,  or  to  claim  the  dividends  without  payment  of 
the  debt.®  "Where  stock  is  held  as  collateral  to  a  debt,  the  statute 
of  limitations  does  not  run  as  against  the  pledge,  and,  although  the 
debt  itself  is  barred,  the  court  may  order  the  stock  sold  to  satisfy 
the  debt.''     Complicated  questions  arise  where  stock  is  held  b}'^  one 


void.  Latta  v.  Tutton,  122  Cal.  279 
(1898).  Where  the  pledgee  brings  suit 
on  the  debt  and  attaches  the  stock  he 
thereby  waives  his  lien,  and  even 
though  the  attachment,  is  illegal  and 
void  for  insufficient  service,  yet  his 
rights  as  pledgee  are  not  thereby  re- 
stored. H.  B.  Clafiin  Co.  v.  Bretzfelder, 
69  Ark.  271  (1901).  Even  though  a 
pledgee  brings  suit  on  a  debt  and  lev- 
ies on  the  stock  he  does  not  thereby 
lose  his  rights  as  pledgee.  Croft  v.  Col- 
fax, etc.  Co.,  113  Iowa,  455  (1901).  A 
person  holding  stock  in  pledge  may 
waive  his  rights  as  pledgee  and  attach 
the  property  of  his  debtor.  Parberry  v. 
Woodson  Sheep  Co.,  18  Mont.  317  (1896), 
citing  Drake  on  Attachments,  7th  ed., 
§  35. 

iShaw  V.  Monson,  etc.  Co.,  96  Me.  41 
(1901). 

2  See  §  478,  supra. 

3  See  §  473,  supra.  See  also  §  763, 
infra,  as  to  pledges  of  bonds. 

*  Fidelity,  etc,  T.  Co.  v.  Roanoke,  etc. 
Co.,  81  Fed.  Rep.  439  (1896).  See  also 
Moore  v.  Potter,  155  N.  Y.  481  (1898); 
Dudley  v.  Gould,  6  Hun,  97  (1875). 

^In  re  Browne,  104  Fed.  Rep.  762  (1900). 

«  Fulton  V.  National  Bank,  62  S.  W. 
Rep.  84  (Tex.  1901).  See  also  §  473, 
stipra. 


'Zellerbach  v.  Allenberg,  99  Cal.  57 
(1893).  Although  the  statute  of  limita- 
tions has  run  against  the  debt  the 
pledgor  cannot  compel  the  pledgee  to 
give  up  the  pledge  unless  the  debt  is 
paid.  Gage  v.  Riverside  Trust  Co.,  86 
Fed.  Rep.  984  (1898).  A  lien  may  be  en- 
forced, even  though  the  debt  is  barred 
by  the  statute  of  limitations.  Common- 
wealth i\  Standard,  etc.  Co.,  50  Atl. 
Rep.  1003  (Pa.  1902).  A  pledgee  may 
bring  suit  to  realize  upon  his  security, 
even  though  the  principal  debt  is  barred 
by  the  statute  of  limitations.  London, 
etc.  Bank  v.  Mitchell,  [1899]  2  Ch.  161. 
The  fact  that  stocks  are  deposited  as 
collateral  security  to  a  note  does  not 
prevent  the  statute  of  limitations  run- 
ning against  the  note.  Re  Hartranft's 
Estate,  153  Pa.  St.  530  (1893).  Although 
the  debt  is  barred  by  the  statute  of 
limitations,  the  pledgee  may  compel 
the  corporation  to  transfer  the  stock  to 
him  on  the  books.  Miller  v.  Houston 
City  St.  Ry.,  55  Fed.  Rep.  366  (1893).  A 
pledgee  may  enforce  payment  of  his 
debt  by  sale  of  stock  held  as  collateral 
security  therefor,  even  though  the  debt 
itself  may  be  barred  by  the  statute  of 
limitations.  Tombler  v.  Palestine  Ice 
Co.,  17  Tex.  Civ.  App.  596  (1897). 


980 


CH.  XXVI.] 


PLEDGE    OF    STOCK, 


[§  4T7. 


person  as  security  for  a  debt  due  to  another  person.  These  ques- 
tions, as  well  as  those  arisino-  from  a  trustee  of  a  morto-ao;e  holdino; 
stock  under  the  mortgage,  are  considered  elsewhere.^ 

§  477.  Notice  of  sale  ofstocli  l)]i  lylcdfjec  to  upiyhj  to  debt  secured  — 
Waiver  of  notice. —  In  case  the  pledgee  pursues  the  remedy  of  sell- 
ing the  stock  without  any  judicial  proceedings,  he  must  give  the 
pledgor  reasonable  notice  of  the  intent  to  sell  and  of  the  time  and 
place  of  sale.'^  A  sale  without  a  notice  is  a  conversion  of  the  stock.' 
The  pledgee  must  demand  payment  of  the  debt  secured  by  the 
pledge  of  stock,  and  a  Avaiver  of  notice  of  sale  is  not  a  waiver  of  a 
right  to  have  such  a  demand  made,^  But  where  the  time  of  pay- 
ment is  fixed  by  the  note,  no  demand  of  payment  need  be  made 
before  sale  of  the  pledge.'^  Where  the  indorser  of  a  note  deposits 
collateral  as  security,  the  collateral  may  be  sold,  although  notice 
of  non-paj^ment  of  the  note  is  not  given  to  him.^  A  notice  of  intent 
to  sell,  however,  is  equivalent  to  a  demand  of  payment.'^  A  broker's 
custom  to  the  e£fect  that  no  notice  is  necessary  is  illegal  and  void.^ 
The  time  and  place  of  the  proposed  sale  must  be  specified  in  the 
notice.^     Where  the  note  for  which  stock  is  pledged  is  made  and 


'  See  §  317,  supra. 

- "  To  authorize  the  defendants  to  sell 
the  stock  purchased,  they  were  bound, 
fir.<t,  to  call  upon  the  plaintiff  to  make 
good  his  margin;  and,  failing  in  that, 
he  was  entitled,  secondly,  to  notice  of 
the  time  and  place  where  the  stock 
would  be  sold;  which  time  and  place, 
thirdly,  must  be  reasonable."  Markham 
V.  Jaudon,  41  N.  Y.  285.  243  (1869).  See 
also  Stratford  v.  Jones,  97  N.  Y.  586 
(1885);  Baker  v.  Drake.  66  N.  Y.  518 
(1876);  Conyngham's  Appeal,  57  Pa.  St. 
474  (1868);  s'tearns  v.  Marsh,  4  Denio, 
227  (1847);  Neiler  v.  Kelley,  69  Pa.  St.  403 
(1871);  Cushman  v.  Hayes,  46  111.  145 
(1867).  A  joint  owner  is  entitled  to  no- 
tice. Clark  V.  Sparhawk,  2  W.  N.  Cas. 
115  (1875);  s.  c,  5  Fed,  Cas.  928. 

3  Fowle  V.  Ward,  113  Mass.  548  (1873); 
Hempfling  v.  Burr,  59  Mich,  294  (1886); 
Illinois  Nat.  Bank  v.  Baker,  128  111,  533 
(1889):  Feige  v.  Burt,  118  Mich.  243 
(1898). 

*  Lewis  V.  Graham,  4  Abb.  Pr.  106 
(1857);  Brass  v.  Worth,  40  Barb.  648 
(1863);  Wilson  v.  Little,  2  N.  Y.  443, 
448  (1849),  saying:  "It  is  well  settled 
that  where  no  time  is  expressly  fixed  by 


contract  between  the  parties  for  the 
payment  of  a  debt  secured  by  a  pledge, 
the  pawnee  cannot  sell  the  pledge  with- 
out a  previous  demand  of  payment,  al- 
though the  debt  is  technically  due  im- 
mediately," Genet  v.  Howland,  45  Barb. 
560  (1866). 

5  Franklin  Nat,  Bank  v.  Newcombe,  1 
N.  Y,  App,  Div.  294  (1896). 

''  Fiske  V.  Williams,  4  N.  Y,  App.  Div. 
487  (1896), 

■7  Nabring  v.  Bank  of  Mobile,  58  Ala. 
204  (1877).  So  also  of  notice  of  intent 
to  foreclose.  Goodrich  v.  Willard,  68 
Mass.  203  (1854),  Demand  of  payment 
may  be  made  by  long  urging  for  pay- 
ment, even  though  the  word  "  demand  " 
is  not  used.  Carson  v.  Iowa,  etc,  Co,,  80 
Iowa,  638  (1890).  The  giving  of  a  note 
to  a  broker  pledgee  does  not  extend  the 
time  within  which  the  pledgor  was  to 
deposit  further  margin.  Gould  v.  Trask, 
10  N,  Y.  Supp.  619  (1890). 

8  Markham  v.  Jaudon,  41  N.  Y.  285 
(1869). 

9  Conyngham's  Appeal,  57  Pa.  St.  474 
(1868);  Genet  v.  Howland,  45  Barb,  560 
(1866);  Canfield  v.  Minneapolis,  eta 
Assoc,   14  Fed,  Rep,   801    (1883).     See 


981 


§  ^ri.-\ 


PLEDGE    OF    STOCK. 


[Cll.  XXVI. 


delivered  and  payable  in  Massachusetts,  and  the  pledge  was  also 
made  there,  and  the  stock  is  in  a  small  Massachusetts  corporation 
and  is  not  known  elsewhere,  it  is  unreasonable  for  the  pledgee  to 
fix  the  place  of  sale  in  New  York,  even  though  the  pledgee  is  a 
New  York  corporation;  but  where  the  pledgor,  on  receiving  notice 
of  the  proposed  sale,  does  not  make  any  protest  or  objection  to  the 
place  of  sale,  and  takes  no  action  whatsoever  in  regard  to  it,  the 
pledgor  waives  any  objection  on  this  account.^     The  time  between 
the  service  of  the  notice  and  the  time  when  the  sale  is  to  take  place 
must  be  reasonable  in  length,  so  as  to  give  the  debtor  an  opportu- 
nity to  obtain  money  to  pay  the  debt.'^     Four  days'  notice  is  suffi- 
cient, although  the  sale  is  made  in  New  York  and  the  pledgor 
resides  in  Boston.^     A  notice  by  a   newspaper   advertisement   is 
insufficient/     It  is  not  sufficient  notice  to  the  pledgor  to  send  him 
a  printed  copy  of  the  public  notice  of  sale,  the  pledged  stock  being 
included  in  a  large  amount  of  other  stock,  and  there  being  nothing 
to  indicate  an  intent  to  sell  nor  to  indicate  that  the  pledgor  was 
interested.^     The  notice  must  be  served  personally,  and  it  seems 
that  it  cannot  be  served  on  one  who  has  charge  of  the  pledgor's 
office  for  the  transaction  of  business.*'  A  sale  of  bonds  as  collateral 


Schouler,  Bailm.,  2d  ed.,  §  229.     It  has  Hill,   389  (1842),  where  two  days  was 

been  held  in  Maryland  that  a  notice  of  held  sufficient;  Edwards,  Bailm.,  §  285. 

the  place  is  unnecessary.  Worthington  Notice  by  the  pledgee  of  merchandise 

V.  Tormey,  34  Md.  182  (1870).     But  such  that  he  will  sell  the  same  on  the  follow- 

decision  would  be  unsafe,  and  probably  ing  day  at  half-past  twelve  o'clock  is 

would  not  be  followed  elsewhere.  insufficient    where    such    notice    was 

1  Guinzburg  v.  H.  W.  Downs  Co.,  165  merely  mailed  and  is  not  received  until 
Mass.  467  (1896).  The  place  of  sale  of  a  ten  o'clock  the  next  morning  by  the 
pledge  may  be  in  the  county  where  the  pledgee,  and  the  advertisement  of  the 
pledgee  resides,  even  though  the  debt  sale  was  on  that  morning  and  on  the 
is  payable  in  another  county  in  which  evening  before.  Such  notice  did  not 
the  pledgor  resides.  Thornton  v.  Mar-  give  the  defendant  an  opportunity  to 
tin,  42  S.  E.  Rep.  348  (Ga.  1902).  redeem  the  property  or  save  his  equity. 

2  In  Maryland  F.  Ins.  Co.  v.  Dalrymple,  Jacoby  v.  S.  Jacoby  &  Co.,  103  Fed.  Rep. 
25  Md.  242  (1866),  a  week's  notice  was  473  (1900).  As  to  place  of  sale,  see  §g  458, 
held    sufficient.     Lewis  v.   Graham,  4  476,  supra. 

Abb.  Pr.  106  (1857),  holding  that  thirty-  3  Guinzburg  v.  H.  W.  Downs  Co.,  165 

four  days,  where  the  pledgor  resides  in  Mass.  467  (1896). 

Illinois  and  the  sale  is  to  be  in  New  *  Lewis  v.   Graham,   4  Abb.  Pr.  106 

York,  is  sufficient;  Bryan  u   Baldwin,  (1857);  and  see  §  119,  supra. 

7  Lans.   174  (1872);  aff'd,  52  N.  Y.  232,  5  McCutcheon  v.  Dittman,  23  N.  Y. 

holding  that  two  days  was  sufficient;  App.  Div.  285   (1897),  modified  in    164 

Stevens  v.  Hurl  but  Bank,  31  Conn.  146  N.  Y.  355. 

(1862),  holding  that  a  sale  on  the  same  ^  Bryan    v.   Baldwin,    52    N.   Y.    232 

day  is  unreasonable  and  the  notice  in-  (1873).     Cf.  Milliken  v.  Dehon,  27  N.  Y. 

sufficient.     See  other  cases  in  i;^  457,  364  (1863). 

458,  supra;  Willoughby  v.  Comstock,  3 

982 


CH.  XXVI.] 


PLEDGE    OF    STOCK. 


[§  ^T7. 


security,  in  violation  of  the  ao;reement  as  to  the  notice  to  be  aiven, 
does  not  release  a  surety  on  the  note  secured  by  the  bonds,  but  dis- 
charges hira  only  to  the  extent  of  the  actual  valoe  of  the  bonds.^ 

By  an  express  agreement  the  pledgor  may  waive  his  right  to 
notice  of  the  time  and  place  of  the  sale.^    The  pledgee's  right  by 


1  Vose  V.  Florida  R.  R.,  50  N.  Y.  369 

(1872). 

2  Maryland  F.  Ins.  Co.  v.  Dalrymple, 
25  Md.  242  (1866);  Genet  v.  Hovvland,  45 
Barb.  560  (1866);  and  see  ^g  459,  463, 
srtpra;  Milliken  v.  Dehon,  27  N.  Y.  364 
(1863);  Stevens  v.  Hurlbut  Bank,  31 
Conn.  146  (1862) ;  Hyatt  v.  Argenti,  3 
Cal.  151  (1853):  Wheeler  v.  Newbould, 
16  N.  Y.  392  (1857);  Stenton  v.  Jerome, 
54  N.  Y.  480  (1873);  Wicks  v.  Hatch,  62 
N.  Y.  535  (1875);  Butts  v.  Burnett,  6 
Abb.  Pr.  (N.  S.)  302  (1869).  The  pledgor 
of  stock  may,  by  the  terms  of  the 
agreement  creating  the  pledge,  waive 
his  right  to  notice  of  sale  for  non-pay- 
ment of  the  debt.  Jeanes's  Appeal,  116 
Pa.  St.  573  (1887).  Formerly  the  valid- 
ity of  a  waiver  was  doubted.  Camp- 
bell t'.  Parker,  9  Bosw.  322  (1862);  Wil- 
son V.  Little,  2  N.  Y.  443  (1849);  Gilpin 
V.  Howell,  5  Pa.  St.  41  (1846);  Hanks  v. 
Drake.  49  Barb.  186  (1867);  Sterlings. 
Jaudon,  48  Barb.  459  (1867).  Authority 
to  the  pledgee  to  sell  "at  public  or 
private  sale,  at  his  discretion,"  thirty 
days  after  notice,  waives  notice  of  sale. 
McDowell  V.  Chicago  Steel  Works,  124 
111.  491  (1888).'"  Notice  may  be  waived. 
Chouteau  v.  Allen,  70  Mo.  290  (1879). 
In  Huiskamp  v.  West,  47  Fed.  Rep.  236, 
249  (1891).  where  the  pledgee  was  au- 
thorized to  sell  before  maturity  and 
without  notice  if  the  security  became 
insufficient,  the  court  held  that  "the 
pledgee  could  not  make  sale  of  the 
collateral  until  after  the  default  in  the 
payment  of  the  note,  without  notice 
and  demand  of  payment  to  the  pledg- 
or." See  also  s.  c.  sub  nom.  West  v. 
HuJskamp,  63  Fed.  Rep.  749  (1894), 
Where  the  pledgees  are  given  power  to 
sell  "  in  such  manner  as  they,  in  their 
discretion,  may  deem  proper,  without 


notice,"  a  sale  without  notice  after 
the  maturity  of  the  loan  is  legal. 
Williams  v.  United  States  Trust  Co., 
133  N.  Y.  660  (1892).  The  sale  by  a 
pledgee  under  an  agreement,  whereby 
he  sold  without  notice,  was  upheld  in 
McDougallv.  Hazel  ton,  etc.  Co.,  88  Fed. 
Rep.  217  (1898).  The  pledgor  may,  sub- 
sequently to  the  making  of  the  pledge, 
release  his  right  to  redeem.  He  may 
agree  that  tiie  pledgee  may  sell  the 
pledge  at  any  time  at  private  sale,  and 
that  the  proceeds  shall,  after  repay- 
ment of  the  amount  loaned,  be  divided 
equally  between  the  pledgor  and 
pledgee.  Rutherford  v.  Massachusetts 
Mut.  Ins.  Co.,  45  Fed.  Rep.  712  (1891). 
The  fact  that  the  pledgee,  under  a 
waiver  of  notice,  of  demand,  and  of 
public  sale,  sells  the  stock  and  debt  to 
an  enemy  of  the  corporation,  does  not 
invalidate  the  sale.  Carson  v.  Iowa,  etc. 
Co.,  80  Iowa,  638  (1890).  Although  the 
pledgor  agrees  that  the  pledgee  may 
sell  part  of  the  pledge  without  notice 
upon  default,  this  does  not  release  the 
remainder  of  the  pledge  from  being 
additional  security  for  the  debt.  Bank 
of  Africa  v.  Salisbury,  etc.  Co.,  L.  R  17 
App.  Cas.  281  (1892).  Where  a  corpora- 
tion authorizes  its  agent  to  pledge  its 
bonds,  the  agent  may  make  the  pledge 
on  the  usual  terms  as  to  selling  the 
bonds  ia  case  of  default.  Morris,  etc. 
V.  East  Side  Ry.,  104  Fed.  Rep.  409 
(1900).  rev'g  95  Fed.  Rep.  13.  A  special 
agreement  authorizing  the  pledgee  to 
sell  is  not  waived  by  the  fact  that  the 
pledgee  does  not  exercise  tliat  right 
when  the  note  becomes  due,  but  does 
exercise  it  afterwards.  Louisville,  etc. 
Co.  V.  Thomas,  etc.  Co.,  68  S.  W.  Rep.  2 
(Ky.  1902).  Where  the' pledgor  waives 
demand  and  notice  of  the  time  and 


983 


§  478.] 


PLEDGE    OF   STOCK. 


[CH.  XXVI. 


written  agreement  to  sell  at  private  sale  without  notice  is  waived 
by  him  if  he  does  anything  which  reasonably  causes  the  pledgor  to 
understand  that  such  special  agreement  is  waived.^  Such  contracts 
are  frequently  entered  into  with  stock-brokers  by  customers  buying 
stock  on  a  margin.  But  an  express  power  to  the  pledgee  to  sell 
the  pledge  on  certain  contingencies  is  not  a  waiver  of  a  right  to 
notice.2  Irregularities  in  the  notice  may  be  waived.  Thus,  where 
a  person,  upon  being  presented  with  his  account,  does  not  object, 
but  promises  to  pay  the  amount,  he  thereby  waives  his  right  to 
object  to  a  sale  as  being  without  notice^*  Even  though  a  pledgee 
sells  the  stock  prior  to  the  date  on  which  he  gave  notice  that  he 
would  sell  it,  yet,  if  the  pledgor,  knowing  the  facts,  directs  the  ap- 
plication of  the  proceeds  of  the  sale  and  accepts  a  statement  of  it, 
he  cannot  afterwards  complain."  The  rights  and  duties  of  a  trus- 
tee holding  stock  as  security  under  a  mortgage  are  considered 
elsewhere.* 

§478.  FormaUties  of  sale.— A   sale  of  stock   on   notice  by  a 
pledgee,  for  the  purpose  of  applying  the  proceeds  to  the  pledgor's 


place  of  sale,  the  pledgee,  after  the'debt 
is  due,  may  sell  without  demand  and 
without  notice.  Thornton  v.  Martin.  42 
S.  E.  Rep.  348  (Ga.  1902). 

The  following  is  a  sample  of  a  note 
and  waiver: 

"  $ .  New  York, ,  19—. 

" after  date promise  to  pay  to  the 

order  of , dollars,  at ,  for  value  re- 
ceived, vFith  interest  at  the  rate  of per  cent. 

per  annum,  having  pledged  to  the  said 

the  following  securities: ,  the  mar- 
ket value  of  which  is  now  $ ,  with  the  right 

on  their  part  from  time  to  time  to  demand  such 
additional  collateral  security  as  they  may  deem 
sufficient  should  the  market  value  thereof  de- 
cline, and  also  hereby  give  them  a  lien  for  the 
amount  of  all  the  said  liabilities  upon  all  the 
property  or  securities  given  unto  or  left  in  their 
possession  by  the  undersigned,  and  also  upon 
any  balance  of  the  deposit  account  of  the  under- 
signed with  them.    Upon failure  to  comply 

with  any  such  demand,  this  obligation  shall 
forthwith  become  due,  with  full  power  and  au- 
thority to  them  or  their  assigns  in  case  of 
such  default  or  of  the  non-payment  of  any  of  the 
liabiUties  above  mentioned  at  maturity,  to  sell, 
assign  and  deliver  the  whole,  or  any  part  of  such 
securities,  or  any  substitutes  therefor  or  addi- 
tions thereto,  at  any  brokers'  board,  or  at  public 
or  private  sale,  at  their  option,  at  any  time  or 
times  thereafter  without  advertisement  or  no- 
tice to and  with  the  right  on  their  part  to  be- 

C'ime  purchasers  thereof  at  such  sale  or  sales, 
freed  and  discharged  of  any  equity  of  redemp- 
tion.    And  after  deducting  all  legal  or  other 


costs  and  expenses  for  collection,  sale  and  de- 
livery, to  apply  the  residue  of  the  proceeds  of 
such  sale  or  sales  so  made,  to  pay  any,  either  or 
all  of  said  liabilities,  as  to  them  shall  be  deemed 
proper,  returning  the  overplus  to  the  under- 
signed; and will  still  remain  liable  for  any 

amoimt  so  unpaid.  The  undersigned  do  hereby 
authorize  and  empower  them  at  their  option,  at 
any  time,  to  appropriate  and  apply  to  the  pay- 
ment and  extinguishment  of  any  of  the  above- 
named  obligations  or  liabilities,  whether  now 
existing  or  hereafter  contracted,  any  and  all 
moneys  now  or  hereafter  in  their  hands,  on  de- 
posit or  otherwise,  to  the  credit  of  or  belonging 
to  the  undersigned,  whether  the  said  obligations 
or  liabilities  are  then  due  or  not  due. 


iToplitz  V.  Bauer,  161  N.  Y.  325 
(1900). 

2  Stevens  v.  Hurlbut  Bank,  31  Conn. 
146  (1862);  Lewis  v.  Graham,  4  Abb.  Pr. 
106  (1857).  See  also  Wilson  v.  Little,  2 
N.  Y.  443  (1849);  Genet  v.  Rowland,  30 
How.  Pr.  360  (1866);  Stenton  u  Jerome, 
54  N.  Y.  480  (1873).  Cf.  Milliken  v.  De- 
hon,  27  N.  Y.  364  (1863).  But  an  express 
power  to  sell  on  a  specified  day  is  held 
to  waive  right  of  notice.  Bryson  v. 
Rayner,  25  Md.  424  (1866). 

SGillett  V.  Whiting,  141  N.  Y.  71 
(1894). 

*  Granger  v.  Fidelity,  etc.  Co.,  198  Pa. 
St.  428  (1901). 

5  See  g  317,  supra. 


984 


^H.  XXVI.] 


PLEDGE    OF    STOCK, 


[§  478. 


debt,  must  be  at  public  auction.^  A  private  sale  is  unauthorized 
and  illegal,  even  though  the  utmost  market  price  is  obtained.^  But 
a  special  contract  by  "which  the  pledgor  authorizes  the  pledgee  to 
sell  without  notice  and  at  public  or  private  sale  has  been  upheld.^ 
Unless  there  is  such  a  special  contract,  the  pledgee  cannot  have  the 
sale  made  at  a  brokers'  board  or  in  a  stock  exchange,  since  only  the 
members  of  the  association  are  allowed  to  bid  for  stocks  sold  therein, 
while  the  law  requires  that  the  public  shall  be  allowed  to  bid  at  a 
pledgee's  sale.*  Frequently  a  special  agreement  is  made  between 
the  pledgor  and  pledgee,  especially  between  a  customer  and  his 
-stock-broker,  whereby  the  pledgee  is  allowed  to  sell  at  a  brokers' 


1  Conyngham's  Appeal,  57  Pa.  St.  474 
(1868);  Rankin  v.  McCuUougb,  13  Barb. 
103  (1851);  Genet  v.  Howland,  45  Barb. 
560(1866);  Ogden  v.  Latbrop,  65  N.  Y. 
158  (1875);  Terry  v.  Birmingham  Nat. 
Bank,  93  Ala.  599  (1891).  An  express 
power  to  sell  has  been  held  to  author- 
ize a  private  sale.  Bryson  v.  Rayner,  25 
Md.  424  (1866).  Or  a  sale  at  a  brokers' 
board.  Bryson  i\  Rayner,  25  Md.  424 
(1866).  A  private  sale  of  collateral  held 
•by  a  receiver  cannot  be  made,  even  by 
order  of  the  court.  In  re  Earle,  92  Fed. 
Rep.  22  (1899). 

2  Castello  V.  City  Bank  of  Albany,  1 
N.  Y.  Leg.  Obs.  25  (1842).  Cf.  Nabring 
■V.  Bank  of  Mobile,  58  Ala.  205  (1877). 
The  pledgee's  right  to  object  is  waived 
by  long  delay.  Hayward  v.  National 
Bank,  96  U.  S.  611  (1877).  In  Willoughby 
V.  Comstock,  3  Hill,  389  (1842),  it  was 
held  that  the  pledgee's  failure  to  object 
when  he  received  notice  of  intent  to 
sell  at  a  brokers'  board  was  fatal.  A 
■bona  fide  pledgee  of  a  certificate  of 
stock  from  an  agent  having  power  to 
pledge,  but  who  had  so  pledged  the 
stock  for  purposes  not  authorized  by 
the  owner,  is  nevertheless  protected, 
and  even  though  such  pledgee  sells  the 
stock  at  private  sale  without  notice  he 
cannot  be  held  liable  if  the  stock  was 
not  worth  more  than  the  debt  secured. 
Brittan  v.  Oakdale,  etc.,  124  Cal.  282 
(1899). 

3  Williams  v.  United  States  Trust  Co.. 
133  N.  Y.  660  (1892);  s.  a,  14  N.  Y.  Sxipp. 
■502.     A  private  sale  by  the  pledgee  in 


accordance  with  an  agreement  author- 
izing such  sale  was  upheld  in  Smith  v. 
Lee,  84  Fed.  Rep.  557  (1898).  where  the 
price  realized  was,  under  the  circum- 
stances, a  fair  price.  In  this  case  a  third 
party  had  substituted  his  stock  for  the 
stock  of  the  original  pledgor,  and  the 
court  held  that  the  substituted  stock 
was  subject  to  the  terms  of  the  original 
agreement  of  pledge  as  to  mode  of  sale. 
A  private  sale  in  accordance  with  the 
contract  allowing  said  sale  was  held  in 
Dullnig  V.   Weekes,  40  S.  W.  Rep.  178 
(Tex.  1897),  not  to  be  invalid,  where  the 
amount  realized  was  greater  than  the 
market  value.   The  court  held  also  that 
a  waiver  of   advertisement  or  notice 
waived  any  notice  to  the  pledgor  and 
also  to  the  public.   See  also  §  477.  mpra. 
"Where  the  pledgor  becomes  insolvent 
and  assigns  for  the  benefit  of  creditors, 
his  assignee  may  agree  with  the  pledgee 
that  the  stock  be  sold  at  private  sale  by 
the  assignee.  Durfee  v.  Harper,  22  Mont. 
354  (1899).     A  provision  in  a  pledge  of 
an  insurance  policy  that  the  pledgee 
may  sell  it  at  public  or  private  sale 
upon   default,  or  surrender  it  to  the 
company,  may  be  waived  by  agreement, 
declaration,  or  course  of  conduct  indi- 
cating that  an  opportunity  would  be 
given  to  redeem.     Toplitz  v.  Bauer,  161 
N.  Y.  325  (1900). 

4  Brass  v.  Worth.  40  Barb.  648  (1863); 
Rankin  v.  McCuUough,  12  Barb.  103 
(1851).  A  sale  in  another  state  is  legal. 
King  V.  Texas,  etc.  Ins.  Co.,  58  Tex.  669 
(1883). 


9S5 


§  478.] 


PLEDGE    OF    STOCK. 


[on.  XXVL, 


board.*  Such  an  agreement,  however,  does  not  authorize  a  private 
sale  at  a  brokers'  board.-  The  usual  printed  agreement  which  a 
bank  requires  a  pledgor  to  sign  will  be  construed  in  favor  of  the 
pledgor,  inasmuch  as  the  agreement  is  drawn  by  the  pledgee.  A 
provision  that  the  pledge  shall  apply  to  all  liabilities  of  the  pledgor 
to  the  bank  does  not  include  a  claim  which  the  bank  purchases.' 
A  sale  is  valid  though  the  stock  is  sold  for  only  a  small  part  of  it& 
value.*  The  fact  that  there  is  only  one  bidder  does  not  render  the 
sale  invalid.'^  The  pledgor  in  selling  must  "exercise  reasonable- 
skill  and  diligence  in  order  to  get  the  value  of  the  property."^ 
"Where  stock  is  sold  on  a  mortgage  foreclosure,  it  will  be  sold  "  by 
offering  the  shares  in  small  blocks,  and  then  as  a  whole,  and  taking 
the  bid  which  aggregates  the  larger  sura."^  But  a  sale  in  small 
blocks  is  not  required  at  common  law.*^  Where  an  Oregon  corpo- 
ration pledges  its  bonds  in  California  to  secure  notes  payable  in 
California,  the  law  of  California  applies  as  to  the  mode  of  selling 
such  bonds  on  default  of  the  pledgor,^ 


1  Wicks  V.  Hatch,  63  N.  Y.  535  (1875). 
See  eh.  XXV,  supra. 

2  Allen  V.  Dykers,  3  Hill,  593  (1842); 
aff'd,  Dykers  v.  Allen,  7  Hill,  497  (1844). 

3  Gillet  V.  Bank  of  America,  160  N.  Y. 
549  (1899). 

4  See  §  850,  infra.  A  bona  fide  pur- 
chaser at  a  pledgee's  sale  is  protected, 
though  he  purchased  for  less  than  the 
real  value  of  the  stock,  and  though  a 
receiver  had  previously  been  appointed 
of  the  pledgor's  property  and  it  had 
been  transferred  to  the  receiver.  Dud- 
ley V.  Gould,  6  Hun,  97  (1875).  Even 
though  stock  actually  worth  §5,000  is 
sold  on  public  execution  for  $9.  yet  the 
sale  cannot  be  attacked  collaterally,  but 
can  be  set  aside  only  in  a  direct  pro- 
ceeding for  that  purpose.  Howard  v. 
Corey,  126  Ala.  283  (1900).  A  pledgee  is 
not  justified  in  selling  the  pledge  for 
just  enough  money  to  pay  the  debt 
where  the  pledge  is  known  to  have 
more  than  double  that  value,  and  where 
the  pledgee,  although  a  bona  ^cZe  holder, 
had  learned  that  the  pledge  had  been 
made  in  breach  of  trust  by  the  pledgor, 
especially  where  the  pledgee  buys  at  the 
sale.  Foote  v.  Utah,  etc.  Bank,  17  Utah, 
283  (1898).  As  to  a  sacrifice  sale  by  a 
trustee  of  a  mortgage,  see  §  317,  supra. 


5  Guinzburg  v,  H.  W.  Downs  Co.,  165 
Mass.  467  (1896). 

6  Guinzburg  v.  H.  W.  Downs  Co.,  165 
Mass.  467  (1896).  A  pledgee  M-ho  is  given 
power  to  manage  the  stock  and  sell 
cannot  easily  be  held  liable  in  damages 
for  mismanagement,  even  though  it 
turns  out  that  he  sold  for  much  less- 
than  the  stock  was  worth.  Hewitt  v, 
Steele,  118  Mo.  463  (1893).  See  also  Min- 
neapolis Trust  Co.  V.  Menage,  73  Minn. 
441  (1898). 

^  Toler  V.  East  Tennessee,  etc.  Ry.,  67 
Fed.  Rep.  168,  181  (1894). 

8  Even  though  the  sheriff,  under  exe- 
cution, sells  a  large  block  of  stock  in 
one  lot,  instead  of  dividing  and  selling, 
it  in  small  lots,  and  even  though  such 
sale  realizes  $12,000,  whereas  the  levy 
was  for  only  $1,000,  yet  the  purchaser 
is  protected  in  his  purchasa  Connecti- 
cut, etc.  Ry.  V.  Morris,  14  S.  C.  Rep. 
(Can.)  318  (1887);  Morris  u  Connecticut, 
etc.  Ry.,  L.  R.  2  Q.  B.  303  (1886).  The 
court  may  order  a  receiver  to  sell  shares 
of  stock  held  by  the  receiver  in  one 
block  instead  of  in  parcels  if  the  court 
deems  best.  First  Nat.  Bank  v.  C.  Bunt- 
ing Co.,  63  Pac.  Rep.  694  (Idaho,  1900). 

»  Morris,  etc.  v.  East  Side  Ry.,  104  Fed.. 
Rep.  409  (1900),  rev'g  95  Fed.  Rep.  13. 


986 


en. 


XXVI.] 


PLEDGE   OF   STOCK. 


[§  4T^. 


§  479.  If  the  pledgee  himself  purcliases  at  tJie  sale,  then  the  sale  is 
voidable. —  It  is  a  well-established  rule  that,  where  a  pledgee  pur- 
sues the  remedy  of  selling  the  stock  upon  notice,  the  pledgee  him- 
self is  disqualified  from  purchasing  the  stock. ^  The  rule  is  based 
on  the  principle  that  the  pledgee  owes  a  duty  to  the  pledgor,  and 
will  not  open  the  door  to  possible  devices  of  the  pledgee  for  pur- 
chasing the  stock  for  himself  at  a  low  price.  The  pledgee  cannot 
purchase,  either  directly  or  indirectly,  in  his  OAvn  name  or  in  the 
name  of  another.-  The  effect  of  a  purchase  by  the  pledgee  for 
himself  is  that  the  whole  proceeding  of  the  pledgee  for  subjecting 
the  pledge  to  the  payment  of  the  debt  is  utterly  futile,  and  void- 
able at  the  election  of  the  pledgor.  The  pledgor,  however,  may 
elect  to  abide  by  the  sale.^  The  pledgor  cannot  claim  that  the 
pledgee  has  converted  the  stock  by  purchasing  at  the  sale,*  but  he 


^Easton  v.  German- Ameriqan  Bank, 
127  U.  S.  532  (1888);  Bryan  v.  Baldwin, 
52  N.  Y.  232  (1873),  the  court  saying: 
"The  plaintiff,  being  pledgee  of  the 
stock,  and  in  that  character  exposing 
it  for  sale,  could  not  become  the  pur- 
chaser unless  the  defendant  assented  to 
such  purchase.  .  .  .  This  sale  to  the 
plaintiff  was  not  void,  but  voidable  at 
the  election  of  the  defendant;"  Mary- 
land F.  Ins.  Co.  V.  Dalrymple,  25  Md. 
242  (18661.  Nor  can  he  buy  where  the 
pledge  is  being  sold  on  a  forfeiture  sale 
for  non-payment  of  calls.  Freeman  i\ 
Harwood,  49  Me.  195  (1859).  See  also 
Sickles  V.  Richardson,  23  Hun.  559  (1881), 
where  the  sale  of  property  pledged  was 
on  an  attachment.  The  pledgor's  silence 
may  constitute  a  ratification  of  the 
pledgee's  purchase.  Carroll  v.  Mullan- 
phy  Sav.  Bank,  8  Mo.  App.  249  (1880). 
If  the  pledgee  is  a  corporation  its  presi- 
dent cannot  purchase  for  it.  Star  F, 
Ins.  Co.  u  Palmer,  41  N.  Y.  Super.  Ct. 
267  (1876).  Lewis  v.  Graham,  4  Abb.  Pr. 
106  (1857),  holds  that  a  special  partner 
of  the  pledgee  firm  may  purchase.  And 
see  ch.  XXV,  §  450,  supra.  Cf.  Finney's 
Appeal,  59  Pa.  St.  398  (1868).  Where  a 
pledgee  bank  having  a  right  to  sell  at 
private  sale  and  without  notice  sells  the 
pledge  through  its  president,  who  buys 
the  pledge  himself,  and  the  president 
openly  pays  the  bank  for  it,  long  delay 


on  the  part  of  the  bank  in  complaining 
is  fatal.  Raymond  v.  Palmer,  41  La. 
Ann.  425  (1889).  Even  though  the  at- 
torney for  the  pledgee  buys  a  pledge  at 
public  sale  and  afterwards  resells  it  to 
the  pledgee,  yet  if  there  is  no  proof  that 
the  transaction  was  a  mere  device  the 
sale  is  valid.  Steelman  v,  Weiskittel, 
88  Md.  519  (1898).  Where  a  bank  holds 
$300,000  of  first-mortgage  bonds  issued 
to  the  bank  by  the  corporation  itself,. 
for  a  debt  of  about  $175,000  and  trans- 
fers the  same  to  another  party,  who  ad- 
vertises and  sells  the  bonds  under  the 
terms  of  the  pledge,  even  though  the 
purchaser  borrows  the  money  from  the 
bank  in  order  to  make  payment,  the 
sale  is  not  thereby  invalidated.  Mor- 
ris, etc.  V.  East  Side  Ry.,  104  Fed.  Rep. 
409  (1900).  rev'g  95  Fed.  Rep.  13. 

'■^Minneapolis  Assoc,  v.  Canfield,  121 
U.  S.  295  (1887).  He  cannot  buy  in  the 
name  of  a  dummy.  Rush  i:  First  Nat. 
Bank.  71  Fed.  Rep.  102  (1895). 

3  Appeal  of  Hibernia  Nat.  Bank,  47 
La.  Ann.  643  (1895). 

4  Bryan  v.  Baldwin,  53  N.  Y.  232 
(1873).  If  the  pledgee  buys  it  in,  there 
is  no  conversion.  The  pledge  continues^ 
Terry  v.  Birmingham  Nat.  Bank.  93 
Ala.  599  (1891).  Where  the  pledgee 
buys  at  a  sale  he  cannot  be  held  liable 
for  conversion  so  long  as  he  retains  the 
property,  unless  the  pledgor  demands 


987 


§  479.] 


PLEDGE    OF    STOCK. 


[ciI.  XXVI. 


may  disregard  the  notice  and  sale  and  the  whole  proceeding  as 
being  ineffectual  and  voidable.  The  pledge  relationship  continues 
as  though  no  attempt  had  been  made  by  the  pledgee  to  subject  the 
pledge  to  the  payment  of  the  debt.^  Where  the  pledgee  buys  the 
security  at  the  public  sale  and  then  sells  it,  and  then  sues  the 
pledgor  for  the  deficiency  on  the  first  sale,  the  pledgor  may  claim 
a  set-off  for  the  full  value  of  the  securities  wrongfully  resold,  and 


the  return  of  the  same  and  offers  to 
perform  his  part  of  the  contract;  but 
where  the  pledgee  sells  a  part  of  the 
property  he  is  liable  for  conversion 
without  any  demand  or  offer  of  per- 
formance by  the  pledgor.  Glidden  v. 
Mechanics'  Nat.  Bank,  58  Ohio  St.  588 
(1895).  Where  the  pledgee  purchases 
at  the  sale  the  sale  is  void,  but  does  not 
amount  to  a  conversion  of  the  secu- 
rities. First  Nat.  Bank  v.  Hall,  22  N.  Y. 
A.pp.  Div.  356  (1897). 

iBryson  v.  Rayner,  25  Md.424  (1866); 
Middlesex  Bank  v.  Minot,  45  Mass.  325 
(1842):  Hestonville,  etc.  R.  R.  v.  Shields, 
8  Brewst.  (Pa.)  257  (1869).  If  the  pledgee 
purchases  at  the  sale  the  pledge  contin- 
ues. The  pledgor  does  not  waive  his 
rights  by  settling  in  ignorance  that  the 
pledgee  purchased.  Sharpe  v.  Birming- 
ham Nat.  Bank,  87  Ala.  644  (1888).  If 
the  pledgee  buys,  the  pledge  continiaes 
unless  the  pledgor  confirms  the  sala 
Hyams  v.  Bamberger,  10  Utah,  3  (1894). 
Where  the  pledgee  buys  in  the  stock 
himself,  it  is  the  same  as  though  no 
sale  had  taken  place,  and  the  corpora- 
tion is  not  liable  for  allowing  a  trans- 
fer of  the  stock  to  such  pledgee.  First 
Nat.  Bank  v.  Mings,  11  Tex.  Civ.  App. 
302  (1895).  Where  a  pledgee  buj's  for 
himself,  and  subsequently  takes  the 
stock  into  his  possession,  the  pledge 
continues,  and  he  cannot  sell  a  second 
time  without  due  notice.  Leahy  v. 
Lobdell,  etc.  Co.,  80  Fed.  Rep.  665 
(1897).  A  pledgee  of  bonds  who  buys 
them  in  at  his  own  sale  as  pledgee  still 
holds  them  in  pledge.  Duncomb  v.  N. 
Y.  etc.  R.  R..  84  N.  Y.  190.  204  (1881). 
Even  though  a  national  bank,  as 
pledgee  of  a  national  bank  stock  whicli 


stands  on  the  books  of  the  latter  bank 
in  the  name  of  the  pledgor,  sells  the 
stock  on  notice  and  buys  it  in  at  a  nom- 
inal figure,  yet  if  the  pledgee  does  not 
have  the  stock  transferred  to  himself 
on  the  books  of  the  bank  he  cannot  be 
held  liable  thereon,  the  pledgee  having 
soon  after  the  sale  waived  its  rights  as 
a  purchaser  at  such  .sale.  Robinson  i\ 
Southern,  etc.  Bank,  180  U.  S.  295  (1901). 
Where  the  pledgee  of  stock  sells  it  out 
and  buys  it  in  himself,  and  at  the  an- 
nual election  votes  the  stock  by  proxy, 
even  though  the  stock  still  stands  on 
the  corporation  books  in  the  name  of 
the  pledgor,  and  the  pledgor  claims 
that  the  sale  is  illegal  and  that  the  di- 
rectors elected  by  the  pledgee's  vote  in- 
tend to  take  action  detrimental  to  the 
corporation,  such  pledgor  is  entitled  to 
an  injunction  again.st  such  directors 
acting  as  directors.  Reynolds  v.  Bri- 
denthal,  57  Neb.  280  (1898).  A  purchaser 
of  stock  who  makes  a  partial  payment 
and  gives  back  the  stock  as  collateral 
security  cannot  abandon  the  conti-act 
and  claim  such  part  of  the  stock  as  the 
payment  already  made  would  pay  for, 
on  the  ground  that  the  seller  has  ob- 
tained control  of  the  corporation  and 
is  guilty  of  a  breach  of  trust.  The  fact 
that  the  seller  as  pledgee  has  sold  the 
stock  and  bought  it  in  himself  is  im- 
material, inasmuch  as  such  a  sale  is 
illegal.  Reid  v.  Caldwell,  110  Ga.  481 
(1900).  Where  the  trustee  of  a  mort- 
gage makes  a  loan  to  the  mortgagor  on 
the  bonds  secured  by  the  mortgage  and 
then  sells  out  the  collateral  and  buys  it 
in  himself,  he  can  upon  foreclosure  en- 
force the  bonds  only  to  the  extent  of 
the  amount  loaned  and  interest.  Knick- 


98: 


CH.  XXVI.] 


PLEDGE    OF    STOCK. 


[§  470. 


need  not  make  a  tender.^  Under  the  statutes  of  California  the 
pledgor  at  a  public  sale  may  buy  in  the  stock;  -  while  in  Massachu- 
setts by  statute  a  pledgee  is  prohibited  from  purchasing  at  his  own 
sale.^  "Where  a  pledge  is  foreclosed  by  legal  proceedings  similar  to 
those  for  the  foreclosure  of  chattel  mortgages,  either  party  may  bid 
at  tne  public  judicial  sale.*  Even  though  the  pledgee  is  authorized 
to  sell  at  public  or  private  sale  without  notice,  yet  he  cannot  bu}'' 
for  himself,  notwithstanding  he  hassoldthenote  with  the  collateral 
to  another  person  who  makes  the  sale.^  The  pledgor  may  authorize 
the  pledgee  to  purchase  at  the  sale  and  retain  the  pledge.^  Stock 
held  in  pledge  to  secure  a  debt  cannot  be  sold  before  the  debt  is 
due,^  unless  there  is  a  special  contract  to  that  effect.     The  pledgor 


erbocker  Trust  Co.  v.  Penacook  Mfg. 
Co.,  100  Fed.  Rep.  814  (1900). 

iRush  V.  First  Nat.  Bank,  71  Fed. 
Rep.  103  (1895  >,  reviewing  the  author- 
ities on  tender  in  such  cases.  Where 
the  pledgee  sues  for  the  balance  due  on 
the  note  after  a  sale  of  the  pledge,  and 
the  pledgor  sets  up  a  counter-claim 
that  the  pledgee  had  sold  the  stock 
"for  the  use  of  defendant  and  con- 
verted to  its  own  use,"  the  pledgor 
thereby  ratifies  the  sale,  and  is  entitled 
only  to  the  purchase  price  of  the  stock, 
and  not  its  actual  value.  Terry  v.  Bir- 
mingham Nat.  Bank.  99  Ala.  566  (1893). 

ZMcAulay  v.  Moody,  128  Cal.  203 
(1900). 

3  Lord  V.  Hartford,  175  Mass.  320 
(1900). 

••Pewabic  Min.  Co.  v.  Mason,  145  U. 
S.  349  (1893).  In  Newport,  etc.  Bridge 
Co.  V.  Douglass,  13  Bush  (Ky.),  673, 
730  (1877),  the  pledgee  of  bonds  from 
the  company  issuing  them  obtained  a 
foreclosure  of  the  pledge  by  suit,  and 
bought  the  bonds  in,  and  was  then  held 
to  be  the  absolute  owner  of  them. 

5  Greer  v.  Lafayette,  etc.  Bank,  138 
Mo.  559  (1895). 

6  Chouteau  v.  Allen,  70  Mo.  290  (1879). 
See  also  Farmers",  etc.  Co.  v.  Toledo, 
etc.  Co.,  54  Fed.  Rep.  759  (1893),  where 
bonds  were  bought  in.  A  pledgee  can- 
not himself  purchase  the  stock  at  the 
sale,  but  the  pledgor  may  lawfully 
contract  so  as  to  allow  the  pledgee  to 


purchase  at  such  sale,  or  may  ratify 
such  purchase  after  it  has  been  made. 
If  there  is  no  such  contract  or  ratifica- 
tion, however,  the  sale  is  void,  and  the 
parties  remain  in  the  same  position  as 
though  no  sale  had  taken  place.  Apple- 
ton  V.  TurnbuU,  84  Me.  73  ( 1891).  Under 
a  power  of  sale  authorizing  a  pledge© 
to  purchase,  and  waiving  notice  of  sale, 
the  pledgee  may  purchase,  and  it  is  im- 
material that  the  sale  took  place  at  a 
time  when  stocks  and  bonds  had  de- 
clined in  a  panic.  The  pledgee  need 
not  wait  for  a  favorable  condition  of 
the  market.  Franklin  Nat.  Bank  v. 
Newcombe.  1  N.  Y.  App.  Div.  394  (1896). 
A  provision  in  a  contract  of  pledge 
that  the  pledgee  may,  at  a  sale  for  non- 
payment, buy  in  the  stock  for  himself, 
is  legal.  Manning  r.  Schriver,  79  Md. 
41  '(1894).  In  Fidelity,  etc.  T.  Co.  v. 
Roanoke,  etc.  Co.,  81  Fed.  Rep.  439  (1896), 
the  court  sustained  a  purchase  by  the 
pledgee  himself,  where  the  agreement  of 
pledge  authorized  him  to  sell  at  public 
or  private  sale  and  without  notice  or 
demand  of  payment.  Where  the 
pledgee  sells  bonds  held  as  collateral 
and  buys  them  in,  he  may  enforce  them 
for  their  full  par  value  instead  of  to  the 
extent  of  only  his  claim.  Atlantic 
Trust  Co.  V.  Wood  bridge,  etc.  Co.,  86 
Fed.  Rep.  975  (1897). 

7  Illinois  Nat.  Bank  v.  Baker,  128  III. 
583  (1889). 


989 


§  479.] 


PLEDGE  OF  STOCK. 


[oh.  XXVI. 


may  release  his  equity  to  the  pledgee.'  A  court  of  equity  scruti- 
nizes closeiy,  however,  a  contract  between  pledgor  and  pledgee  for 
transfer  of  title,  and  will  set  it  aside  if  there  is  any  ground  for  be- 
lieving that  it  is  a  harsh  contract,  brought  about  by  the  position  of 
vantage  occupied  by  the  pledgee.^ 


1  Thomas  v.  Coffin,  62  Fed.  Rep.  665 
(1894);  Small  v.  Saloy,  42  La.  Ann.  183 
(1890).  A  pledgor  may  pledge  the  secu- 
rities pledged,  and  the  sale  may  be  to 
the  pledgee.  The  sale  may  be  oral  and 
will  be  upheld,  the  debt  being  canceled 
thereby.  Brown  v.  Farmers'  L.  &  T.  Co., 
117  N.  Y.  266  (1889).  Cf.  Ryle  v.  Ryle, 
41  N.  J.  Eq.  582  (1886).  Where  the 
owner  of  stock  has  pledged  all  of  it  to 
different  parties  and  arranges  with  one 
of  them  to  take  up  all  the  stock,  and 
the  latter  does  so,  and  for  several  years 
treats  it  as  his  own,  and  the  lower  court 
finds  that  the  agreement  was  that  the 
pledgee  should  own  it,  the  upper  court 
will  not  disturb  the  decision,  especially 
where  the  pledgor  claims  that  he  trans- 
ferred the  stock  to  avoid  paying  other 
creditors.  Hukill  v.  Yoder,  189  Pa. 
St.  233  (1899).  Where  an  agreement 
whereby  stock  is  pledged  to  secure  a 
note  provides  that  the  pledgee  may  buy 
the  stock  at  a  fixed  price  on  or  before  a 
certain  date,  a  transferee  of  the  note 
and  pledgee  cannot  exercise  such  option 
by  notice  to  the  original  pledgee.  The 
notice  must  be  to  the  pledgor.  Rum- 
sey  V.  Lentz,  59  Ohio  St.  189  (1898).  A 
written  agreement  between  the  pledgor 
and  pledgee  by  which  the  note  is  can- 
celed, in  consideration  of  the  stock 
being  sold  and  transferred  absolutely 
to  the  pledgee,  is  legal,  unless  the  agree- 
ment is  an  unconscionable  one.  Cun- 
ningham V.  Jones'  Ex'rs,  57  S.  W.  Rep. 
488  (Ky.  1900).  Even  though  garnishee 
process  has  been  served  upon  the 
pledgee  of  stock  for  a  debt  of  the 
pledgor,  yet  the  pledgor  and  pledgee 
may  agree  that  the  stock  shall  belong 
to  the  pledgee  in  cancellation  of  the 
debt.     Such  agreement  is  not  illegal  if 


the  debt  was  the  full  valueof  the  stock 
at  the  time,  and  even  though  subse- 
quently the  pledgee,  upon  selling  the 
stock  for  more  than  the  debt,  pays  the 
surplus  to  the  pledgor,  the  creditor  is- 
suing the  garnishee  process  cannot  com- 
plain. Steiner  v.  First,  etc.  Bank,  127 
Ala.  595  (1900).  Receiving  the  surplus 
in  ignorance  of  illegality  is  no  waiver. 
Allen  V.  American,  etc.  Assoc,  49  Minn. 
544  (1892);  Sharpe  v.  Birmingham  Nat. 
Bank,  87  Ala.  644  (1888).  A  creditor  of 
an  individual  cannot  set  aside  a  sale  by 
the  latter  of  his  stock  to  a  pledgee  and 
indorser  of  notes,  even  though  such 
sale  was  at  a  figure  much  less  than  the 
price  at  which  said  pledgee  finally  sold 
the  stock  after  putting  in  additional 
money.  Davis  v.  Yoder,  173  Pa.  St.  138 
(1896).  In  Fox  v.  Hartford,  etc.  R.  R., 
70  Conn.  1  (1897),  the  pledgor  sold  the 
pledge  to  the  pledgee.  Where  an  insolv- 
ent pledgor  sells  the  pledge  to  the 
pledgee  for  the  debt  itself,  $7,000,  the 
transaction  is  legal,  even  though  a  jury 
find  that  the  stock  was  worth  $1,500 
more.  Wachovia  L.  &  T.  Co.  v,  Forbes, 
102  N.  C.  355  (1897). 

2  Ritchie  v.  McMullen,  79  Fed.  Rep. 
522  (1897).  Under  the  New  Hampshire 
statutes,  when  a  corporation  is  wound 
up  under  insolvency  proceedings,  all 
claims  are  allowed  as  of  the  same  date, 
interest  being  added  for  those  past  due, 
and  a  rebate  of  interest  made  on  those 
not  yet  due.  An  assignee  in  insolvency 
cannot  agree  that  a  trustee  to  whom 
the  corporation  pledged  mortgages  as 
security  for  debentures  shall  purchase 
such  securities  at  a  price  named.  Bank 
Com'rs  V.  New  Hampshire,  etc  Co.,  69 
N.  H.  621  (1899). 


990 


CHAPTEE  XXYIL 

LEVY  OF  ATTACHMENT  AND  EXECUTION  UPON  SHARES  OF  STOCK. 


%  480.  An  execution  at  common  law 
could  not  reach  shares  of 
stock. 

481.  Nor,  it  seems,  could  a  court  of 

equity  subject  stock  to  the 
payment  of  debts,  except  when 
it  had  been  convej'ed  away 
fraudulently. 

482.  By   statutory  provisions   execu- 

tions ai*e  generally  sufficient 
to  reach  tlie  debtor's  stock  — 
Strict    compliance   necessary. 

483.  Attachment  of  stock  as  allowed 

by  the  statutes  of  the  various 
states. 

484.  Levy  of  attachment  or  execution 

upon  stock  held  in  pledge  or 
by  trustee,  and  of  stock  which 
the  debtor  has  fraudulently 
transferred  away. 

485.  Can  stock  or  certificates  of  stock 

be  attached  elsewhere  than  in 
the  state  creating  the  corpora- 
tion? 

486.  Rights  of  an  unregistered  trans- 

feree of  a  certificate  of  stock 
as  against  an  attachment  or 
execution  levied  on  that  stock. 

487.  In    New     York,     Pennsylvania, 

New  Jersey,  Michigan,  Min- 
nesota, Missouri,  Delaware, 
Nebraska.  Tennessee,  Ken- 
tucky, Louisiana,  Mississippi, 
Texas,  Washington,  and  in  the 
federal  courts  passing  upon 
the  transfer  of  national-bank 
stock,  it  is  held  that   by  the 


common  law  the  unregistered 
transferee  of  a  certificate  of 
stock  is  protected  as  against 
all  subsequent  attachments  or 
executions  levied  on  that 
stock. 

488.  In     Illinois,    Maine.     Maryland, 

Massachusetts,  New  Hamp- 
shire, Rhode  Island,  Virginia, 
Wisconsin,  West  Virginia. 
and  Wyoming,  the  statutes 
have  prescribed  that  an  un- 
registered purchaseror  pledgee 
of  certificates  of  stock  shall  be 
protected  against  subsequent 
attachments  or  executions 
levied  upon  that  stock. 

489.  Rights  and  duties  of  the  corpo- 

ration in  such  cases. 

490.  In  Alabama,  Arkansas,  Califor- 

nia, Colorado,  Connecticut, 
Indiana,  Iowa,  New  Mexico, 
and  Vermont,  the  usual  stat- 
utes requiring  transfers  of 
stock  to  be  registered  on  the 
corporate  books  are  so  con- 
strued as  to  give  an  attach- 
ment or  execution  precedence 
over  a  prior  unregistered  sale 
or  pledge  of  the  certificates  of 
stock  —  Notice  of  transfer 
without  registry. 

491.  Shares  of  stock  cannot  be  sub- 

jected to  the  payment  of  the 
stockholder's  debts  by  the 
process  of  garnishment  unless 
the  statutes  so  provide. 


§  480.  An  execution  at  common  Jaw  could  not  reach  shares  of 
Steele. —  A  share  of  stock  is  in  the  nature  of  a  chose  in  action,  and 
at  common  law  a  chose  in  action  could  not  be  reached  by  or  made 
subject  to  a  levy  of  execution.  Consequently  it  has  been  uniformly 
held  by  the  courts  that  at  common  law  a  levy  of  execution  could 
not  be  made  on  shares  of  stock.  Unless,  therefore,  the  process  of 
execution  has  been  extended  by  statute  so  as  to  reach  such  prop- 
erty, the  stock  of  a  judgment  debtor  cannot  be  made  subject  to 
the  payment  of  his  debts  by  means'  of  an  execution.^     An  attach- 

iVan    Norman    v.   Jackson    Circuit     Burt,  118  Mich.  243  (1S98);  Nashville  T. 
Judge.    45   Midi.    204    (1881):    Feige   v.     Co.   v.    Weaver,    102    Tenn.    66    (1899); 

991 


§  481.] 


ATTACHMENT    AND    EXECUTION. 


[CH. 


XXVII. 


ment,  beins:  entirely  statutorv,  can  be  levied  on  shares  of  stock 
only  when  the  words  of  the  statute  declare  that  an  attachment 
may  be  levied  on  such  property.^ 

§  481.  Nor^  it  seems,  could  a  court  of  equity  subject  stock  to  the 
payment  of  (Jel)ts,  except  when  it  had  been  conveyed  away  fraudu- 
lently.—  There  is  some  doubt  whether  a  court  of  equity  has  power 
to  subject  a  judgment  debtor's  choses  in  action  to  the  payment  of 
his  debts,  where  the  only  ground  for  the  interference  of  the  court 
is  that,  unless  it  does  interfere,  such  property  canjaot  be  reached 
by  the  judgment  creditor.  In  Xew  York,  previous  to  the  statutes 
regulating  this  subject,  the  jurisdiction  of  a  court  of  equity  therein 
was  emphatically  denied  in  one  case,-  and  with  equal  emphasis  de- 
clared to  exist  in  another  case.^  The  English  authorities  are  quite 
uniform  in  holding  that  a  court  of  equity  has  no  such  jurisdiction.* 
And  in  America,  for  the  most  part,  a  similar  conclusion  is  arrived 


Daniel  v.  Gold  Hill,  etc.  Co.,  68  Pac. 
Rep.  884  (Wash.  1903);  Goss,  etc.  Mfg. 
Co.  V.  People,  4  111.  App.  510  (1879); 
Blair  v.  Comptou,  33  Mich.  414  (1876): 
Slaymaker  v.  Bank  of  Gettysburg,  10 
Pa.  St  378  (1849);  Foster  v.  Potter,  37 
Mo.  525  (1866);  Howe  v.  Starkweather, 
17  Mass.  240  (1821);  Nabring  v.  Bank  of 
Mobile,  58  Ala.  204  (1877);  Denton  v. 
Livingston,  9  Johns.  (N.  Y.)  96  (1812), 
per  Chancellor  Kent;  Nashville  Bank 
V.  Ragsdale,  Peck  (Tenn.),  296  (1833). 
Even  where  the  stock  is  held  to  be  real 
estate.  Cooper  v.  Dismal  Swamp  Canal 
Co.,  2  Murph.  (N.  C.)  195  (1812).  Cf.  Gue 
V.  Tidewater  Canal  Co.,  24  How.  (U.  S.) 
257  (1860).  In  the  District  of  Columbia, 
stock  in  an  incorporated  company  can- 
not be  subjected  to  the  process  of  at- 
tachment or  of  execution.  Barnard  v. 
Insurance  Co.,  4  Mackey,  63  (1885).  At 
an  early  day,  when  the  nature  of  stock 
was  little  understood,  an  attachment 
was  attempted  on  the  corporate  prop- 
erty for  the  debts  of  a  stockholder.  It 
failed.  Williamson  v.  Smoot,  7  Mart. 
(La.)  31  (1819).  Stock  cannot  be  taken 
on  a  tax  warrant.  Barnes  v.  Hall,  55 
Vt.  420  (1883).  Cf.  McNeal  v.  Mechan- 
ics', etc.  Assoc,  40  N.  J.  Eq.  351  (1885); 
Smith  V.  Northampton  Bank,  58  Mass. 
1  (1849).  A  tax  collector  cannot  levy 
on  and  sell  stock  under  the  law  rela- 


tive to  attachments.  Kennedy  v.  Mary 
Lee,  etc.  Ry.,  93  Ala.  494  (1891):  and 
§  566.  infra.  Execution  against  a  cor- 
poration cannot  be  levied  on  stock 
owned  by  the  corporation  itself,  such 
stock  having  been  purchased  by  it 
under  statutory  authority  at  a  forfeit- 
ure sale  for  non-payment  of  calls.  Rob- 
inson V.  Spaulding,  etc.  Co.,  72  Cal.  33 
(1887).  An  attachment  of  stock  does 
not  prevent  a  sale  of  property  bj'  the 
corporation.  Gottfried  r.  Miller,  104 
U.  S.  521  (1881).  The  question  of  whether 
an  execution  may  be  levied  on  a  seat 
in  an  exchange  is  considered  in  ch. 
SXIX,  infra. 

1  Plimpton  V.  Bigelow,  93  N.  Y.  592, 
602  (1883);  Merchants'  Mut.  Ins.  Co.  v. 
Brower,  38  Tex.  230  (1873). 

2  Donovan  v.  Finn,  1  Hopk.  Ch.  59,  67 
(1823).  See  also  2  Dan.  Ch.  Pr.,  p.  1037,  n. 

3  Storm  V.  Waddell,  2  Sandf.  Ch.  495, 
511  (1845). 

4  Dundas  v.  Dutens,  1  Ves.  Jr.  196 
(1790);  Bank  of  England  v.  Lunn.  15 
Ves.  Jr.  569  (1809);  Grogan  v.  Cooke,  2 
Ball  &  B.  (Ir.  Ch.)  230  (1812);  Nantes  v. 
Corrock,  9  Ves.  Jr.  182  (1803);  McCarthy 
V.  Goold,  1  Ball  &  B.  (Ir.  Ch.)  387  (1810), 
applying  the  same  rule  to  dividends. 
In  King  v.  Dupine,  2  Atk.  603,  n.  (1744), 
a  court  of  equity  subjected  to  the  pay- 
ment of  a  debt  the  debtor's  reversioa- 


993 


CH.  XXVII.] 


ATTACHMENT    AND    EXECUTION. 


[§  482. 


at.^  Where,  however,  the  debtor  has  conveyed  away  his  stock  for 
the  purpose  of  defrauding  his  creditors,  a  court  of  equity  will  aid 
the  judgment  creditor,  inasmuch  as  it  has  jurisdiction  in  matters 
involving  fraud.- 

§  482.  Bij  statutory  provisions  executions'are  generally  sufficient 
to  reach  the  deUor's  stoch  — Strict  compliance  necessary.— Nearly 
all  of  the  states  of  the  Union  have  enacted  statutes  extending  the 
scope  of  executions  so  as  to  subject  to  them  all  choses  in  action, 
including  shares  of  stock  in  a  corporation.  Frequently  special  pro- 
visions are  made  applicable  to  stock,  and  prescribing  the  steps 
which  are  necessary  to  render  the  levy  of  execution  effectual. 
Where  an  execution  is  levied  in  accordance  w^ith  such  statutes,  its 
provisions  must  be  substantially  complied  with,  and,  if  not  com- 
plied with,  the  sale  is  not  merely  voidable,  but  is  wholly  unauthor- 
ized and  void.  The  mode  of  sale  is  particularly  scrutinized  by  the 
courts.'^     It  is  fatal  to  the  levy  and  sale  if  the  sheriff  fails  to  give 


ary  interest  in  an  annuity.  In  Horn  v. 
Horn,  Ambl.  79  (1749),  the  court  refused 
aid,  inasmuch  as  the  debtor  had  been 
imprisoned  under  a  capias  ad  satis- 
faciendum. 

1  Williams  v.  Reynolds,  7  Ind.  622 
(1856);  Disborough  v.  Outcalt,  1  N.  J. 
Eq.  298,  306  (1831);  McFerran  v.  Jones, 
2  Litt.  {Ky.)219  (1822);  Erwin  v.  Old- 
ham. 6  Yerg.  (Tenn.)  185  (1834).  Contra, 
dictum.  Watkins  v.  Dorsett,  1  Bland's 
Ch.  (Md.)  530  (1828).  In  Brightwell  v. 
Mallory.  10  Yerg.  (Tenn.)  196  (1836),  the 
proceeding  was  statutory. 

2  Taylor  v.   Jones,  2  Atk.  600  (174.3), 
holding  that  the  debtor's  transfer  of 
stock  in  trust  was  in  fraud  of  creditors; 
Hadden  v.  Spader,  20  Johns.  (N.  Y.)  554 
(1822);    Scott    v.   Indianapolis    Wagon 
Works.  48  Ind.  75  (1874);  Van  Norman 
V.  Jackson  Circuit  Judge,  45  Mich.  204 
(1881);    Lathrop    v.   McBurney,  71  Ga. 
815  (1883);  Gillett  v.  Bate,  86  N.  Y.  87 
(1881);  State  Bank  v.  Gill,  23  Hun,  410 
(1881),  and   §  484,   infra;   Skowhegan 
Bank  v.  Cutler,  49  Me.  315  (1860);  State 
V.  Warren  F.  &  M.  Co.,  32  N.  J.  L.  439 
(1868);  Bayard  v.  Hoffman,  4  Johns.  Ch. 
450  (1820):  Moore  v.  Metropolitan  Nat. 
Bank,  55  N.  Y.  41  (1873);  Colbert  r.  Sut- 
ton, 5  Del.  Ch.  294  (1880).     The  fraudu- 
lent transferee  must  be  made  a  party 


defendant.     Hyatt  v.  Swivel,  52  N.  Y. 
Super.  Ct.  1  (1885).     But  the  fraudulent 
transferee  is  not  liable  unless  he  has 
accepted  the  stock.     Skowhegan  Bank 
V.  Cutler,  49  Me.  315  (1860);  Cartmell's 
Case,  L.  E.  9  Ch.  App.  691  (1874).     Ac- 
ceptance is  a  question  of  fact.     Pim's 
Case,  3  De  G.  &  S.  11  (1849).     The  trans- 
feree is  not  allowed  to  claim  that  the 
transfer  was  to  defeat  creditors.    Smith 
V.  Forty-nine,  etc.  Min.  Co.,  14  Cal.  243 
(1859).     The  judgment  creditor  who  in- 
stitutes the  suit  in  equity  has  priority 
in  the  distribution  of  the  proceeds  of 
his  suit.    See  Freeman  on  Executions 
(2d  ed.),  §  434.    The  pledgor  may  by  an 
instrument  in  writing  assign  his  equity 
of  redemption  to  one  of  his  creditors. 
Such  assignment  need  not  be  recorded 
as  a  chattel  mortgage,  and  is  not  fraud- 
ulent, even  though   it  be  kept  secret 
from  the  other  creditors  of  the  pledgor. 
National  H.  R.  Bank  v.  Chaskin,  28  N. 
Y.    App.    Div.    311    (1898).     A  pledgee 
cannot,  by  obtaining  judgment  on  his 
claim,  reach  the  pledge  by  a  judgment 
creditor's   bilL     Shaw  v.  Monson,  etc 
Co.,  96  Me.  41  (1901);  71  Pac.  Rep.  273. 

3  Blair  u  Corapton,  33  Mich.  414(1876), 
holding  that  where  the  sheriff  sold 
without  knowing  or  stating  how  many 
shares  of  stock  the  debtor  owned,  and 


(63) 


993 


§  482.] 


ATTACHMENT    AND    EXECUTION. 


[CH.  XXVII. 


to  the  corporation  the  notice  that  is  generally  required  by  statute," 
or  if  the  sale  by  the  sheriff  is  not  made  promptly  as  advertised  in 


which  were  being  sold,  the  sale  was 
void.     See  also  People  v.  Gbss,  etc.  Mfg. 
Co.   99   111.  355  (1881),  reversing   Goss. 
etc.  Mfg.  Co.  V.  People,  4  111.  App.  510 
(1879).    The  procedure  in  levy  of  execu- 
tion  on  stock    as    laid   down   by  the 
charter  of  the  corporation,  supersedes 
the    procedure  of  a   previous   general 
statute.    Titcouib  v.  Union  M.  &  F.  Ins. 
Co.,  8  Mass.  326  (1811).     And  a  statute 
which  is  subsequent  to  the  charter  su- 
persedes   in    this    respect    the    latter. 
Howe  V.   Starkweather,    17   Mass.    240 
(1821).     The  sheritt"  need    not  sell   the 
stock  in  parcels,  but  may  sell  the  whole 
at  once.     Morris  v.  Connecticut,  etc.  R. 
R  (Montreal),  L.  R.  2  Q.  B.  303  (188()). 
Even  though  the  sheriff  sells  in  one  lot 
a  large  block  of  stock  under  execution 
instead  of  dividing  and  selling   it  in 
small  lots,  and  even  though  such  sale 
realizes  $12,000,  whereas  the  levy  was 
iot  only  §1.000,  yet  the   purchaser   is 
protected  in  his  purchase.  Connecticut, 
etc.  Ry.  V.  Morris,  14  S.  C.  Rep.  (Can.) 
318  (1887).     The  court  may  order  a  re- 
ceiver to  sell  shares  of  stock  held  by 
the  receiver  in  one  block  instead  of  in 
parcels  if  the  court  deems  best.     First 
Nat.  Bank  v.  C.  Bunting  &  Co.,  63  Pac. 
Rep.  694  (Idaho,  1900).     See  also  §  489, 
infra.     An  execution  sale  of  stock  will 
be  set  aside  where  it  was  made  with  an 
intentional    concealment    of  the    sale 
from    the  stockholder,   the  execution 
debtor.     Voorhis  v.   Terhune,  50  N.  J. 
L.  147  (1888).     If  no  notice  is  given  to 
the  debtor  of  the  levy  on  his  stock,  a 
sale  under  the  attachment  is  not  good. 
Commercial  Nat.  Bank  v.  Farmers',  etc. 
Bank,  82  Iowa,  192  (1891).     A  levy  and 
sale  of  '•  all  the  shares  "  vvhich  defend- 
ant owns  is  not  good.     The  number  of 
shares  must  be  ascertained  and  stated. 
Keating  v.  Stone,  etc.   Co.,  83  Tex.  467 
(1892).     A  statute  must  be  substantially 
complied    with,  and  a  failure  to   give 
notice  to  the  corporation  as   required 


by  the  statute  is  fatal  to  the  attach- 
ment. Deutschman  v.  Byrne,  64  Ark. 
Ill  (1897).  Inasmuch  as  shares  of  stock 
cannot  be  levied  upon  at  common  law, 
a  levy  thereon  can  be  made  only  in 
strict  compliance  with  the  statute,  and 
if  the  process  is  a  garnishee  process  the 
levy  is  not  good,  and  even  a  sale  under 
such  a  levy  conveys  no  title.  H.  B. 
Claflin  Co.  v.  Bretzfelder.  69  Ark.  271 
(1901).  The  statute  authorizing  sale 
vmder  execution  must  be  substantially 
complied  with.  Feige  v.  Burt,  118 
Mich.  243  (1898).  The  title  of  a  pur- 
chaser of  stock  at  execution  sale  is  not 
affected  by  the  failure  of  the  sheriff  to 
show  in  his  return  that  he  levied  before 
selling.  McFall  v.  Buckeye,  etc.  Assoc, 
122  Cal.  468  (1898).  The  procedure  pre- 
scribed by  statute  for  attaching  shares 
of  stock  must  be  strictly  followed. 
Leon  hard  v.  John  Hope,  etc.  Co.,  21  R. 
I.  449  (1899).  A  judgment  creditor  of  a 
corporation  may  cause  its  treasury 
stock  to  be  sold  on  execution.  Coit  v. 
Freed,  15  Utah,  426  (1897).  Stock  is 
personal  property,  and  may  be  seized 
under  an  execution.  Brock  v.  Ruttan, 
1  C.  P.  (Can.)  218  (1851).  The  sheriff 
need  not  indorse  on  his  levy  a  descrip- 
tion of  the  stocks.  Ee  Braden's  Estate, 
165  Pa.  St.  184  (1895). 

J  Princeton  Bank  v.  Crozer,  22  N.  J. 
L.  383  (1850),  where  no  notice  was  given, 
but  the  stock  was  merely  mentioned  in 
the  inventory  returned  by  the  sheriff". 
Oral  notice  by  the  sheriff  to  the  corpo- 
ration that  stock  has  been  attached  is 
insufficient.  Moore  v.  Marshalltown, 
etc.  Co.,  81  Iowa,  45  (1890);  Barthell  v. 
Hencke,  99  Wis.  660  (1898).  Service  of 
the  writ  upon  a  corporation  must  be 
upon  the  de  facto  officers  and  not  the 
dejure  officers.  Barthell  v.  Hencke,  99 
Wis.  660  (1898),  An  execution  sale  of 
stock  may  be  valid,  although  the  notice 
of  levy  may  have  been  irregular.  Croft 
V.  Colfax,  etc.  Co.,  113  Iowa,  455  (190U 


994 


CH.  XXVIi;]  ATTACHMENT   AND    EXECUTION.  [§  483. 

accordance  with  the  statute.'  The  sale  itself  is  not  complete  until 
the  sheriff  gives  the  proper  instruments  of  title  to  the  purchaser, 
and  until  then  the  corporation  is  not  obliged  to  recognize  the  lat- 
ter as  having  any  rights.^  A  court  of  equity  will  not  compel  a 
corporation  to  allow  a  transfer  of  stock  by  a  purchaser  at  an  ex- 
ecution sale,  where  the  price  paid  at  such  sale  is  so  small  as  to 
shock  the  conscience  of  the  court.'  A  person  who  buys  stock  at 
an  execution  sale  thereof  and  takes  the  sheriff's  certificate  therefor 
and  presents  the  same  to  the  corporation  for  transfer,  thereby  be- 
comes a  stockholder  to  the  extent  at  least  of  being  liable  for  any 
unpaid  part  of  the  subscription  price  of  such  stock.*  Where  the 
pledgee  brings  suit  on  the  debt  and  attaches  the  stock  he  thereby 
waives  his  lien,  and  even  though  the  attachment  is  illegal  and 
void  for  insufficient  service,  yet  his  rights  as  pledgee  are  not 
thereby  restored.*  Where  the  pledgee  obtains  judgment  on  a  note 
which  is  secured  by  the  stock  and  then  causes  the  stock  to  be  sold 
out  by  the  sheriff  under  levy  of  execution,  such  sale,  however,  not 
being  made  in  accordance  with  the  statutes,  this  is  the  same  as 
selling  the  stock  without  notice  and  amounts  to  a  conversion 
thereof.^ 

§  483.  Attachment  of  stock  as  allowed  ty  the  statutes  of  the  vari- 
ous states. —  The  states  of  the  Union  have  quite  generally  passed 
statutes  providing  for  the  attachment  of  a  debtor's  property  where 
the  debtor  is  a  non-resident  or  is  guilty  of  a  fraud,  or  where  other 
facts  exist  which  bring  the  case  within  the  attachment  statute. 
Inasmuch  as  in  modern  times  a  large  part  of  the  property  of  in- 
dividuals consists  of  shares  ©f  stock  in  corporations,  the  attach- 
ment statutes  generally  provide  specially  for  the  attachment  of 
stock,  and  give  specific  directions  in  reference  to  the  steps  neces- 
sary to  be  taken  in  making  such  attachment.''     In  ITew  York  an 

1  Titcotnb  v.  Union  M.  &  F.  Ins.  Co.,        s  See  §§  489,  850,  infra, 

8  Mass.  326  (1811),  and  Howe  v.  Stark-  <  Basting  v.  Northern  Trust  Co.,  61 
weather,  17  Mass.  240  (1821),  where  the  Minn.  307  (1895).  And  is  also  liable  on 
sale  was  made  after  the  proper  day,  thestatutory  liability  attaching  to  such 
without  a  re-advertisement,  and  conse-  stock.  Oswald  v.  Minneapolis  Times 
quently  was  held  to  be  void.  The  court  Co.,  65  Minn.  249  (1896).  A  dictum  in 
said:  "The  sale  of  them  upon  execu-  Sturges  t\  Stetson,  1  Biss.  246  (1858); 
tion  not  being  justifiable  at  common  s.  C,  23  Fed.  Cas.  311,  says  that  the  pur- 
law,  the  statute  must  be  strictly  pur-  chaser  at  execution  sale  is  liable  on  the 
sued  to  give  any  property  to  the  pur-  unpaid  subscription  the  same  as  his 
chaser."    An  execution  sale  of  stock  at  debtor  was. 

nine  o'clock  at  night,  when  few  are  ^  jj.  B.  Claflin  Co.  v.  Bretzfelder,  69 

present,  is  void.    McNaughton  v.  Mc-  Ark.  271  (1901).    See  also  §  476,  supra. 

Lean.  73  Mich.  250  (1889).  «  Feige  v.  Burt,  118  Mich.  243  (1898). 

2  Morgan  v.  Thames  Bank,  14  Conn.  '  Where  both  an  attachment  and  an 
99  (1840).  execution  on  stock  are  allowed  by  stat- 

995 


§  483.] 


ATTACHMENT    AND    EXECUTION. 


[CH.  XXVII. 


attachment  of  stock  is  provided  for;  but  an  execution  without  a 
previous  attachment  is  not  allowed.^  Where  certificates  of  stock 
and  other  property  are  transferred  to  a  trustee  who  issues  transfer- 
able trustees'  certificates  therefor,  of  the  par  value  of  $5,000  each, 


ute,  the  former  is  said  to  be  the  prefer- 
able remedy  when  the  corporation  lias 
a  lien  on  the  stock  or  there  is  a  claim- 
ant to  the  stock.  Weaver  v.  Hunting- 
don, etc.  Coal  Co.,  50  Pa.  St.  314  (1865); 
Lex  V.  Potter,  16  Pa.  St.  295  (1851).  An 
attachment  of  stock  covers  the  divi- 
dends also.  Upon  vacating  the  attach- 
ment damages  may  be  recovered.  Ja- 
cobus V.  Monongahela  Nat.  Bank,  35 
Fed.  Rep.  395  (1888).  Under  the  Ver- 
mont statutes,  which  prohibit  prefer- 
ences acquired  within  a  specified  time 
before  an  adjudication  of  insolvency,  a 
bank  in  Vermont,  which  on  November 
1st  attaches  stock  in  New  Mexico 
which  was  owned  by  an  insolvent  per- 
son in  Vermont,  is  not  entitled  to  the 
preference  obtained  thereby,  where  a 
creditor's  petition  against  the  insolv- 
ent was  filed  in  Vermont  October  2Sth, 
even  though  the  bank  sold  its  claim 
and  the  attachment. to  a  third  person. 
The  bank  and  its  officers  may  be  held 
liable  to  the  assignees  in  insolvency 
for  the  amount  paid  for  the  stock  at 
the  sale  in  New  Mexico,  the  stock 
itself  having  been  bought  in  for  the 
benefit  of  the  assignees.  Hazen  v.  Lyn- 
donville  Nat.  Bank,  70  Vt.  543  (1898). 
Stock  may  be  sold  under  an  attach- 
ment in  New  Mexico.  Hazen  v.  Lyn- 
donville  Nat.  Bank,  70  Vt.  543  (1898). 
Under  the  statutes  of  Idaho  stock  may 
be  seized  by  levy  of  attachment  or  ex- 
ecution. Wells  V.  Price,  56  Pac.  Rep. 
266  (Idaho,  1899).  Under  the  confiscation 
acts  of  the  United  States  of  1861  and  1863, 
stock  owned  by  a  rebel  in  a  Michigan 
railroad  could  be  condemned  by  giving 
notice  of  seizure  to  the  railroad  corpo- 
ration. This  amounted  to  an  attach- 
ment or  garnishment.  Miller  v.  U.  S., 
11  Wall.  268  (1870).  By  a  statute  in 
Rhode  Island  in  suits  in  equity  a  writ 
of  attachment  may  be    levied    upon 


stock  the  same  as  in  suits  at  law.  Ladd 
V.  Franklin,  etc.  Co.,  53  Atl.  Rep.  59^ 
(R.  I.  1902).  The  statute  may  provide 
for  the  sale  of  stock  at  the  place  where 
the  corporation  exists,  in  case  the  taxes 
upon  such  stock  are  not  paid.  A  pur- 
chaser of  the  outstanding  certificates 
after  the  assessment  has  been  made 
takes  subject  to  the  tax  and  tax  seiz- 
ure. Parker  v.  Sun  Ins.  Co.,  42  La.  Ann. 
1172  (1890).  Under  the  English  statutes, 
1  &  2  Vict.,  c.  110,  §  14,  and  3  &  4  Vict., 
c.  82,  §  1,  stock  in  any  public  company 
standing  in  the  name  of  any  person 
against  whom  judgment  shall  have 
been  obtained,  whether  "  in  his  own 
right  or  in  the  name  of  any  person  in 
trust  for  him,"  may  be  charged  by  a 
judge's  order  with  the  payment  of  the 
amount  of  the  judgment.  The  statute- 
says:  "The  interest  of  any  judgment 
debtor,  whether  in  possession,  re- 
mainder, or  reversion,  and  whether 
vested  or  contingent,"  may  be  so 
reached.  Cragg  v.  Taylor,  L.  R.  2  Exch. 
131  (1867);  Baker  v.  Tynte,  2  El.  &  E. 
897  (1860).  Stock  may  be  reached  by 
supplementary  proceedings  in  Ohio- 
Ball  V.  Towle  Mfg.  Co.,  65  N.  E.  Rep. 
1015  (Ohio,  1902). 

1  Code  Civ.  Proc,  §§  647,  649-651.  See 
4  Wait's  Pr.  'd6j.  Stock  may  be  reached, 
however,  by  supplementary  proceed- 
ings. See,  in  general,  Barnes  v.  Morgan, 
3 Hun,  703  (1875);  O'Briens.  Mechanics",, 
etc.  Ins.  Co.,  56  N.  Y.  52  (1874);  Smoot 
V.  Heim,  1  N.  Y.  Civ.  Pro.  208  (1881)  — 
cases  arising  under  the  attachment 
law;  Simpson  v.  Jersey  City,  etc.  Co., 
47  N.  Y.  App.  Div.  17  (1900),  holding 
that  the  New  York  statute  that  the 
copy  of  the  warrant  and  the  notice 
should  be  served  upon  the  president  of 
the  corporation  applied  only  to  domes- 
tic corporations;  aflf'd,  165  N.  Y.  193- 
(1900). 


996 


CIV 


.  XXVII.l 


ATTACHMENT  AND    EXECUTION. 


[§  483. 


with  various  provisions  for  the  sale  of  the  property  and  a  distribu- 
tion of  the  proceeds,  or  for  the  transfer  to  a  corporation  and  a  dis- 
tribution of  the  stock,  the  legal  title  is  thereby  conveyed,  and  hence, 
the  holders  of  the  certificates  having  only  an  equitable  interest  in 
the  property,  an  attachment  cannot  be  levied  on  such  trustees'  cer- 
tificates, under  the  N'ew  York  statute,  by  serving  the  process  on 
the  trustee,  no  service  having  been  made  upon  the  holder  of  the 
certificates.^  A  pool  of  stock,  however,  does  not  prevent  a  creditor 
of  one  of  the  participants  causing  to  be  sold  on  execution  his  debtor's 
interest  in  the  stock,  such  sale  to  be  subject  to  the  pooling  contract 
if  it  is  lawful.^     It  has  been  held  that  shares  of  stock  may  be  at- 
tached under  the  general  provisions  of  an  attachment  law  which 
does  not  specify  shares  of  stock  as  being  subject  to  an  attachment.^ 
The  formalities  prescribed  by  the  statute  must  be  complied  with 
fully,  as  in  the  case  of  a  levy  of  execution  upon  stock.'*  It  has  been 
held  that  a  state  statute  authorizing  the  levy  of  an  attachment 
upon  stock  does  not  apply  to  stock  in  a  national  bank,  and  that  it 
is  doubtful  whether  a  state  statute  may  legally  authorize  an  attach- 
ment on  national-bank  stock.^     There  are  many  decisions,  how- 
ever, where  such  an  attachment  or  execution  has  been  levied.^ 


1  Montgomery  v.  McDermott,  103  Fed. 
Rep.  801  (1900). 

2  Hardin  v.  White,  etc.  Co.,  67  Pac. 
Rep.  236  (Wash.  1901). 

3  Chesapeake,  etc.   R.  R  v.  Paine,  29 
Grat.  (Va.)  502  (1877),  where  stock  was 
held  to  be  included  under  the  word 
"  estate,"  and  the  procedure  prescribed 
for  garnishment  was  followed  and  up- 
held.   So  also  Curtis  v.  Steever,  36  N.  J. 
L.  304  (1878),  where  an  attachment  of 
stock  was  upheld  though  the  statute 
merely  allowed  attachment  of  "  rights 
and  credits."    In  Haley  v.  Reid,  16  Ga. 
437  (1854),  however,  an  attachment  of 
stock  was  not  allowed  where  the  stat- 
ute allowed  levy  "  upon  the  estate  both 
real  and  personal"  See  also  Merchants' 
Hut.    Ins.    Co.  V.  Brower,  38  Tex.  230 
(1873).     It  has  been  held  that  there  can 
be  no  attachment  of  stock  under  a  stat- 
ute   which   allows   an  attachment  of 
"  real  and  personal  property."  Foster  v. 
Potter,   37  Mo.    525    (1866).     Shares  of 
stock  are  "  personal  property  "  subject 
to  attachment,  although  the  statutes 


provide  only  for  levy  of  execution  upon 
them.  Union  Nat.  Bank  v.  Byram,  131 
111.  92  (1889).  The  ordinary  attachment 
statute  authorizing  the  attachment  of 
shares  of  stock  is  not  applicable  to 
shares  of  stock  in  9,  club  organized  for 
lawful  sporting  purposes,  and  being 
more  in  the  nature  of  a  statutory  joint- 
stock  association  than  a  corporation. 
Lyon  u  Denisou,  80  Mich.  371  (1890). 

*  Stamford  Bank  v.  Ferris,  17  Conn. 
259  (1845).  where  the  attachment  failed 
because  the  sheriff  did  not  leave  a  copy 
of  the  writ,  duly  indorsed,  with  the  cor- 
poration, even  though  the  cashier  of 
the  corporation  was  absent.  A  transfer 
subsequent  to  such  irregular  attach- 
ment is  valid  and  carries  title.  See  also 
§  484,  infra, 

5  Sowles  V.  National  U.  Bank,  82  Fed. 
Rep.  696  (1897).  An  attachment  in  ac- 
cordance with  a  state  statute  may  be 
levied  upon  stock  in  a  national  bank. 
Oldacre  v.  Butler,  116  Ala.  652  (1898). 

6  See  cases  in  notes  to  §  487,  infra. 


997 


484.] 


ATTACHMENT   AND    EXECUTION. 


[CH.  XXVII. 


passed  to  another.^  Where  an  execution  is  levied  upon  a  certificate 
of  stock  found  among  the  assets  of  a  deceased  judgment  debtor, 
such  stock  being  in  the  name  of  another  person  and  indorsed  by 
the  latter  in  blank,  the  administrator  may  file  a  bill  to  enjoin  the 
execution  until  the  real  ownership  of  the  stock  can  be  ascertained 
in  order  that  the  question  of  title  may  be  settled  to  prevent  a  sac- 
rifice of  the  stock.2  j^  Missouri  an  attachment  may  be  levied  on 
stock  standing  in  the  name  of  another.^  But  in  Michigan  an  at- 
tachment cannot  be  levied  on  stock  standing  in  a  person's  name  as 
trustee,  for  a  debt  due  from  the  real  owner  of  the  stock,  even 
though  the  trustee  is  merely  an  agent.  Attachment  reaches  a  legal 
interest  only.*  A  wife  who  allows  stock  bought  with  her  money 
to  stand  for  several  years  in  her  husband's  name,  in  order  to  give 
him  credit,  is  estopped  from  asserting  her  ownership  as  against  his 
creditors.^  Where  the  corporation  has  a  lien  on  stock  for  debts 
due  from  the  stockholder  to  the  corporation,  it  may  enforce  the  lien 
by  an  attachment.^  Where  stock  is  tied  up  by  attachment  which 
is  afterwards  vacated,  and  in  the  meantime  the  stock  depreciates  in 
value,  the  loss  can  be  recovered  from  the  attaching  party  if  the 
stocks  could  and  would  have  been  sold  before  the  depreciation,  if 
they  had  not  been  so  tied  up.  But  if  such  stocks  are  in  pledge,  and 
,    the  pledgor  does  not  pay  the  loan  while  the  stocks  are  so  tied  up, 


^  Thus,  where  A.,  the  registered  stock- 
holder, transfers  the  certificate  of  stock 
to  B.,  and  B.  transfers  it  to  C,  and  C* 
obtains  registry  directly  from  A.,  there 
can  be  no  attachment  of  the  stock 
against  B.  Lippitt  v.  American,  etc.  Co., 
15  R.  I.  141  (1885).  An  attachment 
against  a  person  who  held  the  certifi- 
cate of  stock,  but  was  not  a  stockholder 
of  record,  was  upheld  in  Matusevitz  v. 
Citizens',  etc.  Co.,  19  Mont.  368  (1897). 

2  Nashville  T.  Co.  v.  Weaver,  102  Tenn. 
66  (1899). 

3  Tufts  V.  Volkening,  123  Mo.  631 
(1894). 

*  Gypsum,  etc.  Co.  v.  Kent  Circuit 
Judge,  97  Mich.  631  (1893).  Under  the 
Michigan  statutes  a  levy  of  execution 
cannot  reach  stock  which  stands  on  the 
books  of  the  company  in  the  name  of 
the  pledgee  of  a  judgment  debtor. 
Feige  v.  Burt,  118  Mich.  243  (1898). 
Where  the  real  owner  of  stock  turns  it 
over  to  his  agent  or    trustee  to  look 


1000 


after  the  stock,  the  stock  itself  being 
put  in  the  name  of  the  agent  or  trustee 
as  absolute  owner,  and  the  stock  is 
subsequently  attached  for  a  debt  of 
such  agent  or  trustee  and  sold  there- 
under, the  real  owner  of  the  stock 
may  hold  the  agent  or  trustee  liable  for 
the  value  of  the  stock.  Long  delay  is 
not  a  bar  so  long  as  the  agent  does  not 
deny  the  agency  or  trusteeship.  Hovey 
V.  Bradbury,  113  Cal.  620  (1896).  Where 
a  judgment  creditor  levies  on  stock 
standing  in  the  name  of  a  "dummy" 
for  the  debtor,  the  corporation  may 
practically  interplead  between  such 
creditor  and  an  alleged  bona  fide  holder 
of  the  stock.  A  court  of  equity  has  ju- 
risdiction in  order  to  decree  a  transfer. 
Spencer  v.  James,  10  Tex.  Civ.  App.  327 
(1895). 

5  Hamlen  v.  Bennett,  52  N.  J.  Eq.  70 
(1893). 

6  Sabin  v.  Bank  of  Woodstock,  31  Vt 
353  (1849).     See  also  §  530,  infra. 


CH.   XXVII.]  ATTACHMENT    AXD    EXECUTION.  [§  4S5. 

no  damages  can  be  recovered.^  A  decrease  in  the  value  of  the 
stock,  while  subject  to  attachment,  does  not  render  the  sureties  on 
the  undertaking  liable  therefor.  An  attachment  bond  should  not 
be  increased  merely  because  the  price  of  the  stock  may  go  down.^ 
AVhere  a  sale  of  stock  is  decreed  and  an  appeal  taken  and  a  bond 
given  on  appeal,  and  the  stock  depreciates  during  the  appeal  and 
the  decree  is  affirmed,  the  liability  on  the  bond  is  the  amount  of 
depreciation.* 

§  485.  Can  stock  or  certificates  of  stock  he  attached  eJseii'lure  than 
in  the  state  creating  the  corporation? —  Shares  of  stock  in  a  corpo- 
ration are  personal  property,  whose  location  is  in  the  state  where 
the  corporation  is  created.*  It  is  true  that,  for  purposes  of  taxation 
and  some  other  similar  purposes,  stock  follows  the  domicile  of  its 
owner;  but,  considered  as  property  separated  from  its  owner,  stock 
is  in  existence  only  in  the  state  of  the  corporation.  All  attach- 
ment statutes  provide  for  the  attachment  of  a  non-resident  debtor's 
property  in  the  state,  and  generally,  under  such  statutes,  the  stock 
owned  by  a  non-resident  in  a  corporation  created  by  the  state 
Av herein  the  suit  is  brought  may  be  attached  and  jurisdiction  be 
thereby  acquired  to  the  extent  of  the  value  of  the  stock  attached.' 
But  a  defendant's  shares  of  stock  cannot  be  reached  by  levy  of  at- 
tachment in  an  action  commenced  outside  of  the  state  wherein  the 
corporation  is  incorporated  unless  the  certificates  of  stock  are 
within  the  state  where  the  suit  is  commenced,  and  are  reached  by 

• 

1  Fourth  Nat.  Bank,  etc.  v.  Crescent,  has  no  locality,  and  that  the  law  of  the 
etc.  Co.,  52  S.  W.  Rep.  1031  (Tenn.  1897).  owner's  domicile  is  to  determine  the 
See  also  ^  330,  supra.  validity  of  the  transfer  or  alienation 

2  Miller  v.  Ferry,  50  Hun,  256  (1888;.     thereof,  unless  there  is  some  positive  or 
8  Welch  V.  Welch,  60  S.  W.  Rep.  409    customary  law  of  the  country  where  it 

{Ky.  1901).  is  found  to  the  contrary."  Black  v. 
*  Evans  V.  Monot,  4  Jones,  Eq.  (N.  C.)  Zacharie,  3  How,  483,  514  (1844),  an  at- 
227  (1858).  The  fact  that  certificates  of  tachment  case.  A  suit  by  the  purchaser 
stock  in  foreign  corporations  are  in  of  a  certificate  of  stock  to  compel  de- 
New  York  state  does  not  render  them  livery  may  be  brouglit  at  the  place 
subject  to  taxation  in  that  state.  Re  where  the  certificate  is,  and  absent  de- 
James,  144  N.  Y.  6  (1894).  The  inherit-  fendants  maybe  served  by  publication, 
ance  tax  in  New  York  state  is  not  ap-  Ryan  v.  Seaboard,  etc.  R.  R.,  83  Fed.  Rep. 
plicable  to  certificates  of  stock  which  889  (1897).  See  also  §§  12. 13.  363,  supra, 
happen  to  be  in  the  state  at  the  time  of  5  New  London  Nat.  Bank  v.  Lake 
the  death  of  the  stockholder,  where  the  Shore,  etc.  Ry.,  21  Ohio  St.  221  (1871); 
stockholder  is  a  non-resident  and  |,he  Chesapeake,  etc.  R.  R.  v.  Paine,  29 
corporation  itself  is  a  foreign  corpora-  Gratt.  (Va.)  502  (1877).  An  attachment 
tion.  See  § 572e,  tw/ra.  As  to  the  valid-  and  sale  of  stock  made  on  a  debt  not 
ity  of  a  transfer  of  stock  made  in  one  justly  due  will  be  enjoined  as  regards 
state,  while  the  corporation  issuing  the  registry  on  the  corporate  books,  and 
stock  is  located  in  another  state,  the  the  sale  declared  void.  Seligman  v.  St. 
rule  applies  "that  personal  property  Louis,  eta  R.  R,  22  Fed.  Rep.  39  (1884). 

1001 


§  485.] 


ATTACHMENT    AND    EXECUTION. 


[CH.  XXVII. 


the  sheriff.  For  purposes  of  attachment,  stock  is  located  where 
the  corporation  is  incorporated  and  nowhere  else.'  The  shares 
owned  by  a  non-resident  defendant  in  the  stock  of  a  foreign  corpo- 
ration cannot  be  reached  and  levied  upon  by  virtue  of  an  attach- 
ment, although  officers  of  the  corporation  are  within  the  state  en- 
gaged m  carrying  on  the  corporate  business.-     It  has  even  been 


1  Quoted  and  approved  in  Smith  v. 
Downe}',  8  Ind.  App.  179  (1893),  where 
it  was  held  that  a  citizen  of  Indiana 
could  not  attach  certificates  of  stock 
owned  by  a  non-resident  in  a  Colorado 
corporation,  even  though  the  certifi- 
cates of  stock  were  in  the  state  of  Indi- 
ana, and  within  the  jurisdiction  of  the 
court.  Ireland  v.  Globe,  etc.  Co.,  19 
R.  I.  180  (1805);  Winslow  v.  Fletcher, 
53  Conn.  390  (1886).  the  court  saying 
that  "stock  in  a  corporation,  for  the 
purposes  of  an  attachment,  has  its  situs 
where  the  corporation  is  located."  Un- 
der the  statutes  of  Tennessee,  however, 
requiring  a  foreign  corporation  doing 
business  in  that  state  to  file  its  articles 
of  incorporation  with  the  secretary  of 
state,  it  was  held  that  it  became  a  do- 
mestic corporation  sufiiciently  to  au- 
thorize an  attachment  of  stock  in  that 
state.  Young  v.  South  Tredegar  Iron 
Ca,  85  Tenn.  189  (1886).  Bonds  which 
are  pledged  by  a  non-resident  cannot 
be  attached  by  serving  a  notice  on  the 
pledgee.  Tweedy  v.  Bogart,  56  Conn. 
419  (1888).  Certificates  of  stock  repre- 
sent the  stock  itself  sufiiciently  to  sus- 
tain a  suit  commenced  by  substituted 
service  for  the  purpose  of  establishing 
a  lien,  even  though  the  corporation  is 
located  in  another  state.  Merritt  v. 
American  Steel  Barge  Co.,  79  Fed.  Rep, 
228  (1897).  An  execution  cannot  be 
levied  in  the  Indian  Territory  on  stock 
owned  by  the  defendant  in  a  New  Jer- 
sey corporation  where  the  statutes  of 
the  Indian  Territory  provided  for  exe- 
cution upon  the  stock  of  domestic  cor- 
porations only,  and  the  defendant  is 
not  a  resident  of  that  Territory.  Caf- 
fery  v.  Choctaw,  etc.  Co.,  68  S.  W.  Rep. 
1049  (Mo.  1902).     A  statute  authorizing 


1003 


the  sale  of  stock  on  execution  applies 
to  stock  in  domestic  corporations  only, 
unless  it  clearly  provides  otherwise. 
Hence  an  alleged  sale  under  levy  of 
execution,  in  British  Columbia,  of  stock 
in  a  Washington  corporation  is  not 
good  in  Washington  unless  it  is  alleged 
and  proved  that  such  sale  was  author- 
ized by  the  statutes  of  British  Colum- 
bia. Daniel  v.  Gold  Hill,  eta  Co.,  68 
Pac.  Rep.  884  (Wash.  1902). 

-  Quoted  and  approved  in  New  Jersey, 
etc.  Co.  V.  Traders',  etc.  Bank,  104  Ky. 
90  (1898),  where  the  court  held  that 
garnishee  proceedings  commenced  in 
Kentucky  against  non-resident  stock- 
holders in  a  New  Jersey  corporation, 
the  New  Jersey  corporation  being  so 
garnisheed,  are  not  good  as  regards 
stock  held  by  the  defendants  in  such 
New  Jersey  corporation.  Stock  owned 
by  a  citizen  of  New  York  in  a  railroad 
corporation  of  Michigan  cannot  be  at- 
tached by  process  levied  in  Ohio.  Such 
stock  is  not  located  in  Ohio,  and  hence 
is  not  subject  to  attachment  or  gar- 
nishment there.  Ashley  v.  Quintard.  90 
Fed.  Rep.  84  (1898);  Plimpton  v.  Bige- 
low,  93  N.  Y.  592  (1883),  reversing  29 
Hun,  362,  the  court  saying:  "We  do 
not  doubt  that  shares,  for  the  purpose 
of  attachment  proceedings,  may  be 
deemed  to  be  in  the  possession  of  the 
corporation  which  issued  them,  but 
only  at  the  place  where  the  corpora- 
tion by  intendment  of  law  always  re- 
mains, to  wit,  in  the  state  or  country 
of  its  creation.  .  .  .  Manifestly  the 
res  cannot  be  within  the  jurisdiction, 
as  a  mere  consequence  of  a  legislative 
declaration,  when  the  actual  locality 
is  undeniably  elsewhere."  To  same  ef- 
fect, Preston  v.  Pangburn,  N.  Y.  L.  J., 


en.  XXVII.] 


ATTACHMENT    AND    EXECC'JION. 


[§  485. 


held  that  such  an  attachment  cannot  be  levied,  although  the  for- 
eign corporation  has  a  branch  registry  office  in  the  state  where 
the  attachment  is  levied,  and  although  the  certificates  of  stock  are 
also  in  such  state.^  The  supreme  court  of  Pennsylvania  has  said 
that  stock  cannot  be  attached  by  attaching  the  certificate,  any 
more  than  lands  situated  in  another  state  can  be  attached  by  an 
attachment  in  Pennsylvania  levied  on  the  title  deeds  to  such  land.^ 
And  it  has  been  held  that  even  though  certificates  of  stock  in  a 
West  Virginia  corporation  are  within  the  state  of  Massachusetts, 
yet  a  citizen  of  Massachusetts  cannot  attach  the  same  in  a  suit  in 
Massachusetts  against  a  citizen  of  California,  the  owner  of  such 
certificates  of  stock.*  The  Kew  York  court  of  appeals,  however, 
has  recently  held  that  where  certificates  of  stock  issued  by  a  New 
Jersey  corporation  are  within  the  state  of  New  York,  an  attach- 
ment may  be  levied  upon  them  and  the  interest  of  the  owner  or 
pledgor  therein  sold,  such  certificates  being  a  property  right 
within  the  state.*    And  it  must  be  admitted  that  this  decision,  al- 


March  7,  1892.  See  also  Moore  v.  Gen- 
nett,  2  Tenn.  Ch.  375  (1875).  Garnish- 
ment proceedings  will  not  apply.  The 
defendant  may  move  to  have  the  at- 
tachment levy  set  aside.  Martin  v.  Mo- 
bile, etc.  R.  R.,  7  Bush  (Ky.),  116  (1870), 
holding  that  a  statute  authorizing  a 
foreign  corporation  to  exercise  certain 
powers  does  not  make  it  a  domestic 
corporation.  Certificates  of  stock  in  a 
corporation  of  another  state  cannot  be 
subjected  to  the  payment  of  the  stock- 
holders' debts,  either  by  attachment  or 
a  bill  in  equity.  Morton  v.  Grafflin,  68 
Md.  54")  (1888). 

1  Christmas  v.  Biddle,  13  Pa.  St.  223 
(1850),  approved  in  Childs  v.  Digby,  24 
Pa.  St.  23  (1854).  In  this  case  the  at- 
tachment was  levied  in  Pennsylvania 
on  certificates  of  stock  in  Pennsylvania, 
but  belonging  to  a  citizen  of  Missis- 
sippi, and  the  corporation  was  created 
by  the  laws  of  Mississippi.  Certificates 
of  stock  in  a  corporation  cannot  be  at- 
tached anywhere  except  in  the  state 
where  the  corporation  is  incorporated. 
Armour,  etc.  Co.  v.  St.  Louis  Nat.  Bank, 
113  Mo.  12(1892). 

2  Christmas  v.  Biddle.  13  Pa.  St.  223 
(1850).  In  Win.slow  v.  Fletcher,  53  Conn. 
390  (1886),  the  court  well  says:     "  While 


the  certificates  are  in  themselves  valu- 
able for  some  purposes,  and  to  some 
extent  may  properly  be  regarded  as 
property,  yet  they  are  distinct  from  the 
holder's  interest  in  the  capital  stock  of 
the  corporation,  and  are  not  goods  and 
effects  within  the  meaning  of  the  stat- 
ute relating  to  foreign  attachment. 
They  are  no  more  subject  to  an  attach- 
ment or  a  trustee  process  than  a  prom- 
issory note.  The  debt  is  subject  to  at- 
tachment, but  the  note  itself,  which  is 
simply  evidence  of  the  debt,  is  not. 
So  with  stock.  That  may  be  attached, 
but  the  certificates  cannot  be."  Ne- 
gotiable bonds,  held  outside  of  the 
jurisdiction  of  the  court,  cannot  be  at- 
tached by  serving  the  attachment  on 
the  corporation  which  issued  the  bonds. 
Von  Hesse  v.  Mackaye,  55  Hun,  365 
(1890);  afi'd,  121  N.  Y.  694.  See  also 
Tweedy  v.  Bogart,  56  Conn.  419  (1888). 

spinney  v.  Nevills,  86  Fed.  Rep.  97 
(1898). 

*  Simpson  v.  Jersey  City,  etc.  Co.,  165 
N.  Y.  193  (1900).  the  court  distinguish- 
ing the  case  of  Plimpton  v.  Bigelow,  93 
N.  Y.  592  (1883),  on  the  ground  that  the 
certificates  of  stock  in  that  case  were 
not  within  the  state.  The  court  said: 
'*  Certificates  of  stock  are  treated  by 


1003 


§  486.]  ATTACHMENT   AND   EXECUTION.  [oH.  XXVII. 

though  apparently  a  wide  departure  from  the  common  law,  is  a 
correct  decision,  in  view  of  the  fact  that  certificates  of  stock  have 
gradually  grown  to  be  more  than  mere  receipts  or  evidence  of  stock, 
and  have  come  to  be  the  stock  itself,  practically,  in  business  transac- 
tions, especially  in  America,  and,  like  a  promissory  note,  a  certifi- 
cate of  stock  is  property  in  itself  and  carries  title,  irrespective  of 
the  corporate  books  and  of  transfer  on  the  corporate  books. 

§  486.  Eights  of  an  unregistered  transferee  of  a  certificate  of 
Steele  as  against  an  attachment  or  execution  levied  on  that  stock. — 
The  most  difficult  and  unsettled  question  connected  with  an  attach- 
ment or  execution  levied  on  stock  is  the  question  of  how  far  a  pur- 
chaser of  the  certificate  of  stock  from  the  stockholder  and  debtor 
is  protected  in  his  ownership  Avhere  such  purchaser  does  not  have 
his  transfer  registered  on  the  corporate  books  before  the  attach- 
ment or  execution  is  levied.  The  question  is  especially  important, 
since  it  affects  the  rights  of  a  bona  fide  purchaser  of  stock  in  the 
open  market,  and  constitutes  one  of  the  greatest  dangers  incurred 
in  the  purchase  of  certificates  of  stock.  It  has  been  held  that  if  a 
stockholder  whose  stock  has  been  already  attached  or  sold  on  ex- 
ecution sells  his  certificate  of  stock  after  the  levy  of  such  attach- 
ment or  execution,  the  vendee  or  transferee  buys  subject  to  such 
levy,  even  though  he  had  no  knowledge  of  it.  The  stock,  in  con- 
templation of  law,  has  already  been  seized  by  the  levy,  and  the 
purchaser  is  bound  to  take  notice  of  that  fact.^  The  only  means  of 
avoiding  this  danger  in  the  purchase  of  stock  is  by  an  inquiry  at 
the  office  of  the  corporation  at  the  time  of  making  the  purchase.^ 

A  different  question,  however,  presents  itself  when  the  stock- 
holder against  whose  stock  an  attachment  or  execution  is  levied 
has  already  and  before  such  levy  sold  and  transferred  his  certifi- 
cate of  stock,  but  that  transfer  has  not  been  registered  on  the  cor- 
porate books.  The  courts  of  the  different  states  are  in  irreconcil- 
able conflict  on  this  question  of  whether  the  unregistered  trans- 
feree is  protected  in  his  purchase.  The  better  rule,  and  the  rule 
which  ultimately  will  prevail,  is  that  an  unrecorded  transfer  of 
stock  is  in  this  respect  like  an  unrecorded  deed  of  land,  and  gives 
good  title  as  against  subsequent  attachment  or  executions,  even 

business  men  as  property  for  all  prac-  85  Tenn.   189  (1886);   Chesapeake,  etc. 

tical  purposes.     They  are  sold  in  the  R  R.  u  Paine,  29  Gratt.  (Va.)  503  (1877); 

market,   and  they  are  transferred  as  Shenandoah  Valley  R.  R.  v.  Griffith,  76 

collateral  security  for  loans,  and  they  Va.  913  (1882);  Re  Braden's  Estate,  165 

are  used  in  various  ways  as  property.  Pa.  St.  184  (1895).     Cf.  Dudley  v.  Gould, 

They  pass   by  delivery  from   hand   to  6  Hun,  97  (1875). 

hand  and  they  are  the  subject  of  lar-  2  Quoted    and    approved  in    Ball    v. 

ceny."  Towle  Mfg.  Co.,  65  N.  E.  Rep.  1015  (Ohio, 

1  Young  V.  South  Tredegar  Iron  Co.,  1903). 

1004 


CH.   XXVII.] 


ATTACHMENT    AND    EXECUTION, 


[§  48T. 


though  the  latter  are  levied  in  ignorance  of  the  unrecorded  transfer 
or  deed. 

§  487.  In  Neiu  YorJa,  Pennsylvania,  New  Jersey,  llicliigan,  Min- 
nesota, 3Iissoiiri,  Delaivare,  Nehraslx'a,  Tennessee,  Kentiiclcy,  Louis- 
iana, Mississip2)i,  Texas,  Washington,  and  in  the  federal  courts 
passing  upon  the  transfer  of  national  hanh  stoclc,  it  is  held  tliat  hy 
the  common  law  the  unregistered  transferee  of  a  certificate  of  stock 
is  protected  as  against  all  subsequent  attachments  or  executions 
levied  on  that  stocTc. —  The  decided  weight  of  authority  holds  that 
he  who  purchases  for  a  valuable  consideration  a  certificate  of  stock 
is  protected  in  his  ownership  of  the  stock,  and  is  not  affected  by  a 
subsequent  attachment  or  execution  levied  on  such  stock  for  the 
debts  of  the  registered  stockholder,  even  though  such  purchaser 
has  neglected  to  have  his  transfer  registered  on  the  corporate 
books,  thereby  allowing  his  transferrer  to  appear  to  be  the  owner 
of  the  stock  upon  which  the  attachment  or  execution  is  levied. 
Such  is  the  rule  prevailing  in  the  federal  courts  and  in  the  courts, 
of  the  above-named  states.^  Frequently  this  rule  is  justified  and 
explained  on  the  ground  that  registry  and  by-laws  or  charter  pro- 


1  New  York:  The  case  of  Smith  v. 
American  Coal  Co.,  7  Lans.  317  (1873), 
fully  discusses  and  sustains  this  rule. 
See  also  De  Comeau  v.  Guild  Farm  Oil 
Co.,  3  Daly,  318  (1870),  where  the  court 
says  that  the  sheriff,  "  by  the  levy  of 
such  an  attachment,  could  not  acquire 
any  better  or  greater  title  to  the  stock 
than  a  person  would  have  done  who 
had  purchased  this  stock  of  the  person 
in  whose  name  it  stood  on  the  day  of 
the  levy  of  the  attachment.  And  the 
principle  is  well  settled  in  this  state 
that  such  a  purchaser  would  nx)t  ac- 
quire any  interest  whatever  as  against 
a  prior  purchaser  for  value."  Where 
the  corporation  causes  an  attachment 
to  be  levied  on  the  stock  of  a  stock- 
holder of  record  wJio  has  sold  his  cer- 
tificates to  another  person  and  causes 
a  sale  to  be  made  to  deprive  the  latter 
of  his  stock,  he  may  hold  the  corpora- 
tion liable.  Robinson  v.  New  Berne 
Nat.  Bank,  95  N.  Y.  637  (1884>;  Sims  v. 
Bonner,  16  N.  Y.  Supp.  801  (1891).  See 
also,  in  general,  Dunn  v.  Star  F.  Ins. 
Co.,  19  N.  Y.  Week.  Dig.  531  (1884).  An 
assignment  of  the  certificates  to  a  re- 
ceiver in  another  state    takes  prece- 


dence of  an  attachment  against  the 
stock  at  the  home  of  the  corporation. 
The  court  will  direct  the  corporation  to 
register  the  transfer.  Weller  v.  Pace 
Tobacco  Co.,  5  Ry.  &  Corp.  L.  J.  (5  N.  Y. 
Sup.  Ct,  1888). 

Pennsylvania:  Eby  v.  Guest,  94  Pa. 
St.  160  (1880);  Finney's  Appeal,  59  Pa. 
St.  398  (1868);  Commonwealth  v.  Wat- 
mough,  6  Whart  117  (1840),  holding 
also  that  the  sheriff  need  not  levy  on 
stock  which  he  knows  has  already 
been  sold  to  an  unregistered  transferee. 
When  the  transferrer  notifies  the  corpo- 
ration of  the  transfer,  a  subsequent  at- 
tachment of  the  stock  as  the  property 
of  the  transferrer  is  not  good,  although 
the  transfer  was  not  recorded  in  the 
corporate  book.  Telford,  etc.  Co.  v. 
Gerhab,  13  Atl.  Rep.  90  (Pa.  1888);  U.  S. 
V.  Vaughan,  3  Binn.  394  (1811),  where 
the  unregistered  transferees  resided  in 
foreign  lands. 

New  Jersey:  Broadway  Bank  v.  Mc 
Elrath,  13  N.  J.  Eq.  24  (1860);  aff'd,  sub 
nom.  Hunterdon  County  Bank  v.  Nas- 
sau Bank,  17  N.  J.  Eq.  496  (1864);  Rogers. 
V.  New  Jersey  Ins.   Co.,  8  N.  J.  Eq.  167 
(1849).     In  this  last  case  the  purchaser 


1005 


§  487.] 


ATTACHMENT    AND    EXECDTION". 


[CH.  XXVII. 


visions  requiring  registry  of  transfers  on  the  corporate  books  are 
not  for  the  purpose  of  notifying  the  creditors  of  the  old  registered 
stockholder  that  he  no  longer  owns  the  stock,  nor  for  any  similar 
purpose,  but  are  for  the  purpose  of  protecting  the  corporation  in 
paying  dividends  and  allowing  the  stock  to  be  voted.     Another 


at  the  execution  sale  knew  that  the 
certificates  had  been  sold. 

Michigan:  May  u  Cleland,  117  Mich. 
45  (1898). 

Minnesota:  A  sale  and  transfer  of 
corporate  stock,  although  not  entered 
on  the  books  of  the  corporation,  takes 
precedence  of  a  subsequent  attach- 
ment in  behalf  of  a  creditor  of  the 
vendor.  Lund  v.  Wheaton,  etc.  Co.,  50 
Minn.  36  (1892).  The  court  so  held  al- 
though the  statute  prescribed  that  no 
transfer  should  be  valid  except  as  be- 
tween the  parties  until  such  transfer 
was  registered  on  the  corporate  books. 
Under  the  Minnesota  practice,  where  a 
corporation  issued  for  refusal  to  transfer 
stock  which  is  claimed  on  one  hand  by 
a  purchaser  of  the  certificate  and  on  the 
other  by  a  purchaser  at  an  execution 
sale,  the  claimant  intervenes.  Haslam 
V.  First  Nat.  Bank,  etc.,  79  Minn.  1 
(1900). 

Missouri:  McClintock  v.  Central 
Bank,  120  Mo.  127  (1894).  In  this  case 
it  was  held  that  an  attaching  creditor 
cannot  complain  that  the  pledgee,  who 
has  prior  rights,  settled  with  the 
pledgor  after  the  attachment  and  then 
sold  the  stock.  The  creditor  must  offer 
to  redeem  or  have  a  sale  subject  to  the 
pledge.  The  pledgee  of  the  certificates 
was  the  corporation  itself.  In  Mer- 
chants' Nat.  Bank  v.  Richards,  6  Mo. 
App.  454  (1879),  application  had  been 
made  to  the  corporation  for  registry, 
but  had  been  refused.  The  purchaser 
of  a  certificate  of  stock  in  a  Missouri 
corporation  may  maintain  a  bill  in 
equity  for  injunction  to  prevent  the 
corporation  transferring  such  stock  to 
one  who  purchased  the  same  at  execu- 
tion sale  on  a  judgment  obtained 
against  the  registered  holder  of  such 
stock,  it  being  shown  that  such  pur- 


chaser at  execution  sale  took  with  no- 
tice of  the  prior  sale  of  the  certificate. 
Seligman  v.  St.  Louis,  etc.  R.  R.,  22  Fed. 
Rep.  39  (1884). 

Delaivare:  In  Delaware  the  purchaser 
of  a  certificate  of  stock  is  protected  as 
against  attachments  for  debts  of  the 
transferrer,  even  though  he  does  not 
have  the  stock  transferred  on  the  cor- 
porate books,  and  he  may  have  an  in- 
junction against  such  attaching  cred- 
itor selling  the  stock  on  execution. 
Allen  V.  Stewart,  7  Del.  Ch.  287  (1895). 
In  Trimble  v.  Vandegrift,  7  Houst.  451 
(1887).  the  court  ordered  stock  to  be 
sold  on  an  execution,  although  the  cor- 
poration stated  at  the  time  of  the  at- 
tachment that  it  had  received  notice 
that  the  stock  had  already  been  sold. 
It  appeared,  however,  that  the  state- 
ment made  by  the  corporation  did  not 
tell  to  whom  the  sale  had  been  made, 
and  did  not  state  that  a  transfer  had 
been  made  on  the  corporate  books,  and 
it  appeared  also  that  the  attaching 
creditor  had  no  way  of  testing  his 
right  to  priority,  unless  the  sale  was  al- 
lowed to  take  place,  and  that  the  sale 
would  not  necessarily  cut  off  the  right 
of  the  holder  of  the  certificate  of  stock 
to  litigate  the  priority  of  his  title.  In 
Wilmington,  etc.  Turnp.  Co.  v.  Bush,  1 
Harr.  44  (1832),  the  court  held  that  the 
company  could  not  defend  against  a 
suit  for  dividends  on  the  ground  that 
attachment  had  been  levied  against 
the  stock  as  the  property  of  a  former 
registered  owner  of  the  stock,  it  appear- 
ing that  the  corporation  had  issued 
new  certificates  of  stock  without  a 
transfer  on  the  books  being  made  by 
the  former  owner  of  the  stock. 
■  Nebraska:  In  Nebraska  a  transfer  of 
the  certificates  takes  precedence  over 
an  attachment  or  garnishee    process. 


1006 


CH.  XXVII.] 


ATTACHMENT    AND    EXECUTION. 


K  487. 


and  stroaorer  reason  is  that  the  law  favors  the  transfer  of  stock  cer- 
tificates,  and  discountenances,  so  far  as  possible,  all  secret  dangers 
incurred  in  their  purchase.  By  protecting  the  purchaser  against 
subsequent  attachments  and  executions,  the  law  removes  one  of 


Farmers',  etc.  Bank  v.  Mosher,  88  N.  W. 
Rep.  553  (Neb.  1901). 

Kentucky:  See  the  emphatic  dictum 
in  Thurber  v.  Crump,  86  Ky.  408  (1887). 

Louisiana:  Pitot  v.  Johnson,  33  La. 
Ann.  1286  (1881);  Smith  v.  Crescent 
City,  etc.  Co.,  30  La.  Ann.  1378  (1878); 
Crescent  City,  etc.  Co.  v.  Deblieux,  40 
La.  Ann.  155  (1888).  The  attaching 
creditor  of  one  who  appears  on  the 
books  of  a  corporation  as  registered 
owner  of  shares  of  its  stock  cannot  hold 
the  stock  against  the  true  equitable 
owner,  who  holds  the  certificate  of 
stock  duly  indorsed  by  the  debtor. 
Kern  v.  Day.  45  La.  Ann.  71  (1893).  Cf. 
Bidstrup  v.  Thompson,  45  Fed.  Rep.  452 
(1891),  where  the  pledge  had  not  been 
completed.  See  al.so  Friedlander  v. 
Slaughter  House  Co.,  31  La.  Ann.  523 
(1879),  holding  that  a  company  is  not 
liable  to  the  purchaser  of  the  certifi- 
cate where  such  purchaser  did  not 
make  any  claim  or  give  notice  of  his 
rights  until  after  the  execution  sale 
and  until  after  the  court  had  ordered 
the  corporation  to  make  a  transfer  to 
the  purchaser  at  the  execution  sale. 

Mississippi:  Goyer,  etc.  Co.  v.  Wild- 
berger,  71  Miss.  438  (1894);  Clark  v.  Ger- 
man Security  Bank,  61  Miss.  611  (1884), 
the  court  holding  that  the  holder  of 
the  certificate  was  protected,  although 
the  statute  prescribed  that  stock  should 
be  transferable  "only  "  on  the  books  of 
the  company. 

Tennessee:  A  sale  under  execution  of 
stock  which  has  been  pledged  conveys 
nothing.  McQuade  v.  Williams,  101 
Tenn.  334  (1898).  Even  though  a 
pledgee  who  holds  the  certificates  in- 
dorsed in  blank  sends  them  to  the 
pledgor  to  be  executed  for  new  certifi- 
cates in  a  consolidated  companj',  and 
even  though  the  pledgor  takes  out  such 
new  certificates  in  his  own  name,  yet 


this  is  not  a  waiver  of  the  pledge  en- 
titling attaching  creditors  of  the 
pledgor  to  precedence  over  the  pledgee. 
In  a  suit  by  an  attaching  creditor  to 
determine  the  priority  of  his  rights 
over  an  unregistered  pledgee,  the  court 
has  no  power  to  decree  a  sale  of  the 
pledge  and  the  distribution  of  the  as- 
sets. McClung  V.  Colwell,  64  S.  W.  Rep. 
890  (Tenn.  1901).  See  also  on  the  main 
question,  Cornick  v.  Richards,  3  Lea,  1 
(1879).  Contra,  State  Ins.  Co.  v.  Sax,  3 
Tenn.  Ch.  507  (1875).  A  subscriber's 
subscription  may  be  attached  before 
a  certificate  of  stock  is  issued  and  de-. 
livered,  and  such  attachment  has  pre- 
cedence over  a  mortgage  even  though 
the  mortgage  is  recorded  with  the 
register  of  deeds,  no  notice,  however, 
of  such  mortgage  being  given  to  the 
corporation  itself.  Cates  v.  Baxter,  97 
Tenn.  443  (1896). 

Texas:  Seeligson  v.  Brown,  61  Tex. 
114  (1884).  An  unregistered  pledgee 
has  priority.  Hamilton  v.  San  Antonio, 
etc.  Co.,  51  S.  W.  Rep.  1104  (Tex.  1899). 
A  pledgee  of  the  certificates  is  pro- 
tected against  a  subsequent  attachment, 
although  the  transfer  is  not  recorded. 
Tombler  v.  Palestine  Ice  Co.,  17  Tex. 
Civ.  App.  596  (1897).  Garnishee  process 
to  reach  stock  owned  by  a  judgment 
debtor  is  not  good  as  against  a  prior 
purchaser  of  the  certificate  of  stock. 
South  Texas  Nat.  Bank  v.  Texas,  70 
S.  W.  Rep.  768  (Tex.  1902). 

Idaho:  An  unrecorded  sale  or  pledge 
of  stock  has  preference  over  a  subse- 
quent attachment  by  a  creditor  of  the 
vendor  or  pledgor,  and  a  provision  in 
the  statutes  that  a  transfer  shall  not  be 
valid  until  recorded  is  for  the  benefit  of 
the  corporation,  and  not  for  the  cred- 
itors of  the  transferrer.  Such  attach- 
ment, however,  is  good  as  against  the 
equity  of  redemption  of  the  pledgor. 


1007 


§  487.] 


ATTACHMENT   AND    EXECUTION. 


[CH, 


XXVII. 


the  chief  risks  incurred  in  holding  certificates  of  stock  without  a 
registry,  and  thereby  increases  the  safety  and  desirability  of  such 
investments. 


Mapleton  Bank  v.  Standrod,  71  Pac. 
Rep.  119  (Idaho,  1902). 

Washington:  Port  Townsend  Nat. 
Bank  v.  Port  Townsend,  etc.  Co.,  6 
Wash.  597  (1893),  the  court  so  holding 
although  the  statute  prescribed  that 
the  transfer  should  not  be  good  except 
as  between  the  parties  until  the  same 
was  registered  on  the  corporate  books. 

Federal  Courts:  In  regard  to  stock  in 
national  banks,  the  federal  courts  have 
firmly  established  the  rule  that  the 
unregistered  transferee  is  protected 
against  a  subsequent  attachment  or 
execution.  Continental  Nat.  Bank  v. 
Eliot  Nat.  Bank,  7  Fed.  Rep.  369  (1881), 
with  a  full  review  of  the  authorities  by 
Judge  Lowell;  Hazard  v.  National 
Exch.  Bank,  26  Fed.  Rep.  94  (1886); 
Scott  u  Pequonnock  Nat.  Bank,  15  Fed. 
Rep.  494  (1883),  where  the  rule  was 
applied,  although  the  national  bank 
was  ic  Connecticut,  a  state  which 
strongly  favors  tac  opposite  rule.  The 
court  said:  "The  tendency  of  modern 
decisions  is  to  i-egard  certificates  of 
stock  attached  to  an  executed  blank 
assignment  and  power  to  transfer  as 
approximating  to  negotiable  securities, 
though  neither  in  form  or  character 
negotiable."  The  statutes  of  the  state 
wherein  the  national  bank  is  located 
cannot  change  or  interfere  with  this 
rule  in  regard  to  certificates  of  stock  iu 
national  banks.  Doty  v.  First  Nat. 
Bank,  8  N.  Dak.  9  (1892),  where  the 
court  refused  to  give  precedence  to  an 
attachment  as  against  a  prior  unregis- 
tered transfer  of  a  certificate  of  stock 
in  a  national  bank.  A  pledgee  of 
national  bank  stock  is  entitled  to  pre- 
cedence over  a  subsequent  attachment 
levied  on  such  stock.  Where  the  pur- 
chaser at  the  execution  sale  is  the  cor- 
poration itself,  the  remedy  of  the 
pledgee  is  at  law,  and  he  is  entitled  to 
recover  only  to  the  extent  of  his  debt 


in  case  such  debt  is  less  than  the 
actual  value  of  the  stock.  Second  Nat. 
Bank  v.  First  Nat.  Bank.  8  N.  Dak.  50 
(1898).  Even  in  Massachusetts,  where 
the  courts  upheld  at  common  law  an 
opposite  rule,  the  state  courts  will  fol- 
low the  above  rule  when  the  stock  of  a 
national  bank  is  in  question.  Sibley  v. 
Quinsigamond  Nat.  Bank,  133  Mass. 
515  (1882).  The  decision  in  State  v. 
Jeffersonville  Nat.  Bank,  89  Ind.  30? 
(1883),  is  erroneous  in  various  ways 
See  Indiana,  ^  490,  infra,  p.  1016.  Will- 
iams V.  Mechanics'  Bank,  5  Blatchf.  5£^ 
(1862);  s.  C,  29  Fed.  Cas.  137G,  is  not  w 
accord  with  the  other  federal  decisions 
Where  an  attachment  is  levied  on  stock 
which  has  already  been  pledged,  the 
attachment  reaches  only  the  equitable* 
title  of  the  debtor  pledgor.  Black  u 
Zacharie,  3  How.  483,  511  (1844).  A 
decision  of  a  state  court  that  a  donatic^ 
causa  mortis  of  bank  stock  was  effect- 
ive, although  the  donor  merely  deliv- 
ered the  certificates  of  stock  withouf". 
transferring  the  same  on  the  back 
thereof,  does  not  raise  a  federal  ques- 
tion, even  though  the  stock  was  na- 
tional-bank stock.  Leyson  v.  Davis,  170 
U.  S.  36  (1898). 

In  England  the  creditor  of  a  regis- 
tered stockholder  cannot  subject  the 
stock  to  his  debt  as  against  the  owner 
of  the  certificates,  who  has  allowed  f,h» 
stock  to  remain  in  the  name  of  the 
debtor  in  order  to  qualify  the  latter  as 
a  director.  Cooper  v.  Griffin,  [1892J  1 
Q.  B.  740. 

In  Canada  the  unregistered  trans- 
feree IS  protected.  Morton  v.  Cowan,. 
25  Ont.  Rep.  (Can.)  529  (1894).  An  exe- 
cution has  priority  over  an  unrecorded 
transfer.  Brock  v.  Ruttan,  1  C.  P^ 
(Can.)  218  (1851).  An  execution  levied 
on  stock  after  a  transfer  has  been  en- 
tered on  the  stock  ledger  is  not  good,, 
even  though  the  transferee  has  not  yet 


1008 


CH.  XXVII.] 


ATTACHMENT    AND   EXECUTION. 


[§4S5 


§  488.  In  Illinois,  Maine,  Maryland,  Massachusetts,  New  Hamp- 
shire, Bhode  Island^  Virginia,  West  Virginia,  Wisconsin,  and 
Wyoming,  the  statutes  have  prescribed  that  an  unregistered  pur- 
chaser or  pledgee  of  certificates  of  stoclc  shall  J)e  protected  against 
siibsequent  attachments  or  executions  levied  upon  that  stocli}  —  The 
courts  of  Massachusetts  were  among  the  first  to  lay  down  the  rule 


accepted  the  stock.     Woodruff  v.  Har- 
ris, 11  Q.  B.  Rep.  (Can.)  490  (18o4). 

For  an  able  article  by  L  H.  Hatfield 
in  favor  of  the  doctrine  that  the  attach- 
ing creditor  should  be  preferred  to  the 
unrecorded  transferee,  see  30  Am.  Law 
Rev.,  p.  223.  See  also  the  detailed 
review  of  the  cases  on  this  subject  in 
an  article  written  by  Chief  Justice 
Corlijs  of  North  Dakota  in  1  Am.  & 
Eng.  Corp.  Cas.  (N.  S.).  at  the  end  of 
the  volume.  See.  also  the  table  pre- 
pared by  Lowell,  Stimson.  &  Lowell  for 
the  Boston  Clearing  House  Associa- 
tion. 

^Illinois:  Laws  1883,  page  110;  Rice 
V.  Gilbert.  173  III.  348  (1898).  The  case 
of  People's  Bank  v.  Gridley,  91  111.  457 
(1879),  had  previously  held  tliat  at  com- 
mon law  an  attachment  or  execution 
sale  took  precedence  over  a  prior  un- 
registered sale  of  pledge  or  certificates 
of  stock.  The  statute  was  passed  in 
1883  to  change  this  rule.  Rice  v.  Gil- 
bert, 173  III.  348  (1898). 

Maine:  Laws  of  1897,  chapter  293. 
In  this  state  the  statute  formerly  pre- 
scribed that  no  title  should  pass  by  sale 
of  the  certificates  except  as  between 
the  parties  until  registry  had  been  had 
on  the  corporate  books.  This  statute 
was  held  to  give  precedence  to  an  at- 
tachment or  execution  sale.  Skowhe- 
gan  Bank  v.  Cutler,  49  Me.  315  (1860); 
Fiske  V.  Carr,  20  Me.  301  (1841). 

Maryland:  In  ]MaryIand,  by  chapter 
287,  Laws  of  1886,  a  pledgee  or  pur- 
chaser of  certificates  of  stock  is  pro- 
tected without  a  transfer  on  the  books 
of  the  corporation  as  against  subse- 
quent attachments  or  executions.  Mor- 
ton V.  Grafflin,  68  Md.  545  (1888),  hold- 
ing also  that  the  attaching  creditor 


(64) 


cannot  reach  the  equity  by  a  bill  in 
equity  to  obtain  a  receiver  and  to  com- 
pel the  pledgee  to  resort  to  other  se- 
curity first.  In  a  transaction  arising 
prior  to  the  above  statute,  the  pledgee 
made  no  effort  to  protect  himself,  and 
gave  no  notice  of  the  pledge  until  seven 
years  after  the  stock  had  been  sold  out. 
on  execution.  It  was  held  that  the  cor- 
poration was  not  liable  to  him.  Noble 
V.  Turner,  09  Md.  519  (1888). 

Massachusetts:  Chapter  229,  Laws  1884. 
It  has  been  held  under  the  Massachu- 
setts statute  that  where  a  father  de- 
livers stock  to  his  son  in  order  to  qual- 
ify the  latter  as  director,  and  the  son 
transfers  the  certificate  back  to  his 
father,  a  creditor  of  the  son  cannot  at- 
tach the  stock  as'against  the  father,  al- 
though the  stock  stands  on  the  corpo- 
rate books  in  the  name  of  the  son. 
Andrews  v.  Worcester,  etc.  R  R,,  159 
Mass.  64  (1893).  Where  a  stockholder 
indorses  a  certificate  of  stock  in  blank 
and  delivers  it  to  an  agent  and  the 
agent  pledges  it  for  his  own  purposes, 
the  pledgee,  if  he  took  without  notice 
of  the  breach  of  trust,  is  protected. 
The  court  held  also  that  the  statute  of 
1884  applied  to  such  a  case.  Russell  v. 
American,  etc.  Co.,  62  N.  E.  Rep.  751 
(Mass.  1902).     See  66  N.  K  Rep.  201. 

Neio  Hampshire:  Chapter  16,  Laws 
1887.  The  case  of  Pinkerton  v.  Man- 
chester, etc.  R.  R,  42  N.  K  424  (1861), 
held  that  an  attachment  took  prece- 
dence over  a  prior  unregistered  trans- 
fer of  stock,  except  that  the  purchaser 
of  the  certificate  of  stock  was  to  have 
a  reasonable  time  to  apply  for  registry. 
The  case  of  Buttrick  v.  Nashua,  etc. 
R  R,  62  N.  H.  413  (1882),  held  that  the 
company    itself    might    attach,    even 


1009 


§  489.] 


ATTACHMENT   AND    EXECUTION. 


[CH.  XXVII. 


which  places  an  attachment  or  execution  levy  ahead  of  an  unreg- 
istered purchaser  of  the  certificate  of  stock.  The  evil  consequences 
of  the  rule,  however,  seem  to  have  become  apparent  to  her  courts, 
and  it  was'held  that,  although  the  unregistered  purchaser  was  not 
protected  where  the  charter  of  the  corporation  required  registry,^ 
vet,  where  only  the  by-laws  or  the  certificate  itself  created  such  a 
requirement,  the  unregistered  purchaser  was  protected  and  took 
precedence  over  the  attachment  or  execution.^  The  legislature  of 
Massachusetts  seems  to  have  had  a  still  clearer  perception  of  the 
demands  of  trade  and  of  the  interests  of  those  who  invest  in  cer- 
tificates of  stock,  and  in  1884  enacted  a  statute  which  makes  an  at- 
tachment or  execution  levied  on  stock  no  more  effective  than  in 
New  York  state.^  Similar  statutory  changes  have  been  made  in 
the  other  states  mentioned  above. 

§  489.  Eights  and  duties  of  the  corporation  in  such  cases.— The 
corporation  has  a  dangerous  duty  to  perform  when  stock  has  been 
attached  or  sold  under  levy  of  execution,  and  a  registry  is  requested 


though  one  of  its  directors  knew  of  a 
prior  unregistered  sale  of  the  certifi- 
cates of  stock;  such  director,  however, 
having  taken  no  part  in  levying  the  at- 
tachment. The  case  of  Scripture  v. 
Francestown  Soapstone  Co.,  50  N.  H. 
571  (1871),  held  that  the  attachment 
was  not  good  as  against  a  prior  pur- 
chaser of  the  certificate  of  stock  from 
the  president  himself,  inasmuch  as  the 
president's  knowledge  of  the  sale  was 
sufficient  notice  to  the  corporation  it- 
self. See  also  Stowe  v.  Meserve,  13  N.  H. 
46  (1842). 

Rhode   Island:    Chapter   690,   Laws 
1888. 

Virginia:  Code  of  1887,  sec.  1133. 
West  Virginia:  Section  37,  chapter 
53,  Code  1887.  In  West  Virginia  an  as- 
signment of  the  certificates  cuts  off  sub- 
sequent attachments  obtained  by  cred- 
itors of  the  transferrer.  Donnally  v. 
Hearndon,  41  W.  Va.  519  (1895). 

Wisconsin:  Annotated  Statutes,  chap- 
ter 85,  section  1751,  thereby  changing 
the  law  as  laid  down  in  Re  Murphy,  51 
Wis.  519  (1881). 

Wyoming:  Rev.  Stat.,  §  2779,  protect- 
ing pledgees  against  executions. 

iFishern  Essex  Bank,  71  Mass.  873 
(1855);  Newell  v.  Williston,  138  Mass. 

1010 


240  (1885);  Central  Nat.  Bank  v.  Willis- 
ton.  138  Mass.  244  (1885);  Boyd  v.  Rock- 
port,  etc.  Mills,  73  Mass,  406  (1856); 
Blanchard  v.  Dedham  Gas  Light  Co., 
78  Mass.  213  (1858). 

2  Sargent  n  Essex,  etc.  Ry.,  26  Mass. 
202(1829):  Boston,  etc.  Assoc,  u  Cory, 
129  Mass.  435  (1880),  holding  that  a  delay 
of  four  years  was  not  fatal  to  the  un- 
registered purchaser's  rights. 

3  "  The  delivery  of  a  stock  certificate 
of  a  corporation  to  a  bona  fide  pur- 
chaser or  pledgee  for  value,  together 
with  a  written  transfer  of  the  same,  or 
a  written  power  of  attorney  to  sell, 
assign,  and  transfer  the  same,  signed 
by  the  owner  of  the  certificate,  shall 
be  a  sufficient  delivery  to  transfer  the 
title  as  against  all  parties;  but  no  such 
transfer  shall  affect  the  right  of  the 
corporation  to  pay  any  dividend  due 
upon  the  stock,  or  to  treat  the  holder  of 
record  as  the  holder  in  fact,  until  such 
transfer  is  recorded  upon  the  books  of 
the  corporation,  or  a  new  certificate  is 
issued  to  the  person  to  whom  it  has 
been  so  transferred."  Mass.  Acts  1884, 
ch.  229.  The  enactment  of  a  similar 
statute  is  respectfully  recommended  to 
the  states  mentioned  in  §  490,  infra. 


CH.  XXVII.]  ATTACHMENT    AND    EXECUTION.  [§  489. 

by  the  purchaser  at  such  sale  or  by  a  purchaser  of  the  outstanding 
certificate  of  stock.  If  the  purchaser  of  the  certificate  demands 
registry  before  registry  has  been  allowed  to  the  purchaser  at  the 
execution  sale,  and  if  the  former  claims  to  have  purchased  the  cer- 
tificate before  the  attachment  or  execution  was  levied,  the  right  of 
the  corporation  is  clear.  It  may  refuse  to  allow  the  registry,  and 
when  sued  therefor  may  interplead  and  compel  the  claimants  to 
litigate  the  matter  between  themselves.^  But  where  the  corpora- 
tion does  not  know  whether  the  outstanding  certificate  is  in  the 
hands  of  a  purchaser  or  not,  and  a  registry  is  demanded  by  a  pur- 
chaser at  an  execution  sale,  the  rights  and  duties  of  the  corporation 
are  not  so  clear.  It  has  two  courses  open  to  it:  it  may  refuse  to 
allow  a  registry  until  compelled  to  do  so  by  a  court,  or  it  may 
allow  registry  without  being  so  compelled.  The  former  is  the 
safer  course,  since  the  corporation  will  probably  be  thereby  pro- 
tected from  all  liability  to  a  possible  purchaser  of  the  outstanding 
certificate.'^  The  corporation  should  be  protected  in  its  obedience 
to  the  decree  of  a  court.*  It  is  quite  probable,  also,  that  no  court  in 
any  of  the  above-named  states  would  require  the  corporation  to 
issue  new  certificates  of  stock  to  a  purchaser  of  stock  at  an  execu- 
tion sale,  unless  such  purchaser  give  to  the  corporation  a  bond  of 
indemnity,  whereby  an  unknown  purchaser  of  the  outstanding  cer- 
tificate may  be  protected.*     The  other  course  open  to  the  corpora- 

1  See  §  387,  supra.  The  proper  remedy  the  lower  court,  and  appealed  without 
for  the  purchaser  from  the  judgment  staj'ing  the  decree  below,  the  corpora- 
debtor  to  pursue  under  such  circum-  tion  is  not  liable  for  obeying  the  decree 
stances  is  to  enjoin  the  corporation  and  of  the  lower  court,  although  the  appeal 
the  purchaser  at  the  execution  sale  is  successful.  Chapman  v.  New  Orleans, 
from  registering  the  latter  as  a  stock-  etc.  Co.,  4  La.  Ann.  153  (1849).  See  Rob- 
holder.  Smith  V.  Crescent  City,  etc.  Co.,  inson  v.  New  Berne  Nat.  Bank,  95  N.  Y. 
30  La  Ann.  1378  (1878).    See  also  cases  637  (1884). 

supra.    If    an    attachment    has    been  3 See ^§361, 388,  snpra,  C/.  §330,  swpra. 

levied  he  should  enjoin  that.     Cheever  ♦The  supreme  court  of  Ohio,  in  New 

V.  Meyer,  52  Vt.  66  (1879).  London  Nat.  Bank  v.  Lake  Shore,  etc, 

2  "  Where  a  judicial  tribunal  of  com-  Ry.,  21  Ohio  St.  221  (1871),  very  properly 
petent  jurisdiction  of  last  resort,  after  and  very  distinctly  refused  to  compel  a 
a  fair  contest  in  good  faith  by  the  cor-  registrj',  although  conceding  that  the 
poration,  orders  the  stock  to  be  trans-  execution  purchaser  is  entitled  to  divi- 
ferred  to  the  purchaser  under  such  seiz-  dends.  The  court  said:  "Can  it  be  that, 
ure  and  sale,  the  corporation  cannot  be  because  the  defendant  refused  to  as- 
liable  to  the  holder  of  the  certificate  sume  the  peril  of  deciding  between  the 
who  took  no  steps  to  protect  himself."'  contending  claimants  by  issuing  other 
Friedlander  v.  Slaughter  House  Co.,  31  certificates  for  the  same  stock  to  the 
La,  Ann.  523  (1879).  Where,  also,  tlie  plaintiff  upon  demand,  that  it  thereby 
unregistered  transferee  contested  in  became  a  wrong-doer  and  converted 
the  courts  the  right  of  the  purchaser  at  the  plaintiff's  stock  to  its  own  use,  and 
the  execution  sale,  and  was  defeated  in  rendered  itself  liable  to  respond  in  the 

1011 


§  589.]  ATTACHMENT    AND    EXECUTION.  [CH.  XXVII, 

tion,  that  of  allowing  a  registry  by  the  purchaser  at  the  execution 
sale  without  being  compelled  to  do  so  by  a  court,  is  pursued  by  the 
corporation  at  its  peril.  If  it  afterwards  transpires  that  the  out- 
standing certificate  had  been  purchased  before  the  attachment  or 
execution  was  levied,  the  corporation  is  liable  in  damages  to  such 
purchaser  for  allowing  the  registry,^  but  not  unless  such  purchaser 
gave  a  valuable  consideration  for  the  certificate  and  alleges  that 
fact  in  his  pleading.^  Until  such  purchaser  demands  a  registry 
from  the  corporation,  it  may  safely  pay  dividends  to  the  execution 
purchaser.'  Mandamus  lies  to  compel  a  corporation  to  transfer 
stock  sold  under  levy  of  execution.  It  can  be  granted  as  a  com- 
mon-law remedy  or  as  a  remedy  ancillary  to  the  suit.^  This  rule, 
however,  would  work  harshly  in  states  where  the  purchaser  of  the 
outstanding  certificate  may  have  some  rights.  Where  such  a  pos- 
sibility exists  the  inandarrms  should  be  denied.^  A  judgment  cred- 
itor's execution  lien  on  bank  stock  is  subject  to  the  lien  of  the  cor- 
poration itself  by  statute  on  the  stock  for  debts  due  to  it  from  the 
judgment  debtor,  and  a  further  statutory  provision  that  the  en- 
forcement of  the  corporation's  lien  shall  not  affect  attachment  or 
execution  liens  goes  merely  to  the  remedy  and  does  not  affect  the 
priority,^ 

Where  the  transferee  of  certificates  of  stock  in  a  bank  presents- 
them  to  the  cashier  of  the  bank  for  transfer,  and  the  cashier  and  a 
director  delay  transfer  until  a  debt  of  the  transferrer  to  the  bank 
becomes  due,  and  then  in  behalf  of  the  bank  levy  an  attachment 
on  the  stock  for  such  debt,  the  transferee  may  hold  the  bank  and 

full  value  of  the  stock  to  the  claimant  allow  a  transfer  on  the  books.  St.  Louis^ 

who  could  establish  his  right  in  a  court  etc.  Ry.  v.  Wilson,  114  U.  S.  60  (1885). 

of  law?    The   mere  statement  of  the  See  also  the  case  of  Hazard  v.  National 

proposition  refutes  it."     As  to  the  mode  Exch.  Bank,  26  Fed.  Rep.  94  (1886),  hold- 

of  pleading  that  the  defendant  com-  ing  the  corporation  liable  in  damages 

pany  has   been   compelled  to  transfer  to  the  purchaser  of   the  outstanding 

the  stock  to  a  purchaser  at  an  execu-  certificate. 

tion  sale,  see  Wyoming  Fair  Assoc,  v.  2Littell   v.  Scranton,  etc.  Co.,  43  Pa. 

Talbott,  3  Wyo.  244  (1889).  St.  500  (1862). 

1  Smith  V.  American  Coal  Co.,  7  Lans.  ^  Smith  v.  American  Coal  Co.,  7  Lans. 

317(1873).     If  the  purchaser  at  the  exe-  317  (1873). 

cution  sale  still  has  the  certificates,  the  ^  Hair  v.  Burnell,  106  Fed.   Rep.   280 

purchaser  of  the  old  certificate  may  (1900).     Cf.  %,  390,  supra. 

bring  suit  against  him  and  the  corpo-  *  State  v.  First  Nat.  Bank,  89  Ind.  302 

ration  to  compel  a  retiansfer.     Rogers  (1883);  Bailey  v.  Strohecker,  38  Ga.  259 

V.  New  Jersey  Ins.  Co.,  8  N.  J.  Eq.  167  (1868);  Durham  u.  Monumental,  etc.  Co., 

(1849).     In  a  suit  by  a  purchaser  at  an  9  Greg.  41  (1880). 

execution  sale  to  cut  off  the  rights  of  a  ^  Springfield,   etc.    Co.    v.    Bank    of 

judgment  debtor  the  corporation  is  an  Batesville,  68  Ark.  234  (1900). 
indispensable  party,  since  it  alone  can 

1013 


CH.  XXVII.] 


ATTACHMENT    AND    EXECUTION. 


[§  tt90. 


the  cashier  and  such  director  liable  in  trover  for  conversion  of  the 
stock,  and  it  is  no  defense  that  the  transfer  of  the  certificate  was 
made  to  defraud  creditors.^  If  the  statute  prescribes  that  the  cor- 
poration shall  register  as  a  stockholder  the  purchaser  at  the  execu- 
tion sale,  the  writ  of  mandamus  will  lie  to  compel  the  corporation 
to  make  such  registry;^  but  the  relator  must  allege  that  he  pre- 
sented to  the  corporation  the  required  papers,  and  was  refused 
such  registry.*  A  court  of  equity  will  not  compel  a  corporation 
to  allow  a  transfer  of  stock  by  a  purchaser  at  an  execution  sale 
where  the  price  paid  at  such  sale  is  so  small  as  to  shock  the  con- 
science of  the  court.* 

§  490.  In  Alahama,  Arkansas,  California,  Colorado,  Connecti- 
cut, Indiana,  Iowa,  New  Mexico,  and  Vermont,  the  usual  statutes 
requiring  transfers  of  stock  to  T)e  registered  on  the  corporate  hooks 
are  so  construed  as  to  give  an  attachment  or  execution  lyrecedence 
over  a  prior  unregistered  sale  or  pledge  of  the  certificates  of  stocks- 
Notice  of  transfer  without  registry. —  The  courts  of  these  states  all 
hold  that,  where  a  statute  exists  requiring  a  transfer  of  stock  to  be 
registered  on  the  corporate  books  in  order  to  be  effectual,  an  at- 


1  Hine  v.  Commercial  Bank,  etc.,  119 
Mich.  448  (1899). 

-'Bailey  v.  Strohecker,  38  Ga.  259 
(1868).  Where  the  attachment  is  on 
stock  that,  the  plaintiff  alleges  was 
transferred  in  fraud  of  creditors,  man- 
damus will  not  lie  to  compel  the  corpo- 
ration to  allow  a  registry  under  the  ex- 
ecution sale.  State  v.  Warren  Foundry, 
etc.  Co.,  32  N.  J.  L.  439  (1868).  See  also 
ji  390,  supra.. 

3  Lippitt  V.  American  Wood  Paper 
Co.,  14  R  L  301  (1883). 

•*  Mississippi,  etc  R.  R.  v.  Cromwell, 
91  U.  S.  643  (1875);  Randolph  v.  Quid- 
nick  Co..  135  U.  S.  457  (1890).  See  also 
§  850,  infra.  Inadequacy  of  price  is 
not  sufficient  cause  for  setting  aside  an 
execution  sale  of  stock.  Conway  v. 
John,  14  Colo.  30  (1890).  Where  the 
court  orders  stock  to  be  sold  in  solido 
or  in  blocks  to  suit  the  purchaser,  and 
$200,000  worth  of  stock  is  sold  in  one 
block  for  $1,000,  and  it  is  shown  that 
the  creditor  and  the  debtor  had  united, 
in  order  to  deprive  a  transferee  of  his 
rights,  the  court  held  that  the  sale  was 
fraudulent  and  would  be  set  aside  at 
the  instance  of  the  unregistered  trans- 


feree.    Fahrney  v.  Kelly,  103  Fed.  Rep. 
403  (1900).     See  also  ij  482,  supra. 

5  Alabama:  By  statute  the  attach- 
ment takes  precedence  over  a  prior 
transfer  of  the  certificates,  where  such 
transfer  is  not  recorded  on  the  corpo- 
rate books  within  fifteen  days.  Berney 
Nat.  Bank  v.  Pinckard.  87  Ala.  577 
(1888):  Dittey  v.  First  Nat.  Bank,  112 
Ala.  391  (1896>  Under  this  statute  the 
unregistered  pledgee  is  not  protected 
against  attachments,  but  notice  to  the 
corporate  officer  of  the  attachment 
may  be  oral.  Abels  v.  Planters',  etc. 
Co.,  92  Ala.  382  (1890).  In  Fisher  v. 
Jones,  82  Ala.  117  (1886).  the  court  held 
that  the  unregistered  pledgee  was  pro- 
tected where  there  was  an  entry  made 
on  the  stub  of  the  certificate  book  of 
the  stock  being  held  in  pledge.  Under 
this  statute  the  attaching  creditor 
takes  title  in  preference  to  an  unreg- 
istered transferee,  and  the  same  rule 
prevails  where  the  registered  holder  is 
a  mere  "dummy  "  for  another.  White 
V.  Rankin,  90  Ala.  541  (1890).  The  stat- 
ute in  Alabama  prescribes  that,  unless 
a  transfer  is  made  on  the  corporate 
books  within    fifteen  days  after    the 


1013 


§  490.] 


ATTACHMENT   AND    EXECUTION. 


[oh.  XXVII. 


tachment  or  execution  levied  on  stock  standing  in  the  defendant 
debtor's  name  will  cut  off  the  rights  of  a  previous  purchaser  of  the 
certificate  who  has  not  completed  his  transfer  by  registry.     Even 


transfer,  it  "  shall  be  void  as  to  bona 
fide  creditors  or  subsequent  purchasers 
without  notice."  In  a  suit  by  the  pur- 
chaser at  execution  sale  to  compel  the 
corporation  to  transfer  the  stock  it 
need  not  be  alleged  that  the  purchase 
was  made  without  notice  of  the  claims 
of  other  persons.  Wetumpka,  etc.  Co. 
V.  Kidd,  124  Ala.  243  (1900).  A  pur- 
chaser of  stock  at  an  execution  sale 
may  file  a  bill  against  an  alleged  trans- 
feree of  the  stock  and  the  corporation 
to  have  the  coniiicting  rights  adjudi- 
cated. Howard  v.  Corey,  126  Ala.  283 
(1900). 

Arkansas:  In  Arkansas,  in  business 
corporations,  an  attachment  takes  pre- 
cedence by  statute,  unless  a  certificate 
of  transfer    is  filed   with    the  county 
clerk.  R.  S.,  §  970.  Under  the  Arkansas 
statute  it  is  immaterial  that  the  pur- 
chaser at  the  execution  sale  had  actual 
knowledge  that  the  debtor  had  trans, 
ferred   the  stock,  and  it  is  immaterial 
that  the  attachment  was  due  to  an  ar- 
rangement between  the  corporation,  a 
creditor,  anda  debtor.  Fahrney  u  Kelly, 
103  Fed.  Rep.  403  (1900).    The  Arkansas 
statute  requiring  transfers  of  stock  to  be 
recorded  with  the  county  clerk  does  not 
apply  to  a  pledge  of  stock.     Batesville, 
etc.  Co.  V.   Myer,  etc.  Co..  68  Ark.  115 
(1900).     In  the  case  of  Masury  v.  Arkan- 
sas Nat.  Bank,  93  Fed.  Rep.  603  (1899), 
the  court  in  a  carefully  reasoned  opin- 
ion decided  that  the  Arkansas  statute 
requiring  a  transfer  on  the  corporate 
books  as  against  creditors  of  the  vendor 
of  stock  did  not  apply  to  a  pledge  of 
stock,   even   though  such   pledge   was 
made  by  transferring  and   delivering 
the  certificate  of  stock  without  any  rec- 
ord whatsoever  on  the  corporate  books. 
The  court  stated  that  it  was  unneces- 
sary for  it  to  pass  on  the  question  of 
whether  public    notice  of  the  pledge 
given  at  the  execution  sale  had  any 


bearing  upon  the  rights  of  the  pur- 
chaser.    The  court  said:  "It  is  a   well 
known  fact  that  stock  certificates  fre- 
quently circulate  in  places  far  remote 
from  the  home  of  the  corporation  by 
which   they  were    issued,  that   in  all 
commercial  centers  they  are  commonly 
transferred  from  hand  to  hand  like  ne- 
gotiable paper,  and  that  they  are  hy- 
pothecated for  temporary  loans  by  a  sim- 
ple indorsement  and  delivery  thereof, 
the  latter  being  perhaps  the  most  com- 
mon use  to  which  such  securities  are 
put.     In  the  great  majority  of  cases, 
when  stock  is  merely  pledged  for  a  loan, 
no  record  of  the  transfer  is  made  on 
the  books  of  the  corporation,  and   in 
the  judgment  of  laymen  the  making 
of  such  a  record  seems  to  be  a  needless 
formality.     The  trend  of  modern  de- 
cisions has  been  to  encourage  the  free 
circulation  of  stock  certificates  in  the 
mode  last  indicated,  on  the  theory  that 
they  are  a  valuable  aid  to  commercial 
transactions,  and  that  the  public  inter- 
est is  best  subserved  by  removing  all 
restrictions    against  their  circulation, 
and  by  placing  them  as  nearly  as  pos- 
sible   on     the    plane    of    commercial 
paper." 

California:  In  this  state  the  statute 
prescribes  that  "  no  transfer  of  stock 
shall  be  valid  for  any  purpose  what- 
ever .  .  .  until  it  shall  be  entered  " 
on  the  corporate  books.  Under  this 
statute  an  attachment  takes  preced- 
ence over  an  unrecorded  prior  transfer 
of  a  certificate  of  stock.  See  Weston  v. 
Bear  River,  etc.  Co.,  5  Cal.  186  (1855); 
Farmers',  etc.  Bank  v.  Wilson,  58  Cal. 
600  (1881);  Naglee  v.  Pacific  Wharf  Co., 
20  Cal.  529  (1862).  The  case  of  Weston 
V.  Bear  River,  etc.  Co.,  6  Cal.  425  (1856), 
holds  that  one  who  purchases  stock  at 
an  execution  sale,  knowing  that  a  cer- 
tificate of  stock  had  already  been  sold 
or   pledged  by  the  execution   debtor. 


1014 


CH.  XXVII.] 


ATTACHMENT   AND    EXECUTION. 


[§  490. 


in  these  states,  however,  it  has  been  held  that,  if  the  person  who 
levies  the  attachment  or  purchases  at  the  execution  sale  has  notice 
that  the  defendant  debtor  had  transferred  his  certificate  before  the 


cannot  claim  a  precedence  over  a  sale 
of  the  certificates.  To  same  effect. 
People  V.  Elmore,  35  Cal.  653  (1868).  If 
the  unregistered  purchaser  buys  the 
judgment  obtained  under  the  attach- 
ment, the  latter  is  merged.  Strout  v. 
Natoma  Water,  etc.  Co.,  9  Cal.  78  (1858). 
A  sale  of  stock  after  an  attachment 
suit  has  failed,  and  before  that  decision 
is  reversed,  gives  the  purciiaser  good 
title.  Loveland  v.  Alvord,  etc.  Co.,  76 
CaL  563  (1888).  A  transaction  whereby 
a  debtor  delivers  certificates  of  stock 
to  its  creditor  in  pledge,  and  the  cred- 
itor immediately  returns  tliem  to  the 
debtor,  is  not  a  valid  pledge,  even 
though  the  debtor  told  the  corporate 
officers  of  the  pledge,  but  said  he  did 
not  want  the  transaction  to  appear  on 
the  books,  and  even  though  the  secre- 
tary makes  a  note  of  the  fact  on  the 
stubs  of  the  certificate-of-stock  book. 
An  execution  subsequently  levied  upon 
the  stock  as  the  property  of  the  debtor 
takes  precedence  over  the  alleged 
pledge.  McFall  v.  Buckeye,  etc.  Assoc, 
122  Cal.  468  (1898).  In  California  the 
purchaser  at  execution  sale,  without 
notice  of  a  prior  sale  of  the  certificates, 
is  entitled  to  the  stock  and  to  have 
new  certificates  issued  to  him,  even 
though  the  old  certificates  are  out- 
standing. West  Coast,  etc.  Co.  v.  Wulff, 
183  CaL  315  (1901). 

Colorado:  In  this  state  the  statute 
prescribes  that  "no  transfer  of  stock 
shall  be  valid  for  any  purpose  what- 
ever .  .  .  unless  it  shall  have  been 
entered  "  on  the  corporate  books  within 
sixty  days  from  the  date  of  such  trans- 
fer. See  Conway  v.  John,  14  Colo.  30 
(1890),  giving  a  preference  to  the  at- 
tachment. Cf.  Weber  v.  Bullock,  19 
Colo.  214  (1893 1,  holding  that  the  pledgee 
was  protected  where  he  had  requested 
transfer  and  been  wrongfully  refused 
by  the  corporation.    See  also  Supply 


Ditch  Co.  V.  Elliott,  10  Colo.  327  (1887). 
Where  a  statute  requires  a  transfer  on 
the  books  within  sixty  days,  and  the 
transfer  is  not  made  within  those  sixty 
days,  an  attaching  creditor  of  the  trans- 
ferrer takes  title,  even  though  he  knew 
of  the  unregistered  transfer.  First  Nat. 
Bank,  etc.  v.  Hastings,  7  Colo.  App.  129 
(1895).  Where  the  purchaser  of  a  cer- 
tificate of  stock  files  a  bill  in  equity  to 
enjoin  an  attaching  creditor  of  the 
transferee  from  selling  the  stock  on 
execution,  and  joins  the  corporatioh  as 
a  party  defendant,  and  in  the  suit  the 
court  decides  that  the  stock  was  origi- 
nally legally  issued,  this  decision  is 
binding,  even  though  it  was  not  raised 
by  the  pleadings.  Newman  v.  Bullock, 
23  Colo.  217  (1896). 

Connecticut:  See  Northrup  v.  Curtis, 
5  Conn.  246  (1824);  Oxford  Turn  p.  Co. 
V.  Bunnel,  6  Conn.  552  (1827);  Rich- 
mondville  Mfg.  Co.  v.  Prall,  9  Conn.  487 
(1833);  Button  v.  Connecticut  Bank,  13 
Conn.  493  (1840),  where  the  recording 
of  an  assignment  for  the  benefit  of 
creditors  in  the  probate  office  was  held 
insufficient  notice  to  the  company  as 
against  attachments;  Colt  v.  Ives,  31 
Conn.  25  (1862),  holding  that,  where  a 
transfer  is  wrongfully  refused  by  the 
clerk,  a  subsequent  attachment  does 
not  take  precedence.  The  United 
States  court  sitting  in  Connecticut 
held  in  the  case  of  New  York  Com.  Co. 
V.  Francis,  83  Fed.  Rep.  769  (1897),  where 
stock  in  a  Connecticut  corporation 
stood  on  the  books  of  the  corporation 
in  the  name  of  a  per.son  who  was  really 
but  a  nominal  holder  for  a  copartner- 
ship, that  an  attachment  levied  on  the 
stock  as  the  property  of  such  nominal 
holder  was  not  good  as  against  the  real 
owner.  The  court  distinguished  such 
a  case  from  a  case  where  a  purchaser 
allowed  the  stock  to  stand  in  the  name 
of  the  vendor.     The  court  sustained  a 


1015 


§  490.] 


ATTACHMENT    AND    EXECUTION. 


[CH.  XXVII. 


attachment  or  execution  was  levied,  the  purchaser  of  the  outstand- 
ing certificate  is  entitled  to  the  stock.  If  the  attaching  creditor 
has  notice  before  the  attachment  is  levied,  the  purchaser  may  ob- 


bill  in  equity  on  the  part  of  the  real 
owner  of  the  stock  to  enjoin  its  sale  on 
execution. 

Indiana:  In  this  state  the  statute 
prescribing  that  stock  should  be  trans- 
ferable on  the  corporate  books  "and 
not  otherwise  "  was  held  to  give  pre- 
cedence to  an  attachment  as  against 
unregistered  purchasers  of  certificates 
of  stock.  Coleman  v.  Spencer,  5  Blackf. 
197  (1839).  In  State  v.  Jeffersonville  Nat. 
Bank,  89  Ind.  303  (1883),  the  court  fell 
into  the  error  that  there  could  be  no 
pledgeT)f  stock  unless  there  was  a  trans- 
fer to  the  pledgee  on  the  books  of  the 
company.  Such  of  course  is  not  the 
law.  See  §  465,  supra.  Moreover,  the 
court  did  not  consider  the  federal  de- 
cisions on  this  subject,  although  na- 
tional-bank stock  was  involved.  How- 
ever, the  court  held  that  the  pledgee 
should  have  appeared  and  set  up  his 
claim. 

Iowa:  In  Iowa  the  statute  prescribes 
that  transfers  shall  not  be  valid  except 
as  between  the  parties  until  a  registry 
is  had  on  the  corporate  books.  The 
court  holds  that  this  statute  give  an  at- 
tachment priority  over  a  prior  unregis- 
tered sale  or  pledge  of  the  certificates 
of  stock.  Fort  Madison  Lumber  Co.  v. 
Batavian  Bank,  71  Iowa,  270  (1887).  This 
case  came  up  again  in  1889,  when  it  ap- 
pears that  after  tiie  decision  of  the 
lower  court  in  favor  of  the  pledgee,  and 
before  reversal  by  the  upper  court,  the 
lower  court  ordered  a  sale  and  the 
pledgee  bought  in  the  stock,  and  after- 
wards the  stock  became  worthless.  The 
court  now  holds  (77  Iowa,  393)  that  the 
pledgee  need  restore  only  the  stock, 
although  worthless.  In  Commercial 
Nat.  Bank  v.  Farmers',  etc.  Bank,  83 
Iowa,  103  (1891),  the  attaching  creditor 
took  no  title  because  a  statutory  notice 
as  to  attachments  was  not  given.  In 
Iowa  the  attaching  creditor  has  priority 

1 


even  though  he  knew  at  the  time  of  his 
attachmentthatthe  certificates  of  stock 
had  been  sold  by  his  debtor  and  that 
notice  thereof  had  been  given  to  the 
corporation.  Ottumwa,  eta  Co.  r.  Stod- 
ghill,  103  Iowa,  437  (1897).  Under  the 
Iowa  statute  a  transfer  of  stock  is  not 
effective  as  against  creditors,  even 
though  a  request  has  been  made  to  the 
corporation  to  transfer  the  stock,  if 
such  transfer  has  not  been  made,  and 
even  though  the  corporation  attached 
to  the  stub  of  the  certificate  an  acknowl- 
edgment of  the  assignment  of  the  cer- 
tificate, and  even  though  the  attaching 
creditor  knew  of  such  request.  Where 
the  Iowa  corporation  keeps  its  stock 
books  in  Boston,  a  transfer  on  such 
books  in  Boston  is  not  effective  as 
against  subsequent  attachments  on  the 
stock  in  Iowa,  unless  a  book  is  kept  in 
Iowa  showing  all  transfers  as  required 
by  the  statutes  of  Iowa.  Perkins  v. 
Lyons,  111  Iowa,  193  (1900).  Where  the 
purchaser  of  stock  at  execution  sale  ap- 
plies for  a  mandannis  to  compel  the 
corporation  to  transfer  the  stock  to  him, 
and  the  owner  of  the  stock  intervenes 
and  claims  that  the  debt  on  which  the 
stock  was  sold  had  been  paid,  and  asks 
for  a  delivery  of  the  certificates  to  the 
owner,  the  case  may  be  tried  in  equity. 
Croft  V.  Colfax,  etc.  Co.,  113  Iowa,  455 
(1901),  holding  also  that  even  though  a 
pledgee  brings  suit  on  a  debt  and  levies 
on  the  stock  he  does  not  thereby  lose 
his  rights  as  pledgea  Compare  §  476, 
supra.  The  purchaser  of  a  certificate 
of  stock  in  a  Missouri  corporation  may 
maintain  a  bill  in  equity  for  injunction 
to  prevent  the  corporation  transferring 
such  stock  to  one  who  purchased  the 
same  at  execution  sale  on  a  judgment 
obtained  against  the  registered  holder 
of  such  stock,  it  being  shown  that  such 
purchaser  at  execution  sale  took  with 
notice  of  the  prior  sale  of  the  certifi- 
016 


CH.  XXVII.] 


ATTACHMENT    AND    EXECUTION. 


[§  490. 


tain  a  permanent  injunction  against  the  attachment.^  Moreover, 
if  the  purchaser  at  the  execution  sale  has  notice,  he  may  be  pre- 
vented from  obtaining  registry  and  claiming  the  stock.^ 


oate.  Seligman  v.  St.  Louis,  etc.  R.  R., 
22  Fed.  Rep.  39  (1884).  The  federal  court 
sitting  in  Iowa  will  follow  the  Iowa  de- 
cisions construing  the  Iowa  statute  to 
the  efifect  that  a  purchaser  of  stock  at 
an  execution  sale  takes  title  as  against 
a  prior  transfer  of  the  certificate,  not 
recorded  on  the  corporate  books,  even 
though  the  creditor  and  purchaser  at 
the  sale  knew  that  the  certificate  had 
been  so  transferred.  Hair  v.  Burnell, 
106  Fed.  Rep.  280  (1900). 

Neio  Mexico:  The  statute  in  this  state 
is  su  bstantially  the  same  as  in  Cali  fornia, 
and  the  same  decision  is  made  by  the 
courts.  See  Lyndonville  Nat.  Bank  v. 
Folsom,  7  N.  M.  611  (1894). 

Vermont:  No.  103,  Laws  1884,  provides 
that  notice  to  the  corporation  of  a  trans- 
fer shall  be  the  same  as  a  transfer.  The 
decisions  in  this  state  are  to  the  effect 
that  the  attaching  creditor  takes  prece- 
dence over  an  unregistered  purchaser 
or  pledgee  of  the  certificates  of  stock. 
Sabin  v.  Bank  of  Woodstock,  21  Vt.  353, 
362  (1849);  Warren  v.  Brandon  Mfg.  Co. 
(1874),  cited  in  52  Vt.  75;  Cheever  v. 
Meyer,  52  Vt.  66  (1879),  the  court  hold- 
ing, however,  that  the  attachment  in 
this  case  did  not  take  precedence,  inas- 
much as  the  party  knew  about  the  prior 
sale  of  the  certificates  of  stock. 

For  a  lurid  and  yet  just  invective 
against  the  decisions  of  California,  In- 
diana, Colorado,  and  other  states  allow- 
ing attachments  in  those  states  to  have 
priority  against  a  prior  transfer  of  stock, 
see  12  Ry.  &  Corp.  L.  J.  145. 

1  Cheever  u  Meyer,  52  Vt.  66  (1879); 
Scripture  v.  Francestown  Soapstone 
Co.,  50  N.  H.  571  (1871);  Black  v.  Zach- 
arie,  3  How.  483  (1845).  A  purchaser  at 
an  execution  sale  takes  no  title  as 
iigainst  a  prior  purchaser  of  the  cer- 
tificate where  the  former  knew  of  the 
latter's  purchase  when  the  execution 
sale  took   place.     Wilson  v.  St.  Louis, 

10 


etc.  Ry.,  108  Mo.  588  (1891).  If  the  pur- 
chaser at  the  execution  sale  buys  with 
knowledge  that  the  judgment  debtor 
does  not  own  the  stock  at  the  time  of 
the  sale,  he  takes  no  title  to  the  stock. 
Blakeman  v.  Puget  Sound  Iron  Co.,  72 
Cal.  321  (1887).  Where  the  judgment 
creditor  at  the  time  of  levying  the  exe- 
cution knows  that  the  certificates  of 
stock  have  been  transferred  as  security 
for  a  debt,  its  purchase  of  the  stock  at 
the  sale  does  not  give  title  prior  to  the 
right  of  a  pledgee.  Selma,  etc.  Ca  v. 
Harris,  31  S.  Rep.  508  (Ala.  1902*. 

2  People  V.  Elmore,  35  Cal.  653  (1868); 
Weston  V.  Bear  River,  etc.  Co.,  6  Cal. 
425  (1856);  Van  Cise  v.  Merchants'  Nat. 
Bank,  4  Dak.  485  (1887);  Farmers'  Nat. 
Gold  Bank  v.  Wilson,  58  Cal.  600  (1881), 
holding  also  that  the  execution  sale  will 
not  be  enjoined,  since  the  claimant 
may  attend  and  give  notice  of  his  claim ; 
Newberry  v.  Detroit,  etc.  Mfg.  Co.,  17 
Mich.  141,  158  (1868),  per  Cooley,  J. 
Tlie  purchaser  of  a  certificate  of  stock 
in  a  Missouri  corporation  may  main- 
tain a  bill  in  equity  for  injunction  to 
prevent  the  corporation  transferring 
such  stock  to  one  who  purchased  the 
same  at  execution  sale  on  a  judgment 
obtained  agamst  the  registered  holder 
of  such  stock,  it  being  shown  that  such 
purchaser  at  execution  sale  took  with 
notice  of  the  prior  sale  of  the  certifi- 
cate. Seligman  v.  St.  Louis,  etc.  R.  R., 
22  Fed.  Rep.  39  (1884).  Where  the  cor- 
poration bought  for  itself  at  the  execu- 
tion .sale  and  had  notice,  it  is  liable  in 
tort  to  the  unregistered  purchaser  of 
the  old  certificates.  Bridgewater  Ii'on 
Co.  V.  Lissberger,  116  U.  S.  8  (1885). 
Jones  V.  Latham,  70  Ala.  164  (1881), 
holds  that,  if  the  execution  is  levied 
without  notice  of  an  unrecorded  trans- 
fer, a  subsequent  notice  before  the  sale 
to  the  purchaser  at  the  sale  is  ineffect- 
ual, and  does  not  affect  the  latter, 
17 


§  490.] 


ATTACHMENT    AND    EXECUTION. 


[CH. 


XXVI  Iv 


Actual  notice  of  an  unrecorded  pledge  of  the  certificate  is  suf- 
ficient, even  though  the  statute  requires  a  transfer  on  the  books  or 
the  filing  of  a  power  of  attorney.  The  compan}'^  has  actual  notice 
if  its  treasurer  learns  of  it  at  a  bank.* 

"Where  the  unregistered  transferee  of  the  certificate  of  stock  has 
notified  the  corporation  thereof  and  demanded  registry,  which  is 
not  granted,  any  attachment  or  execution  levied  subsequently  to 
the  improper  refusal  by  the  corporation  to  register  does  not  take 
precedence  over  such  purchaser.^  If  the  corporation  improperly 
refuses  to  allow  the  transferee  of  stock  to  register  his  transfer,  and 
the  stock  is  afterwards  attached  by  a  creditor  of  the  stockholder, 
the  transferee  may,  if  he  chooses,  hold  the  corporation  liable  in 
damages  for  its  refusal  to  allow  the  registry.^  Where  the  trans- 
feree of  the  certificate  has  repeatedly  demanded  a  transfer  of  the 
company,  but  been  refused,  a  subsequent  attachment  by  a  creditor 
of  the  transferrer  does  not  take  precedence,  even  though  the  stat- 
utes require  a  registry  within  sixty  days.*  It  is  proper  and  legal 
for  a  corporation  to  add  to  the  name  appearing  on  the  stock  cer- 
tificate the  words  "  as  pledgee  "  or  "  as  collateral  security,"  or  simi- 
lar words.^  "Where  the  unregistered  purchaser  is  cut  off  by  an  at- 
tachment, he  cannot  compel  a  purchaser  from  him  to  pay  for  the 
stock  which  is  made  valueless  bv  the  attachment.^ 


Where  the  creditor  of  the  vendor  knows 
of  the  pledge  of  the  certificates  at  the 
time  he  sells  the  stock  on  execution, 
lie,  the  creditor,  is  not  protected  in 
such  sale,  George,  etc.  Co.  v.  Range, 
etc.  Co.,  16  Utah,  59  (1897).  Where  a 
statute  requires  a  transfer  on  the  books 
within  sixty  days,  and  the  transfer  is 
not  made  within  those  sixty  days,  an 
attaching  creditor  of  the  transferrer 
takes  title,  even  though  he  knew  of  the 
unregistered  transfer.  First  Nat.  Bank, 
etc.  V.  Hastings,  7  Colo.  App.  129  (1895). 

iHotchkiss,    etc.  Co.  v.  Union  Nat. 
Bank,  08  Fed.  Rep.  76  (1895). 

2  Merchants'  Nat,  Bank  v.  Richards, 
6  Mo.  App.  454  (1879);  aff'd,  74  Mo.  77; 
Colt  V.  Ives,  31  Conn.  25  (1862);  State 
Ins.  Co.  V.  Gennett,  2  Tenn.  Ch.  100 
(1874);  Plymouth  Bank  v.  Bank  of  Nor- 
folk, 27  Mass.  454  (1830):  Sargent  v. 
Franklin  Ins.  Co.,  25  Mass.  90  (1829). 
See  also  §§  258,  382,  383,  supra;  and 
§  532,  infra.  Contra,  Fiske  v.  Carr,  20 
Me.  301  (1841).  But  not  if  the  trans- 
feree merely  sends  a  letter  to  the  cor- 


poration requesting  a  transfer,  without 
sending  the  evidences  of  his  title  and 
the  old  certificate.  Newell  v.  Willis- 
ton,  138  Mass.  240  (1885).  The  corpo- 
ration is  liable  in  damages  if  it  levies 
the  attachment  under  such  circum- 
stances. Sargent  v.  Franklin  Ins.  Co., 
25  Mass.  90  (1829).  Where  registry  is 
allowed  it  cuts  off  a  subsequent  at- 
tachment, even  though  the  transferee 
has  not  formally  accepted  the  stock  as 
required  by  statute.  Woodruff  v.  Har- 
ris, 11  U.  C.  (Q.  B.)  490  (1854).  A  memo- 
randum on  the  stock  book  that  the 
stock  has  been  transferred  as  collateral 
security  is  sufficient  to  give  the  trans- 
fer precedence  over  an  attachment. 
Moore  v.  Marshalltown,  etc.  Co.,  81 
Iowa,  45  (1890). 

3  Robinson  v.  National  Bank  of  New 
Berne,  95  N.  Y.  637  (1884).  See  also- 
Plymouth  Bank  v.  Bank  of  Norfolk,  27 
Mass.  454  (1830). 

4  Weber  v.  Bullock,  19  Colo.  214  (1893). 

5  See  §§  247,  466,  supra. 

«  Rock  V.  Nichols,  85  Mass.  342  (1862), 


1018 


CH.  XXVII.]  ATTACHMENT   AND    EXECUTION.  [§  490. 

It  may  be  added,  in  regard  to  this  whole  subject,  that  the  decis- 
ions and  statutes  of  the  various  states  show  clearly  that  public 
policy  and  the  legitimate  demands  of  trade  have  gradually  caused 
the  courts  and  legislatures  of  the  various  states  to  establish  the 
rule  that  a  sale  or  pledge  of  certificates  of  stock  has  precedence 
over  a  subsequent  attachment  levied  on  that  stock  for  the  debt  of 
the  vendor  or  pledgor,  and  that  the  failure  of  the  pledgee  or  pur- 
chaser of  the  certificate  to  obtain  a  registry  on  the  corporate  books 
is  not  fatal  to  his  interest  in  the  stock.  In  the  great  commercial 
centers,  where  certificates  of  stock  pass  from  hand  to  hand  and  are 
pledged  to  banks  and  financial  institutions  daily  to  secure  great 
sums  of  money,  the  necessity  of  such  a  rule  is  imperative;  ^  and  the 
fact  that  so  many  states  have,  by  legislative  enactment,  adopted 
the  New  York  rule,  while  no  state  has  changed  from  the  New 
York  rule  to  the  New  England  rule,  demonstrates  in  itself  the  jus 
tice  and  advisability  of  the  rule  which  prevails  in  New  York  state 

In  North  Carolina  -  and  North  Dakota  ^  the  question  of  the  prece 
dence  of  attachments  over  unregistered  sales  or  pledges  of  certifi 
cates  of  stock  has  arisen  only  in  an  incidental  way. 

§  491.  Shares  of  stoclc  cannot  he  subjected  to  the  payment  of  tht, 
stocliholder'' s  debts  by  the  process  of  garnishment  imless  the  statutes 
so  provide. —  The  process  of  garnishment  is  proper  only  where  a 
debt  is  due  from  a  third  person  to  the  defendant  debtor.  It  is  not 
a  proper  remedy  for  reaching  shares  of  stock  owned  by  the  debtor.^ 
The  corporation  owes  the  stockholder  no  debt,  and  by  no  fiction  of 
law  can  it  be  held  to  be  a  debtor  of  the  defendant  debtor.     Conse- 

1  Quoted  and  approved  in  Mapleton  court  followed  the  decisions  of  the  fed- 
Bank  V.  Standrod,  71  Pac.  Rep.  119  eral  courts  on  this  subject.  In  a  decis- 
(Idaho,  1902).  ion  in  Dakota  territory  the  court  held 

-  North  Carolina:    In    Morehead    v.  that  where  an  attaching  creditor  knew 

Western  N.  C.  R.  R.,  96  N.  C.  362  (1887),  of  the  priority  of  the  certificates  of 

there  is  a  dictum  to  the  effect  that  the  stock  he  was  not  protected.     Van  Cise 

attachment  has  precedence.  There  was  v.   Merchants'   Nat.   Bank,  4  Dak.  485 

no  proof  that  the  sale  of  the  certificate  (1887). 

was  prior  to  the  attachment,  and  more-        *  Planters',  etc.    Bank  v.  Leavens,  4 

over  the  court  said  that  the  purchaser  Ala.  (N.  S.)  753  (1843);  Foster  r.  Potter, 

of  the  certificate  might  thereafter  liti-  37  Mo.  525  (1866);  Ross  v.  Ross,  25  Ga. 

gate   his  rights  in  another  suit,  inas-  297  (1858),  where  the   court  said:  "Is 

much  as  he  was  not  a  party  to  the  suit  stock  in.  this  railroad  such  a  debt  (in- 

at  bar.  debtedness)  of  the  railroad  to  the  stock- 

^  North  Dakota:  In  Re  Krgus  Print-  holder  that  a  garnishing  creditor  of  the 

ing  Co.,  1  N.  Dak.  434,  444  (1891),  there  stockholder  can  enter  up  judgment  for 

is  a  dictum  giving  priority  to  an  attach-  it  against  the  railroad?    It  is  not;  it  is 

ment.     In  Doty  v.  First  Nat.  Bank,  3  N.  a  debt  which  the  railroad  dares  not  pay. 

Dak.  9  (1892),  the  court  declined  to  pass  even  to  the  stockholder  himself.     The 

upon   the  question,   inasmuch    as  na-  road  may  pay  him  dividends  on  it,  but 

tional-bank  stock  was  involved,  and  the  that  is  all." 

1019 


R  490.]  ATTACHMENT    AND    EXECUTION.  [CH.  XXVII. 

quently,  where  the  sheriff  levies  an  attachment,  not  according  to 
procedure  governing  attachments,  but  according  to  the  procedure 
of  garnishment,  the  whole  proceeding  is  void,  and  a  subsequent 
transfer  of  the  stock  by  the  defendant  debtor  is  valid.^  Stock 
held  as  collateral  is  property  subject  to  garnishment  under  the 
statutes  of  Texas.^  In  Michigan  garnishee  process  lies  against 
the  pledgee  of  stock  in  behalf  of  a  creditor  of  the  pledgor,  and  en- 
ables the  latter  to  reach  the  equity  in  the  stock.^  Garnishee  pro- 
cess lies  to  reach  a  stockholder's  interest,  under  the  statutes  of 
Nebraska,  especially  where  the  real  interest  of  a  registered  stock- 
holder is  different  from  his  apparent  interest.*  In  Pennsylvania 
the  equity  of  redemption  which  a  pledgor  has  in  stocks  which  he 
has  pledged  to  a  national  bank  may  be  reached  by  garnishment 
served  on  the  bank  after  judgment  against  the  debtor.  The  national 
bank  act  does  not  forbid  such  process.^  Even  though  garnishee 
process  has  been  served  upon  the  pledgee  of  stock  for  a  debt  of  the 
pledgor,  yet  the  pledgor  and  pledgee  may  agree  that  the  stock  shall 
belong  to  the  pledgee  in  cancellation  of  the  debt.  Such  agreement 
is  not  illegal  if  the  debt  was  the  full  value  of  the  stock  at  the  time; 
and  even  though  subsequently  the  pledgee,  upon  selling  the  stock 
for  more  than  the  debt,  pays  the  surplus  to  the  pledgor,  the  cred- 
itor issuing  the  garnishee  process  cannot  complain.^  Garnishee  pro- 
ceediniis  against  a  stockholder's  interest  in  stock  which  has  been 
pooled  and  has  also  been  pledged  does  not  affect  such  pool  or 
pledge,  but  is  made  subject  to  them  if  they  are  legal.'^  Certificates 
of  stock  held  by  one  party  and  belonging  to  another  cannot  be 
reached  by  garnishee  process  in  behalf  of  a  creditor  of  the  owner 
of  the  stock.  The  certificate  is  merely  "  like  a  title  deed  or  a  bill 
of  sale,  which  is  not  the  property  itself,  but  simply  the  evidence  of 
title  to  property."  ^ 

1  Mooar  v.  Walker,  46  Iowa,  164  (1877).        3  old  Second  Nat.  Bank  v.  Williams, 
Cf.  Chesapeake,  etc.  R.  R.  v.  Paine,  29     112  Mich.  564  (1897).     ■ 

Gratt.  (Va.)  502  (1877).     Garnishee  pro-  *  Farmers',  etc.    Bank  v.  Mosher,  88 

cess  must  conform  to  the  statute  rela-  N.  W.  Rep.  552  (Neb.  1901). 

tive  to  attachments,  and  if  served  on  ^  Commonwealth    v.    Chestnut,    etc. 

the  holders  of  the  certificates  instead  of  Bank,  189  Pa.  St,  606  (1899). 

on   the  corporation   it    is    ineffectual.  <>  Steiner  v.  First,  etc.  Bank,  127  Ala. 

Younkin   v.   Collier,  47  Fed.    Rep.    571  595  (1900). 

(1891).  7  Hardin  v.  White,  etc.  Co.,  26  Wabli. 

2  Smith  V.  Traders'  Nat.  Bank,  74  Tex.  583  (1901). 

457(1889);  Harreli  u.  Mexico  Cattle  Co.,        8  Packard,  etc.  Co.  v.  Laev.lOO  Wi.s. 
73  Tex.  612  (1889).  644  (1898). 

1020 


CHAPTER  XXYIIL 


CONSTITUTIONALITY  OF  AMENDMENTS  TO  CHARTERS  — RIGHT  OF  A 

STOCKHOLDER  TO  OBJECT. 


§  492, 


493. 


A  corporate  charter  is  a  contract 
between  three  parties  —  the 
state,  the  corporation,  and  the 
stockholders. 

The  charter  as  a  contract  be- 
tween the  corporation  and  the 
stockholders  —  Amendaipntof 
charter  by  majority  of  stock- 
holders as  allowed  by  statute 
existing  at  time  of  incorpora- 
tion. 

Charter  as  a  contract  between 
the  state  and  the  corporation. 
495,  496.  Charter  as  a  contract  be- 
tween the  state  and  the  stock- 
holders. 
497.  Charter  amendments  imposed 
upon  the  stockholders. 


494. 


498.  Charter  amendments  offered  toi 

the  stockholders. 

499.  Auxiliary  and  incidental  amend- 

ments are  constitutional,, 
though  some  of  the  stock- 
holders dissent. 

500.  Material  amendments  offered  to 

the  stockholders  can  be  ac- 
cepted only  by  a  unanimous 
vote. 

501.  Amendments  under  the  reserved 

power  of  the  state  to  alter  or 
amend  the  charter. 

503.  Dissenting  stockholder's  remed}' 
against  an  illegal  amendment. 

503.  Assent  and  acquiescence  as  a 
bar  to  the  stockholder's  rem- 
edy. 


§  492.  A  corporate  charter  is  a  contract  hetiveen  three  parties  — 
the  state,  the  corporation,  and  the  stocldiolders. —  The  charter  of  a. 
corporation  having  a  capital  stock  is  a  contract  between  three  par- 
ties, and  forms  the  basis  of  three  distinct  contracts.^  The  charter 
is  a  contract  between  the  state  and  the  corporation;  second,  it  is  a 
contract  between  the  corporation  and. the  stockholders;  third,  it  is 
a  contract  between  the  stockholders  and  the  state. 

§  493.  The  charter  as  a  contract  hetiveen  the  corporation  and  the 
stocliholders  —  Amendment  of  charter  hij  majority  of  stoclch aiders 
as  alloiced  hy  statute  existing  at  time  of  incorporation. —  That  the 
charter  is  a  contract  between  the  corporation  and  the  stockholdeVs 
has  within  the  last  fifty  years  been  firmly  established,  and  is  now 


1  See  State  Bank  v.  Knoop,  16  How. 
369  (1853);  Port  Edwards,  etc.  Ry.  v. 
Arpin,  80  Wis.  214  (1891);  Northern  R. 
R  V.  Miller,  10  Barb.  260  (1851);  Cooley, 
Const.  Lim.  (5th  ed.),  p.  337,  where  the 
learned  author  says:  "Those  charters 
of  incorporation,  however,  which  are 
granted,  not  as  a  part  of  the  machinery 
of  the  government,  but  for  the  private 
benefit  or  purposes  of  the  corporators, 
stand  upon  a  different  footing,  and  are 
held  to  be  contracts  between  the  legis- 


lature and  the  corporators,  having  for 
their  consideration  the  liabilities  and 
duties  which  the  corporators  assume 
by  accepting  them;  and  the  grant  of 
the  franchise  can  no  more  be  resumed 
by  the  legislature,  or  its  benefits  dimin- 
ished or  impaired  without  the  consent 
of  the  grantees,  than  any  other  grant  of 
property  or  valuable  thing,  unless  the 
right  to  do  so  is  reserved  in  the  charter 
itself." 


1021 


-g  494.]  AMENDxMENTS    TO    CHAIiTKKS.  [CH.  XXVIII. 

unquestioned  law.  The  cases  of  Natusch  v.  Irving '  in  England, 
and  Livingston  v.  Lynch  ^  in  this  country,  followed  by  a  long  line 
of  supporting  decisions,  distinctly  hold  that  the  charter  is  a  con- 
tract prescribing  to  the  corporation  that  it  shall  not  attempt  to 
materially  change,  extend,  alter,  or  abandon  the  particular  business 
which  that  charter  authorizes  the  corporation  to  do.  Any  attempt 
of  the  corporation  to  make  such  a  change,  extension,  alteration,  or 
.abandonment  of  that  business  is  called  an  ultima  vii^es  act.  It  is  an  act 
which  a  single  stockholder  may  prevent  by  injunction  or  set  aside 
by  a  suit  in  equity.  This  subject,  however,  is  fully  treated  in 
another  part  of  this  work.'  Where  the  statutes  in  existence  at  the 
time  of  incorporation  provide  for  the  extension  of  corporate  char- 
ters a  stockholder  cannot  prevent  the  corporation  from  extending 
its  existence  in  accordance  with  such  statutes.*  Under  a  statute 
authorizing  the  stockholders  by  an  amended  certificate  to  change 
the  objects  of  the  corporation,  the  certificate  may  be  amended  so 
as  to  give,  a  corporation  ])Ower  to  purchase  stock  in  other  corpora- 
tions.* A  holder  of  preferred  stock  may  prevent  a  reduction  of  the 
preferred  dividend  by  an  amendment  of  the  certificate  of  incor- 
poration, even  though  the  statutes  of  the  state  at  the  time  of  the 
organization  of  the  company  authorize  the  certificate  of  corpora- 
tion to  be  amended  by  a  certain  vote.  Such  reduction  may  be 
enjoined.^ 

§  494.  Charter  as  a  contract  hetween  the  state  and  the  corpora- 
tion.—  As  between  the  state  and  the  corporation  the  corporate 
charter  is  a  contract,  protected  by  that  provision  of  the  United 
States  constitution  which  prohibits  a  state  from  passing  any  law 
which  will  impair  the  obligation  of  the  contract.''     Hence  it  is 

iThis  case,  decided  by  Lord  Eldon  in  established.     As  early  as  1806  a  court 

1824,  is  reported  in  Gow  on  Partnership,  said:     "We  are  also  satisfied  that  the 

.39,8;  also  2  Cooper's  Ch.  858.  rights  legally  vested  in  this  or  in  any 

24  Johns.  Ch.  573(1820);  Clearwater  corporation   cannot   be    controlled    or 

V.  Meredith,  1  Wall.  25  (1863) ;  Harding  destroyed  by  any  subsequent  statute, 

V.  American,  etc.  Co.,  182  111.  551  (1899).  unless  a  power  for  that  purpose    be 

3  See  ch.  XL,  infra.  reserved  to  the  legislature  in  the  act  of 

4  Smith  r.  Eastwood,  etc.  Co.,  58  N.  J.  incorporation."  Wales  v.  Stetson,  2 
Eq.  331  (1899).  Mass.  143  (1806).     In  England  the  un- 

&  Meredith  v.  New  Jersey,  etc.  Co.,  59  written  constitution  is  not  superior  to 

N.  J.  Eq.  257  (1899);  aflf'd,  60  N.  J.  Eq.  the  powers  of  parliament,  and  conse- 

445  (1899).  quently  the  rule  is  different.     In  that 

"Pronik  v.  Spirits,  etc.  Co.,  58  N.  J.  country,  as  is  said  by  Lord  Coke,  "the 

Eq.  97  (1899).  power  and  jurisdiction  of  parliament  is 

■?  This  rule  of  law,  first  enunciated  in  so  transcendental  and  absolute  that  it 

the    case    of    Dartmouth    College    v.  cannot  be  controlled  or  confined,  either 

Woodward,  4  Wheat.   518    (1819),    by  for  causes   or  purposes,    within    any 

Marshall,  C.  J.,  has  become  thoroughly  bounds."    Stevens  v.  Rutland,  etc.  R 

1022 


■CH.  XXVIII.] 


AMENDMENTS    TO    CHARTERS. 


[§  49i. 


beyond  the  power  of  the  state  to  repeal  or  materially  annul  such  a 
corporate  charter,  unless  the  power  of  amendment  and  repeal  has 
been  expressly  reserved  by  the  state,  or  unless  all  the  parties  to  the 
contract  consent  to  the  change.  All  the  franchises,  privileges,  and 
express  and  implied  powers  necessary  and  essential  to  carrying  out 
the  corporate  purposes  are  protected  by  this  contract.^  This 
branch  of  the  law  is  important  to  stockholders  in  cases  where  the 
corporation  neglects  or  refuses  to  protect  itself  against  legislative 
amendments  or  repeals  violating  the  charter  contract  between  the 
corporation  and  the  state.  In  such  cases  the  stockholder  ma}'  en- 
join or  remed}'-  the  wrong  by  bringing  an  action  in  place  of  and 
on  behalf  of  the  corporation,  making  it  a  party  defendant,  to- 
gether with  the  parties  who,  under  the  authority  of  the  state,  have 
violated  the  contract.^  A  stockholder's  action  to  prevent  the  pay- 
ment of  a  tax  levied  upon  the  corporation  in  violation  of  a  statu- 
tory exemption  from  taxation  is  an  action  of  this  character.'  Cor- 
porate charters,  however,  are  subject  to  constitutional  provisions 
enacted  subsequently  to  the  granting  of  the  charters,  unless  there 
is  a  clear  contract  to  the  contrary.'*  Although  a  special  charter 
gives  the  right  to  a  railroad  corporation  to  consolidate  with  other 
roads,  yet  a  subsequent  general  statute  may  take  away  this  power 
except  so  far  as  the  same  has  been  already  exercised.^    A  general 


R,  29  Vt  545  (1851);  Thorpe  v.  Rut- 
land, etc.  R.  R,  27  Vt.  140  (1857);  Dart- 
mouth College  V.  Woodward.  4  Wheat. 
518,  643  (1819).  Consequently,  the  Eng- 
lish authorities  are  of  little  use  in  this 
chapter. 

1  State  Bank  v.  Knoop,  16  How.  369 
(1853);  Thorpe  r.  Rutland,  etc.  R  R.  27 
Vt.  140  (1857),  per  Redfield,  C.  J.  The 
latter  case  discusses  the  nature  of  the 
privilege  thus  pi-otected. 

2  Greenwood  v.  Union  Freight  R  R, 
105  U.  S.  13  (1881).  See  also  g§  900,  901, 
infra,  on  this  subject.  The  character 
of  such  an  action,  also  the  parties, 
pleadings,  and  rules  of  relief,  are  ex- 
plained in  Part  IV,  infra. 

3  Dodge  V.  Woolsey,  18  How.  331 
(1855);  State  Bank  v.  Knoop,  16  How. 
369  (1853).  See  also  Wilmington  R  R 
V.  Reid,  13  Wall.  264  (1871);  Delaware 
R  R  Tax.  18  Wall.  206  (1873).  See  also 
S  562,  infra. 

*  Pennsylvania  R  R.  v.  Miller,  132  U. 
S.  75  (1889;.    Where  by  an  amendment 


an  insurance  charter  is  changed  into  a 
banking  charter,  an  exemption  from 
taxation  may  be  lost  thereby  by  rea- 
son of  a  constitutional  provision  en- 
acted after  the  original  charter  was 
granted  but  before  the  amendment 
was  granted.  Memphis  City  Bank  v. 
Tennessee,  161  U.  S.  186  (1896). 

sPearsall  v.  Great  Northern  Ry.,  161 
U.  S.  646  (1896).  Mr.  Justice  Brown's 
opinion  in  this  case  contains  a  clear  ex- 
position of  the  law  on  this  subject,  and 
on  the  various  and  far-reaching  appli- 
cations and  restrictions  of  the  Dart- 
mouth College  case.  In  this  case  the 
court  spoke  of  the  Dartmouth  College 
case  as  follows  (p.  660):  "The  doctrine 
of  this  case  has  been  subjected  to  more 
or  less  criticism  by  the  courts  and  the 
profession,  but  has  been  re-affirmed 
and  applied  so  often  as  to  have  become 
firmly  established  as  a  canon  of  Ameri- 
can jurisprudence."  The  statute  au- 
thorizing a  corporation  to  amend  its 
articles  without  changing  substantially 
1023 


^§  495,  496.] 


AMENDMENTS    TO    CHARTERS. 


[CH.  XXVIII. 


act  prohibiting  a  municipality  from  granting  a  ferry  right  within 
a  half  mile  of  an  existing  ferry  does  not  constitute  a  contract  with 
any  particular  ferry,  but  on  the  contrary  may  be  repealed.^  A  city 
ordinance  passed  under  the  authorization  of  a  statute  is  a  law, 
within  the  meaning  of  the  constitution  of  the  United  States  pro- 
hibiting any  law  that  impairs  the  validity  of  the  contract.^  "Where 
an  exclusive  grant  for  a  bridge  by  the  legislature  is  extended,  the 
extension  is  not  a  contract,  being  without  consideration.^  An 
amendment  exempting  a  corporation  from  taxation  may  be  re- 
pealed, there  being  no  consideration  for  the  contract.*  After  a 
foreclosure  sale  the  legislature  cannot  pass  a  law  compelling  the 
purchaser  to  pay  certain  of  the  old  debts,  even  though  the  pur- 
chaser is  a  railroad  corporation,  which  was  organized  under  a  spe- 
cial charter  for  the  purpose  of  making  such  purchase.^  A  statute 
cannot  turn  over  the  property  of  an  educational  institution  to  an- 
other educational  institution.*^ 

§§  495,  496.  Charter  as  a  contract  hetween  the  state  and  the  stock- 
holders.— As  between  the  state  and  the  stockholders,  also,  the  cor- 
porate charter  is  a  contract  protected  by  the  United  States  consti- 
tution.^    In  consequence  thereof  the  state  cannot  materially  amend 


its  purposes  does  not  authorize  a  gas 
and  power  company  to  change  itself 
into  a  street  railway  company.  State 
V.  Taylor,  55  Ohio  St.  61  (1896). 

1  Williams  v.  Wingo,  177  U.  S.  601 
(1900). 

2  Pike's  Peak,  etc.  Co.  v.  Colorado 
Springs,  105  Fed.  Rep.  1  (1900). 

3  Robinson  v.  Lamb,  126  N.  C.  492 
(1900). 

■*  Manistee,  etc.  Co.  v.  Commissioner 
of  Railroads,  118  Mich.  349  (1898).  An 
amendment  which  grants  to  a  street 
railway  company  an  exclusive  right 
to  certain  streets  may  be  amended  or 
repealed,  even  though  it  was  granted 
at  the  session  of  the  legislature  which 
granted  the  original  charter.  Philadel- 
phia, etc.  Ry.'s  Appeal,  102  Pa.  St.  123 
(1883).  See  also  Johnson  v.  Crow,  87  Pa. 
St.  184  (1878);  Norwich  Gas,  etc.  Co.  v. 
Norwich,  etc.  Co.,  25  Conn.  19  (1856). 

5  Woodward  v.  Central,  etc.  Ry.,  63 
N.  E.  Rep.  1051  (Mass.  1902). 

6  Ohio  V.  Neflf,  52  Ohio  St.  375  (1895). 
See  also  §  500,  iyifrcu 

7  "  A  charter  of  incorporation  granted 

10 


by  a  state  creates  a  contract  between 
the  state  and  the  corporators  which  the 
state  cannot  violate."  This  has  been 
held  so  often  by  this  court  that  it  is  a 
"  work  of  supererogation  "  to  repeat  it. 
Willmington  R.  R.  v.  Reid,  13  Wall.  264, 
(1871).  It  "  has  been  the  settled  law  of 
this  court  since  the  decision  in  the 
Dartmouth  College  case."  Delaware  R. 
R.  Tax,  18  Wall.  206  (1873).  To  the 
same  effect,  see  Zabriskie  v.  Hacken- 
sack,  etc.  R.  R.,  18  N.  J.  Eq.  178  (1867); 
Lothropr.  Stedman,  42  Conn.  583(1875); 
Stevens  v.  Rutland,  etc.  R.  R.,  29  Vt. 
545  (1851).  "  An  act  granting  corporate 
privileges  to  a  body  of  men  is,  when 
accepted,  a  contract  between  the  state 
and  the  corporators.  ...  It  is  sustained 
by  everything  that  we  are  bound  to  re- 
gard as  authority," —  by  the  courts,  by 
the  opinion  of  the  legal  profession,  and 
by  the  acquiescence  of  the  people. 
Erie,  etc.  R.  R.  v.  Casey,  26  Pa.  St.  287 
(1856),  per  Jeremiah  Black,  J.  See  also 
Sinking  Fund  Cases,  99  U.  S.  700  (1878). 
"That  an  act  of  incorporation  is  a  con- 
tract between  the  state  and  the  stock- 
24 


CH.  XXVIII.] 


AMENDMENTS    TO    CHARTERS. 


[§  497. 


the  charter,  except  by  the  unanimous  consent  of  the  stockholders, 
unless  the  power  of  amendment  is  expressly  reserved  by  the  state 
at  the  time  "of  granting  the  charter.  It  is  this  contract  which  con- 
stitutes the  subject  of  the  present  chapter. 

§  497.  Charter  amendments  imposed  upon  the  stockholders. — 
The  right  of  the  legislature  to  amend  a  charter  against  the  will  of 
the  stockholders  has  been  the  subject  of  much  litigation.  Such 
amendments  are  clearly  divisible  into  two  kinds.  The  first  are 
those  which,  by  their  terms,  are  absolute  and  compulsory,  and 
become  a  part  of  the  charter  irrespective  of  the  action  or  willing- 
ness of  the  stockholders  to  accept  them.  Such  amendments, 
excepting  those  which  are  made  as  police  regulations,^  are  uncon- 
stitutional and  void,2  unless  made  under  a  reserved  power  to 
amend.'  Of  such  a  kind  are  amendments  repealing  an  exemption 
of  stockholders  from  taxation.^  The  legislature  cannot  compel  a 
turnpike  company  to  build  a  bridge  beyond  the  turnpike  as  a  con- 
dition of  continuing  to  exercise  its  franchise.^  Where  a  foreign 
railroad  company  has  extended  its  lines  into  a  state  under  a  statute, 
the  legislature  of  the  latter  state  cannot  afterwards  require  it  to 
become  a  domestic  corporation.     Such  a  statute  impairs  the  obliga- 


holders  is  held  for  settled  law  by  the 
federal  courts  and  by  every  state  court 
in  the  Union.  All  the  oases  on  tlie  sub- 
ject are  saturated  with  this  doctrina 
It  is  sustained  not  by  a  current  but  by 
a  torrent  of  authorities.  No  judge  who 
has  a  decent  respect  for  the  principle 
of  siare  decisis  —  that  great  principle 
which  is  the  sheet-anchor  of  our  juris- 
prudence —  can  deny  that  it  is  immov- 
ably established."  "If  anything  is  set- 
tled it  is  this  rule  of  construction  that 
a  corporation  takes  nothing  by  its  char- 
ter except  what  it  is  plainly,  expressly, 
and  unequivocally  granted."  Per  Black, 
J.,  Bank  of  Pennsylvania  v.  Common- 
wealth, 19  Pa.  St.  144  (1852). 

1  See  §  900,  infra. 

2  Such  as  an  amendment  changing 
the  route  and  terminus.  Ames  v.  Lake 
Superior,  etc.  R.  R,  21  Minn.  241  (1875). 
A  corporate  charter  right  to  take  a  cer- 
tain rate  of  interest  is  a  contract  and  is 
protected  against  subsequent  legisla- 
tion. Hazen  v.  Union  Bank,  1  Sneed 
(Tenn.),  115  (1853).    See  also  dictum  in 


Philadelphia,  etc.  Ry.'s  Appeal,  102  Pa. 
St.  123  (1883),  that  an  amendment  to  a 
charter  which  enlarges  it  without  im- 
posing any  new  or  additional  burden 
upon  it  is  a  mere  license  and  may  be 
revoked,  citing  Johnson  v.  Crow,  87  Pa. 
St.  184(1878);  Christ  Church  n  Phila- 
delphia County,  24  How.  300  (1860). 
The  legislature  may  subsequently  au- 
thorize the  sale  of  the  corporate  fran- 
chises, etc.,  to  pay  debts.  Louisville, 
etc.  Co.  V.  Ballard,  2  Meta  (Ky.)  165 
(1859). 

3See§501,  infra. 

*  Thus,  a  statute  authorizing  the  tax- 
ation of  stock  which  by  the  corporate 
charter  is  exempt  is  unconstitutional. 
Gordon  v.  Appeal  Tax  Court,  3  How. 
133  (1845);  Farrington  v.  Tennessee, '95 
U.  S.  679  (1877).  An  exemption  from 
taxation  which  is  a  gift  may  be  re- 
pealed. Philadelphia  v.  Pennsylvania 
Hospital,  134  Pa.  St.  171  (1890).  See 
§  568,  infra. 

5  State  V.  Lebanon,  eta  Co.,  61  S.  W. 
Rep.  1096  (Tenn.  1900). 


(65) 


1025 


§  497.] 


AMENDMENTS    TO   CHARTERS. 


[CH.  XXVIII. 


tion  of  the  contract.^  Stockholders  sued  under  the  Minnesota  stat- 
ute cannot  question  the  amount  of  the  assessment  which  has  been 
levied  by  the  court.  A  statute  to  that  effect  is  not  unconstitu- 
tional.^ An  amendment  to  a  banking  act  whereby  a  lien  is  given 
to  banks  on  stock  of  its  stockholders  for  debts  due  the  bank  from 
them  does  not  apply  to  stock  already  issued.^  The  New  Jersey 
statute  prohibiting  suits  at  law  to  enforce  the  statutory  liability  of 
stockholders  in  foreign  corporations,  and  prescribing  that  the  remedy 
shall  be  in  equity  only,  is  unconstitutional  so  far  as  liabilities  ex- 
isting at  the  time  of  the  passage  of  the  statute  are  concerned.^  The 
legislature  may  authocize  the  statutory  liability  of  stockholders  to 
be  enforced  by  a  receiver,  even  in  corporations  which  have  passed 
into  a  receiver's  hands  prior  to  the  enactment  of  the  statute.*  But 
where,  by  statute,  every  creditor  has  the  right  to  bring  suit  to  en- 
force the  stockholders'  liabilit}^  a  statute  taking  away  this  right 
and  ofivinfir  it  to  a  receiver  is  unconstitutional.**  So,  also,  a  statute 
passed  subsequently  to  the  granting  of  a  charter,  and  increasing 
the  liability  of  a  stockholder  on  his  stock  for  the  debts  already 
incurred,  is  unconstitutional  and  void  unless  the  legislature  has  re- 
served the  right  to  alter  or  amend  the  charter.^     Under  such  a 


1  Commonwealth  v.  Mobile,  etc.  R  R., 
64  S.  W.  Rep.  451  (Ky.  1901). 

2  Straw,  etc.  Co.  v.  Kilbourne,  etc.  Co., 
80  Minn.  125  (1900). 

3  Southern,  etc.  Co.  v.  Fidelity,  etc. 
Co.,  105  Ga.  487  (1898). 

4  Western,  etc.  Bank  v.  Reckless,  96 
Fed.  Rep.  70  (1899). 

5  Persons  v.  Gardner,  43  N.  Y.  App.  Div. 
490  (1899). 

BWoodworth  v.  Bowles,  61  Kan.  569 
(1900).    See  §  218,  supra. 

'  It  certainly  is  as  regards  corporate 
debts  already  incurred.  Commonwealth 
V.  Cochituate  Bank,  85  Mass.  42  (1861); 
Wheeler  v.  Frontier  Bank,  23  Me.  308 
(1843).  And  has  been  held  to  be  so  as 
regards  future  corporate  debts.  Ireland 
V.  Palestine,  etc.  Co.,  19  Ohio  St.  369 
(1869).  Contra,  Stanley  v.  Stanley,  26 
Me.  191  (1846);  Coffin  v  Rich,  45  Me.  507 
(1858);  Shufeldtu.  Carver,  8  111.  App.  545 
(1881);  Fogg  V.  Sidwell.  8  111.  App.  551 
(1881);  Child  v.  Coffin,  17  Mass.  64  (1820). 
dictum;  Gray  u  Coffin,  63  Mass.  192,  200 
(1852);  Hathorn  v.  Calef,  53  Me.  471 
(1866).    See  Weidenger  v.  Spruance,  101 


111.  278  (1881).  And  it  is  said  that  a 
stockholder  may  restrain  by  a  proper 
proceeding  the  acceptance  by  the  cor- 
poration of  an  unconditional  amend- 
ment to  the  charter  by  which  the  lia- 
bility of  the  stockholders  is  increased. 
Owen  V.  Purdy,  12  Ohio  St.  73  (1861); 
Fry  V.  Lexington,  etc.  R.  R.,  2  Mete. 
(Ky.)  314  (1859).  Cf.  Bailey  v.  HoUister, 
26  N.  Y.  112  (1862);  Thompson  v.  Guion, 
5  Jones,  Eq.  (N.  C.)  113  (1859);  Mowrey 
V.  Indianapolis,  etc.  R.  R.,  4  Biss.  78 
(1866);  S.C.,  17Fed.  Cas.  930;  Lauman  u 
Lebanon  Valley  R.  R,  30  Pa.  St.  42  (1858); 
Hamilton,  etc.  Ins.  Co.  v.  Hobart,  68 
Mass.  543  (1854):  Gardner  v.  Hamilton 
Mut.  Ins.  Co..  33  N.  Y.  421  (1865).  Where 
the  incident  of  individual  liability  was 
repealed  by  an  amendment  to  the  state 
(Missouri)  constitution  after  the  debt 
accrued,  but  before  the  increase  of  stock 
was  issued,  the  holders  of  the  new  stock 
were  held  not  liable  under  the  former 
constitution.  Ochiltree  v.  Railroad  Co., 
21  Wall.  249  (1874).  A  statute  render- 
ing directors  liable  may  apply  to  rent 
becoming  due   thereafter   on  a  lease 


1026 


•CH.  XXVIII.] 


AMENDMENTS   TO    CHARTERS. 


[§  ^97. 


reservation  the  statute  is  legal  and  binding,  although  there  are 
limits  even  to  this  reserved  power,  as  will  be  shown  hereafter.^  A 
statute  which  authorizes  an  additional  assessment  upon  existing 
paid-up  stock  is  unconstitutional^ 

A  statute  imposing  additional  liability  upon  the  stockholders 
cannot  be  repealed  so  as  to  affect  those  who  were  corporate  cred- 
itors previously  to  the  repeal.^  But,  whenever  the  statute  impos- 
ing the  liability  is  penal  in  its  nature,  a  repeal  of  it,  even  so  as  to 
effect  existing  debts,  is  constitutional  at  any  time  before  the  cor- 
porate creditor  obtains  judgment  on  his  claim.*  An  important  ex- 
ception to  the  general  rules  stated  above  exists  in  regard  to  amend- 
ments under  the  police  power  of  the  state.  The  state  may  amend 
the  charter  of  a  railroad  corporation  by  reducing  its  traffic  charges, 
requiring  it  to  build  fences,  and  in  various  other  ways  for  the  pro- 
tection of  the  public.®   An  amendment  to  a  charter  forbidding  any 


made  before  tlie  passage  of  such  statute. 
Steiffel  V.  Tolhurst,  67  N.  Y.  App.  Div. 
521  (1902 . 

1  See  §  501,  infrcu 

2  Enterprise,  etc.  Co.  v.  Moffitt,  58  Neb. 
'642  (1899). 

» Hawthorne  r.  Calef,2  Wall.  10(1864); 
Conant  v.  Van  Shaick,  24  Barb.  87 
(1857);  Norris  v.  Wrenschall,  34  Md.  492 
(1871);  Provident  Sav.  Inst.  v.  Jackson 
Place,  etc.  Co.,  52  Mo.  552  (1873);  St. 
Louis,  etc.  Co.  v.  Harbine,  2  Mo.  App. 
134  (1876);  Central,  eta  Assoc  v.  Ala- 
bama, etc.  Ins.  Co.,  70  Ala.  120  (1881); 
Woodruff  V.  Trapnall,  10  How.  190 
(1850);  McDonnell  v.  Alabama,  etc.  Ins. 
Co..  85  Ala,  401  (1888).  See  also  Story 
V.  Furman,  25  N.  Y.  214  (1862);  Roches- 
ter V.  Barnes,  26  Barb.  657  (1858);  Sink- 
ing Fund  Cases,  99  U.  S.  700  (1878).  Cf. 
Jerman  v.  Benton,  79  Mo.  148  (1883); 
AVoodhouse  v.  Commonwealth  Ins.  Co., 
54  Pa.  St.  307  (1867);  Re  State  Ins.  Co., 
14  Fed.  Rep.  28  (1882);  Palfrey  v.  Pauld- 
ing, 7  La.  Ann.  363  (1852);  Re  Telegraph 
Constr.  Co.,  L.  R.  10  Eq.  384  (1870); 
Cooper  V.  Frederick,  9  Ala.  (N.  S.)  738 
(1846);  Re  Credit  Foncier,  L.  R.  11  Eq. 
356  (1871);  Coffin  v.  Rich,  45  Me.  507 
(1858).  A  statute  repealing  a  personal 
liability  of  stockholders  is  unconstitu- 
tional as  to  existing  creditors  to  the 
•extent  only  of  such  liability,  and  not  a& 


to  increased  capital  stock  after  the  re- 
peal. Barton,  etc.  Bank  v.  Atkins,  72 
Vt.  33  (1899).  Registered  transferees  are 
liable  the  same  as  their  transferrers, 
even  though  before  the  transfer  the 
statutory  liability  was  decreased  by 
statute.  The  liability  to  old  creditors 
follows  the  stock.  National  Com.  Bank 
V.  McDonnell,  92  Ala.  387  (1890).  A 
statute  giving  the  corporation  a  sum- 
mary remedy  against  a  stockholder  for 
non-payment  of  calls  may  be  repealed. 
Ex  parte  Northeast,  etc.  R  R.,  37  Ala, 
679  ( 1861) :  54  Atl.  Rep.  767. 

*  Breitung  v.  Lindauer,  37  Mich.  217 
(1877);  Union  Iron  Co.  v.  Pierce,  4  Biss. 
327  (1869):  s.  c,  24  Fed.  Cas.  583;  Greg- 
ory V.  German  Bank,  3  Colo.  332  (1877); 
Cooley,  Const.  Lim.  (5th  ed.),  pp.  444, 
474.     See  §  223,  siipra. 

5  See  gg  900,  902,  infra.  The  court  in 
Pearsall  v.  Great  Northern  Ry.,  161  U.  S. 
646.  666  (1896),  in  speaking  of  the  police 
power,  said :  "  So  important  is  this  power, 
and  so  necessary  to  the  public  safety 
and  health,  that  it  cannot  be  bargained 
away  by  the  legislature;  and  hence  it 
has  been  held  that  charters  for  pur- 
poses inconsistent  with  a  due  regard 
for  the  public  health  or  public  morals 
may  be  abrogated  in  the  interests  of  a 
more  enlightened  public  opinion." 


1027 


§§  498,  499.]  AMENDMENTS   TO    QHAKTERS.  [OH.  XXVIII. 

consolidation  with  a  competing  line  is  a  legitimate  exercise  of  the 
police  power  of  the  state,  and  it  is  immaterial  whether  the  power 
to  amend  was  reserved  or  not.^  It  is  constitutional  for  the  legis- 
lature to  require  coal-mining  companies  to  weigh  coal  before  it  is 
screened,  especially  where  the  legislature  has  reserved  power  to 
amend  charters.^  A  statute  requiring  corporations  to  pay  their 
employees  once  a  month,  and  giving  the  latter  a  lien  prior  to  all 
liens  excepting  recorded  mortgages,  is  unconstitutional  as  being  a 
grant  of  special  privileges  and  as  denying  the  corporation  the 
equal  protection  of  the  laws,  and  as  depriving  them  of  their  prop- 
erty without  due  process  of  law,  in  that  such  statute  interferes  with 
the  freedom  to  make  contracts.' 

§  498.  Charter  amendments  offered  to  tlie  stocliliolders.—  The  sec- 
ond class  of  amendments  to  a  charter  —  the  amendments  which 
occur  most  frequently  and  give  rise  to  many  difficulties  —  are  those 
which  allow  the  corporate  directors  or  a  majority  of  the  stock- 
holders in  corporate  meeting  assembled  to  engage  in  a  new  or  dif- 
ferent or  more  extensive  or  more  contracted  business  than  that 
authorized  bv  the  orig-inal  and  unamended  charter.  This  is  the 
subject  of  the  remainder  of  this  chapter. 

§  499.  Auxiliary  and  incidental  amendments  are  constitutional, 
though  some  of  the  stockholders  dissent—  An  amendment  made  to 
a  corporate  charter  is  either  a  material  and  fundamental  change 
from  the  original  plan,  or  it  is  an  auxiliary  and  incidental  change, 
consistent  with  the  cq^-rying  out  of  the  original  plan."  The  latter 
class  of  amendments  are  constitutional  and  valid.  The  acceptance 
of  an  auxiliary  amendment,  however,  should  be  by  the  stockholders 

1  Louisville,  etc.  R.  R.  v.  Kentucky,  tract  or  charter,  after  acceptance,  is 
161  U.  S.  677  (1896).  To  same  effect,  inviolable  between  the  state  and  the 
Pearsall  v.  Great  Northern  Ry.,  161  U.  corporation,  as  it  is  also  between  the 
S.  646  (1896).  corporation  and  stockholders.    Neither 

2  A  majority  of  the  court,  however,  the  one  nor  the  other  can  disregard  its 
adopted  the  view  that  under  the  re-  obligations  or  alter  its  essential  fran- 
served  right  to  amend  charters  the  leg-  chises  without  the  unanimous  concur- 
islature  must  do  so  on  terms  that  are  rence  of  the  stockholders.  ...  If 
just  to  the  stockholders.  Woodson  v.  the  alterations  proposed  in  the  charter 
State,  69  Ark.  521  (1900).  of  a  private  corporation  by  legislative 

3  Johnson  v.  Goodyear,  etc.  Co.,  127  enactment  are  merely  auxiliary  and 
Cal.  4  (1899).  To  same  effect,  State  v.  not  fundamental,  they  may  be  ac- 
Haun.  61  Kan.  146  (1S99),  rev'g  s.  c,  7  cepted  by  a  majority  of  the  corpora- 
Kan.  App.  509.  tors;  and  when  so  assented  to  they  are 

*  The  general  principle  of  law  govern-  binding  on  the  whole;  but  it  is  other- 
ing  this  branch  of  the  subject  is  well  wise  .  .  .  when  the  alterations  are 
expressed  in  Woodfork  v.  Union  Bank,  fundamental,  radical,  and  vital.  The 
3  Coldw.  (Tenn.)  488  (1866).     "The  con-    acceptance  must  then  be  jinanimous." 

1028 


CH.  XXVIII.] 


AMENDMENTS    TO    CHARTERS. 


[§  499. 


in  meeting  assembled  instead  of  by  the  board  of  directors.^  But 
acceptance  may  arise  from  user;^  and  hence  it  generally  happens 
that  an  incidental  or  auxiliary  amendment  to  a  charter  is  deemed 
to  have  been  accepted  by  user  and  a  vote  of  acceptance  by  the 
directors  or  by  user  alone.''  An  amendment  may  be  said  to  be 
auxiliary  and  incidental  when  it  merely  grants  new  powers  or  au- 
thorizes new  methods  and  new  plans  for  the  purpose  of  carrying 
out  the  original  plan  and  effecting  the  real  object  of  that  plan. 
The  individual  motives  and  interests  of  a  stockholder  are  disre- 
garded. "Whatever  is  for  the  benefit  of  the  corporation  is  conclu- 
sively presumed  to  be  for  the  benefit  of  each  stockholder.  A 
change  not  fundamental  to  the  corporation  is  not  fundamental  to 
any  stockholder.* 

Whether  an  amendment  materially  changes  the  corporate  plans 
or  not  is  a  question  of  law  for  the  court.^  Accordingly  each  case 
is  to  be  decided  according  to  the  peculiar  circumstances  of  that 
case,  and  no  general  rules  can  be  laid  down  which  will  apply  to  all 
cases.     Many  illustrations  are  given  in  the  notes  below.'' 


1  Marlborough  Mfg.  Co.  v.  Smith,  2 
Conn.  579  (1818);  Brown  i;.  Fairmount, 
etc.  Co.,  10  Phila.  33  (1873);  Hope  Ins. 
Co.  V.  Beckman,  47  Mo.  93  (1870). 

^See  §  503,  infra,  and  §  2a,  supra. 

3 Illinois,  etc.  R  R.  v.  Zimmer,  20  III. 
658  (1858).  See  also  Blatchford  v.  Ross, 
5  Abb.  Pr.  (N.  S.)  434  (1869);  Re  Excel- 
sior F.  Ins.  Co.,  16  Abb.  Pr.  8,  14  (1862). 
In  Venner  v.  Atchison,  etc.  R.  R.,  28 
Fed.  Rep.  581  (1886),  it  was  held  that 
the  directors  are  the  proper  persons  to 
accept  an  amendment  under  the  cir- 
cumstances of  that  case. 

*  Delaware  R  R.  n  Tharp,  1  Houst. 
(Del.)  149  (1855);  Irvin  v.  Turnpike  Co., 
2  Pen.  &  W.  (Pa.)  466  (1831);  Illinois 
River  R  R  r.  Zimmer,  20  III.  654  (1858); 
Sprague  v.  Illinois,  etc.  R  R.  19  111.  174 
(1857);  Banet  v.  Alton,  etc.  R  R,  13  III. 
504  (1851).  Cf.  Hester  v.  Memphis,  etc. 
R  R.,  32  Miss.  378  (1856);  Witter  v.  Mis- 
sissippi, etc.  R  R,  20  Ark.  463  (1859); 
Fulton  County  v.  Mississippi,  etc.  R.  R., 
21  111.  338  (1859).  The  cases  of  Zabriskie 
V.  Hackensack,  etc.  R  R,  18  N.  J.  Eq. 
178  (1867);  Dayton,  t^tc.  R  R  v.  Hatch, 
1  Disney  (Ohio),  84  (1855),  and  Central 
R  R  V.  Collins,  40  Ga.  617  (1869),  repudi- 
ate the  distinction  between  the  mate- 


rial and  immaterial  changes.  All 
changes  are  held  to  be  equally  mate- 
rial. 

5  Winter  v.  Muscogee  R  R,  11  Ga. 
438  (1852);  Witter  v.  Mississippi,  etc.  R 
R,  20  Ark.  463  (1859);  Memphis  Branch 
R  R.  V.  Sullivan,  57  Ga.  240  (1876).  Cf. 
Southern,  etc.  R  R  v.  Stevens,  87  Pa, 
St.  190  (1878). 

6  Certain  changes  in  the  route  of  a 
railroad  have  been  held  to  be  immate- 
rial, Wilson  V.  Wills  Valley  R  R,  83 
Ga.  466  (1863);  Johnson  v.  Pensacola, 
etc.  R  R  9  Fla.  299  (1860);  Peoria, 
etc.  R  R  V.  Elting,  17  III.  429  (1856); 
Banet  v.  Alton,  etc.  R  R,  13  III.  504 
(1851);  Chattanooga,  etc.  R.  R  v. 
Warthen,  98  Ga,  599  (1896);  building 
branch  lines,  Peoria,  etc.  R.  R  v.  Pres- 
ton, 35  Iowa,  115  (1872);  Greenville,  etc 
R  R  V.  Coleman,  5  Rich.  L.  (S.  C.)  118 
(1851);  issuing  preferred  stock,  Ever- 
hart  n  West  Chester,  etc.  R  R,  28  Pa. 
St.  339  (1857);  Rutland,  etc.  R  R  u 
Thrall,  35  Vt.  536  (1863);  Curry  r.  Scott, 
54  Pa.  St.  270  (1867);  or  more  common 
stock,  Covington  v.  Covington,  etc. 
Bridge  Co.,  10  Bush  (Ky.),  69  (1873); 
Buflfalo,  etc.  R  R  v.  Dudley,  14  N.  Y. 
336  (1856).     Cf.   Hughes    v.    Antietam 


1029 


§  500.] 


amp:ndments  to  charters. 


'[CH.  XXVIII, 


§  500.  Material  amendments  offered  to  the  stoclclwJders  can  le 
accepted  only  ly  a  unanimous  vote.— On  the  other  hand,  a  material 
and  fundamental  change  in  the  charter  by  an  amendment  to  that 
charter  is  an  unconstitutional  violation  of  the  contract  rights  of  any 


Mfg.  Co.,  34  Md.  316  (1870):  extending 
the  time  for  completing  the  road,  Agri-  , 
cultural  Branch  R.  R.  v.  Winchester,  95 
Mass.  29  (1866);  Poughkeepsie,  etc.  Co- 
V.  Griffin,  24  N.  Y.  150  (1861);  Bailey  v. 
HoUister,  26  N.  Y.  112  (1862),  power  to 
amend    being    reserved;     Taggart    v. 
Western  Md.  R.  .R.,  24  Md.  563  (1866); 
Union  Hotel  Co.  v.  Hersee,  79  N.  Y.  454 
(1880);  Danbury,  etc.  R.  R.  v.  Wilson,  22 
Conn.  435  (1853);    consolidations  that 
take  the  place  of  part  of  the  line  as  laid 
out,  Sprague  v.  Illinois  River  R.  R.,*  19 
111.  174  (1857);  Hanna  v.  Cincinnati,  etc. 
R,  R.,  20  Ind.  30  (1863):  change  of  cor- 
porate name,  Bucksport,  etc.  R.   R.  v. 
Buck,  68  Me.  81  (1878);  Clark  v.  Mononga- 
hela  Nav.  Co.,  10  Watts  (Pa.),  364  (1840); 
changing  the  terminus,  Pacific  R.  R.  v. 
Renshaw,  18  Mo.  210  (1852);  Ross  v.  Chi- 
cago, etc.  R.  R,  77  111.  127, 134  (1875);  re- 
duction of  capital  stock  and  shortening 
of  the  road,  Troy,  etc,  R.  R  u  Kerr,  17 
Barb.  581  (1854);  Joslyn  v.  Pacific  Mail 
S.  S.  Co.,  12  Abb.  Pr.  (N.  S.)  329  (1872). 
Cf.  Oldtown,  etc.  R.  R  v.  Veazie,  39  Me. 
571   (1855);  increasing  the   number  of 
directors,  Moveer  v.  Staples,  32  Minn.  284 
(1884);  or  enlarging  the  capital  stock 
and  extending  the  road,  such  changes 
not  appearing  on  the  record  to  be  detri- 
mental, Peoria,  etc.  R  R.  v.  Elting,  17 
111.  429  (1856);  Rice  v.  Rock  Island,  etc. 
R  R,  21  111.  93  (1859);  and  minor  changes 
in  general,  Union  Agric.  etc.  Assoc,  v. 
Mill,  31  Iowa,  95  (1870);  also  extensive 
changes,  Illinois  River  R  R.  v.  Zimmer, 
20  111.  654  (1858);  such  as  extending  the 
road.  Cross  v.  Peach  Bottom  Ry.,  90  Pa. 
St.   392  (1879);  or   purchasing  another 
railroad,  Venner  v.  Atchison,  etc.  R.  R., 
28  Fed.  Rep.  581  (1886).  An  amendment 
increasing  the  capital  stock  and  author- 
izing a  branch  road  does  not  release 
subscribers.     Schenectady,  etc.   Co.   v. 
Thatcher,  11  N.  Y.  102  (1854).    See  also 


Gray  v.  Coffin,  63  Mass.  192  (1852);  Child 
V.  Coffin,  17  Mass.  64  (1820);  Longley  u. 
Little,  26  Me.  162  (1846);  Payson  v. 
Withers,  5  Biss.  269(1873);  S.  C,  19  Fed. 
Cas.  29;  Joy  v.  Jackson,  etc.  Co.,  11 
Mich.  155  (1863);  Lincoln,  etc.  Bank  v. 
Richardson,  1  Me.  79(1820);  Greenville.  . 
etc.  R  R  V.  Johnson,  8  Baxt.  (Tenn.)  332 
(1874);  Fall  River  Iron  Works  v.  Old 
Colony  R.  R,  87  Mass.  221  (1862).  An  in- 
crease of  the  capital  stock  as  allowed  by 
the  charter  does  not  release  subscrib- 
ers. Port  Edwards,  etc.  Ry.  v.  Arpin, 
80  Wis.  214  (1891).  An  amendment  may 
authorize  the  directors  to  change  the 
location  of  toll  gates.  Bardstown,  etc. 
<:o.  V.  Rodman,  13  S.  W.  Rep.  917  (Ky. 
1890).  In  Atchison,  etc.  R  R  v.  Fletcher, 
35  Kan.  236  (1886),  an  amendment  au- 
thorizing a  corporation  to  buy  the  stock 
of  another  railroad  corporation  and  to 
guarantee  its  bonds  was  held  to  be 
valid.  An  amendment  authorizing  a 
dam  company  to  raise  the  height  of  its 
dam  is  not  a  fundamental  change. 
Gray  v.  Monongahela  Nav.  Co.,  2  Watts 
&  S.  156  (Pa.  1841).  So  also  of  an 
amendment  shortening  notices  of  calls 
from  ninety  to  twenty  days.  Illinois 
River  R  R  v.  Beers,  27  111.  185  (1862); 
and  an  amendment  making  subscrip- 
tions payable  five  per  cent,  monthly  in- 
stead of  twenty -five  per  cent,  annually. 
Burlington,  etc.  R  R  u  White,  5  Iowa, 
409  (1857).  The  legislature  may  author- 
ize a  seminary  for  girls  to  lease  a  part  of 
the  premises  to  school  commissioners. 
Webster  v.  Cambridge  Female  Semi- 
nary, 78  Md.  193  (1893).  An  amendment 
to  the  charter  may  prescribe  that  un- 
necessary corporate  real  estate  shall  be^ 
divided  among  or  partitioned  between 
the  stockholders.  Merchants.  Western 
Land  Assoc,  56  Minn.  327  (1894).  The 
legislature  may  authorize  a  water- 
works company  to  sell  its  property  toa- 


1030 


CH.  XXVIII.]  ■ 


AMENDMENTS    TO    CHAKTEKS. 


[§  500. 


stockholder  who  does  not  assent  to  such  an  amendment.  Consider- 
able difficulty  is  experienced  in  determining  what  is  a  material  and 
fundamental  change.  Each  case  is  decided  upon  its  own  facts,  and 
consequently  the  best  light  as  to  the  spirit  of  what  constitutes  a 
material  change  is  obtained  by  a  study  of  the  facts  of  cases  which 
have  been  decided.^ 


municipality.  Peabody  v.  Westerly 
Water-works,  30  R.  I.  176  (1897).  Where 
a  statute  provides  that  the  charter  may 
be  amended  in  certain  respects  upon 
the  directors  or  a  majority  of  them 
making  and  signing  a  certificate,  such 
making  and  signing  need  not  be  at  a 
meeting  of  the  directors.  No  meeting 
is  required.  Burden  v.  Burden,  159 
N.  Y.  287  (1899).  Under  a  statute  au- 
thorizing the  stockholders  by  an 
amended  certificate  to  change  the  ob- 
ject of  the  corporation,  the  certificate 
may  be  amended  so  as  to  give  a  corpo- 
ration power  to  purchase  stock  in  other 
corporations.  Meredith  v.  New  Jersey, 
etc.  Co.,  59  N.  J.  Eq.  257  (1899);  aff'd,  60 
N.  J.  Eq.  445  (1899).  A  member  of  an 
incorporated  mutual  life  insurance  as- 
sociation cannot  prevent  the  association 
accepting  an  amendment  to  its  charter 
changing  the  location  of  its  principal 
place  of  business.  Park  v.  Modern,  etc. 
of  America,  181  111.  214  (1899). 

1  Under  the  circumstances  of  the 
cases  it  has  been  held  a  material  change 
to  shorten  and  vary  the  route,  Winter 
V.  Muscogee  R  R..  11  Ga.  438  (1852);  to 
vary  the  route,  Middlesex  Turnp.  Corp. 
V.  Locke,  8  Mass.  268  (1811);  Middlesex 
Turnp.  Corp.  v.  Swan,  10  Mass.  384  (1813); 
Hester  v.  ^Memphis,  etc.  R.  R.,  32  Miss. 
378  (1856);  Witter  v.  Mississippi,  etc.  R. 
R.,  20  Ark.  463  (1859):  Champion  v. 
Memphis,  etc.  R  R.,  35 Miss.  692  (1858); 
Simpson  v.  Denison,  10  Hare,  54  (1852); 
changing  a  terminus,  Manheim,  etc.  Co. 
V.  Arndt.  31  Pa.  St.  317(1858);  Marietta, 
etc.  R  R  V.  Elliott,  10  Ohio  St.  57(1859)? 
Middlesex  Turnp.  Corp.  v.  Locke,  8 
Mass.  268  (1811);  Middlesex  Turnp.  Corp. 
V.  Swan,  10  Mass.  384  (1813);  Thompson 
V.  Guion,  5  Jones,  Eq.  (N.  C.)  113  (1859); 


permitting  a  railroad  to  go  into  water 
transportation  business,  Hartford,  etc. 
R  R  V.  Croswell,  5  Hill,  383  (1843),  a 
leading  case;  Marietta,  etc.  R.  R.  v.  Elli- 
ott, 10  Ohio  St  57  (1859);  shortening 
the  line,  First  Nat.  Bank  v.  Charlotte, 
85  N.  C.  433  (1881);  allowing  business  to 
be  commenced  before  the  full  capital 
stock  is  subscribed,  Memphis  Branch 
R  R  V.  Sullivan.  57  Ga.  240  (1876);  di- 
viding the  line  and  forming  two  or  more 
corporations,  Indiana,  etc.  Turnp.  Co.  v. 
Phillips,  2  Pen.  &  W.  (Pa.)  184  (1830); 
Fulton  County  v.  Mississippi.  etc.R.  R., 
21  111.  338  (1859);  Carlisle  v.  Terre Haute, 
etc.  R.  R,  6  Ind.  316  (1855);  transferring 
a  railroad  subscription  from  one  rail- 
road to  another,  Pittsburg,  etc.  R.  R.  v. 
Gazzam,  32  Pa.  St.  340  (1858);  making 
the  charter  perpetual  and  increasing 
power  to  hold  property,  Union  Locks 
&  Canals  v.  Towne,  1  N.  H.  44  (1817); 
allowing  a  life  insurance  company  to 
insure  against  fire  and  marine  loss, 
Ashton  V.  Burbank,  2  Dill.  435  (1873); 
S.  C.  2  Fed.  Cas.  26;  extending  the  line, 
Stevens  v.  Rutland,  etc.  R.  R.,  29  Vt. 
545  (1851).  See  also  Noesen  v.  Port 
Washington,  37  Wis.  168  (1875),  where 
there  was  an  amendment  authorizing 
the  purchase  of  a  railroad  running  at 
right  angles  to  the  old,  but  a  lease  was 
upheld:  increasing  the  par  value  of  the 
stock,  Mahan  v.  Wood,  44  Cal.  462  (1872)- 
consolidating  the  corporation  with  an- 
other corporation,  Illinois,  etc.  R.  R.  v 
Cook,  29  111.  237  (1862);  McCray  v.  Junc- 
tion R  R,  9  Ind.  358  (1857)  Shelbyville, 
etc.  Turnp.  Co.  v.  Barnes,  42  Ind.  498 
(1873);  Booe  v.  Junction  R.  R,  10  Ind. 
93  (1857);  New  Orleans,  etc.  R.  R  v. 
Harris,  27  Miss.  517  (1854);  Clearwater 
V.  Meredith,  1  Wall.  25(1863);  Knoxville 


1031 


§  501.] 


AMENDMENTS    TO    CHARTERS. 


[oh.  XXVIII. 


§  501.  Amendments  tinder  the  reserved imwer  of  tJie  state  to  alter, 
amend,  or  7-ei)eal  the  charter. —  The  extent  of  the  power  of  the  leg- 
islature to  amend  a  charter,  where  it  has  reserved  that  power,  is 
not  yet  fully  settled,  and  is  full  of  difficulties. 


There  is  a  strong 


V.  Knoxville,  etc.  R  R,  22  Fep.  Rep.  758 
(1884);  Kean  u  Johnson,  9  N.  J.  Eq.  401 
(1853);  Black  v.  Delaware,  etc.  Canal 
Co.,  34  N.  J.  Eq.  455  (1873).  Cf.  Lau- 
man  v.  Lebanon  Valley  R  R.,  30  Pa.  St. 
42  (1858),  criticised  in  Mowrey  v.  Indian- 
apolis, etc.  R  R,  4  Biss.  78  (1866);  S.  C, 
17  Fed.  Cas.  930:  Fry  v.  Lexington,  etc- 
R  R,  2  Mete.  (Ky.)  314  (1859).  Until, 
however,  the  corporation  accepts  such 
amendment  the  stockholders  cannot 
complain.  Delaware,  etc.  R.  R.  v.  Irick, 
23  N.  J,  L.  321  (1852).  Amendments 
which  have  not  been  acted  upon  do 
not  release  the.  subscriber.  Taylor  v. 
Supervisors,  86  Va.  506  (1889).  See,  in 
general,  Pearce  v.  Madison,  etc.  R.  R., 
21  How.  441  (1858);  Tuttle  v.  Michigan 
Air  Line  R  R,  35  Mich.  247(1877);  New 
Jersey  Mid.  Ry.  v.  Strait,  35  N.  J.  L.  322 
(1872).  In  all  these  cases  neither  a 
mandatory  statute,  nor  a  vote  of  the 
directors  nor  a  majority  of  the  stock- 
holders can  compel  a  dissenting  stock- 
holder to  accept  the  change.  It  would 
be  unconstitutional.  The  stockholder 
may  say:  "I  have  agreed  to  become  in- 
terested in  a  railroad  company,  and 
have  contracted  in  view  of  the  profits 
to  be  expected,  and  the  perils  and 
losses  incident  to  that  description  of 
business;  but  I  have  not  agreed  that 
those  to  be  entrusted  with  the  capital  I 
contribute  shall  have  power  to  use  it  in 
a  business  of  a  different  character,  and 
attended  with  hazards  of  a  different  de- 
scription." Marietta,  etc.  R  R  v.  Elliott, 
10  Ohio  St.  57  (1859).  Even  though  the 
legislature,  after  a  turnpike  corporation 
is  organized,  authorizes  it  to  issue  stock 
in  payment  for  another  turnpike,  yet  a 
dissenting  stockholder  may  prevent  the 
purchase  by  showing  that  it  decreases 
the  value  of  his  stock.  Shaw  v.  Camp- 
bell, etc.  Co.,  15  S.  W.  Rep.  245  (Ky.  1891). 
Where  the  statutes  under  which  the 


1032 


company  is  organized  allow  the  objects 
of  the  company  to  be  changed  on  a  vote 
of  the  stockholders,  a  dissenting  stock- 
holder is  not  released  from  his  sub- 
scription by  such  change.  Mercantile 
Statement  Co.  v.  Kneal,  51  Minn.  263 
(1892).  Acts  relative  to  a  corporation 
may  be  so  radical  as  to  constitute  a 
new  charter  instead  of  amendments  to 
the  old  one.  Snook  n  Georgia  Imp.  Co., 
83  Ga.  61  (1889).  Where  a  municipal- 
ity has  subscribed  for  stock  and  issued 
its  bonds  indorsed  by  a  railroad  com- 
pany to  raise  money  to  pay  the  sub- 
scription, the  legislature  cannot  author- 
ize the  company  to  apply  its  assets  to 
the  payment  of  such  bonds.  A  stock- 
holder may  enjoin  it.  Hill  v.  Glasgow 
R  R,  41  Fed.  Rep.  610  (1888).  The  leg- 
islature cannot,  in  the  amendment  it- 
self, authorize  the  majority  to  bind  the 
minority  herein.  New  Orleans,  etc.  R. 
R  V.  Harris,  27  Miss.  517  (1854).  Where 
a  charter  authorizes  a  lease,  if  assented 
to  by  the  stockholders,  an  amendment 
authorizing  such  a  lease  by  the  direct- 
oi's  would  be  unconstitutional,  unless 
accepted  by  the  stockholders.  Re 
Opinion  of  the  Judges,  28  S.  E.  Rep.  18 
(N.  C.  1897).  Where  a  state  is  a  stock- 
holder, and  by  statute  is  entitled  to  a 
certain  vote  at  elections,  a  subsequent 
statute  cannot  give  to  the  state  a 
larger  vote.  Tucker  v.  Russell,  82  Fed. 
Rep.  263  (1897).  An  amendment  can- 
not deprive  the  members  of  a  corpora- 
tion of  the  privilege  of  electing  its  di- 
rectors. The  legislature  cannot  arbi- 
trarily name  and  appoint  trustees  of 
an  educational  corporation,  the  char- 
ter providing  that  vacancies  shall  be 
filled  by  the  remaining  trustees.  Sher- 
iff V.  Lowndes,  16  Md.  357  (1860).  It  can- 
not  give  to  the  city  of  Louisville  the 
power  to  elect  the  trustees  of  the  Uni- 
versity of  Louisville,  an  educational 


<3H.  XXVIII.] 


AMENDMENTS    TO    CHARTERS. 


L§  501. 


tendency  in  the  decisions,  and  a  tendency  which  is  deserving  of  the 
highest  commendation,  to  limit  the  power  of  the  legislature  to 
amend  a  charter  under  this  reserved  power.  It  should  be  restricted 
to  those  amendments  only  in  which  the  state  has  a  public  interest. 
Any  attempt  to  use  this  power  of  amendment  for  the  purpose  of 
authorizing  a  majority  of  the  stockholders  to  force  upon  the  mi- 
nority a  material  change  in  the  enterprise  is  contrary  to  law  and 
the  spirit  of  justice.  Under  such  reserved  power  the  legislature 
has  only  that  right  to  amend  the  charter  which  it  would  have  had 
in  case  the  Dartmouth  College  case  had  decided  that  the  federal 
constitution  did  not  apply  to  corporate  charters.^     In  fact  the  his- 


corporation.  Louisville  v.  University 
of  Louisville,  15  B.  Mon.  (Ky.)  642  (1855). 
It  cannot  turn  over  the  property  of  an 
educational  institution  to  another  edu- 
cational institution.  Ohio  v.  Neflf,  52 
Ohio  St.  375  (1895).  It  cannot  vest  the 
government  of  an  incorporated  acad- 
emy in  a  new  board  of  trustees.  Nor- 
ris  V.  Abingdon  Academy,  7  Gill  &  J. 
(Md.)  7  (1834).  Cf.  %  609a,  infra.  For  a 
valuable  argument  against  the  power 
of  a  majority  of  the  stockholders  to  ac- 
cept an  amendment  of  the  charter  so 
as  to  give  the  company  the  power  to 
lease  its  railroad,  see  8  Harvard  L.  Rev. 
396.  In  Loewenthal  v.  Rubber,  etc.  Co., 
53  N.  J.  Eq.  440  (1894),  the  court  held 
lat  the  original  by-laws  constituted  a 
intract  between  the  stockholders,  and 
iat  a  by-law  providing  for  cumulative 
»ting  could  not  be  repealed.  On  the 
;ht  of  a  dissenting  stockholder  in  gen- 
ii, see  also  Printing  House  v.  Trus- 
ts, 104  U.  S.  711  (1881;  Hoey  v.  Hen- 
rson,  32  La.  Ann.  1069  (1880);  Re  St. 
lry"s  Church,  7  Serg.  &  R.  (Pa.)  517 
Jl|22).  A  majority  of  the  stockhold- 
ers of  a  railroad  company  have  no 
;'er  to  amend  the  charter  so  as  to  ac- 
t  the  general  railroad  act  of  the 
e,  which  general  act  will  give  the 
pany  the  right  to  indefinitely  ex- 
its railroad,  build  branch  lines, 
e  its  property,  build  and  operate 
mboats,  or  consolidate  with  any 
r  railroad  company.  Such  a  whole- 
saTe  amendment  is  illegal  as  against  the 
dissent  of  a  stockholder,  even  though  a 

10 


portion  of  such  general  act  might  have 
been  accepted  as  being  not  a  funda- 
mental but  merely  an  auxiliary  amend- 
ment. Alexander  v.  Atlanta,  etc.  R. 
R.  Co.,  108  Ga.  151  (1899).  Where  an 
insurance  fund  has  been  collected  by 
an  exchange,  in  accordance  with  its 
charter,  a  by-law  subsequently  passed 
distributing  the  fund  among  the  mem- 
bers is  illegal  as  against  the  objection 
of  any  member  who  contributed  to  the 
fund.  Parish  v.  New  York,  etc.  Ex- 
change, 169  N.  Y.  34  (1901).  A  holder 
of  preferred  stock  may  prevent  a  re- 
duction of  the  preferred  dividend  by 
an  amendment  of  the  certificate  of  in- 
corporation, even  though  the  statutes 
of  the  state  at  the  time  of  organization 
of  the  company  authorized  the  certifi- 
cate of  incorporation  to  be  amended  by 
a  certain  vote.  Such  reduction  may  be 
enjoined.  Pronik  v.  Spirits,  etc.  Co.,  58 
N.  J.  Eq.  97  (1899). 

1  Sinking  Fund  Cases,  99  U.  S.  700, 
720  (1878);  Miller  r.  State,  15  Wall.  478, 
495(1872);  San  Mateo  County  v.  South- 
ern Pacific  R.  R.,  8  Sawyer,  238,  279 
(1882);  Detroit  v.  Detroit,  etc.  Co.,  43 
Mich.  140  (1880).  The  reserved  right  to 
amend  or  repeal  a  charter  "  leaves  the 
state  where  any  sovereignty  would  be 
if  unrestrained  by  express  constitu- 
tional limitations,  and  with  the  powers 
which  it  would  then  possess.  It  might 
therefore  do  what  it  would  be  admissi- 
ble for  any, constitutional  government 
to  do  when  not  thus  restrained,  but  it 
could  not  do  what  would  be  inconsist- 
:33 


§  501.] 


AMENDMENTS    TO    CHARTERS. 


[CH.  XXVIII. 


torical  origin  of  this  reservation  of  the  right  to  amend  was  due  to- 
the  effort  of  the  various  states  of  the  Union  to  escape  from  the  de- 
cision in  the  Dartmouth  College  case.^  By  this  reserved  right  the 
restraint  of  the  federal  constitution  is  done  away  with.  But  the 
power  to  make  a  new  contract  for  the  stockholders  is  not  thereby 
given  to  the  legislature.  The  legislature  may  repeal  the  charter, 
but  cannot  force  any  stockholder  into  a  contract  against  his  will. 
The  power  to  make  amendments,  and  to  repeal  and  alter  char- 
ters, has  been  reserved  in  most  of  the  states  of  the  Union.^  It  is 
clearly  established  that  the  legislature  cannot,  under  this  reserved 
power,  amend  the  charter  so  as  to  change  the  whole  character  of 
the  enterprise  and  compel  the  corporation  to  proceed  under  the 
amended  charter.*  The  restrictions  of  the  state  constitution  still 
exist,  and  individuals  cannot  be  forced  by  the  state  into  nev7  con- 

ent  with  constitutional  principles.  And    N.  Y.  467  (1863) ;  Ashuelot  R.  R  u.  Elliot, 

it  cannot  be  necessary  at  this  day  to 

enter  upon  a  discussion  in  denial  of  the 

right  of  the  government  to  take  from 

either  individuals  or  corporations  any 

property  which   they  may  rightfully 

have  acquired."    Smith  v.  Lake  Shore, 

etc  Co.,  73  N.  W.  Rep.  328  (Mich.  1897), 

reversed  on  another  point  in  173  U.  S. 

684  (1899). 

1  See  Spring  Valley  Water  Works  v. 
Schottler,  110  U.  S.  347,  352  (1884). 

2  See  the  notes  below.  The  following 
special  references  are  made  to  some  of 
the  constitutional  provisions  on  this 
subject:  Constitution  of  Alabama,  XIII, 
1;  Arkansas,  V,  48;  California,  IV,  31; 
1879,  XII,  1;  Colorado,  1876,  XV,  3;  Del- 
aware, II,  17;  Iowa,  VIII,  12;  Kansas, 
XII,  1;  Maine,  Laws  of  1831;  Maryland, 
111,48,  par.  2;  Massachusetts,  St.  1830, 
eh.  81;  R  S.,  ch.  44,  §  23;  Gen.  St.,  ch.  68, 
§  41;  Michigan.  XV,  1, 8;  Missouri,  VIII, 
14;  Nebraska,  1875,  XI;  Nevada,  VIII,  1 ; 
New  Jersey,  Amend.  IV,  7,  par.  11,  cl.  11; 
New  York,  VIII,  1,  Pu  S.,  pt.  1,  ch.  XVIII, 
title  3,  §  8;  North  Carolina,  VIII,  1; 
Ohio,  XVIII,  2;  Oregon,  XI,  2;  Penn- 
sylvania, XVI,  10;  South  Carolina,  XII, 
1;  Tennessee,  XI,  8;  Texas,  1875,  XII, 
5.  7;  Wisconsin,  XI,  §  1;  Re  New  York 
Elevated  R.  R,70  N.  Y.  327  (1877);  John- 
son V.  Hudson  River  R  R,  49  N.  Y.  455 
(1872);  Bank  of  Chenango  v.  Brown,  26 


58  N.  H.  451,  454  (1878). 

3  In  Pennsylvania  it  is  held  that  the 
reserved  power,  when  used  so  as  to 
make  an  amendment  compulsory  on 
the  corporation,  "  is  in  the  nature  of  a 
police  power,  designed  for  the  protec- 
tion of  the  public  welfare."  Cross  v. 
Peach  Bottom  Ry.,  90  Pa.  St.  392  (1879). 
Under  its  reserved  power  to  amend, 
the  state  may  give  a  remedy  against  a 
mill-dam  corporation  for  injury  by 
flood.  Monongahela  Nav.  Co.  v.  Coon, 
6  Pa.  St.  379  (1847),  holding  alsoth^it,  by 
accepting  an  amendment  which  is 
granted  on  condition  that  the  reserved 
power  to  amend  shall  apply  to  the  cor- 
poration, it  is  subject  to  such  power; 
Kenosha,  etc.  R.  R.  v.  Marsh,  17  Wis. 
13(1863);  Troy,  etc.  R  R  v.  Kerr,  17 
Barb.  581  (1854).  In  Knoxville  v.  Knox- 
ville,  etc.  R  R,  22  Fed.  Rep.  758  (1884), 
the  court  said :  "  It  was  not  competent 
for  the  legislature  to  do  more  in  this 
respect  than  to  waive  the  public  rights. 
It  could  not  divest  or  impair  the  rights 
of  the  shareholders  as, between  them- 
selves, as  guaranteed  by  the  company's 
charter,  without  their  consent.  It  was 
upon  the  faith  of  the  stipulations  con- 
tained in  said  charter  that  the  share- 
holders subscribed  to  the  capital  stock, 
and  thereby  made  themselves  members 
of  the  corporation."    In  Orr  v.  Bracken 


1034 


CH.  XXVIII.] 


AMENDMENTS    TO    CHARTERS. 


[§  501. 


tracts.^  Moreover  the  amendment  must  not  be  foreign  to  the  pur- 
poses and  objects  of  the  original  charter.  The  power  of  amend- 
ment has  its  limits.  "It  can  repeal  or  suspend  the  charter;  it  can 
alter  or  modify  it;  it  can  take  away  the  charter;  but  it  cannot  im- 
pose a  new  one  and  oblige  the  stockholders  to  accept  it.  .  .  . 
The  power  to  alter  and  modify  does  not  give  power  to  make  any 
substantial  additions  to  the  work."  ^  The  best  view  taken  of  this 
reserved  power  of  the  state  is  that  under  it  a  fundamental  amend- 
ment to  the  charter  does  not  authorize  a  majority  of  the  stock- 
holders to  accept  the  amendment  and  proceed,  but  that  unanimous 
consent  of  the  stockholders  is  necessary.* 


County,  81  Ky.  593  (1884),  an  amend- 
ment under  the  reserved  power,  chang- 
ing the  method  of  voting,  was  decided 
to  be  of  no  effect  until  the  stockholders 
accepted  it.  The  court  said:  "The 
right  to  amend  the  charter  may  be  ex- 
pressly reserved,  but  that  right  does 
not  confer  the  power  of  taking  from 
the  corporators  the  control  of  the  cor- 
porate property."  See  also  ^  609a,  infra, 
as  to  amendments  affecting  the  right 
to  vote.  Query,  whether  a  mandatory 
consolidation  would  be  legal.  Mowrey 
V.  Indianapolis,  etc.  R.  R,  4  Biss,  78 
(1866);  s.  c,  17  Fed.  Cas.  930.  When 
legal  a  mandatory  change  does  not  re- 
quire acceptance  by  the  stockholders. 
Zabriskie  v.  Hackensack,  etc.  R  R,  18 
N.  J.  Eq.  178  (1867).  But  when  the  man- 
datory amendment  goes  bej'ond  the 
legal  limits,  it  must  be  accepted  by  the 
corporation  as  though  it  were  made  op- 
tional with  the  corporation.  Kenosha, 
etc.  R  R  V.  Marsh,  17  Wis.  13  (1863),  the 
court  saying  that  the  power  of  amend- 
ment w^as  never  reserved  with  refer- 
ence to  any  question  between  the  cor- 
poration and  its  stock  subscribers,  but 
solely  with  reference  to  questions  be- 
tween the  corporation  and  the  state, 
where  the  latter  desired  to  make  com- 
pulsory amendments  against  the  will 
of  the  former.  The  corporation  cannot 
be  compelled  to  proceed.  All  the  state 
"  can  do  is  to  grant  it  the  power,  and 
then  it  is  for  the  corporation  to  accept 
it  or  not,  as  it  pleases."  See  also  §  497, 
supra. 


1  Cooley,  Const.  Lim.  (5th  ed.\  p.  454. 
As  to  repeals  of  charters  under  this  re- 
served power,  see  ch.  XXXVIII,  infra. 

2  Zabriskie  v.  Hackensack,  etc.  R  R, 
18  N.  J.  Eq.  178  (1867).  "The  power  of 
alteration  and  amendment  is  not  with- 
out limit.  The  alterations  must  be  rea- 
sonable; they  must  be  made  in  good 
faith,  and  be  consistent  with  the  scope 
and  object  of  the  act  of  incorporation. 
Sheer  oppression  and  wrong  cannot  be 
inflicted  under  the  guise  of  amend- 
ment or  alteration."  Shields  v.  Ohio, 
95  U.  S.  319  (1877);  Spring  Valley 
Water-works  v.  San  Francisco,  61  Cal. 

3  (1881).  The  amendment  must  "not 
defeat  or  substantially  impair  the  ob- 
ject of  the  grant,  or  any  rights  vested 
under  it."  Close  v.  Gleuwood  Ceme- 
tery, 107  U.  S.  466  (1883).  See  also  Mil- 
ler V.  State,  15  Wall.  478  (1872):  Wor- 
cester V.  Norwich,  etc.  R  R,  109  Mass. 
103  (1871).  The  motives  of  the  legisla- 
tors cannot  be  inquired  into.  Northern 
R  R  27.  Miller,  10  Barb.  260  (1851);  Re 
N.  Y.  Elevated  R  R,  70  N.  Y.  327,  351 
(1877).  See  Astor  v.  Arcade  Ry.,  113  N. 
Y.  93,  111  (1889). 

3  Mills  V.  Central  R  R,  41  N.  J.  Eq.  1, 

4  (1886),  where  a  statute  subsequent  to 
the  charter  authorized  the  consolida- 
tion of  railroad  companies.  The  court 
said:  "The  legislature  did  not  intend 
to  affect  the  rights  of  stockholders 
inter  sese,  and  the  act  does  not  do  so, 
either  expressly  or  by  implication.  .  .  . 
After  shareholders  had  entered  into  a 
contract  among  themselves,  under  leg- 


1035 


§  501.] 


AMENDMENTS    TO    CHARTEKS. 


[oh.  XXVIII. 


Under  this  reserved  power,  however,  the  legislature,  it  is  held, 
may  impose  a  statutory  liability  upon  stockholders  after  they  have 
been  incorporated  and  have  gone  into  business  under  a  charter 
which  does  not  impose  such  liability.  The  exercise  of  this  power 
by  the  legislature,  in  such  a  case,  is  held  to  be  only  a  repeal  of  part 
of  the  corporate  franchises.^  So,  also,  it  is  said  that  under  this  re- 
served power  the  legislature  may  impose  a  statutory  liability  for 
the  future  debts  and  obligations  of  the  corporation.^ 


islative  sanction,  and  expended  their 
money  in  the  execution    of  the  plan 
mutually  agreed  upon,  the  plan  could 
not,  even  by  virtue  of  legislative  enact- 
ment, be  radically  changed  by  the  ma- 
jority   alone,    and    dissentient    stock- 
holders be  compelled  to   engage  in  a 
new  and  totally  different  undertaking, 
because  such  action  would  impair  the 
obligation     of    the     dissenting    stock- 
holders' contract  with  their  associates 
and  the  state."     The  court  said  also, 
that,  under  its  reserved  power  to  amend 
a    charter,  the    state  cannot  give  "a 
power  to  one  part  of  the  corporators  as 
against  the  other  which  they  did  not 
have   befora"     The  case  of  Cross  v. 
Peach  Bottom  Ry.,  90  Pa.  St.  393  (1879), 
holds  that  "  the  legislative  reservation 
is  in  the  nature  of  a  police  power,  de- 
signed for  the  protection  of  the  public 
welfare;  and  where  such  protection  be- 
comes necessary,  the  law-making  power 
may  act  without  consulting  either  the 
interests  or  will  of  the  company;  and 
in  such  case  it.  may  well  be  that  not 
only  the  company  but  its  stockholders 
must  submit.    .    .    .     The  reservation 
.    .    .     was   only   intended  to   enable 
the  legislature  to  act  without  the  con- 
sent and  against  the  will  of  the  corpo- 
ration."   On  this  subject  see  also  g  497, 
supra,  and  the  notes  thereto. 

1  Quoted  and  approved  in  Williams  v. 
Nail,  55  S.  W.  Rep.  706  (Ky.  1900),  a 
case  where  the  court  held  that  the  mi- 
nority stockholders  were  not  entitled 
to  a  dissolution  of  the  corporation  by 
reason  of  a  statute  imposing  a  statu- 
tory liability  upon  the  stockholders. 
McGowan    v.    McDonald,   111    Cal.  57 


1036 


(1896);  Bissell  v.  Heath,  98  Mich.  473 
(1894);  South  Bay,  etc.  Co.  v.  Gray,  30 
Me.  547  (1849);  Sleeper  v.  Goodwin,  67 
Wis.  577  (1887).  Cf.  Close  v.  Glenwood 
Cemetery,  107  U.  S.  466  (1883).  See 
§§  343,  380, 497,  supra.  Amendment  un- 
der reserved  right  cannot  affect  rights 
of  previous  creditors  against  the  corpo- 
ration. Bank  of  Old  Dominion  v.  Mc- 
Veigh, SO  Gratt,  457  (1871). 

2  Sherman  v.  Smith,  1  Black,  587  (1861), 
aff'g  Re  Oliver  Lee's  Bank,  31  N.  Y.  9 
(1860);  U.  S.  Trust  Co.  v.  U.  S.  F.  Ins.  Co.. 
18  N.  Y.  199  (1858).  Cf.  Bailey  u  HoUis- 
ter,  36  N.  Y.  113  (1863):  Sinking  Fund 
Cases,  99  U.  S.  700  (1878);  Oldtown,  etc. 
R.  R  V.  Veazie,  39  Me.  571  (1855);  Green 
V.  Biddle.  8  Wheat.  1.  84  (1833);  Gard- 
ner V.  Hope  Ins.  Co.,  9  R  I.  194  (1869). 
Such  increased  liability  may  be  imposed 
by  a  new  constitution  of  the  state.  Re 
Reciprocity  Bank,  33  N.  Y.  9  (1860); 
U.  S.  Trust  Co.  V.  U.  S.  F.  Ins.  Co.,  18 
N.  Y.  199  (1858);  Re  Oliver  Lee's  Bank, 
21  N.  Y.  9  (1860);  aff'd  sub  nom.  Sher- 
man V.  Smith,  1  Black,  587  (1861).  In 
Consolidated  Assoa  v.  Lord,  35  La.  Ann. 
435  (1883),  the  court  refused  to  uphold 
an  amendment  which  imposed  further 
liability  on  the  stockholder.  The  stat- 
utory liability  in  California  does  not 
^PPly  to  stockholders  in  corporations 
existing  at  the  time  the  statute  was  en- 
acted. United  States  v.  Stanford,  69 
Fed.  Rep.  25  (1895);  aff'd,  161  U.  S.  412 
(1896).  A  legislature  may  by  statute 
create  a  .statutory  liability  of  stock- 
holders for  existing  debts  of  the  cor- 
poration, although  the  original  charter 
did  not  contain  such  liability.  Lincoln 
V.  Carroll,  73  N.  W.  Rep.  173  (Minn.  1897). 


CH.  XXVIII.] 


AMENDMENTS    TO    CHARTERS. 


[§  501.. 


The  constitutionality  of  various  amendments  to  charters  in  which 
the  legislature  reserved  the  right  to  amend  or  repeal  is  considered 
in  the  notes  below.^ 

Under  the  reserved  right  of  the  legis-    does    not    prevent    such    amendment. 

lature  to  alter  or  repeal  charters,  the 

legislature  may  impose  an  additional 

liability  on    stockholders    in   a   bank. 

Barnes  v.  Arnold,  45  N.  Y.  App.  Div.  314 

(1899).    See  also  g  497,  supra. 

1  Under  the  reserved  right  to  amend, 
alter,  or  repeal  charters,  the  rights  of 
stockholders  among  themselves  cannot 
be  irapah-ed,  except  as  required  by  pub- 
lic interest.    While  it  is  true  that  the 
charter  constitutes  a  contract  between 
the  stockholders,  yet  under  this  reserved 
power   the  legislature  may  authorize 
existing  corporations  to  purchase  and 
retire  preferred  stock  and  issue  in  lieu 
thereof  mortgage  bonds,  such  amend- 
ment being  construed  to  be  in  behalf 
of  the  public  interest.     Berger  v.  United 
States  Steel  Corp.,  53  AtL  Rep.  68  (N.  J. 
1902).      Under  the    reserved   right  to 
amend  charters,   the  legislature  may 
authorize  a  corporation  to  reduce  its 
capital   stock  and   issue  bonds  in   ex- 
change for  such   part   of   the  capital 
stock  as  is  retired,  especially  where  the 
original  charter  authorized  the  corpo- 
ration to  decrease  its  capital  stock  by 
purchasing  its  own  stock.     Venner  Co. 
V.  United  States,  etc.  Corp,,  116  Fed. 
Rep.  1012  (1902).     Even  under  the  right 
to  amend  or  repeal  charters  a  statute 
changing  the  amount  which  a  member 
of  a  building  association  is  entitled  to 
upon  withdrawal  is  unconstitutional. 
Intiso  V.  State,  etc.  Assoc,  53  Atl.  Rep. 
206  (N.  J.  1902).     An  exclusive  grant  by 
the  legislature  to  a  water-works  com- 
pany to   supply  the  city  with   water 
may  be  repealed  under  the  constitution 
of  Alabama  which  prohibits  the  legis- 
lature from  "  making  any  irrevocable 
grants  of  special  privileges  or  immuni- 
ties," and  another  provision  of  the  con- 
stitution that  a  repeal  or  amendment 
maybe  made,  provided  "no  injustice 
shall    be  done  to  the  incorporators" 


Bienville,  etc.  Co.  v.  Mobile,  186  U.  S. 
213  (1903).     The  case  of  Sinking-Fund 
Conrrs  v.  Green,  etc.  Co.,  79  Ky.  73  (1880). 
holding  that  the  right  to  take  tolls  can- 
not be  abolished  where  the  company 
has  maintained  and  kept  in  repair  the 
rivers,  relying  on  the  right  to  take  toll, 
is  referred  to  in  Louisville  Water  Co.  v. 
Clark,  143  U.  S.  1  (1893).  Concerning  this 
subject,  see  §  903,  infra.  In  Ohio,  etc.  Ry. 
V.  People,  123  III.  467  (1888).  the  court 
referred  to  but  did  not  decide  the  ques- 
tion whether  a  state  could  withdraw  its 
consent  to  a  consolidation  after  the  con- 
solidation had  been  made.    The  legis- 
lature cannot,  under  its  reserved  power, 
compel  a  dam  company  to  erect  new 
fish-ways  after  it  has  compelled  them 
to  pay  damages  to  fish  owners.     Com- 
monwealth V.  Essex  Co.,  79  Mass.  239 
(1859).    Under  its  reserved   right   the 
legislature  may  amend  the  charter  of  a 
college  which  has  private  stockholders, 
but   to   which    the    state    contributes 
funds,  so  that  instead  of  the  state  hav- 
ing four  directors  out  of  eleven,  the 
state  shall  have  seven  out  of  twelve. 
Jackson  v.  Walsh,  75   Md.   304  (1893); 
but  see  Sage  v.  Dillard,  15  B.  Mon.  (Ky.) 
340,  357  (1854);  State  v.  Adams,  44  Mo. 
570  (1869);  Allen  v.  McKean,  1  Sumn. 
276  (1833);  S.  C,  1  Fed.  Cas.  489.     Under 
its  reserved  right  to  amend  or  repeal  a 
charter,  the  legislature  may  authorize 
a  change  in  the  location  of  a  college, 
even  though  the  citizens  of  the  place 
where    it    was   first   located    donated 
largely  to  its  funds.    Bryan  v.  Board  of 
Education,  151  U.  S.  639  (1894). 

Where  a  gas  company  has  an  exclu- 
sive right  to  supply  gas  to  a  city,  sub- 
ject to  the  right  of  the  legislature  to 
alter  or  revoke  the  same,  the  legisla- 
ture may  authorize  the  city  to  construct 
its  own  gas-works.  A  municipal  ordi- 
nance is  not  such  a  contract  as  is  pro- 


1037 


§  501.] 


AMENDMENTS    TO    CHARTERS. 


[CH.  XXVIII. 


The  supreme  court  of  the  United  States  has  said  that  "a  power 
reserved  to  the  legislature  to  alter,  amend,  or  repeal  a  charter  au- 
thorizes it  to  make   any  alteration  or  amendment   of  a  charter 


tected  by  the  constitution  of  the  United 
States  in  regard  to  impairing  the  va- 
lidity of  contracts.  It  is  a  contract 
that  is  protected  in  the  same  way  as 
contracts  of  individuals.  Hamilton, 
«tc.  Co.  u  Hamilton  City,  146  U.  S. 
258  (1892).  As  to  the  latter  point, 
see  contra,  City  Ry.  v.  Citizens'  Street 
R.  R.,  166  U.S.  557  (1897).  Where 
an  amendment  exempts  the  com- 
pany from  taxation  and  provides 
that  it  shall  furnish  the  city  with 
water  free  of  cost,  a  repeal  of  the  ex- 
emption repeals  the  obligation  as  to 
water.  Louisville  Watty  Co.  v.  Clark, 
143  U.  S.  1  (1892).  An  exemption  from 
taxation  may  be  repealed  under  the 
reserved  right  to  amend,  etc.  Pearsall 
V.  Great  Northern  Ry.,  161  U.  S.  646, 
663  (1896);  Wagner  Free  Institute  v. 
Philadelphia,  132  Pa.  St.  612  (1890).  As 
to  such  repeals  see  §  572&,  infra.  Under 
the  reserved  power  to  amend  or  repeal 
a  charter  the  legislature  may  compel 
the  corporation  to  pay  wages  weekly 
to  its  employees.  State  u  Brown,  etc. 
Mfg.  Co.,  18  R.  I.  16  (1892).  Under  the 
reserved  right  to  amend  the  charter 
the  legislature  may  amend  so  as  to 
confine  the  road  to  a  particular  route, 
and  outstanding  contracts  of  the  com- 
pany do  not  prevent  such  an  amend- 
ment. Macon,  etc.  R.  R.  v.  Gibson,  85 
Ga.  1  (1890).  Under  its  reserved  power 
to  amend,  the  legislature  may  require 
several  railroads  to  acquire,  build  to, 
and  use  a  union  depot.  Worcester  v. 
Norwich,  etc.  R.  R.,  109  Mass.  103  (1871). 
Even  though  a  provision  in  a  special 
railroad  charter  provides  that  rates 
shall  be  fixed  by  its  board  of  directors, 
yet,  under  a  reserved  right  to  amend, 
the  legislature  may  authorize  a  state 
commission  to  regulate  rates.  Mat- 
thews V.  Board  of  Corpoi'ation  Com'rs, 
etc.,  97  Fed.  Rep.  400  (1899).  The  legis- 
lature canot  reduce  the  rates  on  a  rail- 


road where  the  original  charter  fixed 
the  rates,  and  even  a  reserved  right  to 
amend  the  charter  upon  compensation 
being  made  does  not  sustain  such  re- 
duction of  rates,  no  compensation  being 
provided  for.  Pingree  v.  Michigan,  etc. 
Co.,  118  Mich.  314  (1898).  A  state,  under 
its  reserved  power  to  amend  or  repeal 
charters,  cannot  change  the  original 
statute  as  to  rates  to  be  charged  by  ir- 
rigation companies,  which  prescribed 
that  the  actual  investment  should  be 
taken  into  consideration  by  enacting  a 
new  statute  which  omits  that  check  on 
the  reduction.  San  Joaquin,  etc.  Co. 
V.  Stanislaus  County,  113  Fed.  Rep.  930 
(1902).  In  regard  to  the  question  of 
the  constitutionality  of  a  radical 
amendment  to  a  charter  under  the  re- 
served right  to  amend,  see  Shields  v. 
Oliio,  95  U.  S.  319  (1877);  Sinking  Fund 
Cases,  99  U.  S.  700  (1878);  Pennsylvania 
College  Cases,  13  Wall.  190  (1871);  Mil- 
ler r.  State,  15  Wall.  478  (1872);  Spring 
Valley  Water-works  v.  Schottler,  110 
U.  S.  347  (1884);  Close  u,  Glenwood 
Cemetery,  107  U.  S.  466  (1882).  Author- 
izing one  railroad  to  subscribe  for  stock 
in  another  railroad  has  been  held  legal. 
White  V.  Syracuse,  etc.  R.  R.,  14  Barb. 
559  (1853).  Also  borrowing  money  and 
building  branches.  Northern  R.  R.  v. 
Miller,  10  Barb.  260  (1851).  Also  reduc- 
ing capital  stock.  Joslyn  v.  Pacific 
Mail  S.  S.  Co.,  13  Abb.  Pr.  (N.  S.)  329 
(1872).  See  also  White  Hall,  etc.  R.  R. 
V.  Myers.  16  Abb.  Pr.  (N.  S.)  34  (1872); 
State  V.  Accommodation  Bank,  26  La. 
Ann.  288  (1874).  The  extension  of  the 
line  from  six  to  seventeen  miles  was 
held  to  require  a  unanimousacceptance 
in  Zabriskie  v.  Hackensack,  etc.  R.  R.. 
18  N.  J.  Eq.  178  (1867).  Under  its  re- 
served right  to  amend,  the  legislature 
may  change  the  name  of  a  corporation. 
Phinney  v.  Trustees,  etc.,  88  Md.  633 
(1898). 


1038 


-CH.  XXVIII.J 


AMENDMENTS    TO    CHAKTEES. 


[§  501. 


granted  subject  to  it  which  will  not  defeat  or  substantially  impair 
the  object  of  the  grant,  or  any  rights,  vested  under  it,  and  which 
the  legislature  may  deem  necessary  to  secure  either  that  object  or 
any  public  right." '  Under  the  reserved  power  to  amend  a  charter 
the  legislature  may  authorize  the  consolidation  of  railroads.^  Under 
the  reserved  right  of  the  legislature  to  alter  or  amend  a  charter 
the  legislature  may  pass  a  statute  allowing  stockholders  to  cumu- 
late their  votes  in  elections,  thus  enabling  minority  stockholders  to 
«lect  a  minority  of  the  board  of  directors.'  Even  though  a  rail- 
road has  made  a  survey  and  located  its  route,  yet,  if  it  has  not  con- 
demned its  right  of  way  under  the  state  statute,  the  state,  under 
the  reserved  right  to  amend  or  repeal,  may  repeal  the  power  to  so 
€oridemn.<  A  general  statute  reserving  the  power  to  amend  or  re- 
peal charters  is  a  part  of  all  special  charters  passed  subsequently.* 
A  general  statute  reserving  to  the  legislature  the  right  to  repeal 
and  amend  charters  applies  to  extensions  of  pre-existing  charters 


1  New  York  &  New  England  R.  R.  r. 
Bristol,  151  U.  S.  556  (1894). 

2  Market  Street  Ry.  v.  Hellman,  109 
■CaL  571  (1895);  Hale  v.  Cheshire  R  R., 
161  Mass.  443  (1894);  Bishop  v.  Brain- 
erd.  3S  Conn.  289  (1859).     Contra,  Keno- 
sha, etc.   R.   R,   v.   Marsh,  17  Wis.  13 
(1863),   a   dictum:    Mowrey  v.   Indian- 
apolis, etc.  R.  R.,  4  Biss.  78  (1866);  R.  c, 
17  Fed.  Cas.  930.    See  also  §  896,  infra. 
A  subscription  for  stock  is  not  released 
by  a  subsequent  consolidation  of  the 
company    with    another,  unless    such 
consolidation  is  a  fundamental  altera- 
tion of  the  organization.      Morrill    v. 
Smith  County,  89  Tex.  529  (1896).     It 
has  been  held  that,  under  its  reserved 
power,  the  legislature  may  authorize  a 
road  to  lease  to  another.   Durfee  v.  Old 
Colony,  etc.  R.  R,  87  Mass.  230  (1862). 
Under  the  reserved  right  to  amend  the 
charter,  an  amendment  authorizing  a 
lease    is    not  valid    except   with  the 
unanimous  consent  of  the  stockholders. 
Dow  V.  Northern  R,  R.,  67  N.  H.  1  (1887), 
giving  an  exhaustive  discussion  of  the 
question. 

3  Looker  v.  Maynard,  179  U.  S.  46 
(1900).  Where  by  statute  the  state  re- 
tains power  to  amend  charters  subse- 
quently granted,  a  subsequent  constitu- 
tional provision  for  cumulative  voting 


applies  to  all  such  corporations, 
whether  organized  by  special  charter 
or  under  the  general  act,  and  does  not 
impair  the  validity  of  a  contract.  So 
also  where  a  corporation  amends  its 
charter  under  an  act  providing  for 
cumulative  voting,  such  cumulative 
voting  applies  to  it.  Gregg  v.  Granby, 
etc.  Co.,  164  Mo.  616  (1901).  Under  the 
reserved  right  to  amend,  the  legislature 
may  change  the  charter  of  a  library 
corporation  so  that  each  share  shall 
have  one  vote  instead  of  restricting  the 
vote  of  those  who  held  more  than  five 
shares.  Rankin  v.  Newark,  etc.  Assoc, 
64  N.  J.  L.  265  (1900). 

<  Adirondack  Ry.  v.  New  York  State, 
176  U.  S.  335  (1900). 

5  A  general  statute  reserving  to  the 
state  the  right  to  amend  or  repeal  a 
charter  is  a  part  of  all  special  charters 
thereafter  passed,  even  though  not  ex- 
pressly made  a  part  thereof.  Citizens' 
Sav.  Bank,  etc.  v.  Owensboro,  173  U.  S. 
636,  644  (1899).  A  general  statute  re- 
serving the  right  to  alter,  amend,  or 
repeal  charters  applies  to  all  subse- 
quent special  charters  not  expressly 
excepted  from  its  effect  Watson  Semi- 
nary V.  Pike  Co.  Court,  149  Mo.  57 
(1899).  See  §  2,  supra.  A  general  ante- 
cedent statute  reserving  the  right  to 


1039 


§  502.] 


AMENDMENTS    TO    CHARTERS. 


[CH.  XXVIIl 


as  well  as  to  subsequent  grants  of  new  charters.^  Where  a  city 
reserves  the  right  in  its  grant  to  a  telephone  company  to  repeal  it^ 
such  repeal  is  legal.^  An  exclusive  right  of  a  street  railway  com- 
pany may  be  repealed  under  a  reserved  right  by  the  legislature  to 
revoke,  and  such  repeal  may  be  by  implication.^ 

§  502.  Dissenting  stoclholder's  remeihj  against  an  illegal  amend- 
ment.—  Where  an  unauthorized  and  illegal  amendment  has  been 
accepted  by  a  corporation  and  is  about  to  be  acted  upon,  a  stock- 
holder has  two  remedies.  If  he  has  not  paid  his  subscription,  he 
may  consider  himself  released  from  his  liability  to  pay  the  sub- 
scription, or  he  may  begin  suit  in  equity  to  obtain  an  injunction 
against  or  to  set  aside  any  action  by  the  corporation  under  the 
amendment.*     If  the  stockholder  has  already  paid  his  subscription, 


amend  does  not  apply  to  subsequent 
amendments  to  an  old  charter  where 
it  was  not  so  intended.  A  new  charter 
may  be  so  drawn  as  to  be  free  from 
such  a  general  antecedent  statute. 
New  Jersey  v.  Yard,  95  U.  S.  104  (1877), 
revg  37  N.  J.  L.  228.  Where,  subse- 
quently to  the  incorporation  of  a  com- 
pany, a  general  act  reserves  to  the  leg- 
islature the  right  to  amend  or  repeal 
any  and  all  charters,  the  legislature 
may  repeal  any  amendments  to  the 
charter,  so  far  as  such  amendments  are 
passed  after  the  general  act,  where  the 
amendments  do  not  expressly  waive 
the  legislative  right  of  amendment  or 
repeal.  But  any  amendment  should 
be  "saving,  whenever  that  power  was 
exerted,  all  rights  previously  vested." 
An  exemption  from  taxation  may  be 
repealed  under  the  reserved  power. 
(Approving  Tomlinson  v.  Jessup,  15 
Wall.  454  —  1872,  and  Railroad  Co.  v. 
Maine,  96  U.  S.  499  —  1877.)  Creditors 
stand  upon  the  same  footing  in  this  re- 
spect Louisville  Water  Co.  v.  Clark, 
143  U.  S.  1  (1892). 

1  Northern  Bank,  etc.  v.  Stone,  88  Fed. 
Rep.  413  (1898). 

-  Southern,  etc.  Co.  v.  City  of  Rich- 
mond, 98  Fed.  Rep  671  (1899). 

3  Wilmington  City  Ry.  v.  Wilming- 
ton, etc.  Ry.,  46  Atl.  Rep.  12  (Del.  1900). 
Under  the  right  reserved  in  the  consti- 
tutHon  of  the  state  to  revoke  charters, 


the  legislature  may  disregard  an  ex- 
clusive right  granted  to  a  street  rail- 
way by  its  special  charter  and  may 
grant  rights  to  another  company.  Wil- 
mington, etc.  Ry.  V.  People's  Ry.,  47 
Atl.  Rep.  245  (Del.  1900).  Cf.  ^  913.  infra. 
4  This  rule  is  recognized  and  applied 
in  most  of  the  cases  of  this  chapter. 
See  also  Clearwater  v.  Meredith,  1  Wall. 
25  (1863),  holding  that  the  stockholder 
was  released,  and  saying:  "Clearwater 
could  have  prevented  this  consolida- 
tion had  he  chosen  to  do  so;  "  Nugent 
V.  Supervisors,  19  Wall  241  (1873).  An 
amendment  to  the  charter  materially 
changing  the  terminus  releases  a  dis- 
senting subscriber  for  stock  from  his 
subscription.  Kenosha,  etc.  R,  R.  u. 
Marsh,  17  Wis.  13  (1863).  A  change  of 
the  termini  under  an  amendment  to 
the  charter  releases  previous  subscrib- 
ers, there  being  no  reserved  right  to 
make  such  amendment.  Snook  v.  , 
Georgia  Imp.  Co.,  83  Ga.  61  (1889).  A 
fundamental  change  in  the  corporation 
releases  subscribers.  Greenbrier  Ind. 
Exposition  v.  Rodes,  37  W.  Va.  738 
(1893);  Buffalo,  etc.  R.  R.  v.  Pottle,  23 
Barb.  21  (1856).  A  change  in  the  plan 
of  organization  so  as  to  have  a  larger 
capital  stock  than  was  originally  in- 
tended releases  a  subscriber.  Norwich, 
etc.  Co.  V.  Hockaday,  89  Va.  557  (1893). 
A  change  of  route  releases  the  sub- 
scriber.    Champion  v.  Memphis,  etc.  R.. 


1040 


CH.  XXVIII.] 


AMENDMENTS    TO    CHARTERS. 


[§  503. 


then  his  onW  remedy  is  an  injunction  or  a  suit  to  set  aside.^  In 
Pennsylvania  it  has  been  held  that  the  stockholder  may  have  an 
injunction  herein,  but  only  until  the  corporation  shall  have  pur- 
chased his  interest  in  the  corporation.^  This  decision,  however,  has 
been  doubted,  and  hardly  seems  consistent  with  well-established 
principles  protecting  persons  in  their  right  to  retain  their  property 
except  as  taken  from  them  under  the  power  of  eminent  domain.^ 

§  503.  Assent  and  acquiescence  as  a  bar  to  the  stocliJiolder' s  rem- 
g^y_ —  A  stockholder  may  be  estopped  from  objecting  to  an  amend- 
ment by  his  express  or  implied  acquiescence  therein.  Any  acts  in- 
dicating an  acceptance  by  him  of  the  amendment  bind  him  and 
bar  his  suit.*    Acquiescence  may  sometimes  grow  out  of  his  silence 


R,  35  Miss.  692  (1858).  A  charter  amend- 
ment enlarging  the  corporate  objects 
from  fire  and  accident  to  fire,  marine, 
and  inland  insurance  releases  dissent- 
ing stockholders.     Ashton  v.  Burbank, 
2  Dill.  435  (1873);  S.  C,  2  Ffed.  Cas.  26.  A 
legislative  amendment  not  accepted  by 
the  company  is  no  defense  to  a  subscrip- 
tion.    Chattanooga,  etc.  R.  R.  v.  War- 
then,  98  Ga.   599  (1896).     In  opposition 
to  the  above  rule  of  law,  there  are 
some  decisions  holding  that  the  sub- 
scribers' only  remedy  is  an  injunction. 
"Were  it  not  that  the  great  weight  of 
authority  holds  otherwise,   this    view 
would  be  commended  as  the  only  log- 
ical result  of  the  law.     There  is  no  rea- 
son why  a  stockholder  who  has  not  paid 
his  subscription  should  be  better   off 
than  he  who  has  met  that  obligation. 
See  §  187,  supra;  also  Hays  v.  Ottawa, 
etc.  R.  R.,  61  111.  422  (1871);  Pacific  R. 
R.  V.  Hughes,  22  Mo.  291  (1855);  Martin 
V.  Pensacola  R.  R.,  8  Fla.  370,  389(1859); 
Ware  v.  Grand  Junction  "Water  "Works, 
2    Russ.    &  M.    470   (1831);   First  Nat. 
Bank  v.  Charlotte.  85  N.  C.   433  (18^). 
The  plea  of  release  must  allege  accept- 
ance by  the  corporation,  and  injury  to 
the  defendant  sued  on  his  subscription, 
Hawkins  v.  Mississippi,  etc.  R.  R.,  35 
Miss.  688  (1858).     The  subscribers'  rem- 
edy, where  the  charter  differs  from  the 
prospectus  or  contract  of  subscription, 
is  considered  elsewhere.     See  §  194,  ch. 
X.  supra. 

1  This  remedy  also  is  supported  by  a 


large  number  of  the  cases  in  this  chap- 
ter. See  Stevens  v.  Rutland,  etc.  R.  R., 
29  Vt.  545  (1851);  Black  r.  Delaware, 
etc.  Canal  Co.,  24  N.  J.  Eq.  455  (1873); 
Mowrey  v.  Indianapolis,  etc.  R.  R.,  4 
Biss.  78  (1866);  s.  c,  17  Fed.  Cas.  930; 
Ware  v.  Grand  Junction  Water  Works, 
2  Russ.  &  M.  470  (1831).  The  stock- 
holder cannot  enjoin  parties  from  ap- 
plying to  the  legislature  for  the  amend- 
ment. Story  V.  Jersey  City,  etc.  Co.,  16 
N.  J.  Eq.  13  (1863),  reviewing  the  cases; 
Stevens  v.  Rutland,  etc.  R,  R.,  29  Vt. 
545  (1851). 

2  Lauman  v.  Lebanon  Valley  R.  R.,  30 
Pa.  St.  42  (1858),  approved  in  State  v. 
Bailey,  16  Ind.  46  (1861).  Cf.  Ship  v. 
Crosskill,  L.  R.  10  Eq.  73  (1870);  Stewart 
V.  Austin,  L.  R.  3  Eq.  299  (1866),  holding 
that  the  recovery  back  cannot  be  in  a 
court  of  equity. 

3  Mowrej'  v.  Indianapolis,  etc.  R  R.,  4 
Biss.  78  (1866);  S.  c,  17  Fed.  Cas.  930. 

*  Bedford  R  R  v.  Bowser,  48  Pa.  St. 
29  (1864).  Long  delay  may  constitute 
a  ratification  herein,  no  formal  accept- 
ance of  an  amendment  being  necessary. 
Gififord  r.  New  Jersey  R  R,  10  N.  J.  Eq. 
171  (1854);  Bangor,  etc.  R.  R  v.  Smith,. 
47  Me.  34  (1859);  State  v.  Sibley,  2& 
Minn.  387  (1879);  Hope  Mut.  F.  Ins.  Co. 
V.  Beckman,  47  Mo.  93  (1870);  Coving- 
ton V.  Covington,  etc.  Co.,  10  Bush  (Ky,), 
69  (1874):  Kenton  County  Court  v.  Bank 
Lick  Turnp.  Co.,  10  Bush  (Ky.),  529 
(1875);  Sumrall  v.  Sun  Mut.  Ins.  Co.,  40 
Mo.  27  (1867);    Sniead  v.  Indianapolis, 


(66) 


1041 


§  503.] 


AMENDMENTS   TO    CHARTERS. 


[CH.  XXVIII. 


or  delay  under  circumstances  that  called  on  him  to  dissent  if  he  so 
intended.^  A  court  of  equity  will  go  far  to  aid  a  dissenting  stock- 
holder where  he  applies  promptly  and  before  large  investments  and 
many  changes  are  made  on  the  faith  of  the  acts  complained  of. 
But  laches  will  not  be  tolerated  by  the  courts,  especially  where 
important  interests  are  involved.'^ 


etc.  R.  R.,  11  Ind.  104  (1858).  Cf.  Pingry 
V.  Washburn,  1  Aiken  (Vt),  264  (1826). 
See,  in  general,  Memphis  Branch  R.  R. 
V.  Sullivan,  57  Ga.  240  (1876);  Houston 
V.  Jefferson  College,  63  Pa.  St.  428  (1869); 
Danbury,  etc.  R  R.  v.  Wilson.  22  Conn. 
435  (1853);  Vermont,  etc.  R.  R.  v.  Ver- 
mont Central  R.  R.,  34  Vt  1  (1861);  Hay- 
worth  V.  Junction   R  R,   13  Ind.  348 
(1859);  Mills  v.  Central  R  R,  41  N.  J. 
Eq.  1  (1886);  Zabriskie  v.  Hackensack, 
etc.  R.  R.  18  N.  J.  Eq.  178  (1867);    Ex 
parte  Booker,  18  Ark.  338  (1857);  Upton 
V.  Jackson,  1  Flip.  C.  C.  413  (1874);  s.  c, 
28  Fed.  Cas.  844;  Goodin  r.  Evans,  18 
Ohio  St.  150  (1868);  also  §  640  and  ch. 
XLIV,  infra.    If  the  stockholder  sub- 
scribed after  the  amendment  was  made 
he  cannot  complain.    Eppes  v.  Missis- 
sippi, etc.  R  R,  35  Ala,  33,  54  (1859); 
McClure  v.  People's  Freight  Ry.,  90  Pa. 
St.  269  (1879).  If  a  stockholder  does  not 
object  to  an  amendment,  it  is  not  for  a 
person  whose  land  is  being  taken  under 
eminent-domain  proceedings  to  object. 
Ames  V.  Lake  Superior,  etc.  R   R,  21 
Minn.   241,  291    (1875).      Changes  and 
amendments  as  to  the  route  do  not  re- 
lease   the   subscriber  where   he    took 
part    therein.     Owenton,    etc.    Co.   v. 
Smith,  13  S.  W.  Rep.  426  (Ky.  1890). 
Bonds  issued  under  an  amendment  to 
a  charter  with  the  consent  of  all  the 
stockholders  will    be    enforced,  even 
though  the  amendment  was  invalid. 
Johnson  v.  Mercantile,  etc.  Co.,  94  Ga. 
324  (1894). 

1  Commonwealth  v.  Cullen,  13  Pa.  St. 
133  (1850);  Martin  v.  Pensacola,  etc.  R 
R.,  8  Fla.  370  (1859);  Owen  v.  Purdy,  12 
Ohio  St.  73  (1861).  Contra,  Hamilton 
Mut.  Ins.  Co.  V.  Hobart,  68  Mass.  543 
(1854).  Parties  taking  part  in  an  exten- 
sion of  the  road  cannot  object  that  the 
charter  amendment  authorizing  it  was 


unconstitutional.  Jones  v.  Concord,  etc. 
R  R,  67  N.  H,  234  (1892).     Although  a 
radical  change  in  the  location  of  a  rail- 
road after  a  subscription  has  been  made 
releases  the  subscription,  yet  the  sub- 
scriber may  by  his  acts  be  bound  by 
such  change.     Lowell  v.   Washington 
Co.  R  R,  90  Me.  80  (1897).     Although  a 
stockholder  may  enjoin  a  consolidation 
of  his  company  with  another  under  a 
statute  passed  after  the  incorporation, 
the  object  of  the  consolidation  being 
different  frofti  that  of  the  original  cor- 
poration, yet  where  the  stockholder  de- 
lays applying  to  the  court  for  nearly  a 
year,  and  in  the  meantime  the  consoli- 
dated company  has   borrowed  money 
and  given  mortgages,  and  such  mort- 
gages are  about  to  be  foreclosed,  the 
complaining  stockholder  is  guilty  of 
laches  and  his  remedy  is  barred.     Rabe 
V.  Dunlap,  51  N.  J.  Eq.  40  (1893).  A  con- 
solidation of  railroads  under  an  amend- 
ment to  the  charter  may  be  prevented 
by  a  single  stockholder.     But  several 
years'  delay  in    complaining  is  fatal. 
The  stockholder 'then  can  only  recover 
the  value  of  his  stock  and  past  divi- 
dends.    Deposit  Bank  v.  Barrett,  13  S. 
W.  Rep.  337  (Ky.  1890).    Where  stock- 
holders in  a  college  exchange    their 
stock  for  scholarships,  a  removal  of  the 
college  to  another  location  under  an 
amendment  to  the  charter,  such  amend- 
ment having   been   made  twenty-five 
years  prior  to  such  removal,  will  not  be 
enjoined.  Bryan  v.  Board  of  Education, 
90  Ky.  322  (1890).     Assent  of  a  stock- 
holder is  not  presumed,  but  must  be 
proven.    March  v.  Eastern  R.  R,  43  N. 
H.  515  (1862);  Union  Locks  and  Canals 
V.  Towne,  1  N.  H.  44  (1817);  Ireland  r. 
Palestine,  etc.  Turnp.  Co.,  19   Ohio  St. 
369  (1869). 
2  See  ch.  XLIV,  infra. 


1042 


CHAPTER  XXIX. 


"TRUSTS"  AND  UNINCORPORATED  JOINT-STOCK  ASSOCIATIONS. 


A.  "TRUSTS." 

§  503a.  Definition  and  legality  of  a 
"trust" — Decisions  in  the 
various  states  on  this  sub- 
ject—  The  anti-trust  act  of 
Congress. 

503&.  Further  inquiry  as  to  the  legal- 
ity of  a " trust" 

603c.  Liability  of  trustee  and  certifi- 
cate-holders. 

503d.  Qualifications,  powers,  etc.,  of 
the  trustees  and  of  certifi- 
cate-holders. 


B.  UNINCORPORATED  JOINT-STOCK      AS- 
SOCIATIONS. 

§  504.  Definitions  —  Joint-stock  com- 
panies, clubs,  exchanges,  etc. — 
Ownership  of  land. 

505.  Statutory     joint-stock     compa- 
nies—  Conduct  of  meetings. 

506.  Joint-stock  companies  may  arise 
by  implication  of  law. 

507.  How  a  person   becomes  a  mem- 
ber —  Transfers. 

508.  Liability  of  members  to  credit- 
ors and  to  the  company. 

509.  Actions  by  members  against  of- 
ficers and  the  company. 

510.  Dissolution    —    Disposition    of 
property. 

§  60?ja.  Definition  and  legality  of  a  ^Hrust'' —Decisions  in  the 
various  states  on  this  suhject—The  anti-trust  act  of  Congress.— The 
word  "  trust "  was  first  used  to  mean  an  agreement,  between  many 
stockholders  in  many  corporations,  to  place  all  their  stock  in  the 
hands  of  trustees  and  to  receive  therefor  trust  certificates  from  the 
trustees.  The  stockholders  thereby  consolidated  their  interests 
and  became  trust-certificate  holders.  The  trustees  owned  the 
stock,  voted  it,  elected  the  officers  of  the  various  corporations,  con- 
trolled the  business,  received  all  the  dividends  on  the  stock,  and 
used  ail  these  dividends  to  pay  dividends  on  the  trust-certificates. 
The  trustees  were  periodically  elected  by  the  trust-certificate  hold- 
ers. The  purpose  of  the  "  trust "  was  to  control  prices,  prevent 
competition,  and  cheapen  the  cost  of  production.  The  Standard 
Oil  Trust,  the  American  Cotton-Seed  Oil  Trust,  and  the  Sugar 
Trust  were  examples  of  this  method  of  combination.* 


1  The  committee  of  the  House  of  Rep- 
resentatives at  Washington,  in  their  re- 
port, explained  the  nature  of  the  Stand- 
ard Oil  Trust  and  Sugar  Trust  very 
clearly.  The  committee  reports  "  that 
there  exist  a  certain  number  of  cor- 
porations organized  under  the  laws  of 
the  different  states  and  subject  to  their 
control;  that  these  corporations  have  is- 
sued their  stock  to  various  individuals. 


and  that  these  individual  stockholders 
have  surrendered  their  stock  to  the 
trustees  named  in  the  agreements 
creating  these  trusts,  and  accepted  in 
lieu  thereof  certificates  issued  by  the 
trustees  named  therein.  The  agree- 
ments provide  that  the  various  corpo- 
rations whose  stock  is  surrendered  to 
the  trustees  shall  preserve  their  iden- 
tity and  carry  on  their  business."    See 


1043 


§  503a.]  TKUSTS,  ETC.  [CH.  XXIX. 

Later  the  word  "  trust "  was  given  a  wider  and  more  popular 
meaning.  It  is  used  to  designate  any  combination  of  producers 
for  the  purpose  of  controlling  prices,  reducing  cost  of  production, 
and  suppressing  competition.  In  this  sense  of  the  word  all  schemes 
whereby  those  who  were  competitors  combine  their  interests  arp 
"  trusts." 

During  the  past  ten  years  trusts  have  come  into  great  promi- 
nence. They  have  multiplied  rapidly  and  have  extended  into  many 
branches  of  business.  They  have  been  the  object  of  great  popular 
opposition,  and  their  legality  has  been  assailed,  both  in  the  courts 
and  by  prohibitory  statutes. 

The  courts  have  held  with  great  uniformity  that  these  combina- 
tions are  illegal  if  their  purpose  is  to  restrict  production,  rais© 
prices,  ©r  restrain  trade.  The  law  is  clear  that  any  combination  of 
competing  concerns  for  the  purpose  of  controlling  prices,  or  limit- 
ing production,  or  suppressing  competition,  is  contrary  to  pub- 
lic policy  and  is  void.  This  principle  of  law  has  been  applied  with 
great  rigor  to  some  of  the  trusts.  The  two  leading  cases  on  the 
subject  are  the  Sugar  Trust  decision  in  New  York  ^  and  the  Stand- 
ard Oil  Trust  decision  in  Ohio.-  Many  cases  showing  the  differ- 
ent circumstances  under  which  this  rule  has  been  applied  are  given 
in  the  notes  below,  arranged  in  the  alphabetical  order  of  the  vari- 
ous states.^ 

4  Ry.  &  Corp.  L.  J.  98.    Mr.  S.  C.  T.  "  Sugar  Trust  "  and  drove  it  into  trans- 

Dodd,  the  general  solicitor  and  origi-  ferring  all  its  property  to  a  New  Jersey 

nator  of  the  Standard  Oil  Trust,  defines  corporation  organized  for  that  purpose. 

a  trust  as  "  an  arrangement  by  which  the  2  The  next  important  case  was  State 

stockholders    of    various    corporations  u  Standard  Oil  Co.,  49  Ohio  St.  137  (1892). 

place  their  stocks  in  the  hands  of  cer-  This  case  declared  illegal  the  Standard 

tain  trustees,  and  take  in  lieu  thereof  Oil  Trust.     That  trust  was  also  subse- 

certificates  showing  each  shareholder's  quently  reorganized  into  a  New  Jersey 

equitable  interest  in  all  the  stock    so  corporation. 

held.      The  result  is  twofold:    1.    The  ^California:  Master  stevedores  may 

stockholders  thereby  become  interested  form  an  association  for  the  purposes  of 

in  all  the  corporations  whose  stocks  are  fixing  charges  and  agreeing  that  all 

thus  held.     2.  The  trustees  elect  the  business  done  by  them  shall  be  for  the 

directors  of  the  several  corporations."  benefit  of  the  association.     Herriman 

See  7  Ry.  &  Corp.  L.  J.  236.  v.  Menzies,  115  Cal.  16  (1896).     "Monop- 

1  The  state  veill,  at  the  instance  of  oly  signifies  the  sole  power  of  dealing 

the  attorney-general,  forfeit  the  char-  in  a  particular  thing,  or  doing  a  par- 

ter  of  a  corpoi-ation  whose  stockholders  ticular  thing,  either  generally  or  in  a 

have  entered  Into  a  "trust  "with  the  particular  place."      San   Diego  Water 

stockholders  of  competing  corporations  Co.  u  San  Diego  Flume  Co..  108  Cal.  549 

for  the  purpose  of  forming  a  monopoly  (1895).     A  contract  whose  effect  is  to 

in  and  raising  the  price  of  sugar.     Pec-  give  a  monopoly  in  the  sale  of  bags  by 

pie  V.  North  River,  etc.  Co.,  121  N.  Y.  the  vendor  agreeing  to  sell  to  one  party 

582  (1890).     This  case    broke  up    the  exclusively  is  illegal,  and  no  damages 

1044 


CH.  XXIX.] 


TEUSTS,  ETC. 


[§  503<Z. 


These  cases  indicate  the  complicated  questions  and  important 
litigation  that  have  arisen  by  reason  of  the  trusts.     It  is  believed, 


can  be  collected.  Pacific  Factor  Co.  v. 
Adler,  90  Cal.  110  (1891).  Although  the 
state  is  prosecuting  a  suit  to  forfeit  the 
charter  for  entering  into  a  combina- 
tion, yet  a  sale  of  pdrt  of  the  corpo- 
rate property  to  a  stockholder  pending 
the  suit  is  legal,  and  the  receiver  can- 
not follow  the  property.  A  writ  of 
prohibition  will  issue  against  him. 
Havemeyer  v.  Superior  Court,  84  Cal. 
327  (1890).  Where  all  the  manufactur- 
ers of  lumber  at  a  certain  point  con- 
tracted to  sell  to  a  corporation  all  the 
product  of  the  mills  so  far  as  such  prod- 
uct was  sold  in  four  counties,  and  the 
mills  agreed  not  to  sell  to  any  other 
parties  in  those  counties  except  upon 
a  forfeit  to  the  corporation,  the  court 
held  that  any  one  of  the  mills  could 
repudiate  the  contract.  In  a  suit 
brought  by  the  corporation  against  one 
of  the  mills  for  refusing  to  live  up 
to  the  contract,  the  court  held  that  the 
corporation  could  not  recover.  Santa 
Clara,  etc.  Co.  v.  Hayes,  76  CaL  387 
(1888). 

Georgia:  The  statute  against  trusts 
is  unconstitutional,  inasmuch  as  it  ex- 
cepts agricultural  products  and  live 
stock  while  in  possession  of  the  produ- 
cer. But  a  merchant  may  enjoin  other 
merchants  from  combining  and  pre- 
venting others  from  selling  goods  to 
him,  u.aless  he  will  agree  to  sell  goods 
at  prices  fixed  by  them.  Brown  v.  Ja- 
cobs, etc.  Co.,  41  S.  E.  Eep.  553  (Ga. 
1902). 

Illinois:  In  Illinois  it  is  held  that  a 
contract  of  a  citizen  of  Illinois  not  to 
engage  in  the  manufacture  of  paper 
boxes  for  ten  years  in  Illinois  or  Indi- 
ana is  illegal,  as  in  restraint  of  trada 
Lanzit  v.  J.  W.  Sefton,  etc.  Co.,  184  III 
326  (1900).  In  the  case  of  Harding  v. 
American,  etc.  Co.,  182  111.  551  (1899),  an 
Illinois  stockholder  in  a  New  Jersey 
glucose  manufacturing  corporation  en- 
joined in  the  courts  of  Illinois  a  trans- 


fer of  the  property  of  that  corporation, 
including  real  estate  in  Illinois,  to  an- 
other New  Jersey  corporation,  the  lat- 
ter being  a  trust  formed  to  absorb  prac- 
tically all  the  glucose  factories  of  the 
country,  the  court  saying  that  it  need 
not  be  proved  that  prices  have  actually 
been  raised,  but  it  is  sufficient  if  it  is 
within  the  power  of  the  corporation  to 
raise  them.  The  court  said:  "Any 
combination  of  competing  corporations 
for  the  purpose  of  controlling  prices, 
or  limiting  production,  or  suppressing 
competition,  is  contrary  to  public  pol- 
icy and  is  void."  A  state  may  main- 
tain a  suit  for  an  injunction  against 
an  elevator  company  using  all  its  ca- 
pacity for  the  benefit  of  its  stockhold- 
ers, where  the  objection  is  not  raised 
that  there  is  an  adequate  remedy  at 
law.  Central  Elevator  Co.  v.  People, 
174  111.  203  (1898).  Where  a  person  con- 
veys property  to  a  corporation,  the  ob- 
ject being  to  place  the  stock  of  that 
corporation  in  the  hands  of  trustees  to 
create  a  trust,  such  person,  having  re- 
covered possession  of  his  property,  may 
defend  against  his  contract  to  convey. 
Bishop  V.  American,  etc.  Co.,  157  IlL 
284  (1895).  Quo  warranto  lies  against 
a  corporation  formed  to  purchase  sub- 
stantially all  the  distilleries  in  the  coun- 
try. Distilling,  etc.  Co.  v.  People,  156 
111.  448  (1895).  The  Illinois  statute  of 
1891  against  trusts  is  constitutional. 
Ford  V.  Chicago,  etc.  Assoc,  155  IIU  166 
(1895).  The  state  may  forfeit  the  char- 
ter of  a  live-stock  corporation  where  it 
limits  the  number  of  agents  which  each 
of  its  stockholders  may  employ.  People 
V.  Chicago  L.  S.  Exchange,  170  111.  556 
(1897).  A  stockholder  in  a  corporation 
cannot  sustain  a  bill  to  have  the  char- 
ter forfeited  and  the  corporation  wound 
up  on  the  ground  that  it  was  formed 
to  purchase  and  combine  various  com- 
peting linseed-oil  mills  for  the  purpose 
of    forming    a    monopoly.    The    state 


1045 


§  503a.] 


TRUSTS,  ETC. 


[oh.  XXIX. 


however,  that  the  volume  of  such  litigation  will  decrease  rather 
than  increase  in  the  future.     Most  of  the  great  trusts  have   been 


alone  can  ask  for  such  a  forfeiture. 
Moreover,  the  stockholder,  by  being  a 
stockholder,  is  estopped  from  complain- 
ing,  and   is    presumed    to    have  had 
knowledge  of  the  facts  from  the  time 
that  he  became  a  stockholder.   Coquard 
V.  National  L.  S.  Co.,  171  111.  480  (1898). 
Although  the  general  statute  author- 
izes  incorporation  for  any  "  lawful  pur- 
pose," yet  an  incorporation  to  buy  a 
majority  of  the  stock  of  each  of  four 
competing  gas  corporations  in  a  city  is 
illegal  where  the  purpose  is  to  create  a 
monopoly.    The  state  may  by  suit  have 
the  charter  forfeited.      People  v.  Chi- 
cago Gas  T,  Co.,  130  111.  268  (1889).     All 
gas  companies  owe  a  duty  to  the  pub- 
lic.   An  agreement  of  two  companies 
in  one  city  to  keep  out  of  each  other's 
territory  is  void.    Chicago  Gas  L.  Co. 
V.   People's    Gas    L.    Co.,    121    111.    530 
(1887).     In  Illinois  all  the  grain  deal- 
ers in  a  town  secretly  combined  and 
made  contracts  by   which    they  con- 
trolled the  price  of  grain  and  the  local 
storehouse  accommodations.    The  par- 
ties succeeded,  but  disagreed  in  their 
division  of  the  profits.     An  action  for 
an    accounting   was    brought  by  one 
against  another.     The  court  refused  to 
aid  either  party.    The  law  will  leave 
the  guilty  conspirators  as  it  finds  them. 
Craft  V.  McConoughy,  79  111.  346  (1875). 
Indiana:  Where  two  competing  gas 
companies  agree  on  rates  to  be  charged 
the  public,  and  agree  not  to  interfere 
with  each  other's  patrons,  the  state  may 
forfeit  their  charters,  or  the  court  may 
in  its  discretion  declare  a  forfeiture  or 
ouster  of  the  right  of  the  defendants 
to  carry  out  the  illegal  acts.    State  v. 
Portland,  etc.  Co.,  153  Ind.  483  (1899).     A 
depot  corpoi'ation  has  no  right  to  give 
a  monopoly  to  one  person  of  the  right 
to  solicit  cab  business  at  the  entrance 
of  the  depot,  even  though  such  entrance 
is  on  the  company's  grounds.    Indian- 
apolis, etc.  Ry.  V.  Dohn,  153  Ind.  10  (1899). 
Cf.  %  909,  infra. 


Iowa:  The  Iowa  statute  against  trusts 
applies  to  an  agreement  of  insurance 
companies    to    charge    uniform   rates. 
Beechley  v.  Mulville,  102  Iowa,  602  (1897). 
Kansas:      A    criminal     prosecution 
against  the  officers  of  a  company  for 
pooling  with  others  to  fix  the  price  to 
be   paid   for    grain,  failed  in  State  v. 
Dreany.  69  Pac.  Rep.  182  (Kan.  1902),  but 
another  prosecution  was  successful  in 
State  V.  Smiley,  69  Pac.  Rep.  199  (Kan. 
1902).    A  dealer  in  cattle  cannot  enjoin 
a  voluntary  association  of  other  cattle 
dealers  from  expelling  one  of  its  mem- 
bers for  violating  a  b}'-law  prohibiting 
him  from  trading  with  the  plaintiff. 
Downs  V.  Bennett,  63  Kan.  653  (1901). 
Where  an  association  of  live-stock  com- 
mission merchants  is  formed  for  the 
purpose    of    regulating    commissions, 
with  a    penalty     for  violation    of  the 
same,  a  member  cannot  enjoin  the  as- 
sociation from  expelling  him  for  non- 
payment of  the  penalty.  Greer  v.  Payne, 
4  Kan.  App.  153  (1896).    Insurance  busi- 
ness is  not  interstate  commerce.     For- 
eign insurance  companies  that  combine 
to  control  and  increase  the  rates  of  in- 
surance on  property  inside  the  state  vio- 
late the  statute  against  trusts,  and  their 
local  agents  are  subject  to  prosecution 
therefor.     State  v.  Phipps,  50  Kan.  609 
(1893). 

Kentucky:  The  anti-trust  statute  of 
Kentucky  is  not  void  for  uncertainty, 
and  an  indictment  which  follows  the 
language  of  tlie  statute  is  sufficient. 
Commonwealth  v.  Grinstead,  55  S.  W. 
Rep.  720  (Ky.  1900).  The  agreement  of 
two  rival  boats  to  divide  their  earnings 
in  a  certain  proportion,  and  if  either 
owner  sells  he  shall  not  go  into  the  busi- 
ness again  for  a  year,  is  void.  The  party 
who  has  sold  and  then  returned  at  once 
to  the  business  is  not  liable  in  damages.- 
Anderson  v.  Jett,  89  Ky.  375  (1889). 

Louisiana:  Where  a  draj'men's  union 
has  obtained  a  monopoly,  and  dictates- 
■who  shall  receive  a  particular  contract,- 


1046 


CH. 


XXIX.] 


TRUSTS,  ETC. 


[§  50da. 


driven  from  their  original  mode  of  organization  and  have  reorgan- 
ized by  conveying  all  their  property  to  a  corporation  organized  for 


and  a  contract  is  let  to  one  by  a  busi- 
ness firm,  and  then  another  member 
claims  the  contract,  which  the  firm  lets 
to  him,  and  then  the  firm  gives  the 
business  to  the  first  member,  the  second 
cannot  collect  damages.  Fabacher  v. 
Bryant,  46  La.  Ann.  820  (1894;.  A 
stockholder  cannot  hold  a  director 
liable  for  the  stock  becoming  worthless 
by  reason  of  the  fact  that  the  director 
and  others  sold  their  stock,  amounting 
to  three-fourths  of  the  stock,  to  the 
American  Cotton  Oil  Trust,  and  that 
the  trust  then  dissolved  the  corporation 
by  a  three-fourths  vote,  as  allowed  by 
statute,  although  the  directors  as  such 
voted  for  the  dissolution.  Trisconi  v. 
Winship,  43  La.  Ann.  45  (1891^  A  pool- 
ing contract  between  two  railroads 
competing  for  business  between  the 
same  points  is  void  as  against  public 
policy.  The  court  will  leave  the  parties 
where  they  are.  The  arrangement  in 
this  case  was  for  a  division  of  earnings. 
Texas,  etc.  Ry.  v.  Southern  Pac.  Ry.,  41 
La.  Ann.  970  (1889).  In  Louisiana, 
where  several  firms  owned  a  large 
quantity  of  India  bagging,  and  com- 
bined and  agreed  not  to  sell  except 
upon  the  consent  of  a  majority  of  those 
who  were  parties  to  the  agreement,  the 
court  refused  both  to  uphold  the  agree- 
ment and  to  enforce  the  penalty  for  a 
violation  of  the  compact.  India  Bag- 
ging Assoc.  V.  Kock,  14  La.  Ann.  168 
(1859). 

Massachusetts:  "Where  three  electric 
companies  are  combined  into  one,  and 
the  oflBcers  of  the  new  company  are  the 
same  as  the  ofiBcers  of  the  old,  and 
agree  not  to  engage  in  the  same  busi- 
ness for  five  years  in  competition  with 
the  new  company,  such  agreement  is 
legal.  Anchor  Electric  Co.  v.  Hawkes, 
171  Mass.  101  (1898),  reviewing  the  au- 
thorities. The  combination  of  two  parties 
who  each  claim  a  patent  on  an  article 
not  a  prime  necessity  nor  a  staple  com- 


modity in  the  market  is  legal  and  may 
be  specifically  enforced.  Gloucester, 
etc.  Co.  V.  Russia  Cement  Co..  154  Mass. 
92  (1891).  In  Central  Shade-Roller  Co.  v. 
Cushman,  143  Mass.  353  (1887),  where  cer- 
tain shade-roller  manufacturers  formed 
a  corporation  to  sell  their  product,  the 
court  enjoined  one  of  the  parties  from 
repudiating  the  agreement,  but  said: 
"The  agreement  does  not  refer  to  an 
article  of  prime  necessity,  nor  to  a 
staple  of  commerce,  nor  to  merchan- 
dise to  be  bought  and  sold  in  the  mar- 
ket. ...  It  does  not  look  to  affect- 
ing competition  from  outside  —  the 
parties  have  a  monopoly  by  their  pat- 
ents—  but  only  to  restrict  competition 
in  price  between  themselves.  .  .  . 
When  it  appears  that  the  combination 
is  used  to  the  public  detriment,  a  dif- 
ferent question  will  be  presented  from 
that  now  before  us." 

Michigan:  In  ascertaining  the  mar- 
ket price  of  articles  sold,  the  price  as 
fixed  by  a  combination  in  the  trade 
will  not  be  considered.  Lovejoy  v. 
Michels,  88  Mich.  15  (1891).  A  contract 
of  a  concern  not  to  manufacture  a  cer- 
tain line  of  articles  in  some  states  for 
five  years  is  void.  Western,  etc.  Assoc. 
V.  Starkey,  84  Mich.  76  (1890).  Where 
three  persons  interested  in  a  match 
factory  agreed  to  unite  their  property 
with  that  of  their  competitors  in  one 
large  corporation,  a  monopoly  —  the 
Diamond  Match  Company — the  courts 
will  not  enforce  the  contract  between 
these  three  persons  which  specifies  the 
proportion  in  which  each  of  the  three 
was  to  participate  in  the  profits  com- 
ing to  them  jointly  from  the  monopoly. 
The  history,  character  and  purpose  of 
the  match  monopoly  are  fully  stated 
in  this  decision.  Richardson  v.  Buhl, 
77  Mich.  632  (1889). 

Minnesota:  A  member  of  a  commis- 
sion merchant  corporation  whicli  has 
been  formed  to  regulate  the  prices  to 


1047 


§  503a.] 


TRUSTS,  ETC 


[CH.  XXIX. 


the  purpose  of  taking  over  the  propert\\     Such  has  been  the  case 
with  the  Sugar  Trust,  the  Standard  Oil  Trust,  and  the  Cotton-seed 


be  paid  for  produce  may  sue  the  corpo- 
ration for  damages  caused  by  his  being 
boycotted,  even  though  he  helped  to 
form  the  corporation  and  was  after- 
wards suspended.  Ertz  v.  Produce,  etc. 
Co.,  83  Minn.  173  (1901).  It  is  legal  for 
a  large  number  of  retail  lumber  deal- 
ers to  form  a  Toluntary  association, 
and  agree  that  they  will  not  deal  with 
any  manufacturing  or  wholesale  dealer 
who  sells  directly  to  customers,  and 
thereby  deprives  the  retail  dealer  of 
business,  and  the  by-laws  of  their  as- 
sociation may  provide  that  the  secre- 
tary shall  notify  all  members  of  the 
names  of  wholesalers  who  sell  in  this 
manner  to  consumers.  An  injunction 
against  the  secretary  giving  such  no- 
tices will  not  be  granted.  Bohn  Mfg. 
Co.  V.  HoUis,  54  Minn.  223  (1893).  By- 
laws of  an  exchange  restricting  the 
freedom  of  members  to  reduce  prices 
and  establish  offices  for  selling  are 
void.  Kolff  V.  St.  Paul  Fuel  Exchange, 
48  Minn.  215  (1892). 

Mississippi:  Although  two  cotton 
compress  companies  have  agreed  to 
consolidate,  and  have  put  their  prop- 
erty in  the  hands  of  a  governing  com- 
mittee to  manage  until  a  new  charter 
is  obtained,  yet  either  corporation  may 
withdraw  from  the  arrangement,  it 
being  ultra  vires.  Greenville,  etc.  Co. 
■V.  Planters',  etc.  Co.,  70  Miss.  669  (1893). 
As  to  the  Mississippi  statute,  see  also 
American  F.  Ins.  Co.  v.  State,  75  Miss. 
24  (1897). 

Missouri:  The  supreme  court  of  Mis- 
souri, in  the  case  of  State  v.  Firemen's, 
etc.  Co.,  152  Mo.  1  (1899),  rendered  a 
judgment  of  ouster  against  a  large 
number  of  insurance  companies  from 
doing  business  within  the  state  on  ac- 
count of  their  entering  into  an  agree- 
ment to  maintain  uniform  premium 
rates.  See  Skrainka  v.  Sharringhausen, 
8  Mo.  App  522  (1880),  upholding  a  pool- 
ing contract  of  certain  owners  of  stone 


quarries  located  in  St.  Louis,  on  the 
ground  that  the  restraint  was  local  in 
its  effect.     See  73  S.  W.  Rep.  645. 

Nebraska:  An  association  of  retail 
lumber  dealers  which  imposes  a  penalty 
on  members  who  sell  to  consumers  or 
to  retailers  not  eligible  to  membership 
is  illegal.  Cleland  v.  Anderson,  92  N. 
W.  Rep.  306  (Neb.  1902).  Under  the 
Nebraska  statute,  in  a  suit  instituted 
by  the  state  to  enjoin  a  foreign  corpo- 
ration from  doing  business  in  the  state 
on  the  ground  that  it  is  violating  an 
anti-trust  statute,  the  court  may  order 
the  defendant  to  allow  the  plaintiff  to 
examine  the  defendant's  books  and 
records  for  the  purpose  of  obtaining 
evidence  in  the  case.  State  v.  Stand- 
ard Oil  Co.,  61  Neb.  28  (1900).  Where 
the  stockholders  of  a  distilling  corpo- 
ration transfer  their  stock  to  trustees, 
for  the  purpose  of  entering  into  a  trust, 
such  trustees  being  the  holders  of  the 
stock  of  various  other  corporations  en- 
gaged in  the  same  business,  and  trust 
certificates  are  issued  by  them  in  place 
of  the  stock,  the  state,  at  the  instance 
of  the  attorney-general,  will  cause  the 
charter  to  be  annulled  on  the  ground 
of  misuser,  the  corporation  being  no 
longer  engaged  in  a  lawful  business. 
Although  the  corporate  property  was 
transferred  just  before  judgment,  the 
court  will  not  allow  its  decree  to  be 
evaded.  State  v.  Nebraska  Distilling 
Co.,  29  Neb.  700(1890). 

New  Jersey:  Even  though  a  corpo- 
ration is  selling  its  product  below  cost, 
in  order  to  force  another  corporation  to 
combine  with  it,  yet  a  stockholder  in 
the  former  cannot  enjoin  such  sales, 
where  neither  of  the  corporations  has  a 
natural  monopoly.  Trimble  v.  Ameri- 
can, etc.  Co.,  61  N.  J.  Eq.  340  (1901).  ■  It 
is  legal  for  a  corporation  to  purchase  all 
the  competing  concerns  in  a  particular 
line  of  business,  even  though  the  result 
is  temporarily  to  create  a  monopoly  in 


1048 


-CH.  XXIX.J 


TRUSTS,  ETC. 


[§  503a. 


Oil   Trust.      The  decisions  of   the   New  York  court  of   appeals 
against  the  Sugar  Trust  and  of  the  supreme  court  of  Ohio  against 


that  business.  Even  though  the  agree- 
ment of  th§  vendor  not  to  engage  in 
business  covers  too  large  a  territory, 
yet  the  court  will  enforce  it  for  a  rea- 
sonable amount  of  territory.  Trenton, 
etc.  Co.  V.  Olyphant,  58  N.  J.  Eq.  507 
(1899).  A  corporation  formed  to  create 
a  monopoly  in  the  pottery  business  can- 
not enforce  an  agreement  of  one  of  the 
parties  not  to  engage  in  the  business. 
Trenton,  etc.  Co.  v.  Oliphant,  56  N.  J.  Eq. 
680  (1898).  An  injunction  does  not  lie 
at  the  instance  of  the  state  to  restrain  a 
corporation  from  transacting  business, 
even  though  it  was  formed  to  bring 
about,  by  conditions  imposed  upon 
selling  agents,  a  monopoly  in  the  cigar- 
ette business,  and  had  largely  succeeded 
in  doing  so.  The  remedy,  if  any,  is  by 
quo  warranto.  The  court  reviewed  the 
cases  wherein  injunction  would  lie. 
Stockton  V.  American,  etc.  Co.,  55  N.  J. 
Eq.  352  (1897).  Where  a  contract  be- 
tween a  domestic  railroad  company 
and  a  foreign  railroad  company  is 
declared  illegal  and  void  by  the  court 
on  the  ground  that  it  seeks  to  create  a 
monopoly  in  the  coal  business,  and  the 
court  orders  the  domestic  railroad  com- 
pany to  cease  complying  with  such 
contract,  the  court  will  appoint  a 
receiver  of  such  company  if  it  attempts 
to  evade  the  decree;,  but  on  proof  that 
no  evasion  has  been  attempted  the 
court  will  refuse  to  appoint  a  receiver. 
Stockton  V.  Central  R.  R.  of  N.  J.,  50 
N.  J.  Eq.  489  (1892).  It  is  not  illegal  for 
one  stockyard  company  to  buy  out 
another  stockyard  company.  Wil- 
loughby  V.  Chicago,  eta  Co.,  50  N.  J. 
Eq.  656  (1892);  Ellerman  v.  Chicago,  etc. 
Co.,  49  N.  J.  Eq.  217  (1891). 

New  York:  See  People  v.  North 
■River,  etc.  Co.,  121  N.  Y.  582  (1890). 
Under  the  New  York  anti-trust  statute 
the  court  may  grant  an  order  at  the 
instance  of  the  attorney-general  re- 
.'^liiiring  a  person  to  appear  and  be  ex- 


amined before  the  judge  or  referee  in 
view  of  a  suit  to  be  brought.  In  the 
Matter  of  Davies.  168  N.  Y.  89  (1901). 
Whereeighty-fivepercent.  of  the  manu- 
factui-ers  of  envelopes  form  a  selling 
corporation,  and  such  corporation 
agrees  with  an  outside  manufacturer  to 
pay  him  ten  cents  a  thousand  for  envel- 
opes manufactured  by  him  less  that 
fixed  number,  and  he  to  pay  the  corpo- 
ration ten  cents  a  thousand  for  those 
manufactured  by  him  in  excess  of  that 
number,  the  agreement  is  illegal  and 
not  enforcible.  The  court  said:  ■* Con- 
tracts by  which  the  parties  to  them 
combine  for  the  purpose  of  creating  a 
monopoly  in  restraint  of  trade  to  pre- 
vent competition,  to  control  and  thus 
to  limit  production,  to  increase  prices 
and  maintain  them,  are  contrary  to 
sound  public  policy  and  are  void."  The 
court  also  said:  "Such  a  contract 
threatens  a  monopoly  whereby  trade  in 
a  useful  article  may  be  restrained  and 
its  price  unreasonably  enhanced,  and 
it  matters  not  that  the  parties  to  it  may 
have  so  moderately  advanced  prices 
that  the  sum  exacted  for  the  product 
seems  to  some  persons  reasonable,  for 
'  the  scope  of  the  contract,  and  not  the 
possibility  of  self-restraint  of  the  parties 
to  it,  is  the  test  of  its  validity.' "  Cohen  v. 
Berlin,etc.  Co.,  166 N. Y.  292, 304 (1901).  In 
the  case  of  Wood  v.  Whitehead,  etc.  Co., 
165  N.  Y.  545  (1901),  the  New  York  court 
of  appeals  went  far  towards  eliminating 
the  rule  prohibiting  a  party  from  con- 
tracting not  to  engage  in  a  business, 
the  good  will  of  which  he  has  sold  out. 
An  agreement  of  dealers  in  stone  by 
which  all  their  product  is  sold  by  a 
selling  corporation  at  prices  fixed  by 
them,  the  sales  to  be  apportioned 
among  them,  is  illegal  and  not  enforc- 
ible. Cummingsu.  Union,  etc.  Co.,  164 
N.  Y.  401  (1900).  It  is  no  defense  to  an 
action  to  enforce  a  subscription  that 
after  incorporation  the  company  pro- 


1049 


503a.] 


TRUSTS,  ETC. 


[oh.  XXIX. 


the  Standard   Oil  Trust  convinced  the  trusts  that  their  original- 
mode  of  organization  was  illegal  and  must  be  abandoned.     The 


ceeded  to  form  an  illegal  combination 
of  competitors  in  trade.  U.  S.  Vinegar 
Co.  V.  Foehrenbach,  148  N.  Y.  58  (1895). 
A  person  who  buys  a  trust  certificate, 
the  certificate  containing  a  stipulation 
binding  the  holder  to  all  the  terms  of 
the  trust  agreement,  thereby  becomes 
a  party  to  an  illegal  transaction,  and 
such  person  has  no  standing  in  court 
to  obtain  an  accounting  and  distribu- 
tion of  the  property  or  profits.  The 
whole  agreement  and  transaction  being 
illegal,  the  court  will  leave  the  parties 
where  it  finds  them.  The  court  pointed 
out  that  there  was  no  proof  in  this  case 
that  the  defendant  trustees  were  seek- 
ing to  derive  any  personal  advantage 
from  the  agreement,  but,  on  the  con- 
trary, were  endeavoring  to  carry  out 
the  wishes  of  nearly  all  of  the  certifi- 
cate-holders. Unckles  v.  Colgate,  148 
N.  Y.  529  (1896).  A  corporation  formed 
by  milk  dealers  to  fix  the  price  to  be 
paid  to  farmers,  etc.,  for  milk  is  illegal. 
People  V.  Milk  Exchange,  145  N.  Y.  267 
(1895).  Where  an  Illinois  corporation 
sues  in  New  York  on  a  subscription  to 
its  stock,  it  is  no  defense  to  allege  that 
the  company  was  to  create  a  monopoly, 
where  the  only  proof  was  certain  pros- 
pectuses, etc.,  issued  before  the  com- 
pany was  organized.  The  defense  is 
not  good  unless  the  company  "  was 
formed  for  purposes  illegal  here,  or 
was  doing  acts  prohibited  by  the  laws 
of  this  state  to  its  own  citizens  and  cor- 
porations." U.  S.  Vinegar  Co.  ■??.  Schle- 
gel,  143  N.  Y.  537  (1894).  It  is  legal  for 
a  party  who  contemplates  constructing 
water-works  to  abandon  the  project 
and  enter  the  employ  of  a  competitor; 
and  he  may  collect  compensation  there- 
for, although  a  part  of  the  compensa- 
tion was  due  to  his  having  abandoned 
his  own  enterprise.  Oakes  v.  Catter- 
augus  Water  Co.,  143  N.  Y.  430  (1894). 
A  carrier  may  by  special  agreement 
give  reduced  rates  to  customers  who 


stipulate  to  give  it  all  their  business, 
and  refuse  those  rates  to  others  who- 
are  not  able  or  willing  to  so  stipulate, 
provided  that  the  charge  exacted  from 
those  others  is  not  excessive  or  unrea- 
sonable. Lough  V.  Outerbridge,  143  N. 
Y.  271  (1894).  Where  manufacturers 
form  an  illegal  association  to  which 
they  pay  a  certain  sum,  which  they  are 
to  forfeit  if  they  disobey  its  regulations 
and  are  expelled,  one  of  them  cannot 
enjoin  the  association  from  expelling 
him.  This  action  was  to  enforce  the 
agreement,  and  not  to  recover  back  his 
money.  Phoenix  Bridge  Co.  v.  Key- 
stone Bridge  Co.,  143  N.  Y.  425  (1894). 
In  People  v.  Sheldon,  139  N.  Y.  251 
(1893),  the  defendant  was  convicted  of 
the  crime  of  conspiracy  under  the 
Penal  Code  of  New  York,  where  he  and 
others  combined  to  raise  the  price  of 
coal  at  retail  and  destroy  free  competi- 
tion, even  though  no  excessive  price 
was  charged.     175  N.  Y.  1. 

A  combination  between  dealers  in 
sheep,  to  sell  only  to  certain  butchers, 
the  butchers  agreeing  to  buy  only  from 
them,  excepting  that  such  commissions 
as  were  received  from  business  trans- 
acted with  others  should  be  paid  into  a 
common  pool,  is  illegal.  A  penalty  for 
violating  the  agreement  cannot  be  col- 
lected. Judd  V.  Harrington,  139  N.  Y. 
105  (1893).  The  purchaser  of  a  trust 
certificate  issued  by  the  trustees,  the 
certificate  being  in  a  form  similar  to 
that  of  certificates  of  stock,  may  com- 
pel the  trustees  to  transfer  the  same  to 
him  on  their  books,  although  he  is  a 
competitor  of  the  trust  and  has  opposed 
it  in  all  ways  possible.  Rice  v.  Rocke- 
feller, 134  N.  Y.  174  (1892).  In  this  case 
the  court,  speaking  of  the  nature  of  the 
trust,  said:  "The  agreement  consti- 
tuted not  a  partnership,  but  a  trust  in 
behalf  of  the  beneficiaries.  And  while 
it  is  not  a  corporation,  it,  by  the  agree- 
ment, took  some  of  the  attributes  of  a- 


1050 


CH.  XXIX.] 


TRUSTS,  ETC. 


[§  503«. 


result  has  been  that  the  trusts  for  the  most  part  reorganized  and 
reappeared  in  the  form  of  gigantic  corporations.     How  far  the  law 


corporation,  in  so  far  that,  through  its 
trustees,  certificates  of  shares  in  the 
equity  to  the  property  held  by  them 
were  issued,  and  were  transferable  in 
like  manner  apparently  as  are  those  of 
corporations."  Where  several  carbon 
manufacturers  have  formed  a  combi- 
nation by  leasing  their  several  con- 
cerns to  a  trustee,  and  also  assigning  to 
him  their  orders  for  carbons,  and  sub- 
sequently one  of  them  withdraws,  the 
withdrawing  .concern  cannot  sue  for 
and  claim  the  amount  due  upon  one  of 
the  orders  assigned  to  and  filled  by 
such  trustee.  The  defendant  having 
interpleaded,  the  trustee  takes  the 
money.  Pittsburg  Carbon  Co.  v.  Mc- 
Millin,  119  N.  Y.  46  (1890).  Where  a 
manufacturer  of  a  peculiar  kind  of 
machinery  under  a  patent  agrees  with 
a  trustee  for  several  corporations  that 
he,  the  manufacturer,  will  sell  his  ma- 
chinery to  them  alone,  and  they  agree  to 
give  him  a  percentage  of  their  profits 
the  agreement  is  legal  and  may  be  en- 
forced by  him.  Good  v.  Daland,  121 
N.  Y.  1  (1890).  Even  though  a  party 
has  a  legal  contract  with  a  corporation 
by  which  he  has  the  right  to  purchase 
certain  goods  monthly  for  a  certain 
time,  yet,  if  afterwards  the  corporation 
has  sold  out  to  a  trust,  and  the  trust 
assumes  the  contract  and  the  party 
acquiesces  therein  and  sues  the  trust 
for  violation  of  the  contract,  the  suit 
will  fail,  the  trust  agreement  having 
limited  the  manufacture  within  a 
thousand  miles  radius  of  its  headquar- 
ters. Falvey  v.  Woolner,  71  N.  Y.  App. 
Div.  331  (1902).  The  owner  of  a  grain 
elevator  may  bring  suit  for  damages 
against  the  owners  of  other  elevators 
and  a  railroad  company  who  have  en- 
tered into  a  combination  by  which  the 
railroad  will  not  carry  grain  for  any 
owner  of  an  elevator  unless  the  latter 
l)ays  a  certain  sum  to  the  railroad  com- 
pany, the  intent  being  to  control  the 

10 


elevator  business.  Kellogg  v.  Lehigh 
Valley  R  R.,  61  N.  Y.  App.  Div.  35 
(1901).  The  statute  of  New  York  pro- 
hibiting the  issue  of  stock  at  less  than 
par  and  of  bonds  at  less  than  their  fair 
market  value  does  not  prohibit  the 
issue  of  stock  and  bonds  by  a  gas  com- 
pany in  payment  for  the  stock  and 
bonds  of  a  competing  gas  company, 
even  though  a  high  value  is  placed 
upon  the  franchise  of  such  competing 
company  as  a  part  of  the  purchase  price. 
Such  a  transaction  is  not  illegal  on  the 
ground  of  creating  a  monopoly,  nor  is 
it  ultra  vires,  provided  the  charter  of 
the  first  company  allowed  it  to  pur- 
chase stock  and  bonds,  as  provided  in 
the  New  York  statutes.  Rafferty  v. 
Buffalo,  etc.  Co.,  87  N.  Y.  App.  Div.  618 
(1899).  A  person  agreeing  not  to  engage 
in  a  certain  business  within  a  certain 
territory  cannot  evade  the  contract  by 
setting  up  that  the  other  party  is  an 
illegal  combination.  National  Wall 
Paper  Co.  v.  Hobbs,  90  Hun,  288  (1895). 
The  members  of  a  retail  coal  dealers' 
association  formed  to  prevent  and 
actually  preventing  competition  are 
liable  criminally  under  the  New  York 
statutes.  Drake  v.  Siebold,  81  Hun, 
178  (1894).  The  holder  of  trustees' 
certificates,  where  the  trust  is  organ- 
ized on  the  plan  of  trustees  holding  the 
shares  of  stock  of  the  various  corpora- 
tions, is  denied  all  relief  by  the  courts 
as  against  the  trustees.  He  cannot 
compel  them  to  pay  dividends  or  have 
the  property  in  their  hands  divided 
upon  the  dissolution  of  the  trust.  The 
combination  being  illegal,  the  courts 
will  not  aid  any  of  the  parties.  So  far 
as  the  law  is  concerned,  the  trustees 
can  appropriate  the  property  to  their 
own  use,  and  the  holders  of  the  trus- 
tees' certificates  will  not  be  granted 
any  relief.  Rice  v.  Rockefeller,  Supr. 
Ct.,  Sp.  T.,  N.  Y.  L.  J.,  April  26,  1894. 
Where  many  manufacturers  under 
51 


§  503a.J 


TRUSTS,  ETC. 


[CH.  XXIX. 


will  interfere  with  this  class  of  corporations  remains  to  be  seen. 
In  the  Chicago  Gas  Company  case  the  supreme  court  of  Illinois 


various  patents  form  a  corporation  and 
convey  to  it  their  patents  and  take 
back  licenses  under  which  the  corpora 
tion  regulates  the  price,  and  they  agree 
not  to  use  any  new  patents  and  not  to 
manufacture  any  new  kind  of  harrow, 
the  combination  is  illegal.  Any  one  of 
the  parties  may  by  suit  in  equity  be 
relieved  from  its  terms.  Strait  v. 
National  Harrow  Co.,  18  N.  Y.  Supp. 
224  (1891).  The  harrow  trust  was  again 
declared  illegal  in  National  Harrow  Co. 
V.  Bement,  31  N.  Y.  App.  Div.  290  (1897), 
but  this  decision  was  reversed  in  163 
N.  Y.  505.  It  is  established  "  that  no 
contracts  are  void  as  being  in  general 
restraint  of  trade  where  they  operate 
simply  to  prevent  a  party  from  engag- 
ing or  competing  in  the  same  business." 
Hence,  an  agreement  of  one  steamship 
company  to  pay  another  company  a 
certain  sum  for  withdrawing  its  line  of 
boats  was  upheld  as  against  the  dissent 
-of  a  stockholder  in  the  former  com- 
pany. Leslie  v.  Lorillard,  110  N.  Y.  519 
(1888).  A  large  number  of  the  propri- 
etors of  boats  on  the  canals  made  a  com- 
bination. Tlie  income  from  every  boat, 
over  and  above  a  certain  amount  al- 
lowed to  the  boat  for  expenses  for  wear 
and  tear,  was  turned  into  the  "pool." 
At  certain  times  the  fund  in  the  "  pool " 
was  to  be  divided  among  the  parties 
according  to  the  number  of  their  boats. 
In  an  action  to  enforce  payment  under 
the  agreement  the  court  held  that  the 
whole  arrangement  was  illegal,  void, 
and  not  enforceable.  Stanton  v.  Allen, 
5  Denio,  434  (1848).  The  proprietors  of 
five  lines  of  boats  engaged  in  canal 
transportation  agreed  to  combine  and 
do  business  at  certain  rates  for  freight 
and  passage.  The  net  earnings  were 
to  be  divided  among  themselves  in  a 
fixed  proportion.  One  of  the  parties 
•sued  another  to  compel  him  to  make 
payment.  The  court  held  that,  the 
•combination  was  void  under  the  stat- 


utes of  New  York,  and  said:  "It  is  a 
familiar  maxim  that  competition  is  the 
life  of  trade.  It  follows  that  whatever 
destroys  or  even  relaxes  competition  in 
trade  is  injurious  if  not  fatal  to  it." 
Hooker  v.  Vandewater,  4  Denio,  349 
(1847). 

A  coal  company  bought  coal  from 
several  corporations  upon  their  contract 
not  to  sell  to  any  other  parties  in  that 
locality.  The  pvirpose  was  to  enable  the 
purchaser  of  the  coal  to  have  a  monop- 
oly of  the  market.  The  party  which 
purchased  the  coal  did  not  pay  for  it. 
The  coal  company  which  had  sold 
brought  suit  for  the  price,  but  the  court 
held  that  the  suit. must  fail.  The  com- 
pany had  taken  part  in  an  illegal  con- 
tract and  combination.  In  such  cases 
the  parties  are  outside  of  the  pale  and 
protection  of  the  law.  The  courts  will 
not  aid  either  party.  Arnot  v.  Pittston, 
etc.  Co.,  68  N.  Y.  558  (1877).  Many  salt 
manufacturers  in  New  York  state  com- 
bined to  limit  the  production  and  con- 
trol the  price  of  salt.  They  formed  a 
corporation,  and  each  of  the  parties 
leased  to  the  corporation  his  manufac- 
tory of  salt.  Each  of  the  parties  was, 
however,  to  continue  the  manufacture 
of  salt  in  his  manufactory,  but  only  to 
a  limited  extent,  and  was  to  sell  the 
product  to  a  corporation  at  a  fixed 
price.  The  agreement  was  carried  out. 
One  of  the  parties  could  not  collect 
from  the  corporation  the  price  for  the 
salt  delivered  to  it,  and  accordingly  he 
brought  suit.  But  the  court  decided 
that  he  could  not  collect.  He  lost  his 
salt,  and  also  the  price  of  it.  The 
law  declares  such  combinations  illegal, 
and  will  not  aid  any  of  the  parties. 
Ciancey  v.  Onondaga,  etc.  Co.,  62  Barb. 
395  (1862),  The  agreement  of  the  vari- 
ous members  of  the  "  Wire  Trust  "  not 
to  sell  at  less  than  a  certain  price  is 
void.  A  forfeit  cannot  be  recovered 
back  by  one  of  the  parties.  De  Witt, 
0")2 


CH.  XXIX.] 


TRUSTS,  ETC. 


[§  503«. 


forfeited  the  charter  of  the  company,  on  the  ground  that  it  was- 
formed  to  bring  about  an  illegal  combination.     New  Jersey,  on 


etc.  Co.  V.  New  Jersey,  etc.  Co.,  9  Ry.  & 
Corp.  L.  J,  314  (N.  Y.  C.  P.,  1891).  The 
receiver  of  one  of  the  corporations 
forming  a  "trust"  may  enjoin  it  from 
reorganizing  in  the  shape  of  one  large 
corporation.  Gray  v.  De  Castro,  etc. 
Co.,  10  N.  Y.  Supp.  632  (1890).  Although 
the  charter  of  one  of  the  corporations 
whose  stock  is  held  by  a  "trust"  is  for- 
feited, yet  the  receiver  cannot  have  a 
receiver  appointed  of  the  "trust"  prop- 
erty. This  would  amount  to  a  receiv- 
ership of  all  the  property  of  a  person 
who  happened  to  be  a  stockholder  in 
an  insolvent  corporation.  Gray  v.  0x- 
nard,  etc.  Co.,  N.  Y.  L.  J.,  June  6,  1890. 
The  receiver  of  the  company  whose 
charter  is  forfeited  has  no  right  to  an 
accounting  from  the  other  corporations 
as  partners.  He  is  confined  to  the  prop- 
erty of  his  own  company.  Gray  v.  Ox- 
nard,  etc.  Co.,  11  N.  Y.  Supp.  118  (1890); 
affirmed  in  59  Hun,  387  (1891),  on  the 
ground  that  an  illegal  contract  cannot 
be  enforced.  A  receiver  of  an  insolv- 
ent corporation  may  recover  money 
due  it  from  an  illegal  "  trust  "  though 
the  corporation  was  a  party  to  the 
"trust."  Pittsburg  Carbon  Co.  n  Mc- 
Millin,  53  Hun,  67  (1889).  A  contract 
whereby  the  stockholders  of  one  corpo- 
ration were  to  buy  only  from  the  stock- 
holders of  another,  and  the  stockholders 
of  the  latter  were  to  sell  only  to  the 
stockholders  of  the  former,  was  upheld 
in  Live-Stock  Assoc,  etc.  v.  Levy,  3  N. 
Y.  St.  Rep.  514  (1886).  A  trust  being 
illegal,  a  certificate-holder  may  have  a 
receiver  appointed  of  all  the  stock  and 
assets  held  by  the  trustees,  and  may 
have  an  accounting  by  the  trustees. 
Cameron  v.  Havemeyer,  12  N.  Y.  Supp. 
126  (1890).  Where  a  "trust  "  passes  into 
a  receiver's  hands  by  reason  of  insolv- 
ency, the  receiver  may  recover  debts 
due  the  "trust"  from  the  constituent 
corporations.  Pittsburg  Carbon  Co.  v. 
McMillin,  119  N.  Y.  46  (1890).     The  case 

lO: 


of  Diamond  Match  Co.  v.  Roeber,  106 
N.  Y.  473  (1887),  was  not  a  "trust  "case. 
A  stockholder  cannot  maintain  a  suit 
against  the  corporation  to  enjoin  other 
stockholders  from  selling  their  stock  to 
a  second  corporation,  such  second  cor- 
poration and  the  other  stockholders 
not  being  parties  to  the  suit.  Ingra- 
ham  V.  National  Salt  Co.,  36  N.  Y.  Misc. 
Rep.  646  (1902);  aff' d,  72  App.  Div.  582. 

Ohio:  See  State  v.  Standard  Oil  Co., 
49  Ohio  St.  137  (1892).  It  is  constitu- 
tional for  the  legislatvire  to  prohibit  cor- 
porations from  entering  into  combina- 
tions to  restrict  competition  with  a 
view  to  raising  prices.  Quo  warranto 
lies  at  the  instance  of  the  state  against 
such  corporations.  State  v.  Buckeye, 
etc.  Co.,  61  Ohio  St.  520  (1900).  Although 
a  combination  is  illegal,  yet  the  profits 
thereof,  when  placed  in  the  hands  of  a 
third  person  for  the  benefit  of  one  of 
the  corporations,  may  begarnisheed  for 
a  debt  of  that  corporation.  Geurinck 
V.  Alcott,  63  N.  E.  Rep.  714  (Ohio,  1902). 
The  Candle  Manufacturers'  unincorpo- 
rated association,  formed  to  control 
prices,  etc.,  is  illegal.  A  member  can- 
not recover  his  share  of  the  profits. 
Emery  v.  Ohio  Candle  Co.,  47  Ohio  St. 
320  (1890).  Many  salt  manufacturers 
formed  a  "  trust,"  by  agreeing  to  sell 
all  their  product  to  an  unincorporated 
joint-stock  association.  The  latter  was 
composed  of,  and  its  directors  were 
elected  by,  the  manufacturers.  The 
purpose  of  the  combination  was  to  have 
the  association  buy  the  salt  from  the 
manufacturers  and  sell  it  to  the  public. 
Competition  would  thereby  be  pre- 
vented. The  court  held  that  the  com- 
bination was  void,  and  enjoined  the 
association  from  seizing  the  product  of 
one  of  the  manufacturers.  Central 
Ohio  Salt  Co.  v.  Guthrie,  35  Ohio  St.  666 
(1880). 

Pennsylvania:  A combinationof  brew- 
ers to  control  the  price  of  beer  within. 


§  503a.] 


TRUSTS,  ETC. 


[oh.  XXIX. 


the  other  hand,  grants  broad  charters  to  the  combinations  and  re- 
ceives a  heavy  toll  for  the  privileges  and  immunities  granted.     The 


a  city  is  illegal,  and  the  court  will  not 
enforce  the  agreement.  Nester  v.  Con- 
tinental Brewing  Co.,  161  Pa,  St.  473 
(1894).  Five  Pennsylvania  coal  corpo- 
rations, which  together  controlled  a 
certain  kind  of  coal,  combined  and 
agreed  that  sales  should  be  made 
through  a  committee  and  a  general 
agent,  and  that  thereby  prices  should 
be  fixed,  freights  made,  and  sales  and 
deliveries  adjusted.  If  any  company 
sold  more  than  a  fixed  proportion  it  was 
to  pay  a  certain  amount  to  the  others. 
The  combination  was  made  and  carried 
out  in  New  York.  In  the  course  of 
time  one  of  the  companies  sued  another 
to  recover  its  proportion  of  the  amount 
which  the  latter  was  to  pay  for  tlie  ex- 
cess of  coal  sold  by  it.  The  Pennsylva- 
nia court  held  that  it  could  not  recover; 
that  the  combination  was  illegal  and 
void;  and  that  it  was  a  conspiracy 
under  the  New  York  statute  against 
the  commission,  by  two  or  more  per- 
sons, of  "  any  act  injurious  ...  to 
trade  or  commerce."  Morris  Run  Coal 
Co.  V.  Barclay  Coal  Co.,  68  Pa.  St.  173 
(1871).  The  courts  will  refuse  a  charter 
to  a  company  whose  business  is  to  be 
*'  to  promote  the  business  of  such  retail 
coal-dealers  as  become  members  thereof, 
and  to  protect  them,"  etc.,  the  intent 
being  to  combine  the  retail  coal-dealers. 
Re  Richmond  Retail  Coal  Co.,  9  Ry.  & 
Corp.  L.  J.  81  (Phila.  1890). 

Rhode  Island:  Three  out  of  four  oleo- 
margarine companies  in  New  England 
may  legally  agree  to  consolidate  into 
one  company  in  order  to  stop  sharp 
competition.  They  may  also  agree  not 
to  do  business  separately  for  five  years 
anywhere.  Oakdale  Mfg.  Ca  v.  Garst, 
18  R.  I.  484(1894). 

Tennessee:  The  Tennessee  statute,  pro- 
hibiting foreign  corporations  from 
doing  business  in  the  state  where  they 
have  combined  to  lessen  competition 
-and  influence  prices,  is  legal,  and  the 


state  may  file  a  bill  to  restrain  foreign 
corporations  from  doing  business  in  the 
state  where  they  have  violated  such 
statute.  State  v.  Schlitz,  etc.  Co..  104 
Tenn.  715  (1900).  Where  two  manufact- 
uring corporations  organize  a  third  to 
sell  their  product,  and  pay  for  the  stock 
and  distribute  the  stock  among  their 
stockholders,  a  debt  due  from  one  of 
them  to  the  new  corporation  will  not 
be  allowed  to  participate  in  the  distri- 
bution of  the  assets  of  the  debtor  as 
against  other  creditors,  under  the  stat- 
ute of  Tennessee  allowing  such  defense. 
American,  etc.  Co.  v.  Standard,  etc.  Co., 
59  S.  W.  Rep.  709  (Tenn.  1900).  A  ship- 
per cannot  maintain  a  bill  in  equity  to 
compel  a  railroad  to  forward  his  freight 
by  a  certain  route,  even  though  he 
claims  that  the  reason  it  is  not  for- 
warded by  that  route  is  because  of  an 
agreement  between  the  railroads  fixing 
the  rate  and  fixing  the  percentage  of 
traffic  which  each  was  to  carry.  Post 
V.  Southern  Ry.,  103  Tenn.  184  (1899). 
A  by-law  of  a  plumbers'  as.sociation  by 
which  any  member  who  does  work  in 
competition  with  another  shall  pay  a 
certain  sum  to  the  association  is  illegal. 
Bailey  v.  Association  of  Master  Plumb- 
ers, etc.,  103  Tenn.  99  (1899).  It  is  ille- 
gal for  an  Ohio  corporation  to  purchase 
a  majority  of  the  stock  of  a  Tennessee 
corporation  for  the  purpose  of  control- 
ling the  latter,  even  though  they  are  en- 
gaged in  a  similar  business,  the  object 
being  to  form  a  monopoly.  Hence  the 
purchasing  company  cannot  enforce 
the  contract  as  to  certain  things  whicli 
were  to  be  done  by  the  vendor  of  the 
stock.  Marble  Co.  v.  Harvey,  92  Tenn. 
115  (1892).  A  combination  of  four  cot- 
ton-seed oil  corporations,  by  an  agree- 
ment that  the  possession  and  use  of 
all  their  property  should  be  turned  over 
to  certain  persons  to  run,  is  a  partner- 
ship, and  contrary  to  the  rule  of  law 
that  a   corporation   cannot   become  a 


1054 


•CH.  XXIX.]  TRUSTS,  ETC.  f§  503a. 

past  ten  years  have  changed  but  little  the  status  of  the  whole  ques- 


partner.  One  of  the  four  corporations 
sued  and  recovered  possession  of  its  prop- 
erty. Mallory  v.  Hanaur  Oil  Works,  86 
Tenn.  598  (1888). 

Texas:  Where  several  ice  companies 
in  the  city  agree  to  sell  ice  to  a  single 
corporation  only,  this  is  a  violation  of 
the  Texas  anti-trust  law.  Crystal,  etc. 
Co.  V.  State,  23  Tex.  Civ.  App.  293(1900). 
The  charter  of  a  gas  company  formed 
to  combine  all  the  electric  light  and 
gas  interests  in  the  city  was  forfeited 
at  the  instance  of  the  state  under  the 
anti-trust  statute,  in  the  case  of  San  An- 
tonio, etc.  Co.  V,  State.  22  Tex.  Civ.  App. 
118  (1899).  Even  though  a  cotton  com- 
press company  purchases  six  cotton 
compresses  located  in  different  parts  of 
the  state,  yet  if  the  price  for  compress- 
ing cotton  is  fixed  by  a  state  commis- 
sioner there  is  no  violation  of  the  anti- 
trust act.  State  v.  Shippers',  etc.  Co., 
69  S.  W.  Rep.  58  (Tex.  1902).  In  Waters, 
eta  Oil  Co.  v.  State,  19  Tex.  Civ.  App.  1 
(1898),  the  state  forfeited  the  right  of  a 
foreign  corporation  organized  under 
the  laws  of  Missouri  to  do  business  in 
Texas,  the  corporation  having  agreed 
with  various  merchants  and  other  deal- 
ers in  oils  in  Texas  so  that  such  parties 
should  not  sell  any  oils  except  those  of 
that  corporation.  The  Texas  statutes 
against  combinations  was  declared  un- 
constitutional in  Re  Grice,  79  Fed.  Rep. 
627  (1897),  as  violating  the  right  of  con- 
tract guaranteed  by  the  federal  consti- 
tution. A  contract  between  a  brewer 
and  a  dealer  by  which  certain  territory 
is  given  exclusively  to  the  dealer,  and 
the  dealer  agrees  not  to  buy  of  others, 
is  contrary  to  the  Texas  statuta  Texas 
Brewing  Co.  v.  Templeman,  90  Tex.  277 
(1896).  A  manufacturer  of  windmills 
may  grant  an  exclusive  territory  for 
their  sale  to  a  firm,  even  though  such 
firm  agrees  not  to  handle  any  other 
kind  of  windmill.  Welch  v.  Phelps, 
■etc.  Co.,  89  Tex.  653  (1896).  An  agree- 
ment or  combination  of  brewers  as  to 

10 


sales  of  beer  to  dealers  is  legal  at  com- 
mon law,  but  void  under  the  Texas 
statute.  Houch  v.  Anheuser,  etc.  Ass'n, 
88  Tex.  184  (1894).  The  attorney-general 
cannot  maintain  an  injunction  against 
a  combination  of  insurance  companies 
to  fix  rates  and  commissions,  inasmuch 
as  insurance  business  is  not  a  public  or 
quasi-public  business,  nor  does  it  con- 
cern a  staple  of  lifa  Queen  Ins.  Co.  v. 
State,  86  Tex.  .250  (1893),  holding  also 
that  a  statute  against  trusts  and  com- 
binations does  not  apply  to  a  combina- 
tion of  fire  insurance  companies  to  fix 
uniform  rates  and  commissions. 

Wisconsin:  A  retail  dealer  in  coal  to 
whom  the  wholesale  dealers  will  not 
sell  by  reason  of  a  trust  may  maintain 
a  bill  of  injunction  against  the  trust. 
Ha  warden  v.  Youghiogheny,  etc.  Co., 
Ill  Wis.  545  (1901).  A  combination  of 
mason  builders  by  which  they  pay  to 
their  association  six  per  cent,  on  all 
contracts,  and  all  bids  are  submitted 
to  the  association  before  they  are  made, 
and  six  per  cent,  added  to  the  lowest 
bid,  is  illegal.  Milwaukee,  etc.  Assoc. 
V.  Niezerowski,  95  Wis.  129  (1897).  A 
purchaser  of  goods  cannot  defeat  an 
action  for  the  price  on  the  ground  that 
the  vendor  is  an  illegal  trust  or  combi- 
nation. National  Distilling  Co.  v. 
Cream  City  Imp.  Co.,  86  Wis.  352  (1893). 
See  Kellogg  v.  Larkin,  3  Pin.  (Wi&)  123 
(1851). 

The  United  States  Courts:  A  railroad 
pooling  agreement  is  illegal  United 
States  V.  Joint,  etc  Assoc,  171  U.  S.  505 
(1898).  An  employee  who  has  made  a 
legal  contract  not  to  engage  in  a  simi- 
lar business  within  a  radius  of  fifteen 
hundred  miles  during  a  specified  term 
of  a  period  of  five  years  cannot  setup  as 
a  defense  to  such  contract  that  his  em- 
ployer is  an  illegal  trust.  Harrison  v. 
Glucose,  etc  Co.,  116  Fed.  Rep.  304 
(1902).  The  Nebraska  anti-trust  act  of 
1897  is  unconstitutional  as  interfering 
with  the  right  of  'citizens  to  make  con- 
55 


§  5U3a.]  TKDSTS,  ETC.  [CH.  XXIX. 

tion.     The  supreme  court  of  the  United  States  has  declared  illegal 


tracts.    Niagara,  etc.  Co.  v.  Cornell,  110 
Fed.  Rep.  816  (1901).    A  state  statute 
against  trusts  is  no  defense  to  a  pur- 
chaser   from    such    trusts.     Only    the 
state  can  raise  that  question  in  a  direct 
proceeding  for  that  purpose,  unless  the 
statute  provides  other  remedies.     La- 
fayette, etc.  Co.  V.  City  of  Streator,  105 
Fed.  Rep.  729  (1900).    A  stockholder  in 
a  corporation  which  has  entered  a  trust 
need  not  as  a  witness  answer  questions 
as  to  his   participation   therein,  inas- 
much as  it  might  tend  to  criminate 
him   and  subject   him   to    a  penalty. 
Wyckoff,  etc.  Co.  v.  Wagner,  etc.  Co., 
99  Fed.  Rep.  158  (1900).     The  fact  that 
a  corporation  is  a  member  of  a  trust  is 
no  defense  to  a  suit  for  infringement 
of  a  patent.     Brown,  etc.  Co.  v.  Troxel, 
98  Fed.  Rep.  620  (1899).     A   perpetual 
lease  which  enables  one  railroad  to  run 
over  the  tracks  of  another  is  enforce- 
able, althougli  the  lease  contains  a  pro- 
vision  that   its  operation    shall  cease 
during  any  period  of  time  within  which 
the  lessee  extends  its  road  into  certain 
coal  territory  or  receives    coal    from 
other  railroads  running  through  that 
territory.     This  last  provision  is  con- 
trary to  public  policy  and  is  void;  but, 
b^ing  a  condition  subsequent,  does  not 
affect  the  validity  of  the  lease  itself. 
Metropolitan,  etc.  Co.  v.  Columbus,  etc. 
Ry.,  95  Fed.  Rep.  18  (1899).     A  combi- 
nation of  wooden-ware  manufacturers, 
whereby  they  lease  their  machines  to 
a  corporation  which  is  to  fix  the  price 
and  receive  stock  therefor,  the  divi- 
dends upon  which  are  guaranteed  by 
still  another  corporation  in  the  com- 
bine, cannot  collect  such  dividends  by 
legal  proceedings.     Cravens  v.  Carter- 
Crume  Co..  92  Fed.  Rep.  479  (1899).     In 
a  suit  by  a  corporation  to  enjoin  strik- 
ers from  obstructing  the  streets,  etc., 
the  defense  that  the  complainant  is  an 
illegal    combination    in  trade    is    not 
good.     Amer.   Steel,   etc.   Co.   v.  Wire 
Drawers',  etc.  Unions,  90  Fed.  Rep.  608 


(1898).     Even  though  insurance  compa- 
nies have  combined  as  to  rates,  etc.. 
yet  they  may  enjoin  a  state  insurance 
commissioner  from  illegally  revoking 
their    certificates  of  authority   to    do 
business  in  the  state.     Liverpool,  etc. 
Co.  V.  Clunie,  88  Fed.  Rep.   160  (1898). 
Where  a  car-manufacturing  corpora- 
tion leases  all  its  property  to  another 
corporation   for  a  term  of  years  and 
agrees  not  to  engage  in  business  dur- 
ing that  time,  "  the  contract  between 
the  parties  is  void,  because  in  unrea- 
sonable restraint  of  trade,  and  there- 
fore contrary  to  public  policy."    Cen- 
tral Transp.    Co.   v.  Pullman's  Palace 
Car  Co.,  139  U.  S.  24,  53  (1891),  quoting 
from  and  approving  Alger  v.  Thacher, 
36  Mass.  51  (1837).     A  person  may  pur- 
chase at  foreclosure  even  though  he 
represents  the  stockholders,  and  even 
though  the  intention  may  be  to  organ- 
ize a  new  company  to  continue  an  ille- 
gal   combination   in   trade.    Olmstead 
V.  Distilling,  etc.  Co..  73  Fed.  Rep.  44 
(1895).  In  McCutcheon  v.  Merz  Capsule 
Co.,  71  Fed.  Rep.  786  (1896),  several  cor- 
porations   agreed   to  turn    over  their 
property  to  one  corporation  and  to  take 
stock  and  bonds  in  payment,  the  price 
to  be  thereafter   fixed  by  appraisers. 
After  the  stock  was  issued  one  of  the 
companies    withdrew,   and   the   court 
held  that  the  company  withdrawing 
could  file  a  bill  to  cancel   the  agree- 
ment on  the  ground  that  the  company 
had  no  power  to  hold  stock  in  other 
corporations.     An  illegal  combination  [ 
cannot   maintain  a  bill  to  enjoin    in- 
fringement upon  its  patents.    National 
Harrow  Co.  v.  Quick,  67  Fed.  Rep.  130 
(1895).     Rent   may  be  collected   on   a 
lease  of  a  manufacturing   plant  to  a 
competing  concern,  even  though  the 
inten fc  was  to  decrease  competition.    An 
agreement  of  the  lessor  not  to  engage 
in  the  business  during  the  term  of  the 
lease  is  valid.    U.  S.  Chemical  Co.  r. 
Provident  Chemical  Co.,  64  F^jd.  Rep. 
'>^6 


CH.  XXIX.]  TRUSTS,  ETC.  [§  o03«. 

railroad  pooling  contracts,  as  being  contrary  to  the  anti-trust  act 


946  (1894).    A  contract  by  a  manufactur- 
ing company  not  to  manufacture  for  a 
certain  period  if  it  is  paid  a  certain  per- 
centage on  sales  made  by  others  is  illegal 
and  void.     Oliver  v.  Gilmore,  52  Fed. 
Rep.  562  (1892).     It  is  no  defense  to  an 
infringement  suit  that  the  complainant 
has  formed  a  monopoly  of  all  patents 
bearing  upon  the  matter.     Strait  r.  Na- 
tional Harrow   Co.,  51    Fed.   Rep.    819 
(1892).     An  assignment  of  patents  by 
one  of  several  parties  to  a  corporation 
formed  to  unite  various  patents  in  a 
certain  business  is.  absolute  and  cannot 
be  revoked,  even  though  the  party  was 
by  agreement  to  have  a  salary  of  §6,000 
per  year  and  this  salary  has  not  been 
paid.     Bracher  v.  Hat  Sweat  Mfg.  Co., 
49  Fed.  Rep.  921  (1892).     A  person  who 
has  sold  his  bakery  to  a  corporation 
which  is  a  "trust,"  taking  $tock  in  the 
corporation   in   payment,    may  tender 
back  the  stock  and  retake  possession  of 
his  bakery.   The  act  of  congress  against 
combinations  applies.     American,  etc. 
Co.  V.   Klotz,  44  Fed.   Rep.  721    (1891). 
Where  the  stockholders  of  a  corporation 
enter  into  a  contract  for  and  in  behalf 
of  the  corporation  and  for  its  benefit, 
and  the  corporation  accepts  that  benefit, 
the  latter  is  bound  and  affected  by  the 
contract  and  subject  to  the  liabilities 
of  the  contract  the  same  as  though  it 
had  directly  entered  into  it.     Hence  it 
is  that  a  corporation  is  guilty  of  enter- 
ing into  a  "  trust "  in  a  case  where  its 
stockholders    enter    into  the   "trust." 
American  Preservers'  Trust  v.  Taylor 
Mfg.  Co.,  46  Fed.   Rep.  152  (1891).     In 
this  case  the  court  held  that  the  trustees 
were  agents,  and  that  the  corporations 
were  among  the  principals,  and  that  it 
was  ultra  vires  of  the  corporations  to 
purchase    stocks,   bonds,    and  various 
properties  through  these   agents,  the 
trustees.  Hence  one  of  the  corporations 
cannot  be  enjoined  from  breaking  the 
contract.   Where,  in  order  to  enter  into 
a  combination,  one  of  the  corporations 


assigns  all  its  property  to  its  stockhold- 
ers, and  they  assign  it  to  the  new  con- 
solidated and  absorbing  corporation, 
and  also  agree  with  that  corporation 
not  to  compete  with  it  in  business,  the 
first-named  corporation  may  be  started 
in  the  business  anew  and  will  not  be 
enjoined.  American  Preservers'  Co.  v. 
Norris,  43  Fed.  Rep.  711  (1890). 

In  controversies  between  a  certificate- 
holder  and  the  trustees  the  court  will 
not  consider  the  legality  of  the  "  trust." 
Gould  V.  Head,  41  Fed.  Rep.  240  (1890). 
A  certificate-holder  cannot  enjoin  an 
ultra  vires  or  illegal  act  of  the  trustees 
where  he  obtains  service  on  only  four 
out  of  the  nine  trustees.  Each  trustee 
is  liable  personally  for  past  breaches  ol 
trust,  but  an  injunction  against  future 
acts  can  only  be  where  all  the  trustees 
are  made  parties.  Wall  v.  Thomas,  41 
Fed.  Rep.  620  (1890).  A  bill  in  equity  to  re- 
strain a  live-stock  exchange  from  carry- 
ing out  certain  by-laws  which  tended 
to  monopolize  the  business  was  sus- 
tained in  United  States  v.  Hopkins.  82 
Fed.  Rep.  529  (1897),  but  was  reversed 
in  Hopkins  v.  United  States,  171  U.  S. 
578  (1898),  on  the  ground  that  the  busi- 
ness involved  was  not  interstate  com- 
merce. The  arrangement  of  the  liarrow 
trust,  whereby  seventy  per  cent,  of  th& 
manufacturers  assigned  their  patents 
and  good  will  to  a  corporation,  and  then 
acted  as  agents  or  licensees  of  such  cor- 
poration to  manufacture  and  sell  on  the 
terms  prescribed  by  it,  is  illegal.  Na- 
tional Harrow  Co.  v.  Hench,  83  Fed. 
Rep.  36  (1897).  A  corporation  created 
to  form  a  monopoly  in  the  manufacture 
of  harrows  cannot  maintain  a  suit  for 
infringement.  National  Harrow  Co.  v. 
Hench.  84  Fed.  Rep.  226  (1898). 

England:  The  House  of  Lords,  the 
highest  court  in  England,  in  1891  af- 
firmed the  decisions  of  the  courts  below 
in  Mogul  Steamship  Co.  v.  McGregor, 
L.  R.  17  App.  Cas.  25,  affirming  L.  R  23 
Q.  B.  D.  598,  and  L.  R.  21  Q.  B.  D.  544, 


(67) 


1057 


§  503a.] 


TRUSTS,  ETC. 


[CH. 


XXIX. 


of  congress  of  1890.^  Strangely  enough  this  anti-trust  act  of  con- 
gress, which  at  first  was  ignored  by  the  business  public  and  was 
practically  nullified  by  the  decisions  of  the  United  States  courts,^ 


and  held  that  an  action  of  conspiracy 
would  not  lie  against  a  company  that 
gave  lower  rates  of  freight  to  parties 
who  shipped  exclusively  by  them,  there 
being  in  ths  transaction  no  desire  to 
injure  others  and  no  ill-will.     The  de- 
fendant shipping  companies  and  owners 
had  '.combined  together  and  formed  a 
"conference"    or    "ring,"    and     their 
agents  in  China  had  issued  circulars  to 
shippers  there  to  the  effect  that  export- 
ers in  China  who  confined  their  ship- 
ments of  goods  to  vessels  owned   by 
members  of  the  "conference"  should 
be  allowed  a  certain  rebate,  payable 
half-yearly,  on    the    freight    chai-ged. 
The  court  held  that  the  "  conference," 
being  formed  by  the  defendants  with  a 
view  of  keeping  the  trade  in  their  own 
hands,  and  not  with  the  view  of  ruin- 
ing   the    trade    of    the    plaintiffs,    or 
through  any  personal  malice  or  ill-will 
towardthem,was  notunlawful,and  that 
no  action  for  conspiracy  was  maintain- 
able.    Lord  Coke,  in  the  great  and  lead- 
ing "Case  of  the  Monopolies,"  11  Coke, 
841)  (1602),  declared  that  a  monopoly  was 
illegal  and  void.     Lord  Coke  said  that 
a  monopoly  led  to  three  results:  an  in- 
crease in  price,  a  decrease  in  quality 
and  the  impoverishment  of  artisans  and 
others.     An  agreement  of  manufactur- 
ers that  one  shall  not  employ  the  dis- 
charged hands  of  any  other  except  upon 
the  written  consent  of  the  latter  is  void_ 
Mineral  Water,  etc.  Soc.  r.  Booth,  L.  R. 
36  Ch.  D.  465  (1887).     A  company  which 
is  organized  in  violation  of  a  statute 
cannot  collect  debts  which  are  due  to 
it.     Jennings  v.  Hammond,  L.  R.  9  Q.  B. 
D.  225  (1882),  the  company  in  this  case 
being  organized  in  violation  of  a  statute 
which  prohibited   more   than   twenty 
persons  uniting   in  an   association   or 
partnership  except  under  certain  con- 
ditions.    In  another  case   many  man- 
ufacturers, in  consequence  of  troubles 


between  themselves  and  their  em- 
ployees, entered  into  an  agreement  and 
gave  a  bond  that  they  all  would  abide 
by  the  rates  of  labor,  hours  of  work, 
and  other  regulations  which  a  majority 
of  those  who  entered  into  the  combi- 
nation should  decide  upon.  The  court 
held  that  the  compact  was  in  restraint 
of  trade;  that  it  was  illegal  and  void, 
and  that  the  bond  could  not  be  en- 
forced. Hilton  V.  Eckersley,  6  El.  &B1. 
47  (1856).  Cf.  Ontario  Salt  Co.  v.  Mer- 
chants' Salt  Co.,  18  Grant  (U.  C.)  Ch.  540 
(1871),  where  a  Canadian  ''  pool  "  on  salt 
was  sustained;  Wickens  v.  Evans,  3  Y. 
&  J.  318  (1829).  The  word  "  monopoly  " 
originally  meant  an  exclusive  privilege 
granted  by  the  crown.  The  courts  held 
that  the  crown  could  not  grant  it.  See 
Case  of  the  Monopolies,  11  Coke,  84 
(1602):  Mitchell  v.  Reynolds,  1  P.  Wms. 
181,  187  (1711). 

1  The  act  of  congress  of  July,  1890, 
against  unlawful,  monopolies  applies 
to  a  contract  between  railroads  regu- 
lating trafiSc  rates.  United  States  v. 
Trans-Missouri  Freight  Assoc,  166  U.  S. 
290  (1897). 

2  The  federal  statute  against  trusts 
and  monopolies  applies  only  so  far  as 
interstate  and  international  trade  is 
concerned.  It  does  not  apply  to  the 
sugar-refining  business.  United  States 
V.  E.  C.  Knight  Co.,  156  U.  S.  1  (1895), 
which  also  (p.  9)  gives  a  definition  of 
the  word  "  monopoly."  The  United 
States  government  may  file  «,  bill  in 
equity  to  enjoin  importers  and  dealers 
in  coal  in  a  certain  city  from  combin- 
ing, so  as  to  regulate  the  retail  prices 
arbitrarily.  United  States  v.  Coal,  etc. 
Assoc,  85  Fed.  Rep.  252  (1898).  A  com- 
bination of  coal  dealers,  to  regulate 
prices  and  provide  for  the  division  of 
prices  with  the  miners  of  the  coal,  is 
contrary  to  the  act  of  congress,  where 
the    coal-mining    companies    operate 


1058 


CH.  XXIX.] 


TRUSTS,  ETC. 


[§  5U3tJ. 


has  ultimately,  under  the  decisions  of  the  supreme  court  of  the 
United  States,  turned  out  to  be  the  most  powerful  remedy  in  ex- 


istence against  trusts.^ 


chiefly  in  one  state,  and  the  contract 
is  made  and  carried  out  in  a  city  in 
another  state.  United  States  v.  Jellico, 
etc.  Co.,  46  Fed.  Rep.  433  (1891).  A  suit 
for  damages,  based  on  the  federal  anti- 
trust law,  failed  in  Bishop  v.  American 
Preservers'  Co.,  51  Fed.  Rep.  272  (1892). 
The  statute  applies  to  illegal  trusts  of 
stock  to  unite  competing  railroads. 
Clarke  v.  Central  R.  R.,  50  Fed.  Rep. 
338  (1892).  Ih  this  case,  however,  on 
the  final  hearing,  the  bill  was  dis- 
missed. See  Clarke  v.  Richmond,  etc. 
Co.,  62  Fed.  Rep.  328  (1894).  In  United 
States  V.  Patterson,  55  Fed.  Rep.  605 
(1893),  the  federal  statute  was  held  to 
apply  in  certain  particulars,  and  not  to 
apply  in  others.  The  act  of  congress 
relative  to  monopolies  does  not  author- 
ize an  injunction  except  on  the  part 
of  the  government  Blindell  v.  Hagan, 
54  Fed.  Rep.  40  (1893).  An  indictment 
of  a  number  of  lumbermen,  for  raising 
the  price  of  lumber  fifty  cents  a  thou- 
sand feet,  will  not  lie  under  the  federal 
statuta  United  States  v.  Nelson,  52 
Fed.  Rep.  646  (1892).  Indictments  un- 
der the  federal  law  against  monopolies 
were  quashed  in  Re  Corning,  51  Fed. 
Rep.  205  (1892);  Re  Terrell.  51  Fed.  Rep. 
213  (1892);  Re  Greene,  52  Fed.  Rep.  104 
(1892);  United  States  v.  Patterson,  55 
Fed.  Rep.  605,  and  59  Fed.  Rep.  280 
(1893). 

A  suit  by  a  stockholder,  to  set  aside 
an  illegal  transfer  of  the  corporate 
property,  cannot  at  the  same  time  ask 
for  the  treble  damages  given  by  the 
anti-trust  act  of  congress  of  July  2, 
1890.  Such  a  suit  is  multifarious,  in- 
asmuch as  the  treble  damages  would 
go  to  the  plaintiff,  while  the  damages 
generally  would  belong  to  the  corpo- 
ration. Metcalf  V.  American,  etc.  Co., 
108  Fed.  Rep.  909  (1901).  It  is  no  de- 
fense to  a  suit  for  an  infringement  of 
patents  that  the  complainant  is  a  com- 


bination organized  in  violation  of  the 
anti-trust  act  of  congress.  Otis  Ele- 
vator Co.  V.  Geiger,  107  Fed.  Rep.  131 
(1901).  A  suit  giving  any  person  in- 
jured by  a  trust  a  right  to  hold  it  lia- 
ble in  treble  damages  cannot  be 
brought  by  a  party  who  helped  form 
the  trust.  Bishop  v.  American,  etc. 
Co.,  105  Fed.  Rep.  845  (-1900).  A  pur- 
chaser of  a  manufactured  product  from 
a  corporation,  who  gives  his  notes  in 
payment,  cannot  defend  against  such 
notes  on  the  ground  that  the  corpo- 
ration is  a  "  trust "  in  violation  of  the 
common  law  and  of  the  act  of  con- 
gress. Union,  etc.  Co.  v.  Connelly,  99 
Fed.  Rep.  354  (1900).     See  120  id.  721. 

1  A  contract  by  which  coke  manu- 
facturers agree  to  sell  their  output  to  a 
corporation,  to  resell  the  same  at  not 
less  than  a  price  to  be  fixed  by  a  com- 
mittee of  the  manufacturers,  the  profit 
earned  above  a  certain  sum  per  ton  to 
be  divided  among  the  manufacturers, 
the  corporation  agreeing  not  to  sell  the 
product  to  any  other  producers,  the 
amount  of  coal  to  be  furnished  by  each 
producer  to  be  also  fixed  by  the  com- 
mittee, affects  interstate  commerce 
and  is  in  violation  of  the  anti-trust  act 
of  commerce,  the  court  declaring  that 
the  policy  of  that  act  was  to  promote 
individual  competition  and  prevent 
combinations  which  interfered  with 
that  competition,  either  as  between 
the  members  of  the  combination  or 
between  the  members  and  outsiders, 
and  it  is  no  defense  that  no  harm  is 
done  to  the  public,  or  that  the  com- 
bination has  been  able  to  compete  for 
business  in  a  wider  field.  Chesapeake, 
etc.  Co.  V.  United  States,  115  Fed.  Rep. 
610  (1902).  Under  the  act  of  congress 
of  July  2,  1890,  a  dealer  to  whom  a 
manufacturer  refuses  to  sell  may  col- 
lect damages,  the  reason  for  such  re- 
fusal being  an  illegal    association  of 


1059 


§  503^-^]  TRUSTS,  ETC.  [CH.  XXIX. 

The  most  important  decision  was  rendered  in  1890,  when  it  was 
held  that  congress  has  power  to  regulate  the  purchase,  sale 
and  exchange  of  commodities  between  the  states,  and  hence,  under 
the  anti-trust  act  of  1890,  the  United  States  government  may  en- 
join a  combination  in  restraint  of  trade  by  means  of  contracts, 
the  purpose  of  which  is  to  destroy  competition  and  increase  prices.^ 

The  anti-trust  act  of  congress  of  1890  does  not  apply  to  purchas- 
ers of  cattle  on  the  market,  wh-o  form  an  association  by  which 
each  agrees  not  to  recognize  any  yard  trader  or  employ  any  person 
to  buy  or  sell  cattle  unless  he  be  a  member  of  the  association. 
Interstate  commerce  is  not  directly  involved  in  such  an  association, 
and,  moreover,  the  purpose  of  the  agreement  was  clearly  to  regu- 
late and  not  to  restrict  trade.^ 

It  is  no  defense  to  a  mortgage  that  it  was  given  by  a  trust  or 
combination  in  restraint  of  trade.* 

A  statute  of  a  state,  prohibiting  a  foreign  corporation  from 
doing  business  in  the  state,  if  such  corporation  is  connected  with  a 
trust,  is  constitutional.* 

The  fact  is,  however,  that  the  industrial  movement  of  the  age 
is  irresistibly  towards  consolidation  and  combination,  in  connec- 
tion with  the  expansion  and  extension  of  trade  at  home  and  abroad. 
The  law  is  designed  to  check  any  abuses  in  this  tendency,  and  has 
been  successful  in  so  doing.  The  law,  however,  is  not  intended  to 
interfere  with  the  legitimate  demands  of  trade,  and  if  such  inter- 
ference is  attempted  it  will  be  demonstrated,  just  as  it  was  demon- 
strated in  England  in  regard  to  statutory  prohibitions  against  the 
consolidation  of  railroads,  that  the  laws  of  trade  are  stronger  than 
the  laws  of  men.^ 

competitors,  by  which  the  members  reduces  the  production  and  increases 
charged  more  to  outsiders  than  to  mem-  the  prices,  is  in  violation  of  the  anti- 
bers.  Montague  v.  Lowry,  115  Fed.  trust  act  of  congress  of  July  3,  1890, 
Rep.  27  (1903).  The  liability  imposed  where  such  shingles  are  shipped  from 
by  section  7  of  the  anti-trust  act  of  one  state  to  another,  even  though  the 
congress  of  July,  1890,  rendering  an  association  agreement  does  not  men- 
illegal  trust  and  its  members  liable  in  tion  that  fact.  Gibbs  v.  McNeeley,  118 
treble  damages  to  a  person  injured  Fed.  Rep.  130  (1903). 
thereby,  was  enforced  in  Lowry  v.  Tile,  ^  Addyston,  etc.  Co.  v.  United  States, 
etc.  Assoc,  106  Fed.  Rep.  38  (1900).  An  175  U.  S.  311  (1899). 
association  of  fourteen  coal  dealers  to  2  Anderson  r.  United  States,  171  U.  S. 
sell  their  coal  through  one  company,  at  604  (1898). 

prices  fixed  by  themselves,  is  illegal,  ^  Dickerman  v.   Northern  T.  Co.,  176 

under  the  anti-trust  act  of  congress.  U.  S.  181  (1900), 

United  States  v.  Chesapeake,  etc.  Co.,  4  Waters-Pierce,  etc.  Co.  v.  Texas,  177 

105  Fed.  Rep.  93  (1900).     An  association  U.  S.  38  (1900). 

of  shingle  manufacturers,  which  closes  ^  In    England,  for  more  than  thirty 

the  mills  of  some  of  its  members  and  years,    parliament    legislated    against 

1060 


CH.  XXIX.J  TRUSTS,  ETC.  [§  5035. 

In  England  the  genuine  "trust"  has  been  used  for  legitimate  in- 
v'estment  purposes.  The  trustees  are  authorized  to  invest  the  funds 
of  the  "  trust  "  in  the  stocks  and  bonds  of  miscellaneous  corpora- 
tions. Generally,  however,  they  are  limited  in  the  amount  which 
they  may  invest  in  any  one  direction.  That  which  is  lost  in  one 
investment  is  expected  to  be  made  up  by  large  profits  in  another. 
It  is  a  mode  of  investment  on  a  large  scale,  and  is  made  on  the 
principle  of  an  average  gain  and  loss.^  In  England  it  has  been 
held  that  a  workman  who  has  been  discharged  by  his  employer  at 
the  instance  of  a  delegate  of  a  workmen's  organization,  because  he, 
the  workman,  had  at  a  previous  time  done  work  other  than  that 
which  was  his  regular  trade,  cannot  hold  the  delegate  liable  in 
damages,  even  though  the  discharge  was  caused  by  threats  of  the 
delegate  to  the  employer  that  unless  the  discharge  was  made  all 
the  men  would  quit  work.'^ 

The  American  "Car  Trust"  is  practically  an  agreement  of  sev- 
eral owners  of  cars  to  place  them  in  the  hands  of  an  agent  to  sell 
on  the  instalment  plan,  the  agent  having  the  power  to  issue  certifi- 
cates representing  an  interest  in  the  instalments.* 

§  5035.  Furtlier  inquiry  as  to  the  legality  of  a  ^^  trust." — There 
are  other  things  to  be  considered  in  determining  whether  or  not  a 
"  trust "  is  legal.  Does  it  vest  personal  property  or  real  estate  in 
a  trustee  for  a  longer  period  than  is  allowed  by  law  ?  Is  the  forma- 
tion of  a  trust  for  the  purpose  of  carrying  on  business  authorized 
by  law  ?    Is  the  shifting  of  the  parties  interested  —  that  is,  the  cer- 

the  consolidation  of  railroads.  This  Potter,  45  L.  T.  Rep.  612  (1882);  Credit 
legislation  proved  to  be  utterly  ineffect-  Mobilier  v.  Commonwealth,  67  Pa.  St. 
ive,  and  in  1872  a  parliamentary  com-  233  (1870),  the  last  case  being  a  "  trust " 
mittee  made  an  elaborate  and  exhaust-  created  to  construct  a  railroad,  the 
ive  report  on  the  subject,  and  said,  cestui  que  trust  being  the  stockholders 
among  other  things,  that  consolidation  of  a  designated  corporation. 
"  had  not  brought  with  it  the  evils  that  2  Allen  v.  Flood,  [1898]  A.  C.  1.  Cf. 
were  anticipated,  but  that,  in  any  Curran  v.  Galen,  152  N.  Y.  33  (1897).  A 
event,  long  and  varied  experience  had  labor  union  is  not  liable  in  damages  to 
fully  demonstrated  the  fact  that,  while  a  person  who  is  discharged  by  an  em- 
parliament  might  hinder  and  thwart  ployer  at  the  instance  of  the  union,  on 
it,  it  could  not  prevent  it."  the  ground  that  the  person  so  dis- 
1  See  Healey,  Company  Law  and  Prac-  charged  is  not  a  member  of  its  organ- 
tlce  (2d  ed.),  p.  191.  For  the  form  of  ization,  it  being  shown  that  the  pur- 
articles  of  agreement  of  this  kind  of  a  pose  of  the  agreement  was  to  secure 
"trust," and  for  a  detailed  statement  efficient  and  approved  workmen  or 
of  the  various  provisions  that  are  made,  preference  in  employees,  no  force  or 
varying  according  to  the  character  of  unlawful  act  being  involved.  National, 
the  enterprise  and  the  purposes  of  the  etc.  Assoc,  v.  Gumming,  170  N.  Y.  315 
participants,  see  Sykes  v.  Beadon,  L.  R.  (1903). 
11  Ch.  D.  170  (1879);  Smith  v.  Anderson,  3  See  ch.  L,  infra. 
L.  R.  15  Ch.  D.  247  (1880^;  Wigfleld  v. 

1061 


503?*.] 


TRUSTS,  ETC. 


[CH.  XXIX. 


tiiicate-holders  —  allowed  in  cases  of  trusts  ?  These  questions  will 
be  considered  in  the  order  named. 

It  is  the  policy  of  the  law  to  limit  the  time  during  which  a  person 
may  tie  up  his  personal  property  or  real  estate.  Generally  this 
tim.e  is  fixed  as  the  life-time  of  the  survivor  of  any  two  persona 
then  living  and  designated  by  the  person  creating  the  trust.  Each 
state,  by  its  statutes,  generally  limits  the  time  during  which  prop- 
erty may  be  tied  up  by  a  trust,  and  if  a  trust  is  formed  for  a  period 
longer  than  that  allowed  by  statute  the  trust  itself  is  void.'  There 
is  little' doubt  that  merchandise,  land,  and  shares  of  stock  may  be 
placed  in  trust.  The  law  is  clear  that  "every  kind  of  valuable 
property,  both  real  and  personal,  that  can  be  assigned  at  law  may 
be  the  subject-matter  of  a  trust."  ^ 

A  different  question  arises,  however,  in  determining  whether  a 
trust  may  be  created  to  carry  on  business  and  trade,  or  to  control 
a  concern  which  carries  on  business.' 

At  common  law  the  placing  of  personal  property  in  trust  for  the 
purpose  of  carrying  on  business  in  the  name  and  under  the  man- 
aerement  of  the  trustee  is  leaal  and  allowable.*     The  statutes  of  the 


1  Gerard,  Titles  to  Real  Estate  (3d  ed.), 
p.  223.  Moreover,  if  the  time  is  to  be 
measured  by  the  life  of  a  person  then 
living,  a  trust  which  is  to  exist  for  a 
fixed  period,  however  short,  without 
reference  to  the  life  of  a  person  then 
living,  is  void.  Gerard,  Titles  to  Real 
Estate  (3d  ed.),  pp.  224,  225.  In  New 
York  the  suspension  can  be  for  only- 
two  lives  in  being,  and,  in  certain  cases, 
twenty -one  years  thereafter.  1  R.  S.,  773, 
§1;L.  1896,  ch.  547,  §  32.  These  stat- 
utes apply  to  real  and  personal  property. 
Gerard,  Titles  to  Real  Estate  (3d  ed.), 
p.  235;  Hone  v.  Van  Schaick,  7  Paige, 
221  (1838).  Compare  ^§  812,  822/,  infra; 
Holmes  v.  Mead,  52  N.  Y.  332,  344(1873). 
The  statutory  prohibition  against  the 
accumulation  of  the  income  of  trust 
property,  except  in  the  case  of  infants, 
applies  both  to  real  estate  and  person- 
alty. Girard,  Titles  to  Real  Estate  (3d  ed. ), 
pp.  233,  235. 

2  1  Perry,  Trusts,  §  67. 

s  Under  the  statutes  of  New  York  a 
trust  of  property  consisting  of  real  es- 
tate is  void,  unless  the  purpose  of  the 
trust  is  to  sell  the  land  for  the  benefit 
of  creditors;  or  to  sell,   mortgage,  or 


lease  it  for  the  benefit  of  annuitants  or 
for  satisfying  a  lien  on  the  land;  or  to 
receive  the  rent  and  use  it  for  the  sup- 
port of  a  certain  person;  or  to  accumu- 
late the  rent  for  a  certain  person.  L. 
1896,  ch.  547,  §  76.  Accordingly  a  mod- 
ern "  trust,"  whose  property  consists  of 
real  estate  in  New  York,  might  be  void. 
But  as  to  personal  'property  the  law  is^ 
generally  different.  As  to  New  York,  see 
Gerard,  Titles,  p.  235.  Cf.  §§  812.  832/. 
*  For  decisions  at  common  law  to  the 
effect  that  property  may  be  vested  in- 
trustees  for  the  purpose  of  carrying  on 
business,  see  Ex  parte  Garland,  10  Ve.s. 
Jr.  110  (1804);  Scott  v.  Izon,  34  Beav. 
434  (1865).  In  Holmes  v.  Mead,  52  N.  Y. 
332,  344  (1873),  the  court  said:  "  A  trust 
in  personal  property,  which  is  not  in 
conflict  with  the  statute  regulating  the 
accumulation  of  interest  and  protect- 
ing the  suspension  of  absolute  owner- 
ship in  property  of  that  character,  is 
valid  when  the  trustee  is  competent  to 
take,  and  a  trust  is  for  a  lawful  purpose 
well  defined,  so  as  to  be  capable  of 
being  specifically  executed  by  the  court. 
.  .  .  Trusts  of  personal  property  are 
not  affected  by  the  statute  of  uses  and 


1063 


OH.  XXIX.]  TRUSTS,  ETC.  [§  5035. 

various  states,  however,  must  be  consulted  in  reference  to  this 
point.' 

There  is  little  difficulty  in  determining  the  question  whether  it  is 
allowable  in  law  to  create  a  trust  where  the  cesttds  que  trust  —  that 
is,  the  certificate-holders  —  change  and  fluctuate  in  their  identity. 
The  law  does  not  require  the  cestui  que  trust  to  remain  continuously 
one  and  the  same  person.  He  is  not  indefinite,  even  though  by 
transfer  of  interest  his  identity  may  change.^ 

A  more  formidable  objection  to  the  legality  of  a  "  trust ''  is  that 
it  is  similar  to  an  unincorporated  joint-stock  association,  and  that 
the  latter  is  illegal;  inasmuch  as  it  assumes  the  powers,  privileges, 
and  name  of  a  corporation.  It  was  on  this  ground  that  the  decision 
in  Louisiana  declared  that  the  American  Cotton  Oil  Trust  was 
illegal,  and  was  disqualified  to  do  business  within  that  state.  The 
court  held  that,  under  the  statutes  of  I-^uisiana,  an  unincorporated 
joint-stock  association  is  illegal ;  that  a  •'  trust  "  was  one  kind  of  an 
unincorporated  joint-stock  association,  and  consequently  that  it  was 
illegal  and  void.* 

But  this  view  of  the  law  would  not  be  sustained  elsewhere  in 
this  country;  nor  would  it  be  sustained  under  the  old  common  law 
of  England.  Unincorporated  joint-stock  companies  have  existed 
for  years  and  are  common  throughout  all  the  other  states  of  the 
Union.     They  are  legal  methods  of  carrying  on  business."* 

trusts,  which  applies  only  to  trusts  in  mont,  havestatutesexpresslyspecifying 

real  property."  In  Gott  v.  Cook,  7  Paige,  the  objects  for  which  a  trust  may  be 

521,  534(1839),  the  chancellor  said:  "The  created.    See  Stimson,  American  Stat- 

Revised  Statutes  have  not  attempted  to  ute  Law,  §  1703. 

define  the  objects  for  which  express  ^gee  Harrison  v.  Harrison,  36  N.  Y. 
trusts  of  personal  estate  may  be  ere-  543  C1867),  affirming  43  Barb.  162; 
ated,  as  they  have  done  in  relation  to  Holmes  r.  Mead,  52  N.  Y.  332,  343  (1873); 
trusts  of  real  estate.  Such  trusts,  there-  Conkling  v.  Washington  University,  2 
fore,  may  be  created  for  any  purposes  Md.  Ch.  497  (1849);  1  Perry,  Trusts,  §  66. 
which  are  not  illegal."  See  also  Graff  In  regard  to  this  matter,  a  "trust"  is 
V.  Bonnett,  31  N.  Y.  9(1865).  In  Power  legal  on  the  same  principle  that  it  is 
V.  Cassidy,  79  N.  Y.  602.  613  (1880),  the  legal  for  a  bondholder  secured  by  a 
court  said:  "The  law  does  not  limit  or  railway  trust  deed  or  mortgage  to  sell 
confine  trusts  as  to  personal  property  and  transfer  his  interest  to  another, 
except  in  reference  to  the  suspension  of  ^gtate  of  Louisiana  v.  American 
ownership,  and  they  may  be  created  for  Cotton  Oil  Trust,  1  Ry.  &  Corp.  L.  J. 
any  purpose  not  forbidden  by  law."  509  (1887),  the  court  saying:  "A  joint- 
To  the  same  effect,  Bucklin  v.  Bucklin,  stock  company  is  not  known  to  the 
1  Keyes  (N.  Y),  141  (1864);  Goebel  v.  laws  of  Louisiana." 
Wolf,  113  N.  Y.  405  (1889).  4  gee  §  504,  infra.  In  England  there 
1  Many  of  them,  including  Michigan,  formerly  was  doubt  upon  this  subject. 
Wisconsin,  Minnesota,  California,  Da-  but  this  doubt  was  due  to  the  "  Bubble 
kota.  North  Carolina,  Georgia,  Pennsyl-  Act."  This  statute  was  passed  in  1720 
vania,  Connecticut,  Kentucky,  and  Ver-  for  the  purpose  of  suppressing  unincor- 

1063 


036'.] 


TRUSTS,  ETC. 


[CH.  XXIX. 


§  503c.  LiaMlity  of  trustee  and  certificate-liolders. —  The  law  is 
clear  that  a  trustee  who  carries  on  any  kind  of  business  is  liable 
personally,  and  to  the  entire  extent  of  his  private  fortune,  for  all 
the  debts  incurred  in  the  management  and  execution  of  the  trust.l 
It  is  possible,  however,  that  the  use  of  the  words  "  as  trustee,"  in 
the  contract  entered  into,  will  protect  him  against  this  liability .^ 
And  there  is  little  doubt  that  the  creditors  of  the  trust  may  collect 
their  debts  from  its  property.  This  has  been  a  doubtful  point,  but 
is  now  reasonably  well  settled.  It  matters  not  whether  the  trus- 
tees have  expressly  bound  the  trust  property  to  pay  the  debts. 
Where  the  trustee  is  insolvent,  a  creditor  of  the  trust  may  proceed 
against  its  property  to  procure  payment  of  a  debt  incurred  in  the 
execution  of  the  trust.*'' 

But  a  different  rule  prevails  as  regards  the  cestui  que  trust,  the 
beneficiary.  The  cestui  que  trust  cannot  be  held  liable  for  the 
debts  created  by  the  trustees  or  for  debts  incurred  in  the  execu- 
tion of  the  trust.  This  question  has  arisen  chiefly  in  cases  where 
trustees  have  carried  on  the  business  of  an  insolvent  person  for  the 


porated  companies.  At  that  time  they 
were  regarded  as  "dangerous,  mis- 
chievous, and,  in  short,  public  nui- 
sances." But  the  statute  was  repealed 
in  1826,  and  Lindley,  the  great  English 
judge  and  jurist,  says  of  it:  "Juster 
views  of  political  economy  and  of  the 
limits  within  which  legislative  enact- 
ments should  be  confined  have  led  to 
the  repeal  of  the  statute  in  question, 
which,  though  deemed  highly  benefi- 
cial half  a  century  ago,  probably  gave 
rise  to  much  more  mischief  than  it 
prevented."  Lindley,  Company  Law 
(5th  ed.),  p.  132.  Moreover,  a  careful 
examination  of  the  English  authorities 
up  to  the  present  day  shows  conclu- 
sively that  at  common  law  an  unincor- 
porated joint-stock  association  is  legal 
and  valid.  Lindley,  Company  Law  (5th 
ed.),  p.  133.  C/.  Greene  v.  People,  21  N. 
E.  Rep.  605  (111.  1889). 

1  Thompson  v.  Brown,  4  Johns.  Ch. 
619  (1820);  Wild  v.  Davenport,  48  N.  J. 
L.  129  (1888);  Stephens  v.  James,  77  Ga. 
139  (1886):  Rogers  v.  Wheeler,  43  N.  Y. 
598  (1871);  Jones  v.  Seligman,  81  N.  Y. 
190  (1880). 

2  Contracts  entered  into  by  the  trus- 
tees of  a  trust  deed  for  many  share- 


holders bind  the  latter  but  not  the  for- 
mer personally,  where  the  trustees 
were  authorized  to  make  the  con- 
tracts and  did  so  as  trustees.  It  is  im- 
material that  the  contracts  are  under 
seal.  Cook  v.  Gray,  133  Mass.  106  (1882). 
But  see  Stevenson  v.  Polk,  71  Iowa,  278 
(1887);  1  Pars.  Cont.  (6th  ed.),  *122.  As 
to  the  mode  of  compelling  payment  of 
a  debt  incurred  by  a  trustee  who  has 
issued  scrip  to  represent  the  property, 
see  Mayo  v.  Moritz,  151  Mass.  481  (1890^ 
holding  that  the  remedy  is  not  for  a 
receiver  to  wind  up  the  trust. 

3  Cater  v.  Eveleigh,  4  Desaus.  (8.  C.) 
19  (1809) ;  James  v.  Mayrant,  4  Desaus. 
(S.  C.)  591  (1815);  Montgomery  v.  Eve- 
leigh, 1  McCord  Ch.  (S.  C.)  267  (1826); 
Magwood  V.  Johnston,  1  Hill  (S.  C.)  Ch. 
228  (1833);  Gaudy  v.  Babbitt,  56  Ga.  640 
(1876);  Tennant  v.  Stoney,  1  Rich.  Eq. 
(S.  C.)  222,  243  (1845);  Wylly  v.  Collins, 
9  Ga.  228  (1851);  Frost  v.  Shackleford, 
57  Ga.  261  (1876);  Ferrin  v.  Myrick,  41 
N.  Y.  315  (1869).  Contra,  Worrall  n 
Harford,  8  Ves.  Jr.  4  (1802);  Mulhall  v. 
Williams,  32  Ala.  489  (1858);  Jones  v. 
Dawson,  19  Ala.  672  (1851).  See  also 
New  V.  Nicoll,  73  N.  Y.  127  (1878);  Noyes 
V.  Blakeman,  6  N.  Y.  567  (1852). 


1064 


CH.  XXIX.j 


TEUSTS,  ETC. 


[§  503c. 


benefit  of  the  creditors  of  the  latter.^  And  the  same  conclusion  is 
reached  in  cases  where  an  executor,  administrator,  or  trustee  car- 
ries on  a  business  for  the  benefit  of  a  beneficiary .- 

It  has  been  held  also  that  the  trustee  cannot  render  the  cestui 
que  trust  liable  even  though  the  trustee  contracts  with  the  creditor 
to  that  effect.' 

There  is  little  doubt  that  these  old  principles  of  law  are  appli- 
cable to  "  trusts."  The  courts  of  England  have  decided  that  a 
modern  "trust"  is  not  a  partnership  or  mere  association,  but  is 
similar  to  an  old  common-law  trust  estate.  This  conclusion  was 
reached  in  construing  an  English  statute  which  prohibits  certain 
})artnerships  or  associations  from  doing  business.^ 


1  Storrs  V.  Flint,  46  N.  Y.  Super.  Ct.  498 
(1880);  Cox  V.  Hickman,  1  H.  L.  Cas.  268 
(1860);  Re  Stanton  Iron  Co.,  21  Beav. 
164  (1855);  Selwyn  v.  Harrison,  2  Johns. 
A  H.  334  (1862).  See  Bingaman  v.  Hick- 
man, 115  Pa.  St.  420  (1887). 

-In  Ex  parte  Garland,  10  Ves.  Jr.  110 
(1804),  where  a  testator  directed  that  a 
certain  sum  be  used  to  carry  on  a  busi- 
ness, and  the  executor  so  used  it,  and 
the  business  became  insolvent,  held, 
per  Lord  Eldon,  that  no  other  part  of 
the  testator's  property  was  liable  for 
the  debts  thereby  incurred ;  overruling 
Hankey  v.  Hammond,  1  Cooke's  Bankr. 
Law,  67  (1785).  Lord  Eldon  further  said : 
^'On  the  other  hand,  the  case  of  the 
executor  is  very  hard.  He  becomes 
liable,  as  personally  responsible,  to  the 
extent  of  all  his  own  property,  .  •  . 
though  he  is  but  a  trustee.  But  he  places 
himself  in  that  situation  by  his  own 
choice."  In  i^e  Johnson,  L.  R  15  Ch.  D. 
548  (1880),  the  cases  are  reviewed.  Lord 
Eldon's  decision  that  it  is  not  the  gen- 
eral estate  of  the  testator  wJiich  is  lia- 
ble, but  only  so  much  as  he  has  author- 
ized to  be  employed  in  the  business,  is 
stated  to  be  still  the  law.  See  also 
Strickland  v.  Symons,  L.  R.  26  Ch.  D.  245 
(1884).  An  estate  is  not  liable  for  debts 
created  by  a  partnership  continued  by 
order  of  the  will.  Stewart  v.  Robinson, 
115  N.  Y.  328  (1889). 

'Stanton  v.  King,  8  Hun,  4  (1876); 
aflf'd,  69  N.  Y.  609.  See  15  Am.  L.  Rev. 
456;  Burch  v.  Breckinridge,  16  B.  Mon. 


(Ky.)  488  (1855);  New  v.  Nicoll,  12  Hun, 
431  (1877);  aff'd,  73  N.  Y.  127. 

*  In  England  a  statute  exists  which 
forbids  any  company,  association,  or 
partnership  consisting  of  more  than 
twenty  persons  from  carrying  on  any 
business  for  the  acquisition  of  gain, 
unless  it  is  registered  as  a  company 
under  the  Joint-stock  Companies  Act, 
and  complies  therewith  as  regards  re- 
ports, etc.  It  has  been  held  that  a 
"trust"  is  not  a  "company,  association, 
or  partnership,"  and  consequently  is 
not  affected  by  this  statute.  Wigfield 
V.  Potter,  45  L.  T.  Rep.  612  (1882);  Crow- 
ther  V.  Thorley,  32  W.  R.  330  (1884);  Re 
Siddall,  L.  R.  29  Ch.  D.  1  (1885);  Smith 
V.  Anderson,  L.  R.  15  Ch.  D.  247  (1880 . 
The  last  case  cited  was  an  action  to 
have  the  "trust"  dissolved  on  the 
ground  that  it  was  a  partnership,  and 
was  doing  business  in  violation  of  the 
statute.  The  court  refused  to  grant 
the  relief  desired,  and  said  that  the 
certificate-holders  were  not  partners 
and  did  not  form  an  association. 
"There  has  never  been  anything  creat- 
ing any  mutual  rights  or  obligations 
between  those  persons.  They  are  from 
the  first  entire  strangers,  who  have  en- 
tered into  no  contract  whatever  with 
each  other,  nor  has  either  of  them  en- 
tered into  any  contract  with  the  trus- 
tees or  any  trustee  on  behalf  of  the  other, 
there  being  nothing  in  the  deed  point- 
ing to  any  mandate  or  delegation  of 
authority  to    anybody  to  act  for  the 


1065 


§  6i)'SrL] 


TRUSTS,  ETC. 


[CII.  XXIX. 


Such  beino-  the  case,  it  seems  to  be  clear  that  the  trustees  and 
the  property  of  a  modern  "trust"  are  liable  for  all  debts  incurred 
by  it,  but  that  the  holders  of  the  trust  certificates  are  not  in  any 
way  liable  therefor,  unless  they  have  expressly  agreed  to  assume 
that  liability. 

§  50Sd.  Qualifications,  iwivers,  rights,  and  duties  of  the  mana- 
gers and  certificate-holders  of  a  "  trust.'''' — Any  person  may  serve  as  a 
trustee,  provided  that  person  is  competent  to  take  the  legal  title  to 
the  property.^ 

The  trustees  of  a  "  trust "  correspond  somewhat  to  the  directors 
of  a  corporation.  They  generally  are  elected  annually  by  the  cer- 
tificate-holders in  a  regularly  called  meeting  of  themselves.  The 
instruments  creating  the  "  trust "  usually  provide  for  the  election 
of  trustees,  and  for  their  succession  and  term  of  office.  There  is- 
nothing  in  the  old  law  of  trust  estates  which  forbids  this  change 
of  trustees.^ 


certificate-holders  as  between  them- 
selves, and  nothing,  as  it  appears  to 
me,  by  which  any  liability  could  ever 
be  cast  upon  the  certificate-holders 
either  as  between  themselves  or  as 
between  themselves  and  anybody  else. 
...  If  there  is  any  business  at  all,  it 
is  to  be  carried  on  by  the  trustees. 
Whatever  is  to  be  done  is  to  be  done 
by  the  trustees."  And  Cotton,  L.  J., 
said:  "The  trustees  here  are  the  only 
persons  who  are  dealing  with  the  in- 
vestments, and  they  are  dealing,  not  as 
agents  for  some  princinal,  but  as  trus- 
tees in  whom  the  property  and  the 
management  of  it  are  vested,  and  who 
have  the  power  of  changing  the  invest- 
ments and  securities.  That  is  just  like 
the  case  which  often  occurs  where  the 
executors  or  trustees  of  a  will  are  di- 
rected to  carry  on  a  business.  The 
fact  that  they  are  to  account  to  others 
for  the  profits  made  is  a  matter  utterly 
immaterial  as  between  them  and  those 
with  whom  they  deal.  They  deal  with 
those  persons  as  the  only  persons  con- 
tracting, and  hold  themselves  out  as 
personally  liable.  Those  persons  have 
no  right  whatever  as  against  the  per- 
sous  beneficiallj'  entitled."  This  case 
was  one  involving  a  ''trust."  See 
also  dicta  to  the  same  effect  in  Credit 


Mobilier  v.  Commonwealth,  67  Pa.  St. 
233  (1870). 

1 1  Perry,  Trusts,  §  39. 

2  "  The  person  who  creates  the  trust 
may  mould  it  into  whatever  form  he 
pleases;  he  maj'- therefore  determine  in 
what  manner,  in  what  event,  and  upon 
what  condition  the  original  trustees 
may  retire  and  new  trustees  may  be 
substituted.  All  this  is  fully  within  his 
power,  and  he  can  make  any  legal  pro- 
visions which  he  may  think  proper  for 
the  continuation  and  succession  of  trus- 
tees during  the  continuation  of  the 
trust."  Perry, Trusts,  §287.  InEngland, 
under  the  vesting  acts,  the  court  held 
that  it  had  power  to  vest  the  estate  of 
a  modern  "trust"  in  new  trustees  where 
one  of  the  old  trustees  was  dead,  an- 
other was  insane,  and  under  the  trust 
agreement  the  certificate-holders  had 
elected  new  trustees.  i?eSiddall,  L.  R. 
29  Ch.  D.  1  (1885).  A  similar  power  was 
given  to  the  court  in  regard  to  trusts  of 
personal  property  in  New  York  by  L. 
1882,  ch.  185.  As  regards  the  common- 
law  rules  and  powers  of  the  courts 
herein,  see  Perry,  Trusts,  §  276  et  seq. 
At  common  law,  upon  the  death  of  the 
surviving  trustee,  his  executor  or  ad- 
ministrator became  the  trustee.  Boone 
V.  Citizens'  Sav.  Bank,  84  N.  Y.  83,  87 


1066 


CU.  XXIX.] 


TRUSTS,  ETC. 


[§  503J.. 


"Where,  by  the  trust  deed,  a  majority  of  the  cestuis  que  trust  have 
power  to  fill  a  vacancy  caused  by  the  incapacity  or  inability  of  the 
trustee,  they  may  substitute  a  new  trustee  when  the  old  trustee 
removes  to  and  becomes  a  resident  of  a  foreign  country.* 

The  trustee  has  no  powers  beyond  those  which  are  expressly 
conferred  by  the  trust  instrument.'-^ 

The  trustees  who  hold  stock  in  various  corporations  which  make 
up  the  "  trust "  are  trustees  and  not  vendees  of  the  stock.^  The- 
trustee  ordinarily  has  no  power  to  sell  the  stock.*  The  trustee  may 
sue  and  be  sued  in  hi^own  name  on  all  matters  and  contracts  per- 
taining to  the  trust.'^ 

He  is  not  liable  to  the  cestui  que'  trust  for  losses  incurred  by  his 


(1881);  De  Peystert'.  Beeknian,  55  How. 
Pr.  90  (1877).  In  the  cost-book  company- 
case  of  Johnson  v.  Goslett,  18  C.  B.  728 
(1856),  the  folio-wing  provision  appears: 
"The  trustees  of  the  said  lease  shall, 
when  and  if  required  by  the  directors, 
execute  a  deed  declaring  that  they  hold 
the  said  mine  under  and  by  virtue  of 
such  lease  as  trustees  for  the  benefit  of 
the  shareholders  in  the  said  company, 
according  to  their  respective  shares  and 
interests  therein;  and  if  any  or  either 
of  the  said  trustees,  or  any  future  trus- 
tees, shall  resign,  or  die,  or  become  in- 
capable or  unwilling  to  act,  then  new 
trustees  or  a  new  trustee  may  be  ap- 
pointed by  any  of  the  general  meetings 
of  shareholders  hereinafter  provided  for, 
in  the  place  of  the  trustees  or  trustee 
so  resigning,  or  dying,  or  becoming  in- 
capable or  unwilling  to  act,  as  afore- 
said; and  the  said  premises  shall  be 
forthwith  assigned  to  and  vested  in  the 
said  new  trustee  or  trustees  jointly 
with  the  continuing  trustee  or  trustees, 
or  in  such  new  trustees  only,  as  the 
case  may  require,  at  the  expense  of  the 
said  company." 

1  Farmers'  L.  &  T.  Co.  v.  Hughes,  11 
Hun,  130  (1877).  In  this  case  the  deed 
of  trust  provided  that  the  trustees  or 
their  survivor  might  be  removed  by  the 
vote  of  a  majority  in  interest  of  the 
holders  of  the  bonds  referred  to  in 
the  trust  deed,  at  any  meeting  called 
for  that  purpose;  and  further,  by  a 
separate  and  distinct  provision,  that  in 


case  of  the  death,  removal,  resignation, 
incapacity,  or  inability  of  both  or  either 
of  said  trustees  to  act  in  the  execution 
of  the  trust,  then  a  majority  of  the 
holders  of  such  bonds  might  designate 
and  select,  in  writing,  one  or  more  com- 
petent persons  to  fill  the  vacancy  so  oc- 
curring. The  property  may  be  made  to 
vest  in  new  trustees  without  transfer, 
if  the  trust  instrument  is  so  drawn.  1 
Perry,  Trusts,  5<  284. 

2  1  Perry,  Trusts.  §§  454,  460. 

3  People  V.  North  River,  etc.  Co.,  121 
N.  Y.  582  (1890). 

*  See  ch.  XIX,  supra.  The  trustees  of 
the  American  Cattle  Trust  cannot  sell 
shares  of  stock  which  they  hold.  Gould 
V.  Head,  38  Fed.  Rep.  886  (1889);  s.  c,  41 
Fed.  Rep.  240  (1890). 

s  In  this  respect  the  trustee  is  not  the 
same  as  the  director  of  a  corporation. 
"  A  trustee  is  a  man  who  is  the  owner 
of  the  property,  and  deals  with  it  as 
principal,  as  owner,  and  as  master,  sub- 
ject only  to  an  equitable  obligation  to 
account  to  some  persons  to  whom  he 
stands  in  the  relation  of  trustee,  and 
who  are  his  cestuis  que  trust.  .  .  .  The 
office  of  director  is  that  of  a  paid  serv- 
ant of  the  company.  A  director  never 
enters  into  a  contract  for  himself,  but 
he  enters  into  contracts  for  his  prin- 
cipal; that  is,  for  the  company  of  whom 
he  is  a  director  and  for  whom  he  is  act- 
ing. He  cannot  sue  on  such  contracts, 
nor  be  sued  on  them  unless  he  exceeds 
his  authority.    That  seems  to  me  to  be 


1067 


§  5036?.]  TRUSTS,   ETC.  ^    [CH.  XXIX. 

management  of  the  property  of  the  trust.  Tie  is  bound  merely  to 
exercise  ordinary  discretion  and  to  obey  the  directions  of  the  instru- 
ment creating  the  trust.  It  is  only  for  a  breach  of  trust  that  he 
may  be  made  to  account  to  the  cestui  que  trust} 

In  the  case  of  the  modern  "trust,"  it  has  been  doubted  whether 
the  consent  of  all  the  trustees  is  essential  to  its  contracts  and  acts, 
as  is  the  case  with  the  old  common-law  trust.^  But  in  general 
these  matters  are  regulated  and  provided  for  by  the  instrument 
which  creates  the  "  trust." 

The  compensation  of  the  trustee  is  usuafly  fixed  by  the  trust 
deed.  If  not,  it  falls  within  the  provisions  of  the  statutes,  or  a 
reasonable  compensation  is  allowed  by  the  common  law.^ 

The  property  of  the  "trust"  cannot  be  seized  for  the  individual 
debts  of  the  trustee,*  but  the  interest  of  the  certificate-holder  may 
be  reached  so  as  to  subject  it  to  the  payment  of  his  debts.*^  In  this 
respect  the  certificates  resemble  shares  of  stock. 

The  trust  property,  where  it  consists  of  personal  property  in  the 
nature  of  bonds,  stocks,  notes,  or  evidences  of  indebtedness,  or 
corresponds  to  the  capital  stock  of  the  corporation,  may  be  taxed 
at  the  place  where  the  main  office  or  place  of  business  of  the 
"  trust  "  exists.  The  extent  of  the  taxation  depends,  of  course, 
upon  the  statutes  of  the  state,  wherein  the  tax  is  laid.® 

There  is  more  difficulty  in  determining  whether  a  certificate- 
holder  may  terminate  his  interest  in  the  "  trust"  and  demand  his 
proportion  of  the  property.     In  certain  "  trusts,"  whose  property 

the  broad  distinction  between  trustees        6  As  to  the  rule  at  common  law,  see 

and  direetors."    Smith  v.  Anderson,  L.  2  Alb.  L.  J.  261,  288.     In  New  York,  by 

R  15  Ch.  D.  247  (1880).  statute,  all  transfers  of  personal  prop- 

1  Simonton  v.  Sibley,  133  U.   S.  320  erty  made  in  trust,  for  use  of  the  per- 

(1887).     Where  a  railroad  construction  son    making    the    same,    are  void    as 

contract  is  assigned  to  trustees  to  be  against  his  creditors,  existing  or  subse- 

carried  out  and  the  profits  to  be  paid  quent.    2  R.  S.   135,  g  1  (7th  ed.,  p.  2327, 

to  thfe    stockholders  of   a  designated  and  cases  there  cited).    See  also  Graff 

corporation,  the  stockholders  may  com-  v.  Bonnett,  31  N.  Y.  9, 14, 18  (1865). 
pel  the  trustees  to  pay  over  such  prof-        6  Rjcker  v,  American   Loan,  etc.  Co., 

its.     The  trustees  cannot  set  up  that  140  Mass.  346  (1885).    See  also  People 

they  were  also  directors  of  the  railroad,  v.  Albany  Assessors,  40  N.  Y.  154  (1869); 

Hazard  v.  Dillon,  34  Fed.  Rep.  485  (1888).  Re  Jefferson,  35  Minn.  215  (1886),  citing 

•■i  Mills  V.    Hurd,   29    Fed.    Rep.    410  many  cases  on  this  subject.     In  New 

(l^^''')'  York  state,  under  its  statutes,  shares 

3  3  Perry,  Trusts,  §  917.  of  stock  in  either  domestic  or  foreign 

<  Gibson  v.  Stevens,  7  N.  H.  353  (1834),  corporations,  which  are  subject  to  tax- 
where  a  trustee  was  authorized  to  con-  ation  on  their  capital  stock,  are  not 
tinue  the  testator's  business.    The  prop-  subject  to  taxation   except  shares  of 
erty  was  held  not  subject  to  the  trus-  stock  in  banks.     See  §  565,  infra. 
tee's  personal  debts. 

1068 


CH.  XXIX.]  TRUSTS,  ETC.  [§  504. 

consists  of  shares  of  stock,  he  sometimes  may.*  But  in  general  a 
single  certificate-holder  cannot  have  the  whole  "  trust "  dissolved 
and  wound  up  before  the  time  fixed  by  the  trust  agreement  for  its 
dissolution  has  arrived. - 

If  the  "  trust  "  itself  is  forbidden  by  the  statutes  of  the  state 
wherein  it  exists,  it  will  not  be  wound  up  by  the  courts.  The  law 
will  not  compel  a  trustee  to  account  for  property  or  transactions 
which  grow  out  of  a  contract  which  is  prohibited  by  statute.  The 
courts  leave  the  parties  where  they  are  found.  They  are  outside 
of  the  protection  of  the  law.^ 

If,  however,  the  "  trust "  is  legal,  it  may  be  terminated  at  any 
time  by  a  decree  of  a  court,  upon  the  consent  of  all  the  parties  whO' 
are  interested  in  it.*  But  a  "trust"  will  not  be  dissolved  and 
wound  up  merely  because  the  trustees  have  been  guilty  of  a  breach 
of  trust.  The  remedy  in  such  a  case  is  to  enjoin  or  remove  the 
trustees.'^  Where,  however,  the  trust  is  insolvent  and  incapable  of 
proceeding,  a  dissolution  and  winding  up  of  its  business  will  be  de- 
creed by  a  court.® 

B.    UNINCORPORATED    JOINT-STOCK     ASSOCIATIONS. 

§  504.  Definitions  —  Joint-stock  companies^  cliihs,  exchanges, 
etc. — Ownership  of  kind. —  A  joint-stock  company  may  be  defined 
to  be  an  association  of  persons  for  the  purpose  of  business,  having 

^See  §  503b,  supra,  and  §  623,  infra,  had  become  worthless,  the  transaction 
A  syndicate  operation  was  involved  in  being  in  connection  with  the  Oregon 
Hogg  V.  Hoag,  107  Fed,  Rep.  807  (1901),  Pacific  Railroad  Company.  The  court 
where  certain  stocks  and  property  said  that  the  syndicate  was  in  sub- 
were  transferred  to  a  trustee,  who  stance,  though  not  technically,  a  joint- 
issued  certificates  therefor  to  the  mem-  stock  company. 

bers  of  the  syndicata     A  part  of  the  ~  Smith  v.  Anderson,  L.   R.  15  Ch.  D. 

subscribers  did  not  pay,  and  the  vendor  247  (1880).     The  same  rule  prevails  in 

of  the  property  took  the  trustee  certifi-  unincorporated  joint-stock  associations, 

cates   of  such  non-paying  subscribers,  See  Smith  v.  Virgin,  33  Me.  148  (1851j. 

and  on  the  death  of  the  trustee  a  bill  See     also     Waterbury    v.    Merchants' 

was  filed  to  have  the  court  substitute  a  Union    Exp.   Co.,  50  Barb.   157  (1867), 

new  trustee,  and  one  of  the  subscribers  holding  that  such  company  will  not  be 

filed    a    cross-bill    for    an  accounting,  wound  up  merely  because  the  directors 

The  court  decreed  a  winding  up  of  the  have  been  guilty  of  a  breach  of  trust, 

syndicate  and    appointed  a    receiver.  ^Re  Padstow,  etc.  Assoc,  L.  R.  20  Ch. 

The  court  held  that  a  partial  payment  D.  137  (1882). 

made  to  the  vendor  of  the  stocks  was  ^Peny^  Trusts,  §  920. 

legal,  even  though  all  the  pi-operty  was  ^  Perry,  Trusts,  §§  816-853. 

not  conveyed  to  the  trustee,  as  contem-  t^See  Baring  v.  Dix,  1  Cox,  Ch.  213 

plated,   and  that  the  vendor's  accept-  (1786);  Bailey  v.  Ford,  13  Sim.  495(1843); 

ance  of  the  certificates  of  non-paying  Jennings  u.  Baddeley,  3  K.  &  J.  78  (1856), 

subscribers  obligated  him  to  pay  there-  where    insolvent   copartnerships  were 

for,  although  such  trustee's  certificates  wound  up,  though  the  time  for  which 

1069 


.§  504.] 


TRUSTS,  ETC. 


[CH.  XXIX. 


a  capital  stock  divided  into  shares,  and  governed  by  articles  of 
association  which  prescribe  its  objects,  organization,  and  procedure, 
and  the  rights  and  liabilities  of  the  members,  except  that  the 
articles  cannot  release  the  members  from  their  liability  as  partners 
to  the  creditors  of  the  company.' 

A   joint-stock    company   lies   midway   between   a   corporation 


they  were  to  exist  had  not  yet  expired. 
See  also  Sieghortner  v.  Weissenborn,  20 
N.  J.  Eq.  172  (1869);  Howell  v.  Harvey, 
5  Ark.  270  (1843);  Van  Ness  u.  Fisher,  5 
Lans.  28fi  (1871);  Brien  v.  Harriman,  1 
Tenn.  Ch.  467  (1873):  Holladay  v.  Elliott, 
8  Ore^.  84  (1879):  Bagley  u  Smith,  10 
N.  Y.  489  (1853).  In  Sibley  v.  Minton.  27 
L.  J.  (Ch.)  53  (1858),  the  court  held  that, 
in  an  action  by  an  adventurer  in  a  cost- 
book  mining  company  to  wind  up  tlie 
company  and  adjust  the  losses,  all  the 
co-adventurers  were  necessary  parties. 
1"  A  joint-stock  company  is  an  asso- 
ciation of  individuals  possessing  a  com- 
mon capital  divided  into  shares,  of 
which  each  member  possesses  one  or 
more.  These  shares  represent  the  inter- 
est of  the  members,  and  are  transfer- 
able by  the  owners  without  the  consent 
of  the  other  members  or  the  creditors 
of  the  association."  Kossakowski  v. 
People,  177  111.  568  (1899).  In  Hedge's 
Appeal,  63  Pa.  St.  273  (1869,  following 
the  statute  8  &  9  Vict,  e.  110),  it  is  de- 
fined to  be  ^'a  partnership  whereof  the 
capital  is  divided,  or  agreed  to  be 
divided,  into  shares,  and  so  as  to  be 
transferable  without  the  express  con- 
sent of  all  the  copartners."  In  the  stat- 
utes of  Massachusetts  the  words  "  joint- 
stock  company  "  are  used  to  mean  a 
corporation  organized  under  the  gen- 
eral incorporation  act  of  the  state.  At- 
torney-General V.  Mercantile  Ins.  Co., 
121  Mass.  524  (1877).  But  this  is  not 
an  accurate  use  of  the  term.  "The 
articles  of  association  of  an  unincorpo- 
rated joint-stock  company  bear  the 
same  relation  to  it  that  the  charter 
bears  to  an  incorporated  company;  they 
regulate  the  duties  of  the  officers  and 
the  duties  and  obligations  of  the  mem- 

10 


bers  of  suoh  a  company  among  them- 
selves; they  specify  the  capital,  limit 
the  duration,  and  define  the  t)usiness  of 
the  company."  Bray  v.  Farwell,  81 
N.  Y.  600  (1880),  per  Earl,  J.  See  also 
White  V.  Brownell,  4  Abb.  Pr.  (N,  S.) 
162,  193  (1868).  In  Robbins  v.  Butler, 
24  111.  387,  426  (1860),  it  is  said  that 
joint-stock  companies  "  have  none  of 
the  rights  and  immunities  of  .  .  .  a 
regularly  incorporated  company.  These 
stock  companies  are  nothing  more 
than  partnerships;  and  every  member 
of  the  company  is  liable  for  the  debts 
of  the  concern,  no  matter  what  the 
private  arrangements  among  them- 
selves may  be."  To  the  same  effect, 
see  Moore  v.  Brink,  4  Hun,  402  (1875); 
Skinner  v.  Dayton,  19  Johns.  513(1822); 
Wells  V.  Gates,  18  Barb.  554  (1854): 
Keasleyu  Codd,  2  Car.  &  P.  408  (1826). 
"The  term  'joint-stock  company' 
appears  to  have  originated  in  England 
in  comparatively  recent  times.  Joint- 
stock  companies  may  be  said  to  be 
partnerships,  or  individuals  associated 
for  some  specified  purpose,  under  a 
designated  name  or  description,  to 
which,  by  some  general  or  special  stat- 
ute, when  they  have  been  formed  or 
composed  in  a  specified  manner,  some 
of  the  powers  or  proper  attributes  of  a 
corporation  have  been  given."  Dayton, 
etc.  R.  R.  V.  Hatch,  1  Disney  (Oliio),  84, 
90  (1855).  Factors',  etc.  Ins.  Co.  v.  New 
Harbor,  etc.  Co..  37  La.  Ann.  233,  239 

,  (1885),  speaks  of  a  joint-stock  company 
as  "a  nondescript  organization,  com- 
posed of  the  owners  of  certificates  show- 
ing the  proportion  of  their  respective 
interests  in  its  assets  and  liability  for 
its  obligations,  and  who  are  co-owners: 
or  proprietors  in  common.     As  no  one 

70 


<3H. 


XXIX.] 


TEUSTS,  ETC. 


[§  504. 


and  a  copartnership.     It   is,  however,  to  be  distinguished   from 
them,^  also  from  clubs,^  from  social,  benevolent,'  and  mutual-aid  *  or- 


is bound  to  own  property  in  indivision, 
it  follows  that  such  owners  who  wish  a 
division  have  a  right  to  have  that  prop- 
erty sold,  and  after  a  liquidation  of  the 
affairs  of  tlie  concern  to  have  the  resi- 
due distributed  ratably  among  them- 
selves." At  common  law  a  partnership 
or  joint-stock  association  may  do  busi- 
ness under  any  name  that  it  chooses. 
See  §  233,  note,  supra;  Preachers'  Aid 
Soo.  r.Rich,  45  Me.  553  (1858);  2  Perry, 
Trusts,  §  730;  Swasey  v.  American 
Bible  Soc,  57  Me.  523  (1869). 

1  It  differs  from  a  corporation  in  that 
a  joint-stock  company  has  no  limited 
liability  as  regards  its  stockholders; 
and  it  cannot  sue  or  be  sued  in  the 
name. of  the  association.  It  differs  from 
a  copartnership  in  that  it  is  not  dis- 
solved by  a  transfer  of  stock;  and  each 
member  has  not  the  same  powers  of 
transacting  business  and  disposing  of 
the  assets  as  in  a  partnership.  See  Cox 
V.  Bodfish,  35  Ma  803  (1853).  In  Illinois 
it  is  a  criminal  offense  for  individuals 
or  an  unincorporated  association  to  use 
a  name  that  implies  incorporation. 
Hazelton  Boiler  Co.  v.  Hazelton,  etc.  Co., 
143  111.494(1893). 


2  Park  V.  Spaulding,  10  Hun,  128  (1877) ; 
Ridgely  v.  Dobson,  3  Watts  &  S.  (Pa.) 
118  (1842);  Loubat  v.  Le Roy,  40  Hun,  546 
(1886);  Flemyng  v.  Hector,  2  M.  &  W. 
172  (1836);  Re  St.  James  Club,  2  De  G., 
M.  &  G.  383  (1853);  Ewing  v.  Midlock,  14 
Ala.  (O.  S.)  82  (1837);  Todd  v.Emlj,  8 
M.  &  W.  505  (1841);  Reynell  v,  Lewis,  15 
M.  &  W.  517  (1846);  Wood  v.  Finch,  2  F. 
&  F.  447  (1861);  Cross  v.  Williams,  10 
W.  R.  303  (1863);  Cockerell  v.  Aucompte, 
5  W.  R.  633  (1857);  Koehleru.  Brown,  31 
How.  Pr,  235  (1866);  Waller  v.  Thomas, 
42  How.  Pr.  337  (1871);  Hopkinson  v. 
Marquis  of  Exeter,  16  W.  R.  266  (1867); 
Gardner  v.  Fremantle,  19  W.  R.  256 
(1870);  Delauney  v.  Strickland,  2  Stark. 
416  (1818);  Caldicottv.  Griffiths,  8  Exch. 
898  (1853);  Ebbinghousen  v.  Worth  Club, 
4  Abb.  N.  Cas.  300  (1878).  The  ordinary 
attachment  statute  authorizing  the  at- 
tachment of  shares  of  stock  does  not 
apply  to  a  club  organized  for  lawful 
sporting  purposes  and  being  more  of 
the  nature  of  a  statutory  joint-stock 
association  than  a  corporation.  Lyon 
V.  Denison,  80  Mich.  371  (1890).  Even 
though  the  trustees  of  a  club  have  been 
obliged  to  pay  the  debts  of  the  club,  yet 


3  Penfield  v.  Skinner.  11  Vt.  296  (1839); 
Beaumont  v.  Meredith,  3  Ves.  &  B.  180 
(1814).  See  also  Thomas  f.  Ellmaker,  1 
Pars.  Sel.  Eq.  Cas.  98  (1844).  Or  Ma- 
sonic lodges.  See  Ash  v.  Guie,  97  Pa. 
St  493  (1881).  See  also  Cohn  v.  Borst, 
36  Hun,  562  (1885);  Goodman  v.  Jedidjah 
Lodge,  67  Md.  117  (1887);  Schmidt  v. 
Abraham  Lincoln  Lodge.  84  Ky.  490 
(1886).  A  by-law  of  a  benevolent  society 
that,  for  non-payment  of  dues,  the 
names  of  members  shall  be  dropped,  is 
legal  and  self-executing.  Rood  v.  Rail- 
way, etc.  Assoc,  81  Fed.  Rep.  62  (1887). 
See  McCallion  v.  Hibernia,  etc.  Soc,  70 
Cal.  163  (18S6),  involving  a  secession 
from  a  benevolent  association.  Be- 
nevolent associations  are  not  necessa- 

10 


rily  copartnerships.     Brown  v.  Stoerkel, 
74  Mich.  269  (1889). 

*  Lafond  v.  Deems,  81  N.  Y.  507  (1880); 
Fritz  V.  Muck,  63  How.  Pr.  69  (1881); 
Pipe  V.  Bateman,  1  Iowa,  369  (1855). 
Cf.  Thomas  v.  Ellmaker,  1  Pars.  Sel.  Eq. 
Cas.  98  (1844);  Olery  v.  Brown,  51  How. 
Pr.  93  (1875).  An  unincorporated  so- 
ciety which  has  existed  for  nearly  one 
hundred  years,  organized  by  an  agree- 
ment by  which  there  is  a  community 
of  property,  and  any  member  dying  or 
withdrawing  not  to  be  entitled  to  any 
part  of  such  property,  is  valid  in  law, 
and  such  agreement  will  be  upheld. 
Schwartz  v.  Duss,  93  Fed.  Rep.  538  (1899): 
aff'd,  187  U.  S.  8  (1903) 


'1 


§  504.] 


TRUSTS,  ETC. 


[CH.  XXIX. 


ganizations,  and  from  associations  formed  for  business  purposes, 
but  without  a  capital  stoclv,  such  as  stock  and  other  exchanges,^ 


they  cannot  collect  from  the  members. 
Wise  V.  Perpetual,  etc.  Co.,  87  L.  T.  Eep. 
569  (1902),  the  court  saying:  "  Clubs  are 
associations  of  a  peculiar  nature.  They 
are  societies  the  members  of  which  are 
perpetually  changing.  They  are  not 
partnerships;  they  are  not  associations 
for  gain;  and  the  feature  which  distin- 
guishes them  from  other  societies  is 
that  no  member  as  such  becomes  liable 
to  pay  to  the  funds  of  the  society  or  to 
anyone  else  any  money  beyond  the  sub- 
scriptions required  by  the  rules  of  the 
club,  to  be  paid  so  long  as  he  remains  a 
member.  It  is  upon  this  fundamental 
condition  not  usually  expressed,  but 
understood  by  every  one,  that  clubs  are 
formed;  and  this  distinguishing  feature 
has  been  often  judicially  recognized." 
An  unincorporated  club  is  not  a  partner- 
ship, although  the  members  may  be  lia- 
ble as  partners,  and  hence  a  member  has 
no  power  to  make  contracts  for  the  as- 
sociation. Lumbard  v.  Grant,  35  N.  Y. 
Misc.  Rep.  140  (1901).  Of.  88  L.  T.  Rep.  323. 
1  Such  as  stock  exchanges.  See 
Whiter.  Brownell,  2  Daly,  329  (1868); 
Clute  V.  Loveland.  68  Cal.  254  (1885); 
Leech  v.  Harris,  2  Brewst.  (Pa.)  571 
(1SG9);  State  v.  Chamber  of  Commerce, 
20  Wis.  63  (1865);  Weston  u  Ives,  97  N. 
Y.  222  (1884),  relative  to  sale  of  a  seat 
by  the  exchange  to  pay  the  member's 
debts.  See  also  Piatt  v.  Jones,  96  N.  Y. 
24  (1884).  As  to  a  levy  of  execution  on 
a  seat  in  an  exchange,  see  Bo  wen  i'.  Bull, 
12  N.  Y.  Supp.  325  (1800);  Powell  v. 
Waldron,89  N.  Y.  328  (1882);  Ritterband 
V.  Baggett,  4  Abb.  N.  Cas.  67  (1877); 
Londheim  v.  White,  67  How.  Pr.  469 
(1884).  A  seat  in  a  stock  exchange 
owned  by  abankrupt  vests  in  the  trustee 
and  may  be  sold  by  him.  Page  v.  Ed- 
munds, 187  U.  S.  596  (1903).  A  stock  ex- 
change seat  may  be  pledged  to  secure  a 
loan  and  such  pledge  need  not  be  re- 
corded. Upon  the  death  of  the  pledgor, 
the  stock  exchange  has  no  right  to  pay 

10 


the  proceeds  of  the  sale  of  the.seat  to  his 
administrator,  where  notice  of  the 
pledge  had  been  given.  Nashua  Sav. 
Bank  v.  Abbott,  63  N.  E.  Rep.  1058 
(Mass.  1902).  A  seat  in  the  exchange  is 
property  which  may  be  reached  by 
creditors.  But,  if  an  assignee  in  bank- 
ruptcy refuses  to  take  it  and  pay  the 
dues,  the  bankrupt  who  pays  them  may 
retain  the  seat.  Sparhawk  v.  Yerkes, 
142  U.  S.  1  (1891).  It  is  legal  for  an  ex- 
change to  have  and  enforce  a  by-law 
providing  that  the  seat  of  a  member 
shall  be  sold  in  case  of  his  failure  to 
fulfill  his  contracts.  Rorke  v.  San 
Francisco  Stock,  etc.  Board,  99  Cal.  196 
(1893).  A  seat  in  the  stock  exchange 
cannot  be  sold  under  levy  of  execution. 
The  purchaser  takes  nothing.  Lowen- 
berg  V.  Greenebaum,  99  Cal.  162  (1893). 
Tiie  seat  of  a  member  of  an  exchange 
may  be  reached  by  judgment  creditors 
of  the  owner,  although  the  by-laws 
provide  otherwise.  Habenicht  v.  Lis- 
sak,  78  Cal.  351  (1889).  Where,  under 
a  by-law  of  a  board  of  trade,  differ- 
ences between  members  are  arbitrated, 
a  court  of  equity  may  review  the  de- 
cision in  regard  to  the  measure  of 
damages.  Ryan  v.  Cudahy,  157  111.  108 
(1895).  A  fund  accumulated  by  an  ex- 
change under  its  charter,  for  the  ben- 
efit of  the  widows  and  families  of  de- 
ceased members,  cannot,  by  an  amend- 
ment of  the  by-laws,  be  distributed 
among  the  members.  Parish  v.  New 
York,  etc.  Exchange,  169  N.  Y.  34  (1901). 
A  discharge  under  the  bankruptcy  act 
puts  an  end  to  the  lien  of  members 
of  an  exchange  upon  the  seat  of  the 
bankrupt  for  debts  due  to  such  mem- 
bers. State  V.  Chamber  of  Commerce, 
etc.,  77  Minn.  308  (1899).  A  telegraph 
company  is  not  bound  to  furnish  stock 
exchange  quotations  to  a  person  where 
the  stock  exchange  has  ordered  the 
telegraph  company  not  to  furnish 
quotations  to  that  person,  and  tlie  con- 


CH.  XXIX.] 


TRUSTS,  ETC. 


[§  504. 


especially  in  respect  to  the  right  of  expulsion.^  In  the  matter  of 
the  expulsion  of  a  member  from  an  incorporated  exchange,  the 
court  may  pass  upon  the  question  of  the  jurisdiction  of  the  board 
of  directors  to  expel  a  member,  and  also  as  to  whether  there 
was  any  evidence  at   all   justifying   the  expulsion.-    Where  the 


tract  between  the  stock  exchange 
and  the  telegraph  company  required 
the  latter  to  furnish  quotations  to  only- 
such  persons  as  the  stock  exchange 
approved,  the  stock  exchange  being  a 
voluntary  association  and  not  a  corpo- 
ration. Matter  of  Renville,  46  N.  Y. 
App.  Div.  37  (1889).  Associations  may 
be  for  improving  a  water-power.  Troy 
Iron,  etc.  Factory  v.  Corning,  45  Barb. 
231  (1884).  For  building  a  school-house. 
Marston  v.  Durgm,  54  N.  H.  347  (1874). 
For  protecting  business  interests.  Cal- 
dicott  Griffiths  v.  8  Exch.  898  (1853). 
See  also  Tenney  v.  New  England  Pro- 
tection Union,  37  Vt.  64  (1864);  Abels  v. 
McKeen,  18  N.  J.  Eq.  463  (1867);  Henry 
V.  Jackson.  37  Vt.  431  (1865);  Frost 
V.  Walker,  60  Me.  468  (1872).  A  stock 
corporation  organized  to  build  a  build- 
ing for  the  benefit  of  a  library  asso- 
ciation may  sustain  towards  the  lat- 
ter the  relation  of  trustee  towards  a 
cestui  que  trust,  but  the  corporation 
may  insist  on  its  legal  rights.  Pitts- 
burgh, etc.  V.  Mercantile,  etc.  Co..  189 
Pa.  St.  479  (1899).  As  to  building  asso- 
ciations, see  also  Phelps  v.  American, 
etc.  Assoc,  121  Mich.  343  (1899).  In 
buildmg  associations  general  creditors 
are  prior  in  right  to  withdrawing  mem- 
bers. Cook  V.  Emmet,  etc.  Assoc,  90 
Md.  284  (1899).  As  to  the  nature  of  a 
building  and  loan  association  and  the 
legality  of  its  stock,  loans,  and  mode  of 
transacting  business,  see  Mcllwaine  v. 
Iseley,  96  Fed.  Rep.  62.  See  189  U.  S.  122. 
1 A  member  of  a  union  cannot  bring 
a  suit  in  equity  to  declare  void  and  il- 
legal a  by-law  that  members  shall  be 
fined  for  accepting  employment  in  con- 
nection with  non-union  persons,  and 
to  enjoin  the  infliction  of  a  fine  upon 
himself.  His  remedy  is  at  law  or  by 
application  to  the  attorney -general. 
(68)  10 


Thomas  v.  Musical,  etc.  Union,  121  N. 
Y.  45  (1890).  A  by-law  that  the  mem- 
bers of  a  news  association  shall  not 
publish  news  furnished  by  other  asso- 
ciations in  the  same  territory  is  valid. 
The  penalty  for  violation  may  be  sus- 
pension. Matthews  v.  Associated  Press, 
136  N.  Y.  333  (1893).  Where  a  member 
of  a  lodge  was  expelled  for  entering 
into  a  conspiracy  to  blackball  appli- 
cants for  admission,  the  court  refused 
to  restore  him  by  mandamus,  and  said 
that  such  a  case  was  different  from 
one  where  property  rights  or  monej 
demands  are  involved.  State  i'.  Grand 
Lodge,  53  N.  J.  L.  536  (1891).  Where 
the  expelled  member  has  the  right  by 
by-law  to  appeal  from  the  decision 
to  a  corporate  meeting,  the  courts  will 
not  interfere  until  such  appeal  is 
taken.  Screwmen's  Benev.  Assoc,  u 
Benson,  76  Tex.  552  (1890).  As  to 
expulsion  of  a  member  from  a  club 
under  a  by-law,  see  Commonwealth  v. 
Union  League,  135  Pa.  St.  301  (1890).  An 
action  is  not  maintainable  to  compel 
an  unincorporated  voluntary  political 
association  to  admit  a  person  to  mem- 
bership. McKane  v.  Adams,  123  N.  Y. 
609  (1890).  Such  organizations  as  cham- 
bers of  commerce  sometimes  provide 
for  forfeiture  of  membership  for  non- 
payment of  dues,  and  such  provision  is 
legal.  The  corporation  may,  however, 
sue  for  its  dues  instead  of  forfeiting 
the  membership.  Denver,  etc.  Com- 
merce V.  Green,  8  Colo.  App.  420  (1896). 
As  to  expulsion  of  members  from  unin- 
corporated associations,  see  Otto  r- 
Journeymen  Tailors'  Union,  75  Cal.  308' 
(1888).    See  also  §  4a,  supra. 

^People  V.  New  York  Produce  Exch.,. 

149  N.  Y.  401  (1896).     See  also  Re  Haeb- 

ler,  149  N.  Y.  414  (1896),  holding  that  a 

by-law  giving  the  board  of  managers 

73 


§  504.] 


TRUSTS,  ETC. 


[CH.  XXIX. 


charter  of  a  mutual  protective  corporation  does  not  provide  for 
expulsion,  and  the  corporation  has  a  surplus  fund  in  its  treasury, 
the  power  of  expulsion  does  not  exist  unless  the  member  has  been 
guilty  of  some  infamous  offense  or  has  done  some  act  tending  to  the 
destruction  of  the  society.' 

In  corporations  having  a  capital  stock  no  power  of  expulsion  can 
be  exercised  unless  expressly  conferred  by  the  charter  or  by  stat- 
ute.^ 

A  member  who  has  been  unjustly  expelled  may  have  mandamus 
to  compel  the  corporation  to  restore  him  to  membership.'  Accord- 
ingly, where  a  corporate  body  strikes  off  the  name  of  one  of  its 
members  without  giving  him  previous  notice  of  their  intention  so 
to  do,  and  affording  him  opportunity  to  be  heard  in  his  own  de- 
fense, a  mandamus  to  restore  will  be  granted;*  and  an  injunction 
lies  to  restrain  a  board  of  brokers  from  irregularly  expelling  one  of 

254  (1815).  A  resolution  spread  upon 
the  corporate  records  unjustly  expel- 
ling a  member  is  a  libel,  and  the  mem- 
ber offering  the  resolution  is  liable 
to  an  action  thereupon.  Fawcett  v. 
Charles,  13  Wend.  473  (1835).  Cf.  Ad- 
ley  V.  Whitstable  Co.,  19  Ves.  Jr.  304 
(1815);  Chase  v.  East  Tennessee,  etc.  R. 
R,  5  Lea  (Tenn.),415  (1880).  It  is  doubt- 
ful whether  a  stock  corporation  may 
impose  a  fine  upon  the  stockholders  for 
a  violation  of  its  by-laws.  Monroe,  etc. 
Assoc.  V.  Webb,  40  N.  Y.  App.  Div.  49 
(1899).    See  also  §  4a,  supra. 

3  Black,  etc.  Soc.  v.  Vandyke,  2  Whart. 
(Pa.)  309  (1837);  Commonwealth  v.  Ger- 
man Soc,  15  Pa.  St.  251  (1850);  People 
V.  Saint  Frauciscus  Ben.  Soc,  24  How. 
Pr.  216  (1862);  State  v.  Carteret  Club, 
40  N.  J.  Lu  295  (1878);  People  v.  Erie 
Medical  Soc,  32  N.  Y.  187  (1865);  People 
V.  New  York  Ben.  Soc,  3  Hun,  361 
(1875);  Medical,  etc.  Soc  v.  Weatherly, 
75  Ala.  248  (1883).  As  to  the  damages 
to  be  paid  to  a  member  who  has  been 
unlawfully  expelled  and  is  reinstated 
by  the  court,  see  People  v.  Musical,  etc. 
Union,  118  N.  Y.  101  (1889). 

*  Delacy  v.  Neuse  River  Nav.  Co.,  1 
Hawks  (N.  C),  274  (1821).  The  member 
must  have  a  fair  hearing.  Southern 
Plank-road  Co.  v.  Hixon,  5  Ind.  165 
(1854). 


power  to  discipline  members  is  legal. 
A  stock  exchange  may  expel  a  mem- 
ber who  does  not  fulfill  his  contracts 
made  within  the  exchange,  due  notice, 
etc.,  being  given  to  him  in  the  matter. 
Lewis  V.  Wilson,  121  N.  Y.  284  (1890). 
Stock  exchanges  cannot  expel  mem- 
bers for  carrying  cases  into  courts  in- 
stead of  arbitrating.  People  v.  New 
York  Cotton  Exch.,  8  Hun,  216  (1876). 
As  to  the  power  of  a  board  of  trade  to 
expel  a  member,  see  Pitcher  v.  Chicago 
Board  of  Trade,  121  III.  412  (1887).  As 
to  the  expulsion  of  a  member  from  the 
New  York  Stock  Exchange,  see  Belton 
V.  Hatch,  109  N.  Y.  593  (1888).  See  also 
p.  1075,  infra;  78  N.  Y.  App.  Div.  229. 

1  Weiss  V.  Musical,  etc.  Union,  189  Pa. 
St.  446  (1899). 

2  Evans  v.  Philadelphia  Club,  50  Pa. 
St.  107  (1865);  State  v.  Chamber  of 
Commerce,  20  Wis.  63  (1865);  also  State 
V.  Milwaukee  Chamber  of  Commerce, 
47  Wis.  670  (1879).  In  Dickenson  v. 
Milwaukee  Chamber  of  Commerce,  29 
Wis.  45  (1871),  it  is  held  that  there  may 
be  a  lawful  expulsion  under  a  valid  by- 
law. 

Expulsion  by  virtue  of  a  by-law  has 
been  held  to  be  unlawful.  People  v. 
Saint  Franciscus  Ben.  Soc,  24  How.  Pr. 
216  (1863);  People  v.  Mechanics'  Aid 
Soc,  22  Mich.  86  (1870);  Green  v.  Afri- 
can Meth.  Epis.  Soc,  1  Serg.  &  R,  (Pa.) 

1074 


<3G.  XXIX.] 


TRUSTS,  ETC. 


[§  504. 


their  members.^  Such  organizations,  however,  as  chambers  of  com- 
merce sometimes  provide  for  forfeiture  of  membership  for  non- 
payment of  dues,  and  such  provision  is  legaL  The  corporation 
may  sue  for  its  dues  instead  of  forfeiting  the  membership.'- 

TVhere  the  expulsion  is  reguhir  and  authorized  by  the  charter  or 
statute  it  is  conclusive,  and  mandamus  will  not  lie.'  An  act  of  ex- 
pulsion cannot  be  impeached  or  attacked  collaterally.*  At  com- 
mon law  there  were  three  causes  for  expulsion:  where  the  member 
was  guilty  of  an  infamous,  indictable  offense;  or  guilty  of  an  of- 
fense against  his  duty  as  a  corporator;  or  of  an  offense  compounded 
of  these  two.^ 

A  mutual  insurance  company  may  pay  dividends.^    A  joint-stock 


1  Leech  v.  Harris,  2  Brewst.  (Pa.)  571 
(1869);  Hutchinson  v.  Lawrence  (N.  Y. 
Supr.  Ct.),  N.  Y.  D.  Reg.,  Feb.  8,  1887. 
Cf.  Italian  Union  Soc.  v.  Montedonico, 
4  Am.  &  Eng.  Corp.  Cas.  22  (1884).  But 
not  as  against  a  medical  society.  Gregg 
V.  Massachusetts  Medical  Soc,  111  Mass. 
185  (1872).  So.  also,  the  courts  will  not, 
upon  the  application  of  a  member  of 
the  corporation,  grant  an  injunction  to 
restrain  a  corporation  from  initiating 
new  members  when  no  danger  of  pe- 
cuniary loss  is  shown  as  likely  to  result 
to  the  petitioner  from  such  initiation. 
Thompson  v.  Tammany  Soc,  17  Hun, 
305  (1879). 

2  Denver  Chamber,  etc  v.  Green,  8 
Colo.  App.  420  (1896). 

'^  Commonwealth  v.  Pike  Ben.  Soc,  8 
Watts  &  S.  247  (1844);  People  v.  Fire 
Underwriters,  7  Hun,  248  (1876). 

4  Black,  etc.  Soc  v.  Vandyke,  2  Whart. 
(Pa.)  309  (1837);  Commonwealth  v.  Pike 
Ben.  Soc,  8  Watts  &  S.  (Pa.)  247  (1844); 
Society  for  Visitation,  etc.  v.  Meyer,'  52 
Pa.  St.  125,  131  (1866).  Cf.  Common- 
wealth V.  Oliver,  2  Pars.  Sel.  Cas.  420, 
426  (1849). 

SBaggs  Case,  11  Coke.  93&,  99  (1616); 
Rex  V.  Liverpool,  2  Burr.  723, 732  (1759); 
State  u  Milwaukee  Chamber  of  Com- 
merce, 20  Wis.  63  (1865):  People  v.  New 
York  Comm.  Assoc,  18  Abb.  Pr.  271 
(1864);  People  v.  Chicago  Board  of 
Trade,  45  IlL  112  (1867).  .Cf.  Smith  v. 
Smith,  3  Desauss.  (S.  C.)  .  557  (1813), 
where   an   expulsion    for    misconduct 

10 


was  sustained ;  Woolsey  v.  Independent 
Order,  etc.,  1  Am.  &  Eng.  Corp.  Cas. 
172  (1883);  Fisher  v.  Keane,  L.  R.  11 
Cli.  D.  353  (1878);  Hopkinson  v.  Exeter, 
L.  R.  5  Eq.  63  (1867);  Dawkins  v.  An- 
trobuP,  L.  R.  17  Ch.  D.  615  (1881);  Gard- 
ner V.  Fremantle,  19  W.  R.  256  (1871); 
People  V.  New  York  Cotton  Exch.,  8 
Hun,  216  (1876);  Dean  v.  Bennett,  L.R. 
6  Ch.  App.  489  (1871).  In  Sturges  v. 
Chicago  Board  of  Trade,  86  111.  441 
(1877),  it  was  held  that  the  remedy  of 
the  expelled  member  was  at  law,  and 
not  in  equity.  But  see  State  v.  Lusi- 
tanian,  etc.  Soc,  15  La.  Ann,  73  (18C0); 
Wood  V.  Woad,  L.  R.  9  Exch.  190  (1874); 
Bostwick  V.  Detroit  Fire  Dept,  49  Mich. 
513  (1883);  Hassler  v.  Philadelphia  Mu- 
sical Assoc,  14  Phila.  233  (1880);  Ana- 
costa  Tribe  v.  Murbach,  13  Md.  91 
(1858);  State  v.  Georgia  Med.  Soc,  38 
Ga.  608  (1869);  Washington  Ben.  Soc 
V.  Bacher,  20  Pa.  St.  425  (1853);  Riddell 
V.  Harmony  Fire  Co.,  8  Phila.  310  (1871); 
State  V.  Adams,  44  Mo.  570  (1869); 
Harmstead  v.  Washington  Fire  Co.,  8 
Phila.  331  (1871);  Commonwealth  v. 
Philanthropic  Soc,  5  Binn.  (Pa.)  486 
(1813);  Commonwealth  v.  St.  Patrick 
Benev.  Soc,  2  Binn.  (Pa.)  448  (1810); 
People  V.  Fire  Underwriters,  7  Hun,  248 
(1876).  Upon  the  general  question  of 
the  power  to  expel  members,  see  Ang. 
&  A.  Corp.,  §  410  et  seq.;  2  Kent,  Com. 
297. 

6  In  McKean  v.  Biddle,  181  Pa.  St.  361 
(1897),  where  a  mutual  insurance  com- 
75 


§  504.] 


TKL'STS,  ETC. 


[CH.  XXIX. 


company,  although  it  exercises  the  power  to  issue  stock,  the  same 
as' a  corporation,  yet,  when  organized  for  the  purpose  of  transact- 
ing any  lawful  business,  is  itself  a  lawful  means  of  carrying  on 

business.^ 

The  earlier  cases  declaring  that  joint-stock  companies  were  ille- 
gal were  so  decided  largely  because  of  the  Bubble  Act,  which  was 
in  force  from  1720  to  1826.2 

Yery  high  English  authority,  after  a  thorough  review  of  the 
English  cases,  gives  the  opinion  that  at  common  law  joint-stock  as- 

1  to 


sociations  are  legal.^ 

pany  for  one  hundred  and  thirty-two 
years  had  not  paid  dividends,  but  had 
accumulated  a  surplus  of  over  $4,000,000, 
the  court  held  that  the  company  might 
resume  the  payment  of  dividends.  The 
court  also  held  that  every  corporation 
has  the  inherent  right  to  declare  divi- 
dends. 

1 "  It  is  too  late  to  contend  that  part- 
nerships with  transferable  shares  are 
illegal  in  this  commonwealth.  .  .  . 
The  grounds  upon  which  they  were 
formerly  said  to  be  illegal  in  England, 
apart  from  statute,  have  been  aban- 
doned in  modern  times."  Phillips  v. 
Blatchford,  137  Mass.  510  (1884).  "  These 
companies,  being  consonant  with  the 
wants  of  a  growing  and  wealthy  com- 
munity, have  forced  their  way  into  ex- 
istence, whether  fostered  by  the  law  or 
opposed  to  it."  Greenwood's  Case,  3 
De  G.,  M.  &  G.  459,  477  (1854);  Town- 
send  V.  Goewey,  19  Wend.  424  (1838). 
A  laboring  men's  association  for  the 
purpose  of  opposing  capitalists  lias  been 
upheld.  Snow  v.  Wheeler,  113  Mass.  179 
(1873). 

2  Enacted  6  Geo.  I,  c.  18,  §  18;  re- 
pealed, 6  Geo.  IV,  c.  91.  Lindley  says 
of  this  act:  "Juster  views  of  political 
economy  and  of  the  limits  within  which 
legislative  enactments  should  be  con- 
fined have  led  to  the  repeal  of  the 
statute  in  question,  which,  though 
deemed  highly  beneficial  lialf  a  cen- 
tury ago,  probably  gave  rise  to  much 
more  mischief  than  it  prevented." 

3  Lindley,  Company  Law  (5th  ed.), 
p.  130.    In  a  thorough  and  exhaustive 


note  on  this  subject  the  learned  author 
refers  to  Rex  v.  Dodd,  9  East,  516  (1808  , 
holding  that  a  company  with  a  pros- 
pectus limiting  the  liability  of  subscrib- 
ers is  illegal,  as  a  trap  to  ensnare  the 
unwary;  Josephs  v.  Pebrer,  3  B.  &  C. 
639  (1825),  holding  that  unincorporated 
companies  with  transferable  shares  are 
illegal;  and   Buck   v.  Buck,  1  Campb. 
547  (1808),  and  Rexu.  Stratton,  1  Campb. 
549,  n.  (1809),  to  same  effect.     He  states 
that  Kinder  v.  Taylor,  Coll.  Partn.  917 
(2d  ed.,  1825);  S.  C,  3  L.  J.  Ch.  69;  Du- 
vergier  v.  Fellows,  5  Bing.  248  (1828); 
aff'd,  10   B.  &  C.  826,  and  Blundell  v. 
Winsor,   8  Sim.   601   (1837),    contained 
dicta  only,  so  far  as  they  passed  on  the 
legality  of  these  companies.    The  fol- 
lowing cases  clearly  establish  the  le- 
gality of  joint-stock  associations:  Har- 
rison V.  Heathorn,  6 Man.  &  G.  81  (1843); 
Garrard  u.Hardey,5  Man.&  G.471  (1843); 
Barclay's  Case,  26  Beav.  177  (1858);  Re 
Aston,  27  Beav.  474  (1859);  Grisewood's 
Case,  4  De  G.  &  J.  544  1,1859);  Sheppard 
V.  Oxenford,  1  K.  &  J.  491  (1855);  Rex 
V.  Webb,  14  East,  406  (1811);  Walburn 
V.  Ingilby,  1  M.  &  K.  61  (1832);  and  see 
Pratt  V.  Hutchinson,  15  East,  511  (1812); 
Ellison   V.   Bignold,  3  Jac.  &  W.   510 
(1821);  Nockels  v.  Crosby,  3  B.  &'C.  814 
(1825);  Kempson  u  Saunders,  4  Bing. 
5  (1826);  Brown  v.   Holt,  4  Taunt.  587 
(1812).     And  the  learned  jurist  comes 
to  this  conclusion:  "  The  case  of  Blun- 
dell V.  Winsor,  always  relied  upon  as 
an  authority  by  those   who    contend 
that  such  a  company   is  illegal,   has 
never  met  with  approbation  from  the 


1076 


CH.  XXIX.] 


TRUSTS,  ETC. 


[§  504 


In  Louisiana  and  Illinois  a  contrary  conclusion  has  been  ar-. 
rived  at.^ 

The  real  estate  of  an  unincorporated  joint-stock  association  is 
generally  held  in  the  names  of  trustees  for  its  benefit.'    A  deed  of 


bench,  nor  has  it  ever  been  followed. 
Upon  the  whole,  therefore,  it  appears 
that  there  is  no  case  deciding  that  a 
joint-stock  company  with  transferable 
shares,  and  not  incorporated  by  char- 
ter or  act  of  parliament,  is  illegal  at 
common  law;  that  opinions  have  never- 
theless differed  upon  this  question;  that 
the  tendency  of  the  courts  was  for- 
merly to  declare  such  companies  illegal ; 
that  this  tendency  exists  no  longer;  and 
that  an  unincorporated  company  with 
transferable  shares  will  not  be  held 
illegal  at  common  law  unless  it  can  be 
shown  to  be  of  a  dangerous  and  mis- 
chievous character,  tending  to  the 
grievance  of  her  majesty's  subjects. 
The  legality  at  common  law  of  such 
companies  may  therefore  be  consid- 
ered as  finally  established." 

1  See  §  508&,  supra;  Greene  v.  People, 
21  N.  E.  Rep.  605  (111.  1889).  A  mutual 
insurance  company  may  be  sufficiently 
a  corporation,  or  assuming  to  be  such, 
to  sustain  quo  warranto  against  it. 
Greene  v.  People,  150  111.  513  (1894); 
State  V.  Ackerman,  51  Ohio  St.  163 
(1894). 

2  When  an  association  holds  land  in 
the  name  of  trustees  for  the  benefit  of 
certificate-holders,  the  certificates  con- 
stitute an  equitable  lien  on  the  pro- 
ceeds from  the  sale  of  the  lands,  and 
even  a  consolidation  with  another  as- 
sociation does  not  disturb  this  lien. 
Crawford  v.  Gross,  140  Pa.  St.  297  (1891). 
A  conveyance  of  land  to  certain  indi- 
viduals as  trustees  for  the  members  of 
an  unincorporated  association  is  not 
void  by  the  statute  of  uses  and  trusts. 
Turner  v.  Ontonagon,  etc.  Co.,  77  Mich. 
603  (1889).  In  matters  of  deeds,  usage 
and  long  lapse  of  time  may  validate 
deeds  made  out  by  an  unincorporated 
association  as  a  corporation.  Baeder 
V.  Jennings,   40  Fed.   Rep.    199  (1889). 

10' 


Where  an  unincorporated  association 
own3  land  which  is  held  in  trust  for  it 
by  individuals,  it  may,  upon  becoming 
incorporated,  compel  the  trustees  to 
deed  to  it  the  land.  Organized  Labor 
Hall  V.  Gebert,  48  N.  J.  Eq.  393  (1891). 
If  a  trustee  who  holds  land  for  the 
benefit  of  a  corporation  commits  a 
breach  of  trust,  any  stockholder  may 
cause  him  to  be  removed.  Fisk  v.  Pat- 
ton,  7  Utah,  399  (1891).  A  new  unincor- 
porated association  cannot  claim  the 
land  of  the  one  which  it  succeeds, 
where  the  members  are  not  the  same. 
Allen  V.  Long,  80  Tex.  261  (1891).  Al- 
though the  association  has  been  dor- 
mant for  many  years,  yet  a  new  associ- 
ation formed  of  part  of  the  members 
of  the  old  cannot  convey  the  land  of 
the  old  one.  Allen  v.  Long,  80  Tex.  261 
(1891).  A  deed  to  an  unincorporated 
association  vests  title  in  it  as  soon  as  it 
is  incorporated.  Clifton,  etc.  Co.  v. 
Randeli,  82  Iowa,  89  (1891).  Cf.  ch.  XLI, 
infra.  An  absolute  deed  to  an  indi- 
vidual may  nevertheless  be  construed 
as  in  trust,  where  there  is  a  declaration 
in  writing  by  him  that  he  holds  it 
in  trust  for  a  church.  Reorganized 
Church,  etc.  v.  Church,  of  Christ,  60 
Fed.  Rep.  937  (1894).  If  the  trustees 
have  no  power  to  sell  the  land,  except 
on  the  vote  of  the  stockholders,  a  con- 
veyance without  that  consent  is  void. 
Willis  V.  Greiner,  26  S.  W.  Rep.  858 
(Tex.  1894).  Where  an  unincorporated 
association  pays  for  land  and  takes 
title  in  the  name  of  a  corporation,  the 
latter  may  be  compelled  to  convey  the 
land  to  the  former,  upon  the  former 
becoming  incorporated.  Church,  etc. 
V.  Algemeine,  etc.,  31  N.  Y.  A  pp.  Div. 
133  (1898):  It  is  well  settled  that  the 
shareholders  in  an  unincorporated  as- 
sociation cannot  convey  or  dedicate  to 
the  public  any  land  that  is   held   by 


§  504.] 


TEUSTS,  EXO. 


[CH.  XXIX. 


land  to  certain  grantees  as  trustees  for  an  unincorporated  associ- 
ation is  not  void,  but  is  upheld  by  the  court.  The  trust  is  an  act- 
ive one,  and  is  not  executed  at  once  by  force  of  the  statute.^  An 
unincorporated  joint-stock  association  to  buy,  lease,  and  sell  land 
is  legal,  even  though  the  title  to  the  land  is  held  in  the  name  of 
trustees  who  cannot  act  except  upon  a  three-fourths  vote  of  the 
shareholders.  A  shareholder  cannot  have  a  receiver  appointed 
and  the  business  wound  up  on  the  ground  of  its  being  illegal.' 
Shares  of  stock  in  a  joint-stock  association  are  personal  property, 
even  though  the  property  of  the  association  consists  of  real  estate, 
so  far  as  the  question  of  inheritance  taxes  is  concerned.^  A  deed 
to  persons  as  trustees,  the  beneficiaries  being  the  members  of  an 
association,  transfers  title,  and  the  New  York  statute  does  not  vest 
the  title  in  the  beneficiaries,  the  trustees  being  beneficiaries  also.* 
The  English  cost-book  mining  companies  were  organized  on  this 
principle.^    A  deed  or  devise  to  an  unincorporated  association  is 


trustees  for  its  benefit.  Ward  v.  Davis, 
3  Sandf.  503  (1850).  The  interest  of 
one  of  the  cestuis  que  trust  of  such  a 
trust,  consisting  of  real  estate,  is  per- 
sonalty, and  descends  as  such  upon  his 
death.  Mallory  v.  Russell,  71  Iowa,  63 
(1887).  A  scheme  by  which  shares  are 
sold,  each  share  representing  a  lot  in  a 
tract  of  land,  and  upon  a  sale  of  all 
the  shares  the  shareholders  elect  a 
board  of  directors,  who  sell  at  auction' 
the  best  lots  and  distribute  the  re- 
maining lots  by  the  remaining  share- 
holders drawing  the  remaining  lots 
"  by  lot,"  is  not  a  lottery  scheme  pro- 
hibited by  statute.  Elder  v.  Chapman, 
176  111.  143  (1898). 

1  Hart  V.  Seymour,  147  111.  598  (1893). 

2  Howe  u  Morse,  174  Mass.  491  (1899). 

3  Matter  of  Jones,  173  N.  Y.  575  (1903). 

4  King  V.  Townshend,  141  N.  Y.  358 
(1894). 

*  These  mining  companies  existed  in 
the  counties  of  Cornwall  and  Devon- 
shira  They  were  first  heard  of  in  the 
courts  about  the  year  1850.  Their  plan 
of  reorganization  and  operation  arose 
from  custom.  Their  organization  and 
mode  of  business  were  as  follows: 
Many  persons,  desirous  of  working  a 
mine,  would  cause  the  title  or  lease 
thereto  to  be  taken  in  the  names  of  one 


or  more  persons  called  trustees.     The 
business   was  then    carried  on   by  an 
agent  called  a  "  purser,"  or  by  a  board 
of  managers  elected  by  the  participants, 
who  were    called    the  "adventurers." 
The  latter,  of  course,  were  the  benefi- 
ciaries of  the  "  trust."   Any  adventurer 
had  a  right  to  transfer  his  interest  to  a 
transferee.     There  was  no  fixed  capital 
stock.     Calls  for  money  were  made  on 
the    adventurers,    according    to  their 
shares,  as  often  as  it  was  needed.     For 
a  full  statement  of  the  character  of 
these  mining  companies,  see  Kittow  i\ 
Liskeard  Union.  L.  R.  10  Q.  B.  7  (1874). 
See  also  Re  Bodmin,  etc.  Co.,  33  Beav. 
370  (1857),  holding  that  the  court  would 
not  take  judicial  notice  of  the  nature 
of  a  cost-book   mining   company;  Hy- 
bart  V.  Parker,  4  C.  B.  (N.  S.)  309  (1858). 
holding  that  the  purser  could  not  sue 
at  law  on  an  unpaid  call;  Re  Wrysgan, 
etc.  Co.,  38  L.  J.  (Ch.)  894  (1859),   as  to 
right  to  relinquish  shares,  also  describ- 
ing  the  functions    of   the  purser  and 
managing^directors;  Johnson  v.  Goslett, 
18  C.  B.  738  (1856),  affirmed  in  3  C.  B. 
(N.  S.)  569  (1857),  giving  the  full  terms 
of  the  articles  of  agreement;  Thomas 
V.  Clark,  18  C.  B.  663  (1856),  where  the 
court  said :  "  Every  partnership  has  a 
right  to  make  its  own  regulations  as  to 


1078 


CH.  XXIX.] 


TKL'STS,  ETC. 


[§  504. 


not  a  valid  conveyance  of  title.^  But  a  deed  dated  before  incorpo- 
ration, but  actually  delivered  after  incorporation,  is  good.'  An  un- 
incorporated association  may  take  a  bequest.^  And  a  devise  of 
real  estate  "to  an  unincorporated  association  does  not  fail.  The  title 


the  mode  of  transferring  shares  or  in- 
terests therein ; "  Re  Prosper,  etc.  Co., 
L.  R  7  Ch.  286  (1872),  relative  to  rights 
upon  a  resignation;  Mayhew's  Case,  5 
De  G.,  M.  &  G.  837  (1854),  holding  that 
by  a  transfer  of  his  share  "  the  liability 
of  the  transferrer  is  entirely  divested 
from  him  and  passes  to  the  trans- 
feree;" Be  Wrysgan  Co.,  5  Jur.  (N.  S.) 
21.5  (1859),  where  the  court  said:  "The 
vajrious  phases  of  absurdity  which  these 
joint-stock  companies  display  are  such 
that  the  marvel  in  my  mind  is  daily 
increasing  how  any  man  can  become  a 
member  of  a  joint-stock  company;"' 
Northey  v.  Johnson,  19  L.  T.  Rep.  (O. 
S.)  104  (1852),  holding  that  after  trans- 
fer the  transferrer  is  not  liable  for  the 
debts  incurred. 

It  is  clearly  established  that  the  ad- 
venturers in  a  cost-book  mining  com- 
pany are  personally  and  individually  lia- 
ble as  partners  for  the  debts  incurred 
in  the    enterprise.      Peel    v.    Thomas, 
15   C.  B.  714  (1855);  Newton  v.  Daly,l 
F.  &  F.  26  (1858);  Harvey  v.  Clougb,  8 
L.  T.  Rep.  (N.  S.)  324  (1863);  Tredwen  v. 
Bourne,  6  M.  &  W.  461  (1840);  Ellis  v. 
Schmoeck,  5  Bing.  521  (1829);  Lanyon 
V.  Smith,  3  B.  &  S.  938  (1863),  holding  a 
transferrer  liable    for  debts  incurred 
previous  to  the  transfer.    To  same  ef- 
fect, Geake  v.   Jackson,  15  W.  R.  338 
(1867).     They  are  liable,  also,  to  indem- 
nify the  directors  or  trustees.  Ex  parte 
Chippendale,  4  De  G.,  M.  &  G.  19,  52 
(1854).   See  also  Birch's  Case,  2  De  G.  & 
J.  10  (1857),  and  Fenn's  Case,  4  De  G., 
M.  &  G.  285  (1854),  where  the  members 
who  had  exercised  their  right  to  with- 
draw were  held  not  liable.     In  Hart  v. 


Clarke,  6  De  G.,  M.  &  G.  232  (1854),  an 
adventurer  compelled  the  company  to 
account  to  him  for  his  share  of  the  prof- 
its.    The  adventurers  have  no  interest 
in  the  land,  and  consequently  a  trans- 
fer of  their  shares  is  not  a  transfer  of 
an  interest  in  land.  Sparling  v.  Parker, 
9  Beav.  450  (1846);  Powell  v.  Jessopp,  18 
C.  B.  336  (1856);  Hayter  v.  Tucker,  4  K 
&  J.  243  (1858).     The  cost-book  mining 
company  was  frequently  spoken  of  as 
a  species  of  joint-stock  companj%    Re 
Wrysgan  Co.,  5  Jur.  (N.  S.)  215  (1859); 
Geake  v.  Jackson,  15  W.  R  338  (1867); 
Watson  V.  Spratley,  10  Exch.  222  (1854), 
wJiere  the  court  said:  "The  interest  of 
the  shareholder  in  the  great  incorpo- 
rated joint-stock  companies,  and  in  the 
smallest  mine  conducted  upon  the  cost- 
book  principle,  is,  in  its  essential  nat- 
ure and   quality,   identical."      For  an 
American  mining  case  applying  similar 
principles,  see  Treat  v.  Hiles,  68  Wis. 
344  (1887). 

1  As  to  the  effect  of  a  deed,  grant,  or 
bequest  of  real  estate  to  an  unincorpo- 
rated association,  see  Webb  v.  Weather- 
head,  17  How.  576  (1854);  Gerard,  Titles 
to  Real  Estate  (3d  ed.),  p.  420;  Owens  v. 
Missionary  Soc,  14  N.  Y.  380  (1856);  3 
Washb.  Real  Prop.  264  (4th  ed.);  Holmes 
V.  Mead,  52  N.  Y.  332  (1873);  Goesele  v. 
Bimeler,  5  McLean,  223  (1851);  s.  c,  10 
Fed.  Cas.  528;  German  Land  Assoc,  v. 
Schoiler,  10  Minn.  331  (1865);  Peabody 
V.  Eastern  Methodist  Soc,  87  Mass.  540 
(1863);  Towar  v.  Hale,  46  Barb.  361 
(1866);  1  Dart,  Vend.  &  P.  (5th  ed.)  21; 
Chapin  v.  Chicopee  Universalist  Soc, 
74  Mass.  580  (1857);  African  M.  E. 
Church  u  Conover,27N.  J.  Eq.  157  (1876); 


2  San  Diego,  etc.  Co.  v.  Frame,  70  Pac 
Rep.  295  (Cal.  1902). 

3  In  re  Winchester's  Estate,  133  Cal. 
271  (1901).     An  unincorporated  associa- 

1079 


tion  may  be  made  the  recipient  of  a 
bequest.  Hadden  v.  Daudy,  51  N.  J.  Eq. 
154  (1893). 


§  504.] 


TRUSTS,  ETC. 


[oh.  XXIX. 


descends  to  the  heir  at  law,  who  holds  the  same  as  trustee  for  the 
use  and  benefit  of  the  association.^  A  devise  or  bequest  to  a  corpo- 
ration to  be  thereafter  created  is  valid.-  "  That  a  valid  devise  or 
bequest  may  be  limited  to  a  corporation  to  be  created  after  the 
death  of  the  testator,  provided  it  is  called  into  being,  within  the 
time  allowed  for  the  vesting  of  future  estates,  is  not  denied.'' '  A 
deed  to  a  corporation  not  in  existence  is  void.*  But  where  promo- 
ters pay  for  land  and  take  a  deed  in  the  name  of  the  proposed  cor- 
poration, the  vendor  cannot  claim  that  the  deed  was  void,  even 
though  the  corporation  was  not  actually  organized  until  three 
years  after  such  deed  was  given. '^ 

The  question  of  whether  a  deed  to  a  de  facto  corporation  may  be 
questioned  by  any  one  other  than  the  state  is  considered  else- 
where." An  unincorporated  association  may  enjoin  a  corporation 
from  taking  its  name  where  injury  is  shown.'' 


Leonard  v.  Davenport,  58  How.  Pr.  384 
(1877);  Sherwood  v.  American  Bible 
Soc,  4  Abb.  App.  Dec.  237  (1864);  Mo- 
Keon  V.  Kearney,  57  How.  Pr.  849  (1878); 
Gibson  v.  McCall,  1  Rich.  L.  (S.  C.)  174 
(1844);  Byam  v.  Bickford,  140  Mass.  31 
(1885),  holding  that,  although  a  deed  to 
the  association  is  ineffectual,  yet  that 
it  passes  title  to  the  members  of  the  as- 
sociation. They  cannot  take  by  devise 
in  New  York.  White  v.  Howard,  46  N, 
Y.  144(1871);  Philadelphia  Bapt.  Assoc. 
V.  Hart,  4  Wheat.  1  (1819). 

1  American  Bible  Soc.  v.  American 
Tract  Soc,  62  N.  J.  Eq.  219  (1901),  the 
court  refusing  to  follow  the  New  York 
decisions  to  the  contrary. 

2  See  §  694,  infra. 

3Tilden  v.  Green,  130  N.  Y.  29,  47 
(1891),  the  coui't  holding,  however,  that 
the  devise  should  be  to  the  corporation 
to  be  formed,  and  should  not  be  in  trust 
to  the  executors  to  convey  to  such  cor- 
poration when  formed  if  the  executors 
think  best.  See  also  Burrill  v.  Board- 
man,  43  N.  Y.  254  (1871);  Inglis  v.  Trus- 
tees of  Sailors'  Snug  Harbor,  3  Pet.  99 
(1830). 

<  Provost  V.  Morgan's,  etc.  R  E,,  42 
La.  Ann.  809  (1890).  A  lease  to  a  cor- 
poration not  yet  organized  is  void. 
Utah.  etc.  Co.  v.  Keith,  18  Utah,  464 
(1899).     See  also  t:;  243.  supra.     A  deed 

1 


to  certain  persons  "as  incorporators" 
of  a  company  not  yet  incorporated 
does  not  vest  title  in  the  company  when 
incorporated.  McCandless  v.  Inland, 
etc.  Co.,  112  Ga.  291  (1900).  A  statute 
validating  deeds  made  to  supposed  cor- 
porations, which  afterwards  become  in- 
corporated, applies  to  deeds  made  after 
such  statute.  Cumberland,  etc.  Co.  v. 
Daniel,  52  S.  W.  Rep.  446  (Tenn.  1899). 
Where  no  organization  meetings  are 
held  and  no  officers  elected,  and  no  by- 
laws adopted,  and  no  certificates  of 
stock  issued,  and  no  seal  adopted,  and 
no  records  kept,  the  incorpoi*ation  does 
not  exist,  even  though  a  certificate  of 
incorporation  was  issued  by  the  state 
officers.  Hence  a  deed  delivered  to 
such  corporation  does  not  give  title. 
Wall  V.  Mines,  130  Cal.  27  (1900).  A 
vendor  of  property  to  a  concern  which 
he  supposed  was  a  partnership,  but 
turns  out  to  be  a  corporation,  may  re- 
pudiate the  contract  on  discovering 
that  fact,  inasmuch  as  the  minds  of  the 
parties  never  met.  Consumers'  Ice  Co. 
V.  Webster,  etc.  Co.,  32  N.  Y.  App.  Div. 
592  (1898). 

ft  White  Oak,  etc.  u  Murray,  145  Mo. 
622  (1898). 

6  See  §§  637,  694,  infra. 

^Aiello   V.  Montecaloo,  21   R.  I.  496 
(1899). 
080 


OH.  XXIX.] 


TKUSTS,  ETC. 


[§  505. 


§  505.  Statutory  joint-stoclz  company  —  Conduct  of  meetings.— 
There  is  an  essential  difference  between  a  joint-stock  corapan}'  as  it 
exists  at  common  law  and  a  joint-stock  company  having  extensive 
statutory  powers  conferred  upon  it  by  the  state  within  which  it  is 
organized.  The  latter  kind  of  joint-stock  companies  are  found  in 
England  and  in  the  state  of  New  York.  To  such  an  extent  have 
these  statutory  powers  been  conferred  on  joint-stock  companies 
that  the  only  substantial  difference  between  them  and  corporations 
is  that  the  members  are  not  exempt  from  liability  as  partners  for 
the  debts  of  the  company.  Accordingly,  joint-stock  companies, 
both  those  of  England  and  Kew  York,  have  been  held  to  be  corpo- 
rations in  many  respects,  although  expressly  declared  by  statute 
not  to  have  that  character.^     A  joint-stock  association  under  the 


1  In  the  case  of  Ostrom  v.  Greene,  161 
JN".  Y.  353  (1900),  the  court  said  that  a 
voluntary    unincorporated  association 
vof  seven  or  more  persons,  without  capi- 
tal stock,  is,  under  the  statutes  of  New 
York,  neither  a  joint-stock  company, 
nor  a  corporation,   nor  a  partnership, 
but  that  its  proceedings  would  be  tested 
by  the  law  of  corporations  and  partner- 
ships so  far  as  applicable.     See  Thomas 
.r.  Dakin,  22  Wend.  9  (1839):  Warner  v. 
Beers,  23  Wend.  103  (1840);  Parmly  v. 
Tenth  Ward  Bank,  3  Edw.  39.")  (1840); 
People  V.  Watertown,  1  Hill,  616  (1841); 
Bank  of  Watertown  v.  Watertown,  25 
Wend  686  (1841);  Willoughby  v.  Com- 
stock,  3  Hill,  389  (1842);  Leavitt  v.  Yates, 
4  Edw.  134  (1843);  Leavitt  v.  Tylee,  1 
Sandf.  Ch.  207(1843):  People  v.  Niagara 
County,  4  Hill,  20  (1842);  Boisgerard  v. 
New  York  Banking  Co.,  2  Sandf.  Ch.  23 
(1844);  Re  Bank  of  Dansville,  6  Hill,  370 
(1844);  Gifford  v.  Livingston,  2  Denio, 
380  (1845):  Case  v.  Mechanics'  Banking 
Assoc,  1  Sandf.  693  (1848);  Leavitt  v. 
Blatchford,  17  N.  Y.  521  (1858);  S.  C,  5 
Barb.  9;  Cuyler  v.  Sanford.  8  Barb.  225 
(1850);    Gillet  v.  Moody,  3   N.  Y.   479 
(1850);Talmageu  Pell,7N.  Y.  328(1852); 
Tracy  V.  Talmage,  18  Barb.  456  (1854); 
'Gillet  V.   Phillips,  13  N.  Y.  114  (1855); 
Falconer  v.  Campbell,  2  McLean,  195 
(1840);  s.  c,  8  Fed.  Cas.  963:  Duncan  v. 
Jones,  33  Hun,  12  (1884).     A  joint-stock 
,  .association  existing  in  New  York  and 


suable  by  the  laws  of  New  York  by 
service  on  its  president  may  be  sued  as 
a   corporation   in   Ohio,   although   not 
actually    incorporated   in   New  York. 
Adams  Express  Co.  v.  State,  55  Ohio  St. 
69  (1896).     The  United    States  Express 
Company,  an  unincorporated   associa- 
tion under  the  laws  of  the  state  of  New 
York,  is  treated  as  a  coj-poration  in 
other  states.     Edgeworth  v.  Wood,  58 
N.  J.  L.  463  (1896).     The  taxation  stat- 
utes of  Pennsylvania  imposing   taxes 
upon  corporations  organized  in  another 
state  do  not  apply  to  an  unincorporated 
association,  an  express  company  organ- 
ized in  New  York.    Sanford  v.  Gregg,  58 
Fed.  Rep.  620  (1893).     The  English  joint- 
stock  company  is  much  the  same.  "  The 
company  has  a  name  as  an  association, 
maintaining  the  identity  of  the  body 
through  all  changes  of  its  members;  its 
property  is    divided   into  transferable 
shares;  and  it  has  conferred  upon  it  the 
legal  capacity  to  sue  and  be  sued  in  the 
name  of  one  of  its  officers,  and  such  a 
suit    .     .     .      may   be  brought  by  or 
against  a    member  as  well  as  a  third 
person."    It  is  a  corporation,  though 
the  English  statute  declares  it  is  not. 
Oliver  v.   Liverpool,  etc.  Ins.  Co.,  100 
Mass.  531  (1868):  afl'd  sub  nom.  Liver- 
pool Ins.  Co.  V.  Massachusetts,  10  Wall. 
566  (1870).     So,  also,  with  the  New  York 
joint-stock  companies.     Fargo  v.  Louis- 
ville, etc.   Ry.,  6  Fed.  Rep.  78?  (1881); 


1081 


§  505.] 


TRUSTS,  ETC. 


[CH.  XXIX. 


laws  of  the  state  of  'New  Tork  is  sufficiently  a  corporation  to  sus- 
tain an  indictment  in  Illinois  against  an  employee  for  embezzling 
the  funds.'  Where  a  voluntary  unincorporated  association  has  no 
constitution,  or  by-laws,  or  rules,  the  conduct  of  its  meetings  may 
be  in  accordance  with  the  ordinar}^  parliamentary  rules  of  deliber- 
ative assemblies.'^  A  minority  of  an  unincorporated  voluntary  as- 
sociation may  adjourn  from  time  to  time,  even  if  a  majority  of  all 
the  members  is  necessary  to  constitute  a  quorum  in  order  lawfully 
to  transact  business.^  A  voluntary  unincorporated  association,  with- 
out articles,  constitution,  or  rules,  may  remove  its  president  or  other 
officer  at  any  time  and  without  notice,  except  that  the  meeting 
held  for  that  purpose  must  be  duly  held,  but  cannot  expel  a  mem- 
ber without  notice.*  An  unincorporated  association  may  purchase 
its  own  stock,  and  a  question  of  whether  a  reduction  of  the  capital 
stock  is  thereb}'-  effected  is  a  question  of  intention.*  An  unincor- 
porated express  company  cannot  be  compelled  to  divulge  to  railroad 
commissioners  the  business  it  does  outside  of  the  state,  the  purpose 
of  the  investigation  not  being  connected  with  taxation.^    A  limited 

Sanford  v.  Supervisors  of  New  York,  15  statutes  of  that  state  such  associations 
How.  Pr.  172  (1858);  Waterbury  v.  Mer- 
chants' Union  Exp.  Co.,  50  Barb.  157 
(1867).  As  regards  the  liability  of  the 
members  for  the  debts  of  the  company, 
it  is  held  to  be  a  copartnership.  Boston, 
etc.  R.  R.  V.  Pearson,  128  Mass.  445  (1880); 
Oliver  V.  Liverpool,  etc.  Ins.  Co.,  100 
Mass.  531  (1868 1 :  aff'd  STf6  nom.  Liver- 
pool Ins.  Co.  V.  Massachusetts,  10  Wall. 
566  (1870).  The  refusal  of  the  legisla- 
ture to  call  them  corporations  is  impor- 
tant as  cutting  oflf  the  exemption  of  the 
members  from  liability  to  creditors;  an 
exemption  which,  at  common  law,  be- 
longs to  all  corporations.  Joint-stock 
companies  in  England  have  always 
been  largely  statutory.  See  Van  San- 
dau  V.  Moore,  1  Russ.  441  (1826).  In 
New  York  the  English  decisions  on 
these  companies  are  doubtless  good  au- 
thority, since  they  exist  under  statutes 
which  are  much  alike.  In  New  York 
the  statutes  relative  to  taxation  of  cor- 
porations do  not  apply  to  joint-stock 
companies.  They  are  not  corporations. 
People  V.  Coleman,  138  N.  Y.  279  (1892); 
Hoey  v.  Coleman,  46  Fed.  Rep.  221  (1891). 
An  unincorporated  joint-stock  associa- 
tion is  legal  in  New  York.     Under  the 


are  corporations  for  many  purposes. 
People  V.  Wemple,  117  N.  Y.  136  (1889). 

1  Kossakowski  v.  People,  177  111.  563 
(1899). 

^  Ostrom  V.  Greene,  161  N.  Y.  353^ 
(1900). 

3  Ostrom  V.  Greene,  161  N.  Y.  353 
(1900),  the  court  saying  in  regard  to  the 
adjourned  meeting:  "Personal  notice 
to  every  member  was  unnecessary,  for 
it  was  the  same  in  effect  as  if  the  asso- 
ciation had  sat  in  continuous  session 
and  had  adjourned  each  day  to  tho 
next."  In  this  case  the  court  stated 
that  it  was  open  to  question  as  ta 
whether  a  majority  of  all  the  men^bers 
in  an  unincorporated  association  was 
necessary  in  order  to  constitute  a  quo- 
rum. 

4  Ostrom  V.  Greene,  161  N.  Y.  353 
(1900),  the  court  saying:  "The  holding 
of  an  office  unprotected  by  rules  is  not 
an  individual  right,  but  is  subject  to 
change  at  the  pleasure  of  the  associ- 
ation." 

5  Booth  V.  Dodge,  60  N.  Y.  App.  Div. 
23  (1901). 

*>  State  V.  United  States,  etc.  Co.,  81 
Minn.  87  (1900). 


1083 


en.  XXIX.] 


TKDSTS,  ETC, 


[§  506. 


partnership  under  the  Pennsylvania  statutes  is  not  a  corporation 
sufficient  for  purposes  of  jurisdiction  in  the  federal  court.^  Partner- 
ship associations  organized  under  the  laws  of  Michigan  are  con- 
trolled by  the  laws  relative  to  corporations.^  Under  the  partner- 
ship association  statute  of  Pennsylvania,  a  by-law  may  be  enacted 
taking  away  the  voting  power  from  any  stock  which  is  sold,  even 
though  it  is  purchased  by  an  existing  member.^ 

§  506.  Joint-stoclc  companies  may  arise  hij  implication  of  law. 
Joint-stock  companies  are  generally  formed  by  the  mutual  agree- 
ment and  direct  intent  of  the  parties.  They  may,  however,  arise 
by  implication  of  law.  Thus,  an  ineffectual  attempt  at  an  incorpo- 
ration may  make  the  parties  members,  not  of  a  corporation,  but  of 
a  joint-stock  company."  In  like  manner,  after  the  charter  of  a  cor- 
poration expires  and  the  parties  continue  to  do  business,  they  do  sa 
as  a  joint-stock  company.^ 


1  Great,  etc.  Co.  v.  Jones.  177  U.  S.  449 
(1900),  overruling  Andrews  Bros.  Co.  v. 
Youngstown  Coke  Co.,  86  Fed.  Rep.  585. 
A  New  York  joint-stock  association 
cannot  sue  as  such  in  the  federal  courts. 
Chapman  v.  Barney,  129  F.  S.  677(1889). 
A  partnership    association    under  the 
statutes  of  Pennsylvania  is  not  a  cor- 
poration to  the  extent  that  the  estate 
of  a  stockholder  is  liable  on  a  claim 
arising  after  the  death  of  such  stock- 
holder.    Bodey  v.  Cooper,  83  Md.   625 
(1896).     Nor  is  it  a  corporation  within 
the  meaning  of  the  tax  statutes.  Gregg 
V.  Sanford,  65  Fed.  Rep.  151  (1895).     An 
association  formed  under  the  Pennsj'l- 
vania  statutes  is  a  partnership  and  not 
a  corporation.     Hence  it  cannot  be  sued 
in  Massachusetts  in  the  name    under 
which    it    does  business.     Edwards  v. 
Warren,    etc.    Works,    168    Mass.    564 
(1897).     In  Carters.  Producers'  Oil  Co., 
182  Pa.  St.  551  (1897),  the  court  said  in 
regard  to  Pennsylvania  joint-stock  as- 
sociations organized  under  the  statutes: 
"Whether  the  partnership  association 
ought  to  be  classified  by  the  professor 
of  legal  science  as  a  species  of  the  genus 
corporation,  or  the  genus  partnership, 
or  whether  it  should  be  set  apart  as  a 
new  genus,  seems  to  me  unimportant. 
If  a  corporation,  it  is  so  peculiar  in  its 
features  that  the  general  law  of  corpo- 

1083 


rations  cannot  be  applied  to  it  without 
important  modifications;  if  a  partner- 
ship, it  so  differs  from  the  common 
type  that  the  general  law  of  partner- 
ships is  but  slightly  applicable.  Both 
the  law  of  corporations  and  the  law  of 
partnerships  are  to  be  resorted  t@  in 
the  absence  of  statutory  regulations, 
the  choice  being  determined  by  the 
nature  of  the  feature  under  considera- 
tion. .  .  .  A  partnership  association 
differs  from  the  common  type  of  part- 
nerships in  that  the  members  vote, 
and  do  not  act  with  the  powers  of  part- 
ners, and  in  that  they  are  subject  to 
no  joint  liability.  It  differs  from  the 
common  type  of  corporations  in  that 
the  members  have  a  right  to  admit  or 
refuse  membership  in  the  company  to 
the  transferee  of  the  interest,  as  well 
as  in  some  other  particulars." 

2  Rouse,  etc.  Co.  v.  Detroit,  etc.  Co., 
Ill  Mich.  251  (1896). 

3  Carter  v.  Producers'  Oil  Co.,  182  Pa. 
St.  551  (1897). 

4i2e  Mendenhall,  9  Nat.  Ban kr.  Reg. 
497  (1874);  s.  C,  17  Fed.  Cas.  10;  Whip- 
ple V.  Parker,  29  Mich.  369,  380  (1874); 
and  see  ch.  XIII,  supra.  Cf.  Foster  v. 
Moulton,  35  Minn.  458  (1886). 

5  Watertown  Nat.  Bank  v.  Landon,  45^ 
N.  Y.  410  (1871). 


|§  507,  508.] 


TRUSTS,  ETC. 


[CH.  XXIX. 


§  507.  How  a  ijerson  lecomes  a  memTyer  —  Transfers. —  A  person 
becomes  a  member  of  a  joint-stock  company  by  any  act  which  in- 
dicates an  intent  to  become  a  member  on  his  part,  and  a  consent 
or  acquiescence  therein  by  the  company  itself.^  He  may  also  be- 
come a  member  by  a  transfer  made  to  him  of  another  member's 
interest,  unless  the  articles  of  association  restrict  the  right  of 
transfer.^ 

§  508.  Hdbility  of  members  to  creditors  and  to  the  comimny. —  A 
joint-stock  company  is,  in  regard  to  the  liability  of  its  members  to 
creditors  of  the  company,  a  partnership;  its  members  are  liable  as 
partners;'  and  the  ordinary  rules  of  partnership  exist  bet  ween  the 

iThe  formalities  need  be  no  greater  stock  shall  be  made  only  with  consent 
than  in  forming  an  ordinary  partner- 
ship. Schuylerville  Nat.  Bank  v.  Van 
Derwerker,  74  N.  Y.  234  (1878);  Pettis 
V.  Atkins,  60  111.  454  (1871);  Machinists' 
Nat.  Bank  v.  Dean,  124  Mass.  81  (1878). 
Cf.  Volger  V.  Ray,  131  Mass.  439  (1881). 
It  is  not  necessary  that  certificates  of 
the  stock  be  issued  in  order  to  consti- 
tute membership.  Dennis  v.  Kennedy, 
19  Barb.  517  (1854);  Boston,  etc.  R.  R.  v. 
Pearson,  128  Mass.  445  (1880).  Evidence 
of  subscription  and  payment  of  an  as- 
sessment is  sufficient.  Frost  v.  Walker, 
60  Me.  468  (1872).  But  not  of  subscrip- 
tion without  any  participation.  Hedge's 
Appeal,  63  Pa.  St.  273  ( 1869). 

^  A  transfer  of  the  certificate  of  stock 
has  such  effect  although  not  registered 
in  the  stock  book.  Butter  field  v.  Beard- 
sley,  28  Mich,  412  (1874).  Transfer  may 
be  before  the  certificates  are  issued. 
Butterfield  v.  Spencer,  1  Bosw.  1  (1856). 
But  if  the  articles  of  association  pro- 
hibit transfer,  the  transferee  takes 
only  the  right  to  profits,  not  as  a  part- 
ner, but  as  an  assignee,  and  a  transfer 
does  not  carry  dividends  already  de- 
clared. Harper  v.  Raymond,  3  Bosw. 
29  (1858).  So,  also,  where  transfer  is 
allowed  only  on  consent  of  certain 
officers  who  refuse.  Kingman  v. 
Spurr,  24  Mass.  235  (1828).  If  a  trans- 
fer is  improperly  allowed,  the  com- 
pany is  liable  to  the  party  injured. 
Cohen  v.  Gvvynn,  4  Md.  Ch.  357  (1848). 
Although  an  unincorporated  associa- 
tion's articles  provide  that  transfers  of 


of  the  directors,  yet,  where  such  pro- 
vision is  for  many  years  disregarded,  a 
stockholder  who  so  transferred  his 
stock  at  a  time  when  the  assets  equaled 
the  liabilities  cannot  be  held  liable  as 
a  stockholder.  Wadsworth  v.  Duncan, 
164  111.  360  (1896);  Wadsworth  u  Lawrie, 
164  111.  42  (1896).  See  also  §  622,  infra. 
Where  an  unincorporated  partnership 
issues  so-called  certificates  of  stock 
representing  a  specified  interest  in  such 
partnership,  and  one  of  the  partners  as- 
signs his  certificates  as  collateral  secu- 
rity and  afterwards  sells  them,  the  pur- 
chaser is  entitled  to  his  share  of  the 
partnership  property  and  to  demand  an 
accounting,  even  though  the  certifi- 
cates provided  that  they  were  not  trans- 
ferable. The  transfer  of  such  certifi- 
cates as  security  need  not  be  recorded 
as  a  chattel  mortgage.  Rommerdahl  v. 
Jackson,  102  Wis.  444  (1899).  As  to  the 
liability  of  the  transferee,  see  next 
section.     See  78  N.  Y.  App.  Div.  607. 

A  member's  interest  cannot  be 
reached  by  execution.  Kramer  v.  Ar- 
thurs, 7  Pa.  St.  165  (1847).  But  see 
Lindley,  Partn.  (2d  Am.  ed.),  p.  837. 
The  holders  of  certificates  in  an  unincor- 
porated irrigating  ditch  association  are 
tenants  in  common,  and  any  one  may 
sell  his  interest  without  the  consent  of 
the  other.  A  transfer  convej's  his 
water  rights  and  interest  in  the  prop- 
erty. Biggs  V.  Utah,  etc.  Co.,  64  Pac. 
Rep.  494  (Ariz.  1901). 

3  Wadsworth  v.  Duncan,  164  111.  360 


1084 


CH.  XXIX.] 


TRUSTS,  ETC. 


[§  508. 


members  themselves/  including  the  right  to  contribution  as  be- 
tween themselves,^  and  the  members  are  also  liable  to  third  per- 


(1896);  McFadden  v.  Leeka,  48  Ohio  St. 
518  (1891);  Jenne  v.  Matlack,  41  S.  W. 
Rep.  11  (Ky.  1897);  Westcott  v.  Fargo, 
61  N.  Y.  542  (1875);  Witherhead  t'.  Allen, 
3  Keyes,  563  (1867);  Cross  v.  Jackson,  5 
Hill,  478  (1843);  Skinner  v.  Dayton,  19 
Johns.  513  (1823);  Wells  v.  Gates,  18 
Barb.  554  (1854);  Boston,  etc.  R  R  v. 
Pearson.  128  Mass.  445  (1880);  Taft  v. 
Warde,  106  Mass.  518  (1871);  s.  c,  111 
Mass.  518  (1873);  Bod  well  v.  Eastman, 
106  Mass.  525  (1871);  Tappan  v.  Bailey, 
45  Mass.  529  (1842):  Cutler  v.  Thomas,  25 
Vt.  73  (1852);  Kramer  v.  Arthurs,  7  Pa. 
St.  165  (1847);  Gott  v.  Dinsmore,  111 
Mass.  45  (1872);  Newell  v.  Borden,  128 
Mass.  31  (1879).  See  also  §  504,  supra. 
Contra,  lr%'ine  v.  Forbes.  11  Barb.  587 
(1852);  Livingston  v.  Lynch,  4  Johns. 
Ch.  573  (1820),  overruled  as  dicta  by 
Townsend  v.  Goewey.  19  Wend.  424 
(1838);  Allen  v.  Long,  80  Tex.  261  (1891); 
Ridenour  v.  Mayo,  40  Ohio  St.  9  (1883). 
In  Frost  v.  Walker,  60  Me.  468  (1873),  the 
court  said:  "An  unincorporated  joint- 
stock  company  is  a  mere  partnership, 
and  each  member  is  personally  liable 
for  all  its  debts.  It  is  important  for  the 
public  to  know  that  if  persons  connect 
themselves  with  a  company  of  this  de- 


scription they  are  every  one  of  them 
liable  to  pay  the  demands  upon  it."'  The 
officers  who  enter  into  a  contract  for 
the  company  are  liable  thereon  person- 
ally. "It  is  immaterial  whether  they 
be  so  held  because  they  held  themselves 
out  as  agents  for  a  principal  that  had 
no  existence,  or  on  the  ground  that 
they  must,  under  the  contract,  be  re- 
garded as  principals  for  the  simple  rea- 
son that  there  is  no  other  principal  in 
existence."  Lewis  v.  Tilton,  64  Iowa, 
220  (1884);  Fredendall  v.  Taylor,  26  Wis. 
286  (1870).  The  individual  members  of 
a  club  are  not  liable  for  the  salary  of 
the  manager,  even  though  the  club  is 
unincorporated.  Georgeson  v.  Caffrey, 
71  Hun,  473  (1893).  Those  who  actively 
take  part  in  a  purchase  are  liable 
whether  the  others  are  or  not.  Winona 
Lumber  Co.  v.  Church.  6  S.  D.  498(1895). " 
This  liability  as  partners  applies  only 
to  associations  having  a  definite  mem- 
bership, and  does  not  apply  to  a  public 
meeting  held  to  prombte  the  construc- 
tion of  a  shoe  shop,  the  subscriptions 
made  at  such  meeting  having  been  duly 
paid,  even  though  it  was  further  voted 
"to  stand  back  of  the  committee."  In 
any  case  the  suit  would  be  at  law  and 


i  BuUard  v.  Kinney,  10  Cal.  60  (1858). 
The  remedy  of  one  member  against  an- 
other is  in  equity.  Huth  v.  Humboldt 
Stamm,  61  Conn.  227  (1892).  One  mem- 
ber cannot  sue  another  at  law  for  his 
part  of  the  profits  of  the  business,  which 
is  under  control  of  the  latter.  Myrick 
V.  Dame,  63  Mass.  248  (1852);  Duff  v. 
Maguire,  99.  Mass.  300  (1868);  White- 
house  V.  Sprague,  7  Atl.  Rep.  17  (Me. 
1886).  A  person  induced  to  put  money 
into  an  enterprise  on  false  representa- 
tions that  it  is  a  joint-stock  company 
may  recover  back  his  money.  Lebby 
V.  Ahrens,  26  S.  C.  275  (1887).  A  di- 
rector of  an  unincorporated  association 
who  contracts  for  it  is  not  liable  per- 
sonally.    Abbott  V.   Cobb.    17  Vt.    593 


(1845);  Alexander  v.  Worman,  6  H.  &  N. 
100  (1860).    Cf.  54  Atl.  Rep.  798. 

2Morrissey  v.  Weed,  12  Hun,  491 
(1878);  Skinner  v.  Dayton,  19  Johns.  513 
(1823):  Ray  v.  Powers,  134  Mass.  23 
(1883):  Whitman  v.  Porter,  107  Mass. 
522  (1871);  Tyrrell  v.  Washburn,  88 
Mass.  466  (1863).  But  not  if  the  expense 
was  incurred  contrary  to  the  articles- 
of  association.  Danforth  v.  Allen,  49 
Mass.  334  (1844);  Clark  v.  Reed,  28  Mass. 
446  (1831).  Where  the  constitution  of 
an  unincorporated  association  limits 
the  debts,  and  the  directors  incur  a 
larger  amount  of  debts,  the  directors 
cannot  obtain  contribution  from  the 
stockholders.  McFadden  v,  Leeka,  48- 
Ohio  St  513  (1891). 


1085 


§  508.] 


TRUSTS,  ETC. 


[cH.  xxrx. 


sons.*     The  question  whether  a  stockholder  may  limit  his  common- 
law  or  statutory  liability  by  an  express  contract  with  the  company's 


not  in  equity.  Cheney  v.  Goodwin,  88 
Me.  568  (1896).  A  lease  to  an  unincor- 
porated association  binds  personally  all 
members  assenting  to  it  Reding  v. 
Anderson,  72  Iowa,  498  (1887).  Members 
of  co-operative  trading  associations  are 
liable  as  partners  for  the  debts  of  the 
concern.  Davidson  v.  Holden,  55  Conn. 
103  (1887).  And  sometimes  are  liable 
also  for  debts  contracted  after  they 
have  sold  their  stock.  See  Sliamburg 
V.  Abbott.  112  Pa.  St.  6  (1886).  The 
members  of  an  unincorporated  associa- 
tion to  enforce  the  liquor  laws  are  not 
liable  to  an  attorney  for  services  in 
prosecuting  cases.  McCabe  v.  Goodfel- 
low,  183  N.  Y.  89  (1892).  The  vice-presi- 
dent and  the  treasurer  of  an  unincor- 
porated fair  association  are  liable  for 
premiums  offered.  Murray  v.  Walker, 
83  Iowa,  202  (1891).  Members  of  a  joint- 
stock  company  are  personally  liable  for 
the  debts  of  the  company.  Durham 
Fertilizer  Co.  v.  Clute,  112  N.  C.  440 
(1893);  People  V.  Coleman,  133  N.  Y.  279 
(1892).  In  the  case  of  Seacord  v.  Pen- 
dleton, 55  Hun,  579  (1890),  the  court  re- 
viewed the  authorities  and  decided 
that  the  stockholders  in  a  bank  which 
was  not  incorporated  were  not  liable 
to  depositors,  there  being  no  allegation 
that  the  stockholders  had  any  articles 
of  association  or  partnership,  or  had 
performed  any  act,  or  had  knowledge 
of  the  business  or  consented  thereto. 

A  subscription  of  specified  amounts 
by  several  individuals  to  drill  and  oper- 
ate a  gas  well  does  not  render  them 
partners  as  to  creditors  who  were 
aware  of  the  terms  of  the  subscription. 
Clark  V.  Rumsey,59  N.  Y.  App.  Div.  435 
(1901).  See  also  §  76,  supra.  A  joint- 
stock  association  to  organize  and  carry 
on  a  school  is  a  partnership.  Sebastian 
V.   Booneville,   etc.  Co.,  56  S.  W.  Rep. 

'  Acquiescence  in  the  dealings  of 
other  members  with  third  persons 
binds  a  member.      Pennsylvania    Ins. 


810  (K}^  1900).  A  member  of  an  unin- 
corporated church  is  not  liable  for  its 
debts  unless  he  authorized  the  incur- 
ring of  the  same  or  ratified  them.  First, 
etc.  Bank  v.  Rector,  80  N.  W.  Rep.  269 
(Neb.  1899).  A  note  signed  by  the  trus- 
tees as  trustees  of  an  unincorporated 
association  is  personally  binding  upon 
them.  McKenney  v.  Bowie,  94  Me.  397 
(1900).  The  note  of  an  unincorporated 
association  signed  by  the  treasurer  as 
treasurer  may  be  collected  from  him 
personally.  Kierstead  v.  Bennett,  93 
Me.  328  (1899).  A  subscriber  to  stock 
in  an  unincorporated  association  is  not 
relieved  from  liability,  even  though 
some  of  the  subscriptions  necessary  to 
make  up  the  amount  required  by  the 
subscription  paper  were  forgeries  and 
others  obtained  by  false  representa- 
tions, if  it  be  shown  that  the  associa- 
tion accepted  the  building  to  construct 
which  it  was  formed.  Haney,  etc.  Co. 
V.  Adaza,  etc.  Co.,  108  Iowa,  313  (1899). 
In  Pennsylvania  the  probate  court  may 
allow  the  executor  of  an  estate  to  loan 
the  funds  of  the  estate  to  an  unincor- 
porated association  in  which  the  estate 
is  interested.  In  re  Mustin's  Estate,  188 
Pa.  St.  544  (1898).  If  proof  is  given  by 
plaintiff  tiiat  a  copartnership  existed, 
and  the  defense  is  that  it  was  a  corpo- 
ration, the  defendant  must  prove  that 
fact.  Although  the  company  had  a 
president  and  secretary,  this  in  itself 
does  not  raise  a  presumption  of  a  cor- 
poration. Clark  V.  Jones,  87  Ala.  474 
(1889).  A  notice  to  stockholders  that 
they  will  be  held  liable  under  a  statute 
is  not  served  on  the  members  of  an  un- 
incorporated association  by  serving 
such  notice  on  the  chief  officer  of  such 
association.  Wells  v.  Robb,  43  Kan. 
201  (1890).  Where  a  creditor  of  a  bank 
sues  the  stockholders  as  partners,  the 

Co.  V.  Murphy,  5  Minn.  36  (1860);  Wells 
V.  Gates,  18  Barb.  554  (1854). 


1086 


CH.  XXIX.] 


TRUSTS,  ETC. 


[§  508. 


creditors  to  that  effect  is  discussed  elsewhere.^  The  underwriters 
of  an  unincorporated  Lloyds  insurance  association  may  be  liable 
personally  on  its  policies,  even  though  by  the  terms  of  the  policy 
each  underwriter  assumed  only  his  proportionate  part  of  the  loss, 
where  that  provision  is  not  prominently  set  forth.  The  rule  is  that 
the  members  of  an  association  may  contract  against  personal  lia- 
bility, but  the  notice  to  that  effect  must  be  so  plain  and  fair  that 
the  person  contracting  with  the  association  knew  of  it,  or  it  was 
his  own  fault  that  he  did  not  know  it,^  But  where  the  articles  of 
association  of  an  unincorporated  joint-stock  association  provide 
that  the  members  shall  not  be  personally  liable  for  the  debts,  a 
person  who  loans  money  to  the  association  on  its  note,  which  ex- 
pressly states  that  it  is  given  under  such  articles,  cannot  hold  the 
members  personally  liable.*  The  member's  subscription  may  be 
enforced  by  a  suit  at  law.* 

In  enforcing  the  liability  of  members  of  a  joint-stock  company 
by  a  suit  in  equity,  if  the  parties  are  very  numerous  or  unknown, 
they  need  not  all  be  joined  as  defendants.*     Suits  by  or  against  un- 


burden of  proof  is  on  him  to  prove  that 
no  corporation  existed,  it  being  shown 
that  the  bank  always  acted  as  a  corpo- 
ration and  held  itself  out  as  such  and 
was  supposed  so  to  be  by  the  stock- 
holders. Hallstead  v.  Coleman,  143  Pa. 
St.  352  (1891).  The  supposition  or  be- 
lief of  the  members  that  they  are  not 
liable  beyond  the  par  value  of  their 
stock  does  not  protect  them  from  lia- 
bility. Farnum  v.  Patch,  60  N.  H.  294 
(1880);  and  see  §  233,  note,  supra. 

1  See  §  216,  supra. 

2  Imperial,  etc.  Co.  v.  Jewett,  169  N.  Y. 
143  (1901).  A  case  is  not  made  out 
against  the  members  of  an  insurance 
association  by  proving  a  policy  signed 
by  the  manager,  there  being  no  proof 
as  to  who  the  members  were,  even 
though  their  names  were  printed  on 
the  back  of  the  policy.  Scranton  Trac- 
tion Co.  V.  Schlichter,  202  Pa.  St.  6  (1902). 

8  Bank  of  Topeka  v.  Eaton,  100  Fed- 
Rep.  8  (1900).     See  72  S.  W.  Rep.  875. 

*If  the  subscription  runs  to  the  trus- 
tees personally  they  may  sue  thereon. 
Otherwise  all  must  join  as  plaintiffs. 
Cross  V.  Jackson.  5  Hill,  478  (1843); 
Townsend  v.  Goewey,  19  Wend.  424 
,(18(^8).    It  seems  that  a  subscription  to 


a  voluntary  association  is  enforceable 
by  a  corporation  which  took  the  place 
of  the  proposed  voluntary  association, 
where  the  subscriber  knew  of  the 
change  of  plan  and  did  not  object. 
Osborn  v.  Crosby,  63  N.  H.  583  (1885). 
Subscriptions  to  its  stock  are  collectible 
the  same  as  subscriptions  to  stock  of 
corporations.  Bullock  v.  Falmouth,  etc. 
Co.,  85  Ky.  184  (1887).  See  ch.  IV,  mpra. 
A  subscription  agreement  signed  by 
various  parties  to  pay  the  amount  set 
opposite  their  respective  names  towards 
a  creamery  is  several  and  not  joint. 
Cornish  v.  West,  82  Minn.  107  (1901).  A 
citizen  of  Maryland  who  holds  a  loss 
claim  against  a  Pennsylvania  mutual 
insurance  company  which  is  insolvent 
cannot  have  a  receiver  appointed  in 
Maryland  if  it  is  impracticable  for  the 
Maryland  courts  to  levy  the  necessary 
assessments  to  wind  up  the  affairs  of 
the  association.  Stockley  v.  Thomas, 
89  Md.  663  (1899). 

5  Mandeville  v.  Riggs,  2  Pet.  482  (1829), 
reversing  Riggs  v.  Swann,  3  Cranch, 
C.  C.  183  (1827);  s.  C,  20  Fed.  Cas.  788. 
See  also  Phipps  v.  Jones,  20  Pa.  St.  260 
(1853);  Dennis  v.  Kennedy,  19  Barb.  517 
(1854);  Wood  v.  Draper,  24  Barb.    187 


1087 


§  5US.] 


TKLSrs,  KTC. 


[CH.  XXIX. 


incorporated  associations  must  be  brought  in  the  name  of  or  against 
all  the  members.^  A  member  who  transfers  his  interest  is  never- 
theless liable  for  precedent  debts  of  the  association.'  Members  who 
sell  their  stock  and  withdraw  are  liable  for  subsequent  debts  where 
proper  notice  of  their  withdrawal  has  not  been  given,  the  same  as 
in  a  partnership.''  The  members  are  liable  for  past  contracts,  even 
though  they  dissolve  the  association.*  A  purchaser  of  stock  in  an 
unincorporated  association  is  not  liable  to  creditors  for  debts  con- 
tracted before  he  became  a  member.^     The  rights  and  liabilities  of 


(1857);  Smith  v.  Lock  wood,  1  Code  Rep. 
(N.  S.)  319  (1851);  Birmingham  v. 
Gallagher,  112  Mass.  190  (1873);  Snow  v. 
Wheeler,  113  Mass.  179  (1873);  Pipe  v. 
Bateman,  1  Iowa,  369  (1855);  Marshall 
V.  Lovelass,  Cam.  &  N.  (N.  C.)  217  (1801);  " 
Lloyd  V.  Loaring,  6  Ves.  Jr.  773  (1802); 
Deems  v.  Albany,  etc.  Line,  14  Blatchf. 
474  (1878);  S.  C,  7  Fed.  Cas.  348.  As 
regards  the  practice  in  bringing  actions 
against  members  of  an  unincorporated 
association,  see  Kneeland,  Attach- 
ments, ch.  XVI.  The  directoi's  of  nn 
unincorporated  club  may  be  personally 
sued  on  a  lease  without  joining  the  re- 
maining members.  Peltonr.  Place,71  Vt. 
430  (1899).  See  also  note  2,  p.  1070,  sujyra. 
1  Williams  v.  Bank  of  Michigan,  7 
Wend.  539,  542  (1831);  Detroit  Schuetzen 
Bund  V.  Detroit  Agitations  Verein,  44 
Mich.  313  (1880);  Mears  v.  Moulton,  30 
Md.  142  (1868);  McGreary  v.  Chandler, 
58  Me.  537  (1870).  One  or  more  mem- 
bers of  an  unincorporated  association 
may  sue  for  the  benefit  of  all.  Liggett 
V.  Ladd,  17  Oreg.  89  (1888).  In  Perine  v. 
Grand  Lodge  A.  O.  U.  W.,  48  Minn.  83 
(1892),  where  an  insurance  policy  was 
sued  upon,  the  court  held  that  it  was 
immaterial  that  the  defendant  was  not 
incorporated,  inasmuch  as  it  had  held 
itself  out  as  a  corporation.  The  court 
may  direct  a  writ  of  mandamus  to  be 
served  upon  the  resident  general  agent 
of  the  company.  State  v.  Adams,  etc. 
Co.,  66  Minn.  271  (1896).  By  statute,  in 
Ohio,  one  or  more  of  the  stockholders 
may  sue  for  the  benefit  of  the  associa- 
tion. Phitt  V.  Colvin,  50  Ohio  St.  703 
(1898).     In  a  suit  against  an  unincorpo- 


rated association,  the  members  of  which 
are  so  scattered  as  to  render  service 
upon  all  impossible,  service  upon  its 
officers  is  sufficient  to  give  the  court 
jurisdiction  over  the  members.  An 
unincorporated  association  acting  as  a 
corporation  may  be  sued  as  a  corpora- 
tion in  its  corporate  name  by  one  of  its 
members.  Fitzpatrick  v.  Rutter,  160 
III.  282  (1895).  A  member  of  an  unin- 
corporated church  may  bring  suit  in 
behalf  of  himself  and  the  other  mem- 
bers for  a  debt  due  the  church.  Perkins 
V.  Siegfried's  Adm'r,  97  Va.  444  (1899). 
As  to  a  bill  in  equity  in  the  United 
States  court  against  an  unincorporated 
association  leaving  many  members,  see 
Amer.  Steel,  etc.  Co.  v.  Wire  Drawers', 
etc.  Unions,  90  Fed.  Rep.  598  (1898).  An 
agreement  between  an  improvement 
company  and  purchasers  of  lots  that 
the  profits  will  be  used  for  certain  im- 
provements may  be  enforced  by  one  lot 
purchaser  in  behalf  of  all.  Whiting  v. 
Elmira,  etc.  Assoc,  45  N.  Y.  App.  Div. 
349  (1899). 

2  Morgan's  Case,  1  De  G.  &  Sm.  750 
(1849);  Tyrrell  v.  Washburn,  88  Mass. 
466  (1863j.  For  the  liability  as  affected 
by  the  transfer  of  stock,  see  Smith  v. 
Virgin,  33  Me.  148  (1851). 

3 New  York,  etc.  Bank  v.  Crowell,  177 
Pa.  St.  313  (1896). 

4  Camden,  etc.  R.  R.  v.  Guarantors  of 
Pennsylvania,  59  N.  J.  L.  328  (1896). 

5  Christy  v.  Sill,  131  Pa.  St.  492  (1890). 
The  transferee  of  a  share  in  an  unincor- 
porated company  is  liable  for  all  debts 
existing  at  the  time  of  or  after  the 
transfer.     Taylor  v.  Iflll,    1  N.    R.  566 


loss 


CH.  XXIX.] 


TRUSTS,  ETC. 


[§  509. 


a  member  depend  upon  the  law  of  the  place  of  the  domicile  of  the 
company  itself.^  The  rules  applicable  to  stockholders  in  corpora- 
tions are,  by  analogy,  applied  to  members  in  these  companies, 
especially  as  regards  their  defenses  to  subscriptions-  and  meetings 
of  the  company.^  These  associations  cannot  be  taxed  on  a  fran- 
chise, as  corporations  may  be/  Although  a  law  library  corporation 
has  a  capital  stock  which  is  fully  paid,  yet  a  by-law  may  assess 
annual  dues  upon  the  members;^ 

§  509.  Actions  hy  members  against  officers  and  the  comjyany.— 
The  members  may^  bring  an  action  to  remedy  the  fraud,^  ultra 
vires  acts,''  and  negligence  ^  of  the  trustees.     In  New  York  a  mem- 


(1868).  Although  a  stockholder  pur- 
chased his  stock  from  the  association, 
which  was  insolvent  at  the  time,  yet 
he  cannot  offset  this  as  capital  con- 
tributed by  him.  BarndoUar  v.  Du 
Bois,  143  Pa.  St.  565  (1891).  A  member 
is  not  liable  for  debts  contracted  before 
he  became  a  member.  Hornberger  v. 
Orchard,  39  Neb.  639  "(1894). 
.  1  Cutler  V.  Thomas,  25  Vt.  73  (1852). 

2  That  the  full  capital  stock  must  be 
subscribed  before  any  subscription  is 
collectible,  see  Bray  v.  Farwell,  81  N.  Y. 
600  (1880).  Contra,  Tappan  v.  Bailey, 
45  Mass.  529  (1842);  Boston,  etc.  R.  R.  v. 
Pearson,  128  Mass.  445  (1880);  Pitchford 
V.  Davis,  5  M.  &  W.  2  (1839).  Forfeiture 
of  stock  releases  the  member  only  as  to 
subsequent  debts.  Skinner  v.  Dayton, 
19  Johns.  513  (1822). 

3  Notice  of  the  time  and  place  must 
be  given.  Irvine  v.  Forbes,  11  Barb. 
587  (1852).  The  members  cannot  act 
except  in  meeting  assembled.  The 
majority  do  not  rule.  Livingston  v. 
Lynch,  4  Johns.  Ch.  573  (1820);  Irvine  v. 
Forbes,  11  Barb.  587  (1852).  But  the 
articles  may  provide  otherwise.  Water- 
bury  V.  Merchants'  Union  Exp.  Co.,  50 
Barb.  157  (1867).     See  also  g  505,  supra. 

4  Hoadley  v.  Essex  County,  105  Mass. 
519  (1870);  Gleasonu  McKay,  134  Mass. 
419  (1883),  holding  the  statute  to  be  un- 
constitutional.    Of.  §  505.  supra. 

5  Omaha  L.  L.  Assoc,  v.  Connell,  55 
Neb.  396  (1898).    Of.  §§  241-243,  mpra. 


••The  other  members  are  not  proper 
parties.  Boody  v.  Drew,  46  How.  Pr. 
459  (1874).  A  farmers'  co-operativa 
store  carried  on  by  farmers  who  con 
tribute  to  the  capital  and  take  a  certifi- 
cate of  stock  is  a  partnership,  it  being 
unincorporated,  and  if  the  manager  by 
a  fraudulent  chattel  mortgage  gets 
possession  of  the  assets  he  may  be 
brought  to  account  therefor  by  one  of 
the  members.  Snyder  v.  Lindsey.  157 
N.  Y.  616  (1899).  An  officer  may  be 
enjoined,  but  not  removed.  The  suit 
must  not  be  in  the  interest  of  a  rival 
company.  Waterbury  v.  Merchants' 
Union  Exp.  Co.,  50  Barb.  157  (1867). 
Trustees  receiving  gifts  are  liable  there- 
for to  the  company.  Re  Fry,  4  Phila, 
Rep.  129  (1860).  Trustees  cannot  sell  ta 
the  company.  Robbins  v.  Butler,  24 
111.  387  (1860).  The  treasurer  may  be- 
compelled  to  pay  over  funds  belonging 
to  the  company.  Sharp  v.  Warren,  6 
Price,  131  (1818).  The  trustees  are  liable 
in  tort  for  their  frauds  on  the  company. 
Dennis  v.  Kennedy,  19  Barb.  517  (1854). 
A  committee  to  build  may  be  made  to 
account  where  they  secretly  coitract 
with  themselves,  though  the  contract 
is  nominally  with  other  persons.  Whit- 
man V.  Bowden.  27  S.  C.  53  (1887). 

"^  A  member  cannot  be  compelled  to> 
accept  the  stock  of  another  company 
for  his  interest,  a  consolidation  of  the 
two  having  been  made.  Frothingham 
V.  Barney,  6  Hun,  366  (1876).     But  he 


(69) 


8  Re  Fry,  4  Phila.  129  (1860). 
1089 


§  510.] 


TRUSTS,  ETC. 


[CH.  XXIX. 


ber  may,  by  statute,  sue  the  company,  in  the  same  manner  that  a 
stockholder  in  a  corporation  may  sue  the  corporation.'  A  bill  in 
equity  by  a  member  of  an  unincorporated  association  to  enjoin  the 
directors  from  enforcing  an  alleged  illegal  by-law  must  join  all  the 
directors  as  defendants.^ 

§510.  Bissohition  — Disposition  of  pro2)erty.— Where  the  term 
of  existence  of  a  joint-stock  company  is  fixed  by  its  articles  of  as- 
sociation, it  cannot  be  dissolved  at  the  instance  of  a  member  before 
the  expiration  of  that  time.''  It  may,  however,  be  dissolved  where 
the  enterprise  becomes  wholly  impracticable  or  its  attainment  im- 


may  not  be  able  to  prevent  the  consol- 
idation. McVioker  v.  Ross,  55  Barb. 
247  (1869).  An  ultra  vires  act  may  be 
enjoined.  Abels  v.  McKeen,  18  N.  J. 
Eq.  462  (1867).  The  members  need  not 
make  good  the  officers'  debts  paid  by 
the  lattei-,  growing  out  of  ultima  vires 
acts.  Crum's  Appeal,  66  Pa.  St.  474 
(1870).  But  the  ofiBcers  themselves  are 
liable    to    third    persons.     Sullivan    v. 


Blethen,  78  Me.  221  (1886).  The  minority 
of  an  Odd  Fellows'  lodge  cannot  compel 
a  sale  of  the  property  and  distribution. 
Robbins  v.  Waldo  Lodge,  78  Me.  565 
(1887);  and  see  Bagley  v.  Smith,  10  N.  Y. 
489  (1853).  Where  the  articles  of  asso- 
ciation of  an  imincorporated  joint- 
stock  association  authorize  dissolution 
at  any  time  upon  the  vote  of  a  majority 
in   interest,   such   dissolution   may   be 


Campbell,  2  Hall  (N.  Y.),  271  (1829).  And    had,  although  it  is  for  the  purpose  of 

transferring  all  the  assets  to  a  foreign 
corporation  for  stock  of  the  latter,  the 
privilege,  however,  being  given  to  each 
stockholder  to  receive  payment  in  cash 
on  the  basis  of  a  certain  valuation  of 
the  assets,  which  valuation  is  fair  and 
adequate.     Francis  v.  Taylor,  31  N.  Y. 
Misc.  Rep.  187  (1900).    The  nature  of 
a  horticultural  society  issuing  a  certifi- 
cate of  interest  in  the  property  to  each 
member  was  considered  in  Be  Jones, 
[18981  2  Ch.  83,  upon  an  application  for 
dissolution  and  distribution  of  the  as- 
sets.    An  unincorporated  bank  which 
is  owned  entirely  by  one  individual  is 
his  private  property,  even  though  the 
bank  has  a  president  and  cashier.  Long- 
fellow V.  Barnard,  58  Neb.  612  (1899). 
A  court  will  wind  up  a  partnership, 
even  before  its  fixed  time  of  existence 
has  expired,    if  it   is  insolvent   or  un- 
profitable or  incapable  of  proceeding. 
Jennings    v.    Baddeley,   3   K.   &   J.  78 
(1856);  Baring  v.  Dix,  1  Cox,  Ch.  213 
(1786);  Bailey  v.  Ford,  13  Sim.  495  (1843): 
Holladay  v.  Elliott,  8  Oreg.  84  (1879); 
Seighortner  v.   Weissenborn,  20  N.  J. 
Eq.    172  (1869);  Brien  v.   Harriman.  1 


possibly  the  members.  Sullivan  v. 
Campbell,  2  Hall  (N.  Y.),  271  (1829).  If 
a  member  has  not  participated  or  ac- 
quiesced in  the  ultra  vires  act  he  is  not 
liable  thereon.  Roberts's  Appeal,  92  Pa. 
St.  407  (1880).  Cf.  Van  Aernam  v.  Bleis- 
tein,  102  N.  Y.  355  (1886),  holding  the 
members  liable  for  a  libel;  aff'g  Van 
Aerman  v.  McCune,  32  Hun,  316. 

1  Code  Civ.  Proc,  §  1919;  Westcott  v. 
Fargo,  61  N.  Y.  542  (1875):  Saltsman  v. 
Shults,  14  Hun,  256  (1878).  At  common 
law  the  name  is  not  recognized  and  the 
suit  would  fail.  Habicht  v.  Pemberton, 
4  Sandf.  657  (1851);  Pipe  v.  Bateman,  1 
Iowa,  369  (1855);  Ewing  v.  Medlock,  14 
Ala.  (O.  S.)  82  (1837);  Schmidt  v.  Gun- 
ther,  5  Daly,  452  (1874). 

2  Greer,  etc.  Co.  v.  StoUer,  77  Fed.  Rep. 
1  (1896). 

3  Von  Schmidt  v.  Huntington,  1  Cal. 
55  (1850).  See  also  Smith  v.  Virgin,  33 
Me.  148  (1851).  Cf.  Lindley,  Partn.  234; 
Lafond  v.  Deems,  81  N.  Y.  507  (1880). 
The  minority  cannot  force  a  dissolu- 
tion as  in  the  case  of  partnership. 
Equity  will  not  aid,  unless  there  is 
good  reason  for  dissolution.    Hinkley  v. 


1090 


CH.  XXIX.] 


TRUSTS,  ETC. 


[§  510. 


possible,  but  not  always  because  of  the  misconduct  of  its  officers.^ 
The  death  of  a  member  does  not  dissolve  it;-  nor  does  a  transfer 
of  one's  interest.'  The  dissolution  of  one  of  the  subordinate  unin- 
corporated organizations  by  the  general  organization  does  not 
vest  in  the  latter  the  property  of  the  former.*  The  incorporation 
of  the  association  by  a  part  of  the  members  does  not  dissolve  the 
association.*  The  incorporation  of  an  association  is  a  material 
change  in  the  association,  which  is  not  legal  unless  authorized  by 
an  amendment  to  its  articles  of  association."  Upon  dissolution  the 
trustees  of  the  company  are  bound  to  convert  the  property  into 
cash  and  distribute  it.^    One  stockholder  cannot  sue  another  at  law 


Tenn.  Ch.  467  (1873);  Howell  u  Harvey, 
5  Ark.  270  (1843 1;  Van  Ness  v.  Fisher,  5 
Lans.  236  (1871). 

i^Waterbury  v.  Merchants'  Union 
Exp.  Co.,  50  Barb.  157  (1867).  Contra, 
Mills  V.  Hurd,  32  Fed.  Rep.  127  (1887). 

2McNeish  v.  U.  S.  HuUess  Oat  Co., 
57  Vt.  316  (1884).  Cf.  Walker  v.  Wait, 
50  Vt.  668  (1878).  The  death  of  a  stock- 
holder does  not  dissolve  the  association 
nor  release  his  estate  from  subsequently 
incurred  debts.  Phillips  v.  Blatchford, 
137  Mass.  510  (1884).  The  death  of  a 
member  does  not  dissolve  the  company, 
but  if  it  has  not  paid  dividends  for 
tvrenty-three  years  and  is  not  likely  to 
pay  any,  a  court  may  decree  dissolution. 
Willis  V.  Chapman.  68  Vt.  459  (1896). 

3  A  transfer  of  his  stock  by  a  member 
does  not  dissolve  a  joint-stock  associa- 
tion under  the  Pennsylvania  lavs^.  Re 
Globe  Refining  Co.,  151  Pa.  St  558 
(1892). 

4  Wicks  V.  Monihan,  130  N.  Y.  232 
(1891).  The  withdrawal  of  a  charter  by 
a  higher  body  from  one  of  its  branches 
does  not  affect  the  right  of  the  latter 
to  its  property.  Wells  v.  Monihan,  129 
N.  Y.  161  (1891). 

5  See  Schwartz  v.  Duss,  187  U.  S.  8 
(1902).  A  part  of  the  members  of  an  unin- 
corporated association  cannot  proceed 
to  incorporate  it  against  the  objections 
of  the  others.  Rudolph  v.  Southern  Ben. 
League,  23  Abb.  N.  C.  199  (1889). 
Where  an  unincorporated  association 
appoints  a  committee  to  incorporate, 
and  they  do  so,  and  then   proceed  to 


run  an  opposition  business,  the  associa- 
tion cannot  enjoin  them  from  so  doing. 
Paulino  v.  Portuguese  Ben.  Assoc,  18 
R  I.  165  (1893).'  A  committee  appointed 
by  a  voluntary  association  to  obtain  a 
charter  may  incorporate  in  the  name 
of  the  voluntary  association,  and  the 
association  cannot  enjoin  the  use  of 
such  name.  Paulino  v.  Portuguese 
Ben.  Assoc,  18  R.  I.  165  (1893). 

*>  National  Grand  Lodge  v.  Watkins, 
175  Pa.  St.  241  (1896).  Where  the  presi- 
dent of  an  unincorporated  association 
issues  treasury  stock  and  thereby  ob- 
tains control  of  the  association  and  sells 
it  out  to  a  corporation  organized  by 
himself,  the  minority  stockholders  of 
the  association  may  compel  him  to  ac- 
count for  the  property.  As  regards  the 
person  to  whom  the  stock  was  issued, 
however,  a  general  allegation  that  he 
acted  in  connection  with  the  president 
is  not  suflBcient  to  render  him  liable  on 
the  ground  of  fraud.  Booth  v.  Dodge, 
60  N.  Y.  App.  Div.  23  (1901).  Where 
an  unincorporated  association  unani- 
mously agrees  to  incorporate  and  does 
so,  all  rights  pass  to  the  new  corpora- 
tion. Red,  etc  Club  v.  Red,  etc.  Club, 
108  Iowa,  105  (1899). 

^  Frothingham  v.  Barney,  6  Hun,  366 
(1876);  Butterfield  v.  Beardsley,  28 
Mich.  412  (1874).  Upon  the  expiration 
of  the  time  for  which  the  company 
was  organized  it  becomes  dissolved, 
and  the  assets  must  be  distributed  if 
any  one  of  the  members  insists  thereon. 
Mann  v.  Butler,  2  Barb.  Ch.  362  (1847). 


1091 


§  510.] 


TRUSTS,  ETC. 


[CH.  XXIX. 


for  his  part  of  the  assets.*     In  proceedings  for  a  dissolution  all  the 
members  need  not  be  made  parties.^ 


As  to  the  distribution  of  funds  of  an 
incorporated  benevolent  association, 
see  Ashton  v.  Dashaway  Assoc,  84  Cal. 
61  (1890).  As  to  the  land,  see  §  504, 
supra.  As  to  the  rules  governing  the 
distribution  of  the  assets  ef  a  mutual 
benefit  building  corporation,  see  Peo- 
ple V.  Lowe,  117  N.  Y.  175  (1889). 
Where  a  joint-stock  association  having 
$12,000,000  surplus  invested  in  securi- 
ties issues  its  bonds  to  the  amount  of 
$13,000,000  to  its  stockholders  as  a  divi- 
dend in  place  of  distributing  such  se- 
curities or  the  proceeds  thereof,  the 
interest  on  the  bonds  to  be  paid  only 
from  the  income  from  the  securities 
after  paying  the  debts,  such  bonds  do 
not  belong  to  a  life  tenant,  but  belong 


to  the  remaindermen.  D'Ooge  v.  Leeds, 
176  Mass.  558  (1900).  Where  a  majority 
of  a  voluntary  association  secede  from 
the  higher  organization  to  which  the 
lower  one  belongs,  they  cannot  take 
the  property  with  them.  Gorman  v. 
O'Connor,  155  Pa.  St.  339  (189J3).  In  gen- 
eral, see  Clegg  v.  Ellison,  [1898]  3  Ch.  83. 

1  Whitehouse  v.  Sprague,  7  Atl.  Rep. 
17  (Me.  1886). 

-  Such  as  non-residents  who  cannot 
be  reached.    Angell  v.  Lawton,  76  N. 
Y.  540  (1879).     The  complainant   may 
bring  the  proceeding  in  behalf  of  hiui 
self  and  others  having  a  common  in 
terest  with  him.     Mann  v.  Butler,  2- 
Barb.  Ch.  362  (1847). 


1092 


.i 


CHAPTER  XXX. 


STOCKHOLDERS'   RIGHT  TO   INSPECT  THE   BOOKS   OF  THE   CORPO- 
RATION. 


§  511. 
512. 

513. 

514. 


515. 


Common-law  rights. 

Common-law  action  for  dam- 
ages for  refusal. 

Mandamus  is  the  preferable  rem- 
edy. 

Not  granted  as  a  matter  of 
course  unless  the  right  is  stat- 
utory. 

When  it  will  and  will  not  be 
granted. 


§  516. 

517. 

518. 
519. 


Allegations  and  form  of  writ. 

Right  to  inspect  minutes  of 
meetings  of  directors. 

Statutes  giving  right  of  inspec- 
tion. 

Orders  to  corporation  to  allow 
inspection  —  Subpoena  duces 
tecum  —  Bill  of  discovery. 


§  511.  Common-law  rights. — The  stockholders  of  a  corporation 
had,  at  common  law,  a  right  to  examine  at  any  reasonable  time, 
and  for  any  reasonable  purpose,  any  one  or  all  of  the  books  and 
records  of  the  corporation.^      This  rule  grew  out  of  an  analogous 


1 "  At  common  law  the  stockholders 
of  a  corporation  had  the  right  to  exam- 
ine, at  reasonable  times,  the  records 
and  books  of  the  corporation."  Stone 
V.  Kellogg,  165  111.  192  (1896).  Stock- 
holders "have  the  right,  at  common 
law,  to  examine  and  inspect  all  the 
books  and  records  of  the  corporation  at 
all  seasonable  times,  and  to  be  thereby 
informed  of  the  condition  of  the  corpo- 
ration and  its  property."  Per  Redfield, 
J.,  in  Lewis  v.  Brainerd,  53  Vt.  519  (1881). 
In  Commonwealth  v.  Phoenix  Iron  Co., 
105  Pa.  St.  Ill  (1884),  the  court  said; 
"In  the  absence  of  agreement,  every 
shareholder  has  the  right  to  inspect 
the  accounts  —  a  right  subject  to  the 
necessities  of  the  company,  yet  exist- 
ing. .  .  .  The  doctrine  of  the  law  is 
that  the  books  and  papers  of  the  corpo- 
ration, though  of  necessity  kept  in  some 
one  hand,  are  the  common  property  of 
all  the  stockholders."  The  right  exists 
although  "its  exercise  be  inconvenient 
to  the  book  keepers  and  managers  of 
the  partnership  business."  In  Huylar 
V.  Cragin  Cattle  Co..  40  N.  J.  Eq.  392 


(1895),  the  court  said:  "Stockholders 
are  entitled  to  inspect  the  books  of  the 
company  for  proper  purposes  at  proper 
times.  .  .  andthey  are  entitled  to  such 
inspection  though  their  only  object  is 
to  ascertain  whether  their  affairs  have 
been  properly  conducted  by  the  direct- 
ors or  managers.  Such  a  right  is  nec- 
essary to  their  protection."  Deaderick 
V.  Wilson,  8  Baxt.  (Tenn.)  108  (1874). 
"  The  minority  stockholder  should  have 
the  same  right  to  require  a  statement 
from  the  company."  Sage  v.  Culver, 
71  Hun,  42  (1893);  aflf'd,  147  N.  Y.  241. 
A  stockholder  is  not  entitled  as  a  mat- 
ter of  right  to  inspect  the  stock  book  or 
other  books  of  the  bank.  The  court 
will  not,  although  it  has  the  power, 
grant  a  mandamus  for  the  inspection 
of  the  stock  book  or  other  books  of  a 
bank,  unless  some  special  grounds  be 
disclosed  to  warrant  it.  lie  Bank  of 
Upper  Canada  v.  Baldwin,  1  Draper 
(K.  B.  Can.),  55  (1829).  A  stockholder 
in  a  New  York  corporation  has  a  com- 
mon-law right  to  examine  the  books 
and  papers  of  the  corporation  where  a 


1093 


511.] 


INSPECTION    OF    COKPORATE    BOOKS. 


[cu. 


XXX, 


rule  applicable  to  public  corporations  and  to  ordinary  copartner- 
ships, the  books  of  which,  by  well-established  law,  are  always  open 
to  the  inspection  of  members.^  Nevertheless  it  seems  that  a  stock- 
holder has  no  right,  aside  from  statute,  to  examine  the  original 
papers  and  vouchers  of  the  corporation,  unless  some  property  right 
is  involved,  or  some  controversy  exists,  or  some  specific  and  valu- 
able interest  is  in  question,  to  settle  which  an  inspection  of  these 
documents  is  necessary.^  A  by-law  that  no  stockholder  should 
have  a  right  to  examine  the  books  of  the  corporation,  except  by 
special  authority  from  the  board  of  directors,  is  illegal  under  the 
Louisiana  constitution.' 

A  director  has  an  absolute  right  to  examine  all  the  books  of  the 
company,*  even  though  he  is  hostile  to  the  corporation.^  But  in 
Connecticut  a  contrary  rule  is  laid  down  where  he  is  seeking  in- 
formation in  order  to  organize  a  rival  company.^ 

4  People  V.  Throop,  12  Wend.  181 
(1834);  Charlick  v.  Flushing  R.  R.,  10 
Abb.  Pr.  130  (1860);  Be  Ciancimino,  N. 
Y.  L.  J.  Dec.  23,  1890.  Cf.  State  v.  Ein- 
stein, 46  N.  J.  L.  479  (1884).  The  presi- 
dent of  a  corporation  is  entitled  to  a 
mandamus  directing  the  secretary  to 
allow  him  and  his  attorney  to  inspect 
the  stock  book  and  make  extracts 
therefrom,  and  it  is  immaterial  what 
the  motive  of  the  president  is.  "  An 
inspection  of  its  books  by  the  president 
of  the  company  is  a  matter  of  right." 
People,  etc.  v.  Goldstein,  37  N.  Y.  App. 
Div.  550  (1899).  Where  a  director  was 
not  qualified  and  a  new  director  has 
been  elected  in  his  place,  the  former  can- 
not have  mandamus  to  allow  him  to  in- 
spect the  company's  books  and  exercise 
other  rights  of  a  director,  even  though 
for  a  time  he  was  permitted  to  act  as 
director.  People  v.  N.  Y.  etc.  Co.,  34 
N.  Y.  Misc.  Rep.  326  (1901).  After  the 
courts  have  decided  that  certain  per- 
sons are  directors,  mandamus  will  be 
granted  that  the  defeated  parties  turn 
over  the  books  and  papers  to  the  former. 
Matter  of  Journal  Pub.  Club,  30  N.  Y. 
Misc.  Rep.  326  (1900;. 

5  People  V.  Throop,  12  Wend.  181  (1834). 

^  A  director  who  is  actively  organ- 
izing a  rival  company  has  no  right  to 
examine  the  letter  files  of  the  former 
in  order  to  aid  the  latter.    The  secre- 


proposition  has  been  made  for  the  pur- 
chase of  all  the  stock  of  the  company 
and  the  dividends  have  been  greatly 
reduced.  Re  Application  of  Steinway, 
31N.  Y.  App.  Div.  70  (1898);  aff'd,  159 
N.  Y.  251.  As  to  the  general  right  of  a 
stockholder  to  examine  the  books  of 
a  corporation  and  the  recognition  of 
such  right  in  equity  by  discovery,  see 
Gresley,  Eq.  Ev.  116,  117;  Kynaston  v. 
East  India  Co.,  3  Swanst.  249  (1819); 
Bolton  V.  Liverpool,  3  Sim.  467  (1831); 
S.  C,  1  Myl.  &  K  88;  Brace  v,  Ormond, 
1  Meriv.  409  (1816). 

1  Quoted  and  approved  in  Matter  of 
Steinway,  159  N.  Y.  251  (1899).  Com- 
monwealth V.  Phoenix  Iron  Co.,  105  Pa, 
St.  Ill  (1884).  As  to  the  right  to  in- 
spection and  to  take  copies  of  records 
in  a  county  clerk's  or  register's  office, 
see  Randolph  u  State,  82  Ala.  527 
(1886);  Hanson  v,  Eichstaedt,  69  Wis. 
538  (1887);  Brewer  v.  Watson,  71  Ala. 
299  (1882);  Phelan  v.  State,  76  Ala.  49 
(1884);  Webber  v.  Townley,  43  Mich.  534 
(1880);  Diamond  Match  Co.  v.  Powers, 
51  Mich.  145  (1883);  People  v.  Cornell, 
47  Barb.  329  (1866);  People  v.  Reilly,  38 
Hun.  429  (1886);  People  v.  Richards,  99 
N.  Y.  620  (1885). 

2  Ellsworth  V.  Dorwart,  95  Iowa,  108 
(1895). 

3  State  V.  Citizens'  Bank,  etc.,  51  La, 
Ann.  426  (1899). 


1094 


CH.  XXX.] 


INSPECTION    OF    CORPOKATE    BOOKS. 


[§  512. 


A  creditor  of  the  corporation  or  any  person  who  is  a  stranger  to 
it  can  obtain  access  to  its  records  by  a  bill  in  equity  for  discovery.* 
Corporate  books  in  the  hands  of  a  receiver  should  be  open  to  all 
parties.- 

§  512.  Common-law  action  for  damages  for  refusal. —  The  legal 
right  of  a  stockholder  of  a  corporation  to  examine  the  corporate 
books  is  a  right  which  gives  him  a  cause  of  action  at  law  for  dam- 
ages against  the  corporate  officers  if  they  refuse  to  allow  the  in- 
spection.' The  plaintiff  is  entitled  to  nominal  damages,  and  to 
such  further  damages  as  he  may  prove.  It  has  been  held  that  he 
need  not  allege  or  prove  any  special  reason  or  purpose  of  his  desire 
and  request  to  examine  the  books;*  but  the  vast  size  of  modern 
corporations,  with  hundreds  or  thousands  of  stockholders  and  many 


tary  may  forcibly  take  them  from  him. 
Heminway  v.  Heminway,  58  Conn.  443 
(1890). 

1  A  bill  of  discovery  lies  at  instance 
of  corporate  creditors  in  the  courts  of 
one  state  to  compel  corporate  officers 
to  give  the  names  of  stockholders  of 
the  corporation  in  another  state  with  a 
view  to  enforcing  the  statutory  liabil- 
ity in  the  latter  state.  Post  v.  Toledo, 
etc.  R.  R,  144  Mass.  341  (1887).  As  to 
the  remedy  by  subpoena,  etc.,  see  §  519, 
infra. 

-  See  §  872,  infra;  Re  Kent,  etc.  Syn- 
dicate. [1898]  1  Q.  B.  754.  A  receiver  of 
an  insolvent  bank  must  allow  the  dis- 
trict attorney  to  examine  the  books 
and  papers  to  ascertain  the  condition 
of  the  bank  and  whether  the  officers 
had  criminally  received  deposits  after 
the  bank  became  insolvent.  McElree 
V.  Darlington,  187  Pa.  St.  593  (1898). 

3  Lewis  V.  Brainerd,  53  Vt.  510  (1881). 
A  stockholder  has  the  legal  right  to 
inspect  the  books  of  the  corporation  of 
which  he  is  a  member,  but  the  com- 
pany is  not  liable  for  a  refusal  of  the 
secretary  to  allow  a  stockholder  to  ex- 
amine the  books.  Legendre  v.  New 
Orleans  Brewing  Assoc,  45  La.  Ann.  669 
(1893).  Where  the  president  has  cus- 
tody of  the  books  and  refuses  to  allow 
a  stockholder  to  examine  them,  and 
the  stockholder  desires  to  examine 
them  for  the  purpose  of  ascertaining 
whether  he  should  sell  his  stock,  and  is 


obliged  to  obtain  a  mandamus,  he  may 
hold  the  president  liable  in  an  action 
for  damages,  and  if  the  price  of  the 
stock  has  fallen  during  the  delay  in 
obtaining  access  to  the  books  his  meas- 
ure of  damages  is  his  loss,  especially 
where  the  president  was  in  the  mean- 
time selling  his  own  stock.  Bourdette 
V.  Sieward,  52  La.  Ann.  1333  (1900).  In 
a  suit  by  a  stockholder  against  an  offi- 
cer for  damages  for  refusal  to  allow 
him  to  examine  the  books,  remote,  col- 
lateral and  speculative  damages  cannot 
be  recovered.  Even  though  he  alleges 
that  he  would  have  sold  his  stock  if  he 
had  been  allowed  to  examine  the 
books,  and  that  the  stock  subsequently 
declined  in  price,  yet  if  there  was  no 
mismanagement  and  the  decline  of  the 
stock  is  due  to  causes  which  an  in- 
spection of  the  books  would  not  dis- 
close, he  cannot  recover  the  loss  due  to 
the  decline  in  the  stock.  Bourdette  v. 
Seward,  31  S.  Rep.  630  (La.  1902).  A 
minority  stockholder  is  not  entitled  to 
a  receiver  in  a  suit  brought  by  him  for 
an  accounting  and  winding  up  the 
company,  even  though  he  is  refused  an 
inspection  of  the  books  of  the  com- 
pany, and  especially  so  where  he  was 
denied  the  right  for  several  years  for 
the  reason  that  he  did  not  pay  his  sub- 
scription, and  he  finally  sold  his  stock. 
Ridpath  v.  Sans  Poll,  etc.  Co.,  26  Wash. 
427  (1901). 
*  Lewis  V.  Brainerd,  53  Vt.  510  (1881). 


1095 


§513.] 


INSPECTION    OF    CORPORATE    BOOKS. 


[CH.  XXX. 


clerks,  renders  it  impossible  to  open  all  the  books  to  all  the  stock- 
holders, and  renders  necessary  the  rule  that  some  good  reason  be 
given  by  the  stockholder  applying  to  examine  the  books. 

§  513.  Mandamus  is  tlie  preferable  remedy. — An  action  for  dam- 
ages is  generally  totally  inadequate  as  a  remedy.^  The  stockholder 
wishes  to  inspect  the  corporate  books  and  does  not  wish  damages 
or  a  lawsuit.  Accordingly,  in  certain  cases,  upon  the  application 
of  a  stockholder  who  has  been  denied  the  privilege  of  examining  the 
corporate  records,  it  has  been  the  practice  of  the  courts  to  issue  a 
mandamus  to  the  corporate  oflBcers  commanding  them  to  allow  a 
specified  stockholder  to  examine  the  books  of  the  corporation.^  The 
remedy  of  a  stockholder  who  wishes  to  examine  the  corporate 
books  in  order  to  bring  suit  against  the  directors  for  fraud  is  by 
mandamus,  not  by  an  order  for  inspection.^  The  usual  statute 
giving  to  the  courts  the  power  to  order  a  corporation  to  allow  its 
stockholders  to  examine  its  books  does  not  take  away  the  common- 
law  right  of  stockholders  to  have  such  an  inspection,  and  does  not 
take  away  the  power  of  the  court  to  grant  a  mandamus  to  enforce 
such  common-law  right.^  A  stockholder's  bill  against  a  corpora- 
tion and  directors  may  be  to  remedy  certain  alleged  frauds,  and 
also  incidentally  to  obtain  a  disclosure  and  discovery.  The  stock- 
holder need  not  resort  to  a  mandamus? 


1  In  Cockburn  v.  Union  Bank,  13  La. 
Ann.  289  (1858),  the  court  said  a  suit 
for  damages  "might  last  for  a  long 
time  and  petitioner  suffer  great  loss  by 
being  debarred  from  an  examination  " 
of  the  books.  "  He  does  not  ask  for 
damages,  but  for  the  exercise  of  a 
right.  If  he  has  the  right  he  ought  to 
have  the  exercise  of  it  as  soon  as  possi- 
ble; for  the  deprivation  of  his  right 
cannot,  perhaps,  be  accurately  esti- 
mated in  damages.  It  may  be  many 
years  before  the  amount  of  the  dam- 
age can  be  known." 

2  "  It  would  seem,  from  the  weight  of 
authority  and  in  reason,  that  a  share- 
holder is  entitled  to  mandamus  to  com- 
pel the  castos  of  corporate  documents 
to  allow  him  an  inspection,  and  copies 
of  them,  at  reasonable  times,  for  a  spe- 
cific and  proper  purpose,  upon  showing 
a  refusal  on  the  part  of  the  custos  to 
allow  it,  and  not  otherwise."  Common- 
wealth V.  Phoenix  Iron  Co.,  105  Pa.  St. 
Ill  (1884);  s.  c.  sub  nom.  Phoenix  Iron 


1096 


Co.  V.  Commonwealth,  113  Pa.  St.  563 
(1886),  explaining  the  method  of  pro- 
cedure, and  holding  that  the  applicant 
need  not  institute  a  suit  in  a  court  of 
equity.  The  old  rule  that  mandamus 
will  issue  only  for  a  public  purpose  is 
no  longer  a  rule  of  law  so  as  to  prevent 
its  use  herein.  Commonwealth,  etc., 
supra,  questioning  Rex  v.  Bank  of  Eng- 
land, 2  B.  &  Aid.  620  (1819);  and  Rex  v. 
London  Assur.  Co.,  5  B.  &  Aid,  899 
(1822).  See  also  Rex  v.  Clear,  4  Barn.  & 
C.  899  (1825);  Foster  v.  White,  86  Ala. 
467  (1889). 

3  Walsh  V.  Press  Co.,  48  N.  Y.  App.  Div. 
333  (1900). 

4  Matter  of  Steinway,  159  N.  Y.  251. 
(1899). 

5  Weir  V.  Bay  State  Gas  Co.,  91  Fed. 
Rep.  940  (1898).  Where  the  suit  is 
brought  by  the  stockliolder  against  the 
corporation  alone  to  remedy  the  frauds 
of  directors  and  have  a  receiver  ap- 
pointed and  obtain  a  disclosure,  the  bill 
is  defective  for  non-joinder  of  the  guilty 


<!H.  XXX.] 


INSPECTION    OF    COEPOEATE    BOOKS. 


[§  514. 


§  514.  Not  granted  as  a  matter  of  course  unless  tlie  right  is  stat- 
ntory. —  The  writ  of  mandamus^  however,  does  not  issue  herein  as 
.a  matter  of  course.  It  is  an  extraordinary  remedy,  to  be  invoked 
•only  upon  special  occasions.  The  court  does  not  grant  the  man- 
damus until  it  has  taken  into  careful  consideration  all  the  facts  and 
circumstances  of  the  case.  The  condition  and  character  of  the 
books,  the  reasons  for  refusal  by  the  corporation,  the  specific  pur- 
pose of  the  stockholder  in  demanding  inspection,  the  general  rea- 
-sonableness  of  the  request,  and  the  effect  on  the  orderly  transac- 
tion of  the  corporate  business  in  case  it  is  granted,  are  all  consid- 
ered in  granting  or  refusing  the  writ.  It  is  granted  only  in  fur- 
therance of  essential  justice.^ 

Where,  however,  a  statute  gives  to  stockholders  the  right  to  ex- 
amine corporate  books,  mandamus  seems  to  be  granted  as  a  matter 
■of  right.'^ 


parties.     Edwards    v.    Bay  State  Gas 
Co.,  91  Fed.  Rep.  942  (1898);  Morse  v. 
Bay  State  Gas  Co.,  91  Fed.  Rep.  941  (1898). 
1  •'  The  application  is  addressed  to  the 
sound  discretion  of  the  court."      The 
reasons  for  granting  the  writ  "  should 
be  clear  and  cogent.     ...     To  hold 
that  every  person  who  shows  himself 
to  be  a  stockholder  of  stock  is  at  lib- 
erty to  demand  an  examination  of  the 
transfer  books  when  and  as  often  as  he 
pleases,  and,  if  refused,  to  apply  for  a 
writ  of  mandamus  to  enforce  an  abso- 
lute right,  would  be  to  establish  a  rule 
highly  prejudicial  to  the  interests  of 
all  corporations  and  their  stockholders. 
.    .    .     The  power  of  the  court  should 
be  exercised  in  such  cases  with  great 
discrimination    and  care."      People  v. 
Lake  Shore,  etc.  R.  R.,  11  Hun,  1  (1877); 
.affirmed  suh  nom.  Be  Sage,  70  N.  Y. 
220  (1877).     See  also  People  v.  Northern 
Pac.  R.  R.,  50  N.  Y.  Super.  Ct.  456  (1884). 
"Discretion  in  these    matters    should 
be  exercised   in  a  reasonable  manner 
and  subject  to  precedent."    Regina  v. 
Wilts,  etc.  Canal  Nav..  29  L.  T.  Rep.  922 
(1874).     A  reference  may  be  ordered  by 
the  court  to  determine  the  truth  of  the 
allegations  in  the  affidavits  used  to  ob- 
tain a  mmidamus.     People  v.  St.  Louis, 
etc.  Ry.,  44  Hun,  552  (1887).  Mandamus 
is  the  preferable  remedy.     Legendre  v. 


New  Orleans  Brewing  Assoc,  45  La. 
Ann.  669  (1893). 

2  Coquard  v.  National,  etc.  Co.,  171  IlL 
480  (1898);  Cobb  v.  Lagarde,  30  S.  Rep. 
326  (Ala.  1901).     Where  the  right  of  in- 
spection is  statutory,  mandamus  will 
issue,  even  though  a  stockholder  de- 
sires to  examine  the  books  for  the  bene- 
fit of  a  competing  concern  in  which  he 
is  interested.     Johnson  v.  Langdon,  67 
Pac.  Rep.  1050  (Cal.  1902).     A  statute 
giving  the  right  to  examine  the  books 
and  records  gives  the  right  to  examine 
contracts,  and  this  right  may  be  en- 
forced by  mandamus.  Stone  v.  Kellogg, 
165  111.  192  (1896).  Mandamus  lies  at  the 
instance  of  a  stockholder  to  compel  his 
corporation  to  allow  him  to  inspect  the 
books  of  the  company  relative  to  the 
stock  in  accordance  with  the  constitu- 
tion  of  Louisiana,  the  object  of  the 
stockholder  being  to  ascertain  the  value 
of  his  stock  and  to  guide  his  future  ac- 
tion in  regard  thereto.     State  v.  New 
Orleans,  etc.  Co.,  49  La.  Ann.  1556  (1897). 
Under  the  Wisconsin  statute  authoriz- 
ing a  stockholder  to  examine  the  stock 
books  and  accounts,  a  mandamus  may 
be  issued  to  the  ofiicer  having  the  books 
in  charge.    State  v.  Bergenthal,  72  Wis. 
314(1888).  Under  a  con.etitutional  right 
to  see  the  list  of  stockholders,  a  stock- 
holder has  no  absolute  right  to  take  a 


1097 


g  515.] 


INSPECTION   OF   COEPOKATE   BOOKS. 


[oh.  XXX. 


§  515.  When  it  will  and  tvill  not  he  granted. —  It  will  not  be 
granted  to  satisfy  curiosity,  nor  to  aid  the  stock-market  specu- 
lations of  the  stockholders.*  Either  some  property  rights  of  the 
stockholder  must  be  involved,  or  some  controversy  exist,  or  some 
specific  and  valuable  interest  be  in  question,  to  settle  which  an  in- 


list  of  them.     Commonwealth  v.  Em- 
pire Pass.  Ry.,   134  Pa.  St.  237  (1890). 
Mandamus  lies  to  enforce  tlie  statutory 
right  of  inspection.     People  v.  Pacific 
Mail  S.  S.  Co.,  50  Barb.  280  (18G7).   Man- 
damus will  lie  in  behalf  of  th.e  wife  of 
a  deceased  stockholder,  who  holds  the 
certificates  made  out  in  his  name,  to 
compel  the  corporation  to  allow  her  to 
examine  the  transfer  books  in  order 
that  she  may  vote   intelligently  at  a 
coming  election.     People  v,  Eadie,  63 
Hun,  320   (1892);  aff'd.  133  N.  Y.  573. 
Mandamus  lies  to  open  for  the  inspec- 
tion of  a  stockholder  and  for  taking 
memoranda  therefrom  such  corporate 
books  as  the  statute  prescribes  shall  be 
open  to  him.     Re  Martin,  62  Hun,  557 
(1891).    Mandamus  lies  to  allow  inspec- 
tion as  required  by  the  statute,  and  the 
fact  that  the  applicant  bolds  a  certifi- 
cate of'  stock  is  suQicient.     Martin  v. 
Johnston  Co.,  25  Abb.  N.  Cas.  350  (1890). 
Where  there  is  a  state  statute  allowing 
stockholders  to  examine  the  corporate 
books,  a  national  bank  in  the  state  is 
subject  thereto    and  mandamus  will 
issue.     Winter  u  Baldwin,  89  Ala.  483 
(1889).    Under  a  statute  to  the  effect 
that  "the  stockholders  of  all  private 
corporations  have  the  right  of  access 
to,  inspection,  and  examination  of  the 
books,  records,  and  papers  of  the  corpo- 
ration, at  reasonable  and  proper  times," 
a  stockholder  has  the  "  right  to  examine 
the   books  at  any  and  all  reasonable 
times,"  and  "  when  this  right  is  claimed 
and  refused,  he  is  entitled  to  a  manda- 
mus on  the  averment  that  he  is  a  stock- 
holder of  the  corporation;  that  he  has 
demanded  the  right  of  inspection;  that 
tiie  time  was  reasonable  and  proper; 
and  that  the  right  was  denied  him." 
He  may  make  the  examination  through 
an  agent.     Foster  v.  White,  86  Ala.  467 


(1889).   Contra,  State  v.  National  Biscuit 
Co.,  54  At!.  Rep.  241  (N.  J.  1903).     Con- 
cerning the  New  York  act  requiring 
resident    transfer    agents    of    foreign 
corporations  to  exhibit  to  stockhold- 
ers the   transfer  book   and   a   list  of 
stockholders,  and  concerning  an  alter- 
native writ  of  mandamus  therein,  see 
People  V.  Crawford,  68  Hun,  547  (1893). 
Mandamus  lies  to  compel  the  resident 
agent  of  a  foreign  corporation  to  open- 
its  transfer  books  to  a  stockholder  as 
required  by  statute.     People  v.  Paton, 
20  Abb.  N.  Cas.  195  (1887).     Mandamus- 
lies  to  compel  corporate  officers  to  ex- 
hibit to  a  stockholder  the  books  speci- 
fied in  the  statute  giving  this  right. 
Ellsworth    V.    Dorwart,   95    Iowa,   108 
(1895).     See  also,  concerning  such  stat- 
utes, §§  515. 518,  infra.  Cf.  54  Atl.  Rep.  34li 
1  The  writ   will  not  be  "granted  to 
enable  a  corporator  to  gratify  idle  curi- 
osity."    Foster    v.   White,  86   Ala.   467 
(1889);    People  v.  Walker,  9   Mich.  328 
(1861).     "The  interests   of  all  the  cor- 
porators   require   that   the   writ  shall 
not  go  at  the  caprice  of  the  curious  or 
suspicious."  Commonwealth  u  Phoenix 
Iron  Co.,  105  Pa.  St.  Ill  (1884).  "  Courts 
should  guard  against  all  attempts  by 
combinations  hostile  to  the  corporation 
or  its  existing  officers  to  use  its  writ  of 
mandamus    to  accomplish   their    per- 
sonal or  speculative  ends."    People  v. 
Lake  Shore,  etc.  R.  R.,  11  Hun,  1  (1877). 
Nor    will    the    court  grant    "a    mere 
wrecking  petition  to  ruin  a  going  con- 
cern."   Re  West  Devon,  etc.  Mine,  L.  R. 
27  Ch.  D.  106  (1884).     Mere  suspicion  is 
not  enough  to  justify  an  order  of  in- 
spection,  even   though  the    applicant 
stockholder     intends     to    bring    suit 
against    the    dix-ectors.     Central,     etc 
R.   R.   V.  Twenty-third   Street  Ry.,  SB- 
How.  Pr.  45  (1877). 


1098 


c:r.  XXX.] 


IKSPECTION  OF  CORPORATE  BOOKS. 


[§  515. 


spection  of  the  corporate  records  becomes  necessary.^  At  common 
law  a  stockholder  has  a  right  to  a  inandamus  to  compel  the  cor- 
porate officers  to  allow  him  to  examine  certain  books  and  papers  of 
the  corporation,  where  a  proposition  has  been  made  for  the  pur- 


1  It  has  been  granted  to  allow  the  ap- 
plicant to  ascertain  whether  a  by-law 
existed  entitling  him  to  an  oflQce  by 
promotion.     Reg.   v.   Saddlers'   Co.,   10 
W.  R.  87  (1861).     Mismanagement  and 
intent  to  bring  suit  need  not  be  al- 
leged.    "Oftentimes     frauds    are    dis- 
coverable only  by  examination  of  the 
books  by  an  expert  accountant."  Huy- 
laru.  Cragin  Cattle  Co.,  40  N.  J.  Eq.  392 
(1885).     It  is  granted  also  to  a  stock- 
holder who  has  a  suit  or  controversy 
with  a  party  other  tlian  the  corpora- 
tion  itself.     Rex  v.  Hostmen,  2  Stra. 
1223  (1745);  Mayor  of  Southampton  v. 
Graves,  8  T.  R  590  (1800).     It  has  been 
granted  to  enable  a  stockholder  to  see 
the  discount  book,  although  there  is  no 
suit  between  him  and  the  corporation, 
and  no  intent  to  bring  one.     Cockburn 
V.  Union  Bank,  13  La.  Ann.  289  (1858). 
At  an  early  day,  however,  it  was  held 
that  "the  members  have  no  right,  on 
speculative  grounds,  to  call  for  an  ex- 
amination of  the  books  and  muniments 
in  order  to  see  if,  by  possibility,  the 
company's  affairs  maj'  be  better  ad- 
ministered than  they  think  they  are  at 
present.     If  they  have  any  complaint 
to   make,   some    suit  should   be  insti- 
tuted, some   definite   matter  charged, 
.     .    .     or  there  should   be  some   par- 
ticular matter  in  dispute  between  mem- 
bers, or  between  the  corporation  and 
individuals  in  it;  there  must  be  some 
controversy,  some  specific  purpose,  in 
respect  of  which  the  examination  be- 
comes necessary."    King  u  Merchant 
Tailors'  Co.,  2  B.  &  Ad.  115  (1831).     A 
charter  provision    that  the  corporate 
powers  "shall  be  exercised  by  a  board 
of    directors"    is    immaterial    herein. 
State  V.    Bienville   Oil  Works,  28  La. 
Ann.  204  (1876).    Where  a  reduction  of 
capital  stock  is  contemplated,  a  large 

to  inspection 


stockholder  has  a  right 


to  ascertain  whether  the   business  is 
being  " prudently  and  profitably"  car- 
ried on.     State  v.  Bienville  Oil  Works, 
28  La.    Ann.  204  (1876).     The  general 
purpose  of  ascertaining  "the  condition 
of  the  company"  was  held  insufficient 
in  People  u  Walker,  9  Mich.  328  (1861). 
The  stockholder  may  take  memoranda 
or  a  list  of  the  stockholders.    Common- 
wealth V.  Phoenix  Iron  Co.,  105  Pa.  St. 
Ill  (1884);  Cotheal  v.  Brouwer,  5  N.  Y. 
562  (1851),   affirming   Brouwer    v.   Co- 
theal, 10  Barb.  216  (1850) ;  Hide  v.  Holmes, 
2  Molloy,  372  (1825).     In  Stettauer  v. 
New  York,  etc.  Co.,  42  N.  J.  Eq.  46  (1886), 
where   a  stockholder    filed    a    bill  in 
equity  to  compel  corporate  officers  to 
allow  himself  and   his  accountant  to 
examine  the  corporate  books,  its  busi- 
ness having  been  closed  and  distribu- 
tion of  assets  made,  but  a  statement  of 
its  affairs  refused,  the  court  held  that 
the  bill  would  not  lie,  since  no  fraud 
or    insufficient   distribution    of  assets 
was  alleged.     Mandamus  is  the  proper 
remedy.     Swift  v.  Richardson,  7  Houst. 
(Del.)  338  (1886),  holds  that  mandamus 
will  issue  to  the  officers  of  a  foreign  cor- 
poration to  exhibit  its  books  then  in  the 
state,  and  allow  copies  of  records  to  be 
taken  by  a  stockholder  who  intends  to 
commence  suit  against  a  pledgee  of  his 
stock;  the  controversy  turning  on  the 
question  of  the  earnings  and  expenses 
of  the  corporation.    Mandamus  to  open 
the  stock-ledger  was  denied  in  a  case 
where  the  owner  of  four  shares  of  stock 
alleged  that  little  or  no  dividends  were 
paid,  and  the  stock  was  depreciating, 
no  mismanagement  being  charged.     A 
by-law  authorizing  inspection  of  books 
of  account  does  not  authorize  inspec- 
tion of  the  stock-ledger.  Lyon  v.  Ameri- 
can Screw  Co.,  16  R.  L  472  (1889).  Man- 
damus may  he  to  compel  the  resident 
officers  of  a  foreign  corporation  to  per- 


1099 


§  515.] 


INSPECTION  OF  CORPORATE  BOOKS. 


[cn.  XXX. 


chase  of  all  the  stock  of  the  corporation,  and  a  large  reduction  ha-' 
been  made  in  the  dividends,  and  the  stockholder  is  unable  to  ascer- 
tain the  real  value  of  his  stock.^  Where  the  charter  of  a  nationa 
bank  has  expired  the  state  court  may  compel  its  directors  to  allow 
its  stockholders  to  examine  its  books  and  papers.-  "Where  there 
had  been  no  dividends  for  nine  years,  and  the  officers  were  part 
ners  in  a  competing  concern,  and  refused  to  allow  inspection,  i* 
was  granted  in  order  to  enable  the  applicant  to  ascertain  whethei 
the  real  facts  justified  an  action  for  fraud  on  the  part  of  the  offi- 
cers.' Where  a  Michigan  stockholder  in  a  Connecticut  corporation 
is  suing  in  Michigan  other  stockholders,  on  contracts  relative  to 
stock,  he  may  obtain  in  Delaware  a  mandamus  compelling  the 
president,  who  resides  there  and  has  corporate  books  and  papers 
there,  to  allow  him  to  examine  the  same  and  take  copies.*  A  resi- 
dent stockholder  in  a  foreign  corporation  having  an  office  in  the 
state  for  the  transaction  of  business  is  entitled  under  the  New 
York  statutes  to  inspect  the  stock  book  kept  within  the  state,  and, 
if  the  corporation  has  no*  such  book,  to  inspect  any  other  books  in 
the  state  which  will  give  the  information.^ 


mit  insi^ection.  State  v.  Farmer,  7 
Ohio  C.  C.  439  (1892).  A  stockholder 
sued  by  a  corporation  on  an  ordinary 
debt,  and  who  sets  up  in  defense  that 
he  was  induced  to  buy  stock  from  out- 
side parties  by  fraudulent  statements 
made  by  the  company,  cannot  have  a 
tnandamus  to  compel  the  company  to 
allow  him  to  examine  its  books.  His  apt- 
plication  in  such  a  case  is  as  a  creditor 
and  not  as  a  stockholder.  Investment 
Co.  V.  Eldridge,  2  Pa.  Dist.  394  (1893). 

1  lie  Application  of  Steinway,  31  N.  Y. 
App.  Div.  70  (1898);  aff'd,  159  N.  Y.  251. 

2  Matter  of  Tuttle  v.  Iron  Nat.  Bank, 
170  N.  Y.  9  (1903). 

3  Commonwealth  v.  Phcenix  Iron  Co., 
105  Pa.  St.  Ill  (1884). 

■«  Richardson  v.  Swift,  7  Houst.  (Del.) 
137  (1885),  a  carefully  considered  case; 
also  Richardson  v.  Swift,  7  Houst.  (Del.) 
137  (1885). 

5  People  V.  Knickerbocker  T.  Co.,  38 
N.  Y.  Misc.  Rep.  446  (1903).  Mandamus 
as  a  separate  proceeding  not  connected 
with  any  suit  will  not  be  granted  in 
New  York  as  against  a  New  Jersey  cor- 
poration to  compel  the  opening  of  the 
■corporate  books  to  a  stockholder.     The 

11 


application  should  be  made  in  New 
Jersey.  Matter  of  Rappleye,  43  App. 
Div.  84  (1899).  In  the  Matter  of  Crosby, 
28  N.  Y.  Misc.  Rep.  300  (1899),  the  New 
York  court  granted  a  mandamus  in  be- 
half ©f  a  Texas  stockholder  in  a  Colo- 
rado corporation  which  did  all  its  busi- 
ness in  Mexico,  it  being  shown,  how- 
ever, that  all  the  books  were  kept  in 
New  York  and  that  the  officers  resided 
in  New  York,  and  that  the  applicant 
had  pledged  all  his  stock  and  was  un- 
able to  redeem  the  same  for  want  of 
information  as  to  the  value  of  the 
stock.  The  court  held  also  that  in  one 
and  the  same  proceeding  mandamus 
may  issue  to  two  such  corporations 
which  are  practically  one  from  a  busi- 
ness point  of  view.  The  penalty  im- 
posed by  statute  in  New  York  for  re- 
fusal of  a  foreign  corporation  having 
an  office  in  the  state  to  exhibit  its  stock 
book  to  a  stockholder  was  applied  in 
Cox  i\  Island,  etc.  Co.,  65  N.  Y.  App. 
Div.  508  (1901).  See  §  514,  supra,  and 
§  518,  infra.  Mandamus  may  issue  to 
an  officer  of  a  foreign  corporation  in 
the  state  commanding  him  to  show  to 
stockholders  books  that  are  within  the 
00 


en.  XXX.] 


INSPECTION    OF    CORPORATE    BOOKS. 


[§  515. 


The  ]^ew  York  court  of  appeals  has  sustained  a  mandamus 
granted  in  order  to  enable  the  applicant  to  ascertain  who  are  stock- 
holders, with  a  view  to  canvassing  their  votes  for  an  election,^  and 
during  the  past  few  years  there  has  been  a  large  number  of  de- 
cisions in  the  Xew  York  courts  defining  the  limits  within  which 
mandamus  will  be  granted  in  behalf  of  stockholders.^ 

state,  but  not  books  that  are  outside  of    ing    a  corporation   to  allow  a  stock- 


the  state.     State  v.  North   American, 
etc.  Co.,  31  S.  Rep.  172  (La.  1902). 

1  Mandamus  was  granted  in  People 
V.  Eadie,  63  Hun,  320  (1892);  aff'd,  133 
N.  Y.  573,  to  open  the  stock  books  to  a 
stockholder  who  wished  to  ascertain 
■who  were  stockholders  in  order  to  con- 
fer with  them  for  the  purpose  of  chang- 
ing the  board  at  an  approaching  elec- 
tion. Mandamus  was  granted  to  a 
stockholder  who  wished  to  persuade 
other  stockholders  not  to  appeal  a  suit 
in  which  he  was  interested  adversely 
to  the  corporation,  the  defeated  party. 
Reg.  V.  Wilts,  etc.  Canal  Nav..  29  L.  T. 
Rep.  922  (1874).  See  also  People  v.  Lake 
Shore,  etc.  R.  R..  11  Hun,  1  (1877);  alf'd 
sub  nom.  Be  Sage,  70  N.  Y.  220  (1877). 
A  stockholder  in  Pennsylvania  may 
have  a  mandamus  to  compel  the  com- 
pany to  allow  him  to  inspect  and  take 
a  copy  of  the  list  of  stockholders,  his 
purpose  being  to  consult  thera  and  ob- 
tain proxies  from  other  stockholders. 
It  is  immaterial  that  a  receiver  is  in 
charge  of  the  property  under  a  fore- 
closure. Such  a  receiver  has  nothing 
to  do  with  the  stock  book.  Common- 
wealth V.  Philadelphia,  etc.  R.  R.,  3  Pa. 
Dist.  115  (1893). 

2  A  mandamus  will  not  issue  in  be- 
half of  a  stockholder  who  is  a  mere 
dummy  for  others,  whose  purpose  is  to 
get  control  of  the  company  and  sell  it 
out.  A  mandamus  should  not  give  a 
stockholder  the  right  to  examine  all 
books,  vouchers,  records,  papers  and 
minutes  without  restriction  as  to  time 
and  place  and  without  provision 
against  interfering  with  the  regular 
business  of  the  company.  Matter  of 
Coats,  73  N.  Y.  App.  Div.  178  (1902).  But  a 
mandamus  will  be  granted  command- 


holder  to  examine  the  by-laws  unless  a 
very  strong  case  of  bad  faith  is  made 
out  against  him.  Matter  of  Coats,  75 
N.  Y.  App.  Div.  567  (1902).  A  stock- 
holder will  not  be  granted  a  peremp- 
tory writ  of  mandamus  allowing  him 
to  examine  all  the  books  and  accounts 
of  the  corporation  on  the  allegation 
that  he  wishes  to  ascertain  the  names 
and  addresses  of  the  stockholders,  and 
the  further  allegation  that  no  dividends 
have  been  paid,  there  being  no  allega- 
tion that  a  demand  has  been  made  or 
that  it  is  necessary  to  examine  all  the 
books  and  papers,  or  that  there  has  been 
any  misraanagment,  or  that  the  stock 
has  depreciated  in  value.  Matter  of 
Latimer  v.  Herzog,  etc.  Co.,  75  N.  Y. 
App.  Div.  522  (1902).  Mandamus  will 
not  be  granted  to  enable  a  stockholder 
to  obtain  proof  concerning  an  alleged 
improper  loan  made  by  the  corpoi'ation 
in  order  that  the  proof  may  be  used  to 
hold  the  directors  personally  liable. 
People  V.  Produce,  etc.  Co.,  53  N.  Y. 
App.  Div.  93  (1900).  The  president  of 
a  corporation  is  entitled  to a.mandamus 
directing  the  secretary  to  allow  him 
and  his  attorney  to  inspect  the  stock 
book  and  make  extracts  therefrom, 
and  it  is  immaterial  what  the  motive 
of  the  president  is.  "  An  inspection  of 
its  books  by  the  president  of  the  com- 
pany is  a  matter  of  right."  People,  etc. 
V.  Goldstein,  37  N.  Y.  App.  Div.  550 
(1899).  Mandamus  will  not  be  granted 
to  allow  a  stockholder  to  examine  the 
books  of  the  company  where  such  stock- 
holder owns  only  one-thirtieth  of  one 
per  cent,  of  the  preferred  stock,  and  his 
reason  for  examining  the  books  is  that 
he  believes  the  company  is  selling  it& 
product  at  less  than  cost  by  reason  of 


1101 


§  616.] 


INSPECTION    OF    CORPORATE    BOOKS. 


[CH.  XXX. 


A  pledgee  of  stock  which  still  stands  in  the  name  of  the  pledgor 
is  not  entitled  to  a  mandamus  to  allow  him  to  inspect  the  corpo- 
rate books,  even  though  the  pledgor  is  insolvent  and  is  dead.' 
Mandamus  does  not  lie  where  the  applicant  is  not  a  stockholder  of 
record.^  A  stockholder  who  has  made  a  contract  for  the  sale  of 
his  stock  and  received  a  partial  payment  cannot  claim  the  right  to 
inspect  the  books,  the  other  payments  being  not  yet  due.^  It  has 
been  held  in  Pennsylvania  that  mandamus  will  not  be  granted  to 
allow  a  stockholder  to  make  a  list  of  the  stockholders  where  the 
only  purpose  is  to  combine  them  in  attacking  a  lease  made  by  the 
corporation.^ 

§516.  Alle(/ation  and  form  of  writ. —  The  writ  should  run  to 
the  person  or  officer  who  has  control  of  the  records.*     The  stock- 


competition,  and  that  consequently  he 
has  received  no  dividends,  it  not  being 
shown  that  the  market  price  of  the  stock 
has  been  decreased.  Matter  of  Pierson, 
28  N.  Y.  Misc.  Rep.  726  (1899).  Mandamus 
■does  not  lie  to  compel  a  corporation  to 
allow  a  stockholder  to  examine  its 
books  and  records,  where  the  only  rea- 
son given  therefor  is  that  the  corpora- 
tion, a  gas  company,  has  reduced  its 
price  of  gas,  and  the  stockholder  wishes 
toascertainwhetheritis  selling  the  same 
at  a  loss  and  whether  it  is  paying  its 
fixed  charges;  it  being  shown  that  the 
reduction  was  due  to  other  companies 
having  reduced  their  price.  Matter  of 
Pierson,  44  N.  Y.  App.  Div.  215  (1899). 
Mandamus  will  not  lie  to  compel  a  cor- 
poration to  allow  a  stockholder  to  ex- 
amine its  books,  even  tliough  he  alleges 
it  is  necessary  in  order  to  fix  the  tax- 
able value  of  the  stock  in  determining 
an  inheritance  tax,  where  it  is  shown 
that  the  real  object  is  to  obtain  informa- 
tion for  the  benefit  of  a  competing  con- 
cern, to  the  injury  of  the  former.  Mat- 
ter of  Kennedy,  75  N.  Y.  App.  Div.  188 
(1902).  A  stockholder  has  not  an  ab- 
solute right  to  examine  the  books  in 
order  to  enable  him  to  prosecute  a  suit 
against  the  corporation,  and  mandamus 
will  not  issue  where  he  has  already 
been  defeated  in  one  action.  People  v. 
American,  etc.  Co.,  31  N.  Y.  Misc.  Rep. 
617  (1900). 


1  Matter  of  First,  etc.  Bank,  28  Misc. 
Rep,  662  (1899).  An  unregistered  pledgee 
cannot  maintain  a  suit  under  the  New 
York  statute  against  the  treasurer  for 
the  penalty  for  refusing  to  furnish  to 
him  a  statement  of  the  affairs  of  the 
company.  Pray  v.  Todd,  71  N.  Y.  App. 
Div.  391  (1902). 

2  Matter  of  Reiss,  80  N.  Y.  Misc.  Rep. 
234  (1900). 

3  State  V.  Whited,  etc.,  104  La.  125 
(1900). 

4  Commonwealth  v.  Empire  Pass.  Ry., 
134  Pa.  St.  237  (1890),  and  note.  See 
criticism  on  this  case  in  N.  Y.  L.  J., 
Oct.  13,  1890. 

5  "  The  writ  shall  be  directed  to  him 
who  is  to  do  the  thing  required  to  be 
done."  People  v.  Throop,  12  Wend.  183 
(1834).  Mandamus  lies  to  enforce  a 
statutory  right  of  inspection.  Unrea- 
sonable delay  after  a  request  is  suffi- 
cient to  sustain  the  mandamus.  The 
mandamus  may  run  to  the  pi-esident 
and  general  manager  who  has  control 
of  the  business.  The  fact  that  the 
stockholder  is  interested  in  a  rival  com- 
pany and  is  unfriendly  towards  the  of- 
ficers is  immaterial.  Cobb  v.  Lagarde, 
129  Ala.  488  (1901).  A  mandamus  to 
compel  the  production  of  the  books  of 
the  corporation  should  run  to  the  cor- 
poration itself  and  not  to  the  manager. 
State  V.  North  American,  etc.  Co.,  105 
La.  379  (1901).     Mandamus  may  be  di- 


1103 


-CH.  XXX.] 


INSPECTION    OF    COEPOKATE    BOOKS. 


[§  516. 


holder  may  make  the  inspection  through  an  agent,  and  may  have 
the  aid  of  an  interpreter,  attorney,  or  expert.^  The  request  to  in- 
spect the  books,  for  refusal  of  which  the  mandamus  is  asked,  must 
be  alleged  to  have  been  made  at  a  proper  time  and  place,  and  of 
the  proper  person,  and  to  have  been  refused.^    The  application 


rected  against  the  oflBcer  having  charge 
of  the  books.  People  v.  Knickerbocker 
T.  Co.,  38  N.  Y.  Misc.  Rep.  446  (1902). 

1  In  examining  the  books  a  stock- 
holder may  have  with  him  his  attorney 
and  stenographer.  Ellsworth  v.  Dor- 
wart,  95  Iowa,  108  (1895).  A  stock- 
holder who  is  entitled  to  examine  cor- 
porate books  may  have  with  him  an 
attnrney  or  other  person  familiar  with 
that  line  of  business.  People  v.  Nassau 
Ferry  Co.,  86  Hun,  128  (1895).  He  may 
inspect  through  his  duly  authorized 
agent.  State  v.  Bienville  Oil  Works 
Co.,  28  La.  Ann.  204  (1876);  Cincinnati, 
etc.  Co.  V.  Hoflfmeister,  62  Ohio  St.  189 
(1900).  The  executrix  of  an  estate  may 
obtain  a  Tnandamus  allowing  her  to  ex- 
amine the  books  of  a  bank  in  which 
the  estate  holds  stock  in  order  to  ascer- 
tain the  real  value  of  the  stock.  A 
by-law  prohibiting  such  examination, 
except  by  special  authority  by  the 
board  of  directors,  is  illegal  under  the 
Louisiana  constitution.  The  examina- 
tion may  be  by  an  expert  representing 
the  executrix.  State  v.  Citizens'  Bank, 
etc.,  51  La.  Ann.  426  (1899).  Such  in- 
spection may  be  through  agents.  Bon- 
nardet  v.  Taylor.  1  J.  &  H.  883  (1861); 
Draper  v.  Manchester,  etc.  Ry.,  7  Jur. 
(N.  S.)  pt.  1,  86  (1861).  But  see  Re  West 
Devon,  etc.  Mine,  L.  R.  27  Ch.  D.  106 
(1884);  Bank  of  Utica  v.  Hillard.  6  Cow. 
62  (1826).  It  includes  the  agent,  solici- 
tor, counsel,  or  expert  of  the  party  ask- 
ing the  inspection.  Hide  v.  Holmes,  2 
MoUoy,  373  (1825);  Blair  v.  Massey,L.R. 
5  Eq.  623  (1871);  Joint-stock  Discount 
Co.'s  Case,  36  L.  J.  (Eq.)  150  (1867);  Bon- 
nardet  v.  Taylor,  1  Johns.  &  H.  383 
(1861);  Attorney-General  v.  Whitwood 
Local  Board,  40  L.  J.  (Ch.)  592  (1871); 
Lindsay  v.  Gladstone,  L.  R.  9  Eq.  132 
(1869);  Williams  v.  Prince  of  Wales  Ins. 


Co.,  23  Beav.  338  (1875);  State  x\  Bien- 
ville, etc.  Co.,  28  La.  Ann.  204  (1376); 
Ballin  v.  Ferst,  55  Ga.  546  (1875).  But 
see  Bartley  v.  Bartley,  1  Drew.  233 
(1852);  Sumraerfield  v.  Pritchard,  17 
Beav.  9  (1853);  Draper  v.  Manchester, 
etc.  R.  R.,  3  De  G.,  F.  &  J.  23  (1861);  Re 
West  Devon,  etc.  Mine,  L.  R.  27  Ch.  D. 
106  (1884).  And  a  shareholder  who  is 
also  the  solicitor  of  opposing  litiganls 
is  nevertheless  so  entitled.  Reg.  v. 
Wilts,  etc.  Canal  Nav.  Co.,  29  L.  T.  Rep. 
922  (1874):  Kingsford  v.  Great  Western 
Ry.,  16  C.  B.  (N.  S.)  761  (1864).  But  see 
Hutt's  Case,  7  Dowl.  Pr.  690  (1839); 
Herschfeld  v.  Clarke,  11  Exch.  712 
(1856).  See  also  notes  supra.  The  man- 
ner of  inspection  must  be  gentlemanly. 
Williams  v.  Prince  of  Wales,  etc.  Co., 
23  Beav.  338  (1857). 

2  The  stockholder  must  first  apply  to 
the  proper  corporate  officer  having 
authority  to  grant  inspection.  Rex  v. 
Wilts,  etc.  Canal  Nav.,  3  Ad.  &  El.  477 
(1835).  And  must  state  to  him  the 
reason  why  he  desires  inspection.  Rex 
V.  Wilts,  etc.  Canal  Nav.,  3  Ad.  &  EL 
477  (1835);  also  Rex  v.  Clear,  4  Barn.  & 
C.  899  (1825);  People  v.  Walker,  9  Mich. 
328  (1861).  Mandamus  lies  at  the  in- 
stance of  a  stockholder  to  examine  the 
corporate  books  to  enable  the  stock- 
holder to  learn  the  true  condition  of 
the  company  and  of  its  management 
and  of  the  value  of  the  stock.  There 
is  no  presumption  that  the  inspection 
is  hostile  to  the  interest  of  the  com- 
pany, and  it  need  not  be  alleged  that 
a  demand  was  made  during  business 
hours  at  the  company's  office,  or  that 
the  person  making  the  demand  repre- 
sented the  stockholder,  where  it  is 
shown  that  the  officers  refused  to 
grant  inspection  under  any  circum- 
stances.    State  V,  Pacific,  etc.  Co.,  21 


1103 


§  517.] 


INSPECTION  OF  CORPORATE  BOOKS. 


[CU.  XXX, 


should  also  state  what  information  the  applicant  needs,  and  what 
books  of  the  corporation  he  wishes  to  inspect.^  "The  order  should 
be  so  drawn  as  not  to  inconvenience  the  transaction  of  business."- 
In  a  stockholder's  application  at  common  law  for  a  mandamus  tO' 
compel  the  corporation  to  allow  him  to  inspect  the  cash  book  and 
other  books,  the  papers  must  show  for  what  purpose  the  inspection 
is  desired.''  Even  though  a  corporation  does  not  allow  inspection 
of  its  stock  book,  as  required  by  statute,  yet  if,  after  a  mandamus 
has  been  applied  for,  the  corporation  offers  to  pay  the  costs  and 
open  the  stock  book  for  inspection,  the  applicant  is  bound  to  dis- 
continue the  proceedings.^ 

§  517.  Bight  to  inspect  minutes  of  meetings  of  directors.^  It 
would  take  a  strong  case  to  induce  a  court  to  issue  a  mandamus 
commanding  the  corporate  officers  to  allow  a  stockholder  to  inspect 
the  minutes  of  the  meetings  of  the  directors.'  The  success  of  the 
corporate  enterprise  depends  frequently  upon  the  secrecy  of  the 
plans  of  the  directors.  In  connection  with  litigations  the  rule,  of 
course,  is  different;  but,  aside  from  this,  it  seems  that  a  stockholder 


Wash.  451  (1899),  giving  a  very  satis- 
factory discussion  and  review  of  the 
authorities. 

1  Morgan's  Case,  L.  R.  28  Ch.  D.  620 
(1884).  This  case  also  states  that  in 
England  it  is  customary  for  many 
banking  companies  to  insert  in  their 
constitutions  a  provision  forbidding 
the  inspection  of  customers'  accounts 
by  shareholders  or  creditors.  Irrele- 
vant parts  of  the  books  may  be  sealed 
up.  Jones  V.  Andrews,  58  L.  T.  Rep. 
601  (1888);  Earp  v.  Lloyd,  3  K.  &  J.  549 
(1857);  Napier  u.  Staples,  3  Molloy,  270 
(1828j;  Hill  v.  Great  Western  Ry.,  10  C. 
B.  (N.  S.)  148  (1861);  Clifford  v.  Taylor, 
1  Taunt  167  (1808);  Gerard  v.  Penswick, 
1  Swanst.  533  (1818);  Dias  v.  Merle,  3 
Paige,  494  (1831);  Titus  v.  Cortelyou,  1 
Barb.  444  (1847);  People  v.  Pacific  Mail 
S.  S.  Co.,  50  Barb.  280  (1867);  Pynchon 
r.  Day,  118  111.  9  (1886).  But  if  such  ir- 
relevant matter  cannot  be  separated, 
the  party  must  produce  the  whole. 
Carew  u.  White,  5  Beav.  173  .(1843). 

2  Duffy  V.  Mutual  Brewing  Co.,  N.  Y. 
L.  J.,  Oct.  3,  1893,  p.  18,  approving  the 
above  text. 

3  Bruping  v.  Hoboken,  etc.  Co.,  50  Atl. 
Rep.   906  (N.  J.    1902).     The  applicant 


must  allege  the  extent  of  his  interest, 
also  wherein  his  object  of  inspection  is 
just  and  useful.  Hatch  v.  City  Bank, 
1  Rob.  (La.)  470  (1842).  The  case  of 
State  V.  Bienville  Oil  Works,  28  La.  Ann. 
304  (1876),  states  that  the  preceding 
case  "  failed  through  want  of  precision 
and  definiteness  in  stating  some  well- 
defined  purpose,  some  reasonable  cause, 
and  showing  that  they  had  some  in- 
terest in  the  matter." 

■*  Boardman  v.  Marshalltown,  10." 
Iowa,  445  (1898). 

5  "  It  is  highly  proper  that  an  inspec- 
tion of  the  books  containing  the  pro- 
ceedings of  the  directors  should  be  ob- 
tained on  special  occasions  and  for 
special  purposes;  ...  but  the  pro- 
posed daily  and  hourly  inspection  and 
publication  of  all  their  proceedings 
would  be  tantamount  to  admitting  the 
presence  of  strangers  at  all  their  meet- 
ings, and  would  probably  ere  long  be 
found  very  prejudicial  to  the  share- 
holders." Regina  v.  Mariquita,  etc^ 
]\Iin.  Co.,  1  EL  &  El.  289  (1858).  "  A  pri- 
vate stockholder  of  an  incorporated 
company  has  no  right  to  have  access  to 
the  minutes  of  the  proceedings  of  the 
directors  unless  that  right  is  expressly 


1104 


CH.  XXX.] 


INSPECTION    OF    CORPORATE    BOOKS. 


[§  518. 


is  not  entitled  as  a  matter  of  right  to  a  mandamus  to  allow  him  to 
inspect  the  minutes  of  the  directors'  meetings.  The  same  rule 
would  seem  to  apply  to  miscellaneous  questions  asked  of  the  di- 
rectors at  stockholders'  meetings. 

§  518.  Statutes  giving  right  of  inspection. —  The  right  to  inspect 
corporate  records  \i  frequently  given  to  stockholders  by  statutory 
provisions.  In  lSe\Y  York  the  statute  gives  to  all  stockholders  the 
right  to  examine  the  corporate  stock  book/  and  this  statute  has 
been  applied  to  foreign  corporations  having  an  office  and  a  stock 
book  within  the  state.-  Sometimes  the  statute  provides  for  the 
inspection  of  all  corporate  records.^     Mandamus  lies  to  enforce 


given  by  the  charter;  and  consequently, 
and  of  necessity,  he  must  remain  ig- 
norant of  their  action  until  they  choose 
to  make  that  action  known  "  (dictum). 
Alabama,  etc.  R.  R  v.  Rowley,  9  Fla. 
508,  514  (1861).  See  also  Lindley,  Com- 
panies, under  "  Inspection  "  in  Index. 
In  Streit  v.  Citizens'  F.  Ins.  Co.,  29  N.  J. 
Eq.  21,  31  (1878),  the  court  said:  "The 
officers  ought  not  to  have  denied  to  any 
stockholder  an  opportunity,  properly 
applied  for,  to  examine  the  minutes  of 
the  meetings  of  the  directors." 

1  The  New  York  statute  was  con- 
strued in  Cotheal  v.  ferouwer,  5  N.  Y. 
563  (1851);  People  v.  Pacific  Mail  S.  S. 
Co.,  50  Barb.  280  (1867);  Kennedy  v. 
Chicago,  etc.  R.  R,  14  Abb.  N.  Cas.  326 
(1884);  People  v.  Mott,  1  How.  Pr.  247 
(1845);  Kelsey  v.  Pfaudler,  etc.  Co.,  3 
N.  Y.  Supp.  723  (1889);  People  v.  Throop, 

13  Wend.  183  (1834).  The  New  York 
statute  in  relation  to  transfer  agents  in 
this  state  of  foreign  corporations  was 
construed  in  People  r.  Lake  Shore,  etc. 
R.  R,  11  Hun,  1  (1877);  aff'd  suh  norru 
Re  Sage,  70  N.  Y.  220;  People  v.  North- 
ern Pacific  R  R.  50  N.  Y.  Super.  Ct.  456 
(1884);  Kennedy  v.  Chicago,  etc.  R  R, 

14  Abb.  N.  Cas.  326  (1884);  People  v. 
U.  S.  etc.  Co.,  20  Abb.  N.  Cas.  192  (1888); 
People  V.  Paton,  20  Abb.  N.  Cas.  195 
(1887);  Re  Commerford  v.  William  J. 
Johnston  Co.,  N.  Y.  L.  J.,  Oct.  7,  1890; 
Ervin  v.  Oregon  Ry.  etc.  Co.,  22  Hun, 
566  (1880).  A  delay  of  one  day  in  al- 
lowing the  inspection,  owing  to  the 
absence  of  the  person  having  charge  of 


the  books,  does  not  cause  the  penalty  to 
attach.  Kelsey  v.  Pfaudler,  etc.  Co.,  41 
Hun,  20  (1886).  See  also  ^g  514, 515,  supra. 

2  See  §  515,  supra. 

3  Ohio  Rev.  Stat.  (1886),  §  3313;  Cal. 
Civ.  Code,  §§  377,  378;  Penal  Code,  565; 
R  I.  Pub.  St.,  ch.  153,  §  21,  and  ch.  158, 
g  24  (1882);  Mich.  Gen.  Stat.,  §  3173,  for 
baifks.  See  also  Colo.  Gen.  Stat.  (1882), 
§  249;  Mo.  Rev.  Stat.  (1879).  §§  720,  721; 
Vermont  R  Laws  (1880),  g§  3294,  3295; 
Mass.  1860,  ch.  68,  g  10;  111.  Rev.  Stat. 
(1874),  ch.  32,  §  13.  The  pleading  in  a 
cause  of  action  arising  under  a  statute 
herein  must  clearly  bring  the  case 
within  the  statute.  Lewis  v.  Brainerd, 
53  Vt.  510  (1881).  The  purpose  of  the 
inspection  need  not  be  stated  to  the 
officer.  That  the  officer  had  notice  of 
plaintiffs  stockholdership  must  be  al- 
leged. Williams  V.  College  Corner,  etc. 
Co.,  45  Ind.  170  (1873).  Cf.  Queen  v. 
Grand  Canal,  1  Ir.  L.  R  337  (1839).  For 
New  Jersey,  see  Huj^lar  v.  Cragin  Cat- 
tle Co.,  40  N.  J.  Eq.  393  (1885);  s.  c,  7 
Atl.  Rep.  531  (1887).  Under  the  stat- 
utes of  New  Jersey  the  court  will  order 
the  books  of  the  company  to  be  brought 
within  the  state  on  the  petition  of  the 
president  and  a  director.  A  person 
having  a  right  to  examine  the  books  of 
the  company  may  do  so  through  an  at- 
torney. It  is  immaterial  what  the  mo- 
tive of  the  applicant  may  be.  Mitchell 
V.  Rubber  Reclaiming  Co.,  34  Atl.  Rep. 
407  (N.  J.  1893).  As  to  the  law  in  Con- 
necticut, see  Pratt  v.  Meriden  Cutlery 
Co.,  35  Conn.  36  (1868).     See,  in  general, 


(70) 


1105 


§  519.] 


INSPECTION    OF    CORPORATE    BOOKS. 


[CH.  XXX, 


this  right.^  Injunction  lies  to  prevent  a  corporation  refusing  the 
statutory  right  of  a  stockholder  to  examine  the  books  of  a  private 
corporation,  and  it  is  immaterial  what  his  motive  may  be.^  Fre- 
quently the  charter  itself  states  that  the  stockholder  shall  have  cer- 
tain rights  of  inspection.  In  England  the  Companies  Act  regulates 
specifically  the  stockholders'  right  of  inspection,  and  provides  for 
a  committee  of  investigation  in  behalf  of  the  stockholders  when- 
ever an  investigation  is  desired  by  them.'  The  common-law  right 
of  inspection  remains,  although  a  special  statutory  right  is  also 
given/ 

§  519.  Orders  to  cor})oration  to  alloiv  inspection  —  Siibpcena 
duces  tecum— Bill  of  discovery. —  An  inspection  of  corporate 
records  is  often  desired  by  a  stockholder  in  connection  with  an 
action  which  is  pending  in  the  courts,  and  it  has  been  the  practice 
of  the  courts  to  grant  applications  for  this  purpose.^     The  order  to 


Cain  V.  Pullen,  34  La.  Ann.  511  (1883). 
Where  the  statutes  give  a  stockholder 
the  right  to  examine  all  accounts  of 
corporate  transactions  a  stockholder  is 
entitled  to  a  mandamus  to  enforce  this 
right,  even  though  he  desires  to  get 
information  to  use  in  his  own  business 
in  competition  with  that  of  the  corpo- 
ration, but  the  examination  must  be  at 
a  reasonable  time.  Weinhenmayer  v. 
Bitner,  88  Md.  325  (1898). 

1  See  §  514,  supra. 

2  Cincinnati,  etc.  Co.  v.  Hoff meister, 
620hioSt.  189(1900).    C/.54Atl.Rep.241. 

3  25  &  26  Vict.  c.  89,  Table  A.  In  Eng- 
land,  under  a  statute  allowing  a  stock- 
holder to  inspect  the  register  of  stock- 
holders, etc.,  an  injunction  lies  to  re- 
strain corporate  oflScers  from  refusing 
this  right.  Holland  v.  Dickson,  L.  R. 
37  Ch.  D.  669  (1888).  A  company  which 
by  statute  is  bound  to  allow  an  inspec- 
tion of  the  register  must  allow  a  party 
to  take  copies  of  the  same,  and  an  in- 
junction lies  in  case  of  refusal.  Nel- 
son V.  Anglo-American,  etc.  Co.,  [1897] 
1  Ch.  130.  A  stockholder  has  the  right 
to  make  a  copy  of  corporate  records 
which  he  is  examining.  Boord  v.  Afri- 
can, etc.  Co.,  [1898]  1  Ch.  596.  A  pen- 
alty for  not  allowing  inspection  of 
the  corporate  books  does  not  apply  to 
a  liquidator.     Re  Kent,  etc.  Syndicate, 


[1898]  1  Q.  B.  754.  Under  the  English 
statute  a  stockholder  may  inspect  the 
transfer  book  and  take  copies,  even 
though  he  is  acting  in  the  interest  of  a 
rival  company.  Mutter  v.  Eastern,  etc. 
Ry.,  L.  R  38  Ch.  D.  92  (1888).  A  stock- 
holder suing  to  set  aside  a  fraudulent 
contract  may  have  inspection  even  of 
privileged  matters  between  the  com- 
pany and  its  attorney.  Gouraud  v.  Edi- 
son, etc.  Co.,  59  L.  T.  813  (1888). 

4  Matter  of  Stein  way,  159  N.  Y.  251 
(1899);  People  v.  Lake  Shore,  etc.  R.  R, 
11  Hun,  1  (1877). 

•^  The  evidence  sought  must  be  di- 
rectly material  to  the  cause.  Rex  v. 
Hostmen,  2  Stra.  1223  (1745);  Rex  v. 
Babb,  3  T.  R.  579  (1790);  Mayor  of  South- 
ampton  v.  Graves.  8  T.  R,  590  (1800), 
holding  that  a  stranger  has  no  more 
right  to  have  an  inspection  here  than 
in  a  case  where  he  sues  a  copartnership. 
See  Central  Nat.  Bank  v.  White,  37  N. 
Y.  Super.  Ct.  297  (1874),  holding  that  in 
New  York  the  inspection  is  proper  if 
the  evidence  is  material  and  cannot 
otherwise  be  obtained;  Clinch  v.  Finan- 
cial Corp.,  L.  R.  2  Eq.  271  (1866),  where 
a  director  was  compelled  to  produce. 
In  the  federal  courts  an  inspection  will 
not  be  granted  in  order  to  frame  a  com- 
plaint. Paine  v.  Warren,  33  Fed.  Rei^ 
357  (1888). 


1106 


CH.  XXX.] 


INSPECTION    OK    COKrOKATK    BOOKS. 


[§ 


519. 


allow  an  inspection  may  be  made  at  any  stage  of  the  action.  A 
stockholder  has  this  right  to  aid  him  in  suits  with  strangers,  and 
of  course  his  right  herein  is  more  extensive  than  the  rights  of  the 
other  party  to  the  action.     In  fact,  a  person  who  is  not  a  stock- 


In  a  bill  alleging  fraud  on  the  part 
of  the  dii-ectors,  whereby  complainant, 
a  stockholder,   has  been   injured,  the 
latter    may    obtain    such     Inspection. 
Walburn   v.   Ingilby,   1   Myl.  &   K.  61 
(1833).    See    Bassford    v.   Blakesley,  6 
Beav.  131  (1842).     On  a  verified  petition 
by  a  single  stockholder  stating  that  a 
mine  owned  by  the  company  is  being 
worked  at  a  loss,  an  inspection  of  the 
company's  books  will  be  granted.     Re 
West  Devon,  etc.  Mine,  L.  R  27  Ch.  D. 
106  (1884).    In  a  suit  to  hold  the  directors 
of  a  life  insurance  company  personally 
responsible  for  large  losses  alleged  to 
have  been  caused  by  moneys  improperly 
paid  on  policies,  an  inspection  has  been 
allowed,  although  plaintiff  was  said  to 
have  but  a  trifling  interest  in  the  com- 
pany and  was  desirous  of  injuring  it, 
and   had    published   prejudicial  state- 
ments in  regard  to  the  matter.  Williams 
V.  Prince  of  Wales  Ins.  Co.,  23  Beav.  338 
(1857).     Where  a  company  was  being 
wound  up.  an  application  on  behalf  of 
twenty-four  out  of  eight  hundred  and 
fifty-six  stockholders,  who   had  asso- 
ciated themselves  together  for  an  in- 
vestigation into  the  company's  affairs, 
was  allowed,  with  permission  to  employ 
an  accountant  to  carry  on  the  examina- 
tion of  the  books.    Joint-stock  Discount 
Co.'s  Case,  36  L.  J.  Eq.  150  (1867).     See 
Emma  Silver  Min.  Co.'s  Case,  L.  R.  10 
Ch.    App.    194  (1875);    People  v.   Lake 
Shore,  etc  R.  R,  11  Hun,  1  (1877);  70 
N.  Y.  220;  Ex  parte  Buchan,  36  L.  J. 
(Ch.)  150  (1866).     An  inspection  will  not 
be  granted  for  the  purpose  of  fishing 
out  a  defense  to  a  suit.     Birmingham, 
etc.  Ry.  V.  White,  1  Q.  B.  282  (1841); 
Imperial  Gas  Co.  v.  Clarke,  7  Bing.  95 
(1830).     See  Hoyt  v.   American   Exch. 
Bank,  1  Duer,  652  (1853);  Shoe  &  Leather 
Assoc.  V.  Bailey,  49  N.  Y.  Super.  Ct.  385 
(1883).     Nor  to  furnish  materials  to  the 


other  side  for  a  new  trial.  Pratt  v. 
Goswell,  9  C.  B.  (N.  S.)  706  (1861).  Nor 
to  ascertain  whether  petitioner  might 
better  accept,  with  the  other  stock- 
holders, what  was  offered  her  for  her 
holding  in  an  old  company,  which  was 
being  wound  up,  instead  of  proceeding 
wnth  an  arbitration.  Re  Glamorgan- 
shire Banking  Co.,  L.  R  28  Ch.  D.  620 
(1884).  Nor  to  establish  a  justification 
in  an  action  against  the  petitioner  for 
libel,  imputing  insolvency  to  the  com- 
pany. Metropolitan,  etc.  Co.  v.  Hawkins, 
4  H.  &  N.  146  (1859).  See  Finlay  v. 
Lindsay,  7  Ir.  L.  R  (N.  S.)  1  (1857); 
Collins  V.  Yates,  27  L.  J.  (Exch.)  150 
(1858);  Opdyke  v.  Marble,  44  Barb.  64 
(1864).  Nor  to  examine  all  the  books  of 
the  company  for  fifty  years  back,  be- 
cause petitioner  alleges  that  he  is  dis- 
satisfied with  the  management  of  the 
company  and  with  the  accounts,  besides 
other  grounds.  Regina  v.  Grand  Canal, 
1  Ir.  L.  R  337  (1839).  Nor  where  the 
petition  does  not  specify  the  particular 
books  asked  for,  nor  the  object  of  the 
petitioner  in  making  the  application  to 
the  officers  and  to  the  court.  Regina 
V.  London,  etc.  Docks  Co.,  44  L.  J.  (Q.  B.) 
4  (1874).  See  Hunt  v.  Hewitt,  7  Exch. 
236  (1852);  Pepper  v.  Chambers,  7  Exch. 
226  (1852);  New  England  Iron  Co.  v. 
New  York  Loan,  etc.  Co.,  55  How.  Pr. 
351  (1878);  Central,  etc.  R  R  v.  Twenty- 
third  St.  Ry.,  53  How.  Pr.  45  (1877); 
Forsyth  Comm'rs  v.  Lemly,  85  N.  C.  341 
(1881) ;  Walker  v.  Granite  Bank,  44  Barb, 
39.  (1865).  The  court  may  direct  the 
manner  of  the  examination.  Williams 
V.  Prince  of  Wales,  etc.  Co.,  23  Beav. 
338  (1857). 

An  appeal  may  be  taken  from  an 
order  granting  a  party  leave  to  inspect 
and  examine  the  books  of  a  corpora- 
tion, the  appellant.  Thompson  v.  Erie 
Ry.,  9  Abb.  Pr.  (N.  S.)  212  (1870);  Lan- 


1107 


§  519.] 


INSPECTION    OF   COKPOKATE    BOOKS. 


[CH.  XXX. 


holder  has  no  more  right  to  an  inspection  of  the  corporate  books 
than  he  has  to  inspect  the  books  of  a  copartnership.  This  is  the 
rule,  even  though  he  is  suing  or  being  sued  by  a  stockholder.^  But 
in  a  suit  against  stockholders  for  malicious  prosecution,  they  may 
be  required  by  mandamus  to  produce  certain  books  of  the  corpora- 
tion for  the  inspection  of  the  plaintiff.^  Mandamus,  and  not  an 
order  under  a  statute,  is  the  sole  remedy  of  a  stockholder  wishing 
to  inspect  the  books  of  the  company,  there  being  no  suit  pending.^ 
The  remedy  of  a  stockholder  who  wishes  to  examine  the  corporate 


cashire,  etc.  Co.  v.  Greatorex,  14  L.  T. 
Rep.  290  (1866);  People  v.  Kent  County 
Judge,  38  Mich.  351  (1878);  Forsyth 
Comm'rs  v.  Lemly,  85  N.  C.  341  (1881). 
See  Saxby  v.  Easterbrook,  L.  R.  7  Exch. 
207  (1872);  Bustros  v.  White,  L.  R.  1  Q. 
B.  D.  423  (1876);  Clyde  v.  Rogers,  24 
Hun,  145  (1881):  appeal  dismissed  in 
S.  C,  87  N.  Y.  625;  McCargo  v.  Crutcher, 
27  Ala.  171  (1855);  Sage's  Case,  70  N.  Y. 
221  (1877).  As  to  the  costs  of  an  in- 
spection, see  Hill  v.  Philp,  7  Exch.  232 
(1852);  Davey  v.  Pemberton,  11  C.  B. 
(N.  S.)  628  (1862);  Gardner  v.  Danger- 
field,  5  Beav.  385  (1842).  Stockholders 
obtaining  inspection  may  be  ordered 
not  to  disclose  the  information  re- 
ceived. Ex  parte  Buchan,  36  L.  J.  (Ch.) 
150  (1866);  Williams  u  Prince  of  Wales, 
etc.  Co.,  23  Beav.  338  (1857).  May  ex- 
amine through  an  attorney.  Williams 
V.  Prince  of  Wales,  etc.  Co.,  23  Beav.  338 
(1857).  A  professional  accountant  may 
be  employed.  Bonnardet  v.  Taylor,  1 
J.  &  H.  383  (1861);  1  Greenl.  Ev.,  §  474. 
An  inspection  of  the  stock-ledger  was 
allowed  in  People  v.  Pacific  Mail  S.  S. 
Co.,  50  Barb.  280  (1867).  So  also  of  the 
discount  book.  Cockburnu.  Union  Bank, 
13  La.  Ann.  289  (1858);  People  v.  Throop, 
12  Wend.  183  (1834).  So  also  of  the  by- 
laws. Harrison  v.  Williams,  3  B.  &  C. 
162  (1824);  Reg.  v.  Saddlers'  Co.,  10  W. 
R.  87  (1861).  See  also  Walburn  n 
Ingilby,  1  Myi.  &  K.  61  (1833),  where  the 
order  was  to  a  third  person  having 
charge  of  the  books.  "The  courts  of 
common  law  may  also  make  an  order 
for  the  Inspection  of  writings  in  the 
possession  of  one  party  to  a  suit  in  favor 


of  the  other."  1  Greenl.  Ev.,  §  559.  An 
article  of  the  company  taking  away 
the  right  of  inspection  does  not  pre- 
vent a  rule  issuing  requiring  its  allow- 
ance in  pending  litigation.  Hall  v. 
Connell,  3  Y.  &  C.  (Excii.)  707  (1840). 
The  rule  stated  in  the  text  above  ap- 
plies to  joint-stock  companies.  Woods 
V.  De  Figaniere,  1  Rob.  (N.  Y.)  681  (1863). 
In  the  federal  courts  the  right  is  statu- 
tory. U.  S.  Rev.  Stat.,  §  724.  In  regard 
to  the  act  of  congress  authorizing 
courts  to  require  the  production  of 
books  and  writings,  see  Victor  G.  Bloede 
Co.  etc.  V.  Joseph  Bancroft,  etc.  Co.,  98 
Fed.  Rep.  175  (1899).  The  opinions  of 
counsel  in  the  case  of  a  fraudulent 
transaction  are  not  privileged.  Williams 
V.  Quebrada  Ry.  etc.  Co.,  [1895]  2  Ch. 
751. 

'  Strangers  have  no  mores  right  to  de- 
mand inspection  of  the  books  of  a  cor- 
poration during  litigation  in  which  the 
corporation  is  not  interested  than  they 
have  to  demand  a  similar  right  of  any 
other  person.  Mayor  of  Southampton  v. 
Graves,  8  T.  R.  590  (1800),  overruling 
earlier  cases.  See  also  Opdyke  v.  Mar- 
ble, 44  Barb.  64  (1864);  Morgan  v.  Mor- 
gan, 16  Abb.  Pr.  (N.  S.)  291  (1874).  A 
corporation  will  not  be  compelled  to 
open  its  records  for  the  purposes  of  a 
litigation  in  which  it  is  not  a  party. 
Henry  v.  Travelers'  Ins.  Co.,  35  Fed. 
Rep.  15  (1888). 

'-  Eddy  V.  Bay  Circuit  Judge,  114  Mich. 
668  (1897). 

3  Fuller  V.  Alex.  Hollander,  etc.  Co., 
47  Atl.  Rep.  646  (N.  J.  1900). 


1108 


CH.  XXX.] 


INSPECTION    OF    COEPOKATE    BOOKS. 


[^  519. 


books  in  order  to  bring  suit  against  the  directors  for  fraud  is  by 
mandamus,  not  by  an  order  for  inspection.^  If  a  stockholder,  and 
sometimes  a  third  person,  is  suing  or  being  sued  by  a  corporation, 
he  is  entitled  to  the  usual  right  of  giving  a  notice  to  produce  docu- 
ments,'- or  to  a  discovery  by  an  order.^  Even  though  the  secretar}^ 
of  a  company  refuses  in  the  trial  of  a  case  to  produce  the  books  of 
the  company  as  ordered  by  the  court,  yet  an  order  committing 


1  Walsh  V.  Press  Co.,  48  N.  Y.  App.    court  may  order  the  production  of  the 


Div.  383  (1900). 

2  See  Wait,  Insolv.  Corp.,  §  519.  See 
also  ^  714,  infra.  Where  a  defendant 
corporation  does  not  produce  its  minute 
hook  in  accordance  with  the  notice  to 
do  so,  the  evidence  of  its  president  is 
admissible  that  the  board  of  directors 
had  approved  of  his  action  in  entering 
into  the  contract  involved  in  the  suit. 
Strawbridge  v.  Clamond  Tel.  Co.,  195 
Pa.  St.  lis  (1900). 

3  Rex  V.  Travannion,  2  Chitty,  366 
(1S18):  Swansea  Vale  Ry.  v.  Budd.  L.  R. 
3  Eq.  274(1866);  Macintosh  u  Flint,  etc. 
.R.  R.,  1  Ry.  &  Corp.  L.  J.  384  (Mich. 
1887),  a  stockholder's  case.  An  order 
to  allow  examination  of  the  corporate 
records  was  granted  in  Kirkpatrick  v. 
Pope  Mfg.  Co..  61  Fed.  Rep.  46  (1894), 
where  the  defendant  company  said 
that  it  had  not  violated  a  contract,  but 
that  its  successor  was  liable.  Where  a 
stockholder  files  a  bill  to  obtain  an  ac- 
counting, and  charges  misappropria- 
tion, and  makes  a  motion  that  he  be 
allowed  to  examine  the  books,  the  court 
will  wait  until  the  corporation  pleads 
or  answers  before  granting  the  motion. 
Ranger  v.  Champion,  etc.  Co.,  51  Fed. 
Rep.  61  (1892).  Under  the  Nebraska 
statute,  in  a  suit  instituted  by  the 
state  to  enjoin  a  foreign  corporation 
from  doing  business  in  the  state  on  the 
ground  that  it  is  violating  an  anti- 
trust statute,  the  court  may  order  the 
defendant  to  allow  the  plaintiff  to  ex- 
amine the  defendant's  books  and  rec- 
ords for  the  purpose  of  obtaining  evi- 
dence in  the  case.  State  v.  Standard 
Oil  Co.,  61  Neb.  28  (1900).  Under  the 
statutory  practice  in  Rhode  Island  the 

1109 


record  book  of  the  corporation  in  court 
or  for  an  inspection.  Arnold  v.  Paw- 
tuxet,  etc.  Co.,  18  R.  J.  189  (1893).  The 
affidavit  to  obtain  the  order  must  show 
that  the  information  sought  is  essen- 
tial. Imperial  Gas  Co.  v.  Clarke,  7  Bing. 
95  (1830);  Williams  v.  Savage  Mfg.  Co., 
8  Md.  Ch.  418.  428  (1851).  Tlie  officers 
may  be  orally  examined  by  the  court 
with  reference  to  where  the  books  are. 
Lacharme  v.  Quartz  Rock,  etc.  Min.  Co., 
1  H.  &  C.  134  (1862).  They  may  be  re- 
quired to  make  affidavits.  Ranger  v. 
Great  Western  Ry..  4  De  G.  &  J.  74 
(1859);  Be  Burton,  31  L.  J.  (Q.  B.)  62 
(1861).  In  an  action  against  a  corpora- 
tion the  plaintiff  is  entitled  to  inspect 
all  the  minutes  and  entries  in  the  com- 
pany's books  having  reference  to  the 
subject  in  litigation.  Hill  v.  Great 
Western  Ry.,  10  C.  B.  (N.  S.)  148  (1861); 
Harrison  v.  Williams,  3  B.  &  C.  162 
(1824);  Be  Burton,  31  L.  J.  (Q.  B.)  62 
(1861);  Sinclair  v.  Gray.  9  Fla.  71  (1860). 
See  Hill  v.  Manchester,  etc.  Co.,  5  B. 
&  Ad.  866  (1833);  Rex  v.  Bucking- 
ham, 8  B.  &  C.  375  (1828);  Imperial  Gas 
Co.  V.  Clarke,  7  Bing.  95  (1830).  The 
plaintiff  may  have  inspection  of  corpo- 
rate minutes  in  a  suit  by  a  superintend- 
ent against  the  corporation.  Hill  v. 
Great  Western  Ry.,  10  C.  B.  (N.  S.)  148 
(1861).  Or  in  a  suit  by  a  claimant  of 
office.  Be  Burton,  31  L.  J.  (Q.  B.)  62 
(1861).  See  also  §  714.  infra.  An  order 
will  not  be  granted  for  the  purpose  of 
fishing  out  a  defense.  Birmingham,  etc. 
Ry.  V.  White.  1  Q.  B.  282  (1841).  See 
also  Credit  Co.  v.  Webster,  53  L.  T.  Rep. 
419  (1885). 


§  519.] 


INSPECTION    OF    CORPORATE    BOOKS. 


[cri.  XXX. 


him  for  contempt  of  court  is  illegal  if  the  original  order  amounted 
to  an  unreasonable  seizure  and  search  of  the  company's  records, 
especially  where  the  statutes  provided  for  an  inspection  of  corpo- 
rate books  by  a  different  procedure,  and  it  was  not  shown  that  the 
books  would  contain  the  evidence  expected.' 

In  a  suit  in  equity  against  a  corporation  interrogatories  may  be 
attached  to  the  bill  of  complaint  and  the  corporate  officers  may  be 
compelled  to  answer  them.^  In  certain  cases  a  bill  of  discovery 
may  be  filed.^ 


^  Ex  parte  Clarke,  126  CaL  235  (1899). 

^  Where  one  of  the  purposes  of  a  bill 
is  to  require  the  production  of  the  rec- 
ords and  minutes  of  the  meetings  of 
a  corporation,  and  such  records  are 
necessary  for  the  plaintiff  to  prove  his 
case,  the  court  may  order  the  defend- 
ants to  pi'oduce  them  under  penalty  of 
having  their  answer  stricken  from  the 
files  of  the  court.  Ramsdell  v.  National, 
etc.  Co.,  104  Fed.  Rep.  16  (1900).  A 
stockholder's  bill  against  a  corporation 
and  directors  may  be  to  remedy  certain 
alleged  frauds,  and  also  incidentally  to 
obtain  a  disclosure  and  discovery.    The 


stockholder  need  not  I'esort  to  a  man- 
damus. Weir  V.  Bay  State  Gas  Co.,  91 
Fed.  Rep.  940  (1898).  But  where  the 
suit  is  brought  by  the  stockholder 
against  the  corporation  alone  to  rem- 
edy the  frauds  of  directors  and  have  a 
receiver  appointed  and  obtain  a  dis- 
closure, the  bill  is  defective  for  non- 
joinder of  the  guilty  parties.  Edwards 
V.  Bay  State  Gas  Co.,  91  Fed.  Rep.  942 
(1898);  Morse  v.  Bay  State  Gas  Co.,  91 
Fed.  Rep.  944  (1898).  Where  suit  is 
brought  against  a  corporation,  and  its 
officers  are  made  parties  defendant  for 
purposes  of  discovery,  the  latter  are 


3  A  cross-bill  for  discovery  lies  against 
a  corporation,  even  though  the  officers 
might  be  called  as  witnesses.  Indian- 
apolis Gas  Co.  V.  City  of  Indianapolis, 
90  Fed.  Rep.  196  (1898;.  A  bill  for  dis- 
covery against  the  corporation  alone  is 
not  good.  The  officers  should  be  joined. 
Roanoke  St.  Ry.  v.  Hicks,  96  Va.  510 
(1898).  A  bill  in  equity  at  the  instance 
of  a  stockholder  to  obtain  an  inspec- 
tion of  the  books  in  order  to  ascertain 
the  financial  condition  of  the  company 
does  not  lie  where  he  does  not  allege 
that  he  has  been  refused  an  inspection 
or  the  required  information.  Moreover, 
his  remedy  is  by  mandamus.  Trimble 
v.  American,  etc.  Co.,  61  N.  J.  Eq.  340 
(1901).  Where  discovery  is  sought  from 
an  officer  he  should  be  made  a  party 
defendant.  Virginia,  etc.  Co.  ii  Hale, 
93  Ala.  543  (1890).  A  bill  lies  in  equity 
to  compel  a  corporation  to  discover,  in 
aid  of  a  suit  at  law  for  damages  for  in- 
fringement of  patent.    Colgate  v.  Coin- 


pagnie  Frangaise,  23  Fed.  Rep.  83  (1885). 
See  also  as  to  a  bill  of  discovery,  Mc- 
Comb  V.  Chicago,  etc.  R.  R..  19  Blatchf. 
69  (1881);  Costa  Rica  v.  Erianger,  L.  R. 
1  Ch.  D.  171  (1875);  Glasscott  v.  Copper- 
Miners,  11  Sim.  305  (1840);  Moodalay  v. 
Morton,  1  Bro.  C.  C.  469  (1785);  Stet- " 
tauer  v.  New  York,  etc.  Co.,  43  N.  J. 
Eq.  46  (1886);  French  v.  First  Nat.  Bank, 
7  Ben.  488  (1874);  s.  C,  9  Fed.  Cas.  786. 
But  a  bill  of  discovery  will  not  lie 
against  one  who  is  merely  a  witness. 
Fenton  v.  Hughes,  7  Ves.  Jr.  387  (1803); 
Dummer  v.  Chippenham,  14  Ves.  Jr.  24i> 
(1807).  As  to  the  difference  between  a 
bill  of  discovery  and  other  bills,  see 
Mclntyre  v.  Union  College,  6  Paige,  339 
(1837);  Many  v.  Beekman  Iron  Co.,  9 
Paige,  188  (1841).  A  discovery  will  not 
be  granted  where  there  is  no  allegation 
that  information  is  refused,  or  that  the 
party  cannot  examine  the  books,  or 
that  a  mtindamus  would  be  inadequate. 
Wolfe  V.  Underwood,  96  Ala.  329  (1893), 


1110 


CII.  XXX,] 


INSPECTION    OF    CORPORATE    BOOKS. 


[§  519. 


A  bill  of  discovery  may  be  filed  to  discover  the  names  of  stock- 
holders, in  order  to  enforce  their  statutory  liability.^  In  New 
York  an  examination  before  trial  is  sometimes  granted  by  the 
court.2     Sometimes  a  subpoena  duces  tedum^  issued  in  behalf  of  a 


not  merely  nominal  parties.  Doyle  v. 
San  Diego,  etc.  Co.,  43  Fed.  Rep.  349 
(1890).  Where  an  answer  under  oath 
is  waived,  and  no  discovery  is  sought 
in  an  action  against  a  corporation,  the 
officers  are  not  proper  parties  defend- 
ant. Colonial,  etc.  Co.  v.  Hutcliinson 
Mortgage  Co.,  44  Fed.  Rep.  219  (1890). 
A  person  may  be  made  a  party  defend- 
ant for  purposes  of  discovery  only.  See 
Lewis  V.  St.  Albans,  etc.  Works,  50  Vt. 
477  (1878).  In  an  action  by  a  person 
against  a  corporation  for  any  cause  of 
action,  a  secretary  and  bookkeeper 
may  be  made  a  party  defendant  for 
the  purpose  of  getting  an  answer  of 
discovery  under  oath,  which  the  corpo- 
ration cannot  make.  Wych  v.  Meal,  3 
■p.  Wms.  310  (1734);  Chase  v.  Vander- 
bilt,  62  N.  Y.  307,  314  (1875);  Many  v. 
Beekman  Iron  Co.,  9  Paige,  188  (1841); 
Masters  v.  Rossie,  etc.  Co.,  2  Sandf.  Ch. 
301  (1845);  Brumly  v.  Westchester,  etc. 
Soc,  1  Johns.  Ch.  3G6  (1815);  Mclntyre 
V.  Union  College,  6  Paige,  239  (1837); 
Vermilyea  v.  Fulton  Bank,  1  Paige,  37 
(1828).  But  not  where  the  corporation 
is  not  a  party.  Ellsworth  v.  Curtis,  10 
Paige,  105  (1843).  An  officer  of  the  com- 
pany, in  answering  interrogatories  pro- 
pounded to  the  company,  need  not  give 
information  which  he  obtained  outside 
of  the  service  of  the  comi)any  or  which 
he  knows  as  an  officer  of  a  pi-edecessor 
company.  Welsbach,  etc.  Co.  v.  New, 
etc.  Co.,  [1900]  2  Ch.  1.  In  equity  suits 
it  is  the  practice  to  join  as  codefend- 
ants  with  the  corporation  such  officers 
as  may  answer  under  oath  .such  mat- 
ters as  the  complainant  desires  to 
know.  See  §  738,  infra;  Glasscott  v. 
Copper-Miners,  11  Sim.  305  (1840);  Re 
Barned's  Bkg.  Co.,  L.  R.  2  Ch.  App.  350 
(1867);  Frencli  v.  First  Nat.  Bank,  7 
Ben.  488  (1874);  s.  C,  9  Fed.  Cas.  786. 
This  rule  prevails  because  the  corpora- 


tion itself  cannot  be  convicted  of  per- 
jury. McKim  V.  Odom,  3  Bland,  Ch. 
(Md.)  407,  420  (1828);  Wych  v.  Meal,  3 
P.  Wms.  311  (1734);  Bevans  v.  Ding- 
man's  Choice  Turnp.,  10  Pa.  St.  174 
(1849).  The  corporation  itself  may  be 
compelled  to  answer  fully.  See  Game- 
well,  etc.  Co.  V.  New  York,  31  Fed.  Rep. 
312  (1887),  citing  cases.  A  corporate 
officer  may  be  joined  with  the  corpora- 
tion as  a  defendant  to  obtain  from  him 
a  discovery.  Lord  Eldon  said  as  to 
this  rule:  "It  originated  with  Lord 
Talbot,  who  reasoned  thus  upon  it: 
that  you  cannot  have  a  satisfactory 
answer  from  a  corporation,  therefore 
you  make  the  secretary  a  party,  and 
get  from  him  the  discovery  you  cannot 
be  sure  of  having  from  them;  and  it  is 
added  that  the  answer  of  the  secretary 
may  enable  you  to  get  better  informa- 
tion." Continental  Nat.  Bank  v.  Heil- 
man,  66  Fed.  Rep.  184  (1895). 

1  Post  V.  Toledo,  etc.  R.  R.  144  Mass. 
341  (1887).  A  bill  in  equity  for  dis- 
covery lies  at  the  instance  of  a  judg- 
ment creditor  of  a  corporation  to  as- 
certain the  names  and  addresses  of  the 
stockholders,  the  object  being  to  en- 
force the  statutory  liability,  but  such 
bill  must  allege  such  liability.  Clark 
V.  Rhode  Island,  etc.  Works.  53  Atl. 
Rep.  47  (R.  L  1902). 

2  A  corporation  may  appeal  from  an 
order  for  the  examination  of  one  of  its 
officers.  Sherman  v.  Beacon,  etc.  Co., 
58  Hun,  143  (1890).  By  examination 
before  trial,  plaintiff  may  ascertain 
whether  defendants  are  proper  defend- 
ants, or  whether  they  are  a  corpora- 
tion. Sweeney  v.  Sturgis,  24  Hun,  162 
(1881).  Where  persons  sued  as  part- 
ners deny  the  partnership,  the  plaintilf 
may  have  an  examination  before  trial, 
in  order  to  ascertain  what  the  company 
is  and  of  whom  it  consists.     Clark  v. 


1111 


§  519.] 


INSPECTION  OF  OOEPORATE  BOOKS. 


[CH.  XXX. 


stockholder  or  of  a  third  person,  may  serve  the  purpose.*  The 
officers  of  a  corporation  cannot  be  compelled  to  produce  its  books, 
in  a  suit  in  which  the  corporation  is  not  a  party,  even  though  the 
books  may  disclose  facts  material  to  the  issues.'- 

Most  of  the  states  have  statutes  regulating  this  subject,  and  these 
statutes  frequently  displace  the  common-  law  procedure.'     A  cor- 


Wilcklow,  75  Hun,  290  (1894).  A  stock- 
holder who  brings  a  suit  against  par- 
ties who  have  received  from  the  corpo- 
ration $3,000,000  of  stock  for  $10,000 
worth  of  patents  may  examine  the 
defendants  before  trial,  in  order  to 
prove  what  the  patents-  were  worth. 
Insurance  Press  v.  Montauk,  etc.  Co., 
70  N.  Y.  App.  Div.  50  (1903).  As  to  the 
Massachusetts  statute  allowing  an  ex- 
amination of  the  president  before  trial, 
see  Gunn  v.  New  York,  etc.  R.  R.,  171 
Mass.  417  (1898).  A  stockholder  who 
has  exchanged  his  stock  for  bonds,  and 
who  sues  the  directors  for  fraud,  induc- 
ing him  to  make  such  exchange,  can- 
not examine  them  before  trial.  But- 
ler V.  Duke,  39  N.  Y.  Misc.  Rep.  235 
(1902).  So  also  as  to  a  stockholder  who 
sues  the  directors  for  an  accounting,  on 
the  ground  that  they  are  interested  in 
four  corporations  and  had  diverted  the 
business.  Elmes  v.  Duke,  39  N.  Y. 
Misc.  Rep.  244  (1902). 

1  New  York  Code  Civ.  Proc,  §§  868, 
869,  872,  873.  See  New  York,  etc.  R,  R. 
V.  Carhart,  36  Hun,  288  (1885);  Reich- 
mann  v.  Manhattan  Co.,  26  Hun,  433 
(1883);  ch.  536,  L.  1880;  Fenlon  v.  Demp- 
sey,  50  Hun,  131  (1888);  Russell  v.  Man- 
hattan  Ry.,  N.  Y.  D.  Reg.,  Dec.  8, 1887; 
People  V.  Mutual,  etc.  Co.,  74  N.  Y.  434 
(1878);  Wain  Wright  v.  Tiffiny,  13  N.  Y. 
Civ.  Pro.  222  (1887).  The  transfer  book 
may  be  thus  examined.  See  Fenlon  v. 
Dempsey,  50  Hun,  131  (1888).  The  right 
of  a  stockholder  to  compel  a  corpora- 
tion to  produce  in  court  the  corporate 
records  has  been  the  subject  of  some 
controversy.  In  New  York,  under  the 
old  Code,  it  was  held  that  a  subpoena 
duces  tecum  would  not  always  lie 
herein,  but  that  an  order  to  the  corpo- 
ration to  allow  an  inspection  was  the 

11 


proper  remedy.  La  Farge  v.  La  Farge 
F.  Ins.  Co.,  14  How.  Pr.  28  (1857);  Cen- 
tral Nat.  Bank  v.  White,  37  N.  Y.  Super. 
Ct.  297  (1874).  In  a  stockholder's  suit 
to  hold  the  directors  liable  for  mis- 
feasance, an  inspection  of  the  books 
will  not  be  granted  where  the  cause  is 
at  issue,  and  the  same  result  can  be 
reached  by  a  subpoena  duces  tecum. 
Clarke  v.  Eastern,  etc.  Assoc,  89  Fed. 
Rep.  779  (1898).  In  Iowa  a  corporate 
servant  who  is  required  by  a  subpoena 
to  produce  the  corporate  books,  which 
show  that  the  corporation  has  violated 
the  liquor  laws,  need  not  do  so  if  the 
books  are  not  in  his  possession.  But 
otherwise  he  is  guilty  of  contempt. 
U.  S.  Express  Co.  v.  Henderson,  69 
Iowa,  40  (1886).  The  president  may  be 
compelled  by  subpoena  duces  tecum  to 
produce  drawings  owned  by  the  com- 
pany in  a  suit  in  which  it  is  a  party. 
Johnson,  etc.  Co.  v.  North  Branch  Steel 
Co.,  48  Fed.  Rep.  195  (1891).  Stock- 
exchange  books,  as  evidence,  must  be 
proved  by  the  secretary.  Terry  v.  Bir- 
mingham Nat.  Bank,  53  Ala.  599  (1891). 
Where  the  books  of  a  corporation  are 
within  the  jurisdiction  of  the  court, 
their  production  may  be  compelled  in 
a  litigation  in  which  the  corporation 
itself  is  a  party.  State  v.  Allen,  104 
La.  301  (1900). 

2  Southern  Ry.  v.  North  Car.  etc. 
Com.,  104  Fed.  Rep.  700  (1900). 

'■^  In  New  York  the  right  of  inspec- 
tion by  order  is  regulated  by  statute. 
Code  Civ.  Proc,  §§  803,  809.  See  Boor- 
man  V.  Atlantic,  etc  R.  R.,  78  N.  Y.  599 
(1879);  Ervin  v.  Oregon  Ry.  etc  Ca,  22 
Hun,  566  (1880).  holding  that  where  the 
books  are  in  use,  only  sworn  copies  can 
be  required;  Johnson  v.  Consolidated, 
etc  Min.  Co.,  2  Abb.  Pr.  (N.  S.)  413 
12 


•CH.  XXX.]  INSPECTION    OF   CORPORATE    BOOKS.  [§  519. 

poration  may  enjoin  the  secretary  of  state  from  taking  its  certifi- 
cate of  incorporation  out  of  the  state,  even  though  he  proposes  to 
prove  perjury  by  the  officers  in  swearing  to  the  certificate.'  The 
books  of  the  corporation  are  evidence  in  a  suit  against  a  stock- 
holder on  a  call,  even  though  the  entries  are  not  proved  to  be  cor- 
rect by  the  person  actually  making  them.^  In  a  suit  by  a  receiver 
of  a  national  bank  to  recover  back  dividends  illegally  paid,  the 
books  of  the  bank  are  competent  evidence  to  prove  the  acts  of  the 
corporation  and  its  financial  condition,  except  as  to  dealings  be- 
tween the  corporation  and  the  defendant.^ 

(1867);  Walker  v.  Granite  Bank,  19  Abb.  ^  Delaware,  etc.  Co.  v.  Layton,  50  AtL 

Pr.  Ill  (1865);  Thompson  v.  Erie  Ry.,  9  Rep.  378  (Del.  19,01). 

Abb.  Pr.  (N.  S.)  230  (1870);  Fenton  v.  2  sigua,  etc.  Co.  u  Brown,  171  N.  Y. 

Dempsey,  10  N.  Y.  St  Rep.  733  (1887);  488  (1902).    See  also  §  727,  infra. 

People  V.  U.  S.  Mercantile  Rep.  Co.,  20  3  Hay  den  v.  Williams,  96  Fed.   Rep. 

Abb.  N.  Cas.  192  (1888);    Shipherd  v.  279(1899).                                           ^    " 
Cohen,  N.  Y.  D.  Reg.,  Jan.  26,  1888. 

1113 


CHAPTER  XXXI. 


LIENS  OF  THE  CORPORATION  ON  STOCK  FOR  THE   STOCKHOLDER'S- 

DEBTS  TO  THE  CORPORATION. 


§§  520,  521.  No  lien  at  common  law. 
522.  A  lien  may  be  created  by  stat- 
ute, by  charter,  or  possibly  by 
by-law  or  contract. 
523,  525.  Notice  of  the  lien. 
526.  The  lien,  when  established,  cov- 
ers all  the  stockholder's  shares 
and  dividends. 
587.  The  lien  protects  the  corporation 
as  to  all  the  debts  due  to  it 
from  the  stockholders. 


528.  Right  of  lien  as  against   miscel- 

laneous parties. 

529.  The  lien  can  be  enforced  for  the 

benefit  of  the  corporation  only. 

530.  Methods  of  enforcing  the  lien. 

531.  The  corporation  may  waive  its 

lien. 

532.  The  lien  as  affected  by  transfers 

and  notice. 

533.  The  lien  on  national- bank  stock. 


§§  520,  521.  No  lien  at  common  law. —  Corporations,  both  in  this 
country  and  in  England,  frequently  possess  and  exercise  a  lien  on 
a  stockholder's  stock  for  debts  due  from  that  stockholder  to  the 
corporation.  In  this  chapter  it  is  proposed  to  consider  the  origin 
of  the  lien ;  the  extent  to  which  it  may  be  exercised  and  enforced ; 
the  waiver  of  it  by  the  corporation ;  and  its  effect  generally  upon 
the  transfer  of  shares. 

It  is  clear  that  at  common  law  a  corporation  has  no  lien  upon  the 
shares  of  its  stockholders  for  debts  due  from  them  to  the  com- 
pany.* The  policy  of  the  common  law  has  always  been  to  discoun- 
tenance secret  liens,  inasmuch  as  they  hamper  trade  and  restrict  the 
safe  and  speedy  transfer  of  property.^    It  is  upon  this  ground  that 


iQemmell  v.  Davis,  75  Md.  546(1892); 
Massachusetts  Iron  Co.  v.  Hooper,  61 
Mass.  183  (1851);  Bates  v.  New  York 
Ins.  Co.,  3  Johns.  Cas.  238  (1802);  Steam- 
ship Dock  Co.  V.  Heron,  52  Pa.  St.  280 
(1866);  Merchants'  Bank  v.  Shouse,  102 
Pa.  St  488  (1883);  Fitzhugh  v.  Bank  of 
Shepherdsville,  3  T.  B.  Mon.  (Ky.)  126 
(1825):  Williams  v.  Lowe,  4  Neb.  382, 
398  (1876);  Dana  v.  Brown,  1  J.  J.  Marsh. 
(Ky.)  304  (1829);  Hart  r.  State  Bank,  2 
Dev.  Eq.  (N.  C.)  Ill  (1831);  Farmers', 
etc.  Bank  n  Wasson,  48  Iowa,  336  (1878); 
People  V.  Crockett,  9  Cal.  112  (1858); 
Sargent  v.  Franklin  Ins.  Co.,  25  Mass. 
90  (1829);  Nealen  Janney,  2  Cranch,  C. 
C.  188  (1819);  s.  c,  17  Fed.  Cas.   1266; 


McMurrich  v.  Bond  Head  Harbor  Co.,  9 
U.  C.  Q.  B.  333  (1852);  Clise  Inv.  Co.  v. 
Washington  Sav.  Bank,  18  Wash.  8 
(1897).  Cf.  Weston's  Case,  L.  R  4  Ch. 
20  (1868).  See  also  Gibson  v.  Hudson's 
Bay  Co.,  MS.  Rep.  Mich.  T.  12  Geo.  L 
(1726);  7Vin.  Abr.  (2d  Lond  ed.)  125; 
Pinkett  v.  Wright,  2  Hare,  120  (1842); 
Byrne  v.  Union  Bank,  9  Rob.  (La.)  433 
(1845);  Hussey  v.  Manufacturers',  etc. 
Bank,  27  Mass.  415  (1830);  Bryon  v.  Car- 
ter, 22  La.  Ann.  98  (1870);  Bank  of 
Attica  V.  Manufacturers',  etc.  Bank,  20- 
N.  Y.  501  (1859);  DriscoU  v.  West  Brad- 
ley, etc.  Co.,  59  N.  Y.  96  (1874). 

2Quoted  and  approved  in  Boyd  v.  Redd,. 
120  N.  C.  335  (1897). 


1114 


CH.  XXXI.] 


LIEN    OF    THE    CORPORATION    ON    STOCK. 


[§  522. 


the  courts  refuse  to  enforce  a  lien  upon  stock  when  such  lien  is  not 
created  by  charter  or  by  by-law.  A. stockholder  has  a  right  to  sell 
his  stock  and  have  it  transferred  on  the  corporate  books,  although 
there  are  unpaid  calls  due  on  the  stock  at  the  time  of  transfer, 
and  for  refusal  to  transfer  he  may  sue  for  conversion.^  A  trustee 
issuing  certificates  to  represent  an  interest  in  a  reorganized  prop- 
erty has  no  lien  on  a  certificate  for  costs  in  a  litigation  concern- 


ing it.- 


§  522.  A  lien  may  le  created  ly  statute,  ty  cliarter,  or  imssilly  ly 
ly-law  or  contract. —  Such  a  lien  as  this  in  favor  of  the  corporation 
may  be  created  by  statute  ^  or  by  charter,*  and  the  weight  of  au- 
thority holds  that  it  may  be  created  by  by-law. 

With  respect  to  the  right  of  a  corporation  to  enact  a  by-law 
creating  such  a  lien,  it  is  held  in  many  jurisdictions  that  such  a 
by-law  is  valid  and  binding  upon  all  persons  who  buy  or  transfer 
the  shares.^    There  is  nevertheless  strong  authority  for  the  rule 


i  Craig  V.  Hesperia,  etc.  Co.,  113  Cal.  7 
(1896). 

^  Cassagne  v.  Marvin,  143  N.  Y.  292 
(1894). 

3  Pittsburgh,  etc.  R  R  u  Clarke,  29 
Pa.  St.  146  (1857);  First  Nat.  Bank  v. 
Hartford,  etc.  Ins.  Co.,  45  Conn.  22 
(1877);  Presbyterian  Cong.  v.  Carlisle 
Bank,  5  Pa.  St.  345  (1847);  Rogers  v. 
Huntingdon  Bank,  12  Serg.  &  R  (Pa.) 
77  (1824);  National  Bank  v.  Watsontown 
Bank.  105  U.  S.  217  (1881).  An  amend- 
ment to  a  banking  act  whereby  a  lien 
is  given  to  banks  on  stock  of  its  stock- 
holders for  debts  due  the  bank  from 
them  does  not  apply  to  stock  already 
Issued.  Southern,  etc.  Co.  v.  Fidelity, 
etc.  Co.,  105  Ga.  487  (1898).  A  statute 
giving  a  bank  a  lien  on  its  stock  for 
debts  due  to  the  bank  from  the  stock- 
holder is  not  nullified  by  another  statu- 
tory provision  prohibiting  the  bank 
from  loaning  money  on  its  stock.  Battey 
V.  Eureka  Bank,  62  Kan.  384  (1901).  The 
repeal  of  a  statute  giving  a  corporation 
a  lien  on  stock  does  not  affect  a  lien 
which  has  already  accrued.  Wright, 
etc.  Co.  V.  Hixon,  105  Wis.  153  (1889). 

4  Union  Bank  v.  Laird,  2  Wheat  390 
(1817);  Stebbins  v.  Phoenix  F.  Ins.  Co.,  3 
Paige,  350  (1832);  Reese  v.  Bank  of  Com- 


merce, 14  Md.  271  (1859);  Brent  v.  Bank 
of  Washington,  10  Pet.  596  (1836);  Ger- 
man Security  Bank  v.  Jefferson,  10  Bush 
(Ky.),  326  (1874);  Arnold  v.  Suffolk  Bank, 
27  Barb.  424  (1857);  Leggett  v.  Bank  of 
Sing  Sing,  24  N.  Y.  283  (1862);  Bank  of 
Utica  V.  Smalley,  2  Cow.  770  (1824); 
Farmers'  Bank  v.  Iglehart,  6  Gill  (Md.), 
50  (1847);  Bohmer  v.  City  Bank,  77  Va. 
445  (1883);  Hodges  v.  Planters'  Bank,  7 
Gill  &  J.  (Md.)  306  (1835);  Sabm  v.  Bank 
of  Woodstock,  21  Vt.  353  (1849);  Cross 
V.  Phenix  Bank,  1  R  L  39  (1840);  St. 
Louis,  etc.  Ins.  Co.  v.  Goodfellow,  9  Mo. 
149  (1845);  Mechanics'  Bank  v.  Mer- 
chants' Bank,  45  Mo.  513  (1870). 

5  Knight  V.  Old  Nat.  Bank,  3  Cliff.  429 
(1871);  S.  C,  14  Fed.  Cas.  772;  [McDowell 
V.  Bank  of  Wilmington,  1  Harr.  (Del.) 
27  (1832);  Bank  of  Holly  Springs  v.  Pin- 
son,  58  Miss.  421  (1880);  Spurlock  v. 
Pacific  R  R,  61  Mo.  319  (1875);  Re  Bach- 
man,  12  Nat.  Bankr.  Reg.  223  (1876); 
S.  C,  2  Fed.  Cas.  310;  People  v.  Crockett, 
9  Cal.  112  (1858);  Pendergast  r.  Bank  of 
Stockton,  2  Sawyer,  108  (1871);  S.  C,  19 
Fed.  Cas.  135;  Lockwood  v.  Mechanics' 
Nat.  Bank,  9  R  L  308  (1869);  Cunning- 
ham V.  Alabama,  etc.  Co.,  4  Ala.  (N.  S.) 
652  (1843);  Geyer  v.  Western  Ins.  Co.,  3 
Pittsb.  41  (1867);  Re  Dunkerson,  4  Biss. 


1115 


§  522.] 


LIEN    OF    THE    CORPOKATION    ON    STOCK. 


[CH,  XXXI. 


that  such  a  by-law  cannot  create  a  lien  on  the  stock  so  as  to  bind  a 
honafide  purchaser,  or  other  person  into  whose  hands  the  stock  may 
come,  to  whom  actual  knowledge  of  the  by-law  cannot  be  imputed. 
It  has  been  so  held  in  New  York,^  Louisiana,-  Massachusetts,^  Ala- 


227  (1868);  s.  C,  8  Fed.  Cas.  48;  Young 
V.  Vough,  23  N.  J.  Eq.  335  (1873);  Brent 
V.  Bank  of  Washington,  10  Pet.  596, 
615  (1836);  Child  v.  Hudson's  Bay  Co.,  2 
P.  Wms.  207  (1723);  Planters',  etc.  Co.  u 
Selma  Sav.  Bank,  63  Ala.  585  (1879); 
Birmingham  Trust,  etc.  Co.  v.  East  Lake 
Land  Co..  101  Ala.  304  (1893).  Cf.  Heart 
V.  State  Bank,  2  Dev.  Eq.  (N.  C.)  Ill 
(1831);  Farmers',  etc.  Bank  v.  Wasson, 
48  Iowa,  330,  340  (1878).  In  Tuttle  v. 
Walton,  1  Ga.  43  (1846),  it  was  said  that 
as  between  the  corporators  themselves 
such  a  by-law  will  be  held  valid.  A 
by-law  creating  a  lien  in  behalf  of  the 
corporation  on  stock  is  valid  as  against 
a  stockholder  and  any  one  who  pur- 
chases his  stock  with  notice  that  such 
hy-law  exists.  John,  etc.  Co.  v.  Wood- 
side.  87  Md.  146  (1898).  In  the  case  of 
Costello  V.  Portsmouth,  etc.  Co.  69  N.  H. 
405  (1899),  the  court  upheld  a  by-law  of 
a  brewing  company  which  gave  the 
corporation  a  lien  on  the  stock  of  its 
stockholders  for  any  debts  due  from 
them  to  the  corporation,  and  also  gave 
the  corporation  a  right  to  appropriate 
such  stock  at  its  par  value  in  liquida- 
tion of  such  debts  when  overdue  three 
months.  The  corporation  actually  did 
so  appropriate  the  stock  of  one  of  its 
stockholders  in  that  manner  and  after- 
wards sold  the  stock  to  a  third  party, 
and  the  court  upheld  the  transaction. 
Under  the  English  statutes  a  by-law 
may  provide  that  the  company  shall 
have  a  lien  on  the  stockholders'  stock 
for  debts  due  from  them  to  the  com- 
pany. Allen  V.  Gold  Reefs,  etc.  Lim- 
ited, [1900]  1  Ch.  656,  rev'g  [1899]  2  Ch. 
40. 

1  DriscoU  V.  West  Bradley,  etc.  Co.,  59 
N.  Y.  96  (1874);  Bank  of  Attica  v.  Man- 
ufacturers', etc.  Bank,  20  N.  Y.  501 
<1859);  Rosenback  v.  Salt  Springs  Nat. 


Bask,  53  Barb.  495  (1868);  Conklin  v. 
Second  Nat.  Bank,  53  Barb.  512,  note 
(1868);  s.  C.  aff'd.  45  N.  Y.  655  (1871).  In 
the  case  last  cited  it  was  held  that  not 
even  where  the  certificate  of  stock  con- 
tained a  provision  that  the  stock  was 
not  transferable  until  all  the  liabilities 
of  the  stockholder  to  the  bank  were 
paid  did  the  bank  acquire  a  lien  upon 
the  shares  for  the  subsequent  indebted- 
ness of  the  stockholder.  And  all  the 
New  York  decisions  proceed  upon  the 
broad  ground  that  the  policy  of  the  law 
is  to  protect  a  hona  fide  vendee  of  shares 
of  stock  against  secret  or  equitable 
claims  thereto.  Cf.  Leggett  v.  Bank  of 
Sing  Sing.  24  N.  Y.  283  (1862);  McCready 
V.  Rumsey,  6  Duer,  574(1857);  Arnold  u 
Suffolk  Bank,  27  Barb.  424  (1857).  A 
by-law  preventing  the  transfer  or  vot- 
ing upon  stock  while  dues  remain  un- 
paid is  invalid,  even  though  the  stock- 
holder agreed  to  be  bound  by  such 
by-laws.  Kinnan  v.  Sullivan,  etc.,  26 
App.  Div.  213  (1898). 

2  Bryon  v.  Carter,  22  La.  Ann.  98 
(1870);  Bitot  v.  Johnson,  33  La.  Ann. 
1286  (1881).  Cf.  New  Orleans,  etc.  Assoc. 
V.  Wiltz,  10  Fed.  Rep.  330  (1881). 

3  In  Nesmith  v.  Washington  Bank, 
23  Mass.  324  (1828),  the  court  doubted 
whether  a  by-law  could  under  any  cir- 
cumstances create  a  lien  on  stock  as 
against  the  creditors  of  the  stockholder, 
but  did  not  decide  the  point.  In  Sar- 
gent V.  Franklin  Ins.  Co.,  25  Mass.  90 
(1829),  there  is  a  somewhat  decided 
ground  taken  against  the  validity  of 
any  by-law  which  tends  to  limit  the 
free  transfer  of  stocks.  In  Plymouth 
Bank  v.  Bank  of  Norfolk,  27  Mass.  454 
(1830),  Chief  Justice  Shaw  seems  to 
doubt  the  validity  of  a  bj^-law  giving  a 
bank  a  lien  on  its  own  stock. 


1116 


CH.  XXXI.] 


LIEN    OF    THE    CORPOKATION    ON    STOCK. 


[§  522. 


baraa,^  Pennsylvania,^  California,^  Missouri,*  Mississippi,^  and,  it 
seems,  in  -some  other  states.** 

The  question  sometimes  arises  whether  or  not  the  corporation 
has  authority  to  enact  a  by-^aw  creating  a  lien  upon  its  stock  in 
favor  of  the  corporation  for  debts  due  it  by  the  stockholders, 
where  the  charter  or  statute  contains  unusual  words  in  defining 
the  powers  of  the  corporation.  It  has  been  held  that,  where  the 
directors  are  authorized  to  make  "  regulations "  as  to  transfers, 
they  may  make  a  by-law  creating  a  lien.''  So  various  other  phrases 
have  been  held  sufficient  to  confer  this  power,®  Where,  in  addi- 
tion to  the  articles  of  incorporation,  the  statute  provides  for  arti- 
cles of  association,  the  corporation  may  in  the  latter  provide  for  a 


1  Planters',  etc.  Mut.  Ins.  Co.  v.  Selina 
Sav.  Bank,  63  Ala.  585  (1879). 

-Steamship  Dock  Co.  v.  Heron,  52  Pa. 
St.  280  (1866) ;  Merchants'  Bank  v.  Shouse, 
102  Pa.  St.  488  (1883). 

3  Anglo-Californian  Bankz?.  Grangers' 
Bank,  63  Cal.  359  (1883). 

*  A  by-law  giving  the  corporation  a 
lien  on  stock  is  not  good  as  against  a 
bona  fide  purchaser  of  the  certificate 
who  had  no  notice  of  the  by-law. 
Brinkerhoff-Farris,  etc.  Co.  v.  Home 
Lumber  Co.,  118  Mo.  447  (1893).  So,  also, 
as  to  a  pledgee.  Bank  of  Atchison 
County  r.  Durfee,  118  Mo.  431  (1893). 

5  Bank  of  Holly  Springs  v.  Pinson,  58 
Miss.  421  (1880). 

''Carroll  v.  Mullanphy  Sav.  Bank,  8 
Mo.  App.  249  (1880);  Evansville  Nat. 
Bank  u  Metropolitan  Nat.  Bank,  2  Biss. 
527  (1871);  S.  C,  8  Fed.  Cas.  891;  Lee  v. 
Citizens'  Nat.  Bank,  2  Cin.  Super.  Ct. 
(Ohio),  298  (1872).  Cf.  Neale  v.  Janney, 
2  Cranph,C.  C.  188  (1819);  s.  C,  17  Fed. 
Cas.  1266.  A  lien  of  the  corporation  on 
stock  is  prevented  by  a  statutory  pro- 
vision that  the  company  should  not 
loan  monej'  on  the  security  of  its  own 
stock.  Nicollet  Nat.  Bank  v.  City  Bank, 
38  Minn.  85  (1887).  As  to  national  banks, 
see  §  533.  infra. 

'Cunningham  v.  Alabama,  etc.  Co.,  4 
Ala.  (N.  S.)  652  (1843);  Spurlock  v.  Pa- 
cific R.  R.,  61  Mo.  319  (1875);  Pender- 
gast  V.  Bank  of  Stockton,  2  Sawyer,  108 
(1871);  s.  c,  19  Fed.  Cas.  135.  Cf.  Tuttle 
V.  Walton,  1  Ga.  43  (1846). 


8  Bryon  v.  Carter,  22  La.  Ann.  98 
(1870);  Brent  v.  Bank  of  Washington, 
10  Pet.  596,  613  (1836);  Pendergast  v. 
Bank  of  Stockton,  2  Sawyer,  108  (1871);. 
S.  C,  19  Fed.  Cas.  135.  Except  when 
such  power  is  expx'essly  given  to  the 
directors  it  can  only  be  exerciseil  by 
vote  of  the  stockholders.  Carroll  v. 
Mullanphy  Sav.  Bank,  8  Mo.  App.  249 
(1880).  A  charter  power  given  to  the 
directors  of  a  corporation  "  to  make  all 
by-laws  not  inconsistent  with  any  ex- 
isting law  of  the  state  for  the  manage- 
ment of  its  property,  the  regulation  of 
its  affairs,  and  the  transfer  of  its  stock." 
has  been  held  in  Missouri  to  include 
the  power  in  question.  Mechanics' 
Bank  v.  Merchants'  Bank,  45  Mo.  513^ 
(1870).  But  in  New  York  the  same  lan- 
guage used  in  the  general  statute  was 
held  not  to  include  it.  Driscoll  v.  West 
Bradley,  etc.  Co.,  59  N.  Y.  96  (1874).  See 
also  St.  Louis,  etc.  Ins.  Co.  v.  Goodfellow, 
9  Mo.  149  (1845);  Vausands  v.  Middlesex 
County  Bank,  26  Conn.  144  (1857);  Bank 
of  Attica  V.  Manufacturers'  Bank,  20  N. 
Y.  501  (1859).  For  a  discussion  of  this 
question  as  applied  to  national  banks, 
see  §  533,  infra.  A  statute  that  the 
transfer  of  stock  need  not  be  recorded 
on  the  corporate  books  except  as 
against  the  claims  of  the  corporation 
does  not  give  the  corporation  a  lien  on 
the  stock.  Buena  Vista,  etc.  Bank  t;- 
Grier,  114  Ga.  398  (1901). 


1117 


§  523.] 


LIEN    OF    THE    CORPORATION    ON    STOCK. 


[CH.  XXXI. 


lien  on  the  stock.'  Inasmuch  as  bv  the  laws  of  Enoland  an  Eno-- 
lish  corporation  may  amend  its  by-laws  so  as  to  give  it  a  lien  on 
stock  which  will  be  prior  to  any  existing  unregistered  pledge  or 
assignment  of  the  certificates  of  stock,  an  American  pledgee  or 
holder  of  such  certificates  of  stock  is  bound  b}'^  such  by-la w.^ 

Upon  the  whole  it  may  be  said  that  the  question  whether  a  cor- 
poration may,  by  by-law,  create  a  lien  in  its  own  favor  upon  the 
shares  of  its  stockholders  for  debts  due  by  them  to  the  corporation 
is  not  settled.  The  weight  of  authority  in  this  country  is  against 
the  validity  of  the  by  law,  and  such  would  seem  to  be  a  result  most 
in  accord  with  public  policy. 

In  Xew  Hampshire  such  liens  upon  stock  are  forbidden  by  statute.* 
The  right  to  create  a  lien  by  contract  is  considered  elsewhere.* 

§  523.  Notice  of  the  lien. —  When  a  lien  is  expressly  given  to  the 
corporation  by  its  charter  or  by  statute,  all  persons  purchasing  the 
stock  are  affected  by  the  statute  and  must  take  notice  of  it.*  A 
statutory  lien  need  not  be  set  out  in  the  certificate  of  stock  in 
order  to  give  notice  to  the  transferee.*^ 


1  Mohawk  Nat.  Bank  v.  Schenectady 
Bank,  78  Hun,  90  (1894);  aff'd,  151  N.  Y. 
665.  Where  the  statute  allows  the  in- 
corporators to  include  special  provis- 
ions in  their  articles  of  incoriooration, 
and  a  lien  right  is  inserted,  and  the 
certificate  of  stock  on  its  face  refers  to 
the  articles  of  association,  a  purchaser 
of  a  certificate  buys  subject  to  such 
lien.  Gibbs  v.  Long  Island  Bank,  83 
Hun,  92  (1894);  aflf'd,  151  N.  Y.  657. 

2  Hudson,  etc.  Co.  v.  Warner  &  Co., 
-99  Fed.  Rep.  187  (1900). 

3  Hill  V.  Pine  River  Bank,  45  N.  H. 
500,  309  (1864). 

^  See  §  523,  infra. 

5  Bishop  V.  Globe  Co..  135  Mass.  132 
(1883);  Dorr  v.  Life  Ins.  etc.  Co.,  71 
Minn.  38  (1898);  Citizens",  etc.  Bank  v. 
Kalamazoo,  etc.  Bank,  111  Mich.  313 
(1896);  Birmingham  Trust,  etc.  Co.  v. 
East  Lake  Land  Co.,  101  Ala.  304  (1893); 
Union  Bank  v.  Laird,  2  Wheat.  390 
(1817);  Bohmer  v.  City  Bank,  77  Va. 
445  (1883):  Downer  v.  Zanesville  Bank, 
Wright  (Ohio),  477(1833);  Grant  v.  Me- 
chanics' Bank,  15  Serg.  &  R.  (Pa.)  140 
(1826);  St.  Louis,  etc.  Co.  v.  Goodfellow, 
9  Mo.  149  (1845);  Bank  of  Utica  v.  Smal- 
ley,  2  Cow.  770  (1824);  Rogers  v.  Hunt- 

11 


ingdon  Bank,  13  Serg.  &  R.  (Pa.)  77 
(1824);  Sewall  v.  Lancaster  Bank,  17 
Serg.  &  R.  (Pa.)  285  (1828).  Cf.  Stebbins 
V.  Phenix  F.  Ins.  Co.,  3  Paige,  350  (1832); 
Newberry  v.  Detroit,  etc.  R.  R.,  17  Mich. 
141  (1868);  Titcomb  v.  Union  M.  &  F. 
Ins.  Co.,  8  Mass.  326  (1811);  West 
Branch  Bank  v.  Armstrong,  40  Pa.  St. 
278  (1861);  Mechanics'  Bank  v.  Mer- 
chants' Bank,  45  Mo.  513  (1870);  Tuttle 
V.  Walton,  1  Ga,  43  (1846);  Dorr  v.  Life 
Ins.  etc.  Co.,  71  Minn.  38  (1898). 

•>  National  Bank  i:  Rochester  Tumbler 
Co.,  172  Pa.  St.  614  (1896);  McCready  v. 
Rumsey,  6  Duer,  574  (1857);  Reese  v. 
Bank  of  Commerce,  14  Md.  271  (1859); 
First  Nat.  Bank  v.  Hartford,  etc.  Ins. 
Co.,  45  Conn.  22  (1877).  A  lien  on  stock 
created  by  statute  gives  the  corporation 
a  prior  right  in  the  stock  as  against  a 
subsequent  pledgee  and  purchaser  at 
the  pledgee's  sale,  even  though  the  cer- 
tificate of  stock  gives  no  intimation  of 
a  lien.  Hammond  v.  Hastings,  134  U. 
S.  401  (1890).  A  purchaser  or  pledgee 
of  stock  is  bound  to  take  notice  of  a 
statutory  lien  which  the  corporation 
has  on  such  stock.  Wright,  etc.  Co.  v. 
Hixon,  105  Wis.  153  (1899).  A  pledgee 
of  stock  is  bound  to  take  notice  of  a 
18 


■CH,  XXXI.]  LIEX    OF   THE    COEPOBATION   ON    STOCK.  [§§  52i,  525. 

§§  524,  525.  It  is  a  salutary  rule  that  a  »lien  created  by  by-law 
can  bind  only  those  who  take  the  stock  with  notice  of  the  by-law. 
This  is  because  by-laws  do  not  of  themselves  impart  or  convey 
notice.^  A  transferee  of  a  certificate  of  stock  is  not  bound  to  take 
notice  of  a  by-law  giving  a  corporation  a  lien  on  the  stock  for  debts 
due  from  the  registered  owner  to  the  corporation,  even  though  the 
certificate  of  stock  stated  on  its  face  that  it  was  subject  to  the  by- 
laws.'^ So,  too,  a  by-law  enacted  subsequently  to  a  transfer,  al- 
though the  transfer  has  not  been  recorded  on  the  corporate  books, 
cannot  affect  the  rights  of  the  parties  as  to  that  transfer.^  "Where, 
however,  a  prospectus,  offering  for  sale  trustee's  transferable  cer- 
tificates, states  that  such  certificates  represent  stock  deposited  with 
the  trustee,  the  stock  being  in  an  English  corporation,  the  trustee 
is  personally  liable  if  it  turns  out  that  the  English  corporation  had 
a  prior  lien  on  the  stock  to  the  full  extent  of  its  value.  The  trustee 
was  bound  to  take  notice  of  the  lien  created  by  the  by-laws  of  the 
English  corporation.*  By-laws  creating  liens  on  stock  have  been 
held  valid  and  enforceable  as  against  assignees  in  bankruptcy  or 
in  insolvency.^  A  lien  created  by  by-law  is  binding  upon  a  pur- 
chaser of  the  stock  with  notice  of  such  by-law,  and  when  taken  in 
pledge  for  an  antecedent  debt  without  any  agreement  to  postpone 
collection,  the  pledgee  is  bound  to  take  notice  of  the  by-law.® 

A  clause  in  a  charter  declaring  that  debts  due  from  the  stock- 
holders must  be  paid  before  a  transfer  will  be  allowed  is  sufficient 

statute  giving  the  corporation  a  lien  ance  of  certificates  not  containing  this 

upon  the  stock.     Curtice  v.  Crawford,  notice  is  a  waiver  of  tlie  lien  contem- 

etc.  Bank,  110  Fed.  Rep.  830  (1901).  plated  by  such  by-law.     Bank  of  Holly 

1  Driscoll  V.  West  Bradley,  etc.  Co.,  Springs  v.  Pinson.  58  Miss.  431  (1880). 
59  N.  Y.  96,  109  (1874);  Bank  of  Holly        2  Des  Moines,  etc.  Bank  u  Warren,  etc. 

Springs  V.  Pinson,  58 Miss.  421,435(1880j;  Bank,  97  Iowa,  204  (1896). 
Anglo-Californian   Bank   v.   Grangers'        3  People  v.  Crockett,  9  Cal.  112  (1858). 
Bank,  63  Cal.  359  (1883).    See  also  Peo-        *  The  rule  of  caveat  emptor  has  been 

pie  V.  Miller,  39  Hun,  557  (1886);  aff'd,  relaxed  so  as  to  create  an  implied  war- 

114  N.  Y.  636,  concerning  the  validity  ranty  of  title  on  the  part  of  the  seller, 

and  effect  of  by-laws  regulating  the  sale  Even  though  the  trustee  acted  as  agent, 

and  transfer  of  seats  or  membership  in  yet,  the  principal  not  being  disclosed, 

the  commercial  exchanges,  and  the  en-  the  trustee  is  liable.  McClureu.  Central 

forcement  of  the  liens  created  there-  Trust  Co.,  165  N.  Y.  108  (1900). 
upon  by  such  by-laws  in  favor  of  other        5  Morgan  v.  Bank  of  North  America, 

members  of  the  corporation.     Where  8  Serg.  &  R  (Pa.)  73  (1822);  s.  C,  11  Am. 

the   by-law  under  which  the   lien   is  Dec.  575;  Vansandsr.  Middlesex  County 

claimed  directs  that  notice  of  the  lien  Bank,  26  Conn.  144  (1857);  Ee  Bigelow, 

should  be  given  in   the  certificate    of  1  Nat.  Bankr.  Reg.  632,  667  (1868);  s.  C, 

stock,  this  provision  must  be  regarded  3  Fed.  Cas.  341,  343. 
as  meaning  that  the  lien  should  not  be        ''  Bronson,  etc.  Co.  v.  Rheubottom,  122 

asserted  against  a  person   not  having  Mich,  608  (1900). 
notice  by  the  certificate.     And  the  issu- 

1119 


^§  524,  525.]  LIEN    OF   THE    CORPORATION    ON    STOCK. 


[ciI.  XXXI. 


to  create  a  lien  on  the  stock  without  other  action  on  the  part  of 
the  corporation.^  So,  also,  a  power  conferred  by  the  charter  upon 
the  directors  to  refuse  a  transfer  so  long  as  the  stockholder  who 
wishes  to  transfer  is  indebted  to  the  corporation,  supports  the  lien.- 

A  lien  may  be  created  by  special  agreement  among  the  stock- 
holders.*  And  even  a  mere  usage  of  a  corporation  not  to  transfer 
stock  while  the  owner  is  indebted  to  the  corporation  is  sufficient 
to  create  a  lien  on  stock,  as  between  the  corporation  and  its  stock- 
holders, and  it  will  bind  a  stockholder  who  borrows  money  with  a 
knowledge  of  it.*  An  unwarranted  claim  of  lien  by  a  corporation, 
and  consequent  refusal  to  register  a  transfer  until  the  debt  as  to 
which  the  lien  is  asserted  is  paid,  is  a  conversion  of  the  stock,  and  the 
transferrer  may  have  his  action  against  the  corporation  therefor.'^ 

In  Ohio  it  is  held  that  where  the  certificates  of  stock  issued  by 
a  bank  contain  a  provision  on  their  face  that  the  bank  shall  have  a 
lien  on  the  stock  for  all  debts  due  to  it  from  the  registered  owner, 
such  lien  is  valid  and  applies  as  well  to  a  debt  contracted  after  the 
certificate  was  sold  but  before  it  was  presented  for  transfer  on  the 


1  Farmers'  Bank  Case,  2  Bland.  Ch. 
(Md.)  394  (1S30);  Kenton  Ins.  Co.  v.  Bow- 
man, 84  Ky.  430  (1886). 

2  Arnold  v.  SuflFolk  Bank,  27  Barb.  424 
(1857). 

3  Vansandsy.  Middlesex  County  Bank, 
26  Conn.  144  (1857).  The  stockholders 
may  assent  to  a  lien  in  behalf  of  the 
corporation  on  stock  for  debts  due  to  the 
corporation  from  the  stockholder,  and 
the  method  of  foreclosing  it  may  also 
be  so  prescribed.  The  statute  of  lim- 
itations does  not  run  against  it.  Read- 
ing Trust  Co.  V.  Reading  Iron  Works, 
137  Pa.  St.  282  (1890).  The  corporation 
cannot  create  a  lien  on  stock  by  a  by- 
law; but  where  the  surety  of  the  debt 
secured  by  the  stock  as  collateral  pays 
the  debt,  his  equities  are  not  superior 
to  the  corporation,  and  he  cannot  claim 
the  certificate  free  from  the  lien,  he 
having  aided  in  passing  the  by-law. 
Bank  of  Atchison  County  v.  Durfee,  118 
Mo.  431  (1893). 

^  Morgan  v.  Bank  of  North  America, 
8Serg.  &  R.  (Pa.)  73,  88  (1822);  s.  C,  11 
Am.  Dec.  575.  Cf.  Vansands  v.  Middle- 
sex Bank,  26  Conn.  144  (1857).  Where 
the  certificates  of  stock  contain  on 
their  face  a  statement  that  a  corpora- 

1120 


tion  has  a  lien  on  the  stock  for  debts 
due  from  the  registered  owner,  and  for 
many  years  all  the  stockholders  acqui- 
esced therein,  such  a  lien  may  be  up- 
held, although  there  is  no  charter  pro- 
vision or  by-law  authorizing  the  lien. 
So  held  where  a  stockholder  brought 
an  action  for  himself  and  other  stock- 
holders complaining  of  various  misfea- 
sances and  malfeasances,  including  the 
charge  that  such  an  illegal  claim  of 
lien  existed.  Reynolds  v.  Bank  of  Mt. 
Vernon,  6  N.  Y.  App.  Div.  62  (1896); 
aff'd,  158  N.  Y.  740  (1899).  So  in  Bryon 
V.  Carter,  22  La.  Ann.  98  (1870),  it  is  held 
thaf  a  by-law  creating  a  lien,  while  it 
may  be  valid  as  between  the  parties  if 
it  be  brought  to  their  knowledge,  is  not 
binding  on  the  judgment  creditors  of 
the  stockholders. 

5  Bank  of  America  v.  McNeil,  10  Bush 
(Ky.),  54  (1873).  Cf.  Dickinson  v.  Cen- 
tral Nat.  Bank,  129  Mass.  279  (1880); 
Case  V.  Bank,  100  "t.  S.  446  (1879):  Skin, 
ner  v.  City  of  London  M.  Ins.  Corp.,  L. 
R.  14  Q.  B.  D.  882  (1885),  holding  also 
that  only  nominal  damages  could  be- 
recovered  where  the  terms  of  the  trans- 
fer were  secret. 


CH.  XXXI.] 


LIEN    OF   THE    CORPORATION    ON    STOCK. 


[§  526. 


boaks  of  the  bank.  The  lien  exists  even  though  neither  the  stat- 
utes nor  the  by-laws  nor  the  resolutions  of  the  board  of  directors 
provided  for  such  lien.  It  is  sufficient  that  such  certificate  of  stock 
was  the  one  used  by  the  corporation.^  And  the  same  rule  has  been 
upheld  in  Pennsylvania  ^  and  in  California,  Connecticut  and  else- 
where.^ A  national  bank,  however,  cannot  claim  a  lien  on  stock 
for  a  stockholder's  debt,  even  though  notice  of  such  lien  is  printed 
on  the  face  of  the  certificates  of  stock.* 

§  526.  The  lien,  ivlien  estahUslied,  covers  all  the  stockhoMefs  shares 
and  dividends.^  A  valid  lien  in  favor  of  the  corporation,  when 
regularly  established,  attaches  to  all  the  stock  and  dividends  of  the 
indebted  stockholder.  Thus,  it  attaches  to  all  the  stock  the  stock- 
holder owns,  although  the  debt  be  for  calls  due  and  unpaid  upon  only 
a  part  of  them.^  It  may,  moreover,  hold  the  whole  amount  of  the 
stockholder's  stock,  although  the  amount  of  the  debt  be  less  than 
the  value  of  the  stock.     It  cannot  be  compelled  to  transfer  so  much 


1  Stafford  v.  Produce,  etc.  Co.,  61  Ohio 
St.  160  (1899). 

2  Where  the  certificate  of  stock  itself 
provides  that  the  stock  is  liable  to  the 
company  for  indebtedness  of  the  reg- 
istered stockholder  to  the  company, 
this  constitutes  a  contract  which  will 
be  upheld  and  enforced  by  the  courts, 
and  dividends  on  the  stock  may  be  ap- 
plied towards  such  indebtedness.  In 
re  Hovey's  Estate,  198  Pa.  St.  385  (1901). 

3  By  inserting  in  the  certificate  of 
stock  a  statement  that  the  corporation 
has  a  lien  on  it  for  debts  due  to  the 
corporation,  a  purchaser  takes  subject 
thereto.  It  is  a  contract  lien.  Jen- 
nings V.  Bank  of  California,  79  Cal.  323 
(1889).  In  Vansands  v.  Middlesex  County 
Bank,  26  Conn.' 144  (1857),  it  is  held  that 
a  statement  on  the  face  of  the  certifi- 
cate of  stock  that  it  is  issued  subject 
to  all  debts  due  from  the  owners  to  the 
corporation  will  bind  a  transferee  as  a 
qualification  or  restriction  of  the  trans- 
ferrer's title,  and  that,  too,  although  no 
charter  provision  or  by-law  authorizes 
such  a  lien  on  the  stock.  So,  also,  Jen- 
nings V.  Bank  of  California,  79  Cal.  323 
(1889).  A  by-law  of  a  corporation,  or- 
ganized to*  own  and  maintain  a  hunt- 
ing park,  may  authorize  assessments  on 
the  stock  to  pay  any  annual  deficiency, 

(71)  1 


and  such  by-law  is  binding  on  stock- 
holders who  accept  the  certificate  of 
stock,  which  on  its  face  refers  to  the 
by-law.  The  by-law  is  valid  as  a  con- 
tract, even  though  it  is  not  valid  as  a 
by-law.  Blue  Mountain,  etc.  Assoc,  v. 
Borrowe,  51  Atl.  Rep.  670  (N.  H.  19011  A 
lien  created  by  a  by-law  when  printed  on 
the  face  of  the  certificate  of  stock  is 
legal  as  a  contract.  Morrison,  etc. 
Bank  v.  Kerdolflf,  75  Mo.  App.  297  (1898). 

4  Buffalo,  etc.  Co.  v.  Third,  etc.  Bank, 
162  N.  Y.  163  (1900);  Conklin  v.  Second 
Nat.  Bank,  45  N.  Y.  655  (1871). 

^Stebbins  v.  Phoenix  F.  Ins.  Co.,  3'- 
Paige,  350  (1832).  Cf.  Brent  v.  Bank  of 
Washington,  2  Cranch,  C.  C.  517  (1824);. 
s.  C,  4  Fed.  Cas.  61.  In  Virginia,  how- 
ever, it  seems  that  there  can  be  no  lien 
on  wholly  paid-up  stock  to  secure  the 
payment  of  an  unpaid  subscription 
to  other  stock.  Shenandoah  Valley 
R.  R.  V.  Griffith,  76  Va.  913  (1882).  Cf.. 
Va.  Code,  1887,  §§  1127,  1128,  1130;  Pe- 
tersburg Sav.  etc.  Co.  v.  Lumsden,  75' 
Va.  327  (1881).  And  in  England  a  lien 
on  stock  for  unpaid  calls  is  a  lien  only 
,  on  those  particular  shares  upon  which 
the  call  is  made  and  not  on  other 
shares.  Hubbersty  v.  Manchester,  etc 
Ry.,  L.  R.  2  Q.  B.  471  (1867). 


121 


§  527.] 


LIEN    OF    THE    CORPORATION    ON    STOCK. 


[CH. 


XXXI. 


of  the  stock  as  is  in  excess  of  the  amount  of  the  debt.^  The  lien 
attaches  not  only  to  the  stock  itself,  but  to  dividends  declared 
on  the  stock.2  j^  jg  accordingly  held  that  a  corporation  may  law- 
fully retain  dividends,  and  apply  them  to  the  payment  of  a  debt 
due  to  it  from  the  stockholder,  since  in  an  action  by  the  stockholder 
to  enforce  payment  of  his  dividends  the  corporation  may  plead  the 
debt  by  way  of  set-off.^  But  dividends  declared  after  the  death  of 
the  stockholder  are  not  subject  to  a  lien  for  his  debts.^  The  lien 
attaches  to  the  shares  even  after  the  liquidation  or  dissolution  of 
the  company.^  It  attaches  not  only  to  valid  stock,  but  to  spurious 
stock  obtained  by  forgery .** 

§  527.  The  lien  protects  the  corporation  as  to  all  tlie  debts  due  to 
it  from  the  stoclholder. —  It  is  a  general  rule  that  alien  upon  stock 
is  a  lien  for  all  debts  of  the  stockholder  due  to  the  corporation;^ 
and  it  is  not  necessary  that  the  debt  be  due  and  payable  at  the 
time  when  the  lien  is  sought  to  be  enforced.  It  cover  debts  which 
are  not  due  as  well  as  those  that  are  due,  and  all  indebtedness  to 
the  corporation,  whether  payable  presently  or  at  a  future  time.^ 
The  lien  will  continue  for  the  beneiit  of  the  corporation,  although 


1  Sewall  V.  Lancaster  Bank,  17  Serg. 
&  E.  (Pa.)  285  (1828);  Pierson  v.  Bank 
of  Washington,  3  Cranch,  C.  C.  363 
(1828);  s.  C,  19  Fed.  Cas.  671. 

2  Thus,  it  attaches  to  the  dividends, 
even  though  only  "shares  and  stock'' 
be  specifically  named  in  the  statute  or 
charter  as  subject  to  the  lien  (Hague  v. 
Dandeson,  3  Exch.  741  —  1848),  and 
though,  in  the  absence  of  express  pro- 
vision, it  is  held  that  no  such  lien  im- 
pliedly exists.  Sargent  v.  Franklin  Ins. 
Co.,  25  Mass.  90  (1829);  Bates  v.  Nevr 
York  Ins.  Co.,  3  Johns.  Cas.  238  (1802). 
So,  in  Hagar  v.  Union  Nat.  Bank,  63 
Me.  509  (1874),  it  was  held  that  the 
terms  of  the  act  of  1864  vphich  are  in- 
consistent with  the  existence  of  a  stock 
lien  do  not  preclude  a  lien  on  dividends. 

3  Hagar  v.  Union  Nat.  Bank,  63  Me. 
509  (1874);  Sargent  v.  Franklin  Ins.  Co., 
25  Mass.  90  (1829);  Bates  v.  New  York 
Ins.  Co.,  3  Johns.  Cas.  238  (1802).  Cf. 
Merchants'  Bank  v.  Shouse,  102  Pa.  St. 
488(1883);  Brent  r.  Bank  of  Washington, 
2  Cranch,  C.  C.  517  (1824);  s.  C,  4  Fed. 
Cas.  61.     See  also  §  544,  infra. 

•*  Brent  v.  Bank  of  Washington,  2 
Cranch,  C.  C.   517  (1824);  s.  c,  4  Fed. 


Cas.  61;  Merchants'  Bank  v.  Shouse,  102 
Pa.  St.  488  (1883). 

5  Re  General  Exchange  Bank,  L.  R.  6 
Ch.  App.  818  (1871). 

6  Mount  Holly  Paper  Co.'s  Appeal,  99 
Pa.  St.  513  (1882). 

■J  Union  Bank  v.  Laird,  2  Wheat.  390 
(1817);  Mobile  Mut.  Ins.  Co.  v.  Cullom, 
49  Ala.  558  (1873);  Cunningham  v.  Ala- 
bama, etc.  Co.,  4  Ala.  (N.  S.)  652  (1843); 
Rogers  v.  Huntingdon  Bank,  12  Serg. 
&  R.  (Pa.)  77  (1824);  Ex  parte  Stringer, 
L.  R.  9  Q.  B.  D.  436  (1882);  Be  Peebles, 
2  Hughes,  394  (1875);  s.  C,  19  Fed.  Cas. 
94;  Planters',  etc.  Co.  v.  Selma  Sav. 
Bank,  63  Ala.  585  (1879).  Qucere, 
whether  the  lien  attaches  for  funds 
embezzled  by  the  stockholder.  Hotch- 
kiss,  etc.  Co.  v.  Union  Nat.  Bank,  68 
Fed.  Rep.  76  (1895). 

8  Pittsburgh,  etc.  R.  R  v.  Clarke,  29 
Pa.  St.  146  (1857);  Re  Bachman,  12  Nat. 
Bankr.  Reg.  223  (1876);  s.  C,  2  Fed.  Cas. 
310;  Downer  v.  Zanesville  Bank,  Wright 
(Ohio),  477  (1833);  Brent  v.  Bank  of 
Washington,  10  Pet.  596  (1836);  Rogers 
V.  Huntingdon  Bank,  12  Serg.  &  R.  (Pa,) 
77  (1824);  Sewall  v.  Lancaster  Bank,  17 
Serg.  &  R.  (Pa.)  285  (1828);  McCready  v. 


1122 


CH.  XXXI.j 


LIEN    OF   THE    CORPOKATION    ON    STOCK. 


[§  527. 


the  debt  be  barred  by  the  statute  of  limitations.'  The  lien  attaches 
whether  the  stockholder's  debt  to  the  corporation  accrued  before  or 
after  he  became  a  stockholder.-  A  lien  created  by  statute  applies 
to  debts  due  from  the  stockholder  to  the  corporation  prior  to  the 
passage  of  the  statute.^  It  also  secures  debts  for  which  the  stock- 
holder is  liable  only  as  indorser  op  surety,^  and  debts  due  from  a 
partnership  in  which  the  stockholder  is  a  partner.'^  So,  also,  it  se- 
cures the  corporation  for  unpaid  calls  upon  the  original  subscription.® 


Rumsey,  6  Duer,  574  (1857);  St.  Louis, 
etc.  Ins.  Co.  v.  Goodfellow,  9  Mo.  149 
(1845);  Cunningham  v.  Alabama,  etc. 
Co.,  4  Ala.  (N.  S.)  653  (1843);  Leggett  v. 
Bank  of  Sing  Sing,  24  N.  Y.  283  (1862). 
Cf.  Re  Stockton,  etc.  Co.,  L.  R  2  Ch.  D. 
101  (1875).  In  Grant  v.  Mechanics'  Bank, 
15  Serg.  &  R.  (Pa.)  140  (1826),  it  was  held 
that  a  bank  organized  under  the  Penn- 
sylvania law  of  March  21,  1814,  might 
lawfully  refuse  to  permit  the  transfer 
of  the  stock  of  a  stockholder  who  was 
the  drawer  of  a  bill  discounted  by  the 
bank,  but  not  payable  at  the  time  the 
transfer  was  demanded  —  both  the 
stockholder  and  his  indorser  having, 
since  the  discount  of  the  paper,  become 
insolvent.  So,  also,  Downer  v.  Zanes- 
ville  Bank,  Wright  (Ohio),  477  (1833). 
But  where  the  lien  is  expressly  made  a 
security  for  debts  "actually  due  and 
payable,"  it  will  be  held  to  cover  only 
debts  due  and  payable.  Reese  v.  Bank 
of  Commerce,  14  Md.  271  (1859).  Cf. 
Downer  v.  Zanesville  Bank,  "Wright 
(Ohio),  477  (1833).    • 

1  Farmers'  Bank  v.  Iglehart,  6  Gill 
(Md.),  50  (4847);  Geyer  v.  Western  In& 
Co.,  3  Pittsb.  (Pa.)  41  (1867);  Brent  v. 
Bank  of  Washington,  10  Pet.  596,  617 
(1836).    See  also  §  530,  infra. 

2  Schmidt  v.  Hennepin,  etc.  Co.,  35 
Minn.  511  (1886). 

3  Birmingham  Trust,  etc.  Co.  v.  East 
Lake  Land  Co.,  101  Ala.  304  (1893). 

4  McLean  v.  Lafayette  Bank,  3  Mc- 
Lean, 587  (1846);  s.  C,  16  Fed.  Cas.  264; 
Leggett  r.  Bank  of  Sing  Sing,  24  N.  Y. 
283  (1862);  Union  Bank  v.  Laird,  2 
Wheat.  390  (1817);  McDowell  v.  Bank 
of  Wilmington,  1  Harr.  (Del)  27  (1832); 


Bank  v.  Bonnie,  43  S.  W.  Rep.  407  (Ky. 
1897);  Brent  v.  Bank  of  Washington,  10 
Pet.  596,  615  (1836);  St.  Louis,  etc.  Ins. 
Co.  V.  Goodfellow,  9  Mo.  149  (1845).  Cf 
Miles  V.  New  Zealand,  etc.  Co.,  L.  R.  82 
Ch.  D.  266  (1886);  West  Branch  Bank 
V.  Armstrong,  40  Pa.  St  278  (1861).  A 
corporation,  on  discounting  a  bill  or 
note,  may  take  security  from  one  of 
the  parties,  and  also  hold  the  stock  of 
another  party  as  security  for  the  same 
loan.  Union  Banku  Laird,  2  Wheat.  390 
(1817).  Cf.  Conant  v.  Seneca  County 
Bank,  1  Ohio  St.  298  (1853);  Helm  r. 
Swiggett,  12  Ind.  194  (1859):  Dunlop  v. 
Dunlop,  L.  R.  21  Ch.  D.  583  (1882). 

5  Citizens',  etc.  Bank  v.  Kalamazoo, 
etc.  Bank,  111  Mich.  313(1896);  iSeBige- 
low,  2  Ben.  469  (1868);  s.  C,  3  Fed.  Cas. 
341;  Geyer  r.  Western  Ins.  Co.,  3  Pittsb. 
(Pa.)  41  (1867);  Arnold  v.  Suffolk  Bank, 
27  Barb.  424  (1857);  Planters',  etc.  Ins. 
Co.  V.  Selma  Sav.  Bank,  63  Ala.  585 
(1879). 

6  Spurlock  V.  Pacific  R.  R.,  61  Mo.  319 
(1875);  McCready  v.  Rumsey,  6  Duer, 
574  (1857);  Regina  v.  Wing,  33  Eng.  L. 
&  Eq.  80  (1855);  Re  Hoylake  Ry.,  L.  R. 
9  Ch.  257  (1874);  Companies  Clauses  Con- 
solidation Act,  1845  (8  &  9  Vict.,  c.  16, 
§  16;;  Shaw  v.  Rowley,  5  Eng.  Ry,  & 
Can.  Cas.  47  (1847);  Ex  jJCirte  Tooke,  6 
Eng.  Ry.  &  Can.  Cas.  1  (1849).  Cf  Newry, 
etc.  Ry.  V.  Edmunds,  2  Exch.  118  (1848); 
Ambergate,  etc.  Ry.  v.  Mitchell,  4  Exch. 
540  (1849);  Great  North,  etc.  Ry.  v.  Bid- 
dulph.  7  M.  &  W.  243  (1840);  Pittsburgh, 
etc.  R.  R.  V.  Clarke,  29  Pa.  St.  146  (1857); 
Rogers  v.  Huntingdon  Bank,  12  Serg.  & 
R(Pa.)77  (1824);  Petersburg  Sav.  etc, 
Co.  V.  Lumsden,  75  Va.  327  (1881).    The 


1123 


§  528.]  LIEN    OF    THE    COKPOKATION    ON    STOCK.  [CH.  XXXL 

But  the  iien  does  not  attach  until  a  call  is  made.'  The  fact 
that  the  corporation  has  other  security  does  not  prevent  it  from 
enforcing  its  charter  lien  on  the  stock.^  The  lien  also  attaches  to 
the  stock  of  a  depositor  who  has  overdrawn  his  account.'  Where 
a  corporation  has  a  lien  on  stock  for  debts  of  the  stockholder,  an 
embezzlement  by  the  stockholder  as  an  officer  is  such  a  debt.^ 
Where  by  charter  the  amount  which  a  bank  may  loan  to  a  single 
person  shall  not  -exceed  ten  per  cent,  of  its  capital  stock,  a  lien 
which  it  has  by  charter  on  stock  is  not  good  for  the  excess  of  a 
loan  over  ten  per  cent.^ 

§  528.  Eight  of  lien  as  against  miscellaneous  jyarties. —  There  is 
no  lien  on  the  stock  as  to  debts  of  an  intervening  unrecorded  owner 
of  the  stock.**  Where,  however,  the  corporation  is  notified  of  the 
sale  and  transfer  of  the  certificates  of  stock,  without  iv  return  of 
the  certificates  to  the  corporation  and  the  taking  out  new  certifi- 
cates in  the  name  of  the  purchaser,  and  the  corporation  notes  the 
fact  in  its  certificate  book,  the  corporation  has  a  lien  on  the  stock 
for  a  debt  due  from  the  purchaser,  and  not  even  a  ?jo7ia  fide  pur- 
chaser from  him  can  avoid  such  lien.''  A  lien  of  a  corporation  on 
stock  for  debts  due  it  from  its  stockholders  does  not  attach-to  stock 
purchased  by  another  corporation,  the  latter  having  no  power  to 
purchase.*  The  lien  attaches  to  trust  stock  for  debts  due  from  a 
trustee  who  holds  stock  in  trust,  but  in  his  own  name,  and  without 
any  indication  of  the  trust.^  Where  a-  cestui  que  trust  owes  the 
corporation  a  debt,  the  lien  attaches  to  his  stock  though  held  for 
him  in  the  name  of  a  trustee.''^     And  stock  standing  on  the  corpo- 

lien  secures  general  debts  as  well  as  un-  ^  Reese  v.  Bank  of  Commerce,  14  Md. 

paid  calls.  National  Bank,  etc.  r.  Roches-  271  (1859). 

ter  Tumbler  Co.,  172  Pa.  St.  614  (1896).  *  Commonwealth  v.  Standard,  etc.  Co., 

1  Hall  V.  U.  S.  Ins.  Co.,  5  Gill  (Md.),  484  50  Atl.  Eep.  1003  (Pa.  1902). 

(1847).   Cf.  Re  Bachman,  12  Nat.  Bankr.  &  People's  Bank  v.  Exchange  Bank,  43 

Reg.  223  (1876);  &  C,  2  Fed.  Cas.  310;  S.  E.  Rep.  269  (Ga.  1^02). 

Pittsburgh,  etc.  R.  R.  v.  Clarke,  29  Pa.  6  Helm  v.  Swiggett,  12  Ind.  194  (1859). 

St.  146  (1857).     A  director  transferring  ^  Bank  of  Commerce  v.  Bank  of  New- 

his  shares  before  the  call   avoids  the  port,  63  Fed.  Rep.  898  (1894). 

lien,  although  he  knew  the  call  was  to  ^  Lanier  Lumber  Co.  v.  Rees,  103  Ala. 

be  made.     The  call  is  made  when  the  622  (1894). 

date  of  payment  is  fixed,  and  not  by  a  ^  New  London,  etc.  Bank  v.  Brockle- 

mere  general  resolution.    Re  Cawley,  bank,  L.  R.  21  Ch.  D.  302  (1882);  Young 

etc.  Co.,  L.  R.  42  Ch.  D.  209  (1889).     The  v.  Vough,  23  N.  J.  Eq.  325  (1873);  Burns 

lien  attaches  when  a  call  is  made,  and  v,  Lawrie,  2  Sc.  Ct.  of  Sess.  Cas.  (2d  ser.) 

not  when  it   becomes   due.     Queen  v.  1348  (1840),  otherwise  cited,  2  Dunlop, 

Londonderry,   etc.   Ry.,   13   Q.   B.    998  1348. 

(1849).  loStebbins  v.   Phoenix  F.  Ins.  Co.,  3 

2  German  Nat.  Bank  v.  Kentucky  T.  Paige,  350  (1832). 
Co.,  40  S.  W.  Rep.  458  (Ky.  1897);  Dun- 

lop  V.  Dunlop,  L.  R  21  Ch.  D.  583  (1882). 

1124 


CH.  XXXI.]  LIEX    OF    THE    COEPOKATION   ON    STOCK.  [§  529. 

rate  books  in  the  name  of  a  fictitious  person  is  subject  to  a  lien  for 
the  indebtedness  of  the  real  owner.'  The  corporation,  in  transfer- 
ring stock  to  the  trustee  in  bankruptcy  of  a  stockholder,  has  no 
right  to  write  on  the  face  of  the  certificate  that  it  is  subject  to  a 
lien  belonging  to  the  corporation,  even  though  such  lien  exists,  all 
other  certificates  of  stock  not  haYing-  anv  such  writino-  on  them.- 
An  executor  is  entitled  to  have  stock  belonging  to  the  estate  trans- 
ferred into  his  own  name  as  executor,  and  the  corporation  is  liable 
in  damages  for  refusal  to  make  such  transfer,  even  though  the  cor- 
poration has  a  lien  on  the  stock  for  a  debt  owed  it  by  the  deced- 
ent.' 

§  529.  The  lien  canle  enforced  for  the  lenefit  of  the  corporation 
only. —  The  right  of  a  corporation  to  a  lien  on  the  stock  of  its 
stockholders  as  security  for  the  payment  of  their  debts  to  the  cor- 
poration is  a  right  to  be  enforced  only  by  the  corporation  and  ex- 
clusively for  its  own  benefit.  Accordingly,  it  is  held  that  the 
corporation  cannot  become  the  assignee  of  the  claim  of  some  third 
person  against  one  of  its  stockholders  in  order  to  enforce  payment 
of  that  claim  for  the  benefit  of  the  third  person  by  a  recourse  to 
the  corporate  lien  on  the  stockholders  stock.*  ISTeither  can  the 
corporation  be  compelled,  for  the  benefit  of  sureties  as  to  a  part 
of  the  stockholder's  indebtedness,  to  apply  the  proceeds  of  the  sale 
of  the  stock  to  the  liquidation  of  that  part  of  their  claim  which  is 
secured.^  The  lien  does  not  extend  to  claims  ascainst  the  stock- 
holder  on  paper  made  by  the  stockholder  and  purchased  by  the 

1  Stebbins  v.   Phoenix  F.  Ins.  Co.,  3    and  Great  Britain."   London,  etc.  Bank 
Paige,  350  (1832),  where  the  president  of    r.  Aronstein,  117  Fed.  Rep.  601  (1902). 

a  corporation  with  fraudulent  intent  *  A  bank  having  a  lien  by  statute  for 
procured  shares  to  be  recorded  in  a  fie-  any  debt  held  by  it  against  a  stock- 
titious  name,  and,  having  himself  be-  holder  cannot  purchase  notes  of  the 
come  indebted  to  the  corporation,  pro-  stockholder  for  the  express  purpose  of 
cured  an  assignment  of  the  shares  to  acquiring  such  lien,  the  bank  at  the 
another  creditor,  who  sought  to  have  time  of  the  purchase  knowing  that  the 
the  transfer  recorded.  Held,  that  the  stock  had  been  pledged  by  the  stock- 
lien  still  attached  for  the  debts  of  the  holder  to  another  creditor.  Bank  v. 
original  holder.  Bonnie,  43  S.  W.  Rep.  407  (Ky.  1897); 

2  Re  W.  Key,  etc.,  86  L.  T.  Rep.  374  White's  Bank  v.  Toledo,  etc.  Ins.  Co.,  12 
(1902).  Ohio  St.  601  (1861).     To  the  point  that 

3  Under  the  statutes  of  California  this  lien  is  one  exclusively  for  the 
this  rule  applies  to  an  alien  corporation  benefit  of  the  corporation,  see  Bank  of 
doing  business  in  that  state,  the  stat-  U tica  v.  Smalley,  2  Cow.  770  (1824). 
utes  of  the  state  requiring  such  corpo-  5  Cross  v.  Phenix  Bank,  1  R  I.  39 
rations  to  make  transfers  in  that  state.  (1840).  But  see  Kuhns  v.  Westmore- 
It  applies  even  though  the  statutes  of  land  Bank,  2  Watts  (Pa.),  136  (1833), 
Great  Britain  forbid  transfers  of  stock  where  it  is  said  that  "  the  principle 
"without  administration  upon  such  that  a  surety  is  entitled  to  the  benefit 
property  under  the  laws  of  England  of    all    the    creditor's   securities  is  of 

1125 


§  530.] 


LIEN    OF   THE    CORPORATION    ON    STOCK. 


[cii. 


XXXI. 


corporation  '■  The  lien,  however,  is  for  the  benefit  of  the  corpora- 
tion, and  it  may  apply  the  proceeds  of  the  sale  of  the  stock  in  such 
a  way  as  best  to  subserve  itsow^n  interest.- 

§  530.  Methods  of  enforcing  the  lien.— When  a  corporation  has 
a  lien  upon  the  stock  of  those  of  its  stockholders  who  are  indebted 
to  it,  it  may  refuse  to  allow  a  transfer  of  the  stock  until  the  debt  is 
paid  or  secured  to  its  satisfaction.'  And  the  corporation  may  insist 
upon  its  lien  and  hold  the  stock  even  against  a  loyiajide  purchaser, 
inasmuch  as  purchasers  of  stock  are  bound  to  take  notice  of  legal 

liens.* 

The  corporation  may  proceed  by  an  attachment  of  the  stock.* 
So  also,  upon  non-payment  of  the  debt,  the  corporation  may  file  a 
bill  in  a  court  of  chancery  and  have  the  stock  sold  in  the  usual 
way,  as  in  other  cases  of  property  held  under  a  lien.^  In  Mich- 
io-an,  however,  it  is  held  that  a  suit  in  equity  will  not  lie  to  enforce 


such  universal  application  that  it  would 
require  strong  evidence  of  legislative 
intention  to  make  the  present  case  an 
exception  to  it."  Cf.  alsoKlopp  v.  Leb- 
anon Bank,  46  Pa.  St  88  (1863);  Peters- 
burg Sav.  etc.  Co.  v.  Lurasden,  75  Va. 
ii27.  340  (1881). 

1  Boyd  V.  Redd,  130  N.  C.  335  (1897). 

2  Planters',  etc.  Ins.  Co.  v.  Selma  Sav. 
Bank,  63  Ala.  585  (1879);  Mount  Holly 
Paper  Co.'s  Appeal,  99 Pa.  St.  513  (1882); 
Anglo-Californian  Bank  v.  Grangers' 
Bank,  63  Cal.  359  (1883);  Bishop  v.  Globe 
Co.,  135  Mass.  133  (1883). 

3  Reese  v.  Bank  of  Commerce,  14  Md. 
271  (1859);  First  Nat.  Bank  v.  Hartford, 
etc.  Ins.  Co..  45  Conn.  23  (1877);  Van- 
sands  V.  Middlesex  County    Bank,  26 
Conn.  144    (1857);    Farmers'   Bank    v. 
Iglehart,    6  Gill  (Md.),  50   (1847);    Mo 
Cready  v.  Rumsey,  6  Duer,  574  (1857); 
Tuttle  V.  Walton,  1  Ga.  43  (1846);  Sewall 
V.  Lancaster  Bank,  17  Serg.  &  R.  (Pa.) 
285  (1828);  Rogers  f.  Huntingdon  Bank, 
13  Serg.  &  R,  (Pa.)  77  (1834);  Grant  v. 
Mechanics'  Bank,  15  Serg.  &  R.    (Pa.) 
140  (1826).     Cf.  Sabin  v.  Bank  of  Wood- 
stock, 21  Vt.  353  (1849);  West  Branch 
Bank  v.  Armstrong,  40  Pa.  St.  278  (1861). 
In  Bishop  v.  Globe  Co.,  135  Mass.  133 
(1883),  the  rule  is  declared  that  if  by 
the  law  of  the  state  under  which'a  cor- 
poration is  organized   the  corporation 


has  a  lien  on  the  stock  of  any  stock- 
holder for  a  debt  due  from  him  to  the 
corporation,  the  lien  is  a  good  defense 
to  an  action  in  another  state  against 
the  corporation  by  a  person  to  whom 
the  stockholder  has  transferred  his 
stock,  but  in  whose  name,  by  reason  of 
the  lien,  the  corporation  has  refused  to 
register  the  transfer.  In  Farmers' 
Bank's  Case,  2  Bland,  Ch.  (Md.),  394 
(1830),  and  Brent  v.  Bank  of  Washing- 
ton, 10  Pet.  596  (1836),  bills  were  filed  by 
the  owners  of  the  stock  to  compel  a 
transfer,  and  the  corporation  defended 
on  the  ground  of  its  lien. 

4  See  §  533,  supra. 

5  Sabin  v.  Bank  of  Woodstock,  21  Vt. 
353  (1849). 

6  A  lien  of  a  corporation  may  be  en- 
forced by  a  suit  in  equity.  Wright,  etc. 
Co.  V.  Hixon,  105  Wis.  153  (1899);  Re 
Morrison,  10  Nat.  Bankr.  Reg.  105  (1873); 
s.  c,  17  Fed.  Cas.  831.  Under  the  Cali- 
fornia code  a  corporation  may  by  suit 
foreclose  a  lien  which  it  has  on  its 
stock.  Mechanics',  etc.  Assoc,  v.  King, 
83  Cal.  440  (1890).  To  enforce  a  lien 
upon  stock  under  the  Alabama  statute 
no  action  on  the  part  of  the  board  of 
directors  is  necessary.  Elliott  v.  Sib- 
ley, 101  Ala.  344  (1893).  A  suit  to  en- 
force a  statutory  lien  of  a  bank  on 
shares  of  its  own  capital  stock  held  by 


1136 


OH.  XXXI.]  LIEN    OF   THE    COEPORATION    ON    STOCK.  [§  530. 

a  statutory  lien  which  a  corporation  has  on  stock  of  its  stockhold- 
ers for  debts  due  from  them  to  it.^  It  was  on  very  much  the  same 
theory  as  this  that  the  iS^ew  England  and  Pennsylvania  courts 
originally  held  that  a  chancery  court  had  no  inherent  jurisdiction 
to  foreclose  a  mortgage  lien  —  decisions  which  for  half  a  century 
embarrassed  those  states  until  the  legislature  created  the  jurisdic- 
tion which  ought  never  to  have  been  denied.^  In  a  suit  to  fore- 
close a  lien  the  transferrer  of  the  stock  is  not  a  necessary  party.^ 
A  lien  may  be  enforced,  even  though  the  debt  is  barred  by  the 
statute  of  limitations.*  A  decree  authorizing  the  sale  of  stock  for 
the  payment  of  the  debt  need  not  give  the  stockholder  the  right  of 
redemption.  An  absolute  and  valid  title  may  pass  to  the  purchaser 
immediately  upon  the  sale.^  A  valid  lien  in  favor  of  a  bank  upon 
shares  of  stock  in  the  bank  belonging  to  the  estate  of  a  deceased 
person  does  not  yield  to  a  prior  claim  against  the  estate  in  favor 
of  the  government.^  Where  the  stockholder  has  died,  and  his  es- 
tate is  being  distributed,  the  portion  going  to  the  corporation,  by 
reason  of  its  lien,  will  not  be  decreased  by  the  amount  of  such  divi- 
dends.'^ In  order  to  put  the  corporation  in  tlie  wrong  for  a  refusal 
to  transfer  where  it  claims  more  than  is  due,  the  stockholder  must 
tender  what  he  admits  to  be  due.^  The  fact  that  a  stockholder 
claims  that  the  corporation  owes  him  more  money  than  he  owes  it 

one  of  its  debtors  was  sustained  in  Mc-  ^  Brent  v.  Bank  of  Washington,  10 

Ilroy,  etc.  Co.  v.   Dickson,  66  Ark.  327  Pet.  596  (1836).     A  judgment  creditor's 

(1899).  execution  lien  on  bank  stock  is  subject 

1  Aldine  Mfg.  Co.  v.  Phillips,  118  Mich,  to  the  lien  of  the  corporation  itself  by 
163  (1898).  statute  on  the  stock  for  debts  due  to 

2  See  §§  833,  824,  834,  z/i/^«.  it   from  the  judgment  debtor,  and  a 
'Citizens',  etc.  Bank  v.    Kalamazoo,     further    statutory  provision   that   the 

etc.  Bank,  111  Mich.  313  (1896).  enforcement  of  the  corporation's  lien 

*  Commonwealth    v.    Standard,    etc.  shall  not  affect  attachment  or  execu- 

Co..  50  Atl.  Rep.  1003  (Pa.  1902).     See  tion  liens  goes  merely  to  the  remedy 

also  §  527,  supra.  and  does  not  affect  the  priority.  Spring- 

5  Reese  v.  Bank  of  Commerce,  14  Md.  field,  etc.  Co.  v.  Bank  of  Batesville,  68 

271.  284  (1859).     In  one  case  the  lien  was  Ark.  234  (1900). 

held  to  be  equivalent  to  a  pledge;  and  ''In  re  Hovey's  Estate,  198  Pa.  St.  385 

it  was  held  that,  after  giving  due  no-  (1901).     See  also  §  473,  supra. 

tice  to  the  delinquent  stockholder,  the  ^  Pierson   v.  Bank  of  "Washington,  3 

corporation  might  sell  at  public  auction  Cranch,  C.  C.  363  (1828);  s.  C,  19  Fed. 

without  filing  a  bill  to  foreclose.  Farm-  Cas.  671.     In  German  Security  Bank  u 

ers'  Bank's  Case,  3  Bland,  Ch.  (Md.)  394  Jefferson.  10  Bush  (Ky.),  326  (1874),  it 

(1830).     In  this  case  it  is  also  held  that,  was  held  that,  where  the  stock  sold 

where  the  corporation  neglects  or  re-  under  the  lien  realized  a  sum  insuffi- 

fuses  to  sell  the  stock  of  a   deceased  cient  to  satisfy  the  corporate  debt,  the 

stockholder  who  is  in  arrears,  the  admin-  unpaid  balance  of  the  claim  of  the  cor- 

istrator  may  file  a  bill  and  obtain  an  poration  could  not  be  paid  until  there 

order  of  sale  directed  to  the  corporation,  had  been  a  proportionate  payment  of 

112? 


§  531.] 


LIEN    OF   THE    CORrORATION    ON    STOCK. 


[CH,  XXXI. 


is  not  sufficient  to  sustain  a  bill  in  equity  to  enjoin  the  corporation 
from  selling  the  stock  in  order  to  pay  the  amount  due  the  corpora- 
tion. Some  other  ground  of  equitable  jurisdiction  must  be  set  forth.^ 
Where  a  corporation  has  other  security  also,  a  court  of  equit}'  may 
compel  it  to  resort  to  that  first.-  A  corporation  is  liable  in  dam- 
ages for  selling  the  stock  of  a  stockholder  for  non-payment  of  dues, 
where  such  sale  was  irregular  and  illegal.'-'  Where  by  statute  bank 
stock  may  be  sold  for  non-payment  of  assessments  levied  upon  it  to 
restore  the  capital  stock,  the  money  for  which  it  is  sold  belongs  to 
the  stockholder  and  not  to  the  bank.^ 

§  531.  The  corporation  may  tvaive  its  lien. —  A  corporation  which 
has  a  lien  upon  its  stockholders'  stock  for  debts  due  to  it  from  them 
need  not  necessarily  depend  upon  or  insist  upon  its  lien  for  the 
collection  of  the  debt.  It  may  collect  the  debt  as  though  there 
was  no  lien.^    Hence  it  is  that  the  lien  of  a  corporation  on  stock 


the  claims  of  other  creditors  of  the 
stockholder  out  of  his  general  assets. 
Cf.  Re  Peebles,  2  Hughes,  394  (1875); 
s.  C,  19  Fed.  Cas.  94,  and  §§473, 476,  supra. 

1  Elliott  V.  Sibley,  101  Ala.  344  (1893). 
This  case  holds,  also,  that  in  a  suit  in 
equity  by  a  stockholder  to  enjoin  a  sale 
of  his  stock  by  the  corporation  for  a 
debt  due  the  corporation,  the  corpora- 
tion is  a  necessary  party  defendant, 
and  that  the  complainant  must  aver  a 
readiness  to  pay  whatever  may  be  found 
due. 

2  Covington,  etc.  Bank  v.  Commercial 
Bank,  65  Fed.  Rep.  547  (1895).  Where 
the  company  has  a  lien  on  stock,  and 
the  stockholder  sells  a  part,  the  pur- 
chaser may  require  the  company  to 
tirst  have  recourse  to  the  unsold  part  to 
collect  its  debt.  A  subsequent  execu 
tion  levied  on  the  unsold  part  does  not 
deprive  the  purchaser  of  the  other  part 
of  his  rights  stated  above.  Gray  v. 
Stone,  69  L.  T.  Rep.  282  (1893). 

3  The  sale  here  was  contrary  to  the 
requirements  of  the  by-laws.  The  cor- 
poration bought  the  stock  itself  at  such 
sale.  The  fact  that  a  surplus  realized 
at  the  sale  was  sent  to  the  stockholder 
by  check,  and  was  received  by  him,  did 
not  bar  his  remedy,  he  being  in  igno- 
rance of  the  illegality.    Allen  v.  Ameri- 


can Building,  etc.  Assoc,  49  Minn.  544 
(1892). 

*  Chicago  T.  &  T.  Co.  v.  State  Bank, 
86  Fed.  Rep.  863  (1898).  In  Tennessee 
it  has  been  held  that  where  stock  is 
only  partly  paid,  and  the  corporation 
issues  a  certificate  reciting  on  its  face 
how  much  is  still  due,  and  the  holder 
pledges  it,  and  no  transfer  to  the 
pledgee  is  made  on  the  corporate  books, 
the  corporation  can  have  a  sale  of  the 
stock  for  non-payment  of  the  balance 
remaining  due,  but  such  proportion  of 
the  proceeds  will  be  paid  to  the  pledgee 
as  the  amount  already  paid  on  the  stock 
bears  to  the  par  value  of  the  stock. 
Ingles,  etc.  Co.  v.  Knoxville,  etc.  Co.,  53 
S.  W.  Rep.  1111  (Tenn.  1899). 

5  A  subscriber  for  stock  cannot  avoid 
liability  to  the  corporation  by  setting 
up  that  the  corporation  has  a  lien  on 
the  stock  therefor  and  may  enforce  it. 
Lankershim,  etc.  Co.  v.  Herberger,  82 
Cal.  600  (1890).  Even  though  by  the 
statutes  under  which  an  English  corpo- 
ration is  organized  the  company  has  a 
lien  on  the  stock  for  unpaid  assessments 
and  may  forfeit  the  stock  for  non-pay- 
ment, yet  this  does  not  prevent  a  suit 
to  collect  the  assessment.  Nashua,  etc. 
Bank  v.  Anglo-American,  etc.  Co.,  108 
Fed.   Rep.  764  (1901).    See  also  g   124, 


1128 


CH.  XXXI.]  LIEN    OF    THE    COKPOEATION    ON    STOCK.  [§  531. 

may  be  asserted  and  enforced,  or,  in  the  discretion  of  the  corpora- 
tion, it  may  be  waived.^ 

^Yhere  the  corporation  has  other  security  it  is  not  obliged  to 
resort  to  the  lien.-  Cases  may  arise,  however,  where  the  interven- 
ing rights  of  other  creditors  of  the  stockholder  render  it  inequitable 
for  the  corporation  to  waive  its  lien  on  the  stock.^ 

Accordingly,  where  a  note  discounted  for  a  stockholder  was  pro- 
tested for  non-payment,  it  Avas  held  that  the  bank  might  proceed 
directly  against  the  indorser  without  resorting  to  its  lien.^  The 
-corporation,  by  waiving  its  lien,  does  not  discharge  a  surety,  unless 
the  surety  has  given  the  corporation  express  notice  not  to  waive 
the  lien.^  But  where  a  corporation  has  a  lien  on  stock  and  at  the 
same  time  owes  a  stockholder  a  certain  debt  which  is  guaranteed  by 
a  third  person,  and  the  stockholder  causes  the  corporation  to  waive 
the  lien  without  the  consent  of  the  guarantor,  the  guarantor  is 
thereby  discharged.^  The  corporation  will  not  be  held  to  have 
waived  its  lien  upon  the  stock  of  its  debtor  merely  because  it  has 
taken  other  or  additional  security  for  the  debts; '  nor  because  it  as- 
sents to  a  general  assignment  by  the  stockholder  for  the  benefit 
of  creditors.^  But  of  course  if  a  corporation,  having  a  statutory 
lien  on  stock,  agrees  to  take  other  security  in  place  thereof,  it 
thereby  waives  its  lien.^  The  corporation  may  allow  the  transfer 
of  a  portion  of  a  stockholders  stock  without  waiving  its  lien  on 
the  rest.'"  The  fact  that  the  corporation  transfers  other  stock  be- 
longing to  the  same  stockholder  is  no  waiver  of  its  lien  on  stock  as 
against  a  pledgee  of  some  of  the  stock,  the  debt  being  greater 

supra.     Where    the    statute    provides  sert  the  lien  is  not  equivalent  to  a  re- 

that  stock  shall  be  taxed,  and  that  the  linquishment  or  waiver  of  it.      First 

corporation  shall  pay  the  tax  and  have  Nat.  Bank  v.  Hartford,  etc.  Ins.  Co.,  43 

a  lien  therefor  on  the  stock,  the  stock-  Conn.  22,  44  (1877). 

holder  is  not  personally  liable  to  the  ^  Dunlop  v.  Dunlop,  L.  R.  21  Cii.  D. 

corporation  which  has  paid  such  tax.  583  (1882). 

Mercantile,  etc.  Co.  v.  Mellon,  196  Pa.  ^  j^g  Bachman,    12  Nat.  Bankr.  Reg. 

6U  176  (1900).  223  (1876);  s.  a.  2  Fed.  Cas.  310. 

1  National  Bank  u.  Watsontown  Bank,  <  Cross  v.    Phenix  Bank,    1  R.  L  39 

105  U.  S.  217  (1881);  Hodges  v.  Planters'  (1840). 

Bank,  7  Gill  &  J.  (Md.)  306  (1835);  Hall  5  Perrine  v.  Fireman's  Ins.  Co.,  22  Ala 

V.  U.  S.  Ins.  Co.,  5  Gill  (Md.),  484  (1847);  575  (1853). 

Re  Hoylake  Ry.,  L.   R.  9  Ch.  257,  259  «  Robertson  v.  Sully,  157   N.  Y.  024 

(1874).       But    see     Conant    v.    Seneca  (1899). 

County  Bank,  1  Ohio  St.  298  (1853);  Re  '  Union  Bank  v.  Laird,  2  Wheat.  390 

Bigelow,  1  Nat.  Bankr.  Reg.  667  (1868);  (1817). 

S.  c,  3  Fed.  Cas.  341.     A  waiver  is  the  s  Dobbins  v.  Walton,  37  Ga.  614  (1868). 

intentional  relinquishment  of  a  known  ^  St.  Paul  Nat.  Bank  v.  Life    Ins.  etc. 

■right.     It  is  not  to  be  inferred  and  im-  Co.,  71  Minn.  123  (1898). 

puted  to  a  corporation  in  the  absence  'OFirgt  Nat.  Bank  of  Hartford  u.  Hart- 

of  proof  of  it,  and  a  mere  failure  to  as-  ford,  etc.  Ins.  Co.,  45  Conn-  22  (1877). 

1129 


g  531.] 


LIEN    OF   THE    CORPORATION   ON    STOCK. 


[CH.  XXXI. 


than  the  value  of  all  the  stock. ^  A  waiver  of  the  lien  for  a  limited 
time  is  fatal,  provided  the  stock  is  transferred  during  that  time.^ 

A  waiver  which  will  bind  the  corporation  may,  in  the  absence  of 
something  to  qualify  the  power,  be  made  by  the  cashier  of  a  bank, 
acting  by  virtue  of  an  express  or  implied  authority,  for  the  board 
of  directors;  ^  or  the  secretary  of  an  insurance  company;*  or  the 
general  manager  or  properly-qualified  general  agent  of  the  corpo- 
ration, especially  if  that  is  a  general  custom  of  the  company.'^ 
Accordingly,  where  one  buys  stock  on  the  faith  of  a  representation 
of  the  corporate  officers  that  the  stock  is  unincumbered,  he  is 
entitled  to  the  stock  free  from  any  corporate  lien.^ 

Where  the  corporate  officers  allow  a  transfer  to  be  registered, 
and  a  new  certificate  to  be  issued,  there  is  a  waiver  of  the  corpo- 
rate lien  as  to  the  debts  of  the  trans ferrer.'^  Where  the  corpora- 
tion sells  a  claim  it  has  against  a  stockholder  it  thereby  loses  its- 
lien.®  The  lien  is  not  waived  by  a  by-law  that  stockholders  must 
offer  their  stock  to  the  bank  before  selling  elsewhere,  and  that  after 


But  cf.  Presbyterian  Cong.  v.  Carlisle 
Bank,  5  Pa.  St.  345  (1847). 

1  Commonwealth  v.  Standard,  etc.  Co., 
50  Atl.  Rep.  1003  (Pa.  1902). 

2  Thus,  if  within  such  time  the  stock 
is  pledged  for  a  debt,  the  right  of  the 
corporation,  after  the  expiration  of  the 
time  to  acquire  its  charter  lien,  is  sub- 
ordinate to  the  right  of  the  pledgee  un- 
til the  debt  is  paid  or  the  pledge  is  re- 
leased. Bank  of  America  v.  McNeil, 
10  Bush  (Ky.),  54(1873). 

3  National  Banku.  Watsontown  Bank, 
105  U.  S.  217  (1881).  So,  also,  the  refusal 
of  the  cashier  to  permit  a  transfer  is 
the  act  of  the  bank,  for  which  it  may 
be  charged.  Case  v.  Bank,  100  U.  S. 
446  (1879).  Where  the  cashier  of  a  bank 
takes  part  in  the  pledging  of  stock  by 
one  of  the  stockholders,  the  bank  can- 
not subsequently  claim  a  lien  on  the 
stock  for  debts  incurred  by  the  stock- 
holder after  such  pledge.  Birmingham 
Trust,  etc.  Co.  v.  Louisiana  Nat.  Bank,  99 
Ala.  379  (1893). 

4  Chambersburg  Ins.  Co.  v.  Smith,  11 
Pa.  St.  120  (1849).  Cf.  Kenton  Ins.  Co. 
V.  Bowman,  84  Ky.  430  (1886). 

*See  Bishop  v.  Globe  Co.,  135  Mass. 
132  (1883);  Young  v.  Vough,  23  N.  J. 
Eq.  325  (1873). 


fi  Moore  v.  Bank  of  Commerce,  52  Mo. 
377  (1873). 

7  Hill  V.  Pine  River  Bank,  45  N.  H. 
300  (1864);  Higgs  v.  Northern  Assam 
Tea  Co.,  L.  R.  4  Exch.  387  (1869);  Re 
Northern  Assam  Tea  Co.,  L.  R.  10  Eq. 
4.58  (1870).  After  transfer  on  the  books 
the  transferrer  is  no  longer  liable  for 
the  subscription  price,  and  the  trans- 
feree is  liable  even  though  the  cor- 
poration has  a  lien  on  the  stock  by 
statute,  the  transfer  having  been  al- 
lowed by  the  officers  of  the  corporation. 
Rochester,  etc.  Co.  v.  Raymond,  158 
N.  Y.  576  (1899).  So,  also,  a  by-law  re- 
quiring the  consent  of  the  board  of 
directors  to  a  transfer  by  one  indebted 
to  the  corporation  is  held  to  be  repealed 
where  a  custom  of  disregarding  it  has 
been  shown,  it  appearing  also  that  the 
secretary  had  been  allowed  to  exercise 
his  own  discretion  about  such  transfers 
without  consulting  the  directors.  Jn 
such  a  case  the  consent  of  the  secretary 
to  the  transfer  is  a  waiver  of  the  lien. 
Chambersburg  Ins.  Co.  v.  Sraitli,  11  Pa. 
St.  120  (1849) ;  94  N.  W.  Rep.  200. 

8  Ralston  v.  Bank  of  California,  112 
Cal.  208  (1896). 


1130 


CH.  XXXI.]  LIEN    OF   THE    COEPOKATION    ON    STOCK.  [§  532. 

ten  days  they  may  sell  elsewhere.^  Where  a  party  about  to  take 
stock  in  pledge  inquires  of  the  corporation  as  to  its  value,  and  as  to 
whether  there  was  any  lien  upon  the  stock,  and  no  lien  is  claimed, 
and  he  then  takes  the  stock  in  pledge,  and  causes  an  indorsement 
thereof  to  be  made  on  the  stub  of  the  stock  book  of  the  corporation, 
the  corporation  cannot  thereafter  claim  a  lien  as  against  him;  and 
moreover,  a  subsequent  transfer  of  the  stock  by  the  pledgor  to  the 
corporation  as  security  for  a  debt  due  from  him  to  it  does  not  take 
precedence  over  the  first  pledge,  the  certificates  themselves  having 
been  transferred  to  the  first  pledgee,  but  not  transferred  on  the 
books.^  The  fact  that  the  debt  of  the  corporation  has  existed  sev- 
eral years  and  has  not  been  enforced  does  not  affect  the  company's 
statutory  lien  upon  stock  of  its  creditor.^ 

§  532.  The  lien  as  affected  J)y  transfers  and  notice. —  A  purchaser 
of  stock  is  bound  to  take  notice  of  the  statute  giving  a  lien  upon 
the  stock.*  Nevertheless,  upon  a  transfer  of  stock,  the  title  thereto 
passes  absolutely  as  between  transferrer  and  transferee,  even  though 
the  corporation,  in  the  assertion  of  a  lien  upon  the  stock  for  the  in- 
debtedness of  the  transferee,  refuses  to  register  the  transfer  until 
a  certain  debt  is  paid  or  secured.^  But  of  course  the  assignee  or 
transferee,  or  whoever  succeeds  to  the  rights  of  the  stockholder  in 
the  stock,  takes  it  subject  to  the  lien  of  the  corporation.^  And  when 

1  Citizens',  etc.  Bank    v.  Kalamazoo,  aflf'd,  114  N.  Y.  636.     Cf.  Dunn  v.  Cora- 

etc.  Bank,  111  Mich.  313  (1896).  mercial  Bank,  11  Barb.  580  (1853);  Mer- 

2Des  Moines,  etc.  Co.  v.  Des  Moines,  chants'  Bank  v.  Livingston.  74  N.  Y.  223 

etc.  Bank,  97  Iowa,  668  (1896).     Where  (1878);  Pittsburgh,  etc.  R.  R.  v.  Clarke. 

the  cashier  of  a  bank  tells  a  purchaser  29  Pa.  St.  146  (1857);  Sargent  v.  Essex 

of  stock  that  the  bank  has  no  lien  upon  Marine  Ry.,  26  Mass.  303  (1829);  Carroll 

the  stock,  a  statutory  lien  of  the  bank  v.  Mullanphy  Sav.  Bank,  8  Mo.  App.  249 

on  the  stock  is  waived  as  to  him.    Oak-  (1880).   Corporations  having  a  statutory 

land  C.   S.   Bank  v.   State  Bank,   113  lien   on  stock   for  debts  nevertheless 

Mich.  384  (1897).  must  allow  transfer  to  one  who  takes 

3  Wright,  etc.  Co.  v.  Hixon,  105  Wis.  subject  to  the  corporate  lien  for  part  of 

153  (1899).  the  unpaid  subscription.     Herdegen  v. 

*  See  §  533,  supra.  Cotzhausen,  70  Wis.  589  (1888).     A  cor- 

5  National  Banku.  Watsontown  Bank,  porate  lien  for  a  salary  paid  to  a  stock- 

105  D.  S.  317  (1881);  Johnston  v.  Laflin,  holder,  on  his  agreement  to  repay  any 

103  U.  S.  800  (1880);  Fitzhugh  v.  Bank  amount  in  excess  of  dividends  on  his 

ofShepherdsville,  3  T.  B.  Mon.  (Ky.)  136  stock,   has    precedence    as    against    a 

(1825);  St  Louis,  etc.  Ins.  Co.v.Goodfel-  pledgee  of  the  stock.    Russell,  etc.  Ca 

low,  9  Mo.  149  (1845) ;  Commercial  Bank  v.  v.  Hammond,  etc.  Co.,  89  N.  W.  Rep.  590 

Kortrighl,  33  Wend.  348  (1839);  s.  C.  sub  (Mich.  1903). 

nom.  Kortright  v.  Buffalo  Commercial  ^  Mobile  Mut.  Ins.  Co.  v.  Cullom,  49 

Bank,  30  Wend.  91  (1838);  Bank  of  Utica  Ala.  558  (1873);  New  Orleans  Nat,  Bank- 

V.  Smalley,  3  Cow.  770  (1834);  McNeil  v-  ing  Assoc,  v.  Wiltz,  10  Fed.  Rep.  330 

Tenth  Nat.  Bank.  46  N.  Y.  325  (1871);  (1881). 
People  V.  Miller,  39  Hun,  557,  563  (1886); 

1131 


§  532.] 


LIEN    OF    THE    CORPORATION   ON    STOCK. 


[CH.  XXXI. 


the  stock  is  sold  by  the  corporation  to  pay  the  debts  of  the  trans- 
ferrer, the  transferee  is  entitled  to  the  surplus,  if  any  there  be, 
which  remains  after  the  claim  of  the  corporation  is  satisfied.' 

The  corporation  cannot,  after  it  has  been  regularly  notified  of 
the  transfer,  assert  a  lien  upon  the  stock  to  secure  an  indebtedness 
of  the  transferrer  contracted  subsequently  to  the  notice.^  A  mere 
notice  to  the  bank  is,  in  such  a  case,  sufficient  to  protect  the  trans- 
feree. It  is  immaterial  that  the  transfer  was  not  registered.^  Where 
the  directors  of  a  corporation  know  that  a  stockholder  of  record 
has  transferred  his  stock,  the  corporation  cannot  claim  a  lien  for 
debts  incurred' subsequently.^  But  where  there  is  neither  a  register 
of  the  transfer  nor  notice  of  it  served  upon  the  corporation,  the 
stock  may  properly  be  subjected  to  a  corporate  lien  for  the  indebt- 
edness of  the  transferrer  incurred  subsequently  to  the  transfer.*     A 


iTuttle  V.  Walton.  1  Ga.  43  (1846); 
Foster  v.  Potter,  37  Mo.  525  (1866);  West 
Branch  Bank  v.  Armstrong,  40  Pa.  St. 
278  (1861);  Weston  v.  Bear  River,  etc. 
Co.,  5  Cal.  186  (1855). 

2Conant  v.  Seneca  County  Bank,  1 
Ohio  St.  298  (1853):  Nesmith  v.  Wash- 
ington Bank,  23  Mass.  334  (1828).  The 
same  rule  applies  where  the  stock  is 
pledged.  Bradford  Banking  Co.  v. 
Briggs,  L.  R  13  App.  Cas.  39  (1886). 
But  where  the  stockholder  transfers 
his  stock,  and  subsequently,  without 
notifying  the  corporation  of  the  trans- 
fer, borrows  money  from  the  corpora- 
tion in  regular  course  of  business,  the 
corporation  may  refuse  to  register  the 
transfer  and  may  insist  upon  the  lien. 
Piatt  V.  Birmingham  Axle  Co.,  41  Conn. 
255  (1874).  Where  it  is  the  custom  to 
have  the  corporation,  upon  request, 
certify  that  it  has  no  lien,  such  a  re- 
quest operates  as  notice  to  the  corpo- 
ration. Covington,  etc.  Bank  ti.  Com- 
mercial Bank,  65  Fed.  Rep.  547  (1895). 
This  case  holds  also  that  notice  to  the 
corporation  by  a  leaner  of  money  to 
the  stockholder  does  not  inure  to  the 
benefit  of  a  purchaser  who  knew  noth- 
ing thereof.     94  N.  W.  Rep.  200. 

3  Bank  of  America  v.  McNeil,  10  Bush 
(Ky.).  54  (1878).  See  also  §^  25'<,  .382,  383, 
490,  523.  s^ipra.  A  debt  incurred  after 
notice  to  the  corporation  of  a  transfer 

1 


of  stock  by  the  stockholder  is  not  pro- 
tected by  the  lien,  but  knowledge  ac- 
quired by  the  president  in  another 
capacity  is  not  such  a  notice.  People's 
Bank  v.  Exchange  Bank,  43  S.  E.  Rep. 
269  (Ga.  1902). 

4  Prince,  etc.  Co.  v.  St.  Paul,  etc.  Co., 
68  Minn.  121  (1897).  A  lien  of  a  bank  on 
stock  for  a  debt  due  from  a  stockholder 
to  the  bank  is  subject  to  a  pledge  of 
the  stock  where  such  pledge  was  made 
before  the  debt  was  incurred,  and  the 
bank  incurred  the  debt  with  knowl- 
edge of  the  pledge.  Knowledge  of  the 
facts  by  the  president  is  notice  to  the 
bank.  Curtice  v.  Crawford,  etc.  Bank, 
118  Fed.  Rep.  390  (1903). 

5  Piatt  V.  Birmingham  Axle  Co.,  41 
Conn.  255  (1874):  Jennings  v.  Bank  of 
California,  79  Cal.  333  (1889);  Gemmell 
V.  Davis,  75  Md.  546  (1893).  Where  the 
statute  gives  a  lien  for  debts  due,  the 
lien  applies  as  against  a  transfer  of  the 
certificate  made  before  the  debt  be- 
came due,  but  presented  to  the  corpo- 
ration for  transfer  after  the  debt  be- 
came due.  Michigan,  etc.  Co.  v.  State 
Bank,  111  Mich.  306  (1896).  As  to  the 
rule  in  England,  see  Miles  v.  New  Zea- 
land, etc.  Co.,  L.  R.  32  Ch.  D.  266  (1886): 
Dunlop  V.  Dunlop,  L.  R.  21  Ch.  D.  583 
(1883):  Societe  Generale  v.  Tramways 
Union  Co.,  L.  R,  14  Q.  B.  D.  424  (1884): 
New  London,  etc.  Bank  v.  Brocklebank, 

132 


CH.  XX5I.] 


LIEN    OF    THE    CORPOKATION    ON    STOCK. 


[§  53a. 


pledgee  who  is  duly  registered  on  the  corporate  books  as  a  stock- 
holder, but  to  whom  no  certificate  has  been  issued,  is  nevertheless 
protected  against  liens  upon  his  stock  for  the  indebtedness  of  the 
pledgor,'  A  corporate  lien  will  not  attach  to  stock  for  the  debts 
of  a  legatee  unless  the  legatee  accepts  the  stock.- 

Where  one  pays  a  debt  as  surety  for  a  stockholder,  he  is  entitled 
to  be  subrogated  to  the  rights  of  the  corporation  by  way  of  lien  on 
the  stockholder's  stock.'  And  where  the  transferee  pays  the  trans- 
ferrer's debt  to  the  corporation  in  order  to  obtain  a  registry  of  the 
transfer,  he  of  course  may  have  his  action  to  recover  back  from  his 
transferrer  the  amount  so  paid.* 

Where  the  company  has  a  lien  upon  the  stock  of  a  stockholder, 
the  latter  may  compel  the  company  to  assign  their  lien  to  a  third 
person  who  will  advance  the  money,  and  to  whom  the  shares  are 
at  the  same  time  transferred.'^ 

§  533.  Liens  on  national-danh  stock. —  TTational  banks  were  for- 
merly held  to  have  power  to  enact  by-laws  creating  a  lien  on  stock 
in  the  bank  for  debts  owed  by  its  owner  to  the  bank.®  But  the 
supreme  court  of  the  United  States,  when  the  question  came  before 
it,  refused  to  enforce  such  a  by-law,  and  decided  that  its  enactment 
was  not  within  the  spirit  of  those  provisions  of  the  National  Bank- 


L.  R  21  Ch.  D.  302  (1882).  In  England, 
however,  unrecorded  transferees  of 
stock  have  few,  if  any,  rights  as  against 
the  corporation.  It  is  held  in  Ohio  that 
where  the  certificates  of  stock  issued  by 
a  bank  contain  a  provision  on  their  face 
that  the  bank  shall  have  a  lien  on  the 
stock  for  all  debts  due  to  it  from  the 
registered  owner,  such  lien  is  valid  and 
applies  as  well  to  a  debt  contracted  after 
the  certificate  was  sold  but  before  it  was 
presented  for  transfer  on  the  books  of 
the  bank.  The  lien  exists  even  though 
neither  the  statutes  nor  the  by-laws  nor 
the  resolutions  of  the  board  of  directors 
provided  for  such  lien.  •  It  is  siifficient 
that  such  certificate  of  stock  was  the 
one  used  by  the  corporation.  Stafford 
V.  Produce,  etc.  Co.,  61  Ohio  St.  160  (1899). 
See  also  §  522,  supra.  Until  the  cor- 
poration has  notice  of  a  sale  or  a  pledge 
of  the  certificate  of  stock  it  may  con- 
tinue to  loan  money  to  the  stockholder 
and  have  a  lien  therefor.  People's  Bank 
V.  Exchange  Bank,  43  S.  E.  Rep.  269 
(Ga.  1902). 


1  Cecil  Nat.  Bank  v.  Watsontowu 
Bank,  105  U.  S.  217  (1881). 

2  Farmers'  Bank  v.  Iglehart,  6  Gill 
(Md.),  50  (1847). 

3  Young  V.  Vough,  23  N.  J.  Eq.  325^ 
(1873);  Hodges  v.  Planters'  Bank,  7  Gill 
&  J.  (Md.)  306,  310  (1835);  West  Branch 
Bank  v.  Armstrong,  40  Pa.  St.  278  (1861); 
Klopp  V.  Lebanon  Bank,  46  Pa.  St.  88 
(1863).  Cy.  Higgs  V.  Northern  Assam 
Tea  Co.,  L.  R.  4  Exch.  387  (1869):  Re 
Northern  Assam  Tea  Co.,  L.  R.  10  Eq, 
458  (1870);  National  Exch.  Bank  v.  Sil- 
liman,  65  N.  Y.  475  (1875). 

4  Bates  V.  New  York  Ins.  Co.,  3  Johns. 
Cas.  238  (1802).    See  also  §  262,  supra. 

^Everitt  v.  Automatic,  etc.  Co., 
[1892]  3  Ch.  506. 

6 The  leading  case  was  Knight  v.  Old 
Nat.  Bank,  3  Cliff.  429-  (1871);  S.  C,  14 
Fed.  Cas.  772,  upholding  the  lien.  To 
the  same  effect,  see  Lockwood  v.  Me- 
chanics' Nat.  Bank,  9  R.  I.  308  (1869); 
Re  Dunkerson,  4  Biss.  227  (1868);  S.  C, 
8  Fed.  Cas.  48;  Young  v.  Vough,  23  N. 
J.  Eq.  325  (1873). 


1133 


§  533.] 


LIEN    OF    THE    COKPORATION    ON    STOCK. 


[CH.  XXXI. 


ing  Act  of  1864  which  confer  power  upon  the  management  of  a 
national  bank  to  regulate  the  business  of  the  bank  and  to  conduct 
its  affairs.'  In  the  present  state  of  the  law,  therefore,  no  national 
bank  can,  by  any  by-law,  create  any  lien  upon  shares  of  stock  in 
the  bank  to  secure  the  payment  of  any  indebtedness  which  the 
owner  of  the  stock  maj'  contract  to  the  bank.-  A  national  bank 
cannot  claim  a  lien  on  stock  for  a  stockholder's  debt,  even  though 
notice  of  such  lien  is  printed  on  the  face  of  the  certificates  of  stock.' 


1  Bullard  v.  Bank.  18  Wall.  589  (1873). 
See  also  Bank  i\  Lanier,  11  Wall.  3o9 
(1870);  Case  v.  Bank,  100  U.  S.  446 
(1879).  One  reason  for  denying  tliis 
power  to  national  banks  is  that  they 
are  proiiibiteJ  from  loaning  money  to 
stockholders  on  the  security  of  their 
stock. 

2  Delaware,  etc.  R.  R.  v.  Oxford  Iron 
Co.,  38  N.  J.  Eq.  340  (1884):  Meyers  v. 
Valley  Nat.  Bank,  18  Nat.  Bankr.  Reg. 
34  (1879);  s.  C,  17  Fed.  Cas.  2.10;  Hagar 
V.  Union  Nat.  Bank.  63  Me.  509  (lb74); 
New  Orleans  Nat.  Bank  v.  Wiltz.  10 
Fed.  Rep.  330  (1881);  Goodbar  v.  City 
Nat.  Bank,  78  Tex.  461  (1890);  Second 
Nat.  Bank  v.  National  State  Bank,  10 
Bush  (Ky.),  367  (1874);  Lee  v.  Citizens' 
Nat.  Bank,  3  Cin.  Super.  Ct.  (Ohio),  298, 
306  (1872);  Evansville  Nat.  Bank  v. 
lletropolitan    Nat  Bank,   2    Bisa   527 


(1871);  s.  c,  8  Fed.  Cas.  891.  In  the 
case  last  cited,  which  upon  appeal  was 
affirmed  by  the  supreme  court  of  the 
United  States,  it  was  held  that  such  a 
by-law  was  in  its  operation  the  same 
thing  as  though  a  loan  were  made  by 
the  bank  iipon  the  security  of  the 
stock  —  a  transaction  forbidden  by  the 
thirty- fifth  section  of  the  National 
Banking  Act.  Conklin  v.  Second  Nat. 
Bank,  45  N.  Y.  655  (1871).  Cf.  Xenia 
Nat.  Bank  v.  Stewart,  107  U.  S.  670 
(1882);  Rosenback  v.  Salt  Springs  Nat. 
Bank,  53  Barb.  495  (1868).  A  bank,  how- 
ever,  may  attach  the  stock  of  one  of  its 
stockholders  for  debts  due  from  him  to 
it.  Hagar  v.  Union  Nat.  Bank,  63  Me. 
509  (1874). 

3  Bufifalo,  etc.  Co.  v.  Third,  etc  Bank, 
162  N.  Y.  163  (1900). 


1134 


CHAPTER  XXXIL 


DIVIDENDS. 


g  534.  Definition  of  a  dividend  and  the 
four  kinds  of  dividends. 

535.  Scrip  dividends,  property  divi- 
dends, and  bond  dividends. 

.536.  Stock  dividends. 

537.  Interest-bearins;  stock. 

538.  To  vi'honi  the  corporation  is  to 

pay  the  dividend. 

539.  To  whom  the  dividend  belongs. 

540.  Dividends  must    be    equal   and 

without  preferences. 

541.  A  dividend  declared  and  specific- 

ally set  apart  as  a  distinct 
fund  belongs  absolutely  to  the 
stockholder?. 

542.  543.  It  is  a  debt  which  may  be 

collected  by  legal  proceedings. 
544.  Right  of  the  corporation  to  apply 
dividends  to  the  payment  of 
debts  due  to  it  by  the  stock- 
holder—Dividends in  iDayment 
of  subscription  price  of  stock. 


§  545.  The  courts  very  rarely  compel 
the  directors  to  declare  a  divi- 
dend. 

546.  Dividends  can  usually  be  made 

only  from  profits — Exceptions 
to  this  rule — What  are  profits 
which  may  be  used  for  divi- 
dends. 

547.  A  stockholder  may  enjoin   an 

illegal  dividend. 

548.  Dividends  which  impair  the  cap- 

ital stock  may  be  illegal  and 
may  be  recovered  back  from 
the  stockholders  —  Dividends 
on  dissolution. 

549.  Proceedings     to    recover    back 

such  a  dividend. 

550.  The  liability  herein  of  the  cor- 

porate officers. 

551.  Guarantee  of  dividends  by  con- 

tract. 


§  534.  Definition  of  a  dividend  and  the  four  Unds  of  dividends.— 
A  dividend  is  a  corporate  profit  set  aside,  declared,  and  ordered 
by  the  directors  to  be  paid  to  the  stockholders  on  demand  or  at  a 
fixed  time.i  Until  the  dividend  is  declared  these  corporate  profits 
belong  to  the  corporation,  not  to  the  stockholders,  and  are  liable 
for  corporate  indebtedness.^  But  the  board  of  directors  of  a  bank 
has  no  power  to  pledge  its  future  profits,  unless  the  stockholders 
assent  thereto.' 

iLockhart  w  Van  Alstyne,  31  Mich.  (1868);  Hyatt  v.  Allen.  56  N.  Y.  553 
76  (1875);  Chafee  v.  Rutland  R  R,  55  (1874);  Mickles  v.  Rochester  City,  etc. 
Vt.  110,  139  (1882);    Hyatt  v.  Allen,  56     Bank,  11  Paige,  118  (1844),  holding  that 

—      —  .,.   .,      1,    stockholders  are    neither    tenants    in 

common  nor  copartners  of   corporate 
property. 

3  Brown  v.  Bradford,  103  Iowa,  378 
(1897).  A  percentage  of  the  net  profits 
going  to  an  employee  for  his  services 
is  a  part  of  the  expenses  of  the  busi- 
ness, and  not  a  part  of  the  accumulated 
profits.  Bennett  v.  Millville  Imp.  Co., 
51  Atl.  Rep.  706  (N.  J.  1902).  A  corpo- 
ration by  the  action  of  its  board  of  di- 


N.  Y. 553  (1874).  "The  term  'dividend,' 
in  its  technical  as  well  as  in  its  ordi- 
nary acceptation,  means  that  portion 
of  its  profits  which  the  corporation,  by 
its  directory,  sets  apart  for  ratable  di- 
vision among  its  shareholders."  Mo- 
bile, etc.  R.  R  V.  Tennessee,  153  U.  S. 
486,  496  (1894). 

2  Goodwin  v.  Hardy,  57  Ma  143,  145 
(1869);  Rand  v.  Hubbell,  115  Mass.  461, 
474  (1874);  Minot  v.  Paine,  99  Mass.  101 


1135 


§  534.] 


DIVIDENDS. 


[CH.   XXXII, 


A  corporation  may,  in  general,  make  four  different  kinds  of  divi- 
dends: namely,  a  dividend  payable  in  cash,  in  stock,  in  bonds  or 
scrip,  or  in  property. 

Dividends  are  declared  by  the  directors  and  not  by  the  stock- 
holders.' A  division  of  profits  without  the  formality  of  declaring 
a  dividend  is  equivalent  to  a  dividend.-  A  division  of  the  profits 
is  a  dividend  even  though  not  called  such  and  not  considered  such 
by  the  directors  and  stockholders.'  It  is  legal  for  a  corporation  to 
distribute  its  profits  by  the  payment  of  salaries,  provided  all  the 
stockholders  assent  thereto.*   A  stockholder  cannot  prove  by  parol 


rectors  and  consent  of  all  its  stock- 
holders may  agree  that  a  certain  per- 
centage of  its  profits  shall  be  paid  an- 
nually to  a  person  for  services  already 
rendered  by  him.  In  a  suit  by  him  to 
enforce  such  agreement,  and  asking  an 
injunction  against  any  sales  of  stock, 
except  with  notice  of  such  agreement, 
stockholders  are  necessary  parties  de- 
fendant. Such  an  agreement  is  not  an 
exclusion  of  future  boards  of  directors 
from  the  management  of  the  company. 
Dupignao  v.  Bernstrom,  76  N.  Y.  App. 
Div.  105  (1902).     Cf.  §  678,  infra, 

1  See  §  545,  infra. 

2  Rorke  v.  Thomas,  56  N.  Y.  559  (1874); 
Reading  Trust  Co.  v.  Reading  Iron- 
works, 137  Pa.  St.  282  (1890);  McKusick 
V.  Seymour,  etc.  Co.,  48  Minn.  173  (1892). 
See  also  t^  572a,  infra.  Where  a  fixed 
per  cent,  is  paid  annually  to  stockhold- 
ers instead  of  dividends  and  charged 
to  them,  and  the  stock  held  in  pledge 
for  the  same,  such  a  payment  to  the 
life  tenant  does  not  create  a  valid  lien 
on  the  stock  as  against  the  remainder- 
man. Reading  Trust  Co.  v.  Reading 
Ironworks,  137  Pa.  St.  282  (1890).  The 
stockholders  may  agree  among  them- 
selves informally  to  distribute  a  certain 
sum  as  dividends  without  going  through 
the  form  of  corporate  action.  No 
formal  declaration  is  necessary,  either 
by  the  stockholders  or  board  of  direct- 
ors, and  a  distribution  of  profits  by  a 
unanimous  consent  without  corporate 
action  is  legal.  Groh's  Sons  v.  Groh,  80 
N.  Y.  App.  Div.  85  (1903). 

3  Commonwealth    v.    Pittsburg,   etc. 


Ry.,  74  Pa.  St.  83,  90  (1873),  holding  that 
a  stock  dividend  was  not  such  a  divi- 
dend as  entei'ed  into  a  rate  of  taxation. 
Lehigh  Crane  Iron  Co.  v.  Common- 
wealth, 55  Pa.  St.  448  (1867),  where  the 
capital  stock  was  $100,000,  but  divi- 
dends were  declared  on  an  assumed 
capital  of  $1,000,000,  the  property  being 
worth  the  latter  figure  by  reason  of 
profits  invested  in  it.  The  same  device 
was  resorted  to  in  Citizens',  etc.  Ry.  v. 
Philadelphia,  49  Pa.  St.  251  (1865). 
"  Dividends  declared,"  as  used  in  an 
employee's  contract  of  payment  for 
services,  the  rate  of  payment  being  ac- 
cording to  such  "dividend,"  were  con- 
strued to  mean  profits,  even  though  not 
distributed  by  dividends,  the  intent 
being  clear.  Acceptance  of  part  pay- 
ment is  no  bar  to  an  action  to  collect. 
Scase  V.  Gillette-Herzog  Mfg.  Co..  55 
Minn.  349  (1893).  Where  large  salaries 
are  paid,  instead  of  declaring  dividends, 
the  object  being  "  concealment  and  de- 
lusion," the  court  will  not  hold  that 
such  "  salaries  "  are  a  part  of  the  man- 
ufacturing expense  of  a  defendant 
guilty  of  infringing  a  patent.  Rubber  Co. 
V.  Goodyear,  9  Wall.  788  (1869);  Seabury 
V.  Am  Ende,  153  U.  S.  561  (1894).  A 
stockholder  cannot  maintain  a  suit  for 
a  dividend  which  the  stockholders  in- 
formally agreed  should  be  declared,  but 
which  never  was  declared,  American 
Wire  Nail  Co.  v.  Gedge,  96  Ky.  513 
(1895). 

*  Fitchett  V.  Murphy,  46  N.  Y.  App. 
Div.  181  (1899).  Where  all  the  stock- 
holders are  oflScers,  and,  instead  of  divi- 


1136 


CH. 


XXXII.] 


DIVIDENDS. 


[§  535. 


that  a  dividend  was  declared,  the  records  not  showing  the  same.  His 
remedy  is  by  proceedings  to  correct  the  corporate  record.^ 

Numerous  cases  on  the  definition  of  the  word  "dividend  "  have 
arisen  in  connection  with  the  taxation  of  corporations.^  Corpora- 
tions have  inherent  power  to  declare  and  pay  dividends,  even 
though  they  have  no  capital  stock.' 

§  535.  Scrip  dividends,  property  dividends,  and  hond  dividends. 
A  scrip  dividend  is  a  dividend  of  certificates  giving  the  holder  cer- 
tain rights  which  are  specified  in  the  certificate  itself.  These  divi- 
dends are  usually  declared  when  the  company  has  profits  which 
are  not  in  the  shape  of  money,  but  are  in  other  forms  of  property, 
and  the  company  wishes  to  anticipate  the  time  when  the  property 
may  be  sold  for  cash,  and  the  cash  distributed  by  a  money  divi- 
dend. The  certificate  sometimes  entitles  the  holder  to  a  sum  of 
money  payable  with  interest  at  a  certain  time  after  date,  or  at  the 
option  of  the  company,  or  when  the  company  shall  have  accumu- 
lated sufficient  surplus  to  pay  the  certificates  in  full.  Sometimes 
the  certificates  are  certificates  of  indebtedness,  and  are  made  con- 
vertible, at  the  option  of  the  holder,  into  bonds  or  stock;*  and 


dends,  the  corporation  distributes  its 
profits  by  large  salaries,  there  is  danger 
that  upon  the  death  of  one  of  them 
others  may  continue  the  payment  of 
such  salaries  to  themselves,  even 
though  they  are  executors  of  the  de- 
ceased.officer's  estate.  Matter  of  Schae- 
fer,  65  N.  Y.  App.  Div.  878  (1901). 

1  Dennis  v.  Joslin  Mfg.   Co.,  19  R.   L 
666  (1896). 

2  A  tax  upon  the  receipts  of  a  railroad 
is  not  a  tax  upon  dividends.  Comm'rs, 
etc.  V.  Buckner,  48  Fed.  Rep.  533  (1891). 
Profits  applied  to  betterments  are  not 
"  dividends  earned  "  within  the  mean- 
ing of  a  statute  imposing  taxation. 
State  V.  Comptroller,  54  N.  J.  L.  135 
(1891).  Where  all  the  shares  are  re- 
duced in  par  value  from  §50  to  $38,  and 
the  $13  difference  is  paid  to  the  stock- 
holders in  ca,sh,  this  is  a  reduction  of 
capital  stock,  and  not  a  dividend,  and 
cannot  be  taxed  as  a  dividend.  Com- 
monwealth V.  Central  Transp.  Co.,  145 
Pa.  St.  89  (1891).  Where  a  tax  is  levied 
on  dividends  the  officers  cannot  defend 
on  the  ground  that  the  dividend  was 
illegal.  Central  Nat.  Bank  v.  U.  S.,  137  U. 
S.  855  (1890).  In  Commonwealth  v.  Pitts- 


burg, etc.  Ry.,  74  Pa.  St.  83  (1873),  a  les- 
sor company  having  twelve  per  cent, 
dividends  guaranteed  on  its  stock  de- 
clared a  stock  dividend  so  that  the  guar- 
antee should  be  seven  per  cent,  on  the 
stock  thus  increased.  Thecourt  held  that 
such  a  dividend  did  not  subject  the 
company  to  a  tax  based  on  dividends. 
In  Louisiana  taxes  are  assessed  on  fran- 
chises, the  value  of  which  is  ascer- 
tained from  the  earning  capacity  of 
the  corporation.  Crescent  City  R.  Co.. 
V.  New  Orleans,  44  La.  Ann.  1057  (1892);. 
New  Orleans,  etc.  R,  Co.  v.  New  Or- 
leans, 44  La.  Ann.  1053  (1892);  New  Or- 
leans, etc.  R  Co.  V.  New  Orleans,  44  La. 
Ann.  1055  (1892). 

3  In  McKean  v.  Biddle,  181  Pa.  St.  361 
(1897),  where  a  mutual  insurance  com- 
pany for  one  hundred  and  thirty-two- 
years  had  not  paid  dividends,  but  had 
accumulated  a  surplus  of  over  four 
million  dollars,  the  court  held  that  the 
company  might  resume  the  payment, 
of  dividends.  The  court  also  held  that 
every  corporation  has  the  inherent 
right  to  declare  dividends. 

*  Chaffee  v.  Rutland  R  R,  55  Vt  110 
(1882);  State  v.  Baltimore,  etc.  R  R,  6 


(72) 


1137 


§  535.] 


DIVIDENDS. 


[CH.  XXXII. 


sometimes  the  certificate  entitles  the  holder  to  exchange  the  cer- 
tificate for  lands  of  the  corporation  to  an  amount  equivalent  in  value 
to  the  face  value  of  the  certificate;  or  to  receive  from  the  corpora- 
tion any  other  benefit  or  advantage  which  the  corporation  may 
lawfully  confer.     Sometimes  the  certificate  so  far  partakes  of  the 


Gill  (Md.),  363  (1848).  In  Rogers  v.  New 
York,  etc.  Land  Co.,  134  N.  Y.  197  (1893), 
land  had  been  sold  to  the  company 
for  a  certain  amount  of  preferred 
stock,  and  also  a  certain  amount  of 
"land  scrip,"  such  scrip  entitling  the 
holder  to  exchange  them  for  land  so 
conveyed  at  a  price  to  be  thereafter 
determined.  The  company  had  the 
right  to  pay  off  the  scrip  and  retire  it. 
The  company  sold  part  of  the  land,  and 
then  proceeded  to  make  a  scrip  divi- 
dend of  the  scrip  so  taken  up  by  it.  A 
dissenting  scripholder  brought  suit  to 
undo  the  transaction  on  the  ground 
that  the  scrip  taken  up  by  the  com- 
pany should  be  canceled.  The  court 
sustained  his  action,  and  held  that 
from  the  original  contract  it  was  clear 
that  the  land  was  received  as  a  trust 
fund  to  ultimately  pay  off  the  scrip. 
Reversing  Rogers  v.  Phelps,  9  N.  Y. 
Supp.  886  (1890).  In  Brown  v.  Lehigh, 
etc.  Co.,  49  Pa.  St.  270  (1865),  a  dividend 
of  scrip  had  been  declared,  the  scrip 
being  as  follows: 

"  No. .  SCRIP.  Shares. 

"  This  is  to  certify  that , heirs  or 

assigns,  will  be  entitled,  upon  the  surrender  of 

tliis  certificate,    to  shares  in  the  capital 

stock  of  the  Lehigh  Coal  and  Navigation  Com- 
pany so  soon  as  the  present  funded  debt  of  the 
company  has  been  paid  off,  or  adequate  provision 
made  for  its  discharge  when  due  and  payment 
demanded;  and  will  also  be  entitled  'to  a  pro 
rata  share  of  any  future  distribution  of  scrip; 
but  not  to  any  cash  dividend  until  this  certifi- 
cate has  been  converted  into  stocli,  as  above 
provided. 

' '  Or  this  certificate  may  at  any  time,  at  the 
option  of  the  holder  thereof,  be  converted  into 
stock  upon  payment  by  said  holder,  either  in 
cash  or  in  the  six  per  cent,  loans  of  the  com- 
pany, of  the  par  value  of  said  stock,  and  the 
surrender  of  this  certificate. 

"  This  certificate  is  transferable  only  at  the 
office  of  the  company. 

"Witness,"  etc. 


Several  years  after  the  issue,  the 
mortgage  being  paid  off,  the  scrip- 
holders  claimed  that  they  were  en- 
titled to  back  dividends  equal  to  past 
dividends  paid  on  the  stock.  The  court 
held,  howevei-,  that  the  terms  of  the 
contract  did  not  give  any  such  right, 
and  that*  dividends  commenced  only 
from  the  tithe  the  scrip  was  converted 
into  stock. 

The  holder  of  a  certificate  of  indebt- 
edness convertible  into    stock   cannot 
claim  an  interest  in   a  stock  dividend 
until  he  has  converted  the  scrip  into 
stock.    Miller  v.  Illinois  Central  R.  R., 
24  Barb.  312  (1857);  Brundage  v.  Brun- 
dage,  65  Barb.  397  (1873);  aff'd,  60  N.  Y. 
544  (1875),  holding  that  assignable  "  in- 
terest certificates  "  representing  earn- 
ings spent  for  improvements,  and  pay- 
able out  of  future  earnings  with  divi- 
dends, or  convertible  into  stock  at  the 
company's  ojjtion,  did  not  pass  with  a 
bequest  of  a   life    interest  in  certain 
shares  of  the  stock.     See  also,  in  gen- 
eral, Butler  V.  Glen  Cove,  etc.   Co.,  18 
Hun,  47  (1879).     Also  §  283,  supra.     Cf. 
Bailey  v.  Citizens'  Gas  Light  Co.,  27  N. 
J.  Eq.  196  (1876).  The  court  in  this  case, 
speaking  of  a  dividend  of  interest-bear- 
ing securities,  said:     "That   the   com- 
pany had  no  lawful  authority  for  issu- 
ing the  certificates  cannot  be  doubted." 
In  Merz  v.    Interior  Conduit,   etc.,  87 
Hun,  430  (1895),  the  issue  of  bonds  to 
pay  certificates  of  indebtedness  which 
had  been  issued  as  a  dividend  was  en- 
joined.    The  dissenting  opinion  in  this 
case  seems  the  better  view.     A  scrip 
entitling  a  person  named  to  bonds  may 
be  assigned,  even  though  by  its  terms 
it  can  be  assigned  only  with  the  assent 
of  the  corporation  issuing   the  same. 
Hubbard  v.   Manhattan  Trust  Co.,    87 
Fed.  Rep.  51  (1898). 


113S 


CH.  XXXII.] 


DIVIDENDS. 


[§  535. 


character  of  a  certificate  of  stock  as  to  entitle  the  holder  to  divi- 
dends.^ Where  the  corporation,  having  a  large  surplus,  issues  such 
certificates,  they  are  held  not  to  transfer  the  title  to  that  surplus 
from  the  corporation  to  the  holders  of  the  certificates.^  In  general 
the  issue  of  scrip  dividends  may  be  entirely  lawful,  and  they  are 


1  Bailey  v.  Railroad  Co.,  22  Wall.  604 
(1874).  Cf.  Brundage  v.  Brundage,  60 
N.  Y.  544  (1875). 

The  character  of  the  scrip  in  this  case 
is  shown  by  the  resolution  authorizing 
it,  as  follows: 

"Whereas,  this  company  has  hitherto  ex- 
pended of  its  earnings  for  the  purpose  of  con- 
structing and  equipping  its  road,  and  in  the  pur- 
chase of  real  estate  and  other  properties  with  a 
view  to  an  increase  of  its  traffic,  moneys  equal 
in  amount  to  eighty  per  cent,  of  the  capital  stock 
of  the  company;  and  whereas,  the  several  stock- 
holders of  the  company  are  entitled  to  evidence 
of  such  expenditure,  and  to  reimbursement  of 
the  same  at  some  convenient  future  period: 

"  Now,  therefore,  resolved,  that  a  certificate 
signed  by  the  president  and  treasurer  of  this 
company  be  issued  to  the  stockholders  severally, 
declaring  that  such  stockholder  is  entitled  to 
eighty  per  cent,  of  the  amount  of  capital  stock 
held  by  him,  payable  ratably  with  the  other  cer- 
tificates issued  under  this  resolution,  at  the  op- 
tion of  the  company,  out  of  its  future  earnings, 
with  dividends  thereon,  at  the  same  rates  and 
times  as  dividends  shall  be  paid  on  shares  of  the 
capital  stock  of  the  company,  and  that  such 
certificates  may  be,  at  the  option  of  the  com- 
pany, convertible  into  stock  of  the  company, 
whenever  the  company  shall  be  authorized  to 
increase  its  capital  stock  to  an  amount  sufficient 
for  such  conversion." 

This  was  the  famous  scrip  dividend 
made  by  the  New  York  Central  R.  R. 
Co.  under  the  management  of  Commo- 
dore Vanderbilt. 

The  form  of  the  certificate  was  as 
follows: 

"the   new  YORK    OENTRAIi    RAILROAD    COMPANY. 

"  No. .    Interest  Certfficate. 

"  Under  a  resolution  of  the  board  of  directors 
of  this  company,  passed  December  19th,  1868, 
of  which  the  above  is  a  copy,  the  New  York  Cen- 
tral Railroad  Company  hereby  certifies  that 
A.  B.,  being  the  holder  of shares  of  the  cap- 
ital stock  of  said  company,  is  entitled  to dol- 
lars, payable  ratably  with  the  other  certificates 
issued  under  said  resolution,  at  the  pleasure  of 
the  company,  out  of  its  future  earnings,  with 
dividends  thereon,  at  the  same  rates  and  times 


as  dividends  shall  be  paid  upon  the  shares  of  the 
capital  stock  of  said  company. 

"This  certificate  may  be  transferred  on  the 
books  of  the  company  on  the  surrender  of  this 
certificate. 

"  In  witness  whereof,  the  said  company  has 
caused  this  certificate  to  be  signed  by  its  presi- 
dent and  treasurer,  this  19th  day  of  December, 
1868. 


"President." 


"  Treasurer." 

At  the  foot  of  each  certificate  there 
was  a  form  of  transfer  in  blank: 

"For  a  valuable  consideration,  I,  A.  B.,  do 
■hereby  sell,  assign,  and  transfer  all  interest  in 
the  above  certificate  to  C.  D.,  and  do  hereby 
irrevocably  appoint  E.  F.  attorney,  to  execute  a 
transfer  thereof  on  the  books  of  the  railroad 
company  therein  mentioned." 

See  Bailey  u  Railroad  Co.,  22  WalL 
604,  608  (1874).  This  dividend  was  de- 
clared, although  the  company  by  its 
eharter  was  limited  to  ten  per  cent, 
dividends. 

A  dividend  of  scrip  —  i.  e.,  a  paper 
entitling  the  holder  to  dividends  equal 
to  dividends  thereafter  declared  on  the 
capital  stock  —  is  practically  a  stock 
dividend,  except  that  the  scrip  cannot 
vote,  and  provision  is  generally  made 
for  taking  it  up  in  some  manner.  Such 
a  dividend  was  involved  in  Gordon  v. 
Richmond,  etc.  R.  R.,  78  Va.  501  (1884). 

2  People  V.  Board  of  Assessors,  76  N. 
Y.  202  (1879),  affirming  s.  C,  16  Hun, 
196.  In  this  case  it  was  held  that  the 
issue  of  these  certificates  could  not  op- 
erate to  relieve  the  corporation  from 
their  obligations  to  pay  their  tax  upon 
the  surplus,  because  the  surplus  re- 
mained in  the  hands  of  the  company, 
and  as  such  was  liable  to  assessment 
and  taxation.  See  also  Bailey  v.  Rail- 
road Co.,  22  Wall.  604  (1874).  See  also 
Gordon  v.  Richmond,  etc.  R.  R.,  78  Va, 
501  (1884). 


1139 


§  535.J 


DIVIDENDS. 


[CH.  XXXII, 


upheld  by  the  courts.  But  when  they  are  declared  in  fraud  of  the 
rights  of  third  parties  they  may  be  set  aside. ^ 

Scrip  ma}''  be  practically  the  same  thing  as  shares  of  stock,  ex- 
cept that  it  has  no  voting  power.  It  is  issued  sometimes  because 
the  company  cannot  issue  any  more  capital  stock,  the  whole  capi- 
tal stock  being  already  out;  sometimes  to  avoid  taxes,  and  some- 
times to  increase  the  transferable  shares  without  giving  to  the  new 
shares  a  voting  power.^  If  the  interest  or  dividends  are  payable  only 
from  the  profits,  the  issue  of  the  scrip  is  legal  whenever  a  stock 
dividend  would  be  legal,  that  is,  whenever  the  property  of  the  com- 
pany is  equal  in  value  to  the  capital  stock  plus  the  scrip  divfdend. 

A  property  dividend  is  where  property  is  divided  instead  of  that 
property  being  sold  for  cash  and  the  cash  then  used  to  pay  a  divi- 
dend.' A  property  dividend  occurs  where  a  corporation  sells  all 
its  property  to  another  corporation  and  takes  in  payment  therefor 
the  stock  and  the  bonds  of  the  purchasing  corporation  and  then 
makes  a  distribution  of  the  same  among  its  stockholders.  It  has 
been  held  that  any  one  of  its  stockholders  may  object  and  insist  on 
payment  for  his  stock  in  cash.*  This,  however,  is  practically  a 
dissolution  of  the  company  and  a  distribution  of  its  assets,  a  subject 
which  is  considered  elsewhere.* 


1  While  negotiations  were  pending 
between  two  gas  companies  for  their 
consolidation  by  one  company  buying 
the  stock  of  the  other,  upon  a  certain 
basis  of  capital  and  indebtedness,  one 
of  them,  without  the  knowledge  of  the 
other,  passed  a  resolution  declaring  a 
scrip  dividend  of  ten  per  cent,  on  its 
capital  stock,  thus  increasing  its  in- 
debtedness by  that  amount.  The  cer- 
tificates were  accordingly  issued;  but 
after  the  consolidation,  upon  a  bill  filed 
for  that  purpose,  the  scrip  was  declared 
void.  Bailey  v.  Citizens*  Gas  Light  Co., 
27  N.  J.  Eq.  196  (1876). 

2  Where  one  street  railway  company 
takes  a  lease  of  the  street  railways  of 
three  other  companies  on  an  agreement 
whereby  the  stock  of  the  latter  com- 
panies is  deposited  with  a  trustee,  and 
the  lessee  issues  "  stock  trust  certifi- 
cates "  therefor,  being  its  obligation  to 
pay  a  fixed  rate  of  interest  per  year, 
with  an  option  on  its  part  to  pay  the 
principal  sura  or  not  at  its  option  at  a 
specified  time,  the  stock  being  security 


therefor  to  be  sold  by  the  trustee  in 
case  the  principal  and  interest  are  not 
paid,  this  form  of  financing  does  not 
create  a  debt,  and  hence  such  certifi- 
cates are  not  subject  to  taxation  as  a 
bond  and  mortgage,  the  transaction" 
being  really  a  guaranteed  dividend  or 
rental.  Commonwealth  v.  Union,  etc. 
Co..  193  Pa.  St.  507  (1899). 

3  An  amendment  to  the  charter  may 
prescribe  that  unnecessary  corporate 
real  estate  shall  be  divided  among  or 
partitioned  between  the  stockholders. 
Merchant  v.  Western  Land  Assoc,  56 
Minn.  327  (1894).  Where  a  company 
has  in  its  treasury  stock  in  another 
company,  and  distributes  it  among  its 
stockholders,  this  is  a  dividend.  Alle- 
gheny V.  Pittsburg,  etc.  Ry.,  179  Pa. 
St.  414  (1897).  Where  corporate  land 
is  deeded  by  way  of  dividend  or  dis- 
tribution among  stockholders,  there  is 
no  warranty  of  title.  Olsen  v.  Home- 
stead, etc.  Co.,  87  Tex.  368  (1894). 

■*  See  §  671,  inf7-a. 

^  See  §  548,  infra. 


1140 


CH.  XXXII.] 


DIVIDENDS. 


[§  536. 


A  dividend  or  distribution  of  the  company's  bonds  among  its 
stockliolders  is  legal,  if  the  capital  stock  is  not  thereby  impaired.^ 
Unless  some  statute  prohibits  it,  or  some  one  objects,  a  corporation 
may  declare  a  dividend  out  of  its  capital  stock,  subject  to  the 
common-law  liability  for  so  doing.- 

In  the  absence  of  a  special  provision  to  the  contrary,  dividends 
will  be  presumed  to  be  payable  in  cash,  and  in  lawful  or  current 
money.'  But  where  the  dividend  is  paid  in  depreciated  currency, 
a  stockholder  cannot  insist  that  he  shall  be  paid  any  more  than 
what  the  depreciated  currency  is  w^orth  in  regular  currency.* 

§  536.  Stock  dividends. —  A  stock  dividend,  as  the  name  imports, 
is  a  dividend  of  the  stock  of  the  corporation.  Such  a  dividend  is 
lawful  when  an  amount  of  money  or  propert}'"  equivalent  in  value 
to  the  full  par  value  of  the  stock  distributed  as  a  dividend  has  been 


iSee  §  766.   infra.     Where  a  joint- 
stock  association  having  $12,000,000  sur- 
plus   invested   in  securities  issues  its 
bonds  to  the  amount  of  $12,000,000  to 
its  stockholders  as  a  dividend  in  place 
of  distributing  such  securities  or  the 
proceeds  thereof,  the  interest   on   the 
bonds  to  be  paid  only  from  the  income 
from  the  securities  after    paying  the 
debts,  such  bonds  do  not  belong  to  a 
life  tenant,  but  belong  to  the  remain- 
dermen.     D'Ooge  V.  Leeds,  176  Mass. 
558  (1900),  the  court  saying:  "If  this 
company  had  been  a  corporation,  and 
had  wished  to  make  a  dividend  of  pre- 
ferred   stock    to  its    shareholders,    it 
would  have  done  it  in  just  this  way. 
There   has    been  no  dividend  of  any 
money  or  property  among  the  share- 
holders.     There    has    been    merely   a 
change  of  the  form  of  the  ownership  in 
the  property  by  dividing  it   into  two 
classes,  and  by  making  a  different  pro- 
vision in  regard  to  dividends  for  each 
class,  an«l  by  giving  one  class  a  prefer- 
ence over  the  other  in  its  right  to  the 
assets  on  final  liquidation.     Not  a  dol- 
lar's worth  of  the  property  of  the  com- 
pany is  taken  out  of  the   business,  or 
changed  in  its  relation  to  the  business. 
...     It  is  plain  that  the  action  of 
the  company  was  like  making  a  divi- 
dend of  preferred  stock.     It  was  a  more 
formal  capitalization  of  earnings  which 

1 


previously  had  been  capitalized  in  sub- 
stance and  effect." 

'-^A  statutory  liability  for  dividends 
paid  out  of  the  capital  stock  abrogates 
all  common-law  liability,  and  if  such 
statute  does  not  prohibit  such  dividends 
they  may  be  declared  and  paid  subject 
to  such  liability.  People  v.  Barker,  141 
N.  Y.  251  (1894).  See  also  g§  546,  548, 
671,  infra. 

3  Ehle  r.  Chittenango  Bank,  24  N.  Y. 
548  (1862). 

*  Back  dividends  may  be  recovered  on 
stock  which  has  been  illegally  confis- 
cated; but  where  the  dividends  to  other 
stockholders  were  paid  in  Confederate 
currency,  the  back  dividends  paid  after 
the  war  to  a  northern  stockholder 
should  be  a  sum  equal  in  value  to  the 
Confederate  currency  when  the  divi- 
dends were  declared.  Keppel  v.  Peters- 
burg R.  R,  Chase's  Dec.  167  (1868);  S.  c, 
14  Fed.  Cas.  357;  Scott  v.  Central  R.  R. 
etc.  Co.,  52  Barb.  45  (1868).  In  this  case 
two  of  the  three  judges  held  that 
though  the  dividends  were  declared 
without  specifying  how  they  should  be 
paid,  yet  where  they  were  paid  as  a 
matter  of  fact  in  depreciated  Confeder- 
ate currency,  a  northern  stockholder 
could  not,  after  the  war,  claim  the 
same  dividends  payable  in  United 
States  currency. 


141 


§  536.] 


DIVIDENDS. 


[CH.  XXXII. 


accumulated  and  is  permanently  added  to  the  capital  stock  of  the 
corporation.  Corporations  frequently  make  a  dividend  of  this  char- 
acter when  improvements  of  the  corporate  property  or  extensions 
of  the  business  have  been  made  out  of  the  profits  earned.  It  is  also 
made  when  the  corporate  plant  has  increased  in  value,  and  it  seems 
better  to  issue  new  stock  to  represent  the  excess  of  value  than  to 
sell  the  increase  and  declare  a  cash  dividend.  In  this  country  these 
dividends  are  frequently  made,  and  are  sustained  by  the  courts.^ 


1  Williams  v.  Western  Union  Tel.  Co., 
93  N.  Y.  162,  188  et  seq.  (1883);  Dock  v. 
Schlichter,  etc.  Co.,  167  Pa.  St.  370(1895); 
Farwellu.  Great  Western  Tel.  Co.,  161  111. 
523  (1896),  a  dictum;  City  of  Ohio  v. 
Cleveland,  etc.  R.  R,  6  Ohio  St.  489 
(1856);  Howell  v.  Chicago,  etc.  Ry.,  51 
Barb.  378  (1868);  Clarkson  v.  Clarkson, 
18  Barb.  646  (1855);  Simpson  v.  Moore, 
30  Barb.  637  (1859);  Gordon  v.  Rich- 
mond, etc.  R.  R.,  78  Va.  501.  521  (1884); 
Minot  V.  Paine,  99  Mass.  101  (1868;;  Bos- 
ton, etc.  R.  R.  V.  Commonwealth,  100 
Mass.  399  (1868);  Daland  u  Williams, 
101  Mass.  571  (1869):  Rand  v.  Hubbell, 
115  Mass.  461,  474  (1874);  Gibbons  v. 
Mahon,  4  Mackey,  130  (1885);  Jones  v. 
Morrison,  31  Minn.  140  (1883):  Earp's 
Appeal,  28  Pa.  St.  368  (1857);  Wiltbank's 
Appeal,  64  Pa.  St.  256  (1870);  Common- 
wealth V.  Pittsburgh,  etc.  R.  R.,  74  Pa. 
St.  83  (1873);  Brown  v.  Lehigh  Coal,  etc. 
Co.,  49  Pa.  St.  270  (1865);  Commonwealth 
V.  Cleveland,  etc.  R.  R.,  29  Pa.  St.  370 
(1857);  Parker  u  Mason,  8  R.  I.  427  (1867); 
State  V.  Baltimore,  etc.  R.  R.,  6  Gill 
(Md.),  363  (1848).  A  stock  dividend  is 
not  in  itself  injurious  to  the  corporation 
or  its  creditors,  and  the  creditors  can- 
not complain  of  it,  and  hold  the  stock- 
holders liable  thereon,  but  a  subsequent 
gratuitous  issue  of  stock  to  stockhold- 
ers, a  part  of  which  they  then  con- 
tribute to  go  with  a  sale  of  bonds  by 
the  corporation,  a  portion  of  the  price 
therefor  to  be  paid  to  the  stockholders, 
is  illegal,  and  such  proportion  so  paid 
to  the  stockholders  may  be  recovered 
back  by  bondholders  upon  the  corpora- 
tion becoming  insolvent.  Great  West- 
ern, etc.  Co.  V.  Harris'  Estate,  111  Fed. 


Rep.  38  (1901).  Harris  v.  San  Francisco 
Sugar,  etc.  Co.,  41  Cal.  393  (1871),  holds 
that  one  who  is  entitled  to  and  receives 
a  stock  dividend  cannot  claim  also  a 
part  of  the  cash  proflts  which  are  used 
for  improvements,  even  though  a  con- 
tract calls  for  cash.  See  also  §  51,  supra, 
and  ch.  XXXIII,  infra.  As  to  the  tax- 
ation of  stock  dividends,  see  §  572a, 
infra.  In  England  a  stock  dividend 
has  been  declared  to  be  ultra  vires  so 
for  as  dissenting  stockholders  are  con- 
cerned. It  cannot  be  forced  upon  a 
stockholder.  Hoole  v.  Great  Western 
Ry.,  L.  R.  3  Ch.  262  (1867).  In  Re  Eastern, 
etc.  Co.,  68  L.  T.  Rep.  321  (1893),  a  stock 
dividend  was  involved,  but  its  legality 
was  not  passed  upon.  It  is  discretion- 
ary with  the  directors  as  to  whether 
they  will  declare  a  stock  or  a  cash  divi- 
dend. Howell  V.  Chicago,  etc.  Ry.,  51 
Barb.  378  (1868).  Where  a  consolidation 
of  three  corporations  is  made  by  in- 
creasing the  capital  stock  of  one  and 
issuing  the  increased  stock  to  the  stock- 
holders of  all  three  corporations  in  the 
proportion  agreed  upon,  this  is  not  a 
stock  dividend,  even  though  the  aggre- 
gate capital  stock  was  $400,000,  but  by 
the  consolidation  is  $1,000,000.  Alle- 
gheny V.  Federal,  etc.  Ry.,  179  Pa.  St. 
424  (1897).  Where  a  company  leases  its 
property  to  another  company  at  a  nom- 
inal rental,  and  the  stockholders  of  the 
first  company  transfer  their  stock  to 
the  second  company  in  exchange  for 
stock  of  the  latter,  no  dividend  is  in- 
volved, and  a  tax  on  dividends  of  the 
first  corporation  does  not  attach.  Alle- 
gheny V.  Pittsburgh,  etc.  R.  R.,  179  Pa. 
St.  414  (1897).     In  the  case  of  Rose  v. 


1142 


CH.  XXXII,] 


DIVIDENDS. 


[§§  537,  538. 


The  stockholders,  having  voted  to  declare  such  a  dividend,  may,  at 
any  time  before  the  certificates  are  issued,  reconsider  the  matter 
and  revoke  the  dividend.^  Preferred  stockholders  may  be  entitled 
to  share  in  the  distribution  of  stock  b}''  a  stock  dividend  according 
to  the  terms  of  their  preferred  stock.^  In  some  of  the  states  a  stock 
dividend  is  prohibited  by  statute  or  constitutional  provision.^  This, 
however,  does  not  prevent  a  cash  dividend  and  the  issue  of  new- 
stock  for  cash  at  the  same  time.'* 

§  537.  Interest-hearing  stoclt. — It  has  already  been  shown  that  a 
corporation  may  issue  stock  and  may  make  a  contract  with  the  sub- 
scriber that  the  company  will  pay  interest  upon  the  sums  paid  in  by 
the  subscriber.^  Such  a  contract  is  legal,  however,  only  when  the 
interest  is  to  be  paid  from  the  net  profits  of  the  enterprise,  and 
not  from  the  capital  stock.  Unless  net  profits  have  been  earned 
the  stipulated  interest  cannot  legally  be  paid.  Consequently  there 
is  little  difference  between  interest-bearing  stock  and  preferred  stock. 

§  538.  To  icliom  the  corjmration  is  to  pay  the  dividend. —  The 
question  as  to  whom  a  dividend  shall  be  paid  after  it  has  been  reg- 


Barclay,  191  Pa.  St.  594  (1899),  the  va- 
lidity of  a  stock  dividend  whereby  a 
gas  company  having  $300,000  capital 
stock  distributed  $300,000  additional 
capital  stock  among  its  stockholders  as 
a  stock  dividend  to  represent  the  en- 
hanced value  of  the  property  was  not 
questioned.  A  stock  dividend  is  to  be 
counted  as  a  part  of  the  capital  stock 
to  sustain  a  debt  of  the  corporation 
under  a  charter  which  limits  the  debts 
to  one-half  of  the  capital  stock.  Cun- 
ningham V.  German,  etc.  Bank,  101  Fed. 
Rep.  977  (1900).  A  stock  dividend  was 
sustained  in  Cole  v.  Adam^,  19  Tex.  Civ. 
App.  507  (1898),  to  the  extent  that  such 
dividend  represented  profits  which  had 
been  used  in  the  property,  but  not  to 
the  extent  that  such  dividends  repre- 
sented a  rise  in  the  value  of  the  prop- 
erty of  the  company.  In  the  case  of 
Shaw  V.  Gilbert,  111  Wis.  165  (1901), 
where  a  so-called  "dividend  stock  "  had 
been  issued,  it  was  assumed,  under  the 
circumstances  of  the  issue,  that  the 
stockholders  receiving  the  same  were 
liable  thereon  to  corporate  creditors 
with  interest  from  the  date  of  issue. 
Where  the  life  tenant  refuses  to  pay  for 
increased  capital  stock  which  is  issued 


at  fifty  cents  on  a  dollar,  the  remaining 
fifty  cents  being  a  stock  dividend,  and 
the  trustee  takes  the  stock  for  himself, 
and  ten  years  have  elapsed  since  the 
life  tenant  claimed  the  stock,  the  stat- 
ute of  limitations  is  a  bar  to  his  suit  to 
compel  the  trustee  to  account  for  the 
stock.  Matter  of  Smith,  66  N.  Y.  App. 
Div.  340  (1901). 

1  Terry  v.  Eagle  Lock  Co.,  47  Conn. 
141  (1879).  After  cancellation  there  is 
no  statutory  liability  on  such  stock. 
Hollingshead  v.  Woodward,  35  Hun, 
410  (1885);  aff'd,  107  N.  Y.  96  (1887).  A 
stock  dividend  after  declaration  can- 
not be  revoked,  except  possiblj-  for 
some  extraordinary  cause.  Dock  v. 
Schlichter,  etc.  Co.,  167  Pa.  St.  370 
(1895).     Cf.  §  541,  infra. 

2  Gordon  v.  Richmond,  etc.  R.  R.,  78 
Va,  501  (1884).  See  also  Phillips  v. 
Eastern  R.  R.,  138  Mass.  123  (1884),  and 
ch.  XVI,  supra. 

3  See  ^§  51,  287,  supra. 

4  In  Massachusetts  a  stock  dividend 
is  practically  declared  by  a  large  cash 
dividend  and  simultaneously  the  issue 
of  new  stock  at  par.  Jones  v.  Brown. 
171  Mass.  318  (1898).  See  66  N.  E.  Rep.  423. 

5  See  ch.  XVI,  supra. 


1143 


538.] 


DIVIDENDS. 


[oh.  XXXII. 


ularly  declared  is  one  which  sometimes  involves  the  corporation  in 
considerable  diiiiculty.  It  is  not  always  easy  to  decide  which  one 
of  two  or  more  claimants  is  entitled  to  the  dividend. 

The  general  rule  is  that  the  corporation  may  pay  the  dividend  to 
the  person  in  whose  name  the  stock  stands  registered  upon  the  cor- 
porate stock  book  at  the  time  the  dividend  is  declared.^  It  may  do 
so  without  itfquiring  whether  he  has  transferred  the  stock,  and 
without  requiring  the  production  of  the  certificate.^  In  fact,  it  is 
a  well-settled  rule  that  the  corporation  is  protected  in  paying  divi- 
dends to  a  recorded  stockholder,  although  he  may  have  transferred 
his  stock,  no  notice  of  the  transfer  having  been  given  to  the  com- 
pany.* But  after  notice  of  a  transfer  the  corporation  must  pay  the 
dividend  to  the  transferee,  although  no  registry  has  been  made.* 


^  Brisbane  v.  Delaware,  etc.  R.  R,  94 
N.  Y.  204  (1883),  affirming  25  Hun,  438 
(1881);  Donnally  u  Hearndon,  41  W.  Va. 
519  (1895);  Jones  v.  Terre  Haute,  etc.  R 
R,  29  Barb.  353  (1859);  affirmed,  57  N. 
Y.  196;  Northrop  u  Newtown,  etc.  Co., 
3  Conn.  544  (1821).  Cf.  Manning  v. 
Quicksilver  Min.  Co.,  24  Hun,  360  (1881), 
in  regard  to  the  assignment  of  divi- 
dends. The  guaranty  accumulations 
of  an  insurance  company  conducted 
both  on  the  mutual  and  stock  principle 
belong  to  thestockholders  and  not  to  the 
policy-holders.  Traders',  etc.  Ins.  Co.  v. 
Brown,  142  Mass.  403'  (1886).  As  to  divi- 
dends on  a  tontine  insurance  policy, 
see  Pierce  v.  Equitable  Life  Ass.  Soc, 
145  Mass.  56  (1887).  In  a  few  instances 
there  have  been  attached  to  certificates 
of  stock  what  are  called  "dividend 
warrants,"  the  object  being  to  enable 
such  warrants  to  be  cut  off  like  coupons, 
and  sold  and  collected  like  coupons.  A 
form  of  such  warrants  is  as  follows: 

THE  SOUTHERN  PACIFIC  COMPANY 

Dividend  Warrants. 

The  bearer  is  entitled  to  the  first  dividend  on 
one  hundred  shares  of  the  capital  stock  of  this 
company  represented  by  certificate  No.  — ,  on 
or  after  the  date  upon  which  said  dividend 
shall  be  made  payable.  Payable  in  the  city  of 
New  York  and  elsewhere,  as  may  be  designated 
by  said  comj)any. 

,  Secretary. 

2  Brisbane  v.  Delaware,  etc.  R  R,  94 
N.   Y.  204    (1883),   affg    25    Hun,   438; 


Cleveland,   etc.   R   R   v.   Robbins,   35 
Ohio  St.  483  (1880). 

3  Bank  of  Commerce's  Appeal,  73  Pa. 
St.  59  (1873),  where  a  distribution  of 
assets  was  made;  Bell  v.  Lafiferty,  1  Pa, 
Supr.  Ct.  454  (1881),  where  the  assignee 
of  a  dividend  without  a  certificate  ob- 
tained payment,  and  the  court  held  the 
company  not  liable  to  an  unrecorded 
pledgee;  Bank  of  Utica  v.  Smalley,  2 
Cow.  770  (1824);  Smith  v.  American 
Coal  Co.,  7  Lans.  317  (1873);  Cleveland, 
etc.  R  R  V.  Robbins,  35  Ohio  St.  483 
(1880),  the  corporation  not  having  been 
notified. 

••See  same  cases  as  in  preceding  note. 
The  corporation  is  liable  to  a  transferee 
for  dividends  declared  after  a  registry 
has  been  requested  and  improperly  re- 
fused. Robinson  v.  New  Berne  Nat. 
Bank,  95  N.  Y.  637  (1884).  Where  the 
transferee  and  holder  of  the  certificate 
notifies  the  corporation  of  his  purchase 
after  a  dividend  has  been  declared,  but 
before  it  is  paid,  he  is  entitled  to  the 
dividend,  and  may  sue  the  corporation 
for  it.  Timberlake  v.  Shippers'  Com- 
press Co.,  72  Miss.  323  (1894).  A  bill  in 
equity  lies  to  compel  a  corporation 
which  has  declared  a  stock  dividend  to 
stockholders  of  record  July  1st  to  de- 
liver such  stock  dividend  to  a  pur- 
chaser on  July  6th  whose  purchase  in- 
cluded such  dividend.  Rose  v.  Barclay, 
191  Pa.  St.  594  (1899). 


1144 


C'H.  XXXII.]  DIVIDENDS.  [§  538. 

As  between  two  claimants  of  the  dividend,  one  being  the  cestui 
qtie  trust  and  the  other  a  bona  fide  transferee,  the  corporation  may 
interplead.^ 

The  right  to  dividends  does  not,  however,  depend  upon  the  issue 
of  the  certificate,  and  the  owner  of  shares  may  claim  his  dividends 
though  no  certificate  has  ever  been  issued  by  the  corporation.' 
The  corporation  is  protected  if  it  pay  dividends  to  the  administra- 
tor without  notice  of  a  transfer  by  him.^  Under  the  statutes  of 
California,  even  though  stock  is  distributed  by  executors  in  accord- 
ance with  a  decree  of  distribution,  and  the  distributees  sell  the 
stock  and  it  is  transferred  on  the  books  of  the  company,  neverthe- 
less, if  the  decree  is  reversed  on  appeal,  the  transfers  are  void  and 
the  company  is  liable  for  dividends  paid  in  the  meantime  to  such 
purchasers.  In  a  suit  by  the  executors  to  recover  such  dividends 
the  purchasers  need  not  be  made  parties.*  Where  stock  in  a  bank 
stands  in  the  name  of  a  person  for  sixty-five  years  without  the 
identity  of  the  stockholder  being  known  and  without  dividends 
being  claimed  by  him,  although  the  bank  annually  advertised  the 
unclaimed  dividends,  clear  proof  of  the  identity  of  such  stockholder 
must  be  given  by  his  alleged  descendants  who  do  not  produce  the 
certificate  of  stock.^ 

With  respect  to  the  dividends  on  the  stock  of  a  married  woman, 
the  corporation  must  pay  them  to  the  husband  or  not,  according  to 
the  law  of  the  domicile  of  the  corporation,  and  not  according  to 
the  law  of  the  domicile  of  the  married  woman.^     The  husband,  by 

1  Salisbury    Mills    v.  Townseiid,^   109  dends,  and  afterwards  sells  his  stocli, 

Mass.  115  (1871);  Cross  v.  Eureka,  etc.  the  corporation  may  interplead  to  as- 

Co..  73  Cal.  303  (1887),  a  case  between  certain  to  whom  to  pay  the  dividends, 

pledgor  and  pledgee.     See  also  §  387,  Price  v.  Morning,  etc.  Co.,  83  Mo.  App. 

supra,  and  §  543,  infra.     Cf.  Stone  v.  470  (1899). 

Reed,  152  Mass.  179  (1890),  where  a  cor-  2  Ellis  v.  Essex  Merrimack  Bridge,  19 

porate  creditor  sued  the  treasurer  for  Mass.  248  (1824). 

distributing  property  among  the  stock-  3  Brisbane  v.  Delaware,  etc.  R  R,  94 
holders.  A  corporation  cannot  inter-  N.  Y.  204  (1883).  The  heirs  of  a  stock- 
plead  as  between  stockholders  for  the  holder  must,  in  order  to  entitle  them- 
purpose  of  determining  the  ownership  selves  to  dividends,  procure  a  transfer 
of  stock,  there  having  been  no  claim  of  their  ancestor's  shares  into  their  own 
made  upon  it  in  regard  to  registry  or  names  on  the  corporate  books,  vvliere 
in  regard  to  dividends.  It  must  be  the  certificates  have  been  pledged  and 
shown  also  that  the  company  has  not  the  company  notified.  State  v.  New 
acted  in  a  partisan  manner  as  between  Orleans,  etc.  R  R,  30  La.  Ann.  308  (1878). 
the  different  claimants.  Hinckley  v.  ^Ashton  v.  Zelia  Min.  Co.,  134  Cal. 
Pfister,  83  Wis.  64  (1892),  The  corpora-  408  (1901).  See  also  §  330,  sujjra. 
tion  interpleaded  between  claimants  5  Moss  v.  Manhattan  Co.,  48  N.  Y. 
to  a  dividend  on  stock  in  Amberson  v.  App.  Div.  561  (1900). 
Johnson.  127' Ala.  490  (1900).  Where  a  « Graham  v.  First  Nat.  Bank  of  Nor- 
etockholder    assigns    the  future  divi-  folk,  84  N.  Y.  393  (1881),  affirming  s.  C, 

1145 


§  539.] 


DIVIDENDS. 


[on.  xxxir. 


collecting  dividends  on  his  wife's  shares,  does  not  thereby  reduce 
the  stock  to  possession.^ 

Even  though  the  corporation  closes  its  transfer  book  several  days- 
before  a  dividend  is  declared,  nevertheless  those  are  entitled  to  the 
dividend  who  apply  for  registry  on  or  before  the  day  of  the  decla- 
ration of  the  dividend.^ 

If  the  holder  of  a  certificate  of  stock  has  applied  for  transfer  and 
been  refused,  he  may  sue  for  the  dividend  before  bringing  a  suit  in 
equity  to  obtain  a  transfer  of  his  stock.' 

§  539.  To  ivliom  the  dividend  belongs. —  As  between  the  vendor 
and  vendee  of  shares  of  stock,  it  is  a  settled  rule  that  the  vendee 
is  entitled  to  all  the  dividends  on  the  stock  which  are  declared 
after  the  sale  of  the  stock.  Even  though  the  transfer  has  not  been 
recorded,  the  transferee  has  a  right  to  the  dividends  as  against  the 
transferrer.  The  law,  moreover,  refuses  to  investigate  the  ques- 
tion when  the  dividend  was  earned.  In  contemplation  of  law  the 
net  profits  are  earned  at  the  instant  the  dividend  is  declared.  This 
rule  is  just,  inasmuch  as  the  accrued  profits  and  expected  dividends 
enter  into  the  value  and  price  at  which  the  stock  is  sold.* 


20  Hun,  326.  As  to  the  rule  in  Cali- 
fornia, see  Dow  v.  Gould,  etc.  Co.,  31 
Cal.  629  (1867). 

iBurr  V.  Sherwood,  3  Bradf.  (N.  Y. 
Surr.)  85  (1854).  Cf.  Harcum  v.  Hud- 
nall,  14  Gratt.  (Va.)  369,  382  (1858);  Sear- 
ing V.  Searing.  9  Paige,  283  (1841).  A 
receipt  of  dividends  by  the  husband 
only  reduces  the  dividends  into  posses- 
sion and  not  the  stock.  See  §  319,  su- 
pra, 

2  Jones  V.  Terre  Haute,  etc.  R.  R.,  57 
N.  Y.  196,  205  (1874);  Robinson  v.  New 
Berne  Nat.  Bank,  95  N.  Y.  637  (1884). 
Frequently,  however,  the  charter  or 
statutes  provide  otherwise. 

3  Hill  V.  Atoka,  etc.  Co.,  21  S.  W.  Rep. 
508  (Mo.  1893);  Robinson  v.  New  Berne 
Nat.  Bank,  95  N.  Y.  637  (1884).  But  not 
if  the  transferee  has  treated  the  refusal 
to  transfer  as  a  conversion.  Hughes  v. 
Vermont  Copper  Min.  Co.,  72  N.  Y.  207 
(1878).  Where  the  purchaser  of  the  cer- 
tificate of  stock  applies  for  transfer  on 
the  corporate  books,  which  is  refused,  he 
can  hold  the  corporation  liable  for  divi- 
dends subsequently  paid  on  such  stock. 
Blooming  Grove,  etc.  Co.  v.  First  Nat. 
Bank,  etc.,  50  S.  W.  Rep.  552  (Tex.  1900). 

1 


*  Jermain  v.  Lake  Shore,  etc.  R  R.,  91 
N.  Y.  483  (1883);  March  v.  Eastern  R.  R., 
43  N.  H.  515,  520  (1862);  Ryan  v.  Leav- 
enworth, etc.  Ry.,  21  Kan.  365,  403 
(1879);  Foote  v.  Worthington,  39  Mass. 
299  (1839);  Jones  v.  Terre  Haute,  etc. 
R.  R.,  57  N.  Y.  196  (1874);  Currie  v. 
White,  45  N.  Y.  822  (1871);  Brundagev. 
Brundage,  65  Barb.  397,  408  (1873);  af- 
firmed, 60  N.  Y.  544;  Goodwin  v.  Hardy, 
57  Me.  143  (1869);  Hill  v.  Newichawa- 
nick  Co.,  8  Hun,  459  (1876);  aff'd,  71^ 
N.  Y.  593  (1877);  Bates  v.  Mackinley,  31 
L.  J.  (Ch.)  389  (1862);  King  v.  Follett,  3 
Vt.  385  (1831);  Abercrombie  v.  Riddle, 
3  Md.  Ch.  320  (1850).  See  also  ch. 
XXXIII,  infra.  Cf.  Kane  v.  Blood- 
good,  7  Johns.  Ch.  90  (1823).  A  person 
who  guai'antees  to  another  a  dividend, 
and  is  obliged  to  pay  it  himself,  cannot 
claim  a  subsequent  dividend  by  way  of 
reimbursement.  Parks  v.  Automatic, 
etc.  Co.,  14  Daly,  424  (1888).  A  dividend 
declared  after  the  certificates  have  been 
sold  belongs  to  the  ti'ansferee  as  against 
the  transferrer.  Gemmell  v.  Davis,  75 
Md.  546  (1892),  approving  the  text 
herein.  Where  a  stockholder  assigns- 
by  contract  the  stock  and  all  dividends 
146 


CH.  XXXII.] 


DIVIDENDS. 


[§  o3&. 


A  transfer  of  stock  passes,  of  course,  all  dividends  declared  sub- 
sequently to  the  transfer,  although  the  dividend  was  earned  before 
the  transfer  was  made.^ 

A  dividend  is  something  distinct  and  separable  from  the  fund 
upon  which  it  is  declared,  and  it  may  be  the  subject  of  assignment 
by  a  stockholder  before  it  is  received  from  or  declared  by  the  cor- 
poration.^ 

A  pledgee  is  entitled  to  dividends  on  the  stock  held  in  pledge, 
but  must  account  for  them  when  the  pledge  is  redeemed.^ 


to  another,  he  must  pay  to  the  latter 
any  subsequent  dividends  which  he  re- 
ceives. Cook  V.  Monroe,  45  Neb.  849 
(1895).  A  purchaser  of  stock  is  entitled 
to  subsequently  declared  dividends  from 
the  vendor  irrespective  of  whether  a 
transfer  has  been  made  on  the  books. 
Farmers',  etc.  Bank  v.  Mosher,  88  N.  W. 
Rep.  552  (Neb.  1901).  Even  though  a 
transfer  has  not  been  recorded,  yet  the 
transferee  is  entitled  to  the  dividends 
as  against  the  transferrer,  and  may  re- 
cover this  from  him.  Houser  v.  Rich- 
ardson, 90  Mo.  App.  134  (1901).  Where 
stock  is  sold  at  auction  on  August  1st 
and  a  deposit  paid,  the  balance  to  be 
paid  August  29th,  a  dividend  declared 
on  August  24th  belongs  to  the  pur- 
chaser. Black  V.  Homersham,  L.  R.  4 
Exch.  D.  24  (1878).  Where  a  company 
purchases  shares  of  its  own  stock  and 
subsequently  uses  it  to  declare  a  stock 
dividend,  a  stockholder  who  sold  part 
of  his  stock  in  the  interim  is  entitled 
to  the  dividend  on  only  such  stock  as 
he  owned  when  the  dividend  was  de- 
clared. Coleman  v.  Columbia  Oil  Co., 
51  Pa.  St.  74  (1865).  Where  defendant 
purchased  stock  for  the  plaintiff  and 
accounted  therefor,  but  refused  to  ac- 
count for  dividends  received  while  he 
held  the  stock,  the  defendant  is  guilty 
of  conversion.  Shaughnessy  v.  Chase, 
7  N.  Y.  St.  Rep.  293  (1887).  Although 
the  purchaser  of  stock  is  entitled  to  a 
dividend  declared  after  the  contract  of 
sale  is  made,  even  though  the  contract 
has  not  yet  been  carried  out,  yet  the 
purchaser  cannot  insist  on  the  vendor's 
giving  an  order  on  the  corporation  for 


such  dividends.  The  purchaser  should 
collect  without  such  order.  He  re- 
scinds the  sale  by  Insisting  on  such  or- 
der. Phinizy  v.  Murray,  83  Ga.  747 
(1889).  An  alleged  vendee's  suit  for  a 
dividend  is  res  judicata  as  to  a  suit  for 
the  stock.  Shepard  v.  Stockham,  45 
Kan.  244  (1891).  Where  an  agent  to 
sell  was  to  have  all  that  he  sold  for 
above  a  certain  price,  a  sum  in  excess 
thereof  belongs  to  him,  although  it 
was  for  dividends  not  yet  declared. 
Blakeslee  v.  Ervm,  40  Neb.  130  (1894). 

1  Kane  v.  Bloodgood,  7  Johns.  Ch.  90 
(1823),  by  Chancellor  Kent;  Goodwin 
V.  Hardy,  57  Me.  143  (1869);  March  v. 
Eastern  R.  R.,  43  N.  H.  515  (1862); 
Phelps  V.  Farmers',  etc.  Bank,  26  Conn. 
269  (1857);  Brundage  v.  Brundage.  1 
Thomp.  &  C.  82;  aff'd,  60  N.  Y.  544 
(1875);  Jones  "y.  Terre  Haute,  etc.  R.  R, 
57  N.  Y.  196  (1874);  Currie  r.  White, 
45  N.  Y.  822  (1871).  And  a  purchaser 
of  stock  at  a  tax  sale,  if  the  proceed- 
ings are  legal  and  regular,  is  entitled 
to  a  certificate  and  to  dividends  sub- 
sequently declared.  Smith  v.  North- 
ampton Bank,  58  Mass.  1  (1849). 

2  Marten  v.  Gibbon,  33  L.  T.  Rep. 
561  (1875).  Cf.  Jermam  v.  Lake  Shore, 
etc.  R.  R.,  91  N.  Y.  483  (1883).  Bar- 
gains in  prospective  dividends  are 
transactions  which,  by  rule  61  of  the 
stock  exchange,  the  committee  will 
not  recognize  or  enforce.  The  con- 
tract is,  however,  one  which  is  not  con- 
trary to  law,  and  it  is  good  between 
the  parties.  Marten  v.  Gibbon,  33  L.  T. 
Rep.  561  (1875).     Cf.  §  536,  supra. 

3  See  S  468,  supra. 


1147 


§  539.] 


DIVIDENDS. 


[cn.  XXXII. 


When  a  dividend  is  made  payable  on  a  day  subsequent  to  the 
day  on  which  it  is  formally  declared,  it  belongs  to  the  stock- 
holder who  owns  the  shares  on  the  day  the  dividend  is  declared, 
and  not  to  the  owner  at  the  time  it  is  payable,^  unless,  of  course, 
the  resolution  declaring  the  dividend  makes  it  payable  to  stock- 
holders of  record  of  a  later  date.^ 

Where  stock  is  bought  deliverable  at  the  seller's  option,  the 
dividends  declared  between  the  day  of  the  purchase  and  the  de- 
livery belong  to  the  purchaser.^  But  a  contract  to  sell  on  demand 
entitles  the  vendor  to  dividends  declared  before  the  demand  is 
made.*  But  of  course  any  agreement  between  vendor  and  vendee, 
modifying  or  changing  the  above  rules,  will  be  upheld.  Divi- 
dends are  a  proper  subject  for  a  contract,  and  a  valid  contract 
may  be  made  in  reference  to  them.^    The  vendor  may  provide  b^'^ 


1  Wheeler  v.  Northwestern  Sleigh  Co., 
39  Fed.  Rep.  347  (1889);  Wright  v. 
Tuckett,  1  Johns.  &  H.  266  (I860);  De 
Gendre  v.  Kent,  L.  R.  4  Eq.  283  (1867); 
Hill  V.  Newichawanick  Co.,  71  N.  Y. 
593(1877),  affirming  s.  C,  8  Hun,  459; 
48  How.  Pr.  427  (1874);  Spear  v.  Hart, 
3  Rob.  (N.  Y.)  420  (1865);  Bright  v. 
Lord,  51  Ind.  272  (1875),  where  an  op- 
tion had  been  given.  Cf.  Hopper  v. 
Sage,  112  N.  Y.  530  (1889);  Manning  v. 
Quicksilver  Min.  Co.,  24  Hun,  360  (1881); 
Board  man  v.  Lake  Shore,  etc.  R  R.,  84 
N.  Y.  157,  178  (1881);  Ee  Kernochan, 
104  N.  Y.  618  (1887);  Clive  v.  Clive,  Kay. 
600  (1854).  Contra,  Burroughs  v.  North 
Carolina  R.  R.,  67  N.  C.  376  (1872).  The 
transfer  of  stock  does  not  transfer  past 
stock  dividends  which  have  been  de- 
clared, even  though  the  stock  dividend 
has  not  been  actually  delivered.  City 
of  Ohio  V.  Cleveland,  etc.  R.  R.,  6  Ohio 
St.  489  (1856).    See  also  ch.  XVI,  siqyra. 

2  A  sale  of  stock  July  6th,  "  including 
all  dividends  due  or  to  become  due 
thereon,"  carries  a  stock  dividend  de- 
clared June  5th  and  payable  to  stock- 
holders of  record  July  1st,  and  the 
sale  is  not  fraudulent  although  the 
seller  did  not  know  of  such  stock 
dividend  and  the  buyer  did  know. 
Rose  V.  Barclay,  191  Pa.  St.   594  (1899). 

^Currie  v.  White,  45  N.  Y.  822  (1871); 
Black  V.  Homersliam.  L.  R.  4  Excli.  D. 


24  (1878).  Under  a  contract  of  a  person 
to  buy  certain  stock  withiu  a  certain 
time  if  the  other  party  desired  to  sell 
(a  "  put ").  the  first  person  reserving  all 
dividends  "declared  during  the  time," 
a  dividend  declared  before  but  payable 
during  the  time  of  the  option  belongs 
to  the  seller.  Hopper  v.  Sage,  112  N.  Y. 
530  (1889).  Contra,  Harris  v.  Stevens, 
7  N.  H.  454(1835). 

4  Bright  V.  Lord.  51  Ind.  272  (1875). 

5  Cook  V.  Monroe,  45  Neb.  349  (1895); 
Brewster  v.  Lathrop,  15  Cal.  21  (1860); 
Hyatt  V.  Allen,  56  N.  Y.  553  (1874); 
Union  Screw  Co.  v.  American  Screw 
Co..  11  R.  I.  569  (1877);  affirmed,  13  R  L 
673  (1882),  in  which  it  was  held  that 
where  performance  of  a  contract  be- 
tween two  corporations  for  the  pur- 
chase of  the  stock  of  one  of  them  on  a 
certain  day  was  by  agreement  jiost- 
poned  to  a  later  day,  a  dividend  de- 
clared in  the  interval  belonged  to  the 
purchaser.  Where  the  vendor  of  stock 
reserves  "one-half  of  whatever  price 
the  same  should  be  sold  for,  when  sold, 
over  and  above  that  sum,"  he  is  not  en- 
titled to  an  account  of  dividends,  or 
other  income  received  by  the  vendee 
from  Qx  on  account  of  the  stock.  Jones 
V.  Kent,  80  N.  Y.  585  (1880).  A  person 
who  sells  stock  reserving  a  dividend 
that  may  be  declared  at  a  certain  date 
cannot  claim  a  stock  dividend  which  is 


1148 


i)U.  XXXII.] 


DIVIDENDS. 


[§  53&. 


contract  that  he  should  have  the  dividends  in  lieu  of  interest  on  the 
purchase  price  until  such  purchase  price  is  paid.^ 

A  legatee  of  shares  takes  the  stock  as  it  was  at  the  time  of  the 
testator's  death.  All  dividends  declared  previous  to  that  event  go 
to  the  administrator.2  A  gift  of  stock  on  condition  that  the  divi- 
dends should  all  go  to  the  owner  and  that  he  should  vote  it  is  a  gift 
of  a  remainder  with  a  life  interest  in  the  donor.^ 

The  question  of  whether  a  dividend  is  apportionable  is  considered 
elsewhere.* 

A  person  who  claims  to  be  the  owner  of  stock  cannot  establish 
his  rights  in  a  court  by  suing  the  party  in  possession  of  the  stock 
for  the  dividends  declared  and  paid.^ 


declared  at  the  specified  date.     He  can 
only  claim  the  cash  dividend.     Kauf- 
man V.  Charlottesville  Woolen  Mills,  93 
Va.  673  (1896).  A  contract  by  which  the 
"  surplus  fund  "  on  stock  in  a  corpora- 
tion up  to  a  certain  time  shall  belong 
to  a  certain  party  was   construed  in 
Thompson    v.    Hudgms,    116    Ala.    93 
( 1897).     Where  an  employee  is  paid  ac- 
cording to  the  percentage  of  dividends, 
it  is  for  the  jury  to  say  whether  divi- 
dends on  an  increased  capital  stock  are 
the  proper  gauge  of  such  salary.     Brad- 
burn  V.  Solvay  Process   Co.,  18  N.  Y. 
App.  Div.  542  (1897).    In  the  case  of  Big- 
bee,  etc.  Co.  V.  Moore,  121  Ala.  379  (1899), 
the  court  sustained  a  by-law  whereby 
stockholders  in  a  steamboat  company 
each  put  a  boat  into  the  service  of  the 
company  and  each  was  to  draw  divi- 
dends on  his  stock  only  so  long  as  his 
boat    remained   fit    for    service,    such 
dividend  to  cease  upon  the  boat  becom- 
ing unfit  for  service,  until  it  was  re- 
paired by  the  owner.     In  the  case  of 
Rivers  v.  Oak,  etc.  Co.,  53  La.  Ann.  763 
(1899),  the  court  upheld  an  oral  agree- 
ment that  the  vendor  of  stock  should 
be    entitled  to  his  proportion   of  the 
profits  of  the  company  for  the  ensuing 
year. 

1  Hancock  v.  Clark,  68  Vt.  303  (1896). 

2  Brundage  v.  Brundage,  60  N.  Y.  544 
(1875);  Re  Kernochan,  104  N.  Y.  618 
(1887).  where  it  was  payable  after  the 
testator "s  death.  Cf.  Johnson  v.  Bridge- 

1 


water  Iron  Mfg.  Co.,  80  Mass.  374  (1859); 
§  301,  supra.  The  profits  and  surplus 
funds  of  a  corporation,  whenever  they 
may  have  accrued,  are,  until  separated 
from  the  capital  by  the  declaring  of  a 
dividend,  a  part  of  the  stock  itself,  and 
will  pass  under  that  name  in  a  transfer 
or  bequest.  Phelps  v.  Farmers',  etc. 
Bank,  36  Conn.  269  (1857).  Cf.  Clapptv 
Astor,  2  Edw.  Cli.  379  (1834).  In  regard 
to  the  rights  of  a  life  tenant  of  stock 
as  against  a  remainderman,  see  ch. 
XXXIII,  infra. 

3  Matter  of  Brandreth,  169  N.  Y.  437 
(1902).  A  stockholder  may  transfer  his 
certificate  to  his  children,  wjio  at  the 
same  time  may  give  him  an  irrevocable 
power  to  vote  the  stock  during  his  life 
and  to  receive  and  keep  the  dividends 
on  the  stock.  Such  an  agreement  is  en- 
forcible,  even  though  the  stock  is  trans- 
ferred into  the  name  of  the  children, 
the  certificates,  however,  not  being 
actually  delivered  to  them.  Matter  of 
Brandreth,  58  N.  Y.  App.  Div.  575(1901). 
A  gift  of  stock,  the  donee  to  have  the 
possession  and  management  of  the 
same,  but  the  donor  to  have  the  income 
during  his  life,  makes  the  donee  trustee, 
until  the  death  of  the  donor,  and  hence 
such  gift  is  taxable  under  the  New 
York  statutes  as  a  transfer  to  take 
effect  on  his  death.  Matter  of  Cornell, 
170  N.  Y.  423  (1902). 

4  See  3  558,  infra. 

s  Peckham  v.  Van  Wagenen,  83  N.  Y. 
149 


§  540.] 


i/iVlDEXDS. 


[cn.  xxxii. 


It  seems  that  a  stockholder  may  lease  his  stock.  He  may  for  a 
certain  sum  assign  to  another  all  dividends  during  the  specified 
time  and  give  to  the  lessee  the  right  to  vote  the  stock  during  that 
time.^ 

§  540.  Dividends  mustle  equal  and  without  preferences. —  Divi- 
dends among  stockholders  of  the  same  class  must  be  always  ^>ro 
rata^  equal,  and  without  preference.  If  the  company  has  issued 
preferred  stock,  the  holders  thereof  constitute  a  class  by  themselves, 
and  stockholders  of  that  class  will  be  entitled,  as  a  class,  to  divi- 
dends in  preference  to  holders  of  the  common  stock.  But  as  be- 
tween stockholders  of  the  same  class  there  can  be  no  discrimina- 
tion, and  profits  set  aside,  for  dividends  must  be  evenly  divided 
among  the  stockholders  according  to  the  amount  of  stock  each  one 
owns.'-  Accordingly  there  can  be  no  lawful  discrimination  in  the 
division  of  dividends,  although  the  subscription  price  o.f  part  of  the 
stock  is  due  and  unpaid;^  or  because  the  contract  work  has  not 


40  (1880).  Conversion  lies  for  an  unau- 
thorized sale  of  stock  and  also  for  divi- 
dends received  thereon.  Shaughnessy 
V.  Chase,  7  N.  Y.  St.  Rep.  293  (1887). 

JZaolir^'  V.  Nolan,  66  Fed.  Rep.  467 
(1895). 

2  Luling  V.  Atlantic  Mut.  Ins.  Co.,  45 
Barb.  510  (1865),  where  part  were  paid 
in  gold;  Jones  v.  Terre  Haute,  etc.  R. 
R.,  57  N.  Y.  196  (1874),  aflf'g  29  Barb.  353 
(1859^;  Morgan  v.  Great  Eastern  Ry.,  1 
Hem.  &  M.  560  (1863);  Ryder  v.  Alton, 
etc.  R.  R.,  13  111.  516  (1851),  a  case  of  pre- 
ferred stock;  State  v.  Baltimore,  etc.  R. 
R.,  6  Gill  (Md.),  363  (1848),  where  some 
were  paid  in  cash  and  others  were  of- 
fered part  cash  and  part  stock;  Atlan- 
tic, etc.  Tel.  Co.  v.  Commonwealth,  3 
Brewst.  (Pa.)  366  (1870),  where  a  tax 
was  levied  on  the  assumption  of  an 
equal  dividend  to  all;  Hale  v.  Republi- 
can River  Bridge  Co.,  8  Kan.  466  (1871), 
where  by  mistake  a  stockholder  got 
more  land  scrip  than  was  his  share; 
Jackson  v.  Newark  Plank  .Road  Co.,  31 
N.  J.  L.  277  (1865).  Cf.  Chase  v.  Vander- 
bilt,  62  N.  Y.  307  (1875).  A  holder  of  a  re- 
ceipt under  a  reorganization,  entitling 
him  to  preferred  stock  in  the  new  com- 
pany, is  entitled  to  dividends  declared 
before  he  obtains  the  certificates.  Els- 
worth  v.  New  York,  etc.  R.  R..  10  Week. 


Dig.  211;  aflf'd,  98  N.  Y.  648  (1885).  See 
also  Coey  v.  Belfast,  etc.  Ry.,  Ir.  Rep.  2C. 
L.  112(1866);  Harrison  v.  Mexican  Ry., 
L.  R.  19  Eq.  358  (1875),  preferred  stock 
cases.  As  to  preferred  stock,  see  ch. 
XVI,  supra.  Although  dividends  are 
guaranteed  to  a  certain  date,  and  are 
paid,  the  stock  is  entitled  to  partici- 
pate in  all  subsequent  dividends.  Parks 
V.  Automatic,  etc.  Co.,  14  N.  Y.  St.  Rep. 
710  (1888).  If  a  stockholder  by  accept- 
ing the  benefits  assents  to  a  change  in 
the  privileges  which  pertain  to  his 
stock,  he  cannot  afterwards  object 
thereto.  Compton  v.  The  Chelsea,  59 
Hun,  024  (1891);  aff'd,  128  N.  Y.  537. 

3  Oakbank  Oil  Co.  v.  Crum,  L.  R.  8  App. 
Cas.  65  (1882).  Where  a  subscription 
for  stock  is  paid  up,  the  stockholder  is 
entitled  to  his  stock  and  past  dividends, 
even  though  for  thirty  years  lie  has 
slept  upon  his  rights.  Kobogum  v.  Jack- 
son Iron  Co.,  76  Mich.  498  (1889);  Bed- 
ford County  V.  Nashville,  etc.  Ry.,  14 
Lea  (Tenn.),  525  (1884).  It  has  been  held 
in  Maryland  that  a  subscriber  to  the  in- 
creased capital  stock  of  a  company  is 
not  entitled  to  a  certificate  until  he 
has  paid  for  the  stock  in  full,  and  such 
subscriber  is  not  entitled  to  the  rights 
of  a  stockholder  until  lie  has  paid  in 
full    The  court  stated  that  such  stock- 


1150 


•CH.  XXXII.] 


DIVIDENDS. 


[§  541. 


been  done ;  ^  nor  on  the  ground  that  the  stockholder  has  no  legal 
right  to  purchase  the  stock  ;^  nor  can  there  be  a  discrimination 
between  the  large  and  small  stockholders  of  a  company  as  to  the 
manner  of  payment  of  dividends.^  After  paying  a  dividend  to  a 
part  of  the  stockholders  the  corporation  cannot  refuse  to  pay  the 
rest  upon  the  ground  that  by  so  doing  the  capital  stock  will  be  im- 
paired,'* or  that  all  the  surplus  earnings  have  been  either  paid  out 
as  dividends  or  invested  in  permanent  improvements.'^ 

A  bill  in  equity  may  be  maintained  by  a  stockholder  to  prevent  an 
unequal  or  unfair  distribution  of  the  profits  of  the  compan}",^  and 
for  an  injunction  to  restrain  a  dividend  when  stock  has  been  fraud- 
ulently overissued,  until  a  true  list  of  the  holders  of  genuine  stock 
can  be  obtained.^ 

§  541.  A  dividend  declared  and  specifically  set  apart  as  a  distinct 
fund  belongs  ahsolutely  to  the  stocliliolders. —  When  a  dividend  out 
of  the  earnings  of  a  company  has  been  regularly  declared  and  is 


holders  are  not  entitled  to  dividends 
equally  with  other  stockholders.  The 
basis  of  the  decision  was  the  difference 
between  original  stock  and  increased 
stock.  The  court  refused  to  compel  the 
corporation  to  issue  a  certificate.  Bal- 
timore, etc.  Ry.  V.  Hambleton,  77  Md. 
841  (1893). 

1  Although  stock  is  issued  to  contract- 
ors before  they  are  entitled  to  it,  yet 
they  are  entitled  to  the  dividends  on 
such  stock  unless  there  was  some  agree- 
ment to  the  contrary.  Central  R.  R. 
«tc.  Co.  V.  Papot,  59  Ga.  342  (1877);  S.  C. 
sub  nom.  Southwestern  R.  R.  v.  Papot, 
67  Ga.  675,  690  (1881). 

2  Where  one  corporation  subscribes 
for  stock  in  another  corporation  and 
pays  for  such  stock,  and  dividends  are 
declared  by  the  latter,  it  cannot  refuse 
to  pay  the  dividends  to  the  former  on 
the  ground  that  the  former  had  no 
power  to  subscribe  for  the  stock.  Big- 
bee,  etc.  Co.  V.  Moore,  121  Ala.  379  (1899). 

3  Accordingly  where  a  dividend  was 
declared,  viz.,  to  all  stockholders  own- 
ing less  than  fifty  shares,  cash,  but  to 
aU  of  fifty  shares  and  over,  part  cash 
and  part  in  interest-bearing  bonds  of 
the  corporation,  the  discrimination  was 
held  invalid  and  unlawful.  State  v. 
Baltimore,  etc.  R.  R.,  6  Gill  (Md.),  363 


(1848);  Jones  v.  Terre  Haute,  etc.  R.  R., 
57  N.  Y.  196  (1874).  So  also  where  a 
part  of  the  authorized  capital  stock  re- 
mained untaken,  and  a  resolution  of 
the  directors  was  cai'ried  into  effect,  by 
which  the  untaken  portion  of  the  stock 
was  issued  to  those  shareholders  not  in 
arrears  upon  shares  pi'eviously  taken, 
to  the  exclusion,  as  to  the  new  shares, 
of  those  in  arrears  upon  the  original 
issue,  it  was  held  an  invalid  discrimi- 
nation and  an  unlawful  imposition  of 
a  penalty  upon  those  in  arrears. 
Reese  v.  Montgomery  County  Bank,  31 
Pa.  St.  78  (1855). 

*  Stoddard  v.  Shetucket  Foundry  Co., 
34  Conn.  542  (1868).  The  validity  of  a 
dividend  cannot  be  called  into  question 
by  a  bank  in  a  suit  to  collect  taxes  on 
such  dividend.  Central  Nat.  Bank  v. 
U.  S.,  137  U.  S.  355  (1890). 

» Beers  v.  Bridgeport  Spring  Co.,  42 
Conn.  17  (1875). 

^Luling  V.  Atlantic  Mut.  Ins.  Co.,  45 
Barb.  510  (1865).  The  minority  may 
bring  the  officers  to  an  accounting  for 
an  unfair  distribution  of  the  bonds,  etc., 
owned  by  a  construction  company. 
Meyers  v.  Scott,  2  N.  Y.  Supp.  753  (1888). 
Or  the  stockholder  may  sue  at  law  for 
an  equal  dividend.     See  §  542,  infra. 

"^  Underwood  v.  New  York,  etc.  R.  R, 


1151 


§  541.] 


DIVIDENDS. 


[CH,  XXXII. 


due,  it  becomes  immediately  the  individual  property  of  the  stock- 
holder. There  is  at  once  a  severance,  for  the  use  and  benefit  of  the 
members  of  the  corporation,  of  so  much  of  the  accumulated  earn- 
ings as  are  declared ;  and  the  dividend  thereafter  exists  as  a  sepa- 
rate fund,  distinct  from  the  capital  stock  or  surplus  profits.  It  then 
becomes  the  absolute  property  of  the  stockholders.* 

Accordingly,  whenever  a  dividend  is  regularly  declared  and 
credited  to  a  depositor  it  becomes  his  property,  to  which  he  is  en- 
titled in  preference  to  the  creditors  of  the  corporation.^  If  the 
funds  to  pay  a  dividend  are  placed  by  the  corporation,  on  deposit 
at  a  bank  or  elsewhere,  the  deposit  is  made  and  remains  at  the  risk 
of  the  corporation  and  not  of  the  stockholders,  until  a  reasonable 
time  after  actual  notice  is  given  to  the  latter.'  But  it  cannot  be 
withdrawn  and  reclaimed  either  by  the  corporation  or  a  receiver 
of  the  corporation,  since  the  stockholders  acquire,  by  virtue  of  the 
declaration  of  the  dividend,  a  lien  in  equity  upon  the  deposit.* 

But  where  the  fact  that  a  dividend  has  been  voted  by  directors 
is  not  made  public,  or  communicated  to  the  stockholders,  and  no 
fund  is  set  apart  for  payment,  the  vote  may  be  rescinded.^ 


17  How,  Pr.  537  (1859),  a  case  growing 
out  of  the  Schuyler  frauds  in  New  York. 
See  also  ^  297,  supra. 

1  Van  Dyck  v.  McQuade,  86  N.  Y.  38 
(1881);  Jermain  v.  Lake  Shore,  etc.  R.  R., 
91  N.  Y.  483  (1883);  Keppel  v.  Peters- 
burg R.  R.,  Chase's  Dec.  167  (1868);  s.  C, 
14  Fed.  Cas.  357;  King  v.  Paterson,  etc. 
R.  R,  29  N.  J.  L.  82,  504  (1860);  Hill  v. 
Newichawanick  Co.,  71  N.  Y.  593  (1877), 
affirming  s.  C,  8  Hun.  459  (1876);  Brun- 
dage  V.  Brundage,  60  N.  Y.  544  (1875), 
affirming  s.  c,  65  Barb.  397  (1873);  Spear 
V.  Hart,  3  Rob.  (N.  Y.)  420  (1865);  Man- 
ning V.  Quicksilver  Min.  Co.,  24  Hun, 
360  (1881);  Kane  u  Bloodgood,  7  Johns. 
Ch.  90  (1823);  Beers  v.  Bridgeport  Spring 
Co.,  42  Conn.  17  (1875):  Fawcett  t\  Lau- 
rie, 1  Dr.  &  Sm.  192  (1860);  Re  Le  Blanc, 
14  Hun,  8  (1878).  Upon  the  latter  point 
compare  People  v.  Merchants',  etc. 
Bank.  78  N.  Y.  269  (1879).  Dividends  on 
life-insurance  policies,  when  once  de- 
clared, cannot  be  varied  by  the  com- 
pany subsequently.  Heusser  v.  Conti- 
nental Life  Ins.  Co.,  20  Fed.  Rep.  222 
(1884).  Execution  or  garnishee  process 
cannot  be  levied  on  stock  held  by  an 

111 


individual  as  trustee,  where  the  debt  is 
his  individual  debt.  Nor  can  it  be 
levied  on  the  dividend  from  such  stock. 
So  held  where  stock  was  owned  by  k 
city  in  trust  for  the  citizens.  Hitch 
cock  V.  Galveston  Wharf  Co.,  50  Fed 
Rep.  263  (1880). 

2  Van  Dyck  v.  McQuade,  86  N.  Y.  3fc 
(1881);  Peckham  v.  Van  Wagenen,  83 
N.  Y.  40  (1880).  A  dividend  declared 
and  ordered  deposited  to  the  order  ot 
the  stockholders  and  so  held  until  the 
further  order  of  the  court  is  legal,  and 
the  amount  cannot  be  taxed  as  belong- 
ing to  the  bank.  Pollard  v.  First  Nat. 
Bank,  47  Kan.  406  (1891). 

3  King  V.  Paterson,  etc.  R.  R.,  29  N.  J. 
L.  82,  504  (1860). 

*Re  Le  Blanc,  14  Hun,  8  (1878);  aff'd, 
75  N.  Y.  598;  Beers  u  Bridgeport  Spring 
Co.,  42  Conn.  17  (1875). 

*Ford  V.  Easthampton,  etc.  Co.,  158 
Mass.  84  (1893).  A  stockholder  who  ac- 
cepts a  dividend  which  has  been  de- 
clared in  lieu  of  one  already  declared 
and  thus  revoked,  cannot  claim  both 
dividends.  Albany,  etc.  Co.  v.  Arnold, 
103  Ga.  145  (1897).    Where  the  charter 


CH,  XXXII.] 


DIVIDENDS. 


[§  542. 


The  stockholders'  right  to  a  dividend  regularly  declared,  and  to' 
the  fund  set  apart  by  the  corporation  to  pay  the  dividend,  is  not 
affected  by  the  subsequent  insolvency  of  the  corporation.^  But 
where  no  specific  fund  has  been  set  aside,  a  stockholder  not  having 
claimed  or  received  his  dividend  has,  upon  the  insolvency  of  the 
corporation,  merely  a  claim  of  debt  against  the  corporation,  and 
must  come  in  and  fare  as  the  other  creditors  do.^ 

Not  only  must  the  time  of  payment  be  reasonable,  but  a  reason- 
able place  of  payment  must  be  designated,  and  the  entire  transac- 
tion must  be  in  good  faith.' 

§542.  It  is  a  debt  irhich  1)1(11/1)6  collected  hy  legal  proceedings. 
The  debt  which  the  corporation  owes  its  stockholders,  when  a  divi- 
dend is  declared  and  the  day  of  payment  arrives,  is  one  which  may 
be  collected  by  the  usual  action  at  law.  A  suit  to  compel  the  dec- 
laration of  a  dividend  must  be  in  equity;  but  when  the  dividend  is 
not  paid  after  it  has  been  regularly  declared  the  stockholder's  ac- 
tion is  at  law,  and  he  may  sue  in  assumpsit  for  the  amount  due  him 
by  the  resolution  declaring  the  dividend,*  or,  under  certain  circum- 


allows  the  directors  to  pay  "  interim 
dividends,"  in  other  words,  dividends  to 
apply  on  the  next  regular  dividend,  an 
interim  dividend  may  be  revoked  after 
it  has  been  declared  and  before  it  has 
been  paid.  Lagunas,  etc.  Co.  v.  Schroe- 
der  &  Co.,  85  L.  T.  Rep.  23  (1901). 

1  Le  Roy  v.  Globe  Ins.  Co.,  2  Edvr.  Ch. 
657  (1836). 

'^  Lowne  v.  American  Fire  In&  Co.,  6 
Paige,  482  (1837);  Curry  u  Woodward, 
44  Ala.  305  (1870).  Where  a  dividend 
is  declared  in  1894,  but  is  not  called  for 
by  one  stockholder  until  1897,  after  the 
company  has  passed  into  an  assignee's 
hands,  he  is  a  general  creditor  to  that 
amount,  but  is  not  entitled  to  be  paid 
in  full  unless  a  specific  sum  was  de- 
posited for  the  purpose  of  paying  this 
dividend.  Hunt  v.  0'Shea,  69  N.  H.  600 
(1899). 

3  King  V.  Paterson,  etc  R  R.,  29  N. 
J.  L.  83  (1860). 

*  Jackson  v.  Newark  Plank  Road  Co., 
81  N.  J.  L.  277  (1865);  West  Chester,  etc. 
R.  R.  V.  Jackson,  77  Pa.  St.  321  (1875); 
Coey  V.  Belfast,  etc.  Ry.,  Ir.  Rep.  2  C.  L. 
113  (1866);  King  v.  Paterson,  etc.  R.  R, 
29  N.  J.  L.  504  (1860);  Stoddard  v.  She- 


tucket  Foundry  Co.,  84  Conn.  542  (1868); 
Hallu.  Rose  Hill,  etc.  Co.,  70  111.  673 
(1873);  City  of  Ohio  v.  Cleveland,  etc.  R 
R,  6  Ohio  St.  489  (1856);  Marine  Bank 
V.  Biays,  4  Har.  &  J.  (Md.)  338  (1818); 
State  V.  Baltimore,  etc.  R.  R,  6  Gill 
(Md.),  363  (1848);  Kane  v.  Bloodgood,  7 
Johns.  Ch.  90,  133  (1823);  Jones  v.  Terra 
Haute,  etc.  R  R,  57  N.  Y.  196  (1874); 
Fawcett  v.  Laurie,  1  Dr.  &  Sm.  193,  203 
(I860);  Dalton  v.  Midland  Counties  Ry., 
13  C.  B.  474  (1853);  Scott  v.  Central  R 
R  etc.  Co.,  53  Barb.  45  (1868).  See  Beers. 
V.  Bridgeport  Spring  Co.,  42  Conn.  IT 
(1875).  sustaining  a  remedy  in  equity. 
But  if  a  stockholder  is  not  entitled  to 
share  in  the  dividend  according  to  the 
terms  of  the  resolution  declaring  it,  he 
cannot  have  his  action  of  assumpsit. 
State  V.  Baltimore,  etc.  R  R.,  6  Gill 
(Md.),  363  (1848).  In  suing  for  a  divi- 
dend the  plaintiff  must  allege  that  the 
dividend  has  been  declared.  Hill  v. 
Atoka,  etc.  Co.,  21  S.  W.  Rep,  508  (Mo. 
1893).  Where  a  dividend  has  been  paidi 
to  all  stockholders  except  one,  he  may 
collect  his  by  a  suit  Southwestern,  et(X. 
Ry.  V.  Martin,  57  Ark.  855  (1893> 


(73) 


1153 


543.J 


DIVIDENDS. 


[CH.  XXXII. 


stances,  he  may  file  a  bill  in  equity  for  an  accounting.^  But  man- 
damus is  not  a  proper  remedy  in  such  a  case.'^ 

§  543.  A  demand  is  necessary  before  the  action  at  law  by  the 
stockholder  can  be  maintained.' 

It  has  been  held,  however,  that  the  commencement  of  the  suit 
constitutes  in  itself  a  sufficient  demand.'*  Under  ordinary  circum- 
stances interest  is  not  recoverable  upon  dividends  which  have  been 
declared,  but  which  the  stockholder  has  not  claimed.  The  right  to 
interest  arises  only  upon  a  demand  and  a  refusal  to  pay.^  A  stock- 
holder is  not  entitled  to  interest  on  dividends,  even  where  he  has 
demanded  the  same  after  they  have  been  declared,  where  an  attach- 
ment is  pending  against  his  stock.^  The  statute  of  limitations 
begins  to  run  only  after  demand.^ 


1  Keppel  V.  Petersburg  R.  R,  Chase's 
Dec.  167  (1868);  s.  C,  14  Fed.  Cas.  357. 
This  is  the  usual  remedy  where  pre- 
ferred stockholders  sue  to  have  a  divi- 
dend declared.     See  §  272,  supra. 

2  Van  Norman  v.  Central  Car,  etc. 
Co.,  41  Mich.  166  (1879).  But  see  dicta 
in  King  v.  Paterson,  etc.  R.  R.  29  N.  J. 
L.  504  (1861),  and  LeRoy  v.  Globe  Ins. 
Co.,  2  Edw.  Ch.  657  (1836). 

3  Hagar  v.  Union  Nat.  Bank,  63  Me. 
509  (1874);  Scott  v.  Central  R.  R.  etc. 
Co.,  52  Barb.  45  (1868);  State  v.  Balti- 
more, etc.  R,  R.,  6  Gill  (Md.),  363  (1848): 
King  V.  Paterson,  etc.  R.  R.,  29  N.  J.  L. 
504  (1860).  A  mere  letter  of  inquiry  has 
been  held  under  this  rule  an  insuffi- 
cient demand.  Scott  v.  Central  R,  R. 
etc.  Co.,  52  Barb.  45  (1868).  A  demand 
while  the  shares  are  under  and  subject 
to  an  attachment  by  the  corporation  is 
not  such  a  demand  as  this  rule  con- 
templates. Hagar  17.  Union  Nat.  Bank, 
68  Me.  509  (1874). 

*  Robinson  v.  New  Berne  Nat.  Bank, 
95  N.  Y.  637  (1884);  Keppel  v.  Peters- 
burg R.  R,  Chase's  Dec.  167  (1868). 
This  accords  with  the  settled  theory  of 
the  law  as  to  demand  in  similar  cases. 
See  East  New  York,  etc.  R  R.  v.  Elmore, 
5  Hun,  214  (1875);  Delamater  v.  Miller, 
1  Cow.  75  (1823);  Everett  v.  Coffin,  6 
Wend.  603  (1831);  Walradt  v.  Maynard, 
3  Barb.  584  (1848);  Carroll  v.  Cone,  40 
Barb.  220  (1862);  Ayer  v.  Ayer,  83  Mass. 
327  (1835). 


5  Keppel  V.  Petersburg  R  R.,  Chase's 
Dec.  167  (1868);  S.  C,  14  Fed.  Cas.  357; 
Boardman  v.  Lake  Shore,  etc.  R.  R,  84 
N.  Y.  157, 187  (1881);  States  Baltimore, 
etc.  R  R,  6  Gill  (Md.),  363,  387  (1848); 
Philadelphia,  etc.  R.  R  v.  Cowell,  28  Pa, 
St.  329  (1857):  Bank  of  Louisville  v. 
Gray,  84  Ky.  565  (1886);  Cochran  v. 
McGee,  53  S.  W.  Rep.  519  (Ky.  1899). 
As  to  interest  on  preferred  dividends, 
see  ch.  XVI,  siqwa. 

6  Mustard  v.  Union  Nat.  Bank,  86  Me. 
177  (1893). 

■^  The  statute  of  limitations  begins  to 
run  against  a  stockholder's  suit  to  col- 
lect dividends  only  after  a  demand  and 
refusal,  or  notice  to  a  shareholder  that 
his  right  to  dividends  is  denied.  Phila- 
delphia, etc.  R  R  V.  Cowell,  28  Pa.  St 
329  (1857);  Bank  of  Louisville  v.  Gray, 
84  Ky.  565  (1886);  Kobogum  u  Jackson 
Iron  Co.,  76  Mich.  498  (1889);  Bedford 
County  V.  Nashville,  etc.  Ry.,  14  Lea 
(Tenn.),  525  (1884).  Cf.  Winchester, 
etc.  Co.  V.  Wickliffe,  100  Ky.  531  (1897). 
The  statute  of  limitations  does  not  be- 
gin to  run  against  the  collection  of  a 
dividend  until  it  is  demanded.  A  pro- 
vision of  a  new  charter  into  which  the 
old  company  is  merged,  applying  a 
three-year  statute  of  limitations  to 
dividends,  does  not  affect  dividends  on 
old  stock  which  has  not  come  into  the 
reoi'ganization.  Armant  v.  New  Or- 
leans, etc.  R.  R,  41  La.  Ann.  1020  (1889). 
In  Bills  V.  Silver  King  Min,  Co.,  106  Cal. 


1154 


CH.  XXXII.]  DIVIDENDS.  [§  543. 

In  England,  however,  it  has  been  held  that  where  dividends  are 
credited  up  to  the  personal  accounts  of  the  stockholders,  and  for 
nearly  twenty  years  certain  stockholders  do  not  claim  dividends 
so  credited  to  them,  the  statute  of  limitations  is  a  bar,  and,  the 
company  having  been  sold  out  by  authority  of  a  statute,  the  pro- 
ceeds are  to  be  divided  among  the  stockholders  without  regard  to 
such  past-due  and  unpaid  dividends.  The  statute  of  limitations 
began  to  run  from  the  time  the  dividends  became  payable,  and  the 
company  is  not  to  be  considered  as  a  trustee  in  that  respect.' 

The  action  at  law  for  the  payment  of  a  dividend  which  has  been 
declared  should  bd  against  the  corporation,  and  not  against  the 
corporate  officers.^  But  where  the  treasurer  of  an  incorporated 
company  withheld  a  dividend  belonging  to  one  of  the  stockholders 
on  the  ground  that  he  himself  owned  the  stock,  an  action  of  as- 
sumpsit against  him  individually  was  sustained.'  In  a  case  where 
a  stockholder  had  been  unjustly  deprived  of  his  stock,  it  was  held 
that  he  could  not  sue  an  individual  stockholder  to  recover  a  divi- 
dend which  should  have  been  paid  to  him,  but  that  his  action  was 
properly  against  the  corporation.*  In  actions  on  the  part  of  stock- 
holders to  enforce  the  payment  of  dividends,  the  validity  or  legal- 
ity of  the  dividend  cannot  be  questioned  by  the  corporation.^ 
AVhen  a  corporation  is  sued  for  a  dividend  by  two  claimants  there- 
for, it  may  support  a  bill  of  interpleader  between  thera.^ 

9  (1895),  it  is  held  that  the  statute  of  per  cent,  per  annum  on  the  sums  in- 
limitations  begins  to  run  against  the  vested,  and  such  dividends  had  equaled 
right  of  a  stockholder  to  sue  for  his  the  amount  invested,  the  surplus  there- 
dividends  from  the  time  when  his  ad-  after  over  and  above  fifteen  per  cent, 
ministrator  inquires  at  the  corporate  dividends  should  be  paid  to  the  corn- 
office  as  to  whether  all  dividends  had  mon  school  fund,  the  state  may  collect 
been  paid  to  decedent,  even  though  a  such  surplus,  and  the  twenty-year  stat- 
false  answer  in  the  affirmative  was  ute  of  limitations  is  the  only  statute 
made  by  the  corporation.  Even  though  applicable.  A  subsequent  statute  au- 
a  person  subscribes  for  stock  in  a  turn-  thorizing  the  attorney-general  toinsti- 
pike  company  in  1857  and  he  does  not  tute  suit  is  constitutional,  but  not  so 
claim  the  stock  or  dividends,  and  after  far  as  such  statute  increases  the  obliga- 
seven  years  does  not  attend  meetings  tion.  Terre  Haute,  etc.  R.  R.  v.  State, 
or  pay  any  attention  to  his  interest,  and  65  N.  E.  Rep.  401  (Ind.  1902). 
dies  in  1868,  nevertheless  his  represent-  l  Re  Severn,  etc.  Ry.,  [1896]  1  Ch.  559. 
atives  may  collect  the  dividends  due  on  2  French  v.  Fuller,  40  Mass.  108  (1839); 
the  stock  and  may  claim  the  stock.  Smith  v.  Poor,  40  Me.  415  (1855);  s.  C,  3 
The  statute  of  limitations  is  no  bar  if  Ware,  148  (1858);  S,  C,  23  Fed.  Cas.  627. 
the  company  has  never  notified  him  « Williams  v.  FuUerton,  20  Vt.  346 
that  his  right  to  the  stock  is  disputed.  (1848). 

Owingsville,  etc.  Co.    v.    Bondurant's  *  Peckham  v.  Van  Wagenen,  83  N.  Y. 

Adm'r,   54  S.  W.   Rep.   718  (Ky.  1900).  40(1880). 

Where  the  charter  of  a  railroad  com-  ^  Stoddard  v.  Shetucket  Foundry  Co., 

pany  provides  that  after  the  stockhold-  34  Conn.  542  (1868). 

€rs  had  received  dividends  equal  to  ten  •*  Salisbury    Mills  v.   Townsend,    109 

1155 


§  544.] 


DIVIDENDS. 


[CH. 


XXXII. 


§  544,  Right  of  the  corporation  to  opphj  dividends  to  the imyment 
of  debts  due  to  it  hij  the  stochholder  —  Dividends  in  payment  of  sub- 
scription price  of  stock. —  It  is  well  settled  that  if,  at  the  time  a  divi- 
dend becomes  payable,  the  stockholder  owes  the  corporation  any 
debt,  the  dividend  due  that  stockholder  may  be  applied  in  liquida- 
tion of  the  indebtedness;  and  if  the  corporation  is  sued  for  the  divi- 
dend it  may  set  up  the  debt  by  way  of  set-off  or  counter-claim.^ 
This,  however,  is  not  upheld  where  the  registered  stockholder  has 
sold  and  transferred  his  certificate  of  stock  before  the  dividend 
is  payable.-^  The  company  cannot  retain  the  dividend  to  secure 
a  debt  for  which  the  stockholder  is  only  surety  or  guarantor,  the 
debt  not  yet  being  due,'  nor  can  it  set  off  a  claim  which  it  has 
against  the  plaintiff  and  another  person  jointly.* 

Where  a  corporation  has  made  profits  it  may  declare  a  dividend 


Mass.  115  (1871).  See  also  §§  387,  538, 
supra.  In  England  the  rule  was  for- 
merly otherwise.  Dalton  v.  Midland 
Ry.,  12  C.  B.  458  (1852). 

•  Hagar  v.  Union  Nat.  Bank,  63  Me. 
509  (1874);  Philadelphia,  etc.  R.  R  r. 
Cowell,  28"  Pa.  St.  329  (1857);  King  v. 
Paterson,  etc.  R.  R.,  29  N.  J.  L.  504  (1860); 
Sargent  v.  Franklin  Ins.  Co.,  25  Mass.  90 
(1829);  Bates  v.  New  York  Ins.  Co.,  3 
Johns.  Cas.  238  (1802);  Donnally  v. 
Hearndon,  41  W.  Va.  519  (1895).  See  also 
§  526,  supra.  But  a  contrary  rule  pre- 
vails as  to  a  deceased  stockholder,  upon 
a  winding  up  of  the  company  and  a 
distribution  of  its  assets.  See  Merchants' 
Bank,  etc.  v.  Shouse,  102  Pa.  St.  488 
(1883);  Brent  v.  Bank  of  Washington,  2 
Cranch,  C.  C.  517  (1824);  s.  C,  4  Fed. 
Cas.  61.  See  also,  contra,  in  general. 
Ex  parte  Windsor,  3  Story,  C.  C.  411 
(1844);  s.  C,  30  Fed.  Cas.  312.  By  agree- 
ment a  dividend  may  be  applied  to  an 
unpaid  call.  Kenton,  etc.  Co.  v.  Mc- 
Alpin,  5  Fed.  Rep!  737  (1880).  For  a 
contract  of  a  corporation  to  sell  to  its 
superintendent  shares  of  its  stock  at  his 
option,  and  to  allow  him  to  pay  for  the 
stock  by  the  dividends,  see  Goodwin, 
etc.  Co.'s  Appeal,  117  Pa.  St.  514  (1888). 
The  only  right  that  a  corporation  has 
to  retain  a  dividend  from  a  stockholder 
who  owes  it  money  is  based  on  set-off. 
Gemmell  v.  Davis,  75  Md.  546  (1892), 


2  Where  a  stockholder  of  record 
pledges  his  certificates  of  stock,  and  no 
transfer  is  made  on  the  books,  and  sub- 
sequently a  dividend  is  declared,  and 
after  such  dividend  is  payable,  but  be- 
fore it  is  actually  paid,  the  pledgee  pre- 
sents to  the  company  the  stock  for 
transfer  with  a  written  request  of  the 
pledgor  to  the  same  effect,  together 
with  an  assignment  by  the  pledgor  to 
the  pledgee  of  the  dividend,  it  is  no  de- 
fense to  the  company  that  it  has  a 
claim  against  the  pledgor  for  a  personal 
debt  or  for  a  debt  of  a  firm  in  which  he 
is  interested.  American  Nat.  Bank  v. 
Nashville,  etc.  Co.,  36  S.  W.  Rep.  960 
(Tenn.  1896).  This  set-off  is  not  good  on 
a  debt  against  the  transferrer  where 
the  certificates  were  sold,  although  not 
transferred  on  the  books,  before  the 
dividend  was  declared.  A  pledgee  of 
stock,  even  though  not  recorded  as  a 
stockholder,  is  entitled  to  dividends 
declared  after  the  pledge  was  made,  as 
against  a  claim  of  the  corporation 
against  the  pledgor  as  an  offset.  Gem- 
mell V.  Davis,  75  Md.  546  (1892). 

3  Solomon  v.  First  Nat,  Bank,  72  Miss. 
854(1895);  First  Nat.  Bank  v.  De  Morse, 
26  S.  W.  Rep.  417  (Tex,  1894). 

^  Rumney  v.  Detroit,  etc.  Co.,  89  N.. 
W.  Rep.  573  (Mich.  190^). 


1156 


CH.  XXXII.]  DIVIDENDS.  [§  545. 

thereof,  and  apply  such  dividend  to  the  unpaid  subscription  price 
of  subscribers  to  its  capital  stock.^  But  a  payment  of  the  subscrip- 
tion price  by  what  purports  to  be  a  dividend  or  distribution  of 
profits  is  invalid  as  against  creditors,  where  such  profits  did  not 
exist.2  Even  though  subscribers  claim  that  their  stock  was  to  be 
paid  for  by  dividends,  yet  such  an  agreement  is  no  defense  as 
against  creditors.^  An  agreement  of  the  corporation  with  a  stock- 
holder to  pay  to  him  in  dividends  the  amount  he  pays  for  the  stock 
cannot  be  enforced  as  an  obligation  of  the  corporation.*  A  bonus 
paid  by  citizens  may  be  used  by  subscribers  for  stock  in  partial 
payment  for  their  stock,  unless  the  bonus  was  made  directly  to  the 
corporation.^ 

§  545.  The  courts  very  rarely  compel  the  directors  to  declare  a 
dividend. —  The  board  of  directors  declare  the  dividends,  and  it  is 
for  the  director?,  and  not  the  stockholders,  to  determine  whether 
or  not  a  dividend  shall  be  declared.^ 

"When,  therefore,  the  directors  have  exercised  this  discretion  and 
refused  to  declare  a  dividend,  there  will  be  no  interference  by  the 
courts  with  their  decision,  unless  they  are  guilty  of  a  wilful  abuse 
of  their  discretionary  powers,  or  of  bad  faith  or  of  a  neglect  of 
duty.  It  requires  a  very  strong  case  to  induce  a  court  of  equity  to 
order  the  directors  to  declare  a  dividend,  inasmuch  as  equity  has 
no  jurisdiction,  unless  fraud  or  a  breach  of  trust  is  involved.   There 

1  Where  the  corporation  has  an  ac-  6  "The  directors  of  a  corporation,  and 
cumulated  profit,  and  that  profit  is  by  they  alone,  have  the  power  to  declare 
agreement  with  the  stockholders  ap-  a  dividend  of  the  earnings  of  the  cor- 
plied  to  unpaid  subscriptions,  such  poration  and  to  determine  its  amount." 
stock  is  then  paid  up.  Kenton,  etc.  Co.  Hunter  r.  Roberts,  etc.  Co.,  83  Mich.  63 
V.  McAlpin,  5  Fed.  Rep.  737  (1880).  See  (1890).  The  board  of  directors  and  not 
also  §168,  sitpra.  It  is  a  question  for  the  the  stockholders  declare  dividends, 
jury  whether  fraud  exists  in  the  sale  of  Grant  r.  Ross,  100  Ky.  44  (1896).  See 
stock,  represented  to  be  paid  up,  when  also  the  various  cases  in  this  and  sue- 
part  of  the  payments  had  been  by  divi-  ceeding  sections.  Under  the  New  Jer- 
dends  from  the  corporation.  Kryger  v.  sey  statutes  dividends  must  be  paid  in 
Andrews,  65  Mich.  405  (1887).  January,  unless  the  charter  or  by-laws 

2  Gager  v.  Paul,  111  Wis.  638  (1901).  fix  some  other  date  therefor.    Marquand 

3  Hawkins  v.  Citizens',  etc.  Co..  38  v.  Federal  Steel  Co.,  95  Fed.  Rep.  725 
Oreg.  544  (1901).  holding  also  that  the  (1899),  holding  also  that  where  the 
cancellation  of  such  portion  of  sub-  charter  provides  that  dividends  on  the 
scriptions  as  is  in  excess  of  a  certain  common  stock  shall  be  declared  after 
dividend  declared  is  illegal  as  against  the  close  of  any  fiscal  year,  the  corpora- 
creditors  existing  at  the  time  of  such  tion  has  no  power  to  pay  any  dividends 
cancellation.     See  also  §  170,  supra.  on  the  common  stock  prior  to  the  close 

<  Smith  V.  Alabama,  etc.  Assoc,  123  of  the  fiscal  year,  and  hence  cannot  pay 
Ala,  538  (1899).  quarterly  dividends   on  the  common 

5  McDermott  v.  Squier,  83  N.  W.  Rep.    stock. 
2S7  (Mich.  1900). 

1157 


§  545.] 


DIVIDENDS. 


[CH.  XXXIT. 


hav^e  been  many  attempts  to  sustain  such  a  suit,  yet,  although  the 
courts  do  not  disclaim  jurisdiction,  they  have  quite  uniformly  re- 
fused to  interfere.^     The  discretion  of  the   directors  will  not  be 


1  New  York,  etc.  R.  R.  v.  Nickals,  119 
U.  S.  296  (1886),  rev'g  15  Fed.  Rep.  575; 
Ely  V.  Sprague,  Clarke,  Ch.  351  (1840); 
Williams  v.  Western  Union  Tel.  Co., 
93  N.  Y.  163  (1883);  Reynolds  v.  Bank  of 
Mt.  Vernon,  6  N.  Y.  App.  Div.  62  (1896); 
aff'd,  158  N.  Y.  740;  Park  v.  Grant  Loco- 
motive Works,  40  N.  J.  Eq.  114  (1885); 
Barnard  v.  Vermont,  etc.  R.  R.,  89  Mass, 
512  (1863):  Chaffee  v.  Rutland  R.  R,  55 
Vt.  110,  133  (1882);  Barry  v.  Merchants' 
Exchange  Co.,  1  Sandf.  Ch.  280  (1844); 
Rex  V.  Bank  of  England,  2  B.  &  Aid. 
620  (1819),  where  the  court  refused  to 
grant  a  mandamus  for  an  examination 
of  the  accounts  with  a  view  to  compel- 
ling a  dividend.  In  the  case  of  Burden 
V.  Burden,  159  N.  Y.  287,  308  (1899),  the 
court  held  that  so  long  as  the  directors 
are  acting  honestly  and  within  their 
discretionary  powers  in  accumulating 
a  surplus  in  an  iron  manufacturing 
corporation,  a  stockholder  must  sub- 
mit, but  "  if  it  can  be  shown  that  trus- 
tees of  a  corporation  are  guilty  of  fraud 
and  bad  faith  in  accumulating  a  large 
surplus  to  the  injury  of  the  stockhold- 
ers, a  court  of  equity  would  doubtless 
interfere."  The  court  in  this  case  re- 
fused to  interfere,  although  the  capital 
was  $2,000,000  and  the  surplus  $1,100,000, 
$JOO,000  of  which  was  in  the  bank 
and  $600,000  invested  in  stocks  which 
were  not  in  a  legal  sense  a  surplus,  but 
were  capital  whose  income  alone  would 
go  to  swell  the  regular  dividends  of  the 
corporation,  and  it  appearing  also  that 
the  corporation  had  paid  very  large 
dividends.  Where  the  profits  are  prop- 
erly used  to  pay  debts,  a  guarantor  of 
dividends  cannot  question  the  propriety 
of  such  use  of  the  profits.  Pratte  v. 
Enslow.  46  W,  Va.  527  (1899).  The.di- 
rectors  are  bound  to  distribute  as  prof- 
its only  such  part  of  the  net  income  as 
they  think  proper;  and  their  judgment 
of  what  is  proper  is  conclusive  upon 


the  stockholders.  State  v.  Baltimore, 
etc.  R  R.,  6  Gill  (Md.),  363  (1847).  Cf. 
Dent  V.  London  Tramways  Co.,  L.  R.  16 
Ch.  D,  344  (1880).  See  also  §  272,  supra. 
In  Park  v.  Grant  Locomotive  Works, 
40  N.  J.  Eq.  114  (1885),  the  court  said: 
"  In  cases  where  the  power  of  the  di- 
rectors of  a  corporation  is  without  lim- 
itation and  free  from  restraint,  they 
are  at  liberty  to  exercise  a  very  liberal 
discretion  as  to  what  disposition  shall 
be  made  of  the  gains  of  the  business  of 
the  corporation.  Their  power  over 
them  is  absolute  so  long  as  they  act  in 
the  exercise  of  an  honest  judgment. 
They  may  reserve  of  them  whatever 
their  judgment  approves  as  necessary 
or  judicious  for  repairs  and  improve- 
ments, and  to  meet  contingencies,  both 
present  and  prospective." 

In  State  v.  Bank  of  Louisiana,  6  La. 
745  (1834),  the  court  refused  to  order  a 
bank  to  declare  a  dividend  although  it 
had  profits  on  hand  of  about  one-tenth 
of  its  capital.  The  court  said:  "  If  the 
board  honestly  err  in  these  matters,  we 
are  not  ready  to  say  the  courts  possess 
the  power  to  rectify  its  mistakes."  The 
remedy  is  in  the  elections.  Courts  will 
not  order  a  dividend  to  be  declared  un- 
less the  directors  "  refuse  to  declare  a 
dividend  when  the  corporation  has  a 
surplus  of  net  profits  which  it  can, 
without  detriment  to  its  business,  di- 
vide among  its  stockholders,  and  when 
a  refusal  to  do  so  would  amount  to  such 
an  abuse  of  discretion  as  would  consti- 
tute a  fraud,  or  breach  of  that  good 
faith  which  they  are  bound  to  exercise 
towards  the  stockholders."  A  dividend 
will  not  be  ordered  when  the  profits 
are  invested  in  the  plant  and  in  long- 
time notes.  Hunter  v.  Roberts,  etc. 
Co.,  83  Mich.  63  (1890).  In  Smith  v. 
Prattville,  etc.  Co.,  29  Ala.  503(1857', 
the  court  refused  to  order  a  dividend, 
inasmuch    as    the    charter   expressly 


1158 


CH.  XXXII.] 


DIVIDENDS. 


[§  545. 


interfered  with  by  the  courts,  unless  there  has  been  bad  faith,  wil- 
ful neglect,  or  abuse  of  discretion.^ 


vested  discretion  as  to  that  matter  in 
the  board  of  directors.  A  stockholder 
cannot  have  a  receiver  appointed 
merely  because  the  directors  reserved 
the  profits  for  a  surplus  instead  of  dis- 
tributing them  by  way  of  dividends. 
Marcuse  v.  Gullett,  etc.  Co.,  52  La.  Ann. 
1383  (1900). 

1  Greeff  v.  Equitable,  etc.  Soc,  160  N. 
Y.  19,  33  (1899). 

Where  large  dividends  are  made  by  a 
manufacturing  company,  it  is  entirely 
within  the  fair  and  honest  discretion 
of  the  directors  whether  the  remaining 
profits  shall   be   passed   to  surplus  or 
used  for  dividends.     McNab  v.  McNab, 
etc.  Co.,  63  Hun,  18  (1891);  aflf'd,  133  N. 
Y.  687,  the  court  holding  also  that  the 
fact   that  a   manufacturing   company 
extended  its  business  so  as  to  include 
iron  pipe  as  well  as  brass,  and  loaned 
money,  which  loans,  however,  the  pres- 
ident was  willing  to  take  up,  and  had 
owned  government  bonds,  is  not  suffi- 
cient to  entitle  a  stockholder  who  has 
acquiesced  therein  to  demand  that  all 
profits  be  paid  out  in  dividends.     Al- 
though the  road  was  leased  and  the 
floating  debt  was  only  $1,000,  and  the 
bonded  debt,  $70,000,  was  due  in  seven- 
teen years,  and  the  other  expenses  only 
$6,000,  while  the  company  had  $86,000 
on  hand  and  the  regular  rental  for  its 
road  coming  in,  yet  the  court  refused 
to  order  a  dividend,  in  Karnes  v.  Roch- 
ester, etc.  R.  R.,  4  Abb.  Pr.  (N.  S.)  107 
(1867),  the  court  holding  also  that  a  de- 
mand must  first  be  made,  and  that  the 
directors,  instead  of  the  company,  are 
the  proper  parties  defendant.     In  Bar- 
nard V.  Vermont,  etc.  R.  R.,  89  Mass. 
512    (1863),    there   was  a  contract    to 
pay   dividends,   and  it  was  upon  this 
contract  that  the  court  based  its  right 
to  pass  upon  the  ability  of  the  company 
to  declare  a  dividend.    The  court  re- 
fused to  order  a  dividend.     In  Richard- 
son V.  Vermont,  etc.  R.  R.,  44  Vt.  613 


(1872),  the  court  decreed  the  payment 
of  what  was  substantially  a  dividend 
to  the  stockholders,  but  stated  that  an 
accounting  must  first  be  had  to  ascer- 
tain whether  there  was  available  for 
that  purpose  "a  fund  adequate  not  only 
for  the  payment  of  the  claims  of  the 
plaintififs  in  the  cause,  but  for  the  pay- 
ment of  all  other   stockholders  having 
like  claims;"  and  there  "must  be  a 
surplus  fund  over  and  above  what  is 
requisite  for  the  payment  of  the  cur- 
rent expenses  of  the  business,  for  dis- 
charging   its   duties  to  creditors,  and 
over  and  above  what  reasonable  pru- 
dence would  require  to  be  kept  in  the 
treasury  to  meet  the  accidents,  risks, 
and  contingencies  incident  to  the  busi- 
ness of  operating  the  railroad."  In  Dent 
V.  London   Tramways  Co.,  L.  R.  16  Ch. 
D.  344  fl880),  the  court  compelled  the 
company    to   pay  a    dividend   on  the 
preferred    stock,     where    there    were 
profits  available,  and  the  common  stock- 
holders proposed  to  use  all  the  profits 
for    long-neglected    repairs,    the    real 
reason  being  that   there   were   profits 
sufficient   for  a  dividend  on    the  pre- 
ferred, but  not  on  both  the  common 
and    preferred.    The   court   said   that 
profits  meant  the  "surplus  in  receipts, 
after  paying  expenses  and  restoring  the 
capital  to  the  position  it  was  in  on  the 
first  of  January  in  that  year."    Where 
a  bill  in  equity,  filed  for  the  purpose  of 
obtaining  an  accounting  and  the  decla- 
ration of  a  dividend,  does  not   clearly 
make  out  the   existence  of  a  surplus 
which  the  directors  ought  to  distribute, 
the  suit  will  fail.     A  discovery  will  not 
be  granted  where  there  is  no  allega- 
tion that  information  is  refused,  or  tliat 
the  party  cannot  examine  the  books,  or 
tliat    a    mandamus    was    inadequate. 
Wolfe  V.  Underwood,  96  Ala.  329  (189J). 
Where  the  licensor  of  a  patent  is  to 
have  from  a  corporation  as  licensee  a 
certain  payment  from  the  net  profits. 


1159 


545.] 


DIVIDENDS. 


[CH.  XXXII, 


Accordingly  the  directors  may,  in  the  fair  exercise  of  their 
discretion,  invest  profits  to  extend  and  develop  the  business, 
and  a  reasonable  use  of  the  profits  to  provide  additional  facilities 
for  the  business  cannot  be  objected  to  or  enjoined  by  the  stock- 
holders.^ 

Profits  may  also  be  set  aside  for  the  payment  of  indebtedness, 
though  it  is  not  yet  due.^  Where  stock  is  pledged  and  the  pledgee 
is  in  control  of  the  company,  and,  instead  of  declaring  dividends, 
he  honestly  and  intelligently  applies  the  profits  to  improvements, 
the  pledgor  cannot  hold  him  liable  for  not  declaring  dividends, 
and  for  not  thus  decreasing  the  debt  for  which  the  stock  was  given 
in  pledge.'  The  free  exercise  of  the  director's  discretion  cannot 
be  interfered  with  by  the  contracts  of  promoters  or  original  incor- 
porators as  to  the  disposition  of  corporate  profits.*  A  court  will 
not  compel  a  foreign  corporation  to  declare  a  dividend.'^  Under 
the  New  Jersey  statute  a  stockholder  may  file  a  bill  to  compel  the 
declaration  of  a  dividend  out  of  accumulated  profits  not  reserved 
for  working  capital  by  vote  of  the  stockholders,  as  provided  in  the 
statute.''  A  stockholder's  bill  to  compel  the  directors  to  declare  a 
dividend  under  the  new  Jersey  statute  must  allege  that  the  accu- 


such  payment  not  to  be  cumulative 
and  to  be  subject  t©  provision  for  a  re- 
serve fund,  it  is  legal  for  the  company 
to  pass  a  sum  to  the  reserve  fund,  and 
also  a  further  sum  for  depreciation  and 
the  cost  of  licenses.  Bagot,  etc.  Co.  v. 
Clipper,  etc.  Co.,  [1902J  1  Ch.  i46. 

1  Where  a  corporation  having  a  large 
surplus  proposed,  with  the  concur- 
rence of  a  majority  of  the  stockhold- 
ers, to  employ  the  surplus  in  extend- 
ing the  business,  although  such  exten- 
sion was  opposed  by  a  minority  of  the 
stockholders,  it  appearing  that  the  pro- 
posed enlargement  of  the  corporate  en- 
terprise was  clearly  intra  vires,  it  was 
held  on  a  bill  brought  by  the  dissent- 
ing minority  for  an  injunction  against 
the  proposed  use  of  the  surplus,  and  pray- 
ing a  distribution  of  it  among  the  stock- 
holders, that  the  facts  were  not  such  as 
to  require  the  interposition  of  the  court 
on  behalf  of  the  minority.  Pratt  v. 
Pratt,  33  Conn.  446  (1866),  the  court  say- 
ing: "  On  a  question  of  this  sort  much 
must  necessarily  be  left  to  the  discre- 
tion of  the  managing  directors;  and  so 
long  as  they  keep  within  the  objects 


contemplated  by  the  articles  of  associa- 
tion, and  the  expediture  is  not  unreason- 
able in  reference  to  the  amount  of  their 
capital,  a  court  of  equity  ought  very 
seldom  to  interfere  with  them." 

2  Karnes  v.  Rochester,  etc.  R.  R.,  4 
Abb.  Pr.  (N.  S.)  107  (1867). 

3  Zellerbach  v.  Alleuberg,  99  Cal.  57 
(1893). 

■*  The  agreement  of  the  promoters 
and  preliminary  subscribers  to  the 
stock  of  the  proposed  company  as  to 
the  division  and  disposition  of  the  net 
profits  does  not  bind  the  company  un- 
less it  has  expressly  acquiesced  in  such 
agreement.  Coyote,  etc.  Co.  v.  Ruble,  8 
Oreg.  284  (1880).  But  if  expressly  rati- 
fied by  the  company  it  is  binding. 
Richardson  v.  Vermont,  etc.  R.  R.,  44 
Vt  613  (1872),  where  an  agreement  to 
pay  annual  interest  to  the  stockholders 
out  of  the  net  profits  was  considered. 

5  Berford  v.  New  York  Iron  Mine,  4 
N.  Y.  Supp.  836  (1888).  See  also  §  734, 
infra. 

•>  GriflSng  u  A.  A.  GriflBng,  etc  Co.,  61 
N.  J.  Eq.  269  (1901). 


1160 


•CH,  XXXII.] 


DIVIDENDS. 


[§  545. 


mulated  profits  are  larger  than  the  reserve  as  fixed  by  the  stock- 
holders.^ Where,  by  a  by-law,  the  board  of  directors  has  power  to 
set  aside  from  the  profits  such  sum  as  they  think  proper  as  a  re- 
serve fund  to  meet  contingencies,  they  have  power,  after  paying 
dividends  on  the  preferred  stock,  to  carry  the  balance  to  a  reserve 
fund,  although  the  common  stock  is  thereby  deprived  of  any  divi- 
dend.2  A  surplus  of  a  company  may  be  invested  in  such  securities 
as  the  board  of  directors  may  deem  best,  and  the  board  is  not  con- 
fined  to  securities  in  which  a  trustee  may  invest.^ 

Nevertheless  the  discretion  of  the  directors  in  the  matter  of  de- 
-claring  or  refusing  to  declare  a  dividend  is  not  absolute;  and  where 
there  is  a  clear  abuse  of  power  in  refusing  to  declare  the  dividend, 
^  court  of  equity  will,  at  the  instance  of  any  stockholder,  compel 
the  proper  authorities  to  declare  and  pay  the  dividend.*     Laches 


1  Trimble  v.  American,  etc.  Co.,  61  N. 
J.  Eq.  340  (1901). 

2  Fisher  v.  Black,  etc.  Co..  [1901]  1  Cli. 
174.  In  the  important  case  of  Burland, 
etc.  V.  Earle,  etc.,  [1902]  A.  C.  83.  the 
Privy  Council,  passing  on  a  by-law  au- 
thorizing the  directors,  subject  to  the 
approval  of  a  meeting  of  the  stockhold- 
ers, to  set  apart  any  portion  of  the 
profits  for  a  reserve  fund  of  a  corpora- 
tion that  had  paid  on  an  average  divi- 
dends of  forty  per  cent,  per  annum,  the 
capital  stock  being  $200,000,  and  had 
accumulated,  as  undivided  profits, 
$2(54,000.  which  was  carried  in  profit 
and  loss  account,  held  that  a  stock- 
holder could  not  maintain  a  suit  to  de- 
clare the  accumulation  tohe  ultra  vires 
and  to  obtain  a  distribution  thereof 
among  the  stockholders. 

3  Burland,  etc.  v.  Earle,  etc.,  [1902]  A. 
C.  83.  In  this  case  the  surplus  was  in- 
vested in  bank  shares  and  mortgages, 
and  such  investment  was  made  in  the 
name  of  a  director.  The  court  further 
stated  that  such  investments  should 
not  be  in  speculative  securities. 

^  In  the  case  of  Matter  of  Eogers,  161 
N.  Y.  108,  112  (1899),  the  court  of  ap- 
peals said:  "An  argument  is  made, 
which  has  the  sanction  of  some  of  the 
authorities,  to  the  effect  that  all  of  the 
assets  of  a  corporation  are  deemed  capi- 
ttal  until  a  dividend  is  declared.     We 


may  concede  that  assets  are  ordinarily 
so  treated  in  going  concerns,  but  the 
rule  has  its  limitations.  The  directors 
must  act  in  good  faith.  If  they  fail  to 
do  so,  and  it  clearly  appears  that  they 
have  accumulated  earnings  not  re- 
quired in  the  prosecution  of  the  busi- 
ness, which  they  withhold  from  the 
stockholders  for  illegitimate  purposes, 
a  court  of  equity  may  interfere  and 
compel  a  distribution  of  such  earn- 
ings." Where  two  directors,  forming 
a  majority  of  the  board,  vote  them- 
selves very  large  salaries,  and  refuse 
information  to  another  director  who  is 
the  only  other  stockholder,  and  refuse 
to  declare  dividends,  and  proceed  to 
convey  the  property  of  the  company 
to  another  company  controlled  by 
themselves,  a  court  of  equity  will  set 
aside  the  illegal  conveyances  and  the 
resolutions  authorizing  the  salaries,  and 
will  order  the  books  to  be  opened  to 
the  other  director,  and  will  order  divi- 
dends to  be  declared.  The  court,  how- 
ever, will  not  appoint  a  receiver  and 
enjoin  the  continuance  of  the  business, 
and  will  not  order  a  distribution  of  the 
assets  of  the  company.  Laurel  Springs 
Land  Co.  v.  Fougeray,  50  N.  J.  Eq.  756 
(1893),  rev'g  Fougeray  v.  Cord,  50  N.  J. 
Eq.  185.  Where  for  seven  years  a  stock- 
holder who  owned  a  majority  of  the 
stock  elected  himself  and  two  of  his 


1161 


§  546.] 


DIVIDENDS. 


[CH.  XXXII. 


on  the  part  of  the  stockholders  in  failing  to  commence  their  suit 
to  compel  the  payment  of  a  dividend  until  the  corporation  be- 
comes insolvent  is  fatal.^  And  the  court  will  also  consider  that 
the  aggrieved  stockholders  may,  if  a  majority,  refuse  to  re-elect  the 
directors  at  the  next  election,  or  may  sell  their  shares.^ 

§  546.  Dividends  can  usually  l)e  made  only  from  profits — Excep- 
tions to  this  rule — What  are  profits  tvhich  may  he  used/or  divi- 
dends.—  As  against  the  dissent  of  stockholders  or  creditors,  a  divi- 
dend can  lawfully  be  made  only  out  of  profits.  The  payment  of 
it  must  leave  the  capital  stock  of  the  company  intact  and  unim- 
paired, or  the  dividend  itself  will  be  held  illegal.'  A  contract  of 
directors  to  pay  a  dividend  as  a  debt  at  fixed  intervals,  being  in 
reality  a  preferred  dividend,  cannot  be  enforced  either  at  law  or 
in  equity,  except  out  of  net  profits,  like  other  dividends.^  An  agree- 
ment of  the  corporation  with  a  stockholder  to  pay  to  him  in  divi- 
dends the  amount  he  pays  for  the  stock  cannot  be  enforced  as  an 


dummies  as  directors  of  the  company, 
and  caused  the  board  to  vote  a  large 
salary  to  himself  as  president  and  man- 
ager, and  had  leased  to  the  company 
his  property  at  a  large  rental,  the  sal- 
ary and  rental  are  illegal  and  void;  and 
inasmuch  as  the  company  had  failed 
to  pay  its  dividends  by  reason  of  such 
acts,  a  court  of  equity,  upon  the  suit 
of  another  stockholder,  ordered  the 
president  to  account,  and  appointed  a 
receiver  of  the  company  and  directed 
that  its  affairs  be  wound  up.  The  court 
ordered  a  repayment  of  the  dividends 
and  a  distribution  thereof  among  the 
stockholders.  Miner  v.  Belle  Isle  Ice 
Co.,  93  Mich.  97  (1892);  Brown  v.  Buf- 
falo, etc.  R.  R,  27  Hun,  343  (1882).  See 
also  Park  v.  Grant  Locomotive  Works, 
40  N.  J.  Eq.  114  (1885).  In  this  case 
there  was  a  contract  that  the  net  prof- 
its should  be  divided  annually.  Scott 
V.  Eagle  Fire  Co.,  7  Paige,  198  (1838); 
Pratt  V.  Pratt,  33  Conn.  446  (1866); 
Beers  v.  Bridgeport  Spring  Co.,  42  Conn. 
17  (1875).  Upon  a  sale  of  all  the  prop- 
erty of  the  corporation  the  directors 
may  be  compelled  to  declare  a  divi- 
dend. Cramer  v.  Bird,  L.  R.  6  Eq.  143 
(1868).  A  stockholder  cannot  sue  for 
profits  until  a  dividend  is  declared. 
Beveridge  v.  New  York,  etc.  R  R.  112 

n 


N.  Y.  1  (1889),  Where  an  employe© 
gives  his  note  in  payment  for  subscrip- 
tion for  stock,  such  note  to  be  paid  out 
of  future  dividends,  the  court  will  hold 
that  the  note  has  been  paid  when  the 
dividends  were  earned,  but,  for  the 
purpose  of  defrauding  the  subscriber, 
were  not  declared.  Morey  v.  Fish,  etc. 
Co..  84  N.  W.  Rep.  862  (Wis.  1901).  A 
lawyer  having  a  contract  with  a  cor- 
poration that  he  should  receive  five  per 
cent,  of  its  net  earnings  may  enforce 
the  agreement  by  a  suit  in  equity 
where  net  earnings  exist  and  the  di- 
rectors ignore  the  contract.  Dupignac 
V.  Bernstrom,  37  N.  Y.  Misc.  Rep.  678 
(1902);  afl'd,  76  N.  Y.  App.  Div.  105. 

1  Scott  V.  Eagle  Fire  Co.,  7  Paige,  198 
(1838). 

2  Barry  v.  Merchants'  Exchange  Co., 
1  Sandf.  Ch.  280  (1844). 

3  Lockhart  v.  Van  Alstyne,  31  Mich. 
76  (1875);  Hughes  v.  Vermont  Copper 
Min.  Co.,  72  N.  Y.  207,  210  (1878).  See 
also  §  272,  supra,  and  cases  in  notes  to 
this  section.  As  to  what  constitutes  a 
payment  of  dividends  out  of  capital, 
see  3  Ry.  &  Corp.  L.  J.  409,  reviewing 
English  decisions. 

•*  Painesville.  etc.  R  R  r.  King,  17 
Ohio  St.  534  (1867;.  See  also  ch.  XVI. 
supra. 


CH.  XXXII.] 


DIVIDENDS. 


[§  546. 


obligation  of  the  corporation.'  A  company  may,  however,  legally 
pay  interest  on  such  part  of  the  subscription  as  is  paid  in  before  re- 
quired by  calls.  Such  interest  may  be  paid  although  there  are  no 
profits.^  An  agreement  by  which  some  of  the  directors  of  a  com- 
pany sell  their  stock  to  the  remaining  stockholders,  who  take  pay 
therefor  from  the  assets  of  the  corporation,  is  not  illegal  if  all  the 
stockholders  assent  and  the  corporation  is  not  injured.*    Where 


1  Smith  V.  Alabama,  etc.  Assoc,  123    the  transaction  cannot  be  impeached. 


Ala.  538  (1899).    See  also  §  544,  supra. 

2  Lock  V.  Queensland,  etc.  Co.,  [1896] 
A.  C.  461. 

3  Raymond  v.  Colton.  104  Fed.  Rep. 
219  (1900),  holding  also  that  the  assent 
of  a  few  minor  stockholders  whose 
stock  was  given  to  them  may  be  pre- 
sumed, in  case  they  have  not  objected 
to  an  agreement  whereby  some  of  the 
stockholders  sell  their  stock  to  the 
others  and  take  their  pay  from  the  cor- 
poration itself  and  resign  their  offices 
and  substitute  new  parties  as  directors. 
See  also  i;§  548,  671,  infra,  and  §  535, 
supra.  In  New  York,  however,  the 
Penal  Code  prohibits  such  a  dividend. 
Penal  Code,  §  594.  In  tlie  case  of  First 
National  Bank,  etc.  v.  Winchester,  119 
Ala,  168  (1898),  where  a  private  corpo- 
ration had  but  four  stockholders  and 
two  of  them  bought  the  stock  of  the 
other  two  and  paid  therefor  by  notes 
signed  by  them  and  the  corporation 
and  secured  by  mortgage  on  the  corpo- 
rate property,  the  court  held  that  the 
note  was  not  enforcible  against  the 
corporation,  but  held  that  the  mortgage 
was  legal  as  against  subsequent  credit- 
ors, mortgagees,  and  purchasers  from 
the  corporation  who  took  with  no- 
tice of  the  facts.  Approving  Swift  v. 
Smith,  65  Md.  4-^8(1886);  121  Fed.  Rep.  956. 

Where  three  persons  have  formed  a 
corporation  and  transferred  a  patent 
to  it  for  all  its  capital  stock,  and  are 
the  sole  stockholders,  there  being  no 
creditors,  they  may  purchase  the  patent 
back  and  give  the  corporation  their 
note  for  the  par  value  of  the  whole 
capital  stock.  Although  the  corpora- 
tion subsequently  becomes   insolvent 


Skinner  v.  Smith,  56  Hun,  437  (1890); 
aff'd,  134  N.  Y.  240  (1892).  It  is  legal 
for  a  coal  corporation,  with  the  assent 
of  all  its  stockholders,  to  sell  all  its 
property  to  its  president,  and  for  him 
to  pay  therefor  in  cash  and  by  a  mort- 
gage on  the  property  so  purchased,  he 
also  agreeing  to  pay  all  the  debts  of  the 
company.  Payment  was  made  directly 
to  the  stockholders,  and  they  trans- 
ferred their  stock  to  him  in  addition  to 
the  transfer  of  the  property.  A  subse- 
quent creditor  of  the  company  who 
knew  all  the  facts  cannot  complain. 
Parke,  etc.  Co.  v.  Terre  Haute,  etc.  Co., 
129  Ind.  73  (1891);  93  N.  W.  Rep.  1024. 

Practically  there  was  a  division  of 
the  corporate  assets  among  the  stock- 
holders in  Boston,  etc.  Co.  v.  Bankers', 
etc.  Co.,  36  Fed.  Rep.  288;  aff'd  sub  nom. 
United,  etc.  Co.  v.  Boston,  etc.  Co.,  147 
U.  S.  431  (1893).  In  this  case  the  usual 
and  simple  process  of  one  company  sell- 
ing all  its  property  to  the  other  com- 
pany and  taking  purchase-money  mort- 
gage bonds  in  payment,  and  then 
distributing  the  bonds  among  its  stock- 
holders, was  not  adopted,  but  the  mort- 
gage was  given  by  the  vendor  com- 
pany, the  object  being  not  to  have  the 
mortgage  cover  existing  property  of 
the  vendee  company.  The  vendee  com- 
pany at  the  same  time  agreed  to  con- 
struct new  lines  and  place  them  under 
the  mortgage.  The  whole  scheme  was 
awkward,  and  was  sustained  by  the 
courts  only  after  prolonged  litigation. 

Although  a  corporation  sells  all  its 
property  to  an  individual  for  purchase- 
money  mortgage  bonds,  and  distributes 
these  bonds    among  its  stockholders* 


1163 


§  546.] 


DIVIDENDS. 


[cn.  XXXII. 


the  sole  owner  of  the  stock  of  a  corporation  executes  the  note  of 
the  corporation  for  his  individual  indebtedness,  no  one  but  the 
creditors  of  the  corporation  can  complain.^  Where  a  few  persons 
own  all  the  stock  of  a  company,  and  use  the  profits  for  personal  ex- 
penses and  miscellaneous  purposes,  irrespective  of  the  corporation, 
all  the  stockholders  knowing  thereof  and  assenting  thereto,  a 
policy  of  insurance  issued  to  one  of  them  is  his,  even  though  the 
premiums  were  paid  out  of  the  corporate  profits,  it  being  shown 
that  all  this  was  done  while  the  corporation  was  solvent,  and  that 
no  rights  of  creditors  then  intervened,  and  that  all  the  debts  rep- 
resented by  the  receiver  arose  subsequently.^  Even  though  a  bond 
dividend  results  in  the  impairing  of  the  capital  stock,  the  court 
will  not  interfere  if  no  harm  can  come  from  it.'  A  statutory 
liability  for  dividends  paid  out  of  the  capital  stock  abrogates  all 
common-law  liability,  and  if  such  statute  does  not  prohibit  such 
dividends  they  may  be  declared  and  paid  subject  to  such  liability.'' 
In  view  of  the  rule  that  dividends  can  be  made  only  from  prof- 


without  paying  the  creditors,  never- 
theless a  bona  fide  purchaser  of  such 
bonds  is  protected  as  against  the  cor- 
porate creditors.  A  former  decree  in 
a  court  of  equity  against  the  trustee 
of  the  mortgage  in  regard  to  the  mat- 
ter does  not  bind  the  bondholders,  al- 
though a  suit  at  law  against  the  trus- 
tee would  have  bound  thesn.  Lebeck 
V.  Ft.  Payne  Bank,  115  Ala.  447  (1897). 
Where  a  corporation  distributes  all  its 
assets  among  its  stockholders  without 
paying  the  debts,  a  corporate  creditor 
may  hold  them  liable,  but  he  must  first 
obtain  a  judgment  against  the  corpora- 
tion, and  execution  must  be  returned 
unsatisfied.  Lamar  v.  Allison,  101  Ga. 
270  (1897).     See  72  S.  W.  Rep.  669. 

Even  though  two  persons  own  the 
entire  capital  stock  of  a  railroad  com- 
pany, yet  if  they  use  a  part  of  its  assets 
for  their  own  individual  purposes  and 
make  false  entries  on  the  books,  some 
of  the  entries  showing  cash  on  hand, 
but  which  is  not  on  hand,  they  are  lia- 
ble to  the  company  later  when  it  has 
passed  into  other  hands.  Saranac,  etc. 
R.  R.  V.  Arnold,  167  N.  Y.  368  (1901). 

Where  the  directors,  with  the  con- 
sent and  knowledge  of  all  the  stock- 
holders, there  being  no  creditors,  pay  a 

1 


part  of  the  capital  stock  to  the  stock- 
holders by  way  of  dividends,  and  after- 
wards the  directors  are  compelled  to 
pay  back  such  sums  in  order  to  liqui- 
date subsequent  debts,  the  directors 
may  recover  from  the  stockholders  the 
sums  so  paid  to  the  latter.  Moxhara  v. 
Grant,  [1899]  1  Q.  B.  480;  aff'd,  [1900]  1 
g.  B.  88. 

Under  the  New  Hampshire  statute 
of  1844  to  the  effect  that  the  state 
should  be  entitled  to  the  net  profits  of 
railroads  in  excess  of  ten  per  cent,  per 
annum  on  the  money  invested  by  the 
stockholders,  the  state  must  do  more 
than  prove  that  more  than  ten  per  cent, 
dividends  have  been  paid  to  the  stock- 
holders. The  state  must  prove  that  the 
excess  came  from  the  earnings  of  the 
road  and  was  not  a  division  of  the  cap- 
ital or  derived  from  some  source  other 
than  tolls  paid  by  the  public.  State  v. 
Manchester,  etc.  R.  R.,  70  N.  H.  421 
(1901). 

1  Millsaps  V.  Merchants',  etc.  Bank,  71 
Miss.  361  (1893). 

2  Little  V.  Garabrant.  90  Hun,  404 
(1895);  aflf'd,  153  N.  Y.  661. 

3  Chaffee  v.  Rutland  R.  R.,  55  Vt.  110 
(1882). 

4  People  V.  Barker,  141  N.  Y.  251  (1894). 
164 


CH.  XXXII.] 


DIVIDENDS. 


L§  ^i^- 


its,  it  becomes  important  to  ascertain  what  part  of  the  income  of 
a  corporation  constitutes  "profits"  which  may  be  used  for  a  divi- 
dend. This  question  has  caused  the  courts  considerable  difficulty. 
There  have  been  various  definitions,  explanations,  and  different 
states  of  facts  involved  in  the  cases  which  have  come  before  the 
courts.  The  supreme  court  of  the  United  States  has  said  that  "  the 
term  '  profits,'  out  of  which  dividends  alone  can  properly  be  de- 
clared, denotes  what  remains  after  defraying  every  expense,  in- 
cluding loans  falling  due,  as  well  as  the  interest  on  such  loans."  ^ 
An  English  court  says  that  profits  are  "  the  excess  of  the  current 
gains  over  the  working  expenses  as  shown  by  revenue  accounts  as 
distinguished  from  capital  accounts."  -  A  clear  idea  of  what  con- 
stitutes profits  available  for  dividends  can  be  obtained  only  by  a 
study  of  the  cases  themselves.' 


I  Mobile,  etc.  R  R.  v.  Tennessee,  153 
U.  S.  486  (1894). 

2i2e  London  &  Gen.  Bank,  73  L.  T. 
Rep.  227,  229  (1894);  aff'd,  [1895]  2  Ch. 
166,  673.  The  House  of  Lords  in  Dovey, 
etc.  V.  Cory,  [1901]  A.  C.  477,  said: 
"Even  the  distinction  between  fixed 
and  floating  capital  which  in  an  ab- 
stract treatise  like  Adam  Smith's 
Wealth  of  Nations  is  appropriate 
enough,  may,  with  reference  to  a  con- 
crete case,  be  quite  inappropriate.  It 
is  easy  to  lay  down  as  an  abstract  prop- 
osition that  you  must  not  pay  divi- 
dends out  of  capital,  but  the  appli- 
cation of  that  very  plain  proposition 
may  raise  questions  of  the  utmost  diffi- 
culty in  their  solution.  I  desire,  as  I 
have  said,  not  to  express  any  opinion, 
but  as  an  illustration  of  what  difficul- 
ties may  arise,  the  example  given  by 
the  learned  counsel  of  one  ship  being 
lost  out  of  a  considerable  number,  and 
the  question  whether  all  dividends 
must  be  stopped  until  the  value  of  that 
lost  ship  is  made  good  out  of  the 
further  earnings  of  the  company  or 
partnership,  is  one  which  one  would 
have  to  deal  with.  On  the  one  hand, 
people  put  their  money  into  a  trading 
concern  to  give  them  an  income,  and 
the  sudden  stoppage  of  all  dividends 
would  send  down  the  value  of  their 
shares  to  zero  and    possibly    involve 

1 


their  ruin.  On  the  other  hand,  com- 
panies cannot  at  their  will  and  with- 
out the  precautions  enforced  by  the 
statute  reduce  their  capital;  but  what 
are  profits  and  what  is  capital  may 
be  difficult  and  sometimes  an  almost 
impossible  problem  to  solve."  "There 
is  no  hard-and-fast  rule  by  which  the 
company  can  determine  what  is  cap- 
ital and  what  profit.  It  may  be  safely 
said  that  what  losses  can  be  properly 
charged  to  capital  and  what  to  income 
is  a  matter  for  business  men  to  deter- 
mine, and  it  is  often  a  matter  on  which 
the  opinion  of  honest  and  competent 
men  will  difi'er.  .  .  .  There  is  no 
single  definition  of  the  word  '  profits ' 
which  will  fit  all  cases."'  Bond  v.  Bar- 
row, etc.  Co.,  86  L.  T.  Rep.  10  (1902). 

3 "  Net  earnings  are,  properly,  the 
gross  receipts,  less  the  expenses  of 
operating  the  road  to  earn  such  receipts. 
Interest  on  debts  is  paid  out  of  what 
thus  remains;  that  is,  out  of  the  net 
earnings.  Many  other  liabilities  are 
paid  out  of  the  net  earnings.  When 
all  liabilities  are  paid,  either  out  of  the 
gross  receipts  or  out  of  the  net  earnings, 
the  remainder  is  the  profit  of  the 
shareholders  to  go  towards  dividends, 
which  in  that  way  are  paid  out  of  the 
net  earnings."  St.  John  v.  Erie  Ry.,  10 
Blatchf.  271,  279  (1872);  s.  C,  21  Fed. 
Cas.  167;  s.  C,  aflf'd,  22  Wall.  136  (1874); 
165 


§  5iG.] 


DIVIDENDS. 


[CII.  XXXIl. 


There  are  some  general  principles  connected  with  this  subject 
which  have  been  established  by  the  adjudications.  It  is  not  nec- 
essary for  a  railroad  or  other  corporation  to  use  its  profits  to  pay 
its  funded  or  bonded  debt  instead  of  using  those  profits  for  a  divi- 
dend.' But  it  is  necessary  to  pay  the  interest  on  such  bonded  debt 
before  any  dividend  is  declared,^ 


Warren  v.  King,  108  U.  S.  389  (1883); 
Van  Dyck  v.  McQuade,  86  N.  Y.  38,  47 
(1881).  "Popularly  speaking,  the  net 
receipts  of  a  business  are  its  profits." 
Eyster  v.  Centennial  Board,  94  U.  S.  500 
(1876).  "  Surplus  earnings  "  are  said  to 
be  the  moneys  available  for  dividends. 
Williams  v.  Western  Union  Tel.  Co.,  93 
N.  Y.  163,  191  (1883).  "Net  earnings" 
is  a  term  synonymous  with  "net  in- 
come," and  also  "net  income  "  as  used 
in  the  statute  under  consideration. 
Phillips  V.  Eastern  R.  R.,  138  Mass.  123 
(1884).  In  Belfast,  etc.  R  R.  v.  Belfast, 
77  Me.  445  (1885),  it  is  said  that  the  term 
"  net  earnings "  does  not  imply,  that 
the  company  is  wholly  out  of  debt.  In 
Park  V.  Grant  Locomotive  Works,  40 
N.  J.  Eq.  114  (1885),  it  is  said  that  prof- 
its mean  "the  clear  gains  of  any  busi- 


ness venture,  after  deducting  the  capital 
invested  in  the  business,  the  expenses 
incurred  in  its  conduct,  and  the  losses 
sustained  in  its  prosecution;"  and  fur- 
ther, that  bills  receivable  constitute  a 
part  of  the  assets  or  net  profits,  but  are 
not  to  be  considered  as  the  basis  of  a 
dividend,  unless  they  can  be  sold  with- 
out material  loss.  In  the  following 
cases  the  term  "  net  profits,"  or  an 
equivalent  phrase,  is  defined:  Coltness 
Iron  Co.  V.  Black,  L.  R.  6  App.  Cas.  315 
(1881);  New  York,  etc.  R.  R.  v.  Nickals, 
119  U.  S.  296  (1886).  In  Richardson  v. 
Buhl,  77  Mich.  633  (1889),  the  court  ap- 
proved of  the  following  statement: 
"  That  the  first  thing  to  be  done  by  any 
manufacturer  who  would  ascertain  his 
net  earnings  during  the  preceding 
year  is  to  take  a  careful  inventory  of 


1  A  company  has  'power  to  and  does 
raise  its  capital  both  by  stock  and  by 
bon-owing.  "  They  expend  that  money 
in  executing  the  works,  and,  the  works 
havmg  been  executed,  the  capital  of 
the  company  i-emains  in  the  shape  of 
the  station-houses,  the  permanent  way, 
the  warehouses,  and  everything  else 
which  requires  expenditure  of  capital. 
The  shareholders  .  .  .  are  not  to  be 
told  that  all  these  things  are  to  be  paid 
for  before  they  are  to  have  any  divi- 
dends out  of  the  income."  Mills  v. 
Northern  Ry.,  L.  R.  5  Ch.  621,  631  (1870). 
For  a  learned  and  very  satisfactory  dis- 
cussion of  when  net  earnings  are  to  be 
retained  for  the  purpose  of  accumulat- 
ing a  fund  to  pay  a  corporate  debt  not 
yet  due,  see  Hazeltine  v.  Belfast,  etc. 
R.  R..  79  Me.  411  (1887).  In  Gratz  v. 
Redd.  4  B.  Mon.  (Ky.)  178,  188  (1843),  the 
court  said  that  all  interest  must  be  paid 
out  of  profits,  and  should  not  be  charged 


to  construction  account;  also  that  a 
sinking  fund  should  be  provided  and  an 
annual  contribution  made  to  it  out  of 
the  profits. 

2  Mobile,  etc.  R.  R.  v.  Tennessee,  153 
U.  S.  486,  498  (1894);  Gratz  v.  Redd.  4  B. 
Mon.  (Ky.)  178,  188  (1843).  A  dividend 
cannot  properly  be  based  on  a  state- 
ment which  includes  accrued  interest 
with  no  allowance  for  interest  on  lia- 
bilities; outstanding  accounts  with  no 
allowance  for  bad  debts;  and  expense 
for  perfecting  a  machine,  it  not  being 
a  success.  Hubbard  v.  Weare,  79  Iowa, 
678  (1890).  Whether  the  interest  on 
debentures  can  be  legally  charged  upon 
the  capital  account  of  the  company,  the 
revenue  available  for  dividend  being 
thereby  increased,  was  not  decided  in 
Bloxam  v.  Metropolitan  Ry.,  L.  R  3  Ch. 
337,  344,  350  (1868),  but  a  preliminary 
injunction  against  the  dividend  was 
granted. 


1166 


€H.  XXXII.] 


DIVIDENDS. 


[§  546. 


The  floating  debt  should  be  paid  or  funded  before  a  dividend  is 
•declared.^    A  corporation  often  owes  large  debts  and  still  has  its 


what  he  has  left,  including  his  plant 
and  machinery,  and  then  make  just 
and  full  allowances  for  all  losses  and 
shrinkages  of  every  kind  that  he  has 
suffered  in  his  property  during  the 
year,  and  for  all  expenses  of  every  kind, 
ordinary  or  extraordinary,  that  have 
occurred  during  the  year;  and,  having 
made  such  inventory.aii(i  deducted  such 
losses  and  shrinkage  of  every  kind,  his 
net  earnings  will  be  the  difference  be- 
tween all  his  investments  in  his  busi- 
ness and  all  his  expenses  of  every  kind 
on  the  one  hand,  and  this  new  inventory, 
with  the  reductions  jjroperly  made, 
and  all  that  he  has  received  of  every 
kind,  on  the  other  hand;  and  if  his 
books  are  properly  kept  and  proper  de- 
ductions made,  these  net  earnings  will 
finally  appear  on  the  balance  sheet  to 
the  credit  of  the  profit-and-loss  ac- 
count." In  Gratz  v.  Redd,  4  B.  Mon. 
(Ky.)  178,  187  (1843),  it  is  held  that  cap- 
ital paid  in  on  stock  which  is  after- 
wards forfeited  does  not  thereby  be- 
come profits  and  liable  to  be  distrib- 
uted as  a  dividend,  also  that  money 
paid  in  as  capital  must  remain  and  be 
treated  and  expended  as  capital, 
whether  the  stock  that  represents  it  is 
forfeited  or  not.  To  distribute  such 
money  as  profits  is  to  squander  and  dis- 
sipate the  capital  stock.  "  Gross  earn- 
ings "  include  earnings  of  the  railroad 
through  a  transfer  company  operated 
by  it.  Dardanelle,  etc.  Ry.  v.  Shinn,  52 
Ark.  93  (1889).  "  The  assets,  resources, 
and  funds  of  the  corporation  must  con- 
sist of  cash  on  hand  and  other  property, 
and,  if  such  assets  exceed  the  liabilities, 
a  dividend  can  be  lawfully  declared; 
in  other  words,  a  profit  exists."  Hub- 
bard V.  Weare,  79  Iowa,  678  (1890) ;  Mil- 
ler V.  Bradish,  69  Iowa,  278  (1886).  See 
also  McDougall  v.  Jersey,  etc.  Co.,  2 
Hem.  &  M.  528  (1864). 
1  The  funded  debt  need  not  be  paid 


before  dividends  are  declared,  but  **  any 
debts  which  have  been  incurred  and 
which  are  due  from  the  directors  or 
the  company,  either  for  steam-engines, 
for  rails,  for  completing  stations,  or  the 
like,  which  ought  to  have  been  and 
would  have  been  paid  at  the  time,  had 
the  defendants  possessed  the  necessary 
funds  for  that  purpose,  those  are  so 
many  deductions  from  the  profits, 
which,  in  my  opinion,  are  not  ascer- 
tained till  the  whole  of  them  are  paid." 
Corry  v.  Londonderry,  etc.  Ry.,  29  Beav. 
263,  273  (1860).  However,  in  Stevens  v. 
South  Devon  Ry.,  9  Hare,  313,  326  (1851), 
a  stockholder  failed  in  his  suit  to  en- 
join dividends  until  the  floating  debt 
was  paid.  The  court  said:  "I  am  of 
opinion  that  the  court  ought  not,  upon 
this  ground,  to  interfere  by  injunction. 
...  I  think  also  that  the  question 
upon  this  third  point  is  one  of  internal 
management,  with  whicli  the  court 
canncft  interfere."  In  Belfast,  etc.  R. 
R  V.  Belfast,  77  Me.  445  (1885),  the  court 
said:  "Net  earnings  are  the  gross  re- 
ceipts less  the  expenses  of  operating 
the  road  to  earn  such  receipts;  also  less 
the  interest  on  the  bonded,  funded,  per- 
manent, or  standing  debt;  also  floating 
debts  '  which  it  is  not  wise  and  pru- 
dent to  place  in  the  form  of  a  funded 
debt  or  to  postpone  for  later  payment;' 
also  an  annual  contribution  to  a  sink- 
ing fund  to  pay  the  funded  debt,  when 
the  condition  of  the  company  renders 
it  expedient,  as  where  the  company 
will  at  some  future  time  earn  only  its 
operating  expenses.  The  court  also 
said  that  whether  the  floating  debt 
should  be  paid  and  a  contribution  be 
made  to  a  sinking  fund  '  depends  upon 
the  financial  resources  and  abilities  of 
the  corporation  and  the  prospects  of 
its  road,'  and  further,  that  the  cost  of 
construction  may  be  charged  to  the 
capital-stock  account." 


116: 


§  546.] 


DIVIDENDS. 


[CH.  XXXII. 


capital  stock  intact.     So  also  outstanding  and  disputed  claims  need 
not  be  first  paid.^ 

A  proper  sum  must  first  be  expended  or  set  aside  for  repairs  and 
reconstruction  to  replace  depreciation  due  to  wear  and  tear.'^  In 
other  words,  the  fund  available  for  dividends  is  ascertained  by  tak- 
ing into  account  the  cost  of  repairs  and  a  reasonable  allowance  for 
depreciation,  giving  credit  for  all  actual  permanent  improvements.' 


'  The  court  will  not  enjoin  a  divi- 
dend where  the  company  shows  that  it 
has  the  necessary  profits,  even  though 
there  are  outstanding  claims  on  illegal  ly 
issued  stock.  Carpenter  v.  New  York, 
etc.  R.  R.,  5  Abb.  Pr.  277  (1857).  Where 
the  company  denies  that  the  complain- 
ant is  a  stockholder,  a  preliminary  in- 
junction falLs.  Blatchford  v.  New  York, 
etc.  R.  R.,  5  Abb.  Pr.  276  (1857).  Direct- 
ors are  not  liable  to  replace  dividends 
declared  (by  reason  of  a  statute  making 
them  so  liable  if  the  dividends  are  not 
"from  the  surplus  profits"),  although 
dividends  were  declared  while  the  com- 
pany, being  engaged  in  raining,  as- 
sumed a  mortgage  debt  in  buying  addi- 
tional property,  a  sinking  fund  being 
begun  to  meet  that  liability  gradually, 
and  although  the  money  to  pay  the 
dividend  was  borrowed,  money  to  that 
amount  having  been  put  into  improve- 
ments, and  although  losses  due  to  an 
injunction  against  using  a  stream  of 
water  were  not  at  once  charged  up  to 
operating  expense.  Excelsior,  etc.  Co. 
V.  Pierce,  90  Cal.  131  (1891). 

2  In  Davison  v.  Gillies,  L.  R  16  Ch.  D. 
347,  note  (1879),  the  court,  at  the  in- 
stance of  a  stockholder,  enjoined  the 
declaration  of  a  dividend  on  the  ground 
that  the  street-railway  tracks  of  the 
company  had  become  worn  out,  and 
needed  very  expensive  repairs,  for  which 
no  provision  had  been  made  by  the  com- 
pany, and  that  this  capital  so  used  up 
must  be  restored  before  a  dividend  was 
declared.  The  by-laws  prohibited  divi- 
dends except  from  profits.  The  court 
said:  "A  tramway  company  lay  down 
a  new  tramway.  Of  coui-se  the  ordi- 
nary wear  and  tear  of  the  rails  and 


sleepers,  and  so  on,  causes  a  sum  of 
money  to  be  required  from  year  to  year 
in  repairs.  It*  may  or  may  not  be  de- 
sirable to  do  the  repairs  all  at  once;  but 
if  at  the  end  of  the  first  year  the  line 
of  tramway  is  still  in  so  good  a  state  of 
repair  tiiat  it  requires  nothing  to  be 
laid  out  on  it  for  repairs  in  that  year, 
still,  before  you  can  ascertain  the  net 
profits,  a  sum  of  money  ought  to  be  set 
aside  as  representing  the  amount  in 
which  the  wear  and  tear  of  the  line 
has,  I  may  say,  so  far  depreciated  it  in 
value  as  that  that  sum  will  be  required 
for  the  next  year  or  next  two  years. 
.  .  .  I  should  think  no  commercial 
man  would  doubt  that  this  is  the  right 
course  —  that  he  must  not  calculate  net 
profits  until  he  has  provided  for  all  the 
ordinary  repairs  and  wear  and  tear  oc- 
casioned by  his  business.  .  .  .  That 
being  so,  it  appears  to  me  that  you  can 
have  no  net  profits  unless  this  sum  has 
been  set  aside.  When  you  come  to  the 
next  year,  or  the  third  or  fourth  year, 
what  happens  is  this:  as  the  line  gets 
older  the  amount  required  for  repairs 
increases.  If  you  had  dotie  what  you 
ought  to  have  done,  that  is,  set  aside 
every  year  the  sum  necessary  to  make 
good  the  wear  and  tear  in  that  year, 
then  in  the  following  years  you  would 
have  a  fund  sufficient  to  meet  the  extra 
cost."  See  also,  as  to  construction  ac- 
count. Mackintosh  v.  Flint,  etc.  R.  R.,  34 
Fed.  Rep.  583  (1888). 

3  Depreciation  at  the  rate  of  two  per 
cent,  a  year  was  charged  in  one  case, 
but  the  directors  were  held  liable  under 
the  New  Jersey  statute  for  illegally  de- 
claring dividends.  Whittaker  v.  Am- 
well  Nat.  Bank,  52  N.  J.  Eq.  400  (1894), 


1168 


CH.  XXXII.] 


DIVIDENDS. 


[§  546. 


But  in  the  case  of  a  company  owning  patent  rights,  or  of  a  mining 
company  whose  product  when  once  used  can  never  be  replaced,  it 


•'  The  following  quotation  from  Greene 
on  "Corporation  Finance"  (1897,  pp.  83, 
114)  will  show  how  an  auditor  would 
treat  depreciation.    He  says: 

"  One  of  the  perplexing  things  in  the  financial 
management  of  a  large  manufacturing  or  trad- 
ing company  is  the  treatment  of  the  expendi- 
tures for  the  care  of  the  plant,    A  depreciation 
account  in  some  shape  must  be  kept  by  every 
company  or  firm  in  business.    The  real  estate 
may  decUne  in  value,  and  in  any  case,  in  any 
progressing  concern,  money  -n-ill  be  required  to 
be  spent  each  year  to  adjust  the  buildings  more 
perfectly  to  the  requirements  of  the  business, 
and  yet  these  adjustments  may  not  add  any- 
thing to  the  salable  value  of  the  property,  and 
should  not,  therefore,  be  added  in  the  accounts 
to  the  company's  investment  in  real  estate.    In 
like  manner,  machinery  will  wear  out,  and  is 
always  subject  to  the  danger  of  new  inventions, 
which  may  render  the  old  machinery  practically 
worthless.    It  is  not  easy  to  foresee  when  a  new 
outfit  will  be  in  part  or  in  whole  required,  though 
experience  soon  places  a  hmit  to  the  number  of 
years  in  which  a  given  set  of  machinery  may  be 
useful.  The  proper  course  in  these  cases  is  always 
the  conservative  one.    The  corporation  should 
esthnate  the  probabilities  of  depreciation  always 
against  itself,  and  set  aside  yearly  such  sums 
from  its  profits  as  will  suffice  to  renew  so  much 
of  the  plant  as  may  be  expected  to  wear  out  or 
to  become  useless  in  a  given  tune.    Unless  this 
depreciation  fund  is  carefully  thought  out  and 
its  separation  from  profits  rigidly  insisted  upon, 
the  shareholders  of  the  corporation  and  perhaps 
the  bondholders  may  in  the  course  of  years  find 
that  their  securities  cover  a  property  of  little  or 
no  business  value.    If  certain  sums  are  not  set 
aside  to  meet  this  depreciation,  and  if  for  this 
reason  dividends  are  paid  larger  than  would 
otherwise  be  the  case,  to  the  extent  to  which 
this  is  carried,  the  retvims  received  by  the  share- 
holders are  not  dividends,  but  their  capital  re- 
turned to  them  in  piece-meal.    These  deprecia- 
tion sums  should  be  real  and  not  merely  book- 
keepmg  liabilities  of  the  company  to  itself. 

"  Modern  coi-poration  accounting  requires  that 
in  theory  a  sharp  Une  of  distinction  should  be 
drawn  between  outlays  which  may  be  consid- 
ered a  part  of  the  regular  workmg  expenses,  and 
those  which  are  chargeable  to  an  increased  in- 
vestment in  the  business.  In  theory  the  former 
should  be  deducted  from  the  gross  earnings  be- 
fore the  net  revenue  is  determmed,  while  the 
latter  may  be  met  by  an  increased  issue  of  bonds 
or  shares.  There  is  no  doubt  of  the  correctness 
of  this  principle  in  general,  but  in  its  practical 
appUcation  it  is  subject  to  great  modification. 
(74)  1 


English  shareholders  in  American  corporations 
usually  insist  upon  such  a  system  of  accounting 
as  divides  the  expenditures  strictly  according  to 
this  rule;  and  such  indeed  is  the  general  prac- 
tice in  Great  Britain.  By  charging  to  capital 
every  item  small  and  large  which  could  by  any 
possibility  be  construed  to  be  a  betterment,  the 
British  railways  have  increased  their  capitaliza- 
tion until  they  are  dependent  for  a  contmuance 
of  interest  payments  on  good  traffics  year  by 
year.  Thus  far  no  harm  has  come  to  these  rail- 
ways from  this  poUcy,  because  the  fluctuations 
in  the  volume  of  their  traffics  have  been  com- 
paratively slight. 

"But  in  the  United  States  more  caution  must, 
be  observed  in  this  matter.    From  the  very  nat- 
ure of  the  case,  business  of  all  kinds  in  a  devel- 
oping country  must  be  more  subject  to  changes 
in  profitableness  than  in  older  countries.    The 
very  character  of  the  American  people,  energetic 
and  progressive,  makes  business  aU  the  more 
liable  to  such  fiuctuations.    Bad  years  follow 
good  years  in  every  line  of  American  industry, 
although  differences  are  less  violent  in  those 
trades  which  are  the  longest  established,  and 
among  those  companies  which  have  been  in  op- 
eration long  enough  to  render  their  business 
comparatively  stable.    The  principle,  therefore, 
of  charging  all  so-called  betterments  to  capital 
and  meeting  the  cost  from  the  sale  of  bonds  or 
shares,  requires  modification  according  to  the 
ctrcimistances  of  each  particular  company.  The 
more  fluctuating  the  volume  of  business  has 
been  or  is  likely  to  be,  the  more  important  is  it 
that  in  one  form  or  another  a  part  of  the  profits 
in  prosperous  years  should  be  withheld  from  the 
shareholders  and  put  into  the  property  or  set 
aside  for  its  renewal.    To  those  who  wish  a 
working  principle   to    distinguish   the   proper 
items  to  be  charged  to  capital  account  in  the 
actual  management  of  American  corporations, 
railway  and  other,  the  following  definition  is 
suggested:  No  additions  to  the  property,  either 
to  the  real  estate  or  to  the  machinery  (if  a  man- 
ufacturing company),  or  to  the  road-bed  and 
track  (if  a  railway  company),  should  be  consid- 
ered betterments  and  charged  to  capital,  unless 
they  increase  the  productivity  or  earning  capac- 
ity of  the  plant.    Under  this  rule  the  purchase 
of  additional  equipment  for  a  railway  would  be 
an  expenditure  which  could  conservatively  be 
met  by  the  issue  of  bonds  or  equipment  notes, 
because  such  purchases  would  enable  a  larger 
volume  of  traffic  to  be  handled;  on  the  other 
hand,  the  replacement  of  a  wooden  bridge  by  an 
iron  one  would  not  be  a  proper  charge  to  capital, 
under  our  definition,  unless  it  was  one  of  a  series 
of  expenditures  deliberately  resolved  upon  in 
order  that  heavier  trains  could  be  nm  and  a 
169 


§  546.] 


DIVIDENDS. 


[oh.  XXXII. 


is  not  necessary  to  set  aside  funds  for  the  purpose  of  purchasing 
new  patents  or  a  new  mine.^ 


larger  volume  of  traffic  handled,  thus  increasing 
the  revenues  of  the  company  —  an  increase 
which  our  theory  demands  should  be  clearly 
seen  to  be  possible  after  the  various  amounts  of 
capital  set  aside  for  this  purpose  had  been  spent. 
The  same  rule  might  be  applied  to  corporations 
other  than  railways;  the  safe  course  is  to  charge 
against  revenues  (possibly  through  the  profit 
and  loss  account)  the  cost  of  all  additions  to  the 
property  which  do  not  increase  the  output  or 
decrease  the  cost  of  production.  Yet  any  rule 
or  any  principle  in  so  delicate  a  matter  can  prop- 
erly be  applied  in  each  case  only  after  a  careful 
Btudy  of  all  the  circumstances,  including  the 
business  of  past  years  and  the  prospect  for  the 
future.    .    .    . 

"Every  active  concern  must  in  some  shape 
keep  a  depreciation  acceunt,  to  which  shall  be 
charged  certain  sums  for  renewal  of  machinery, 
etc.,  before  profits  are  divided.  If  this  is  not 
done,  the  company  wUl  at  the  end  find  itself 
without  plant  and  without  money." 

1 A  mining  or  patent-right  company 
may  make  dividends  without  setting 
aside  sinking  funds  to  meet  the  gradual 
consumption  of  capital  stock.  The  argu- 
ment to  the  contrary  "  leads  to  the  con- 
clusion that  tlie  most  prosperous  min- 
ing corporation,  doing  the  heaviest 
business  and  paying  the  largest  divi- 
dends, is  suffering  from  the  greatest 
impairment  of  capital  and  has  drifted 
furthest  towards  final  and  hopeless  in- 
solvency." People,  etc.  v.  Roberts,  156 
N.  Y.  585  (1898).  In  the  case  of  Bond  v. 
Barrow,  etc.  Co.,  86  L.  T.  Rep.  10  (1902), 
the  court  said  that  it  had  not  been  de- 
cided that  every  company  owning  wast- 
ing property  need  create  a  depreciation 
fund,  but  it  had  been  decided  only  that 
some  companies  with  wasting  assets 
need  not  have  a  depreciation  fund. 

A  company  owning  a  mine,  lease,  or 
patent  may  declare  dividends  out  of  its 
net  proceeds,  altliough  the  necessary  re- 
sult is  that  that  much  is  permanently 
taken  away  from  the  substance  of  the 
estate.  Excelsior,  etc.  Co.  v.  Pierce,  90 
Cal.  131  (1891).  Judge  Lindley,  in  Ver- 
ner  v.  General,  etc.  Trust,  [1894]  2  Ch. 
239,  266,  said:  "But  the  word  'profits' 
is  by  no  means  free  from  ambiguity. 

11 


The  lav7  is  much  more  accurately  ex- 
pressed by  saying  that  dividends  can- 
not be  paid  out  of  capital  than  by  say- 
ing that  they  can  only  be  paid  out  of 
profits.  The  last  expression  leads  to 
the  inference  that  the  capital  must  al- 
ways be  kept  up  and  be  represented  by 
assets  which,  if  sold,  would  produce  it; 
and  this  is  more  than  is  required  by 
law.  Perhaps  the  shortest  way  of  ex- 
pressing the  distinction  which  I  am 
endeavoring  to  explain  is  to  say  that 
fixed  capital  may  be  sunk  and  lost,  and 
yet  that  the  excess  of  current  receipts 
over  current  payments  may  be  divided, 
but  that  floating  or  circulating  capital 
must  be  kept  up,  as  otherwise  it  will 
enter  into,  and  form  part  of,  such  ex- 
cess, in  which  case  to  divide  such  excess 
without  deducting  the  capital  which 
forms  part  of  it  will  be  contrary  to  law." 
In  Lambert  v.  Neuchatel  Asphalte  Co., 
51  L.  J.  (Ch.)  882  (1882),  a  stockholder 
sought  to  enjoin  a  dividend  on  the 
ground  that  the  beds  of  asphalt  belong- 
ing to  the  company  were  being  con- 
sumed by  the  company,  and  that  funds 
sufficient  to  replace  this  consumption 
should  be  set  aside  before  any  dividend 
was  declared.  Otherwise  the  capital 
would  gradually  be  entirely  used  up. 
The  court  refused  the  injunction,  inas- 
much as  the  by-laws  of  the  company 
gave  absolute  discretion  to  the  stock- 
holders to  determine  the  net  profita 
No  creditor's  rights  were  involved  in 
the  case. 

A  very  full  and  careful  discussion  of 
the  right  to  declare  dividends  out  of  a 
mining  property  is  to  be  found  in  Lee 
V.  Neuchatel  Asphalte  Co.,  L.  R.  41  Ch. 
D.  1,  20,  22,  24  (1889).  In  that  case,  how- 
ever, the  mines  were  at  the  time  of  the 
litigation  more  valuable  than  at  the 
time  when  the  company  was  formed, 
and  it  is  to  be  noticed  that  the  rules 
laid  down  expressly  assumed  that 
enough  property  existed  to  pay  all  cred- 
70 


OH.  XXXII.] 


DIVIDENDS. 


[§  546. 


In  estimating  the  profits  for  a  year  for  the  purpose  of  declaring 
a  dividend,  it  is  not  necessary  to  take  into  account  the  decrease  in 
the  value  of  the  assets  and  the  impairment  of  the  capital  stock  of 
the  company  prior  to  that  year.  The  fact  that  in  a  year  prior  to 
the  declaration  of  the  dividend  some  portion  of  the  capital  has  been 
lost  and  has  not  since  been  made  good  affords  no  ground  for  re- 
straining the  payment  of  a  dividend  out  of  profits  subsequently 
earned.!     ^  corporation  "  which  has  lost  part  of  its  capital  can  law- 


itors  after  declaring  the  dividend.   The 
•court  said,  per  Lindley,  J.: 

"It  is  obvious  with  respect  to  such 
property,  as  with  respect  to  various 
other  properties  of  a  like  kind,  mines 
and  quarries  and  so  on,  every  ton  of 
stuff  which  you  get  out  of  that  which 
you  have  bought  with  your  capital 
may.  from  one  point  of  view,  be  consid- 
ered as  embodying  and  containing  a 
small  portion  of  your  capital,  and  that 
if  you  sell  it  and  divide  the  proceeds 
you  divide  some  portion  of  that  which 
you  have  spent  your  capital  in  acquir- 
ing. It  may  be  represented  that  that 
is  a  return  of  capital.  All  I  can  say  is, 
if  that  is  a  return  of  capital,  it  appears 
to  me  not  to  be  such  a  return  of  capital 
as  is  prohibited  by  law.    .     .    . 

"As  I  pointed  out  in  the  course  of 
the  argument,  and  I  repeat  now,  sup- 
pose a  company  is  formed  to  start  a 
daily  newspaper;  supposing  it  sinks 
£250,000  before  the  receipts  from  sales 
and  advertisements  equal  the  current 
expenses,  and  supposing  it  then  goes 
on,  is  it  to  be  said  that  the  company 
must  come  to  a  stop,  or  that  it  cannot 
divide  profits  until  it  has  replaced  its 
£350,000,  which  has  been  sunk  in  build- 
ing up  a  property  which  if  put  up  for 
sale  would  perhaps  not  yield  £10,000  ? 
That  is  a  business  matter  left  to  busi- 
ness men.  If  they  think  their  prospects 
of  success  are  considerable,  so  long  as 
they  pay  their  creditors  there  is  no  rea- 
son why  they  should  not  go  on  and 
divide  profits,  so  far  as  I  can  see,  al- 
though every  shilling  of  the  capital 
may  be  lost  It  may  be  a  perfectly 
jflourishing  concern,  and  the  contrary 


view,  I  think,  is  to  be  traced  to  this 
that  there  is  a  sort  of  notion  that  the 
company  is  debtor  to  capital.  In  an  ac- 
countant's point  of  view  it  is  quite 
right,  in  order  to  see  how  you  stand,  to 
put  down  company  debtor  to  capital 
But  the  company  do  not  owe  the  capi- 
tal. What  it  means  is  simply  this: 
that  if  you  want  to  find  out  how  you 
stand,  whether  you  have  lost  your 
money  or  not,  you  must  bring  your 
capital  into  account  somehow  or 
other.    ... 

"  If  a  company  is  formed  to  acquire 
and  work  a  property  of  a  wasting  nat- 
ure, for  example,  a  mine,  a  quarry,  or  a 
patent,  the  capital  expended  in  acquir- 
ing the  property  may  be  regarded  as 
sunk  and  gone,  and  if  the  company  re- 
tains assets  sufficient  to  pay  its  debts, 
it  appears  to  me  that  there  is  nothing 
whatever  in  the  act  to  prevent  any  ex- 
cess of  money  obtained  by  working  the 
property  over  the  cost  of  working  it 
from  being  divided  amongst  the  share- 
holders; and  this,  in  my  opinion,  is  true 
although  some  portion  of  the  property 
itself  is  sold,  and  in  some  sense  the  capi- 
tal is  thereby  diminished.     .    .     . 

"  But  it  is,  I  think,  a  misapprehension 
to  say  that  dividing  the  surplus  after 
payment  of  expenses  of  the  produce  of 
your  wasting  property  is  a  return  of 
capital  in  any  such  sense  as  is  forbidden 
by  the  act." 

The  court  held  consequently  that  the 
stockholder's  suit  to  enjoin  the  divi- 
dend must  fail. 

1  Hence  where,  in  1882,  £72.000  was 
charged  off  for  bad  debts,  but  this  was 
offset  by  credit  for  £69,000  for  increase 


1171 


546.] 


DIVIDENDS. 


[CH.  XXXII. 


fully  declare  or  pay  a  dividend  without  first  making  good  the  cap- 
ital which  has  been  lost."^  '  Thus,  although  a  mining  company  for 
several  years  is  obliged  to  pay  the  interest  on  its  debts  out  of  the 
capital  stock,  nevertheless  in  subsequent  years,  when  large  profits 
are  earned,  it  may  use  such  profits  for  dividends  in  any  year  after 


in  the  value  of  land  owned  by  the  com- 
pany, this  transaction  was  not  to  be 
considered  in  1885  in  ascertaining  the 
profits  of  1885.  It  is  immaterial  whether 
the  alleged  increase  in  the  value  of  the 
land    was    correct    or  not.     Bolton  v. 
Natal  Land,  etc.  Co.,  [1892]  2  Ch-  124. 
Though  the  capital  stoek  has  been  im- 
paired in  time  past,  it  has  been  held 
that  dividends  may  be  declared  out  of 
profits    subsequently    earned    without 
setting  them  aside  to  restore  the  lost 
capital.     Healey,  Company  Law  &  Pr. 
(3d  ed.  1894),  138.    Where  a  bank  sells 
its  business  for  a  certain  sum,  and  sub- 
sequently buys  back  a  portion  of  it  for 
another  sum,  it  may  declare  a  dividend 
of  the  surplus  that  remains  after  de- 
ducting from  the  first-mentioned  sum 
the    second-mentioned  sum,   and  also 
the  capital  stock.     Lubbock  v.  British 
Bank,  etc.,  [1892]  2  Ch.  198.  At  common 
law  a  company  may  pay  a  dividend, 
even  though  its  capital  stock  has  been 
impaired  in  past  years.     Where  losses 
incurred  by  a  banking  company  during 
the  year  are  written  off,  and  the  bal- 
ance of  the  receipts  in  each  year  over 
the  outgoings  in  the  same  year,  after 
making  some  allowance  for  bad  debts 
and  deductions  for  sums  carried  over 
to  a  reserve  fund,  is  treated  as  the  profit 
of  that  year,  and  is  divided  as  dividends 
without  making  any  further  provision 
for  the  losses  of  previous  years,  the  di- 
rectors are  not  liable  on   the  ground 
that  the  dividends   were  paid   out  of 
capital,  although  this  method  of  pro- 
cedure would  ultimately  exhaust  the 
paid  up  capital  of  the  company.    The 
discretion  of  the  managers   in   fixing 
the  losses  to  be  charged  to  capital  and 
those  to  be  charged  to  income   is  not 
inquired  into  by  the  courts,  unless  ob- 
viously improper    charges    to  capital 


have  been  made,  in  order  to  increase 
apparent  profits.  The  directors  are  not 
personally  liable  unless  they  were  cul- 
pably or  grossly  negligent  in  the  matter. 
Even  though  a  director  knew  his  name 
was  signed  to  a  report  to  the  stock- 
holders after  he  has  resigned,  yet  he  is 
not  liable,  where  he  took  no  part  in  . 
drawing  the  report  or  in  recommending 
the  dividend  based  thereon.  It  seems 
that  an  improper  dividend  may  be  re- 
covered from  the  directors,  even  though 
the  creditors  have  all  been  paid  and 
the  stockholders  will  have  the  benefit 
of  the  recovery,  they  having  been  ig- 
norant of  the  fact  that  the  dividends 
were  paid  from  capital  stock.  Re  Na- 
tional Bank  of  Wales,  [1899]  2  Ch.  629, 
rev'g  79  L.  T.  Rep.  667.  The  House  of 
Lords  in  Dovey,  etc.  v.  Cory,  [1901]  A. 
C.  477,  declined  to  discuss  the  question 
as  to  whether  the  losses  in  one  year 
must  be  made  up  out  of  the  following 
year's  profits,  that  question  not  being 
directly  involved  in  the  case. 

1  Verner  v.  General,  etc.  Trust,  [1894] 
3  Ch.  239.  Where  the  value  of  the 
assets  of  a  solvent  company  has  fallen 
below  the  nominal  amount  of  the  cap- 
ital stock,  the  company,  in  the  absence 
of  any  special  provisions  in  its  articles 
or  of  a  contract  binding  the  company, 
is  under  no  obligation  to  make  good 
such  depreciation  in  the  value  of  the 
assets  before  declaring  a  dividend  out 
of  the  profits.  Depreciation  in  the 
value  of  the  lease  and  good-will  of  a 
company  is  a  loss  of  "fixed  "  as  distin- 
guished from  "  floating  "  capital.  The 
balance  sheet  of  a  company  cannot 
therefore  be  impeached  on  the  ground 
that  it  does  not  charge  anything  against 
revenue  in  respect  of  depreciation  of 
good-will.  Wilmer  v.  McNamara  &  Co.» 
[1895]  3  Ch.  245. 


1173 


CH.  XXXII.]  DIVIDENDS.  [§  54:6. 

paying  the  interest  on  the  debt  for  that  year.  The  company  need 
not  first  restore  the  capital  stock.^ 

In  Connecticut  it  is  held  that  dividends  may  be  declared  on  pre- 
ferred stock  where  the  net  earnings  since  the  issue  of  the  stock  are 
sufficient,  even  though  prior  to  such  issue  the  capital  stock  had 
been  impaired,^  but  that  ordinarily,  in  declaring  dividends,  the  di- 
rectors are  not  justified  in  assuming  that  the  value  of  property 
which  was  originally  received  in  payment  for  stock  is  still  worth 
that  value,  and  if  such  property  at  the  time  of  the  dividend  was 
not  actually  worth  the  par  value  of  the  stock  which  was  issued  for 
it,  the  dividend  is  illegal,  and  a  director  receiving  such  dividend  as 
a  stockholder  may  be  compelled  to  pay  it  back  at  the  instance  of 
a  receiver  of  the  corporation.'^  This  rule  is  of  course  subject  to 
statutory  restrictions,  as,  for  instance,  in  New  York  state,  where 
dividends  can  be  made  only  from  "surplus  profits."*  A  dividend 
may  be  declared  although  the  company  has  not  yet  completed  its 
works.^  In  the  case  of  railroads,  the  cost  of  additional  rolling- 
stock  and  improvements  may  be  charged  to  capital  account,  and 
need  not  be  paid  before  a  dividend  is  declared.^  Where  one  com- 
pany buys  out  another  and  agrees  to  pay  a  certain  salary  to  an  offi- 
cer of  the  latter,  or  a  lump  sum  in  lieu  thereof,  such  lump  sum,  if 
paid,  is  a  part  of  the  capital  stock,  and  need  not  be  considered  as 
expenses.' 

Insurance  companies  cannot  declare  dividends  out  of  unearned 

1  Bosanquet  v.  St.  John,  etc.,  Ltd.,  77  em  Ry.,  L.  R.  5  Ch.  App.  631  (1870). 
L.  T.  Rep.  206  (1897).  For  a  definition  of  "  net  earnings  "  as 

2  Getting  V.  New  York,  etc.  R.  R,  54  used  in  the  federal  statutes  in  regard 
Conn.  156  (1886).  to  the  governmenfs  claims  on  the  Pa- 

3  Davenport  v.  Lines,  72  Conn.  118  cific  railroads,  see  Union  Pacific  R.  R.  r. 
(1899).  U.  S.,  99  U.  S.  402  (1878);  U.  S.  v.  Central 

*  See  L.  1893,  ch.  688,  §  23,  and  Penal  Pac.  R.  R.,  99  U.  S.  449  (1878);  U.  S.  i\ 

Code,  §594.  Kansas  Pac.  Ry.,  99  U.  S.  455  (1878); 

'"  In  Browne  v.  Monmouthshire  Ry.,  U.  S.  v.  Sioux  City,  etc.  R.  R.,  99  U.  S. 
13  Beav.  33  (1851),  the  court  refused  to  491  (1878).  Although  ordinarily  from 
enjoin  a  company  from  declaring  a  the  gross  earnings  there  should  be  de- 
dividend,  the  only  ground  of  complaint  ducted  "  a  reasonable  amount  for  bet- 
being  that  the  company  had  not  yet  terments  and  improvements,  rendered 
completed  its  works.  Penalties  due  by  necessary  by  the  gradual  increase  of 
reason  of  a  contractor  not  completing  traffic,  the  better  discharge  of  business, 
his  contract  within  a  specified  time  and  the  public  accommodation,"  in  ar- 
may  be  used  for  dividends.  Such  pen-  riving  at  the  net  earnings  under  the 
alties,  however,  may  be  released.  Alcoy,  Thurman  act  relative  to  the  Pacific 
etc.  Co.  V.  Green  hill,  79  L.  T.  Rep.  257  railroads,  no  such  deductions  are  to  be 
(1898).  made.     U.  S.  v.  Central  Pac.  R.  R,  138 

•>  Rolling-stock  may  be  carried  to  cap-  U.  S.  84  (1891). 
itai  account  instead  of  being  charged        ^  Royal  Ins,  Co.  v.  Watson,  [1897]  A. 

to  operating  expense.     Mills  v.  North-  C.  1. 

1173 


§  546.] 


DIVIDENDS. 


[CH.  XXXII. 


premiums.^  Banks  cannot  declare  dividends  out  of  interest  not 
yet  received.-  The  question  of  what  constitutes  profits  applicable 
to  dividends  arises  often  in  connection  with  preferred  stock.^ 

Profits  earned  and  invested  in  times  of  prosperity  may  properly 
be  paid  out  as  dividends  subsequently  and  at  a  time  when  no  divi- 
dends have  been  earned.'*  "When  the  company  has  used  profits  for 
improvements,  it  may  lawfully  borrow  an  equivalent  sum  of  money 
for  the  purpose  of  a  dividend.^  And  it  may  properly  borrow  money 
to  pay  a  dividend  if,  upon  a  fair  estimate  of  its  assets  and  lia- 
bilities, it  has  assets  in  excess  of  its  liabilities  and  capital  stock 
equal  to  the  amount  of  the  proposed  dividend.*^  The  subsequent 
insolvency  of  the  corporation  does  not  invalidate  a  dividend  de- 
clared when  there  were  net  profits.^     The  English  authorities  go 


1  Unearned  premiums  received  by  an 
insurance  company,  on  which  the  risks 
are  still  running,  are  not  surplus  profits 
out  of  which  dividends  can  legally  be 
made,  there  not  being  a  sufficient  sur- 
plus on  hand  in  excess  of  the  capital 
stock  to  meet  the  probable  losses  ou 
risks  not  yet  terminated.  De  Peyster 
V.  American  Fire  Ins.  Co.,  6  Paige,  486 
(1837).  See  also  Scott  v.  Eagle  Fire  Co., 
7  Paige,  198  (1838);  Lexington,  etc.  Ins. 
Co.  V.  Page,  17  B.  Mon.  (Ky.)  413  (18o6). 

-  "  Money  earned  as  interest,  however 
well  secured,  or  certain  to  be  eventu- 
ally paid,  cannot  in  fact  be  distributed 
as  dividends  to  stockholders,  and  does 
not  constitute  surplus  profits."  People 
V.  San  Francisco  Sav.  Union,  72  Cal. 
199  (1887).  In  Iowa  it  has  been  held 
that  where  a  bank  with  a  capital  of 
$106,860;  assets  of  $156,904;  liabilities 
of  $56,065,  declares  and  pays  a  dividend 
of  ten  per  cent.,  i.  e.,  $10,686,  the  cor- 
porate creditors  could  not  compel  the 
stockholders  to  return  the  dividend. 
Miller  v.  Bradish,  69  Iowa,  278  (1886). 
In  Re  London  &  Gen.  Bank,  72  L.  T. 
Rep.  227,  230  (1894):  aflf'd,  [1895]  2  Ch. 
166,  673,  the  court  intimates  "that 
nothing  ought  to  be  included  as  an- 
nual profit  which  could  not  be  realized 
as  a  profit  if  need  should  be,"  the  court 
having  before  it  the  question  of  inter- 
est earned  but  not  collected.  Where 
the  directors  in  declaring  dividends  in- 
clude as  good  assets  renewed  notes,  it 

11 


may  be  for  the  jury  to  decide  whether 
such  renewed  notes  were  in  the  due 
course  of  business  or  were  taken  merely 
to  cover  defaulted  and  bad  debts.  Dyk- 
man  v.  Keeney,  34  N.  Y.  App.  Div.  45. 
(1898). 

3  See  ch.  XVI,  supra, 

4  Mills  V.  Northern  Ry.  etc.  Co.,  L.  R. 
5  Ch.  621  (1870);  Hoole  u  Great  Western 
Ry.,  L.  R  3  Ch.  262  (1867);  Beers  i\ 
Bridgeport  Spring  Co.,  42  Conn.  17  (1875) ; 
Re  Mercantile  Trading  Co.,  L.  R.  4  Ch. 
475  (1869). 

5  Mills  V.  Northern  Ry.  etc.  Co., 
L.  R.  5  Ch.  621  (1870);  Re  Mercantile 
Trading  Co.,  L.  R.  4  Ch.  475,  492  (1869). 
A  dividend  may  be  declared  if  the  rev- 
enue account  shows  profits,  even 
though  such  profits  are  not  on  hand 
in  the  way  of  cash.  Re  London  &  Gen. 
Bank,  72  L.  T-  Rep.  227  (1894);  aflf'd, 
[1895]  2  Ch.  166,  673. 

<>  Re  Mercantile  Trading  Co.,  L.  R.  4 
Ch.  475  (1869).  "A  company  is  quite  as 
competent  to  declare  dividends  out  of 
property  which  is  invested  for  the  time 
being  in  buildings,  or  anything  else,  as 
it  is  out  of  cash  in  hand,  and  it  is  not  at 
all  necessary  that  a  company,  any  more 
than  an  individual,  should  have  cash  at 
the  bank  on  which  he  can  draw  in  order 
to  declare  dividends."  Municipal,  etc. 
Land  Co.  v.  PoUington,  63  L.  T.  Rep. 
238  (1890). 

7Reid  V.  Eatonton   Mfg.  Co.,  40  Ga. 
98  (1869):  Le  Roy  v.  Globe  Ins.  Co.,  2 
74 


CH.  XXXII.] 


DIVIDENDS. 


[§  547. 


further  and  hold  that  where  profits  have  been  earned  and  properly 
entered  as  profits  on  the  corporation  books  they  belong  to  the 
stockholders,  even  though  thereafter  the  corporation  becomes  insolv- 
ent and  is  wound  up  before  such  profits  are  declared  to  be  and 
set  apart  as  dividends.^  And  even  though  the  business  is  a  hazardous 
one,  money  need  not  be  set  aside  for  possible  disasters.- 

Upon  a  reduction  of  the  capital  stock  the  surplus  funds  over  and 
above  the  full  amount  of  the  capital  stock  as  reduced  may  be 
divided  among  the  stockholders,  the  only  restriction  being  that 
such  a  distribution  must  leave  the  reduced  capital  stock  entire  and 
unimpaired.  A  stockholder  may  insist  upon  a  division  of  such  a 
surplus.'*  The  question  of  dividends  where  one  road  is  consolidated 
with  another  is  considered  elsewhere.* 

§  547.  A  stocJiliolder  may  enjoin  an  illegal  dividend. —  A  court  of 
equity  will,  upon  the  application  of  a  stockholder,  enjoin  an  attempt 
to  distribute  in  dividends  any  part  of  the  capital  stock.^    But  the 


Edw.  Ch.  637  (1836).  In  deciding 
whether  a  dividend  was  rightfully 
made,  the  transaction  must  be  viewed 
from  the  standpoint  of  that  time,  and 
not  in  the  light  of  subsequent  events. 
Notes  or  overdrafts  by  persons  then 
considered  abundantly  good,  included 
among  the  corporate  assets  when  the 
dividend  was  declared  and  paid,  should 
not  be  regarded  as  losses  sustained  by 
the  corporation  because  they  afterwards 
proved  to  be  unavailable.  Main  v. 
Mills,  6Biss.  98  (1874);  s.  C,  16  Fed.Cas. 
506.  Cf.  Flitcroft's  Case,  L.  R.  21  Ch.  D. 
519  (1882),  where  the  directors  figured 
in  what  they  knew  were  bad  debts. 

1  The  creditors  of  the  corporation  are 
entitled  to  the  corpus  of  the  estate,  but 
not  to  any  profits.  If  there  is  preferred 
stock,  such  profits  go  to  that  stock. 
Bishop  V.  Smyrna,  etc.  Ry.,  [1895]  2  Ch. 
265. 

-  A  balance  sheet  sustatning  a  divi- 
dend is  upheld  where  the  business  is 
extra-hazardous,  such  as  blockade-run- 
ning, and  such  dividend  need  not  be  re- 
funded, even  though  the  blockade  run- 
ners are  lost  and  other  assets  turn  out 
to  be  worthless.  Re  Mercantile  Trad- 
ing Co.,  L.  R.  4  Ch.  App.  475  (1869). 

^Seeley  v.  New  York,  etc.  Bank,  8 
Daly,  400  (1878):   S.  C,  Thompson  Nat. 

11 


Bank  Cas.,  804;  aff'd,  78  N.  Y.  608  (1879); 
Strong  V.  Brooklyn  Cross-Town  R.  R., 
93  N.  Y.  426,  435  (1883).  See  also  §  548, 
infra;  Eyster  v.  Centennial  Board,  94 
U.  S.  500  (1876);  Parker  v.  Mason,  8  R. 
I.  427  (1867).  Where  the  capital  stock 
is  reduced,  and  the  corporate  property 
over  and  above  the  reduced  capital 
stock  is  disti'ibuted  among  the  stock- 
holders, this  is  not  a  dividend  within 
the  meaning  of  the  New  York  tax 
statute.  People,  etc.  v.  Roberts,  41  N. 
Y.  App.  Div.  21  (1899). 

*  See  §  270,  supra. 

5  Macdougall  v.  Jersey  Imperial  Hotel 
Co.,  2  Hem.  &  M.  528  (1864);  Bloxam  v. 
Metropolitan  Ry.,  L.  R.  3  Ch.  337(1868); 
Salisbury  v.  Metropolitan  Ry.,  38  L.  J. 
(Ch.)  249  (1869);  Carlisle  v.  Southeastern 
Ry.,  1  Macn.  &  G.  689  (1850);  Ward  v. 
Sittingbourne,  etc.  Ry..  L.  R.  9  Ch.  488 
(1874);  Davison  v.  Gillies,  L.  R.  16  Ch.  D. 
347,  n.  (1879).  "Dividends  can  be  right- 
fully paid  only  out  of  profits.  Corpora- 
tions are  liable  to  be  enjoined  by  share- 
holders or  creditors  from  making  a 
distribution  in  dividends  of  capital." 
Mobile,  etc.  R.  R.  v.  Tennessee,  153  U.  S. 
486  (1894),  a  dictum.  A  stockholder  has 
the  right  to  enjoin  the  payment  of  a 
dividend  from  the  capital  stock,  but  the 

bill  for  that  purpose  must  be  explifit  in 

'^'■\ 


§  547.] 


DIVIDENDS. 


[cH.  xxxn. 


courts  will  not  lightly  review  the  decision  of  the  board  of  directors 
in  regard  to  whether  the  necessary  profits  actually  exist.^  If  the 
dividend  has  been  declared,  but  not  paid,  it  has  been  held  that  all 
the  stockholders  must  be  joined  as  parties,-  but  this  can  hardly  be 
held  to  be  sound  law.'  The  court  will  not  interfere  if  neither  the 
stockholders  nor  the  corporate  creditors  can  be  injured  by  the  divi- 
dend.* The  courts  of  one  state  will  not  enjoin  a  corporation 
created  by  another  state  from  declaring  a  dividend,  unless  a  fraud 
is  being  perpetrated  on  citizens  of  the  first-mentioned  state/  but 


its  allegations.  Coquard  v.  National, 
etc.  Co.,  171  111.  480  (1898).  See  also  cases 
in  preceding  section.  By  its  certificate 
of  incorporation  a  New  Jersey  corpora- 
tion may  have  power  to  purchase  "and 
retire  part  or  all  of  its  preferred  stock, 
and  to  issue  in  payment  therefor  its 
bonds  or  to  sell  its  bonds  and  use  the 
proceeds  to  retire  such  preferred  stock, 
or  it  may  purchase  and  hold  such  stock 
for  reissue.  The  ofi'er  to  purchase  must 
be  made  pro  i^ata  to  all  the  preferred 
stockholders.  Under  the  reserved  rights 
to  amend,  alter,  or  repeal  charters,  the 
rights  of  stockholders  among  them- 
selves cannot  be  impaired,  except  as 
required  by  public  interest,  but,  while 
it  is  true  that  the  charter  constitutes  a 
contract  between  the  stockholders,  yet 
under  this  reserved  power  the  legisla- 
ture may  authorize  existing  corpora- 
tions to  purchase  and  retire  preferred 
stock  and  issue  in  lieu  thereof  mort- 
gage bonds,  such  amendment  being 
construed  to  be  in  behalf  of  the  public 
interest.  Where  a  corporation  has  char- 
ter authority  to  retire  its  preferred  stock 
and  issue  mortgage  bonds  in  lieu  thereof, 
on  a  vote  of  the  directors  and  stockhold- 
ers, a  minority  stockholder  cannot  en- 
join such  action  on  the  ground  that  it 
would  be  disastrous  in  its  effect  on  the 
corporation.  Berger  v.  United  States 
Steel  Corp.,  53  Atl.  Rep.  68  (N.  J.  1902). 
1  Where  the  directors  declare  a  divi- 
dend after  a  proper  investigation  of  the 
financial  position  of  the  company,  the 
court  will  not  lightly  interfere  with  the 
payment  tliereof:  but  where  they  de- 
clare it  without  proper  investigation  or 


professional  assistance,  and  it  is  called 
in  question,  the  burden  of  proof  is  upon 
them  to  show  that  it  is  to  be  fairly  paid 
out  of  net  profits.  Re  County  Marine  Ins. 
Co.,  L.  R.  6  Ch.  App.  104  (1870).  See  also 
Hoole  V.  Great  Western  Ry.,  L.  R.  3  Ch. 
App.  262  (1867). 

2  A  stockholder  may  file  a  bill  in  be- 
half of  himself  and  other  stockholders 
to  enjoin  the  declaration  of  dividends 
where  there  are  no  net  profits;  but 
where  he  has  not  joined  all  the  stock- 
holders as  parties,  he  cannot  enjoin  the 
payment  of  a  dividend  already  de- 
clared, even  though  the  time  of  pay- 
ment has  not  j'et  arrived.  Fawcett  v. 
Laurie,  1  Dr.  &  Sm.  192  (1860).  To  same 
effect,  Carlisle  v.  Southeastern  Ry.,  1 
Macn.  &  G.  689  (1850).  See  Browne  v. 
Monmouthshire  Ry.,  13  Beav.  32  (1851); 
Coates  V.  Nottingham  Water-works  Co., 
30  Beav.  86  (1861). 

3  Even  though  a  dividend  has  been 
declared,  the  payment  of  it  may  be  en- 
joined at  the  instance  of  stockholders, 
and  all  the  stockholders  need  not  be 
joined  as  parties  defendant.  Marquand 
V.  Federal,  etc.  Co.,  95  Fed.  Rep.  725 
(1899). 

*  "  Equity  would  not  interfere  with 
a  dividend  unless  it  appeared  that 
somebody  in  particular  was  hurt  or  lia- 
ble to  be  injured.  It  would  not  inter- 
fere after  all  danger  had  passed,  and 
for  the  sake  of  vindicating  general 
principles."  Chaffee  v.  Rutland  R  R., 
55  Vt.  110,  133  (1882);  93  N.  W.  Rep.  1024 

5  Howell  V.  Chicago,  etc.  R.  R.,  51 
Barb.  378  (1868).  In  Massachusetts  no 
equitable  relief  can  be  granted  against 


1176 


<iU.  XXXII.]  DIVIDENDS.  [§  548. 

the  United  States  court  sitting  in  the  Xew  Tork  district  has  power 
to  enjoin  the  payment  of  a  dividend  by  a  Xew  Jersey  corporation 
where  such  dividend  is  illegal. •  A  corporate  creditor  has  no  stand- 
ing in  court  to  enjoin  a  dividend,  even  though  it  will  impair  the 
■capital  stock.-  But,  in  certain  cases,  owners  of  claims,  even  though 
not  yet  due,  may  prevent  a  distribution  of  capital  stock  upon  a  re- 
duction thereof,  unless  securitv  is  ffiven.^ 

§  548.  Dividends  ivMcli  imimir  the  ccqjttal  stock  may  T)e  illegal, 
and  may  he  recovered  hack  from  the  stockholders  —  Dividends  on 
dissolution. —  As  already  shown,  as  against  dissenting  stockholders 
and  as  against  corporate  creditors  a  dividend  can  be  lawfully  de- 
clared only  when  sufficient  net  profits  have  been  earned  to  pay  that 
dividend.  Accordingly,  a  dividend  paid  wholly  or  partly  from  the 
■capital  stock  may  be  illegal,  and  may  subject  the  corporation  and 
the  stockholders  to  serious  liability.  Hence  the  rule  has  been 
firmly  established  that,  where  dividends  are  paid  in  whole  or  in 
part  out  of  the  capital  stock,  corporate  creditors,  being  such  when 
the  dividend  was  declared,  or  becoming  such  at  any  subsequent 
time,  may,  to  the  extent  of  their  claims,  if  such  claims  are  not 
otherwise  paid,  compel  the  stockholders  to  whom  the  dividend  has 
been  paid  to  refund  whatever  portion  of  the  dividend  was  taken 
out  of  the  capital  stock.*    The  supreme  court  of  the  United  States, 

a     foreign     corporation,     which     has  r.  Dummer,  3  Mason,  308  (1824);  s.  C,  80 

neither  ofiBcers  nor  place  of  business  in  Fed.  Cas.  435;  Gratz  v.  Eedd,  4  B.  Mon. 

that  state,  to  compel  the  company  to  (Ky.)  178  (1843);  Bank  of  St.  Mary's  v. 

declare  and  pay  dividends  according  St.  John,  25  Ala.  566  (1854);  Bartlett  v. 

to  the  stipulations  of  their  certificates  Drew,  57  N.   Y.   587  (1874) ;  Heman  v. 

of  preferred  stock.     Williston  v.  Michi-  Britton,   88  Mo.  549  (1885) ;   Story,  Eq. 

.gan  Southern,  etc.  R  R.,  95  Mass.  400  Jur.  (13th  ed.,  1886),  §  1252.     A  stock- 

(1866).      See  also  Berford  v.  New  York  holder  who  receives  an  illegal  dividend 

Iron  Mine,  4  N.  Y.  Supp.  836  (1889).  is  liable  for  it,  even  though  he  has  paid 

1  Marquand  v.  Federal,  etc.  Co.,  95  it  over  to  another  person  to  whom  the 
Fed.  Rep.  725  (1899).  See  also  §  734,  stock  belonged.  Finn  v.  Brown,  142 
■infra.  U.  S.  56  (1891).  Where  the  stockholders 

2  Mills  V.  Northern  Ry.  etc.  Co.,  L.  R.  distribute  the  assets  among  themselves, 
5  Ch.  App.  621  (1870).  See  also  g  735,  a  creditor  may  follow  the  assets.  Pan- 
infra.  handle  Nat.  Bank  v.  Emery.  78  Tex.  498 

3  Re  Telegraph  Const.  Co.,  L.  R.  10  Eq.  (1890).  The  stockholders  of  a  corpora- 
384  (1870).  tion  have,  in  Louisiana,  no  right  to  ap- 

■*  Curran  v.  Arkansas,  15  How.  (U.  S.)  propriate  any  part  of  its  assets  to  pay 

304  (1853);  Railroad  Co.  v.  Howard,   7  large  salaries  to  themselves  as  officers 

Wall.  392  (1868);  Osgood  v.  Laytin,  48  of  the  company,  until  all  creditors  wJio 

•Barb.  463  (1867);    aflE'd,   3  Keyes,  521;  are  not  stockholders  have  been  paid. 

Johnson  v.  Laflin,  5  Dill.  65,  86,  note  Cochran  v.  Ocean  Dry  Dock  Co..  30  La. 

<1878);  affU  103  U.  S.  800(1880);  Hast-  Ann.  1365(1878).  In  Lexington,  etc.  Ins. 

dngsr.  Drew,  76  N.  Y.  9, 19(1879);  Sagory  Co.  v.  Page,  17  B.  Mon.  (Ky.)  412  (1856), 

r.  Dubois,  3  Sandf.  Ch.  466  (1846);  Wood  it  is  held  that  the  action  to  recover  the 

1177 


§  548.] 


DIVIDENDS. 


[CH.  XXXIIv 


however,  has  held  that  the  receiver  of  a  national  bank  cannot  re- 
cover a  dividend  paid  to  a  stockholder,  even  though  it  was  paid  en- 
tirely out  of  capital,  where  the  stockholder  receiving  such  dividend 
acted  in  good  faith,  believing  the  same  to  be  paid  out  of  profits,  and 
w^here  the  bank,  at  the  time  such  dividend  was  declared  and  paid, 
was  not  insolvent.'  But  a  receiver  of  a  national  bank  may  recover 
back  dividends  paid  at  a  time  when  the  bUnk  was  insolvent,  even 
though  the  stockholders  did  not  know  of  such  insolvency,  and  it 
seems  that  a  suit  in  equity  lies  for  that  purpose.^ 

A  stockholder  may  by  bill  in  equity  compel  a  return  of  a  divi- 
dend paid  out  of  the  capital  stock.^  A  stockholder,  however,  who 
receives  dividends  wrongfully  declared  cannot  then,  as  a  corporate 
creditor,  hold  other  stockholders  liable  on  a  statutory  liability  for 
wrongfully  declaring  dividends.*  And  a  corporate  creditor  may 
by  his  acts  be  estopped  from  attacking  the  dividend.*   Notes  given 


dividend  in  such  a  case  may  be  main- 
tained by  the  company  or  its  assigns 
where  the  dividend  had  been  paid  by 
mistake.  See  also,  in  general,  Skrainka 
V.  Allen,  7  Mo.  App.  484  (1879);  Ward  v. 
Sittingbourne,  etc.  Ry.,  L.  R.  9  Ch.  App. 
488  (1874):  Clappv.  Peterson,  104  111.  26 
(1882),  holding  that  the  property  so 
withdrawn  was  liable  for  the  creditor's 
whole  debt  and  not  merely  for  a  pro 
rata  share  thereof.  If  a  fixed  per  cent, 
is  drawn  out  by  stockholders  instead  of 
a  dividend,  and  this  per  cent,  exceeds 
the  profits,  a  stockholder,  upon  the  in- 
solvency of  the  corporation,  must  pay 
back  the  excess  received  by  him.  Read- 
ing Trust  Co.  V.  Reading  Iron  Works, 
137  Pa.  St.  283  (1890).  Creditors  may 
reach  shares  @f  stock  that  the  corpora- 
tion which  becomes  insolvent  has  dis- 
tributed without  a  dividend.  McKusick 
V.  Seymour,  etc.  Co.,  48  Minn.  158  (1893). 
A  payment  of  the  subscription  price 
by  what  purports  to  be  a  dividend  or 
distribution  of  profits  is  invalid  as 
against  creditors,  where  such  profits  did 
not  exist.  Gager  v.  Paul,  111  Wis.  638 
(1901).  A  preferred  stockholder  is  liable 
to  corporate  creditors  for  illegal  divi- 
dends paid  on  his  stock  the  same  as  a 
common  stockholder  is.  American,  etc. 
Co.  V.  Eddy,  89  N.  W,  Rep.  952  (Mich. 
1902). 

11 


1  McDonald  v.  Williams,  174  U.  S.  397 
(1899).  The  court  held  also  that  "  tha^ 
theory  of  a  trust  fund  has  no  applica- 
tion to  a  case  of  this  kind." 

^  Hayden  v.  Williams,  96  Fed.  Rep.  279 
(1899).  In  the  case  of  Hayden  v.  Brown, 
94  Fed.  Rep.  15  (1899),  in  a  suit  by  a  re- 
ceiver, judgment  was  rendered  against 
various  Vermont  stockholders  in  a  na- 
tional bank  in  Nebraska  for  dividends 
paid  from  the  capital  stock,  except  sa 
far  as  recovery  was  barred  by  the  stat- 
ute of  limitations.  See  also  Fort  Payne 
Bank  v.  Alabama  Sanitarium,  103  Ala. 
358  (1894);  Bingham  r.  Marion  T.  Co., 
61  N.  E.  Rep.  29  (Ind.  1901):  Re  Denham, 
L.  R.  25  Ch.  D.  752  (1883).  It  has  been 
held  in  England,  however,  that  where 
the  by-laws  provide  that  the  directors, 
for  salary,  siiall  have  ten  percent,  of  the 
surplus  profits  over  a  certain  dividend, 
they  may  recover  it,  although  they  sue 
for  it  many  years  afterwards,  when  it 
turns  out  that  the  assets  were  overesti- 
mated, but  in  good  faith.  lie  Peruvian 
Guano  Co.,  [1894]  3  Ch.  690. 

3  Holmes  v.  Newcastle,  etc.  Co.,  L.  R. 
1  Ch.  D.  682  (1875). 

*  Thompson  v.  Bemis  Paper  Co.,  127 
Mass.  595  (1879). 

5  "  A  corporate  creditor  may  by  his 
acts  estop  himself  from  his  right  to  at- 
tack a  dividend."  Lawrence  v.  Greenup, 
78 


CH.  XXXII.] 


DIVIDENDS. 


[§  548. 


by  an  insolvent  corporation  for  unearned  dividends  are  not  legal 
except  in  honafide  hands.^ 

A  corporate  creditor  may  compel  stockholders  to  refund  the 
amount  received  by  them  on  a  distribution  of  the  corporate  assets 
upon  dissolution  or  a  sale  of  all  the  assets  of  the  company,  to  the 
extent  that  his  claim  has  not  been  paid,  after  he  has  exhausted  his 
remedy  against  the  corporation  itself.^  So  also  the  stockholders 
are  not  allowed  to  defraud  creditors  by  bringing  about  a  foreclos- 
ure and  purchase  of  the  property  by  themselves  at  a  low  price 
which  will  not  pay  the  corporate  debts.'    But  this  is  the  extent  to 


97  Fed.  Rep.  906  (1899).  Thus,  where  a 
company  is  insolvent,  and  bondholders 
have  agreed  to  sell  their  bonds  to  a  cer- 
tain party  at  seventy-five  cents  on  the 
dollar,  and  that  party  then  agrees  with 
the  corporation  to  acquire  and  cancel 
the  bonds  and  take  the  property  from 
the  corporation  for  a  nominal  consider- 
ation, and  after  he  has  made  such 
agreement  the  bondholders  decline  to 
and  proceed  to  foreclose  their  mortgage 
■and  realize  ninety  cents  on  the  dollar, 
the  court  will  not  compel  the  stock- 
holders to  pay  to  the  bondholders  the 
corporate  assets  which  the  stockhold- 
ers have  distributed  among  themselves. 
Brooks  V.  Brooks,  174  Pa.  St.  519  (1826). 

1  Alabama,  etc.  Co.  v.  Chattanooga, 
etc.  Co.,  37  S.  W.  Rep.  1004  (Tenn.  1896). 

2  See  ^§  549,  672,  infra.  A  solvent 
corporation  does  not  hold  its  property 
in  trust  for  its  creditors,  even  though 
it  is  in  process  of  liquidation,  and  hence 
a  partial  distribution  of  the  assets  of  a 
bank  to  the  stockholders  during  liqui- 
dation, when  the  bank  was  solvent  and 
retained  what  seemed  to  be  sufficient 
assets  to  pay  its  liabilities,  cannot  be  re- 
covered back  subsequently  by  the  re- 
ceiver in  an  action  at  law,  although  it 
turned  out  that  the  remaining  assets 
were  not  sufficient  to  pay  all  liabilities, 
no  bad  faith  being  involved.  Lawrence 
V.  Greenup,  97  Fed.  Rep.  906  (1899). 
Where  a  construction  company  distrib- 
utes its  assets  among  its  stockholders 
without  paying  its  creditors,  the  stock- 
holders may  be  compelled  to  disgorge 
to  the  extent  of  the  debts  so  remaining 


unpaid.  Grant  v.  Southern  Contract 
Co.  etc.,  104  Ky.  781  (1898).  A  debt  of  a 
stockholder  to  be  paid  from  "  dividends  " 
must  be  paid  from  the  dividends  of 
assets,  if  the  company  dissolves.  Cozad 
V.  McKee,  130  Pa.  St.  406  (1889).  Dia 
tribution  of  funds  of  incorporated  as- 
sociation. Ashton  V.  Dashaway  Assoc, 
84  Cal.  61  (1890).  Upon  the  winding  up 
of  a  building  association  distribution 
is  made  on  the  basis  of  fictitious  divi- 
dends being  first  charged  against  each 
member  and  dues  paid  being  credited 
to  them.  Boice  v.  Rabb,  24  Ind.  App. 
368  (1900). 

3  A  foreclosure  which  is  brought  about 
by  the  stockholders  for  the  purpose  of 
buying  in  the  property  and  reorganiz- 
ing the  property  so  as  to  protect  tlie 
mortgage  bondholders  and  also  the 
stockholders,  but  to  cut  off  the  claima^ 
of  unsecured  creditors,  and  particularly 
to  cut  off  a  guaranty  on  the  bonds  of  an- 
other corporation,  is  illegal,  and  if  such 
facts  are  proved  the  foreclosure  sale 
will  be  set  aside.  Louisville,  etc.  Ry.  v. 
Louisville  Trust  Co.,  174  U.  S.  674  (1899), 
the  court  saying  (p.  683),  "  no  such  pro- 
ceedings can  be  rightfully  carried  to 
consummation  which  recognize  and 
preserve  an  interest  in  the  stock- 
holders without  also  recognizing  and 
preserving  the  interests,  not  merely  of 
the  mortgagee,  but  of  every  creditor 
of  the  corporation.  In  other  words,  if 
the  bondholder  wishes  to  foreclose  and 
exclude  inferior  lienholders  or  general 
unsecured  creditors  and  stockholders- 
he  may  do  so;  but  a  foreclosure  which. 


1179 


§  549.] 


DIVIDENDS. 


[CH.  XXXII. 


which  the  common  law  goes.  So  long  as  corporate  creditors  are 
paid,  no  one  is  injured  by  the  stockholders  distributing  among  them- 
selves the  assets.^ 

The  distribution  of  the  assets  among  the  stockholders  upon  dis- 
solution is  made  upon  equitable  principles.- 

§  549.  Proceedings  to  recover  lack  such  a  dividend.—  It  is  in 
general  the  practice,  where  dividends  have  been  paid  out  of  the 
capital  stock  in  prejudice  of  the  rights  of  corporate  creditors,  for 
a  judgment  creditor,  upon  the  return  of  his  common-law  execution 
against  the  corporation  wholly  or  partly  unsatisfied,  to  commence 
an  action  in  equity  on  behalf  of  himself  and  all  other  creditors 
who  may  come  in,  in  the  nature  of  a  creditors'  bill,  against  the 
stockholders  to  whom  the  dividend  was  unlawfully  paid,  to  recover 
back  so  much  thereof  as  was  paid  out  of  the  capital  stock.' 

It  is  a  necessary  condition  precedent  to  the  right  to  bring  this 
action  that  a  valid  judgment  shall  have  been  obtained  against  the 
corporation,  and  that  execution  thereon  shall  have  been  returned 
wholly  or  partly  unsatisfied,  and  this  judgment  is  conclusive  as  to 
the  merits  of  the  creditor's  claim.*     If  the  treasurer  is  sued  by  a 


attempts  to  preserve  anj^  interest  or 
right  of  the  mortgagor  in  the  property 
after  the  sale  must  necessarily  secure 
and  preserve  the  prior  rights  of  general 
creditors  thereof.  This  is  based  upon 
the  familiar  rule  that  the  stockholders' 
interest  in  the  property  is  subordinate 
to  the  rights  of  creditors;  first  of  se- 
cured and  then  of  unsecured  creditors. 
And  any  arrangement  of  the  parties  by 
which  the  subordinate  rights  and  in- 
terests of  the  stockholders  are  at- 
tempted to  be  secured  at  the  expense 
of  the  prior  rights  of  either  class  of 
creditors  comes  within  judicial  denun- 
ciation."   Cf.  §  886,  infra. 

1  See  §§  3  and  546,  supra,  and  §g  671, 
766,  infra, 

-  See  §  641,  infra. 

3  Hastings  v.  Drew,  76  N.  Y.  9  (1879); 
Bartlett  v.  Drew,  57  N.  Y.  587  (1874);  Mc- 
Lean V.  Eastman.  21  Hun,  312  (1880); 
Gratz  V.  Redd,  4  B.  Mon.  (Ky )  178  (1843); 
Curran  v.  Arkansas,  15  How.  304  (1853); 
Grant  v.  Ross,  100  Ky.  44  (1896).  See 
also  U.  S.  V.  Globe  Works,  7  Fed.  Rep. 
530  (1881);  Brewer  v.  Michigan  Salt 
Assoc,  58  Mich.  351  (1885).  See  also 
§  548,  supra.    And  see  Vose  v.  Grant,  IS- 


Mass.  505  (1819),  where  it  was  held  that 
an  action  as  for  tort  could  not  be  main- 
tained by  a  creditor  against  an  indi- 
vidual stockholder  who  had  received 
dividends.  Spear  v.  Grant,  16  Mass.  9, 
15  (1819),  holding  that  an  action  at  law 
will  not  lie.  An  action  on  the  case  for 
fraud  lies  for  a  conspiracy,  the  stock 
having  been  sold  back  to  the  corpora- 
tion bank  and  the  bank  then  closed. 
Bartholomew  v.  Bentley,  15  Ohio,  659 
(1846).  Where  all  the  property  of  a 
telegraph  company  is  sold  and  the  pro- 
ceeds distributed  among  the  stock- 
holders, a  creditor  of  the  company  may 
by  a  bill  in  equity  compel  the  stock- 
holders to  pay  the  claim  against  the 
corporation,  the  proceeds  being  a  trust 
fund.  Baltimore,  etc.  Co.  v.  Interstate 
Co.,  54  Fed.  Rep.  50  (1893),  121  id.  956. 

*In  a  judgment  creditor's  suit  to 
reach  assets  of  an  insolvent  corporation 
which  have  been  turned  over  to  the 
stockholders  in  fraud  of  creditors,  the 
judgment  of  the  creditor  against  the 
corporation  cannot  be  impeached  ex- 
cept by  fraud  and  jurisdiction.  All  ot 
the  stockholders  need  not  be  joined, 
but  if  any  stockholder  wishes  the  equi- 


1180 


CH.  XXXII.] 


DIVIDENDS. 


[§  549. 


corporate  creditor  to  reach  assets  of  the  corporation  which  he  holds, 
he  cannot  interplead.'  A  receiver  may  be  authorized  by  the  court 
to  institute  the  suit.-  He  may  file  a  bill  in  equity  to  compel  stock- 
holders to  refund  dividends  illegally  paid  by  them.'  He  represents^ 
the  creditors  as  well  as  the  corporation  and  stockholders.  As  an 
officer  of  the  court  he  may  sue,  and  is  not  estopped  by  the  acts  of 
the  corporation. 

In  a  suit  by  a  receiver  of  a  national  bank  to  recover  back  divi- 
dends illegally  paid,  the  books  of  the  bank  are  competent  evidence 
to  prove  the  acts  of  the  corporation  and  its  financial  condition, 
except  as  to  dealings  between  the  corporation  and  the  defendant.* 
It  has  been  held  that  even  though  a  receiver  is  in  charge,  yet  a 
judgment  creditor  may  file  a  bill  to  compel  a  stockholder  to  pay 
back  an  illegal  dividend  and  also  to  account  for  property  trans- 


ties  adjusted  as  between  the  various 
stockholders,  he  can  file  a  cross-bill. 
Singer  v.  Hutchinson.  183  111.  606  (1900); 
Sturges  V.  Vanderbilt,  73  N.  Y.  384 
(1878 >.  In  this  case  there  was  no  re- 
covery against  a  director  who  had  sold 
his  stock  and  ceased  to  participate  in 
the  company's  affairs  five  years  before 
the  dissolution.  Dudley  v.  Price,  10  B. 
Mon.  (Ky.)  84  (1849);  Andrew  v.  Van- 
derbilt, 37  Hun,  468  (1885;;  Hastings  v. 
Drew,  76  N.  Y.  9  (1879),  where  this 
liability  was  enforced  against  one  who 
had  become  a  purchaser  of  stock  after 
the  cause  of  action  arose  upon  which 
the  judgment  was  secured,  the  stock 
being  by  the  terms  of  the  transfer  sub- 
ject to  all  claims  against  it. 

1  A  treasurer  cannot  interplead  be- 
tween the  stockholders  and  a  corpo- 
rate creditor  who  is  seeking  to  reach 
bonds  received  by  the  corporation  in 
payment  for  its  property.  Stone  v. 
Reed,  152  Mass.  179  (1890). 

-  A  receiver  of  the  corporation  is  the 
proper  part}'  to  sue  to  recover  back 
any  dividends  which  were  paid  from 
the  capital  stock.  Corporate  creditors 
cannot  sue  for  these  after  the  receiver 
goes  in.  It  is  doubtful  whether  the 
corporation  itself  could  complain  of 
such  dividends.  A  sale  of  the  assets  by 
the  receiver  does  not  carry  this  cause 
of  action. 


don,  44  Minn.  37  (1890).     In  New  York 
the  receiver  of  an   insolvent  corpora- 
tion may  maintain  an  action  for  the 
benefit  of  tlie  creditors    against    the 
stockholders  to   recover  the  sums  re- 
ceived by   them  as   dividends    at  the 
time  tlie  company  was  insolvent;  and 
in  such  an  action  the  creditors  of  the 
corporation  are   proper  parties  defend- 
ant for  the  purpose  of  restraining  them 
from   proceeding  individually  against 
the  stockholders  separately  to  recover 
the  unlawful  dividends.  Osgood  v.  Lay- 
tin,  3  Keyes,  521  (1867).     See  also  Lex- 
ington, etc.  Ins.  Co.  r.  Page,  17  B.  Mon. 
(Ky.)  412(1856),  holding  that  an  assignee 
of  the  company  for  the  benefit  of  the 
compan}'  might  sue.     But  a  receiver's 
suit  cannot  in  such  a  case  be  brought 
for  the   benefit    of    the   stockholders. 
Butterworth  v.  O'Brien,  39   Barb.    192 
(1863).    Cf.  McLean  v.  Eastman,  21  Hun, 
312  (1880).     An  order  of  the  court  direct- 
ing a  receiver  to    recover    dividends 
illegally  paid  is  not  an   adjudicatioii 
bindingon  the  stockholders  to  the  effect 
that  such  dividends  were  illegally  paid. 
Stewart  v.  Marion,   etc.  Co.,  155   Ind. 
174  (1900). 

3  Hayden  r.  Thompson,  71  Fed.  Rep. 
60  (1895),  revg'.67  Fed.  Rep.  278. 

*  Hayden   v.  Williams,  96  Fed.   Rep.. 
279  (1899). 


Minnesota,  etc.  Ca  v.  Lang- 


1181 


§  550.] 


DIVIDENDS. 


[oh.  XXXII, 


ferred  to  him  by  the  corporation  for  a  portion  of  his  stock,  the 
receiver  being  made  a  party  defendant.' 

In  the  creditor's  suit  all  the  stockholders  who  can  be  reached 
should  be  made  parties  defendant,  and  as  to  those  unknown  or 
insolvent  or  beyond  the  jurisdiction  there  should  be  a  proper  aver- 
ment in  the  bill.^  The  corporation  also  should  be  made  a  party 
defendant  to  the  bill.' 

The  stockholder  who  is  compelled  to  pay  more  than  his  equitable 
proportion  of  any  unpaid  corporate  debt  may,  in  a  proper  proceed- 
ing, resort  to  his  associates  for  contribution.^  A  transferee  of  stock 
against  which  creditors  have  this  claim  at  the  time  of  transfer  is 
not  liable  to  respond  in  a  creditor's  suit  therefor.^  The  statute  of 
limitations  runs  in  favor  of  stockholders,  who  receive  such  divi- 
dends in  good  faith  and  without  actual  notice,  from  the  time  they 
are  ]3aid.® 

§  550.  The  UaMliti/  lierein  of  the  corjmrate  officers. — The  liability 
of  the  corporate  officers  as  to  dividends  paid  out  of  the  capital  stock 
is  not  definitely  determined.     They  of  course  are  liable  for  the 


1  Bowker    v.  Hill,  115  Fed.  Rep.  528 
(1879). 

-Wood  V.  Dummer,  3  Mason,  308 
(1824);  s.  c.,80  Fed.  Cas.  435:  Bartlett  v. 
Drew.  57  N.  Y.  587  (1874).  In  the  case  last 
cited  it  is  held  that  the  creditor  is  not 
required  to  bring  his  suit  on  behalf  of 
other  creditors  who  may  choose  to  come 
in.  but  may  sue  aloue  and  for  his  own 
'benefit  exclusively,  and  that  he  need 
not  make  all  the  stockholders  parties, 
but  ma3'  pursue  one,  any,  or  all,  as  he 
may  elect,  upon  the  theory  that  with 
the  equities  between  the  stockholders 
themselves  he  has  nothing  to  do,  unless 
he  choose  to  intervene  to  settle  them. 
See  also  Brewer  v.  Michigan  Salt  Assoc, 
58  Mich.  351  (1885);  Pacific  Ry.  v.  Cut- 
ting, 27  Fed.  Rep.  63S  (1886);  Williams 
V.  Boice,  38  N.  J.  Eq.  364  (1884).  Many 
stockholders  may  be  joined  as  defend- 
ants in  a  suit  in  equity  to  recover  back 
illegal  dividends,  even  though  some  re- 
ceived a  greater  number  of  dividends 
than  others,  Hayden  v.  Thompson,  71 
Fed.  Rep.  60  (1895). 

3  First  Nat.  Bank  v.  Smith,  6  Fed. 
Hep.  215  (1879).  followed  in  Dormitzerr. 
Illinois,  etc.  Co.,  6  Fed.  Rep.  217  (1881). 


Where  all  the  assets  have  been  distrib- 
uted, an  action  against  the  stockhold- 
ers to  recover  back  damages  for  a  tort 
committed  by  the  corporation  must 
include  the  corporation  as  a  co-defend- 
ant. Swan,  etc.  Co.  v.  Frank,  39  Fed. 
Rep.  456  (1889).  In  a  suit  to  compel 
stockholders  of  a  foreign  corporation 
to  discover  and  account  for  corporate 
property  illegally  divided  among  them, 
the  property  must  be  definitely  de- 
scribed. Service  on  the  corporation  by 
publication  is  insufficient.  King  v. 
Sullivan.  93  Ga.  621  (1894). 

*  Bartlett  v.  Drew,  57  N.  Y.  587  (1874). 

5  Hurlbut  V.  Tayler,  62  Wis.  607  (1885). 

•>  The  statute  of  limitations  runs 
against  an  action  to  recover  back  ille- 
gal dividends  from  stockholders.  It 
begins  to  run  from  the  time  when  the 
dividend  is  paid,  provided  the  stock- 
holder did  not  know  or  have  reason  to 
know  the  condition  of  the  company. 
Hayden  v.  Thompson,  71  Fed.  Rep.  60 
(1895);  Lexington,  etc.  Ins.  Co.  v.  Page, 
17  B.  Mon.  (Ky.)  412,  446  (1856).  See  also 
Re  Mammoth  Copperopolis,  50  L.  J.  (Ch.) 
11  (1880):  Dudley  v.  Price,  10  B.  Mon. 
(Ky.)  84  (1849). 


1182 


<3H.  XXXII.] 


DIVIDENDS. 


[§  550. 


amount  of  any  such  dividend  that  the}'  themselves  receive  as  stock- 
holders.^ 

Some  cases  goes  to  the  full  extent  of  holding  the  directors  liable 
absolutely  for  ail  dividends  paid  out  of  capital  stock.  But  the  better 
rule  is  that,  when  the  directors  declare  a  dividend  in  good  faith  and 
without  negligence,  they  are  not  to  be  held  liable  merely  because 
the  dividend  turns  out  to  have  impaired  the  capital  stock.^    Direct- 


1 A  receiver  may  recover  back  a  divi- 
dend paid  to  a  director  when  the  corpo- 
'  ration  was  insolvent.  Davenport  v. 
Lines,  72  Conn.  118  (1899);  Main  v.  Mills, 
6  Biss.  98,  and  note  (1874);  s.  C,  16  Fed. 
Cas.  506,  where  a  dividend  paid  to  the 
president,  but  not  legitimately  earned, 
was  recovered  from  the  president  of  a 
bank  by  the  assignee  in  bankruptcy; 
Re  County  Marine  Ins.  Co.,  L,  R  6  Ch. 
App.  104  (1870).  which  was  the  case  of  a 
marine  insurance  company,  where  the 
directprs  declared  a  bonus  on  the  shares 
of  stock  without  making  out  a  profit 
and  loss  account,  and  it  was  held  that  a 
director  who  had  received  such  bonus 
on  a  balance  sheet  thus  carelessly 
drawn  up  should,  in  consequence  of  his 
neglect  of  duty,  repay  the  amount  to 
the  liquidator.  It  was  the  gross  neglect 
of  the  directors  which  militated  so 
strongly  against  them,  and  both  the 
lord  justices  declared  the  court  would 
not  have  so  held  had  there  been  bona 
fides  and  regularity  in  the  declaration 
of  the  bonus.  Re  Denham,  L.  R.  25  Ch. 
D.  752  (1883).  Here  it  was  held  that  an 
innocent  director  was  not  personally 
responsible  for  the  fraudulent  reports 
and  balance  sheets  and  the  dividends 
paid  under  them,  and  that  —  having 
regard  to  the  extraordinary  powers 
vested  by  the  articles  in  the  chairman, 
and  to  the  fact  that  the  books  had  been 
kept  and  audited  by  duly  authorized 
officers,  and  that  the  director  sought  to 
be  charged  had  no  reason  to  suspect 
any  misconduct  —  he  was  not  liable  to 
repay  any  of  the  dividends  so  received 
by  him.  although  they  were  in  fact  paid 
out  of  the  capital.  Where  the  directors 
pay  a   dividend    to    themselves    only, 


without  there  being  any  profits,  they 
must  refund  the  same.  Latimer  v. 
Equitable,  etc.  Assoc,  78  Mo.  App.  463 
(1898). 

2  Excelsior  Petroleum  Co.  v.  Lacey,  63 
N.  Y.  422  (1875).  Directors  are  not  liable 
to  corporate  creditors,  either  at  common 
law  or  under  a  statute,  for  paying  divi- 
dends when  they  supposed,  and  the 
books  showed,  that  the  company  was 
prosperous  and  had  profits  for  distribu- 
tion, but  it  subsequently  turned  out 
that  the  president  had  embezzled  the 
funds  and  substituted  fictitious  notes  of 
customers  and  had  falsified  the  books 
in  omitting  debts  for  material,  there 
being  no  proof  that  the  directors,  even 
in  the  exercise  of  ordinary  diligence, 
would  have  discovered  that  the  com- 
pany was  insolvent.  Chick  v.  Fuller, 
114  Fed.  Rep.  22  (1902).  Where  losses 
incurred  by  a  banking  company  during 
the  year  are  written  off,  and  the  balance 
of  the  receipts  in  each  year  over  the 
outgoings  in  the  same  year,  after  mak- 
ing some  allowance  for  bad  debts  and 
deductions  for  sums  carried  over  to  a 
reserve  fund,  is  treated  as  the  profit  of 
that  year,  and  is  divided  as  dividends 
without  making  any  further  provision 
for  the  losses  of  previous  years,  the  di- 
rectors are  not  liable  on  the  ground 
that  the  dividends  were  paid  out  of 
capital,  although  this  method  of  pro- 
cedure would  ultimately  exhaust  the 
paid-up  capital  of  the  company.  The 
discretion  of  the  managers  in  fixing 
the  losses  to  be  charged  to  the'  capital 
and'  those  to  be  charged  to  income  is 
not  inquired  into  by  the  courts,  unless 
obviously  improper  charges  to  capital 
have  been  made,  in  order  to  increase 


1183 


§  550.] 


DIVIDENDS. 


[CH.  XXXII. 


ors  are  not  personally  liable  for  dividends  improperly  paid,  where 
they  honestly  believe  in  a  state  of  facts  which  would  justify  the 
payment  and  rely  upon  the  general  manager's  certificate  as  to  the 
assets.^ 

The  House  of  Lords  in  England  has  recently  held  that  even  though 
dividends  have  been  declared  and  paid  illegally,  by  reason  of  the 
fact  that  bad  debts  have  not  been  charged  off,  yet  a  director  who 
acted  in  good  faith  and  relied  upon  the  statements  of  the  officers 
of  the  company  in  voting  for  such  dividends  is  not  liable  to  repay 
the  same  for  the  benefit  of  the  stockholders.-     But  where  the  di- 


apparent  profits.  The  directors  are  not 
personally  liable  unless  they  were  cul- 
pably or  grossly  negligent  in  the  matter. 
Even  though  a  director  knew  his  name 
was  signed  to  a  report  to  the  stock- 
holders after  he  has  resigned,  yet  he  is 
not  liable,  where  he  took  no  part  in 
drawing  the  report  or  in  recommending 
the  dividend  based  thereon.  It  seems 
that  an  improper  dividend  may  be  re- 
covered from  the  directors,  even  though 
the  creditors  have  all  been  paid  and  the 
stockholders  will  have  the  benefit  of 
the  recovery,  they  having  been  ignorant 
of  the  fact  that  the  dividends  were  paid 
from  capital  stock.  Re  National  Bank 
of  Wales,  [1899]  2  Ch.  639,  rev'g  79  L.  T. 
Rep.  667.  In  i^e  Mercantile  Trading  Co., 
L.  R.  4  Ch.  App.  475  (1869),  it  was  held, 
in  accordance  with  this  view,  that 
where  the  action  of  a  board  of  directors 
in  making  a  dividend  was  bo7ia  fide, 
they  are  not  liable  for  errors  of  judg- 
ment in  preparing  a  balance  sheet  show- 
ing the  assets  of  the  concern.  In  this 
case  it  appears  that  the  directors  in- 
cluded among  the  corporate  assets  a 
debt  due  the  company  by  the  govern- 
ment of  the  Confederate  States;  some 
cotton  owned  by  the  company  but 
stored  within  the  limits  of  the  Con- 
federacy; and  certain  merchant  ships 
engaged  in  running  the  blockade,  all 
which  were  estimated  at  their  full  value. 
These  assets  being  subsequently  de- 
stroyed and  lost  to  the  company,  its 
bankruptcy  followed.  Osgood  v.  Laytin, 
3  Keyes  (N.  Y.),  521  (1867),  was  an  ac- 
tion  by  a  receiver  to  recover  dividends 


improperly  declared.  The  court  said: 
"Ignorance  of  facts  that  it  was  the 
duty  of  the  managers  to  know  —  not  to 
know  which  was  gross  ignorance  —  can- 
not excuse  the  managers  and  impart 
any  virtue  or  validity  to  acts  otherwise 
clearly  illegal,  and  which  were  a  pal- 
pable fraud  upon  the  creditors."  But 
the  directors  of  a  bank  are  not  liable 
for  dividends  declared  in  good  faith, 
even  though  it  subsequently  turns  out 
that  debts  to  the  bank  which  they  con- 
sidered good  were  found  to  be  bad. 
Witters  v.  Sowles,  31  Fed.  Rep.  1  (1887). 
However,  the  court  in  Re  Oxford  Build- 
ing, etc.  Soc,  55  L.  T.  Rep.  598  (1886), 
say  it  is  settled  that  "directors  who 
improperly  pay  dividends  out  of  capital 
are  liable  to  repay  such  dividends  per- 
sonally upon  the  company  being  wound 
up;  "that  the  company,  or  a  creditor, 
or  a  liquidator  may  enforce  it;  that  the 
acquiescence  of  the  stockholders  does 
not  affect  creditors;  that  the  statute  of 
liquidations  does  not  apply;  and  that 
the  innocent  intent  of  the  directors  is 
no  defense.  The  directors  are  Jiot  per- 
sonally liable  for  dividends  declared, 
even  though,  in  estimating  the  assets, 
claims  are  included  which  ultimately 
prove  to  be  bad,  the  result  thereby 
bemg  that  the  dividend  was  paid  out  of 
the  capital.  Re  London  &  Gen.  Bank, 
72  L.  T.  Rep.  227  (1894);  aflf'd,  [1895]  2 
Ch.  166,  673. 

1  Re  Kingston  Cotton  Mill  Co.,  [1896] 
1  Ch.  331. 

2  Dovey,  etc.  v.  Cory  (H.  of  L.),  [1901], 
A.  C.  477. 


1184 


CH.  XXXII.] 


DIVIDENDS. 


[§  550. 


rectors  negligently  or  wilfully  and  knowingly  declare  and  pay  a 
dividend  out  of  the  capital  stock,  they  are  personally  liable  to  re- 
fund that  dividend.^  Where  the  directors  of  a  national  bank  place 
a  fictitious  value  on  the  assets  of  the  bank  in  order  to  declare  a 
stock  dividend,  such  directors  are  liable  for  the  par  value  of  the 


1  In  order  to  ascertain  profits  the  di- 
rectors should  have  a  careful  valuation. 
If  they  employ  persons  whom  they  rea- 
sonably believe  to  be  competent  and 
adopt  their  conclusions,  they  are  not 
liable  for  mistakes.  Where,  however, 
the  directors  take  no  active,  intelligent, 
guiding  part  in  the  affairs  of  the  com- 
pany, and  really  do  nothing  except  as 
suggested  by  the  secretary,  and  do  not. 
examine  the  accounts  at  all,  and  cause 
the  stockholders  to  declare  dividends 
on  a  statement  which  omits  large  lia- 
bilities, so  that  dividends  are  really 
paid  out  of  the  capital  stock,  such  di- 
rectors are  personally  liable  to  corpo- 
rate creditors  for  such  dividends.  The 
secretary  also  is  liable,  he  being  the 
active  manager  of  the  company.  The 
six-years  statute  of  limitations,  how- 
ever, applies,  and  only  those  dividends 
which  have  been  declared  within  six 
years  must  be  repaid.  Interest,  how- 
ever, will  be  allowed.  Municipal,  etc. 
Land  Co.  v.  Pollington,  63  L.  T.  Rep. 
238  (1890).  See  also  Re  National  Funds, 
etc.  Co.,  L.  R.  10  Ch.  D.  118  (1878);  Gratz 
V.  Redd,  4  B.  Mon.  (Ky.)  178,  194  (1843); 
Hill  V.  Frazier,  2a  Pa.  St.  320  (1853);  Re 
Alexandra  Palace  Co.,  L.  R  21  Ch.  D. 
149  (1882);  Salisbury  v.  Metropolitan 
Ry.,  32  L.  T.  Rep.  839  (1870),  where  the 
suit  was  by  a  non-participating  stock- 
holder; Flitcroft's  Case,  L.  R.  21  Ch.  D, 
519  (1882):  Evans  v.  Coventry,  8  De  G.. 
M.  &  G.  835  (1857);  Turquand  v.  Mar- 
shall, L.  R.  4  Ch.  App.  376  (1869),  deny- 
ing this  remedy  to  the  stockholders  as 
a  body.  In  Burnes  v.  Pennell,  2  H.  L. 
Cas.  497.  531  (1849),  Lord  Brougham 
said:  "I  beg  to  be  understood  as  going 
with  those  who  view  with  the  greatest 
severity  the  conduct  of  railway  direct- 
ors in  declaring  dividends  which  can 
only  be  paid  out  of  capital,  because  I 


consider  that  that  is  of  itself  a  most 
vicious  and  fraudulent  course  of  con- 
duct. It  is  telling  the  world  that  their 
profits  are  large  when  it  may  be  that 
their  profits  are  nil,  or  that  their  losses 
are  large  with  no  profits.  It  is  a  false 
and  fraudulent  representation  by  act 
and  deed,  much  to  be  reprobated;  and 
I  go  the  full  length  of  what  my  noble 
and  learned  friend  has  laid  down,  that 
it  would  be  a  just  ground,  if  a  course  • 
of  conduct  of  this  sort  were  pursued, 
coupled  with  such  circumstances  as 
clearly  to  show  a  fraudulent  intent,  for 
proceedings  of  a  graver  nature  against 
these  parties."  The  payment  of  a  divi- 
dend out  of  the  capital  stock  is  tiUra 
vires.  Accordingly,  where  the  directors 
mislead  the  stockholders  by  represent- 
ing in  the  reports  and  balance  sheets, 
as  good,  debts  which  they  know  to  be 
bad,  and  thus  knowingly  pay  dividends 
which  in  fact  impair  the  capital  stock, 
it  is  not  a  defense  that  the  stockhold- 
ers, relying  in  good  faith  upon  the  rep- 
resentations and  reports  of  the  di- 
rectors, pass  resolutions  declaring  the 
dividends  at  regular  meetings  of  the 
corporation;  and  an  action  will  lie  on 
behalf  of  creditors  to  compel  the  di- 
rectors to  refund.  In  such  an  action 
the  directors  cannot  set  off  any  money 
due  from  the  company  to  them,  nor 
have  they  recourse  to  the  stockholders 
who  took  the  dividends  foona^de.  Flit-  - 
croft's  Case,  L.  R.  21  Ch.  D.  519  (1882); 
Re  County  Marine  Ins.  Co.,  L.  R.  6  Ch. 
104  (1870).  See  also  Scott  v.  Eagle  Fire 
Co.,  7  Paige,  198  (1838).  In  Kentucky 
it  is  doubted  whether  directors  are  lia- 
ble to  creditors,  the  courts  of  that  state 
seeming  to  incline  to  hold  them  liable 
only  to  the  corporation  or  the  stock- 
holders. Lexington,  etc.  R.  R  u 
Bridges,  7  B.  Mon.  (Ky.)  556,  559  (1847). 


(75) 


1185 


§  550.]  DIVIDENDS.  [CH.  XXXII, 

stock  to  the  receiver  of  the  bank  for  the  benefit  of  its  creditors, 
unless  the  directors  show  that  the  stock  could  not  have  been  other- 
wise issued  or  sold.^  "Where  the  directors  make  even  grave  errors 
in  the  exercise  of  judgment  they  are  not  liable;  but  where  they 
surrender  their  judgment  to  others,  either  the  manager  or  auditors, 
they  are  liable  for  dividends  illegally  paid,  especially  where  they  in- 
clude, as  good,  loans  which  they  had  not  looked  into,  and  where  they 
do  not  take  into  consideration  overdrafts.  They  will  be  held  liable 
from  the  date  when  a  prudent  man  would  not  have  included  in  the 
profits  unpaid  interest.  Each  director  is  liable  only  for  dividends 
declared  or  recommended  at  meetings  when  he  was  present.-  Fre- 
quently, when  a  dividend  is  paid  out  of  the  capital  stock,  the  di- 
rectors are  made  liable  therefor  by  statute  without  reference. to  any 
fraud  or  fraudulent  intent  on  their  part.''  A  court  of  equity  has 
.  power  to  entertain  a  suit  to  enforce  the  statutory  liability  of  di- 
rectors for  paying  dividends  in  violation  of  such  statute,  where 
there  is  no  other  remedy  in  any  other  court,  even  though  the 
money  is  not  needed  to  pay  the  company's  debts.  A  stockholder 
may  maintain  such  a  suit  in  behalf  of  himself  and  other  stockholders, 
forthebenefit  of  the  corporation,  under  such  circumstances, especially 
where  he  was  induced  to  purchase  his  stock  by  reason  of  such  divi- 
dends. Investors  as  well  as  stockholders  have  a  right  to  rely  on  divi- 
dends as  having  been  earned.^  Under  the  New  Jersey  statutes,  if  the 
directors  upon  the  dissolution  of  a  corporation  distribute  the  assets 
among  the  stockholders  without  paying  the  debts,  they  are  personally 

1  Cockrill  V.  Abeles,  86  Fed.  Rep.  505  ing  dividends  from  the  capital  stock, 

(1898).  they  are  liable  to  the  extent  to  which 

^  Re  London  &  Gen.   Bank,  72  L.  T.  the  capital  stock  is  reduced  by  the  div- 

Rep.  227  (1894);  aff'd,  [1895]  2  Ch.  166,  idend,  and  in  the  case  of  bank  directors 

673.     See  Stroud  v.  Lawson,  [1898]  2  Q.  they  may  show  that  notes  which  it  is 

B.  44  claimed  they  should  have  charged  off 

3  In  Massachusetts,  officers  of  a  cor-  were  actually  paid  later.  Dykman  v, 
poration  can  be  charged,  under  the  Keeney,  10  N,  Y.  App.  Div.  610  (1896). 
statute  in  force  upon  the  subject  in  Under  the  New  York  statute  the  di- 
•  that  state  (Stat.  1862,  ch.  218,  §  3;  Stat,  rectors  are  liable  to  repay  only  such 
1870,  ch.  224,  §§  40,  42),  with  corporate  part  of  an  illegal  dividend  as  will  re- 
debts  after  a  judgment  against  the  cor-  coup  the  corporation  or  its  creditors 
poration  and  after  a  demand  and  re-  for  the  actual  loss  sustained  thereby, 
turn  upon  the  execution.  Chamber] in  Dykman  v.  Keeney,  16  N.  Y.  App.  Div. 
V.  Huguenot  Mfg.  Co.,  118  Mass.  532,  131  (1897);  aff'd,  160  N.  Y.  677.  Divid- 
536(1875);  Priest  v.  Essex,  etc.  Co.,  115  ing  the  property  is  equivalent  to  a 
Mass.  380  (1874).  In  that  state  the  lia-  declaration  of  a  dividend  so  far  as  the 
bility  of  the  directors  has  been  held  directors  are  concerned.  Rorke  v. 
to  be  enforceable  by  corporate  credit-  Thomas,  56  N.  Y.  559  (1874). 
ors  only.  Smith  v.  Hurd,  53  Mass.  371  ^Appletonu  American  Malting  Co.,  54 
(1847).  Under  the  New  York  stat-  Atl.  Rep.  454  (N.  J.  1903).  Cf.  Siegman 
ute  maiiing  directors  liable  for  declar-  v.  Maloney,  51  Atl.  Rep.  1003. 

1186 


■OH.  XXXII.] 


DIVIDENDS. 


[§  550. 


liable  for  such  debts.'  In  England,  the  auditors  of  a  company  are 
officials,  and  are  liable  for  dividends  improperly  paid,  based  on 
balance  sheets  improperly  made  up  by  the  auditors,  especially 
where  the  auditors  included  as  regular  investments  loans  for  which 
there  was  no  proper  security.-  The  manager  of  a  corporation  who 
makes  up  the  accounts  may  also  be  liable  for  dividends  illegally  de- 
clared.^ After  dissolution  has  been  decreed  it  is  too  late  for  a  cor- 
porate creditor  to  bring  an  action  to  hold  the  directors  liable  for 
declaring  dividends  out  of  the  capital  stock,  no  fraud  in  obtaining 
the  dissolution  being  alleged."* 

Under  certain  circumstances,  in  the  absence  of  actual  fraud,  the 
directors  who  have  been  compelled  to  pay  the  claims  of  corporate 
-creditors  may  in  turn  recover  what  they  have  paid  in  an  action 
against  the  stockholders.*  And  claims  against  directors  who  are 
made  liable  by  statute  in  these  cases  may,  in  the  absence  of  actual 
fraud  on  their  part,  be  barred  by  laches  or  the  statute  of  limita- 
tions.^ A  statutory  liability  in  reference  to  illegal  dividends  may 
not  survive  the  death  of  a  director  who  is  liable.^ 


1  Keen  v.  Maple,  etc.  Co.,  50  Atl. 
Rep.  467  (N.  J.  1901);  N.  J.  Rev.  (1877), 
p.  178;  Williams  v.  Boice,  38  N.  J.  Eq.  364 
U884).  The  New  Jersey  statute  impos- 
ing a  liability  on  directors  for  illegally 
declared  dividends  was  applied  in  Whit- 
taker  V.  Amwell  Nat.  Bank,  52  N.  J.  Eq. 
400  (1894). 

2JBe  London  &  Gen.  Bank,  72  L.  T. 
Rep.  227  (1894);  aflf'd,  [1895]  2  Ch.  166, 


673.  Auditors  are  not  officers  in  the 
true  sense  of  the  word.  Re  Western, 
etc.  Co.,  [1897]  1  Ch.  617,  rev'g  75  L.  T. 
Rep.  648. 

3  Re  London  &  Gen.  Bank,  72  L.  T. 
Rep.  227  (1894);  aff'd,  [1895]  2  Ch.  166, 
673. 

4  Coxonu  Gorst,  [1891]  2  Ch.  73. 

5  Salisbury  v.  Metropolitan  Ry.,  22  L. 
T.  Rep.  839  (1870);  Re  Alexandra  Palace 


*>  Re  Mammoth  Copperopolis,  50  L.  J. 
^Ch.)  11  (1880).  The  acquiescence  of 
stockholders  does  not  bind  creditors, 
and  the  statute  of  limitations  does  not 
apply.  Re  Oxford,  etc.  Soc,  55  L.  T. 
Rep.  598  (1886).  That  the  statute  of 
limitations  does  not  apply,  see  also 
Flitcroft's  Case,  L.  R.  21  Ch.  D.  519 
(1882).  The  statute  of  limitations  does 
not  commence  to  run  against  an  officer 
of  the  corporation  who  has  paid  div- 
idends to  himself  out  of  the  capital 
stock  until  the  fraud  is  discovered. 
Main  v.  Mills,  6  Biss.  98  (1874);  s.  C,  16 
Fed.  Cas.  506.  Where  the  directors 
paid  out  dividends  from  the  organiza- 
tion of  the  company  in  18G8  until  1878, 
and  were  then  stopped  at  the  instance 
of  the  board  of  trade,  and  the  company 


was  wound  up  in  1886,  and  in  1889  the 
receiver  brought  suit  to  hold  the  di- 
rectors liable,  it  was  held  that  there 
was  no  such  delay  as  to  bar  the  remedy, 
since  the  defendants  had  not  been  prej- 
udiced by  the  delay.  Masonic,  etc. 
Ass.  Co.  V.  Sharpe,  [1892]  1  Ch.  154. 

■^  Boston,  etc.  R.  R  v.  Graves,  80  Fed. 
Rep.  588  (1897).  A  statutory  liability 
of  directors  for  illegal  payment  of  div- 
idends is  penal  and  does  not  survive  the 
death  of  a  director  and  is  not  assign- 
able. Killen  v.  State  Bank,  106  Wis. 
546  (1900.  The  statutory  liability  of 
directors  in  an  Oregon  corporation  for 
declaring  dividends  out  of  the  capital 
stock  is  a  penal  liability.  Patterson  v. 
Wade,  115  Fed.  Rep.  770  (1903). 


1187 


§  551.]  DIVIDENDS.  [CH.  XXXII. 

An  action  on  the  case  is  not  the  proper  remedy  of  the  creditor  of 
an  insolvent  corporation  to  hold  a  director  liable  for  dividends  paid 
out  of  the  capital  stock.  The  remedy  is  in  equity.^  A  suit  to  hold 
the  directors  liable  for  declaring  a  dividend  out  of  the  capital  stock 
and  thereby  inducing  the  plaintiff  to  purchase  the  stock  cannot  at 
the  same  time  seek  to  hold  the  directors  liable  to  the  corporation 
for  the  dividend  so  declared.'^ 

§  551.  Guaranty  of  dividends  hj  contract— A  guaranty  of  divi- 
dends is  often  made  by  the  corporation  itself  that  issues  the  stock. 
The  stock  is  then  called  guaranteed  or  preferred  stock.  This  class 
of  stock  is  fully  considered  elsewhere.' 

A  guaranty  of  dividends  frequently  is  made  by  a  third  person. 
Such  a  guaranty  is  often  made  when  one  person  sells  stock  to  an- 
other and  guarantees  that  the  corporation  will  pay  certain  divi- 
dends thereon.  It  often  arises,  also,  where  one  company  buys  out 
another  or  leases  the  property  of  another  corporation  and  guaran- 
tees dividends  on  the  stock  or  the  interest  on  the  bonds  of  the  lat- 
ter. This  subject,  also,  is  considered  elsewhere.''  A  foreclosure 
brought  about  for  the  purpose  of  cutting  off  a  guaranty  of  the 
bonds  of  another  corporation  is  illegal,  the  real  purpose  being  to 
allow  other  creditors  of  the  corporation  and  the  stockholders  to 
obtain  tiie  property  free  from  such  guaranty.** 

Co.,  L.  R  21  Ch.  D.  149  (1883).  Cf.  %  548,  until  the  claims  of  stockholders  are 
supra.  Where  a  part  of  the  capital  satisfied.  Kisterbock's  Appeal,  51  Pa. 
stock  is  paid  by  the  director?  to  the  St,  483  (1866).  But  a  director  from 
stockholders  with  the  knowledge  and  whom  a  recovery  is  had  under  the 
consent  of  all,  but  without  the  capital  Pennsylvania  statute  (Act  of  April  7, 
stock  being  regularly  reduced,  the  di-  1849,  §  9),  as  a  wrong-doer,  has  no  right 
rectors  may  be  required,  on  the  dissolu-  of  subrogation  as  against  the  corpora- 
tion of  the  corporation,  to  repay  such  tion.  Hill  v.  Frazier,  22  Pa.  St.  320 
sum  so  distributed,  but  the  directors  (1853).  In  this  case  it  was  held  that,  in 
are  then  entitled  to  recover  from  the  the  creditor's  suit  against  the  director, 
stockholders  the  amount  so  paid  to  the  the  corporation  itself  is  not  a  necessary 
stockholders.     Noxham  v.  Grant,  [1900]  co-defendant. 

1  Q.  B.  88,  aflf'g  [1899J  1  Q.  B.  480;  aff'd.  ^  John  A.  Roebling's,  etc.  Co.  v.  Mode, 

[1900]  1  Q.  B.  88.     A  director  who,  with  1  Pennewill,  515  (Del.  1899). 

knowledge  of  the  insolvency  of    the  2  stroud  v.  Lawson,  [1898]  2  Q.  R  44. 

company,  loans  money  to  the  corpora-  ^  gee  ch.  XVI,  supra. 

tion  for  the  purpose  of  declaring  a  div-  <  See  ch.  XLVI,  g  775,  infra. 

idend,  is  not  entitled,  upon  an  assign-  » Louisville,    etc.    Ry.    v.    Louisville 

ment  of  the  corporate  effects,  to  repay-  Trust  Co.,  174  U.  S.  674  (1899). 
ment  of  any  part  of  the  loan  so  made 

1188 


CHAPTER  XXXIIL 

LIFE  ESTATES  AND  REMAINDERS  IN  SHARES  OF  STOCK. 


^  552.  The  subject. 
558.  The    three    rules    in  regard   to 
stock    or  extraordinary   cash 
dividends. 

554.  The  American  or  Pennsylvania 

rule. 

555.  Tlie  Massachusetts  rule. 


556,  557.  The  English  rule. 

558.  The  apportionment  of  dividends. 

559.  The  right  to  subscribe  for  new 

shares  as  between  life  tenant 
and  remainderman. 

560.  Miscellaneous  questions  herein. 


§  552.  The  siihject. —  Where  shares  of  stock  are  held  by  an  estate, 
-and  the  income  of  the  estate  is  to  go  to  a  life  tenant  for  life,  and 
the  remainder  to  another  party,  the  question  of  whether  the  life 
tenant  or  the  remainderman  is  entitled  to  a  stock  dividend  or  ex- 
traordinary cash  dividend  is  a  perplexing  one.  The  stock  divi- 
dend or  extraordinary  cash  dividend  may  represent  profits  which 
were  earned  or  accumulated  before  the  life  tenancy  began.  In  that 
case  it  is  clear  that  in  justice  the  remainderman  should  receive  it. 
If,  however,  it  was  earned  after  the  life  tenancy  began,  it  is  clear 
that  the  life  tenant  should  have  it.  If  it  was  earned  partly  before 
and  partly  after  the  life  tenancy  began,  then  it  is  apparent  that  in 
justice  some  apportionment  should  be  made  if  possible. 

The  courts,  however,  differ  widely  in  laying  down  rules  on  this 
subject.     These  differences  form  the  subject  of  this  chapter. 

§  553.  The  three  rules  in  regard  to  stock  or  extraordinary  cash 
dividends. —  When  a  stock  or  extraordinary  cash  dividend  is  de- 
clared upon  shares  held  in  trust,  or  owned  in  such  a  way  that  one 
person  has  an  estate  therein  for  life  and  another  person  the  re- 
mainder over,  there  at  once  arises  a  contest  between  life  tenant 
and  remainderman.  Their  interests  necessarily  conflict,  because, 
if  such  dividend  is  held  to  be  income,  it  belongs  to  the  tenant  for 
life;  whereas  if  it  is  held  to  be  a  part  of  the  coyyus,  or  principal,  it 
inures  to  the  benefit  of  the  remainderman's  estate.  There  are 
three  well-defined  rules  upon  this  subject,  which  may  be  denomi- 
nated respectively  the  American  or  Pennsylvania,  the  Massachu- 
setts, and  the  English  rule.  They  lead  to  essentially  contrary  con- 
clusions, and  will  be  considered  in  order. 

^  554.  The  American  or  Pennsylvania  rule. —  This  rule,  inas- 
much as  it  obtains  in  nearly  every  state  in  the  Union,  may  well  be 
•called  the  American  rule.  It  proceeds  upon  the  theory  that  the 
-court,  in  disposing  of  stock  or  property  dividends,  as  between  life 

1189 


§  554.] 


LIFE    ESTATES    AND   EEMAINDERS    IN    STOCK.       [CH.  XXXIII. 


tenant  and  remainderman,  may  properly  inquire  as  to  the  time 
when  the  fund  out  of  which  the  extraordinary  dividend  is  to  be 
paid  was  earned  or  accumulated,  and  also  as  to  the  method  of  ac- 
cumulation. If  it  is  found  to  have  accrued  or  been  earned  before 
the  life  estate  arose,  it  ma}'^  be  held  to  be  principal,  and,  without 
reference  to  the  time  when  it  is  declared  or  made  payable,  to  be- 
long to  the  corpus  of  the  estate,  and  not  to  go  to  the  life  tenant. 
But  when  it  is  found  that  the  fund,  out  of  which  the  dividend  is 
paid,  accrued  or  was  earned,  not  before  but  after  the  life  estate 
arose,  then  it  may  be  held  that  the  dividend  is  income,  and  belongs 
to  the  tenant  for  life.^  The  court  will  also  take  into  consideration 
the  custom  and  regularity  of  the  corporation  in  accumulating  its 
surplus,  inasmuch  as  the  testator  may  be  presumed  to  have  ex- 
pected the  corporation  to  continue  its  accumulation  of  a  surplus  or 
to  provide  for  improvements  out  of  profits.  This  equitable  rule 
prevails  not  only  in  Pennsylvania,  where  it  seems  to  have  been 
first  clearly  declared,  but  also  in  many  other  jurisdictions.- 


lEarp's  Appeal,  28  Pa.  St.  368  (1857); 
Wiltbank's  Appeal,  64  Pa.  St.  2o6  (1870). 
See  also  the  following  later  Pennsyl- 
vania cases  in  point:  Moss's  Appeal,  83 
Pa.  St.  264  (1877);  Biddle's  Appeal,  99 
Pa,  St.  278  (1882);  Vinton's  Appeal,  99 
Pa.  St.  434  (1882);  Re  Thompson's 
Estate,  11  W.  N.  Cas.  482  (1882).  Cf. 
Roberts's  Appeal,  92  Pa,  St.  407  (1880); 
Thomson's  Appeal,  89  Pa.  St.  36  (1879). 
A  scrip  dividend  converted  into  stock 
may  belong  to  the  life  tenant.  Philadel- 
phia Trust,  etc.  Co.'s  Appeal,  16  Atl. 
Rep.  734  (Pa.  1889).  A  large  dividend 
in  cash,  owing  to  a  sale  of  part  of  the 
property  of  an  unincorporated  associa- 
tion, may  be  income,  and  go  to  the  life 
tenant.  Oliver's  Estate,  136  Pa.  St.  43 
(1890).  Money  received  by  the  corpora- 
tion from  new  stock  issued  to  obtain 
funds  to  replace  profits  which  had 
been  used  for  improvements  is  capital 
and  not  income,  and  does  not  go  to  the 
life  tenant.  Smith's  Estate,  140  Pa.  St. 
344  (1891).  Where  the  company  in 
which  the  trustee  holds  stock  gives  to 
its  stockholders  the  option  to  subscribe 
to  the  stock  of  another  company,  the 
pi'emium  at  which  the  trustee  sells 
this  option  is  principal  and  not  income. 
Thomson's  Estate,  153  Pa.  St.  332  (1893). 


2  Connecticut:  A  stock  dividend  based 
upon  the  profits  actually  invested  in 
the  business  is  not  income  or  dividends 
such  as  pass  to  the  life  tenant.  Spooner 
V.  Phillips,  62  Conn.  62  (1892).  Where 
an  estate  is  merged  into  a  corporation, 
the  life  tenant  of  the  real  estate  can- 
not claim  that  a  part  of  the  capital 
stock  represents  past  increase  of  value 
and  that  she  is  entitled  absolutely  to 
that  part  of  the  stock.  Hotchkiss  v. 
Brainerd  Quarry  Co.,  58  Conn.  120  (1889). 
Where  it  is  impossible  for  the  company 
to  pay  arrears  of  dividends  on  cumu- 
lative preferred  stock,  and  a  compro- 
mise is  made  by  which  the  dividend  is 
to  be  reduced  one-half,  and  double  the 
amount  of  stock  is  to  be  given  to  each 
stockholder,  this  new  stock  goes  to  the 
remainderman.  Mills  v.  Britton,  64 
Conn.  4  (1894).  A  large  surplus  gradu- 
ally accumulated  by  a  coal  company  is 
a  part  of  the  "floating  capital"  and 
upon  distribution  does  not  go  to  the 
life  tenant.  Society,  etc.  v.  Colegrove, 
49  Atl.  Rep.  902  (Conn.  1901),  being  a 
case  involving  the  distribution  of  a 
large  surplus  by  the  Pennsylvania  Coal 
Company,  upon  the  sale  of  its  assets. 

Kentucky:  As  between  a  life  benefi- 
ciary in  corporate    stock  and  the  re- 


1190 


CH.  XXXIII.]       LIFE   ESTATES    AND    REMAINDERS    IN    STOCK. 


[§  554. 


"Where  a  cestui  que  trust  is  to  receive  the  income  until  he  reaches 
a  certain  age  and  then  is  to  receive  the  principal,  he  is  considered 
a  life  tenant  until  he  arrives  at  that  age.  The  life  tenant  takes  the 
entire   interest  on   bonds,   although  the  premium  on  the   bonds 


mainderman,  a  stock  dividend  will  be- 
treated  as  income  if  it  in  fact  repre- 
sents a  profit.  Hite  v.  Hite,  93  Ky.  257 
(1893);  s,  a  below,  2  Ry.  &  Corp.  L.  J. 
568. 

Maine:  For  the  rule  in  Maine,  see 
Richardson  v.  Richardson,  75  Me.  570 
(1884).  A  dividend  consisting  of  stock 
purchased  by  an  issue  of  bonds  by  the 
company  belongs,  not  to  the  life  estate, 
but  to  the  body  of  the  estate.  Gilkey  v. 
Paine,  80  Me.  319  (1888). 

Maryland:  Dividends  coming  from  a 
fund  accumulated  during  the  testator's 
life  to  pay  a  mortgage,  but  which  are 
not  used  for  tliat  purpose,  belong  to  the 
life  tenant  and  not  to  the  remainder- 
man. Quinn  v.  Safe-Deposit,  eta  Co.,  93 
Md.  285  (1901).  See  Thomas  v.  Gregg, 
78  Md.  545  (1894). 

New  Hampshire:  Lord  v.  Brooks,  52 
N.  H.  73  (1872);  Wheeler  v.  Perry,  18 
N.  H.  307  (1846);  Peirce  v.  Burroughs, 
58  X.  H.  303  (1878).  An  increase  of  stock 
upon  consolidation  and  a  stock  divi- 
dend thereon  are  pirincipal.  Law  v. 
Alley,  29  Atl.  Rep.  636  (N.  H.  1892).  A 
fifty  per  cent,  cash  dividend  is  pre- 
sumed to  be  from  the  profits  and  to 
belong  to  the  life  tenant.  Walker  v. 
Walker,  68  N.  H.  407  (1896), 

Neiv  Jersey:  Van  Doren  v.  Olden,  19 
N.  J.  Eq.  176  (1868);  Ashhurst  v.  Field, 
26  N.  J.  Eq.  1  (1875).  Where  a  few 
months  after  the  testator's  death  a 
large  cash  dividend  is  declared,  the 
C50urt  will  consider  the  profits  earned 
during  such  months  of  the  year  as  were 
prior  to  his  death,  and  also  such  part  as 
was  earned  subsequent  to  his  death, 
and  will  apportion  the  dividend  on 
such  basis.  Lang  v.  Lang's  Executor, 
57  N.  J.  Eq.  325  (1898). 

New  York:  McLouth  v.  Hunt,  154  N. 
Y.  179  (1897);  Riggs  v.  Cragg,  89  N.  Y. 
479  (1883);  Be  Kernochan,  104  N.  Y.  618 


(1887);  Riggs  v.  Cragg,  26  Hun,  89 
(1881);  Clarkson  v.  Clarkson,  18  Barb. 
646  (1855);  Simpson  v.  Moore,  30  Barb. 
637  (1859);  Woodruff's  Estate,  Tucker, 
58  (1865),  and  Goldsmith  v.  Swift,  25 
Hun,  201  (1881).  Cf.  Cragg  v.  Riggs,  5 
Redf.  82  (1880):  Scovel  v.  Roosevelt,  5 
Redf.  121  (1881).  A  stock  dividend  goes 
to  the  life  tenant  and  not  to  the  re- 
maindermen, where  the  words  in  the 
will  clearly  indicate  that  such  was  the 
intent  of  the  testator,  it  being  clear 
that  the  stock  dividend  represents  ac- 
cumulated profits  and  not  a  diminution 
of  the  capital  stock.  Lowry  v.  Farmers', 
etc.  Co.,  172  N.  Y.  137  (1902).  Profits 
upon  the  sale  of  stock  are  principal 
and  not  income  in  New  York.  Whit- 
ney V.  Phoenix,  4  Redf.  180  (1880).  In 
Hyatt  V.  Allen,  56  N.  Y.  553,  557  (1874), 
the  court  of  appeals  intimated  plainly 
its  disapproval  of  the  rule  prevailing  in 
England  upon  this  subject.  Farwell  v. 
Tweddle,  10  Abb.  N.  Cas.  94  (1881); 
Prime's  Estate,  N.  Y.  L.  J..  March  6, 
1891,  reviewing  the  authorities.  A  div- 
idend arising  from  the  sale  of  a  part  of 
the  assets  of  a  company  belongs  to  the 
remainderman.  Re  Curtis,  N.  Y.  L.  J., 
Jan.  24,  1890.  Money  received  from 
stock  upon  the  winding  up  of  the  cor- 
poration belongs  to  the  remainderman. 
Be  Skillman's  Estate,  9  N.  Y.  Supp. 
469  (1890).  Where  the  capital  is  re- 
duced and  returned  to  the  stock- 
holders with  a  surplus,  the  surplus 
goes  to  the  life  tenant.  Be  Warren's  Es- 
tate, 11  N.  Y.  Supp.  787  (1890).  Though 
the  dividends  are  necessarily  from  the 
capital  stock,  as  in  mining  or  other 
similar  corporations,  the  life  tenant  is 
entitled  to  them.  Be  James,  78  Hun, 
121  (1894);  aff'd,  146  N.  Y.  78  (1895). 
Where  a  manufacturing  corporation 
had  a  capital  stock  of  §300,000,  and  in 
course  of  time  it  sold  its  plant  and  p  art 


1191 


§  554.] 


LIFE    ESTATES    AND    REMAINDERS    IN   STOCK.       [CH.  XXXIII. 


gradually  disappears  as  they  come  nearer  to  being  due.  A  stock 
dividend  representing  accumulated  profits  goes  to  the  life  tenant, 
the  court  stating  that  the  question  is  always  to  be  decided  according 
to  the  actual  facts  of  the  transaction.  The  New  York  court  of  ap- 
peals says:  "For  all  corporate  purposes  the  corporation  may  doubt- 
less convert  earnings  into  capital,  when  such  power  is  conferred  by 
its  charter;  but  when  a  question  arises  between  life  tenants  and  re- 
maindermen concerning  the  ownership  of  the  earnings  thus  con- 
verted, the  action  of  the  corporation  will  not  conclude  the  courts."' 


of  its  working  capital  for  $2,750,000  of    it.  Tiiis  requires  what  is  usually  termed 


the  capital  stock  of  a  new  corpora- 
tion, and  retained  certain  cash,  bonds, 
stocks  and  surplus  lands  which  it  pro- 
ceeded to  distribute  among  its  stock- 
holders, the  court  held  that  the  plant 
and  working  capital  were  practically 
capital  stock,  but  that  the  cash,  bonds, 
stocks,  and  surplus  lands  were  income 
that  went  to  the  life  tenant.  Matter 
of  Rogers,  161  N.  Y.  108  (1899).  The 
words  "capital"  and  "i^rofits,"  as  used 
in  connection  with  life  estates  and  re- 
mainders in  stocks,  have  a  different 
meaning  from  what  they  have  in  de- 
termining the  right  of  a  corporation  to 
declare  dividends.  In  passing  upon 
the  relative  interests  of  a  remainder- 
man and  life  tenant  in  shares  of  stock 
and  the  dividends  therefrom,  the  courts 
will  sometimes  include  in  capital  stock, 
extensions,  improvements,  plant,  and 
working  capital  which  have  been  ob- 
tained from  past  profits  and  not  from 
subscriptions  to  the  capital  stock.  Mat- 
ter of  Rogers,  161  N.  Y.  108  (1899),  the 
court  saying:  "  What,  then,  is  capital 
and  what  is  profits?  Inamanufactui*- 
ing  business  a  plant  is  of  first  impor- 
tance, and  as  the  business  increases  an 
enlargement  thereof,  with  the  neces- 
sary tools,  fixtures,  and  machinery,  is 
one  of  the  things  to  which  the  earn- 
ings of  the  company  may  properly  be 
devoted.  This  must  be  deemed  to  be 
fairly  within  the  contemplation  of  the 
testator  in  creating  the  trusts  with  the 
capital  stock  of  this  company.  After 
the  plant  there  arises  a  necessity  for 
raw  material  and  labor  to  manufacture 


a  working  capital,  and  it,  of  necessity, 
varies  in  amount,  depending  upon  the 
magnitude  of  the  business.  It  must, 
therefore,  also  have  been  within  the 
contemplation  of  the  testator  that  a 
reasonable  amount  would  be  retained 
by  the  directors  for  this  purpose."  In 
the  case  of  Chester  v.  Buffalo,  etc.  Co., 
70  N.  Y.  App.  Div.  443  (1902),  where 
a  surplus  had  been  accumulated,  partly 
before  the  testator's  death  and  partly 
after  it,  and  a  stock  dividend  was  then 
declared,  the  court  refused  to  give  to 
the  life  tenant  such  part  of  the  stock 
dividend  as  would  correspond  to  the 
surplus  accumulated  after  the  testa- 
tor's death,  inasmuch  as  the  same  reg- 
ular dividends  had  been  paid  after  the 
testator's  death  as  before,  and  the 
testator  evidently  expected  that  simi- 
lar dividends  should  go  to  the  life  ten- 
ant. 

South  Carolina:  Profits  and  income 
existing  when  the  trust  is  created  are 
corpus,  but  subsequent  profits  and  in- 
come are  income.  Cobb  v.  Fant,  36  S. 
C.  1  (1892). 

Tennessee:  Stock  dividends  declared 
from  net  earnings  made  after  the  death 
of  testator,  who  bequeathed  the  stock 
on  which  the  dividends  were  declared, 
for  life,  belong  to  the  life  tenant  as  in- 
come, not  to  the  remaindermen  as  part 
of  the  corpus.  Pritchitt  v.  Nashville 
Trust  Co.,  96  Tenn.  472  (1896).  For  arti- 
cles on  "Right  to  dividends  as  between 
life  tenant  and  remainderman."  see  26 
Am.  L.  Rev.   1,   and  24  Am.  Rep.  109. 

1  McLouth  V.  Hunt,  154  N.  Y.  179  (1897). 


1192 


<!H.  XXXIII.]        LIFE    ESTATES    AND    REMAINDERS    IN    STOCK. 


[§  555. 


In  New  Jersey  the  reasonable  and  logical  rule  is  laid  down  that 
-a  cash  dividend  from  earnings  is  apportioned  between  the  corjms 
of  the  estate  and  the  life  tenant,  in  the  proportion  of  the  lapse  of 
time  since  the  last  dividend,  unless  proof  is  given  that  such  divi- 
dend was  earned  not  day  by  day  but  at  irregular  times.  The  trus- 
tee is  justified  in  distributing  the  dividend  on  this  basis  unless 
notice  by  an  interested  party  is  given  him  not  to  do  so.^ 

§555.  The  Massachusetts  rule.— This  rule,  which  prevails  in 
Massachusetts,  Georgia,  and  Ehode  Island,  is  sometimes  called  "  the 
rule  in  Minot's  Case."  It  regards  cash  dividends,  whether  large  or 
•small,  as  income,  and  stock  dividends,  w-henever  earned  and  how- 
ever  declared,  as  capital,  and  the  rule,  accordingly,  is  a  simple  one. 
Cash  dividends  belong  to  the  tenant  for  life  and  stock  dividends 
to  the  corjyus?  There  is  little  doubt,  however,  that  this  rule  works 
great  hardship  and  injustice  in  many  cases.  Hence  the  rule  is  not 
rigidly  adhered  to,  but  the  court,  in  deciding  whether  the  distri- 
bution is  a  stock  or  a  cash  dividend,  may  consider  the  actual  and 
substantial  character  of  the  transaction,  and  not  its  nominal  char- 
acter merely.^ 


1  Lang  V.  Lang's  Ex'r,    57  N.  J.  Eq. 
-325  (1898),  rev'g  56  N.  J.  Eq.  603  (1898). 
The  court  held  that  there  was  no  dif- 
ference between  ordinary  and  extraor- 
dinary  dividends  so  far  as  this  right 
of  apportionment  is  concerned.      The 
court  said:  "  We  think  that  when  a  divi- 
dend is  declared  out  of  earnings,   the 
reasonable   presumption   is  that  those 
earnings   have  been   made  uniformly, 
day  by  day,  since  the  last  similar  divi- 
dend was  declared,  leaving  the  parties 
in  interest  at  liberty  to  show  that  the 
earnings  were  really  made  differently. 
This  will   afford  a  practical   rule   for 
■trustees  who  receive  such  a  dividend, 
and   if  they  act  on  the  presumption, 
without  notice  to  the  contrary,  either 
from  the  parties  or  by    the'  circum- 
stances,  they  will   be  protected.     So, 
also,  they  should  be  allowed  to  presume 
that  dividends  are  out  of  earnings,  un- 
less like  notice  shall  charge  them  to  the 
contrary." 

2  Minot  V.  Paine.  99  Mass.  101  (1868). 
Jn  this  case  the  principle  is  thus  stated: 
'•  A  simple  rule  is  to  regard  cash  divi- 
dends, however  large,  as  income,  and 

1 


stock  dividends,  however  made,  as  capi- 
tal." In  subsequent  cases  this  rule  has 
been  affirmed  and  elaborated.  Daland 
r.  Williams,  101  Mass.  571  (1869);  Leland- 
V.  Hayden,  102  Mass.  542  (1869);  Heard 
V.  Eldredge,  109  Mass.  258  (1872);  Rand 
V.  Hubbell,  115  Mass.  461  (1874);  Gifford 
V.  Thompson,  115  Mass.  478  (1874); 
Hemenway  v.  Hemenway,  134  Mass. 
446  (1883);  New  England  Trust  Co.  v. 
Eaton,  140  Mass.  532  (1886).  See  also 
Harvard  College  v.  Amory,  26  Mass. 
446  (1830);  Balch  v.  Hallet,  76  Mass.  402 
(1858);  Atkins  v.  Albree,  94  Mass.  359 
(1866).  Where  all  the  stock  of  a  cor- 
poration is  sold,  and  it  is  a  part  of  tlie 
sale  that  a  large  accumulated  surplus 
shall  be  distributed  among  the  old 
stockholders  by  way  of  a  dividend,  this 
dividend  belongs  to  the  life  tenant. 
Hemenway  v.  Hemenway,  63  N.  E.  Rep. 
919  (Mass.  1902);  66  N.  E.  Rep.  423. 

3  Where  a  joint-stock  association 
having  $12,000,000  surplus  invested  in 
securities  issues  its  bonds  to  the 
amount  of  $12,000,000  to  its  stockhold- 
ers as  a  dividend  in  place  of  distribut- 
ing such  securities  or  the  proceeds 
193 


§  555.J 


LIFE    ESTATES    AND    REMAINDERS    IN    STOCK.       [CH.  XXXIII- 


The  supreme  court  of  the  United  States  has  held  that  a  life  ten- 
ant of  stock  does  not  take  a  stock  dividend  declared  during  the 
life  tenancy.* 


thereof,  the  interest  on  the  bonds  to 
be  paid  only  from  the  income  fi-om  the 
securities  after  paying  the  debts,  such 
bonds  do  not  belong  to  a  life  tenant, 
but     belong     to     the     remaindermen. 
D'Ooge  V.  Leeds,  176  Mass.  558  (1900), 
the   court  saying:  "In  considering  the 
distribution  to  determine  its  character, 
substance,  and  not  form,  is  regarded. 
The  simple  question  in  every  case  is 
whether  the  distribution  made  by  the 
corporation  is  of  money  to  be  spent  as 
income,  or  capital  to  be  held  as  an  in- 
vestment in    the  corporation.     While 
this  arbitrary  rule  may  sometimes  de- 
feat the  intention  of  the    testator,  in 
most  cases  it  accomplishes  the  result 
intended,  and  there  were  practical  con- 
siderations, as  well  as  principles,  which 
required   the    adoption    of   it."    Also, 
"  Our  court  does  not  inquire   further 
than  to  ascertain  whether  the  distribu- 
tion is  of  money  to  be  used  as  income, 
or  as  of  capital,  to  be  continued  in  the 
business."  The  court  said  also  that  this 
was  substantially  the  rule  in  Eiigland, 
and  the  rule  laid  down  by  the  supreme 
court  of  the  United  States.     In  Daland 
V.  Williams,  101  Mass.  571  (1869),  where 
the  directors,  having  voted  to  increase 
the    capital  stock  by   three  thousand 
shares,    declared    a    cash  dividend  of 
forty  per    cent.,    and    authorized   the 
treasurer  to  receive  that  dividend  in 
payment  for  two  thousand  eight  hun- 
dred of  the  shares,  the  remaining  two 
hundred  shares  to  be  sold,  the  court  held 
that  the  transaction  was  virtually  a 
stock  dividend,  and  that  the  shares  must 
go  to  the  remainderman's  fund.     Cf. 
Eand  v.  Hubbell,  115  Mass.  461  (1874).   In 
Leland  v.  Hayden,  103  Mass.  543  (1869), 
where  it  appeared  that  the  company 
had  invested  its  surplus  earnings  in  its 
own  stock,  and  subsequently  declared 
a  dividend  of  that  stock,  the  life  ten- 


ant was  held  absolutely  entitled  to  it. 
The  life  tenant  takes  the  dividend 
where  it  is  in  cash,  although  the  cash 
is  derived  from  increased  stock  which- 
is  offered  to  the  old  stockliolders  for 
subscription,  the  profits  having  been 
used  for  improvements.  This  is  not  a 
stock  dividend.  Davis  v.  Jackson,  152 
Mass.  58  (1890).  See  also  Balch  v.  Hal- 
let,  76  Mass.  402  (1858);  Reed  v.  Head,  88 
Mass.  174  (1863);  Harvard  College  v. 
Amory,  26  Mass.  446  (1830);  Gififord  v. 
Thompson,  115  Mass.  478  (1874);  Hem- 
enway  v.  Hemenway,  134  Mass.  446 
(1883).  In  New  England  Trust  Co.  v. 
Eaton,  140  Mass.  533  (1886),  it  was  held, 
in  an  elaborate  opinion  by  Devens,  J., 
that  the  gain  or  loss  arising  from  the 
sale  of  stock  held  in  trust  is  the  gain 
or  loss  of  the  corpus,  and  that  the  sum 
received  constitutes  a  new  principal. 
Accordingly,  a  trustee  who  has  in- 
vested in  bonds  at  a  premium  may  re- 
tain annually  from  the  income  payable 
to  the  life  tenant  such  sums  as  will  re- 
store to  the  fund  at  its  maturity  what 
was  taken  therefrom  at  the  time  of  the 
investment.  See  also  the  dissenting 
opinion  of  Mr.  Justice  Holmes  in  this 
case;  and  cf.  Bowker  v.  Pierce,  130 
Mass.  263  (1881);  Dodd  v.  Winship,  133 
Mass.  359  (1883);  Wright  v.  White,  136 
Mass.  470  (1884);  Parsons  v.  Winslow, 
16  Mass.  361  (1820);  Lovpll  v.  Minot,  37 
Mass.  116  (1838).  The  court  will  takt* 
into  consideration,  in  determining  thb 
question  as  between  life  tenant  an^ 
remainderman,  the  whole  character  ol 
the  transaction,  and  the  nature  and 
source  of  the  property  distributed,  with 
due  regard  to  all  the  facts  preceding, 
attending,  and  resulting  from  the  dec- 
laration of  the  dividend.  In  Heard  v. 
Eldridge,  109  Mass.  258  (1872),  it  is  said: 
"  The  suggestion  that  the  intention  of 
the    directors    should    determine    the- 


1  Gibbons  v.  Mahon,  136  U.  S.  549  (1890). 
1194 


CH.  XXXIII.]      LIFE   ESTATES   AND   REMAINDERS   IN    STOCK.      [§§  556,  557. 


•  In  Ehode  Island  the  courts  have  adopted  a  rule  somewhat  like 
"  the  rule  in  Minot's  Case,"  without  the  modification  engrafted 
upon  it  by  the  subsequent  decisions  of  the  Massachusetts  courts. 
It  is  a  rule  which  in  general  prefers  the  remainderman  to  the  life 
tenant.^ 

§§  556,  557.  The  English  rule.— In  England  an  ordinary,  regu- 
lar, usual  cash  or  stock  or  property  dividend  belongs  to  the  life 
tenant,  while  an  extraordinary  cash  or  stock  or  property  dividend 
belongs  to  the  corj)tis  of  the  trust.^    This  rule  was  established  in 


England  in  1799. 

question  whether  the  dividend  is  cap- 
ital or  income  cannot  be  correct.  .  .  . 
It  is  more  safe  to  look  at  the  character 
of  the  property  and  the  transaction." 
See  three  interesting  and  valuable 
little  pamphlets  by  "A  Layman," 
wherein  the  merits  of  the  question  are 
fully  and  learnedly  discussed,  and  en- 
titled respectively  "Common  Sense 
versus  Judicial  Legislation;"  "Stock 
Dividends;  the  Rule  in  Minot's  Case 
Again  Restated  with  Variations  by  the 
Supreme  Judicial  Court  of  Massachu- 
setts," and  "  A  Third  Chapter  on  the 
Rule  in  Minot's  Case."  (N.  Y.:  G.  P. 
Putnam's  Sons.)  See  5  Am.  L.  Rev.  720; 
Perry,  Trusts  (3d  ed.),  §§  544,  545,  and 
notes.  In  Georgia  the  code  is  con- 
strued so  as  to  follow  the  Massachusetts 
rule.  Millen  v.  Guerrard,  67  Ga.  284 
(18S1);  Ga.  Code,  §  2256. 

1  Parker  v.  Mason,  8  R.  L  427  (1867); 
Bushee  v.  Freeborn,  11  R.  I.  149  (1875); 
Brown's  Petition,  14  R.  L  371  (1884).  A 
stock  dividend  is  capital  and  not  in- 
come. Greene  v.  Smith,  17  R.  L  28 
(1890). 

2  The  courts,  perhaps  uniformly,  in- 
sist upon  this  distinction,  ^^xtraordi- 
nary  dividends  may  be  either  of  cash  or 
stock,  and  appear  under  a  variety  of 
names,  such  as  "participations,"  "dis- 
tributions," or,  more  commonly,  "  bo- 
nuses." See  Witts  v.  Steere,  13  Ves.  Jr. 
363  (1807);  Norris  v.  Harrison,  2  MadtL 
268  (1817);  Hooper  v.  Rossiter,  McClel. 
(Exch.)  527  (1824).  To  the  point  that 
regular  dividends,  though  increased  in 
amount,  go  as  income  to  the  owner  of 


the  life  estate,  see  Barclay  r.  Waine- 
wright,  14  Ves.  Jr.  66  (1807);  Price  v. 
Anderson,  15  Sim.  473  (1847);  Bates  v. 
Mackinley,  31  Beav.  280  (1862),  a  cash 
dividend;  to  the  point  that  "extra"  or 
unusual  dividends,  whether  of  cash  or 
shares,  go  to  augment  the  principal  of 
the  trust  fund,  see  Irving  v.  Houstoun, 
4  Pat.  H.  L.  Cas.  521  (1803),  a  stock  divi- 
dend;    Hooper    v.     Rossiter.     McClel. 
(Exch.)  527  (1824),  a  stock  dividend;  Re 
Barton's  Trust,  L  R.  5  Eq.  238  (1868),  a 
stock  dividend;  Paris  v.  Paris,  10  Ves. 
Jr.  185  (1804),  a  cash  dividend;  Clayton 
V.  Gresham,  10    Ves.  Jr.  288  (1804),  a 
cash  dividend;  Witts  v.  Steere,  13  Ves. 
Jr.   363  (1807),   a   cash   dividend.      Cf. 
Gilly  V.   Burley,    22  Beav.   619   (1856); 
Straker  v.  Wilson,  L.  R.  6  Ch.  App.  50» 
(1871);  Brander  r.  Brander,  4  Ves.  Jr. 
800  (1799);  Preston  v.  Melville,  16  Sim. 
163  (1848);  Murray  r.  Glasse,  17  Jur.  S1& 
(1853);  Johnson  v.  Johnson,  15  Jur.  714 
(1850);  Plumbe  u  Neild,  6  Jur.  (N.  S.) 
529  (1860):  Hollis  v.  Allan,  12  Jur.  (N.  S.) 
638    (1866).      See    also    Re    Hopkins's 
Trusts,  L.  R.  18  Eq.  696  (1874);  Schole- 
field  V.  Redfern,  2  Dr.  &  Sm.  173  (1863); 
Hartley  v.  Allen,  4  Jur.  (N.  S.)  500  (1858); 
Lock  V.  Venables,  27  Beav,  598  (1859), 
holding  to  the  effect  that  a  specific  be- 
quest of  "the  dividends,  interest,  and 
proceeds"  of  shares    will  not   pass  a 
bonus  on  the  shares.       In   Alcock  v. 
Sloper,  2  Myl.  &  K.  699  (1833),  the  in- 
come of  the  testator's  long  annuities 
was  given  to  the  life  tenant.     Wilday 
r.  Sandys,  L.  R.  7  Eq.  455  (1869).  In  Lane 
V.  Loughuan,  7  Vict  L.  R.  Eq.  19  (1881),  it 


1195 


§§  556,  557.]      LIFE    ESTATES    AND   EEMAINDEKS    IN    STOCK.      [cH.  XXXIII. 


There  are,  hoAvever,  cases  in  England  to  the  effect  that  extra- 
ordinary cash  dividends  may  be  decreed  to  belong  to  the  life  ten- 
ant.* There  of  course  is  no  question  that  ordinary  cash  dividends 
belong  to  the  life  tenant.^  This  rule  applies  even  though  it  may  be 
shown  that  the  dividend  in  question  was  earned,  wholly  or  in  part, 
before  the  commencement  of  the  life  estate.^ 

Where  it  is  shown  that  dividends  have  been  fraudulently  retained 
in  prejudice  of  the  rights  of  the  life  tenant,  and  subsequently  a 


was  held  that  the  premium  on  a  lease 
of  part  of  a  trust  estate  belonged  to  the 
tenant  for  life  and  not  to  the  corpus. 
An  executor  may  plainly  transfer  the 
stock  to  pay  the  decedent's  debts,  al- 
though it  isbequeatlied  for  life  with  re- 
mainder over.  Franklin  v.  Bank  of 
England,  1  Russ.  575  (1826).  In  Clive  v. 
Clive,  Kay,  600  (1854),  by  the  terms  of 
the  deed  of  settlement  the  net  profits 
of  the  concern  were  to  be  divided  rata- 
bly to  such  an  amount  as  should  be  de 
Glared  at  the  semi-annual  meetings, 
and  were  to  be  paid  within  twenty-one 
days  thereafter;  and  it  was  provided 
that  a  stockholder  was  not  to  receive 
any  dividend  after  the  period  at  which 
he  ceased  to  be  a  proprietor  of  shares, 
but  the  dividends  on  such  shares  were 
to  continue  in  suspense  until  some 
other  person  should  become  proprietor 
of  them.  When  a  stockholder  died 
sixty-nine  days  after  a  half-yearly  meet- 
ing at  which  a  dividend  had  been  de- 
clared, but  before  notice  had  been 
given  that  such  dividend  was  payable, 
having  by  his  will  bequeathed  the  in- 
terest and  annual  income  arising  from 
all  his  shares  to  one  for  life,  and  then 
in  remainder  to  others,  it  was  held  that 
this  dividend  belonged  to  the  legatee 
for  life,  and  not  to  the  general  personal 
estate  of  the  testator.  See  also  Title  to 
Dividends,  19  Am.  L.  Rev.  571;  Bostock 
V.  Blakeney,  2  Bro.  Ch.  653  (1789);  2 
Perry,  Trusts,  t^§  544,  545.  Mr.  Moak's 
note,  31  Eng.  Rep.  328-332;  Browne  v. 
Collins,  L.  R.  12  Eq.  586  (1871),  is  to  the 
effect  that  profits  of  a  partnership  ac- 
crued and  earned  before,  but  not  set 
aside  qua  profits  until  after  the  death 
of  the  testator,  belong  to  the  corpus  of 


the  estate,  and  that  profits  accruing 
after  his  death  go  to  the  tenant  for  life 
as  income.  See  also  the  important  re- 
view of  the  whole  subject  in  Bouch  v. 
Sproule,  L.  R,  12  App.  Cas.  385  (1887), 
reversing  the  court  below,  Sproule  v. 
Bouch,  L.  R.  29  Ch  D.  635  (1885). 

1  In  Sugden  v.  Alsbury,  L.  R  45  Ch.  D. 
237  (1890),  the  court  held  that  the  life 
tenant  was  entitled  to  an  extraordinary 
dividend  payable  in  cash.  The  dividend 
was  called  a  bonus,  but  was  nothing 
more  or  less  than  a  large  dividend,  be- 
ing a  division  of  accumulated  profits. 
In  Ellis  V.  Barfield,  64  L.  T.  Rep.  625 
(1891),  the  court  held  that  a  large  divi- 
dend was  income  and  belonged  to  the 
life  tenant,  although  it  was  used  by  the 
trustee  to  pay  up  the  stock  in  full,  and 
also  to  purchase  new  shares  which  he 
immediately  sold;  but  the  excess  for 
which  he  sold  the  stock  at  a  profit  be 
longs  to  the  remainderman. 

2  A  cash  dividend  of  prof>s  whicb 
have  been  earned  since  the  last  preced 
ing  dividend,  such  last  preceding  divi- 
dend having  been  made  in  a  regular 
and  reasonable  time  previously,  belongs 
to  a  life  tenant  of  stock,  and  not  to  the 
remainderman.  Barclay  v.  Waine- 
wright,  14  Ves.  Jr.  66  (1807);  Norris  v. 
Harrison,  2  Madd.  268  (1817);  Clive  v. 
Clive,  Kay,  600  (1854);  Murray  v.  Giasse, 
17  Jur.  816  (1853);  Preston  v.  Melville, 
16  Sim.  163(1848);  Cuming  r.  Bosweli,  2 
Jur.  (N.  S.)  1005  (1856).  Cf.  Ware  v.  Mc- 
Candlish,  11  Leigh  (Va,),  595  (1841);  Price 
V.  Anderson,  15  Sim.  473  (1847);  Witts 
V.  Steere,  13  Ves.  Jr.  363  (1807). 

3  Bates  V.  Mackinley,  31  Beav.  280 
(1862);  Jones  v.  Ogle,  L  R.  8  Ch.  App. 
192(1872). 


1190 


CH.  XXXIII.]        LIFE    ESTATES    AND    REMAINDERS    IN    STOCK. 


[§  558. 


bonus  is  paid  upon  the  shares,  it  belongs,  as  income  deferred,  to  the 
tenant  for  life,  even  though  it 'be  called  a^bonus.^  The  life  tenant 
does  not  take  any  part  of  the  surplus  value  of  shares  upon  distribu- 
tion after  dissolution,  if  such  surplus  was  clearly  capital.- 

In  all  cases,  however,  the  intent  of  the  grantor  or  testator  is  the 
pole-star,  and  will  be  carried  out  by  the  courts.* 

§  558.  The  apiwrtionment  of  dividends. —  AVhen  a  life  tenant  dies 
before  the  date  at  which  a  dividend  is  declared,  the  question  arises 
whether  the  dividend  declared  next  after  his  death  ought  or  ought 
not  to  be  apportioned  between  the  reversioner  or  remainderman 
and  the  estate  of  the  life  tenant  for  the  period  of  time  partially 
covered  by  the  life  estate.  It  is,  in  general,  the  rule  in  such  a  case 
that  the  dividend  is  not  apportionable,  but  belongs  entirely  to  the 
corpus  of  the  trust  fund.*  But  where  a  tenant  for  life  dies  after 
the  dividend  is  declared,  but  before  the  dividend  becomes  due,  his 
estate  will  be  entitled  to  the  whole  of  that  dividend.^    In  England, 


1  Maclaren  v.  Stainton,  L,  R.  11  Eq.     (1863);  Foote,  Appellant,   39  Mass.  299 


383  (1871);  s.  C  3  De  G.,  F.  &  J.  203 
(1861),  reversing  s.  C,  27  Beav,  460  (1859); 
Edmondson  v.  Crosthwaite,  34  Beav.  30 
(1864);  Dale  v.  Hayes.  40  L.  J.  (Ch.)  244 
(1871).  Cf.  Lean  v.  Lean,  33  L.  T.  Rep. 
305  (1875);  Lambert  v.  Lambert.  29  L. 
T.  (N.  S.)  878  (1874);  Re  Tinkler's  Estate, 
L.  R.  20  Eq.  Cas.  456  (1875).- 

2  Re  Armitage,  [1893]  3  Ch.  337. 

3  Sproule  V.  Bouch,  L.  R.  29  Ch.  D.  635 
(1885);  Re  Hopkins's  Trusts,  L.  R.  18  Eq. 
696  (1874);  Scholefield  v.  Redferu,  2  Dr. 
&  Sm.  173  (1863);  Jones  v.  Ogle,  L.  R  14 
Eq,  419  (1872);  Re  Box,  1  Hem.  &  M.  553 
(1863).  Cf.  Reed  v.  Head,  88  Mass.  174 
(1863);  Clarkson  v.  Clarkson.  18  Barb. 
646  (1855);  Millen  v.  Guerrard,  67  Ga. 
284  (1881);  Thomson's  Appeal,  89  Pa, 
St.  36  (1879).  The  life  tenant  takes  a 
dividend  paid  immediately  after  the 
death  of  the  testator,  where  the  will 
provides  that  each  share  bequeathed  by 
the  will  should  carry  the  dividend  ac- 
cruing at  the  time  of  the  testator's 
death.  Lysaght  v.  Lysaght,  [1898]  1  Ch. 
115  (1897). 

*  Pearly  v.  Smith,  3  Atk.  260  (1745); 
Sherrard  v.  Sherrard,  3  Atk.  502  (1747); 
Wilson  V.  Harman,  2  Ves.  Sr.  672  (1755); 
Hartley  v.  Allen,  4  Jur.  (N.  S.)  500  (1858); 
Re  Maxwell's  Trusts,  1  Hem.  &  M.  610 


(1839);  Granger  v.  Bassett,  98  Mass.  463 
(1868);  Clapp  v.  Astor,  2  Edw.  Ch.  379 
(1834).  Cf.  Hyatt  v.  Allen,  56  N.  Y.  558 
(1874);  Brundage  v.  Brundage,  60  N.  Y. 
544,  551  (1875);  Perry,  Trusts,  g  556.  But 
in  Massachusetts  it  has  been  held  that 
sometimes  dividends  declared  after  the 
life  tenant's  death  will,  nevertheless,  go 
to  his  estate.  Thus,  a  life  tenancy  in 
stock  for  the  support  of  the  testator's 
widow  and  children  was  held  to  entitle 
the  widow's  estate  to  a  dividend  de- 
clared after  her  death,  but  for  a  period 
which  expired  before  that  event.  John- 
son V.  Bridgewater  Mfg.  Co.,  80  Mass.  874 
(1859).  See  also  Ellis  v.  Essex  Merri- 
mack Bridge,  19  Mass.  243  (1824);  Gifford 
V.  Thompson,  115  Mass.  478  (1874.  Cf. 
King  V.  FoUett,  3  Vt  385  (1831),  in 
which  the  residuary  legatee  claimed 
from  the  legatee  of  certain  stock  the 
share  of  dividends  earned  in  the  life- 
time of  his  testator,  but  declared  after 
his  death:  the  court  holding  that  a  sale 
or  gift  of  stock  carries  with  it  all  divi- 
dends declared  after  it  takes  effect, 
whether  earned  before  or  not. 

5  Wright  V.  Tuckett,  1  J.  &  H.  266 
(1860);  Paton  v.  Sheppard,  10  Sim.  186 
(1839). 


1197 


'§  559.] 


LIFE    ESTATES    AND    REMAINDERS    IN    STOCK.        [CH.  XXXIII. 


under  the  statute  known  as  the  Apportionment  Act  of  1870,  divi- 
dends are  apportionable  in  these  cases  between  the  estate  of  the 
life  tenant  and  the  corpus;^  and  in  this  country  at  common  law,  in 
one  or  two  jurisdictions,  there  is  a  tendency  to  hold  that  dividends 
are  apportionable.^  In  Maryland  a  stock  dividend  has  been  appor- 
tioned.^ At  the  termination  of  the  life  estate  no  claim  can  be  made 
in  behalf  of  the  life  tenant  for  increase  in  the  value  of  the  stock,  no 
dividends  having  been  declared.* 

§  559.  The  right  to  suhscrihe  for  new  shares  as  letiveen  life  ten- 
ant and  remainderman. —  The  right  to  subscribe  for  new  shares  at 
par  upon  an  increase  of  the  capital  stock,  which  is  an  incident  of 
the  ownership  of  the  stock,  does  not  belong  as  a  privilege  to  the 
life  tenant,  but  such  an  increment  must  be  treated  as  capital,  and 
be  added  to  the  trust  fund  for  the  benefit  of  the  remainderman. 
This  is  equally  the  rule  whether  the  trustee  subscribes  for  the  new 
stock  for  the  benefit  of  the  trust  or  sells  the  right  to  subscribe  for 
a  valuable  consideration.     In  either  event  the  increase  goes  to  the 


'33  &  34  Vict.,  ch.  35,  §  2;  Pollock  v. 
Pollock,  L.  R.  18  Eq.  329  (1874),  qualify- 
ing or  explaining  Whitehead  v.  White- 
head, L.  R.  16  Eq.  528  (1873);  Beavan  v. 
Beavan,  53  L.  T.  Rep.  245  (1885).  Cf. 
Capron  v.  Capron,  L.  R  17  Eq.  288  (1874); 
and  see  Banner  v.  Lowe,  13  Ves.  Jr.  135 
(1806);  Hay  v.  Palmer,  2  P.  Wms.  501 
(1728).  The  statute  applies  only  to  divi- 
dends upon  the  stock  of  corporations, 
strictly  speaking,  and  not  to  those  upon 
the  shares  in  private  trading  cori^ora- 
tions.  Jones  v.  Ogle,  L.  R.  8  Ch.  App. 
192  (1872).  And  does  not  apply  to  stock 
dividends.  Hartley  v.  Allen,  4  Jur.  (N,  S.) 
500  (1858).  Under  the  Apportionment 
Act  of  England,  a  dividend  declared 
after  the  death  of  the  tenant  for  life 
may  be  apportioned  between  his  estate 
and  the  remainderman.  Bulkeley  v. 
Stephens,  [1896]  2  Ch.  241. 

-^In  Ex  parte  Rutledge,  1  Harp.  Eq. 
(S.  C.)  65  (1824),  a  dividend  was  appor- 
tioned between  life  tenant  and  remam- 
derman.  This  is  regarded  as  a  leading 
case  in  favor  of  apportionment.  In 
Pennsylvania  the  interest  on  municipal 
bonds  and  on  the  bonds  of  private  cor- 
porations is  apportionable;  but  quere 
-whether  or  not  the  interest  on  govern- 


ment bonds  would  be.  Wilson's  Appeal, 
108  Pa.  St.  344  (1885),  overruling  Earp's 
Will,-1  Pars.  Eq.  Caa  (Pa.)  453  (1850). 
But  in  Massachusetts  the  statute  of  ap- 
portionment is  held  not  to  apply  to 
dividends  upon  the  stock  of  corpora- 
tions. Granger  v.  Bassett,  98  Mass.  462, 
469  (1868),  construing  Mass.  Gen.  Stat., 
ch.  97,  §  24.  In  New  York  an  appor- 
tionment is  provided  for  by  Laws  of 
1875,  ch.  542.  See  Goldsmith  v.  Swift, 
25  Hun.  201  (1881).  Where  dividends 
are  declared  at  irregular  intervals,  such 
dividends  are  not  apportionable  under 
the  New  York  statute.  Matter  of  Kane, 
64  N.  Y.  App.  Div.  566  (1901). 

3  A  stock  dividend  declared  in  1891  to 
represent  profits  which  for  three  years 
had  been  used  for  improvements  should 
be  apportioned  between  the  life  tenant 
and  remaindermen,  the  testator  having 
died  in  1890.  Thomas  v.  Gregg,  78  Md. 
545  (1894). 

*  In  re  Connolly's  Estate,  198  Pa,  St. 
137  (1901).  A  dividend  paid  after  the 
death  of  the  life  tenant  belongs  to  the 
remaindermen  and  there  is  no  appor- 
tionment unless  the  will  provides  other- 
wisa  Mann  v.  Anderson,  106  Ga.  818 
(1899). 


1198 


<3H.  XXXIII.]       LIFE    ESTATES    AND    KEMAINDERS    IN    STOCK. 


[§  500. 


corpus}  The  subsequent  income,  however,  of  such  increase  belongs, 
during  the  continuance  of  the  life  tenancy,  to  the  life  tenant  as  in- 
come; the  new  shares  are  part  of  the  corpus^  and  the  life  tenant, 
being  entitled  to  the  income  from  the  corpus,  takes  the  income  from 
the  accretions  thereto.^  Where  new  stock  is  issued  and  the  right 
to  subscribe  therefor  is  sold,  the  proceeds  of  such  sale  belong  to  the 
remainderman,  and  only  the  income  to  the  life  tenant.* 

§  560.  -Miscellaneous  questions  herein. —  An  executrix  is  liable  on 
stock  standino'  in  the  name  of  the  estate  instead  of  in  the  name  of 

o 

the  deceased  or  the  executrix,  it  being  shown  that  the  stock  for- 
merly stood  in  the  name  of  the  deceased.*  Even  though  executors 
transfer  to  themselves  as  trustees  certain  national  bank  stock  and 
pay  the  dividends  to  a  legatee  of  a  share  in  the  estate,  yet  if  the 
will  did  not  set  aside  such  stock  for  such  legatee,  the  estate,  and 


1  Atkins  V.  Albree,  94  Mass.  359  (1866); 
Brinley  v.  Grou,  50  Conn.  66  (1883);  Bid- 
die's  Appeal,  99  Pa.  St.  278  (1883);  Moss's 
Appeal,  83  Pa.  St.  264  (1877);  Goldsmith 
V.  Swift,  25  Hun,  201  (1881):  Re  Brom- 
ley, 55  L.  T.  Rep.  145  (1886).  Profit 
.upon  the  sale  of  stock  is  corpus,  and 
not  income  for  the  life  tenant.  Whit- 
ney V.  Phoenix,  4  Redf.  (Surr.)  180  (1880). 
Cf.'Leitchv.  Wells,  48  N.  Y.  585  (1872); 
Hemenway  v.  Hemenway,  134  Mass. 
446  (1883):  New  England  Trust  Co.  v. 
Eaton.  140  Mass.  532  (1886).  A  privilege 
given  by  a  corporation  to  its  stockhold- 
ers to  take  additional  stock  at  par  is 
appurtenant  to  the  old  stock,  and  does 
not  belong  to  the  life  beneficiary.  Hite 
■V.  Hite,  93  Ky.  257  (1893).  Where  the 
life  tenant  refuses  to  pay  for  increased 
capital  stock  which  is  issued  at  fifty 
cents  on  a  dollar,  the  remaining  fifty 
cents  being  a  stock  dividend,  and  the 
trustee  takes  the  stock  for  himself,  and 
ten  years  have  elapsed  since  the  life 
tenant  claimed  the  stock,  the  statute 
of  limitations  is  a  bar  to  his  suit  to 
compel  the  trustee  to  account  for  the 
stock.  Matter  of  Smith,  66  N.  Y.  App. 
Div.  340(1901).  Sometimes  certificates  of 
new  stock  issued  to  represent  property 
acquired  are  not  stock  dividends.  Chi- 
cago, etc.  R  R.  V.  Page,  1  Biss.  461 
(1864);  s.  C,  5  Fed.  Cas.  600.    In  Londes- 


borougli  V.  Somerville,  19  Beav.  295 
(1854).  where  consols  were  sold  just  be- 
fore a  dividend  day  and  the  proceeds 
invested  in  realty,  a  tenant  for  life  was 
held  entitled  to  be  paid,  as  income  on 
the  consols,  the  difference  between  the 
price  obtained  and  the  value  exclusive 
of  the  next  dividend.  See  also  notes  in 
§  554,  and,  in  general,  §  286,  supra. 

2  Quoted  and  approved  in  Re  Eisner's 
Estate.  175  Pa.  St.  143  (1896);  Moss's 
Appeal,  S3  Pa.  St.  264  (1877);  Biddle's 
Appeal,  99  Pa.  St.  278  (1883),  and  the 
cases  generally  cited  in  the  preceding 
note;  Re  Bromley,  55  L.  T.  Rep.  145 
(1886). 

3  Walker  v.  Walker,  68  N.  H.  407 
(1896).  A  life  tenant  is  not  entitled  to 
the  price  realized  by  the  trustee  from 
the  sale  of  the  right  to  subscribe  for 
new  stock,  neither  is  the  life  tenant  en- 
titled to  a  large  sum  realized  on  the 
sale  of  the  securities  in  excess  of  the 
inventoried  value,  the  sale  being  for 
purposes  of  reinvestment,  nor  is  he  en- 
titled to  profits  on  securities  purchased 
and  later  sold  at  a  higher  price,  but  the 
life  tenant  is  entitled  to  a  stock  divi- 
dend representing  earnings  used  by  the 
company  to  increase  its  plant.  Stewart 
V.  Phelps,  71  N.  Y.  App.  Div.  91  (1902). 

4  Brown  v.  Ellis,  103  Fed.  Rep.  834 
(1900).    See  also  §  248,  supra. 


1199 


§  560.] 


LIFE    ESTATES    AND    REMAINDERS    IN    STOCK,        [CH.  XXXIII, 


not  the  legatee's  interest,  is  liable  for  an  assessment  on  such  stock.*' 
The  life  tenant  must  pay  calls  which  are  made-  and  taxes  levied'' 
during  the  continuance  of  his  estate  upon  shares  held  in  trust  for 
his  benefit.  Where  stock  to  produce  a  fixed  income  is  bequeathed 
for  life,  a  subsequent  increase  in  the  earnings  from  that  stock  in- 
ures to  the  benefit  of  the  life  tenant.''  The  enhanced  price  for 
which  stock  sells  by  reason  of  dividends  earned  but  not  declared 
belongs  entirely  to  the  remainder.'^  Profits  realized  from  the  en- 
hanced value  of  securities  belong  to  the  remainderman.^  Where  a 
trustee  sells  stock  by  decree  of  the  court  on  account  of  the  preca- 
rious nature  of  the  stock,  the  life  tenant  is  not  entitled  to  anything 
from  the  corpus  of  the  estate,  where  it  is  not  shown  that  the  income 


lEarle  u  Rogers,  105  Fed.  Rep.  208 
(1900). 

2  Re  Box.  1  Hem.  &  M.  552  (1863);  Day 
V.  Day,  1  Dr.  &  Sni.  261  (1860).  In  case 
of  a  life  estate,  followed  by  a  life  es- 
tate, followed  by  a  remainder  to  the 
nominees  of  the  first  life  tenant,  the 
estate  of  the  first  life  tenant  is  liable 
for  calls  made  after  the  remainder 
commences.  Hobbs  v.  Wayet,  L.  R.  36 
Ch.  D.  256  (1887).  If  a  call  becomes 
due  the  day  after  the  testator  dies,  it  is 
the  duty  of  the  executor  to  pay  it  from 
the  general  fund.  Emery  v.  Wason, 
107  Mass.  507  (1871). 

3  Webb  V.  Burlington.  28  Vt.  183 
(1856);  Citizens'  Mut.  Ins.  Co.  v.  Lott,  45 
Ala.  185  (1871).     See  also  §  248,  supra. 

4  Russell  V.  Loring,  85  Mass.  121  (1861). 
But  when  a  fixed  income  is  bequeathed 
and  the  income  fails  or  falls  short,  the 
principal  must  be  resorted  to.  Bon- 
ham  V.  Bon  ham,  33  N.  J.  Eq.  476  (1881); 
Haydel  v.  Hurck,  72  Mo.  253  (1880). 
The  opposite  rule,  however,  prevails  in 
New  York.  Deianey  v.  Van  Aulen,  84 
N.  Y.  16  (1881),  reversing  S.  C,  21  Hun, 
274.  C/.  Crawford  v.  Dox,  5  Hun,  507 
(1875).     See  also  §  304,  stiipra. 

5  Where  stock  is  sold  the  life  tenant 
is  not  entitled  to  such  part  of  the  price 
as  might  represent  the  income  since 
the  last  dividend.  The  court  has  no 
power  to  make  any  division.  Schole- 
field  I'.  Redfern,  2  Dr.  &  Sm,  173  (1863), 
the  court  refusing  to  follow  Londes- 

1 


borough  V.  Somerville,  19  Beav.  295, 
and  stating  that  the  ]?-tter  turned  upon 
very  special  circumstances.  See  also 
Abercrombie  n  Riddle.  3  Md.  Ch.  320 
(1850);  Van  Blarcom  v.  Dager,  31  N.  J. 
Eq.  783  (1879);  Re  Stutzer,  26  Hun,  481 
(1882);  Re  Gerry's  Accounting,  103  N.  Y. 
445  (1886).  Where,  during  the  life  ten- 
ancy, the  corporation  passes  a  large 
portion  of  its  profits  to  surplus,  and  by 
reason  thereof  the  market  value  of  the 
stock  increases  and  is  sold  for  a  higher 
price,  the  difference  belongs  to  the  life 
tenant.  Simpson  v.  Millsaps,  31 S.  Rep. 
912  (Miss.  1902). 

<i  Stewart  v.  Phelps,  71  N.  Y.  A  pp.  Div. 
91  (1902).  Concerning  the  question  as 
to  the  rights  of  the  life  tenant  and  re- 
mainderman where  trustees  buy  securi- 
ties at  a  premium  or  sell  them  at  a 
premium,  see  Scovel  v.  Roosevelt,  5 
Redf.  121  (1881);  Townsend  v.  U.  S. 
Trust  Co.,  3  Redf.  220  (1877);  Duclos  v. 
Benner,  5  N.  Y.  Supp.  733  (1888);  Far- 
well  V.  Tweddle,  10  Abb.  N.  Cas.  94  ' 
(1881);  Whittemore  v.  Beekman,  2  Dem. 
275  (1883);  Cridland's  Estate,  132  Pa,  St. 
479  (1890).  See  note  in  18  Abb.  N.  Cas. 
185.  An  increase  in  the  value  of  securi- 
ties in  which  a  trust  fund  of  $10,000  is 
invested  belongs  to  the  life  tenant 
where  the  instrument  creating  the 
trust  divides  "the  said  principal  sum 
of  $10,000  "  among  remaindermen  upon, 
the  death  of  the  life  tenant.  Claflin, 
V.  Dewey,  177  Mass.  166  (1900). 
200 


CH.  XXXIII.]       LIFE    ESTATES    AND    KEMAINDEKS    IN    STOCK. 


[§  560. 


is  decreased.*  On  the  other  hand,  even  though  trust-estate  funds  are 
used  to  purchase  securities  at  a  higher  price  than  par,  yet  the  life  ten- 
ant is  entitled  to  the  entire  income  from  such  securities.^  Where,  dur- 
ino-  the  life  tenancy,  the  corporation  ceases  business  and  is  wound  up, 
the  life  tenant  is  entitled  to  such  part  of  the  surplus  value  of  the  stock 
as  was  earned  during  the  life  tenancy.'  Where  a  trustee  has 
power  to  sell  and  reinvest,  profits  made  in  this  way  belong  to  the 
corpus.^  A  life  tenant  is  not  entitled  to  have  the  stock  trans- 
ferred to  him  on  the  corporate  books.^  The  corporation,  if  it  had 
notice  of  the  trust,  may  be  held  liable  for  transferring  shares  in 
prejudice  of  the  rights  of  the  life  tenant.^  And  an  administrator 
who  permits  an  irregular  transfer  in  fraud  of  the  life  tenant's 
rights  makes  himself  personally  liable.'^     A  dividend  declared  be- 


1  Lister  v.  Weeks.  47  Atl.  Rep.  588  (N. 
J.  1900).    See  S.  C,  60  N.  J.  Eq.  215  (1900). 

2  Re  De  Pothonier,  [1900]  3  Ch.  529. 

3  In  re  Connolloy's  Estate,  198  Pa,  St. 
137  (1901). 

4  In  re  Kemble's  Estate,  201  Pa,  St. 
523  (1902).  A  life  tenant  entitled  to  div- 
idends and  income  is  not  entitled  to 
•profits  made  in  the  sale  and  reinvest- 
ment of  the  fund.  Smith  v.  Hooper,  51 
AtL  Rep.  814  (Md.  1902).  Where  a  trus- 
tee is  authorized  to  sell  the  securities 
and  reinvest  th  money,  and  he  sells 
bonds  at  a  premium,  the  premium  does 
not  belong  to  the  life  tenant.  Whitting- 
ham  V.  Schofield's  Trustee,  67  S.  W. 
Rep.  816  (Ky.  1902). 

5  Collier  v.  Collier,  3  Ohio  St.  369 
(1854).  Cf.  State  u  Robinson,  57  Md. 
486  (1881).  If  the  corporation  transfers 
the  stock  to  the  life  tenant,  even  by  or- 
der of  the  court,  and  issues  a  certificate 
not  stating  the  facts  of  life  tenancy, 
and  tells  a  purchaser  of  the  certificate 
that  it  is  all  right,  the  corporation  is 
liable  to  the  remainderman.  Caulkins 
V.  Gaslight  Co.,  85  Tenn.  683  (1887). 

6  Stewart  v.  Fireman's  Ins.  Co.,  53 
Md.  564  (1880).  Where  a  life  tenant 
transfers  the  stock  to  the  remainder- 
man, the  former's  executor  cannot 
hold  the  corporation  liable  for  dividends 
paid  to  the  latter.  Kennedy  v.  First 
Nat  Bank,  115  N.  C.  233  (1894).  Where 
a  life  tenant  transfers  the  stock  into 
kis  own  name,  the  remainderman  may 


recover  the  stock  upon  the  death  of  the 
life  tenant,  even  though  the  latter  was 
insolvent.    Mercantile,  etc.  Co.  v.  Weld, 
85  Md.  685  (1897).     A  bank  is  liable  to 
the  remainderman  for  allowing  a  trans- 
fer to  the  life  tenant,  even  though  the 
transfer  to  the  life  tenant  if5  by  the  ex- 
ecutors.    Cox  V.  First  Nat.  Bank,  119 
N.  C.  302  (1896).   Wh  ere  stock  is  specific- 
ally bequeathed  in  trust  for  a  certain 
person  daring  her  life  and  then  for  her 
children,  and  the  corporation  allows 
the  executor  to  transfer  the  stock  to 
the  trustee,  as  trustee  for  the  life  tenant 
only,  and  afterwards  allows  the  trustee 
to  transfer  the  stock  to  bona  fide  hands, 
the  corporation  is  liable  for  allowing 
the  second  transfer.     In  a  suit  by  a  re- 
mainderman to  recover  from  a  corpo- 
ration the  value  of  stock  which  the 
corporation  had  transferred  to  the  life 
tenant  absolutely  aud  which  had  been 
lost,  the  statute  of  limitations  does  not 
begin  to  run  until  the  death  of  the  life 
tenant,  even  though  the  trust  was  cre- 
ated in  1854  and  the  life  tenant  died  in 
1898.   Wooten  v.  Wilmington,  etc.  R  R.^ 
138  N.  C.  119  (1901).  See  also  §  330,  supra. 
7  Keeney  v.  Globe  Mill  Co.,  39  Conn. 
145  (1873).    See  also  Amiss  v.  William- 
son, 17  W.  Va.  673  (1881).    Where  the 
executor,  who  is  also  the  life  tenant, 
wrongfully  pledges  the  stock,  his  ex- 
ecutor may  rightfully  use  the  funds  of 
the  estate  to  redeem  such,  stock.    In  re 
Orne's  Estate,  193  Pa.  St.  636  (1899). 


(76) 


1301 


§  560.] 


LIFE    ESTATES    AND    REMAINDERS    IN    STOCK.       [CH.  XXXIII. 


fore  but  payable  after  the  testator's  death  belongs  to  the  estate.^ 
A  claim  of  the  company  against  the  life  tenant  for  dividends  paid 
cannot  be  enforced  against  the  remainderman's  interest.'^  Where 
a  life  interest  is  given  to  one  person  with  remainder  over,  and  it  is 
necessary  that  the  stock  be  sold  in  order  to  preserve  the  estate,  a 
decree  of  sale  is  valid  if  both  the  executor  and  life  tenant  are  parties 
to  such  suit,'  A  gift  of  stock  on  condition  that  the  dividends 
should  all  go  to  the  owner,  and  that  he  should  vote  it,  is  a  gift  of  a 
remainder,  with  a  life  interest  in  the  donor.^  A  tenant  for  life, 
unless  restrained  by  condition,  may  sell  his  interest.* 


1  De  Gendre  v.  Kent,  L.  R.  4  Eq.  283 
(1867).  Cf.  Browne  v.  Collins,  L.  R.  12 
Eq.  586,  594  (1871);  Lock  v.  Venables,  27 
Beav.  598  (1859).  See  also  Cogswell  v. 
Cogswell,  2  Edw.  Ch.  231  (1834);  Aber- 
crombie  v.  Riddle,  3  Md.  Ch.  320  (1850); 
Wright  V.  Tuckett,  1  Johns.  &  H.  266 
(1860);  Furley  v.  Hyder,  42  L.  J.  (Ch.) 
626  (1873), 

^  Where  a  fixed  per  cent,  is  paid  an- 
nually to  stockholders  instead  of  div- 
idends and  charged  to  them,  and  the 
stock  held  in  pledge  for  the  same,  such 
a  payment  to  the  life  tenant  does  not 
create  a  valid  lien  on  the  stock  as 
against  the  remainderman,  Reading 
Trust  Co.  V.  Reading  Iron  Works,  137 
Pa.  St.  282  (1891), 

3  Drovers',  etc,  Banku  Hughes,  83  Md. 
355  (1896). 

4  Matter  of  Braudreth,  169  N.  Y.  437 


1902).  A  gift  of  stock,  the  donee  to 
have  the  possession  and  management 
of  the  same,  but  the  donor  to  have  the 
income  during  his  life,  makes  the  donee 
trustee  until  the  death  of  the  donor, 
and  hence  such  gift  is  taxable  under 
the  New  York  statutes  as  a  transfer  to 
take  effect  on  his  death.  Matter  of 
Cornell,  170  N.  Y.  423  (1902). 

s  Jackson  v.  Van  Hoesen,  4  Cowen, 
325  (1825);  Bailey  v,  Bailey,  97  N.  Y. 
460,  470  (1884).  An  estate  may  be  ren- 
dered inalienable  by  vesting  it  in  trus- 
tees or  by  creating  future,  contingent, 
or  expectant  estates,  so  that  there  are 
no  persons  in  being  during  the  two 
lives  who  can  convey  a  perfect  title. 
Murphy  v.  Whitney,  140  N.  Y.  546 
(1894);  Williams  v.  Montgomery,  148 
N.  Y.  519  (1896). 


1202 


CHAPTER  XXXIY. 


TAXATION  OF  SHARES  OF  STOCK  AND  OF  CORPORATIONS. 


^  o61.  The  four  methods  of  taxing  cor- 
porate interests. 

A.  TAXATION  OF  SHARES  OF  STOCK. 


562. 


563. 


564. 


565. 


566. 


567. 
568. 


Relation  of  stockholders  to  the 
first  three  methods  of  taxa- 
tion. 

Tax  on  shares  of  stock  as  distin- 
guished from  the  other  meth- 
ods. 

Tax  by  a  state  or  municipality 
on  stockholders  residing,  in 
the  state  creating  the  corpora- 
tion. 

Tax  on  resident  stockholders  in 
a  non-resident  or  foreign  cor- 
poration. 

Tax  on  non-resident  stockhold- 
ers in  resident  or  domestic 
corporation  —  Mode  of  collect- 
ing. 

Double  taxation. 

Exemptions  from  taxation  as 
affecting  tax  on  shares  of 
stock. 


R   TAXATION  OF  NATIONAL-BANK  STOCK. 


569. 
570. 


571. 


572. 


General  rules. 

Place  in  which  shares  in  na- 
tional-bank stock  may  be 
taxed. 

The  tax  must  not  be  greater 
than  that  imposed  on  other 
"moneyed  capital." 

The  bank  may  bring  suit  to  re- 
strain illegal  tax  on  its  stock- 
holders. 


OTHER    METHODS  OF  TAXING 
RATIONS. 


CORPO- 


572a.  General  principles. 
572&.  Exemptions  from  taxation. 
572c.   Taxation   of  foreign    corpora- 
tions. 
Taxation    must    not  interfere 

with  interstate  commerce. 
Inheritance  tax. 


572d 


572e. 


§  561.  The  four  metJiods  of  taxing  corporate  interests.—  There 
are,  in  general,  four  methods  of  taxing  corporate  interests.  These 
are,  first,  by  a  tax  on  the  franchise;  second,  on  the  capital  stock; 
third,  on  the  real  estate  and  personal  property  of  the  corporation; 
fourth,  by  a  tax  on  the  shares  of  stock  in  the  hands  of  the  stock- 
holders.^ There  is  another  mode  of  taxation  which  is  sometimes 
adopted  — a  tax  on  corporate  dividends;  but  since  this  is  generally 
construed  to  be  only  a  method  of  valuing  the  franchise  or  capital 
stock,  it  can  hardly  be  called  a  fifth  method  of  taxing  corporate 
interests.^ 

It  is  entirely  within  the  discretion  of  the  legislature  to  say  which 
one  of  these  four  methods  of  taxation  shall  be  adopted,  where  the 
matter  is  not  regulated  by  the  state  constitution.  Not  only  this, 
but  it  is  also  within  the  discretion  of  the  legislature  to  tax  the  cor- 
poration in  two  or  more  of  these  ways  —  to  levy  a  double  tax  on 
the  corporate  interests,  and  even  to  levy  a  treble  or  quadruple  tax 
thereon. 

12  Redfield,  Railw.  (3d  ed.),  p.  453;  (1876);  Louisville,  etc.  R  R.  t;.  State.  8 
Ottawa  Glass  Co.  v.  McCaleb,  81  111.  556    Heisk.  (Tenn. )  663.  795  (1875). 

2  See  %  5120.  infra. 
1203 


§  562.] 


TAXATION    OF    STOCK    AND    CORPORATIONS.  [OH.  XXXIV. 


A.     TAXATION    OF   SHARES    OF    STOCK. 

§  562.  Relation  of  stoclholders  to  the  first  three  methods  of  tax- 
ation.—  The  stockholders  in  a  corporation  have  very  little  to  do 
directly  with  any  of  the  first  three  modes  of  taxing  corporate  inter- 
ests. The  tax  is  levied  directly  against  the  corporation,  and  is 
paid  by  the  corporate  oflBcers  out  of  the  treasury  of  the  corpora- 
tion. If  the  tax  is  unauthorized  or  illegal,  or  improperly  assessed, 
or  is  based  on  too  high  a  valuation,  it  is  ordinarily  the  duty  of  the 
corporate  officers  to  rectify  or  oppose  such  tax.  The  stockholders 
have  nothing  to  do  with  the  ordinary  transaction  of  corporate 
business,  of  which  this  forms  a  part.  Where,  however,  the  corpo- 
rate officers  refuse,  upon  request  of  one  or  more  stockholders,  to 
oppose  or  decline  to  pay  an  unauthorized  tax  levied  in  any  one  of 
the  three  methods  mentioned  above,  the  stockholder  himself  may 
bring  a  suit  in  a  court  of  equity,  in  behalf  of  and  for  the  protection 
of  the  corporate  interests,  to  enjoin  the  payment  and  collection  of 
such  unauthorized  tax.' 


1  Dodge  V.  Woolsey,  18  How.  331 
(1855);  Barnes  r.  Kornegay,  63  Fed.  Rep. 
671  (1894);  State  Bank  v.  Knoop,  16 
How.  369  (1853);  Wilmington  R.  R.  v. 
Reed,  13  Wall.  264  (1871);  Delaware  R.  R. 
Tax,  18  Wall.  206  (1873):  Greenwood  v. 
Freight  Co.,  105  U.  S.  13  (1881);  Paine 
V.  Wright,  6  McLean,  395  (1855);  s.  C, 
18  Fed.  Cas.  1010;  Foote  v.  Liuck,  5 
McLean,  616  (1853);  s.  c,  9  Fed.  Cas. 
366,  holding  also  that  the  corporation 
is  a  necessary  party,  and  that  if  the 
complainant  is  a  non-resident  he  may 
bring  the  suit  in  the  United  States  cir- 
cuit court;  Davenport  V.  Dows,  18  Wall. 
626  (1873),  also  holding  that  the  corpo- 
ration is  a  necessary  party  defendant; 
Bailey  v.  Atlantic,  etc.  R.  R.,  3  Dill.  22 
(1874);  s.  C,  2  Fed.  Cas.  365;  Parmley 
V.  St.  Louis,  etc.  R.  R.,  3  Dill.  13, 25  (1874); 
s.  C,  18  Fed.  Cas.  1223,  1226.  But  the 
stockholder  must  allege  actual  tender 
of  the  amount  of  tax  conceded  to  be 
due.  Allegation  of  readiness  to  pay  is 
insufficient.  Huntington  v.  Palmer,  8 
Fed.  Rep.  449  (1881).  See  also  Trask  v. 
Maguire,  18  Wall.  391  (1873);  Wood  v. 
Draper,  24  Barb.  187  (1857);  London  v. 
Wilmington,  78  N.  C.  190  (1878).  .See 
also  §  494,  supra.    The  case  of  State  v. 


Flavell,  24  N.  J.  L.  370  (1854),  denies 
this  right.  A  stockholder's  injunction 
against  a  tax  on  corporate  property 
fails  when  the  property  is  subsequently 
sold  under  execution.  Secor  v.  Single- 
ton, 35  Fed.  Rep.  376  (1888).  The  general 
character  of  such  a  suit  as  this  comes 
under  the  principles  of  law  set  forth  in 
ch.  XLV,  infra.  A  stockholder  may 
enjoin  the  corporation  from  obeying  an 
illegal  order  of  railroad  commissioners 
of  a  state  requiring  shippers  to  pay  a 
war  revenue  stamp  tax.  Dinsmore  v. 
Southern,  etc.  Co.,  92  Fed.  Rep.  714 
(1899).  A  suit  in  equity  lies  in  the  fed- 
eral court  to  enjoin  the  collection  of 
taxes  on  stock  held  by  one  corporation 
in  another  on  the  ground  that  it  de- 
prives the  stockholder  of  the  equal  pro- 
tection of  the  law,  where  the  statutes 
of  the  state  forbid  such  tax.  Louisville 
T.  Co.  V.  Stone,  107  Fed.  Rep.  305 
(,1901).  A  stockholder  in  a  corporation 
cannot  maintain  a  bill  to  enjoin  the 
payment  by  the  corporation  of  the*  tax 
imposed  by  act  of  congress  upon  such 
corporation  for  doing  business  in  Alaska. 
Corbus  V.  Alaska,  etc.  Co.,  99  Fed.  Rep. 
334  (1899);  aflf'd,  187  U.  S.  455  (1903). 


1204 


CH.  XXXIV.]  TAXATION    OF    STOCK    AND    CORPORATIONS. 


[§  563. 


§  563.  Tax  on  shares  of  stock  as  distinguished  from  tlie  other 
methods. — A  tax  on  shares  of  stock  is  clearly  different  from  a  tax 
upon  the  franchise,  the  corporate  property,  or  the  capital  stock. 
Especially  is  it  important  to  distinguish  a  tax  on  shares  of  stock 
from  a  tax  on  the  capital  stock.^  The  latter  is  always  taxed  against 
the  corporation,  is  paid  by  the  corporation,  and  is  based  on  a  valu- 
tion  which  does  not  necessarily  depend  on  the  value  of  the  shares 
of  stock.  A  tax  on  the  shares  of  stock  is  generally  levied  directly 
against  the  stockholders  themselves  at  their  place  of  residence,  is 

iln  Porter  v.  Rockford,  etc.  R.  R.,  76     gregate  of  the   shares  of  stock.     See 


111.  561  (1875),  the  court  clearly  recog- 
nized this  distinction,  and  said:  "The 
legal  property  of  the  shareholder  is 
quite  distinct  from  that  of  the  corpo- 
ration, altliough  the  shares  of  stock 
have  no  value  save  that  which  they 
derive  from  the  corporate  property  and 
franchise,  and  a  tax  levied  upon  the 
property  of  the  one  is  not,  in  a  legal 
sense,  levied  upon  the  property  of  the 
.  other."  See  also  Bradley  v.  Bauder,  36 
Ohio  St.  28  (1880).  Cf.  Delaware  R.  R. 
Tax,  18  Wall.  206.  230  (1873);  Farriugton 
V.  Tennessee,  95  XT.  S.  679  (1877),  where 
the  distinction  is  clearly  drawn;  Quincy 
Bridge  Co.  u  Adams  County,  88  111.  615 
(1878).  In  North  Ward  Nat.  Bank  v. 
Newark,  39  N.  J.  L.  380  (1877),  the  court 
said:  "The  moneyed  capital  of  a  bank  is 
an  entirely  different  thing  from  its  cap- 
ital stock.  The  former  is  the  property 
of  the  corporation.  It  may  consist  of 
cash  or  bills  discounted,  or  be  in  part  in- 
vested in  real  estate  or  in  the  securities 
of  federal  government.  In  whatever 
form  it  is  invested,  it  is  owned  by  the 
bank  as  a  corporate  entity  and  not 
by  the  stockholders.  The  stock  or 
shares  represent  the  interests  of  the 
shareholders,  which  entitle  them  to 
participate  in  the  net  profits  of  the 
bank  in  the  employment  of  its  capital, 
and  is  a  distinct  and  independent  in- 
terest or  property  m  the  shareholders, 
held  by  them  like  other  property."  The 
case  of  Porter  v.  Rockford,  etc.  R.  R.,  76 
111.  561  (1875),  holds  also  that  a  tax  on 
the  "capital  stock"  means  the  prop- 
erty of  the  corporation  and  not  the  ag- 


also  State  v.  Hamilton,  5  Ind.  310  (1854), 
where  the  word  "stock  "  was  construed 
to  mean  the  tangible  property  of  the 
corporation.  But  see  Trask  v.  Ma- 
guire,  18  Wall.  391  (1873).  and  g  8.  su- 
pra, where  the  word  "  stock "  is  de- 
fined. And  even  though  the  value  of 
the  capital  stock  is  estimated  by  the 
aggregate  value  of  the  shares,  it  is  still 
a  tax  on  the  capital  stock.  New  Or- 
leans, etc.  R.  R  V.  Board  of  Assessors,  32 
La.  Ann.  19  (1880).  See  also  State  Bank 
V.  Richmond.  79  Va.  113  (1884).  So  also 
where  the  franchise  is  valued  in  that 
manner  for  taxation.  Commonwealth 
V.  Hamilton  Mfg.  Co.,  94  Mass.  298  (1866): 
Att'y-Gen.  v.  Bay  State  Min.  Co.,  99 
Mass.  148  (1868).  Hamilton  Co.  v.  Mas- 
sachusetts, 6  Wall.  632  (1867),  holds  tliat 
a  tax  on  the  excess  of  the  market  value 
of  the  stock  over  the  value  of  the  cor- 
porate realty  and  machinery  is  a  fran- 
chise tax.  In  Indiana  it  is  held  that  a 
tax  on  the  shares  of  stock  is  the  proper 
mode  of  taxation  unless  the  statute 
provides  otherwise.  Whitney  v.  Madi- 
son, 23  Ind.  331  (1864).  Cf.  Wright  v. 
Stelz,  27  Ind.  338  (1866).  The  mere  fact 
that  the  corporation  is  compelled  to  pay 
the  tax  does  not  prevent  its  being  con- 
sidered a  tax  on  the  shares.  National 
Bank  v.  Commonwealth,  9  Wall.  353, 
360  (1869),  per  Miller,  J.  Stockholders 
are  liable  for  taxes  levied  on  a  distillery 
where  the  statute  levies  the  tax  on 
"persons  interested  in  the  use  of  the 
distillery."  U.  S.  v.  Wolters,  46  Fed. 
Rep.  509  (1891). 


1205 


§  564.]  TAXATION    OF    STOCK    AND    CORPORATIONS.  [CH.  XXXIV. 

based  on  the  market  value  of  the  stock,  and  is  entirely  distinct  from 
the  location,  interests,  property,  or  taxes  of  the  corporation  itself. 
There  are,  however,  some  instances  of  taxation  herein  which  are 
on  the  border-line  between  the  two.  Thus,  a  statute  expressly  lay- 
ing a  tax  on  the  shares  of  stock,  but  requiring  the  corporation  to 
pay  that  tax  from  the  corporate  funds,  has  been  held  to  be  a  tax, 
not  on  the  shares  of  stock,  but  on  the  capital  stock.  In  other  juris- 
dictions it  has  been  held  to  be  a  tax  on  the  shares  of  stock.  Taxes 
on  shares  of  stock  in  national  banks  are  frequently  so  levied  and 
collected,  and  are  held  to  be  upon  the  shares  of  stock  and  not  on 
the  capital  stock. ^  A  tax  laid  on  shares  owned  by  non-residents  of 
the  state  which  creates  the  corporation  and  which  levies  the  tax  is 
a  tax  on  the  shares  of  stock  and  not  on  the  capital  stock,  even 
though  the  corporation  is  required  to  pay  it  and  to  collect  the  same 
from  the  owners  of  those  shares.  A  state  may  tax  the  shares  of 
stock  of  a  corporation,  even  though  a  part  of  its  assets  consist  of 
United  States  bonds.^ 

§  564.  Tax  hy  a  state  or  municipality  on  stocklioMers  residing  in 
the  state  creating  the  corporation. —  The  right  of  the  state  to  tax 
resident  stockholders  of  a  resident  corporation  on  their  shares  of 
stock  is  undoubted,  and  has  been  unquestioned  except  where  double 
taxation  would  result  therefrom  and  is  prohibited;  or  where  a  con- 
stitutional provision  restricts  this  mode  of  taxation.^  Generally 
such  a  tax  on  resident  stockholders  is  levied  on  them,  not  in  the 
municipality  where  the  corporation  is,  but  in  the  cities,  counties,  or 
towns  where  the  stockholders  respectively  reside.  This  is  always 
the  rule  if  the  statute  is  silent,  and  is  the  rule  unless  the  statute 
expressly  provides  otherwise.* 

1  See  §  570,  infra.  As  to  the  valuation  of  the  shares  of 

2  Cleveland  T.  Co.  v.  Lander,  184  U.  S.  stock,  see  St.  Charles,  etc.  R.  R.  v.  As- 
Ill  (1903).  sessors,  31  La.  Ann.  852  (1879).     If  the 

3  In  Illinois,  under  the  act  of  1872  corporation  owns  shares  of  its  own 
taxing  railroad  corporations,  resident  stock  it  is  taxable  the  same  as  though 
stockholders  in  domestic  corporations  owned  by  another.  Richmond,  etc.  R. 
are  not  taxed.  Porter  v.  Rockford,  etc.  R.  v.  Alamance  Co.,  84  N.  C.  504  (1881). 
R.  R.,  76  111.  561  (1875X  In  Iowa  stock  is  <  Evansville  v.  Hall,  14  Ind.  27  (1859). 
taxed  under  §  813  of  the  Code.  See  A  pledgor  is  the  proper  person  to 
Cook  V.  Burlington,  59  Iowa,  251  (1882);  be  assessed  on  stock  which  has  been 
Henkle  v.  Keota,  68  Iowa,  334  (1886).  pledged.  Tucker  v.  Aiken,  7  N.  H.  113 
Cf.  National  State  Bank  v.  Young,  25  (1834).  A  pledgee  of  stock  is  not  sub- 
Iowa,  311  (1868).  In  Iowa,  where  de-  ject  to  a  tax  levied  on  the  shares  of 
ductions  for  debts  are  allowed  to  per-  stock  held  by  him.  Waltham  Bank  v. 
sons  taxed  on  their  "  credits,"  no  de-  Waltham,  51  Mass.  334  (1845).  In  Mas- 
duction  is  allowed  from  the  tax  on  sachusetts  shares  held  by  executors  or 
shares  of  stock.  They  are  not  "credits."  administrators  are  taxed  in  the  town 
Bridgman  v.  Keokuk,  72  Iowa,  42  (1887).  of  which  the  deceased  was  an  inhabit- 

1206 


CH.  XXXIV.]  TAXATION    OF    STOCK    AND    CORPORATIONS. 


[§  565. 


Controversips  sometimes  arise  as  to  the  power  of  a  municipality 
to  tax  stockholders  living  in  the  state,  but  not  in  the  municipality 
which  levies  a  tax  on  their  shares  of  stock,  the  corporation  itself 
being  located  within  that  municipality.  The  law  plainly  is  that 
such°a  tax  is  unauthorized,  illegal,  and  not  collectible,  unless  the 
municipality  is  authorized  by  statute  to  levy  the  tax.^  A  mere 
general  authority  to  the  municipality  to  tax  all  property  within  its 
boundaries  will  authorize  a  tax  by  it  of  shares  of  stock  owned  by 
persons  living  within  it.^  But  such  authority  does  not  sustain  a 
tax  on  stockholders  residing  out  of  the  municipality,  although 
within  the  state.  The  location  of  such  shares  of  stock,  as  property 
for  purposes  of  taxation,  is  not  where  the  corporation  is  located, 
but  where  the  stockholder  lives.^  The  statutes  of  the  state  may 
change  this  situs  of  the  stock  so  as  to  render  it  taxable  where  the 
corporation  is ;  but  unless  there  is  a  statute  to  that  effect,  such  a 
tax  by  a  municipality  is  unauthorized  and  void. 

§565.  Tax  on  resident  stocMolders  in  a  non-resident  or  foreign 
corporation.—  It  is  undoubtedly  within  the  constitutional  power  of 
the  legislature  of  a  state  to  enact  a  statute  that  persons  residing  in 
that  state,  who  are  stockholders  in  a  corporation  created  by  an- 
other state,  shall  be  taxed  on  their  shares  of  stock  at  their  residence 


ant  at  the  time  of  his  death,  and  shares 
held  by  trustees  are  taxed  in  the.  towns 
in  which  the  cestuis  que  trust  respect- 
ively reside.  Revere  v.  Boston,  123 
Mass.  375  (1877).  As  to  the  legal  rem- 
edy in  Massachusetts  for  an  unjust  val- 
uation of  stock  for  taxation,  see  Boston 
Mfg.  Co.  V.  Commonwealth,  144  Mass. 
598  (1887).  As  to  taxation  of  stock  un- 
der the  Vermont  law,  see  Willard  v. 
Pike,  59  Vt.  202  (1887). 

1 A  city  has  no  inherent  power  to 
levy  a  tax  on  the  capital  stock  of  a  cor- 
poration. Macon  v.  Macon  Constr,  Co., 
94  Ga.  201  (1894);  Stetson  v.  Bangor,  56 
Me.  274  (1868).  the  court  saying:  "Mu- 
nicipalities can  tax  shares  of  stock  only 
when  authorized  so  to  do  by  some  law 
of  the  state.  They  are  the  creatures  of 
state  law,  and  derive  their  powers  in 
this  respect  solely  from  state  enact- 
ments; "  Griffith  V.  Watson,  19  Kan.  23 
(1877);  Evansville  v.  Hall,  14  Ind.  27 
(1859);  Con  well  v.  Connersville,  15  Ind. 
150  (1860).  Such  a  tax  may  be  levied 
under  a  general  power  of  the  munici- 

1 


pality  to  tax  property.  Gordon  v. 
Mayor,  etc..  5  Gill  (Md.),  231  (1847).  Cf. 
Richmond  v.  Daniel,  14  Gratt.  (Va.)  385 
(1858);  Augusta  v.  National  Bank,  37 
Ga.  620  (1868).  Markoe  v.  Hartranft,  6 
Am.  L.  Reg.  (N.  S.)  487  (1867),  holds  that 
in  Pennsylvania  such  a  tax  is  uncon- 
stitutional, and  that  a  tax  must  be 
levied  where  the  stockholder  resides. 
See  also  Craft  v.  Tuttle,  27  Ind.  332 
(1866). 

2  But  a  municipality  can  levy  a  tax 
only  when  specially  authorized  so  to 
do,  and  can  tax  only  such  property  as 
the  statute  permits  it  to  tax.  Cooley, 
Taxation  (2d  ed.),  678.  Hence,  power 
to  a  municipality  to  levy  a  tax  for 
watchmen  purposes  will  not  authorize 
a  tax  on  shares  of  stock.  Bank  of 
Georgia  v.  Savannah,  Dudley  (Ga.),  130 
(1832).  Under  a  statute  authorizing  it, 
a  city  may  levy  a  tax  on  stock  in  a  lo- 
cal bank,  even  though  some  of  the 
stockholders  are  non-residents.  Union 
Bank  v.  City,  94  Va.  316  (1897). 

3  See  §  566,  iiifra. 
207 


§  565.] 


TAXATION    OF    STOCK    AND    CORPORATIONS.  L<^^-  XXXIV. 


within  the  former  state.*  This  principle  of  law  is  based  on  the  fact 
that  shares  of  stock  are  personal  property;  that  they  are  distinct 
from  the  corporate  property,  franchises,  and  capital  stock;  that 
they  follow  the  domicile  of  their  owner  like  other  personal  prop- 
erty, and  that  consequently  he  may  be  taxed  therefor  wherever  he 
may  reside.  It  accordingly  is  a  question  of  policy  and  expediency 
with  a  state  whether  or  not  it  will  tax  its  citizens  who  are  stock- 
holders in  foreign  corporations.-  A  few  of  the  states  levy  such  taxes.^ 


1  Worthington  v.  Sebastian,  25  Ohio 
St.  1  (1874);  Bradley  w  Bauder,  36  Ohio 
St.  28  (1880),  holding  it  valid,  although 
the  corporation  is  taxed  in  the  state 
where  it  exists.  To  same  effect,  Seward 
V.  Rising  Sun,  79Ind.  351  (1881);  Dyer  v. 
Osborne,  11  R.  I.  321  (1876);  McKeen  v. 
Northampton  County,  49  Pa.  St.  519 
(1865);  Dwight  v.  Boston,  94  Mass. 
316  (1866);  Whitesell  v.  Northampton 
County,  49  Pa.  St.  526  (1865);  Great 
Barrington  v.  County  Com'rs,  33  Mass. 
572  (1835);  Worth  v.  Com'rs,  82  N.  C.  420 
(1880);  s.  C,  90  N.  C.  409  (1884). 

2  Quoted  and  approved  in  Hart  v. 
Smith.  64  N.  E.  Rep.  661  (Ind.  1902). 

3  State  V.  Hannibal,  etc.  R.  R.,  37  Mo. 
265  (1866);  Ogden  v.  St.  Joseph,  90  Mo. 
522(1887);  Sturges  v.  Carter,  114  U.  S 
511  (1884),  upholding  such  a  tax  in  Ohio; 
Newark  City  Bank  v.  Assessor,  30  N.  J. 
L.  1  (1862).  In  Illinois,  also,  resident 
stockholders  in  foreign  corporations  are 
taxed  on  their  shares  of  stock.  Porter 
V.  Rockford,  etc.  R,  R.,  76  111.  561  (1875). 
Under  the  Illinois  statute  a  resident  of 
the  state  is  subject  to  taxation  on  stock 
owned  by  him  in  a  Kansas  corporation, 
all  the  property  of  the  corporation  being 
in  Kansas.  In  re  Greenleaf,  184  111.  226 
(1900);  Cooley.  Taxation  (2ded.),  57,  221; 
Hoi  ton  V.  Bangor,  23  Me.  264  (1843); 
Smith  V.  Exeter,  37  N.  H.  556  (1859).  A 
citizen  of  California  may  be  taxed  on 
mortgage  bonds  held  by  him  in  an  Ari- 
zona railroad  company,  payable  in  New 
York.  Mackay  v.  San  Francisco,  113 
Cal.  392  (1896).  Stocks  and  bonds  of  a 
foreign  corporation  owned  by  a  resident 
of  California  are  located  in  that  state 
for  taxation  purposes,  even  though  they 


are  pledged  for  a  loan  in  another  state. 
Stanford  v.  City,  etc.,  131  Cal.  34  (1900). 
Bonds  secured  by  a  mortgage  on  a  rail- 
road in  California  are  not  taxable, 
under  the  California  constitution,  the 
railroad  itself  being  taxed  for  its  full 
value.  Germania,  etc.  Co.  v.  City,  etc. 
of  San  Francisco,  128  Cal.  589  (1900)* 
But  mortgage  bonds  of  a  foreign  rail- 
road company  are  taxable.  In  re  Fair's 
Estate,  128  Cal.  607  (1900)).  If  such 
bonds  are  held  by  two  trustees,  one  a 
resident  and  the  other  a  non-resident, 
one-half  in  value  of  the  bonds  will  be 
taxed  in  the  state,  even  though  all  the 
bonds  are  outside  of  the  state.  Mackay 
V.  Citj',  etc.  of  San  Francisco,  128  Cal. 
678  (1900).  See  also  Webb  v.  Burling- 
ton, 28  Vt.  188  (1856);  Lycoming  County 
V.  Gamble,  47  Pa.  St.  106  (1864).  Re 
Short's  Estate,  16  Pa.  St.  63  (1851),  where 
a  decedent  who  died  a  resident  of  Penn- 
sylvania left  a  fortune  in  stocks  of  non- 
resident corporations.  The  stocks  were 
held  subject  to  a  collateral  inheritance 
tax.  In  1879  Pennsj-^lvania  adopted  in 
large  part  the  system  of  taxation  that 
prevails  in  New  York  for  the  taxation 
of  corporations.  See  Hunter's  Appeal, 
10  Atl.  Rep.  429  (Pa.  1887).  By  the  still 
later  statute  of  1885,  manufacturing 
corporations  are  specially  favored  in 
the  way  of  taxation.  MacKellar,  etc. 
Co.  V.  Commonwealth,  10  Atl.  Rep.  780 
(Pa.  1887).  In  ascertaining  the  value  of 
stock  for  purposes  of  taxation  the 
amount  paid  in  on  the  stock  may  be 
taken  as  the  value  if  there  have  been 
no  sales  of  the  stock,  and  if  there  is  no 
other  evidence  as  to  its  value.  Com- 
monwealth V.  People,  etc.  Co.,  183  Pa. 


1208 


OH.  XXXIV.]  TAXATION    OF    STOCK    AND    CORPORATIONS. 


[§  565. 


But  Xew  York  pursues  the  more  broad  and  liberal  policy  that 
shares  of  stock  should  not  be  taxed  where  the  corporation  is  already' 
taxed;  that  the  state  which  furnishes  facilities  to  the  corporation 
for  the  earning  of  dividends  should  have  the  sole  benefit  of  taxes 
on  such  corporate  interests;  that  a  tax  on  resident  stockholders  in 
non-resident  corporations  would  generally  result  in  a  double  tax- 
ation of  stockholders  not  residing  in  the  state  creating  the  corpo- 
ration; and  that  interstate  comity,  interests,  and  financial  invest- 
ments are  promoted  best  by  taxing  corporations  directly,  and  not 
levying  a  tax  on  either  resident  stockholders  in  non-resident  corpo- 
rations or  resident  stockholders  in  resident  corporations  where  the 


St.  405  (1898).  In  New  Jersey  now  there 
is  no  tax  on  shares  of  stock  except  in 
banks.  See  Newark  Banking  Co.  v, 
Newark,  121  U.  S.  163  (1887).  and  in  that 
state  shares  of  stock  owned  by  residents 
in  foreign  corporations  are  not  taxable 
if  a  tax  is  paid  by  the  corporation  itself. 
State  V.  Eamsey,  54  N.  X.  L.  546  (1892). 
In  Texas  shares  of  stock  are  not  taxed 
where  the  capital  or  property  of  the 
corporation  is  taxed.  Gillespie  v.  Gaston, 
67  Tex.  599  (1887).  California  made  a 
wise  resolution  when,  in  1881,  it  repealed 
§  3640  of  its  political  code,  taxing  shares 
of  stock,  and  added  the  following 
(§3608)  to  the  code:  "Shares  of  stock 
in  corporations  possess  no  intrinsic  value 
over  and  above  the  actual  value  of  the 
property  of  the  corporation  which  they 
stand  for  and  represent,  and  the  assess- 
ment and  taxation  of  such  shares  and 
also  of  the  corporate  property  would  be 
■  double  taxation.  Therefore  all  property 
belonging  to  corporations  shall  be  as- 
sessed and  taxed;  but  no  assessment 
shall  be  made  of  shares  of  stock,  nor 
shall  any  holder  thereof  be  taxed  there- 
for." Sustained  and  applied  in  Burke 
V.  Badlam,  57  Cal.  594  (1884);  Spring 
Valley  Waterworks  v.  Schottler,  62  Cal. 
69,  118  (1883).  But  the  temptation  to 
tax  stockholders  in  non-resident  cor- 
porations was  yielded  to.  See  San  Fran- 
cisco V.  Fry,  63  CaL  470  (1883);  San 
Francisco  v.  Flood,  64  Cal.  504  (1884). 
As  to  Ohio,  see  R  S.  1886,  §§  2737.  2739, 
2744,  construed  in  Jones  v.  Davis,  35 
•Ohio  St.  474  (1880J.     In  Ohio  resident 


stockholders  in  foreign  corporations 
may  be  taxed  on  their  stock.  Lee  u 
Sturges,  46  Ohio,  153  (1889).  In  Ohio 
stock  of  both  foreign  and  domestic  cor- 
porations is  taxed  unless  the  property 
of  the  corporation  is  taxed  in  its  name 
in  that  state.  Lander  u  Burke,  63  N.  E. 
Rep.  69  (Ohio,  1902).  See  also  Worth  v. 
Ashe  County,  90  N.  C.  409  (1884);  Seward 
V.  Rising  Sun,  79  Ind.  351  (1881).  As  to 
taxation  of  shares  of  stock  in  foreign 
corporations  under  the  Michigan  stat- 
utes, see  Graham  v.  St.  Joseph,  67  Mich. 
652  (1888).  Shares  of  stock  may  be 
taxed  although  the  corporation  is  also 
taxed.  The  corporation  may  be  com- 
pelled to  pay  the  tax  on  the  shares  of 
stock  by  deducting  it  from  dividends. 
South  Nashville  Street  R.  R.  v.  Morrow, 
87  Tenn.  406  (1889).  Under  the  Con- 
necticut statutes,  shares  of  stock  owned 
by  residents  in  foreign  express  com- 
panies are  taxed,  even  though  such 
comp/inies  are  not  incorporated.  Lock- 
wood  V.  Weston,  61  Conn.  211  (1891).  In 
Mayor,  etc.  of  Baltimore  v.  Baltimore, 
etc.  St.  Ry.,  57  Md.  31  (1881),  it  was  held 
that  stock  in  street  railway  companies 
in  Maryland  may  be  taxed,  although  by 
statute  stock  in  steam  railroad  com- 
panies cannot  be.  In  Virginia  shares 
of  stock  in  domestic  as  well  as  foreign 
corporations  held  by  residents  are 
taxed.  Jennings  v.  Commonwealth,  98 
Va.  80  (1900).  Citizens  of  Alabama 
owning  stock  in  foreign  corporations 
may  be  taxed  thereon  in  Alabama. 
State  V.  Kidd.  125  Ala.  413  (1900).    The 


1209 


§  -0(^G-] 


TAXATION    OF    STOCK    AND    CORPORATIONS.  [CH.  XXXIV. 


corporation  itself  is  subject  to  taxation.^  The  injustice  of  a  tax  on 
resident  stockholders  in  foreign  corporations  is  at  once  apparent 
when  it  is  considered  that  the  state  creating  the  corporation  nearly 
always  taxes  the  corporation  itself  or  all  its  stockholders,  resident 
and  non-resident;  and  that  if  stockholders  residing  elsewhere  are 
taxed  again  where  they  reside,  they  are  taxed  both  in  the  state  of 
the  corporation,  directly  or  indirectly,  and  also  directly  in  the  state 
where  they  reside.  No  reduction  need  be  allowed  in  the  latter 
state  for  taxes  levied  upon  the  corporation  in  another  state.^ 

§  566.  Tax  on  non-resident  siockliolders  in  resident  or  domestiG 
corporation. —  Mode  of  collecting. —  When  it  is  determined  by  a  state 
that  it  prefers  to  levy  a  tax  on  shares  of  stock  rather  than  on  the 
franchises,  capital  stock,  or  tangible  property  of  the  corporation,  or 
to  levy  a  tax  on  both,  there  is  no  doubt  as  to  its  right  to  tax  the 
stockholders  residing  within  the  state.  But. more  difficulty  occurs^ 
as  to  the  right  of  the  state  to  tax  non-resident  stockholders  in  cor- 
porations created  by  the  state.  This  right  has  been  strenuously 
denied  on  the  ground  that  shares  of  stock  are  not  located  at  the 
domicile  of  the  corporation,  but  follow  the  domicile  of  the  stock- 
holder. 

It  is  the  well-established  rule,  however,  that  although  shares  of 


situs  of  stock  for  the  purpose  of  tax- 
ation may  be  where  the  owner  of  the 
stock  resides.  Stanford  v.  City,  etc.,  131 
Cal.  34  (1900).  Stock  held  by  residents 
in  foreign  corporations  may  be  taxed. 
Bacon  v.  Board,  etc.  Com'rs,  126  Mich. 
23  (1901). 

iThe  statute  is  as  follows:  "The 
owner  or  holder  of  stock  in  any  incorpo- 
rated company  liable  to  taxation  ofi  its 
capital  shall  not  be  taxed  as  an  indi- 
vidual for  such  stock."  Laws  189.6,  eh. 
908,  §  4,  (16).  See  also  People  v.  Com. 
of  Taxes.  4  Hun,  595  (1875);  afE'd,  63 
N.  Y.  630,  holding  that  residents  of  this 
state,  owning  shares  of  stock  in  a  cor- 
poration created  under  and  by  the  laws 
of  this  state  or  of  any  foreign  state, 
are  not  subject  to  be  personally  assessed 
and  taxed  thereon  under  the  laws  of 
this  state.  Also  People  v.  Com'rs,  5 
Hun.  200  (1875);  Be  Enston's  Will,  113 
N.  y.  174  (1889).  For  the  purpose,  how- 
ever, of  making  the  taxation  of  mon- 
eyed corporations  correspond  to  tax- 
ation of  stockholders  in  national  banks. 

1310 


and  for  the  purpose  of  taxing  the  lat- 
ter, stockholders  in  banks  incorporated 
under  the  laws  of  New  York  are  taxed 
on  their  shares  of  stock.  The  tax  gen- 
erally levied  on  corporations  in  New 
York  is  held  to  be  a  tax  on  their  fran- 
chises. See  People  v.  Home  Ins.  Co., 
92  N.  Y.  328  (1883);  People  v.  McLean, 
80  N.  Y.  254  (1880);  People  v.  Ferguson, 
38  N.  Y.  89  (1868);  People  v.  Assessors, 
etc.,  76  N.  Y.  202  (1879).  See  People  v. 
New  York,  etc.,  Co.,  93  N.  487  (1883); 
People  V.  Davenport,  91  N.  Y.  574 
(1883);  Nassau,  etc.  Co.  v.  Brooklyn, 
89  N.  Y.  409  (1883);  Oswego  Starch 
Factory  v.  DoUoway,  21  N.  Y.  449 
(1860);  People  v.  Com'rs,  95  N.  Y.  554 
(1884);  Valle  v.  Ziegler,  84  Mo.  214 
(1884);  People  v.  Bradley,  39  III.  130- 
(1866).  Cf.  Bank  of  Republic  v.  Hamil- 
ton County,  21  111.  54  (1858).  See  also 
Smith  V.  Exeter,  37  N.  H.  556  (1859),  and 
Jersey  City  Gas  Light  Co.  v.  Jersey 
City,  46  N.J.  L.  194(1884). 
2  See  g§  566,  567,  infra. 


CH,  XXXIV.]  TAXATION    OF    STOCK    AND    COEPOKATIONS. 


[§  566. 


stock  have  at  common  law  a  situs  at  the  domicile  of  the  stockholder, 
yet  that  a  statute  enacted  by  the  state  creating  the  corporation 
may  give  to  the  shares  of  stock  a  situs  at  the  location  of  the  corpo- 
ration; that  such  a  statute  may  thus  determine  the  situs  of  shares 
of  non-resident  stockholders  without  chanfjino:  the  situs  of  shares  of 
resident  stockholders;  and  that  consequently,  under  a  statute  ex- 
pressly authorizing  such  a  tax,  non-resident  stockholders  in  a  resi- 
dent corporation  may  be  taxed  thereon  in  the  place  where  the  cor- 
poration has  its  domicile.^     The  method  of  enforcing  the  payment 


1  In  Ottawa  Glass  Co.  v.  McCaleb,  81 
111.  556  (1876),  the  court  said  that  the 
legislature  might  "  require  the  taxes  to 
be  paid  by  the  corporation,  and  col- 
lected by  them  of  the  shareholder,  by 
deducting  the  amount  from  his  divu 
dends  or  otherwise;  "  State  v.  Mayhew, 
2  Gill  (Md.),  487  (1845).  where  the  corpo- 
ration was  to  pay  the  tax  from  divi- 
dends if  declared,  and  from  profits  if  no 
dividends  were  declared;  St.  Albans  v 
National  Car  Co.,  57  Vt.  68  (1884),  hold- 
ing that  the  statute  giving  shares  of 
stock  a  situs  at  the  location  of  the  cor- 
poration may  be  passed  after  the  incor- 
j)oration,  and  that  mandamus  lies  to 
compel  the  corporation  to  pay  the  tax. 
In  Tappan  v.  Merchants'  Nat.  Bank,  19 
Wall.  490,  499  (1873),  the  court  said: 
"  Persona'l  property,  in  the  absence  of 
any  law  to  the  contrary,  follows  the 
person  of  the  owner,  and  has  its  situs 
at  his  domicile.  But,  for  the  purpose  of 
taxation,  it  maybe  separated  from  him, 
and  he  may  be  taxed  on  its  account  at 
the  place  where  it  is  actually  located." 
See  also  Whitney  v.  Ragsdale,  83  Ind. 
107  (1870);  Tallman  v.  Butler  County, 
12  Iowa,  531  (1861);  Faxton  v.  McCosh, 
12  Iowa,  527  (1861);  Mayor,  etc.  of  Bal- 
timore V.  Baltimore,  etc.  Ry.,  57  Md.  81 
(1881).  Cf.  Richmond  v.  Daniel,  14 
Graft.  (Va.)  885  (1858);  also  the  case  of 
Oliver  v.  Washington  Mills,  93  Mass.  268 
(1865),  which  holds  such  a  tax  to  be  un- 
constitutional. The  common-law  rule 
is  well  expressed  in  Union  Bank  v. 
State,  9  Yerg.  (Tenn.)  490  (1836),  where 
the  court  said:  "  The  power  to  tax  non- 
resident stockholders  is  denied,  and  we 

12 


think  correctly;  from  its  very  nature  it 
must  be  a  tax  in  personam  and  not  in 
rem.  Stock  is  in  the  nature  of  a  chose  in 
action  and  can  have  no  locality ;  it  must, 
therefore,  of  necessity  follow  the  per- 
son of  the  owner.  .  .  .  Bank  stock 
is  not  a  thing  in  itself  capable  of  being 
taxed  on  account  of  its  locality,  and 
any  tax  imposed  upon  it  must  be  in  the 
natui'e  of  a  tax  upon  income,  and  of  ne- 
cessity confined  to  the  person  of  the 
owner;  and  if  lie  be  a  non-resident,  he 
is  beyond  the  jurisdiction  of  the  state 
and  not  subject  to  her  laws."  See  also 
Minotr.  Philadelphia,  etc.  R.  R,  18  Wall. 
206  (1878);  Davenport  v.  Miss.  etc.  R.  R., 
12  Iowa,  539  (1861);  Howell  v.  Cassopo- 
lis,  85  Mich.  471  (1877).  In  Bradley 
V.  Bander,  36  Ohio  St.  28  (1880),  the 
court  said:  "That  shares  of  stock  may 
be  separated  from  the  person  of  the 
owner  by  statute,  and  given  a  situs 
of  their  own,  was  held  in  Tappan  v. 
Merchants'  Nat.  Bank,  19  Wall.  490 
(1873).  But  when  not  so  separated,  that 
this  situs  follows  and  adheres  to  the 
domicile  of  the"  owner,  is  supported  by 
a  great  weight  of  authority."  See 
State  Tax  on  Foreign-held  Bonds,  15 
Wall.  300  (1872).  See  also  Jenkins  r. 
Charleston,  5  S.  C.  393  (1874).  In  Na- 
tional Com.  Bank  v.  Mobile,  63  Ala.  284 
(1878),  the  court  well  said:  "It  may  be 
made  the  duty  of  a  bank  to  pay  for  its 
shareholders  the  tax  legally  assessed 
against  their  respective  shares,  whether 
the  stockholders  reside  in  the  state  of 
Alabama  or  not.  Contestations  upon 
these  points  have  been  made  time  and 
again,  sometimes  by  the  banks  and 
11 


§  5QQ-] 


TAXATION    OF    STOCK    AND    COKPOEATIONS.  [CH.  XXXIV. 


of  this  tax  may  be  by  compelling  the  corporation  to  pay  it  and 
giving  it  a  lien  therefor  on  the  stock,  or  authorizing  it  to  deduct 
the  tax  from  the  non-resident  stockholders'  dividends;  or,  if  the 
statute  is  silent  as  to  the  mode  of  collection,  a  tax  warrant  or  an 
attachment  and  execution  therefor  may  be  levied  on  the  shares  of 
stock.i     Where  the  statute  provides  that  stock  shall  be  taxed  and 

sometiniesby  the  shareholders,  to  avoid  tion  of  the  tax  levied  thereon."  But 
this  liability.  But  it  is  established  by  where  the  statute  merely  made  the 
repeated  adjudications,  and  ought  to  bank  the  agent  to  pay  the  tax  and  to 
be  considered  definitely  settled."  And 
in  First  Nat.  Bank  v.  Smith,  65  III  44 
(1872),  the  court  said:  "The  separation 
of  the  situs  of  personal  property  from 


the  domicile  of  the  ovimer  for  the  pur- 
poses of  taxation  is  familiar  doctrine 
of  the  courts  of  this  country,  and  has 
been  sanctioned  by  this  court  in  vari- 
ous cases.    .    .    .    The  act  of  congress 
itself  contemplates  a  severance  of  the 
situs  of  such  shares  from  the  person  of 
their    owner    by  providing   that  they 
should  not  be  taxed  except  in  the  state 
where  the  bank  is  established.      But, 
apart  from  this,  it  is  really  much  more 
reasonable  to  fix  the  situs  of  shares  at 
the  place  where  the  bank  is  located, 
and  where  it  must  continue  to  do  its 
business  or  wind  up  its  affairs,  than  to 
separate  by  legislation    tangible  per- 
sonal property  from  the  person  of  its 
owner."     In  St.   Louis  Nat.  Bank  v. 
Papin,  4  Dill.  29  (1876);  S.  C,  21  Fed. 
Cas.  203,  the  following  statute  was  sus- 
tained: "The  taxes  assessed  on  shares 
of  stock  embraced  in  such  list  shall  be 
paid  by  the  corporations  respectively, 
and  they  may  recover  from  the  owners 
of  such  shares  the  amount  so  paid  by 
them,  or  deduct  the    same   from   the 
dividends    accruing    on  such  shares: 
and  the  amount  so  paid  shall  be  a  lien 
on  such  shares  respectively,  and  shall 
be  paid  before  a  transfer  thereof  can  be 
made."     And  again,  in  American  Coal 
Co.  V.  County  Com'rs,  59  Md.  185  (1882), 
the  court  said:    "The  state  may  give 
the  shares  of  stock  held  by  individual 
stockholders    a   special    or    particular 
situs  for  purposes  of  taxation,  and  may 
provide  special  modes  for  the  collec- 


deduct  it  from  the  dividends,  the  bank 
is  not  liable  if  there  have  been  no  divi- 
dends.    Hershire  v.  First  Nat.  Bank,  35 
Iowa,  272  (1872).     Non-resident  stock- 
holders in  Virginia  banks  are  taxed. 
Stockholders  v.  Supervisors,  88  Va.  293 
(1891).     Concerning  the  situs  of  stock, 
see  also  an  article  in  45  Alb.  L.  J.  330. 
1  In  Farrington  v.  Tennessee,  95  U.  S. 
679,  687  (1877),  the  court  said:    "The 
bank  may  be  required  to  pay  the  tax 
out  of  its  corporate  funds  or  be  author- 
ized to  deduct  the  amount   paid    for 
each  stockholder  out  of  his  dividend." 
And,  in  general,  under  the  act  of  con- 
gress allowing   taxation  of  shares  of 
stock  in  national  banks,  a  situs  is  given 
by  statute  to  the  shares  so  as  to  locate 
them  where  the  bank  is  located,  even 
though   the  stockholders  be  non-resi- 
dent.    But    collections  cannot   be  en- 
forced against  the  corporation  unless 
the    statute    specially    authorizes     it. 
First  Nat.  Bank  v.  Fancher,  48  N.  Y. 
524  (1872).     As  to  collection  by  execu- 
tion, see  Gordon  v.  Mayor,  etc.,  5  Gill 
(Md.),  231  (1847);  Weld  v.  Bangor,  59 
Me.  416  (1871).    But  a  levy  of  execution 
on  stock  can  only  exist  when  the  stat- 
ute allows  stock  to  be  so  taken.    Barnes 
V.  Hall,  55  Vt.  420  (1883).  See  also  §  480, 
supra.  A  state  may  prescribe  that  resi- 
dent stockholders  shall  pay  a  tax  where 
they  reside,  and  that  the  corporation 
shall  pay  a  tax  based  upon  the  value  of 
the  shares  of  stock  held  by  non-resi- 
dents, and  that  the  corporation  shall 
have  a  lien  on  the  stock  of  such  stock- 
holders for  such  tax  so  paid.    State  v. 
Travellers'  Ins.  Co.,  70  Conn.  590  (1898). 
In  this  case  the  Connecticut  statute  of 
1213 


CH.  XXXIV.]  TAXATION    OF    STOCK    AND    CORPOKATIoNS. 


[§  5Q6. 


that  the  corporation  shall  pay  the  tax  and  have  a  lien  therefor  on 
the  stock,  the  stockholder  is  not  personally  liable  to  the  corporation 
which  has  paid  such  tax.^  Even  though  a  statute  states  that  stock 
in  banks  shall  be  listed  by  the  banks  and  the  tax  paid  by  the  banks 
with  a  right  to  recover  from  its  stockholders,  yet  this  does  not  au- 


1897  imposing  a  tax  of  one  and  one-half    Kennedy  v.  Mary  Lee,  etc.  Ry.,  93  Ala. 


per  cent,  on  the  value  of  stock  held  by 
non-resident  stockholders  in  resident 
corporations  was  upheld  and  applied. 
The  court  held  also  that  a  state  may  tax 
shares  of  stock  held  by  non-residents  in 
domestic  corporations,  even  though  the 
corporation  pays  a  tax  on  all  its  property. 
It  also  held  that  although  resident  stock- 
holders in  a  domestic  corporation  are 
allowed  a  deduction  of  $183  per  share 
from  a  market  value  of  §280  a  share  of 
their  holdings  of  stock,  leaving  the  tax- 
able value  of  the  stock  $47,  a  similar 
deduction  may  be  refused  to  non-resi- 
dent stockholders,  inasmuch  as  the 
,  statute  did  not  provide  for  such  deduc- 
tion for  the  latter,  and  inasmuch  as 
there  was  no  proof  that  the  non-resi- 
dent stockholders  were  citizens  of  the 
United  States.  As  to  levy  under  a 
tax  warrant,  see  McNeal  v.  Mechanics', 
etc.  Assoc,  40  N.  J.  Eq.  351  (1885).  But 
if  the  stockholder  pays  the  tax,  even 
under  protest,  he  cannot  recover  back 
the  money  paid.  Sowles  r.  Soule,  59 
Vt.  131  (1887).  In  the  case  of  State  v. 
Thomas,  26  N.  J.  L.  181  (1857),  the  court 
refused  to  compel  the  corporation  to 
pay  the  tax  on  stock  of  non-residents, 
and  said:  ''It  has  been  decided  bv  this 
court  that  the  bonds  and  stocks  of  cor- 
porations in  this  state  held  by  non- 
residents are  not  liable  to  taxation, 
though  they  are  clearly  within  the  let- 
ter of  the  act."  A  state  may  collect  a 
non-resident  stockholder's  tax  from  the 
corporation  and  give  it  a  lien  therefor 
on  his  stock.  North  Ward  Nat.  Bank 
V.  Newark,  39  N.  J.  L.  380  (1877);  but  see 
Raleigh,  etc.  R  R.  v.  Wake  County 
ComTS.  87  N.  C.  414  (1882).  A  tax  col- 
lect or  cannot  levy  on  and  sell  stock 
under  the  law  relative  to  attachments. 


494  (1891).  The  statute  may  provide 
for  the  sale  of  stock  at  the  place  where 
the  corporation  exists,  in  case  the  taxes 
upon  such  stock  are  not  paid.  A  pur- 
chaser of  the  outstanding  certificates 
after  the  assessment  has  been  made 
takes  subject  to  the  tax  and  tax  seiz- 
ure. Parker  v.  Sun  Ins.  Co.,  42  La.  Ann. 
1172  (1890).  It  is  clear,  where  shares  of 
stock  are  sold  under  a  tax  warrant, 
that  the  corporation  is  not  obliged  to 
oppose  the  sale.  McNeal  v.  Mechanics' 
Building,  etc.  Assoc,  40  N.  J.  Eq.  351 
(1885).  Where  by  statute  taxes  levied 
on  stock  are  to  be  paid  by  the  corpora- 
tion, such  taxes  must  be  paid  by  the  cor- 
poration although  it  becomes  insolvent. 
Boston,  etc.  Co.  v.  Mercantile,  etc.  Co., 
34  Atl.  Rep.  778  (Md.  1896).  Cooley, 
Taxation  (2d  ed.),  433,  clearly  upholds 
the  rule  that  the  state  may  levy  a  tax 
on  shares  of  stock  and  compel  the  cor- 
poration to  pay  it,  citing  Maltby  v. 
Reading  R.  R„  52  Pa.  St.  140  (1866); 
Haight  ?'.  Railroad  Co.,  6  Wall.  15  (1867); 
National  Bank  v.  Commonwealth,  9 
Wall.  353  (1869);  U.  S.  v.  Railroad  Co., 
17  Wall.  322  (1872);  Minot  v.  Railroad 
Co..  18  Wall.  206  (1873);  Ottawa,  etc  v. 
McCaleb,  81  111.  556  (1876);  New  Orleans 
V.  Saving,  etc.  Co.,  31  La.  Ann.  826 
(1879):  Baltimore  v.  City  Passenger  R 
R..  57  Md.  31  (1881);  St.  Albans  v.  Na- 
tional Car  Co.,  57  Vt.  68  (1884);  Ameri- 
can Coal  Co.  n  Allegany  County,  59 
Md.  185  (1882);  Barney  v.  State,  42  Md. 
480  (1875):  McVeagh  r.  Chicago,  49  III 
318  (1868);  First  Nat.  Bank  v.  Fancher, 
48  N.  Y.  524  (1872);  Lionberger  v.  Rowse, 
43  Mo.  67  (1868);  Relfe  v.  Life  Ins.  Co., 
11  Ma  App.  374  (1882). 

1  Mercantile,   etc  Co.  v.  Mellon,  l-QB^ 
Pa.  St.  176  (1900). 


1213 


§  567.]  TAXATION    OF    STOCK    AND    CORPOKATIONS.  [CH.  XXXIV. 

thorize  the  assessment  of  the  stock  to  the  bank.'  The  Connecticut 
statute  authorizing  the  taxation  of  stock  held  by  non-residents  in 
resident  corporations  is  constitutional,  even  though  a  deduction 
for  real  estate  held  by  the  corporation  is  allowed  the  resident 
stockholders,  but  not  to  non-resident  stockholders.^  In  New  York, 
where  neither  resident  nor  non-resident  stockholders  in  either 
foreign  or  domestic  corporations,  excepting  banking  corporations, 
are  taxed  on  their  shares  of  stock,  these  interstate  complications, 
hardships,  and  jealousies  do  not  arise.  Trover  and  case  lie  against 
a  tax  collector  for  selling  stock  for  an  illegal  tax.' 

§  567.  Double  taxation.— The  most  objectionable  feature  of  a  tax 
levied  on  shares  of  stock  is  that  almost  inevitably  it  operates  to 
impose  a  double  tax  on  a  part  or  all  of  the  stockholders.*  Such  a 
double  tax  exists  where  either  the  corporate  realty  or  personalty 
or  franchise  or  capital  is  taxed,  and  a  tax  is  also  levied  on  the 
shares  of  stock  without  any  deduction  for  the  former  taxation.'^ 
There  has  been  some  controversy  as  to  the  right  of  a  state  to  levy 
a  double  tax  on  property.  Sometimes  the  state  constitution  pro- 
hibits such  taxation."  Thus,  in  Michigan  it  is  held  that  the  consti- 
tutional requirement  of  uniform  taxation  prevents  a  tax  being 
levied  on  stock  held  by  residents  in  a  foreign  corporation  where 
the  property  of  the  corporation  is  situated  in  that  state  and  is  taxed 

'  State  V.  Merchants'  Bank,  160  Mo.  *  This  is  practically  the  result.     In 

640  (1901).  the  case  of  Farrington  v.  Tennessee,  95 

2  Traveller's,  etc.  Co.  v.  Connecticut,  U.  S.  679,  687  (1877),  however,  the  court 
185  U.  S.  364  (1903).  said  in  a  dictum:  "The  capital  stock 

3  Sprague  v.  Fletcher,  69  Vt.  69  (1896).     and  the  shares  may  both  be  taxed,  and 
*  In  Ohio  such  double  taxation  is  ad-    it  is   not   double  taxation."    See  also 

vocated  and  recommended.  In  Frazer  New  Orleans  i\  Houston,  119  U.  S.  265, 
V.  Siebern,  16  Ohio  St.  614  (1866),  the  277(1886).  Cf.  Ryan  r.  Com'rs,  30  Kan. 
court  said  that  an  equitable  system  of  185  (1883).  A  tax  on  the  tangible  prop- 
taxation  "is  best  attained  in  case  of  a  erty  and  on  the  capital  stock  is  not 
corporation  or  joint-stock  company  by  double  taxation.  Second  Ward  Sav. 
taxing  the  stockholders,  the  persons  Bank  v.  Milwaukee,  94  Wis.  587  (1896). 
who  own  the  property,  upon  the  full  ^  County  Com'rs  v.  Farmers'  Nat. 
value  of  their  shares  therein,  including.  Bank,  48  Md.  117  (1877),  the  constitution 
of  course,  their  interest  in  the  franchise  saying  that  each  person  shall  pay  a  tax 
or  privilege,  and  in  all  tangible  property  "according  to  his  actual  worth  in  real 
owned  by  the  company;  and  by  taxing  or  personal  property."  See  also  San 
the  corporation  also  upon  the  value  of  Francisco  v.  Mackey,  21  Fed.  Rep.  539 
such  tangible  property.  The  stock-  (1884);  Burke  v.  Badlam,  57  Cal.  594 
holder  is  thus  taxed,  as  all  other  Individ-  (1881),  relative  to  the  California  consti- 
uals  who  own  tangible  and  intangible  tution,  art.  XII,  §  1,  that  "all  property 
property  are  sometimes  unavoidably  shall  be  taxed  in  proportion  to  its 
taxed,  once  upon  all  he  is  worth,  and  a  value." 
second  time  ui>oii  that  part  of  hisprop- 
.  erty  which  is  tangible." 

1214 


•CH.  XXXIV.]  TAXATION    OF    STOCK   AND    CORPORATIONS. 


[§  567. 


by  it.  Such  taxation  is  double  taxation.^  But,  aside  from  consti- 
tutional restrictions,  it  unquestionably  is  within  the  power  of  the 
state  to  levy,  not  only  a  double  tax,  but  even  a  treble  or  quadruple 
tax,  if  it  so  chooses.-  The  injustice  of  such  taxation,  however,  gen- 
erally  prevents  its  occurrence.  The  courts  also  do  their  utmost  to 
prevent  double  taxation,  and  will  construe  a  taxation  statute  so 
as  to  avoid  such  a  result,  and  sometimes  even  in  opposition  to  the 
plain  words  of  the  statute  itself.* 


JStroh  V.  City  of  Detroit,  90  N.  W. 
•Rep.  1029  (Mich.  1903). 

2  Salem  Iron,  etc.  Co.  i'.  Dan  vers.  10 
Mass.  514  (1813),  where  corporate  realty 
was  taxed  although  the  shares  of  stock 
were  also  taxed.     See  also  Belo  v.  For- 
syth Com'rs,  82  N.  C.  415  (1880).    In  the 
remarkable  case  of  Toll  Bridge  Co.  v. 
Osborn,  35  Conn.  7  (1868),  it  seems  that 
the  realty,  capital  stock,  and  shares  of 
stock  of  a  corporation  were  taxed,  and 
that  the  chief  stockholder,  a  railroad, 
was  taxed  on  its    capital    stock  and 
■shares  of  stock,  making  four  or  five 
taxations  of  the  same  property.     Evi- 
dently corporations  were  not  popular 
in  Connecticut  in  1868,  except  for  taxa- 
tion purposes.  Cf.  Jones,  etc.  Co.  y.  Com- 
monwealth. 69  Pa.  St.  137  (1871).  See  also 
-Cook  u.  Burlington,  59  Iowa,  251  (1882); 
State  V.  Branin,  23  N.  J.  L.  484  (1852); 
State  V.  Bentley,  23  N.  J.  L.  532  (1852); 
Memphis  v.  Ensley,  6  Baxt.  (Tenn.)  553 
(1873);  Providence,  etc.  R.  R  v.  Wright, 
H   R.    I.   459,   464   (1853),  holding   that 
a  tax  on  the  stock  does  not  raise  a  pre- 
sumption that  a  municipality  is  thereby 
prevented  from   taxing  the  corporate 
realty.    See  also  Hannibal,  etc.  R.  R,  v. 
Shacklett,  30  Mo.  550,  560  (1860).     Al- 
though by  the  charter  a  tax  is  levied 
on  the  capital  stock,  a  tax  may  also  be 
levied  on  the  shares  of  stock.    Mem- 
phis V.  Home  Ins.   Co.,  91  Tenn.  558 
(1892).     A  tax  on  the  bonds  which  are 
issued  by  a  corporation  does  not  consti- 
tute double  taxation  although  there  is 
also  a  tax  on  the  franchises  of  the  cor- 
poration.  Commonwealth  v.  New  York, 
etc.  R.  R.,  150  Pa.  St.  234  (1892).     Wliere 
the  stock  is  not  taxable  if  the  tangible 

1 


property  is  taxed,  the  stock  may  never- 
theless be  taxed  for  such  part  of  its 
value  as  the  capital  stock  exceeds  in 
value  the  tangible  property.  Hyland 
u  Central  Iron,  etc.  Co.,  129  Ind.  68 
(1891).  A  tax  may  be  levied  on  the 
capital  stock  even  though  the  shares  of 
stock  are  also  taxed.  Durham  County 
V.  Blackwell,  etc.  Co.,  116  N.  C.  441 
(1895).  The  franchise  may  be  taxed 
although  the  shares  of  stock  are  also 
taxed,  the  latter  tax  being  collected 
also  from  the  corporation.  U.  S.  Elec- 
tric, etc.  Co.  V.  State,  79  Md.  63  (1894). 
A  national  bank  may  be  taxed  on  stock 
owned  by  it  in  other  corporations,  even 
though  such  latter  corporations  also 
pay  a  tax.  Pacific  Nat.  Bank,  etc.  v. 
Pierce  County,  20  Wash.  675  (1899). 

3  Thus,  in  Illinois,  in  cases  where  the 
capital  stock  is  taxed  by  the  state,  the 
shares  of  stock  are  held  to  be  free  from 
taxation.  Republic  Life  Ins.  Co.  v. 
Pollak,  75  111.  292  (1874).  See  also  Lack- 
awanna County  V.  First  Nat.  Bank,  94 
Pa,  St.  221  (1880),  holding  that  under 
the  act  of  March  31,  1870,  releasing 
corporations  from  all  other  taxes  if  they 
pay  one  per  cent,  tax  on  the  par  value 
of  the  stock,  the  corporate  realty  can- 
not be  taxed  after  such  one  per  cent, 
has  been  paid;  State  v.  Hannibal  &  St. 
J.  R.  R.,  37  Mo.  265  (1866);  Jersey  City, 
etc.  Co.  V.  Jersey  City,  46  N.  J.  L.  194 
(1884);  Cheshire,  etc.  Teleph.  Co.  v. 
State,  63  N.  H.  167  (1884);  Valle  v.  Zeig- 
ler,  84  Mo.  214  (1884);  Tax  Cases,  12 
G.  &  J.  (Md.)  117(1841);  Provident  Inst. 
V.  Gardiner,  4R  I.  484  (1857);  Mechan- 
ics' Bank  v.  Thomas,  26  N.  J.  L.  181 
(1857);  American  Bank  v.  Mumford,  26 
l\5 


568.] 


TAXATION    OF    STOCK    AND    CORPORATIONS.  [CH.  XXXIV. 


§568.  Exemptions  from  taxation  as  affecting  tax  on  shares  oj 
stoclc. —  An  exemption  of  shares  of  stock  is  a  contract  protected  by 
that  provision  of  the  constitution  of  the  United  States  which  pre- 
vents a  state  from  passing  a  law  which  will  impair  the  validity  of 
contracts.^  This  provision  has  frequently  been  construed  and 
applied  in  cases  involving  the  taxation  of  the  corporate  franchises, 
capital  stock,  or  tangible  property.  In  the  numerous  decisions  on 
this  subject  there  appear  two  classes  of  cases  of  exemptions  from 
taxation  which  affect  the  taxation  of  shares  of  stock.  The  first 
class  involves  the  question  whether  an  exemption  of  the  corporate 
property,  franchises,  or  capital  stock  from  taxation  exempts  also 
the  shares  of  stock  from  any  tax;  the  second,  whether  an  exemp- 
tion of  the  shares  of  stock  from  taxation  exempts  the  corporate 


N.  J.  L.  478  (1857);  State  v,  Tunis,  23  N.     monwealth.  15  Atl.  Rep.  456  (Pa.  1888). 


J.  L.  546  (1852):  Smith  v.  Burley.  9  N.  H. 
4-33  (1838);  Frazerv.  Siebern,  16  Ohio  St. 
614(1866);  Savings  Bank  v.  Nashua,  46 
N.  H.  389  (1866),  the  court  saying:  "  It 
is  a  fundamental  principle  in  taxation 
that  the  same  property  shall  not  be 
subject  to  a  double  tax,  payable  by  the 
same  party, either  directly  or  ind irectly ; 
and  where  it  is  once  decided  that  any 
kind  or  class  of  property  is  liable  to  be 
taxed  under  one  provision  of  the  stat- 
utes, it  has  been  held  to  follow  as  a 
legal  conclusion  that  the  legislature 
could  not  have  intended  the  same  prop- 
erty would  be  subject  to  another  tax, 
though  there  may  be  general  errors  in 
the  law  which  would  seem  to  imply 
that  it  was  to  be  taxed  a  second  time." 
In  Michigan,  where  shares  of  stock  in 
savings  banks  are  taxed,  a  reduction 
being  allowed  for  realty,  which  is  taxed 
separately,  the  courts  held  that  no 
other  tax  can  be  levied  against  the  cor- 
poration. Lenawee,  etc.  Bank  v. 
Adrian,  66  Mich.  273  (1887).  The  Ken- 
tucky tax  statutes  are  so  construed 
that  a  corporation  need  not  pay  a  tax 
on  its  property  in  addition  to  the  tax  on 
the  stock.  Louisville,  etc.  Co.  v.  Bar- 
bour, 88  Ky.  73  (1888);  Commonwealth 
V.  St.  Bernard  Coal  Co.,  9  S.  W.  Rep. 
709  (Ky.  1888).  The  Pennsylvania  acts 
are  construed  so  as  to  prevent  double 
taxation.  Pennsylvania  Co.  etc.  v.  Com- 


Where  a  coal  company  owns  all  the  stock 
of  a  railroad  company,  and  taxes  have 
been  paid  by  the  railroad  on  the  ap- 
praised value  of  its  capital  stock,  the  coal 
company  cannot  be  taxed  on  such  stock 
again.  Double  taxation  is  legal,  but 
will  not  be  imposed  unless  the  statvite 
clearly  requires  it.  Commonwealth  v. 
Fall  Brook  Coal  Co..  156  Pa.  St.  488 
(1893).  In  the  case  of  Louisville,  etc. 
R.  R.  V.  Wright,  116  Fed.  Rep.  669  (1902), 
the  court  held  that  stock  could  not  be 
taxed  under  the  Georgia  statute,  where 
the  corporation  paid  taxes,  even  though 
the  statute  required  taxpayers  to  make 
a  return  of  stock  owned  by  them. 
Where  all  the  property  of  the  corpora- 
tion is  taxed  and  then  a  tax  is  levied  on 
the  capital  stock,  this  amounts  to  a 
double  taxation  and  will  not  be  upheld 
unless  the  statute  clearly  authorizes 
such  double  taxation.  Lewiston,  etc. 
Co.  V.  Asotin  County,  24  Wash.  371 
(1901). 

1  Farrington  v.  Tennessee,  95  U.  S. 
679  (1877).  See  also  §  497,  sujora.  An 
exemption  of  the  stock  of  a  railroad 
company  does  not  exempt  stock  issued 
for  constructing  branch  roads  of  that 
company,  such  construction  being  sub- 
sequent to  a  constitutional  provision 
prohibiting  exemptions.  Chicago,  etc. 
R    R.   V.  Guflfey,  120   U.  S.  569  (1887). 


1216 


CH.  XXXIV.]  TAXATION    OF    STOCK    AND   COKPOEATIONS. 


[§  568. 


property,  franchises,  and  capital  stock.  As  regards  the  former 
exemption,  the  effect  thereof  depends  largely  on  the  words  used  in 
the  statute  or  charter  granting  the  exemption.  The  question  has 
given  rise  to  a  difference  of  opinions.  In  the  federal  courts,  ITew 
Jersey,  Indiana,  and  Kentucky,  it  has  been  decided  that  an  exemp- 
tion of  the  corporation  from  taxation  on  one  or  more  of  the  first 
three  methods  of  taxation  exempts  by  implication  the  shares  of  stock,^ 
although  the  supreme  court  of  the  United  States  has  recently  held 
that  exemption  of  the  capital  stock  does  not  necessarily  exempt 
the  stockholders.2  j^  Tennessee,  North  Carolina,  and  Maryland, 
and  in  fact  generally,  an  exemption  is  strictly  construed.* 

(1886).  An  exemption  of  the  corporation 
exempts  it  from  a  tax  upon  the  stock 
of  stockholders,  which  the  company  is 
required  to  pay  irrespective  of  any 
dividends  or  profits  payable  to  the 
stockholder,  since  this  is  substantially 
a  tax  on  the  corporation  itself.  New 
Orleans  v.  Houston,  119  U.  S.  265  (1881). 
Cf.  U.  S.  V.  Kailroad  Co.,  17  Wall. 
322  (1872).  An  exemption  of  shares 
of  stock  from  taxation  is  waived  by 
the  acceptance  of  subsequent  stat- 
utes imposing  a  tax.  Hannibal,  etc. 
R.  R.  V.  Shacklett,  30  Mo.  550  (1860); 
Cooley,  Taxation  (2d  ed.),  212. 

2  New  Orleans  v.  Citizens'  Bank,  167 
U.  S.  371  (1897). 

3  Union  Bank  v.  State,  9  Yerg.  (Tenn.) 
490  (1836),  holding  that  an  exemption 
of  the  capital  stock  did  not  exempt 
shares  of  stock.  To  same  effect,  Mem- 
phis V.  Farrington,  8  Baxt.  (Tenn.)  539 
(1876),  the  court  saying:  "The  capital 
stock  and  shares  of  stock  are  two  dis- 
tinct properties,  and  an  exemption  of 
the  one  does  not  thereby  necessarily 
exempt  the  other,  nor  the  taxation  of 
the  latter  operate  as  a  tax  on  the  for- 
mer, so  as  to  interfere  with  its  exemp- 
tion from. such  burdens."  A  tax  may 
be  levied  on  the  shares  of  stock  al- 
though the  capital  stock  is  exempt. 
State  V.  Bank  of  Commerce,  95  Tenn. 
221  (1895);  Belo  v.  Forsyth  Com'rs,  83 
N.  C.  415  (1880),  holding  that  an  exemp- 
tion of  the  corporate  realty  does  not 
exempt  the  shares  of  stock;  Appeal 
Tax  Court  v.  Rice,  50  Md.  302  (1878); 

217 


1  State  V.  Branin,  23  N.  J.  L.  484  (1852); 
State  V.  Bentley,  23  N.  J.  L.  532  (1852); 
Johnson    v.  Commonwealth,    7    Dana 
(Ky.),  338  (1838);  King  v.  Madison,  17 
Ind.  48  (1861),  holding  that  an  exemp- 
tion of  the  capital  stock  exempts  shares 
of  stock.     An  exemption  of  the  corpo- 
ration on  its  property  exempts  also  the 
shares  of  stock,  and  exemption  of  the 
shares  of  stock  exempts  the  corpora- 
tion.    State  V.  Heppenheimer,  58  N.  J. 
L.  633  (1896).     An  exemption  from  tax- 
ation  of  the  capital  of  a  corporation 
exempts  the  shares  of  stock.    Penrose 
V.  Chaffraix,  108  La.  250  (1901).     An  ex- 
emption of  the   capital  and  personal 
property  of  the  corporation  from  tax- 
ation   exempts    the    shares    of   stock. 
Richardson  v.  City  of  St.  Albans,  72  Vt. 
1  (1899).    Gordon  v.  Appeal  Tax  Court, 
3  How.  133  (1845),  held  that  an  exemp- 
tion prohibiting  any  "further  tax  or 
burden   upon  them,"  the    banks,   ex- 
empted the  shares  of   stock.     Again, 
where  the  charter  provided  that  "  the 
capital  stock  of  said  company  shall  be 
forever    exempt    from    taxation,    the 
shares  of  stock  cannot  be  taxed.    .    .    . 
Each  share  is  a  part  of  the  whole,  and, 
as  the  whole  is  exempt  from  taxation,  it 
follows  that  each  part  or  share  must 
also  be  exempt."    Tennessee  v.  Whit- 
worth,  22  Fed.  Rep.   75   (1884).     And 
the  purchaser  and  successor  of  a  rail- 
road, taking  by  statute  all  its  rights 
and  privileges,  is  also  exempt  in  the 
same  manner.  Tennessee  u  Whitworth, 
22  Feci  Rep.   81;  aff'd,   117   U.  S.  139 
(77)  1 


§  568.] 


TAXATION    OF    STOCK    AND    CORPORATIONS.  [CH.  XXXIV. 


As  regards  the  second  class  of  exemptions,  it  seems  to  be  es- 
tablished by  the  great  weight  of  authority  that  an  exemption  of 
the  shares  of  stock  from  taxation  exempts  also,  by  implication,  the 
corporate  franchises,  the  capital  stock,  and  tangible  property  from 
any  tax.^  Where  the  charter  compels  a  corporation  to  pay  an  an- 
nual tax  on  each  share  of  stock  "  in  lieu  of  all  other  taxes,"  the 
stockholders  themselves  cannot  be  taxed  on  their  stock.^  Such  an 
exemption,  however,  does  not  prevent  the  state  from  levying  a  tax 


Tax  Cases,  13  G.  &  J.  (Md.)  117  (1841). 
In  County  Com'rs  v.  Annapolis,  etc.  R. 
R,  47  Md.   592  (1877),  the  court  said: 
"To  make  out  the  claim  to  this  exemp- 
tion from  the  taxing  power  of  the  state, 
so  essential  to  the  support  of  its  govern- 
ment, it  is  incumbent  upon  corpora- 
tions to  show  that  the  power  to  tax 
has  been  clearly  relinquished  by  the 
state;  and  if  this  has  not  been  done  in 
clear  and  explicit  terms,  or  by  neces- 
sary implication,  the  question  whether 
or  not  the  exemption  has  been  granted 
must  be  resolved  in  favor  of  the  state." 
Citing  Providence  Bank  v.  Billings,  4 
Pet.  514  (1830);    Wilmington  11.11.1?. 
Reid,  13  Wall.  264  (1871);  Philadelphia 
&  W.  R.  R.  V.  State,  10  How.  376  (1850). 
But  a  clear  exemption  of  the  shares  of 
stock  is  a  contract  which  is  protected 
by    the    United    States    constitution. 
State  V.  Baltimore,  etc.  R.  R,  48  Md.  49 
(1877).     A  charter  provision,   however, 
that  a  certain  tax  shall  be  paid  by  the 
corporation  does  not  prevent  a  subse- 
quent change  in  that  tax.     Delaware 
Railroad  Tax,  18  Wall.  206  (1873).     And 
an  exemption  by  the  state  has  been 
held  not  to  exempt  the  shares  from 
taxation  by  a  municipality.     Gordon  v. 
Mayor,  etc.,  5  Gill  (Md.),  231  (1847). 

1  In  State  v.  Bank  of  Commerce,  53 
Fed.  Rep.  735  (1892),  it  is  held  that  a 
provision  imposing  a  tax  on  each  share 
of  stock,  "  which  shall  be  in  lieu  of  all 
other  taxes,"  exempts  the  property  of 
the  company  as  well  as  the  stock  from 
further  taxation.  Scotland  County  v. 
Missouri,  etc.  Ry.,  65  Mo.  123  (1877),  the 
court  saying :  "  It  is  clear  that  a  tax  on 
the  property  represented  by  the  stock 

l: 


is  substantially  a  tax  on  the  stock."  An 
exemption  of  shares  of  stock  from  "any 
tax  or  impost  whatsoever  "  exempts  the 
capital  stock  also  by  implication.  Han- 
cock V.  Singer  Mfg.  Co.,  62  N.  J.  L.  289 
(1898).  See  also  County  Com'rs  v.  Anna- 
polis, etc.  R.  R.,  47  Md.  592  (1877),  where 
the  court  said :  "  It  is  settled  by  repeated 
decisions  of  this  court,  which  we  are 
not  disposed  to  disturb,  that  the  ex- 
emption of  the  shares  of  the  capital 
stock  operates  as  an  exemption  of  the 
property  of  the  corporation,  or  so  much 
of  it  as  the  corporation  is  fairly  author- 
ized to  hold  for  the  proper  exercise  of 
its  franchises;  and  this  upon  the  prin- 
ciple that  the  shares  of  the  stock  in  the 
hands  of  the  shareholders  represent  the 
property   held    by    the    corporation; " 
Cape  Fear  Bank  v.  Edwards,  5  Ired.  L. 
(N.    C.)   516  (1845),  where  the   charter 
said:  "  The  said  bank  shall  not  be  liable 
to  any  further  tax;  "  Mayor,  etc.  v.  Bal- 
timore &  O.  R  R,  6  Gill  (Md.)  288  (1848); 
Tax  Cases,  12  G.  &  J.  (Md.)  117  (1841); 
Gordon  v.  Mayor,  etc.,  5  Gill  (Md.),  231 
(1847).     In   Wilmington,  etc.  R   R  v. 
Reid,  64  N.  C.  226  (1870),  however,  it  was 
held  that  an  exemption  of  shares  of 
stock  does  not  exempt  the  corporate 
franchise  from  taxation.     Raleigh,  etc. 
R  R  V.  Reid,  64  N.  C.  155  (1870).     And 
in  State  v.  Petway,  2  Jones,  Eq.  (N.  C.) 
396  (1856),  it  was  held  that  a  charter 
provision  that  the  shares  of  stock  should 
be  taxed  a  certain  amount  did  not  pre- 
vent a  tax  on  dividends. 

2  Bank  of  Commerce  v.  Tennessee,  161 
U.  S.  134  (1896).    On  a  rehearing  the  de- 
cision in  this  case  was  modified  so  as  to 
allow  a  recovery  against  holders  of  new 
J18 


CH.  XXXIV,]  TAXATION    OF    STOCK    AND    CORPORATIONS.  [§  5G9. 

on  the  capital  stock,^  and  such  an  exemption  is  lost  by  a  judicial 
sale  of  the  franchises  of  the  company .2  A  statute  conferring  upon 
a  new  corporation  "  all  the  rights  and  privileges  "  of  a  former  cor- 
poration does  not  confer  such  an  exemption.'  ITor  does  such  ex- 
emption continue  where  the  charter  is  so  amended  as  to  change 
an  insurance  company  into  a  banking  company.^  ISTor  is  such  an 
exemption  good  where,  after  the  granting  of  a  charter,  but  before 
the  first  organization  meeting,  a  new  constitution  is  adopted  by  the 
state  forbidding  such  exemptions.^  An  exemption  of  stock  does 
not  exempt  the  propert}'-  of  the  corporation  where  the  charter  pro- 
vides against  such  latter  exemption.^  Exemptions  have  no  effect 
and  are  of  no  avail  beyond  the  boundaries  of  the  state  granting 
them;  and  accordingly  a  non-resident  stockholder,  who  is  taxed 
on  his  stock  in  the  state  where  he  resides,  cannot  defeat  that  tax 
by  reason  of  exemptions  enjoyed  within  the  state  creating  the  cor- 
poration.' 

B.    TAXATION   OF   NATIONAL-BANK    STOCK. 

§  569.  General  rules. —  It  is  one  of  the  established  principles  of 
constitutional  law  in  this  country  that  the  instruments  of  govern- 
ment by  the  United  States  shall  not  be  taxed  by  any  state,  and 
also  that  those  of  a  state  shall  not  be  taxed  by  the  United  States. 
Accordingly,  bonds  issued  by  the  United  States  government  can- 
not be  taxed  by  any  state.^  So,  also,  when  the  old  United  States 
Bank  was  in  existence,  it  was  held  that  neither  the  banl>:  nor  its 
capital  stock  could  be  taxed  by  a  state.  But  it  was  also  held  that, 
inasmuch  as  the  interest  of  the  stockholders  in  the  bank  was  dif- 
ferent from  the  franchises,  property,  capital  stock,  and  the  United 
States  bonds  held  by  the  bank,  such  interest  of  the  stockholder 
could  be  taxed  by  a  state,  and  that  such  taxation  would  be  con- 
stitutional and  legal.^  The  same  rules  apply  to  the  present  national 

stock,  but  not  as  against  holders  of  old  7  Appeal  Tax  Court  v.  Patterson,  50 

stock.  Bank  of  Commerce  u  Tennessee,  Md.   354  (1878);   Appeal  Tax  Courts 

163  U.  S.  416  (1896).  Gill,  50  Md.  377  (1878).    See  also  Rail- 

1  Shelby  County  v.  Union,  etc.  Bank,  road  Co.  v.  Pennsylvania,  15  Wall.  300 
161  U.  S.  149  (1896).  (1872). 

2  Mercantile  Bank  v.  Tennessee,  161  sCooley,  Taxation  (2d  ed.),  84,  85. 
U.  S.  161  (1896).  Formerly    government     bonds     were 

3 Phoenix F.&M.  Ins.  Co.  V.Tennessee,  called  stock  both  in  England  and  in 

161  U.  S.  174  (1896).  this  country.     That  use  of  the  term, 

4  Memphis  City  Bank  v.  Tennessee,  however,  has  become  practically  obso- 

161  U.  S.  186  (1896).  lete.    See  Bank  of  Commerce  v.  New 

6  Planters' Ins.  Ca  V.Tennessee,  161  York,  2  Black,  620  (1862);   Weston  v. 

U.  S.  193  (1896).  Charleston,  2  Peters,  449  (1829). 

6  Central  R.  R.  etc.  Co.  v.  Wright,  164  9  McCulloch  v.  Maryland,  4  Wheat. 

U.  S.  327  (1896).  316,  436  (1819);  Bulow  v.  Charleston.  1 

1219 


§  569.] 


TAXATION    (>F    Slo(_K    AND    CORPOKATION8.  [CH.  XXXIV. 


banks.  A  state  tax  on  the  capital  stock  of  the  bank  is  illegal  and 
void.^  But  a  tax  on  its  real  estate  or  on  its  shares  of  stock  is  up- 
held as  legal  and  enforceable  where  such  tax  is  substantially  the 
same  as  on  state-bank  stock.^  This  is  the  law,  although  a  large 
part  or  all  of  the  bank's  capital  stock  is  invested  in  United  States 
bonds.*    The  authority  of  a  state  to  tax  shares  of  stock  in  national 


Nott  «S;  IVL  (S.  C.)  527  (1819).  See  also 
Berney  v.  Tax  Collector,  2  Bailey  (S. 
C.)  654  (1831);  National  Bank  v.  Com- 
monwealth, 9  Wall  353  (1869),  per  Mil- 
ler, J. 

1 A  state  tax  upon  the  franchise  or 
intangible  property  of  a  national  bank 
is  illegal.  Owensboro  Nat.  Bank  v. 
Owensboro,  173  U.  S.  664  (1899);  First 
Nat.  Bank  v.  Douglas  County,  3  Dill. 
298  (1873);  s.  C,  9  Fed.  Cas.  100;  Collins 
V.  Chicago,  4  Biss.  472  (1867);  S.  C„  6 
Fed.  Cas.  118;  Salt  Lake,  etc.  Bank  v. 
Golding,  2  Utah,  1  (1876);  Mayor,  etc.  v. 
First  Nat.  Bank,  59  Ga.  648  (1877); 
Bradley  v.  People,  4  Wall.  459  (1866); 
Bank  of  Commerce  v.  New  York  City, 

2  Black,  620  (1862),  reversing  People  v. 
Com'rs  of  Taxes,  23  N.  Y.  192  (1861); 
S.  C,  32  Barb.  509,  and  declaring  uncon- 
stitutional the  New  York  statutes 
under  which  the  national  banks  were 
taxed.  New  York  has  been  exceed- 
ingly unfortunate  in  its  efforts  to  tax 
national  banks.  After  the  decision  in 
Bank  of  Commerce  v.  New  York  City, 

3  Black,  620  (1862),  came  Bank  Tax 
Case,  2  Wall.  200  (1864),  declaring  un- 
constitutional the  New  York  statute  of 
April  29,  1863,  for  the  taxation  of  na- 
tional banks,  the  tax  still  being  on  the 
capital  stock.  Next  came  Van  Allen 
V.  Assessors,  3  Wall.  573  (1865)  (reversing 
Utica  V.  Churchill,  33  N.  Y.  161  —  1865. 
See  also  First  Nat.  Bank  v.  Fancher,  48 
N.  Y.  524  —  1872),  declaring  unconstitu- 
tional the  New  York  statute  of  March 
9,  1865,  taxing  the  stockholders  in  na- 
tional banks,  because  the  act  did  not 
prescribe  expressly  that  the  tax  should 
be  no  greater  than  the  tax  on  other 
shares  of  stock,  and  because  taxes  in 
New  York  on  other  corporations  were 


not  on  shares  of  stock,  but  on  the  capi- 
tal stock.  New  York  then  passed  the 
act  of  April  23,  1866,  which  was  sus- 
tained in  People  v.  Com'rs,  4  Wall.  244 
(1866).  Still  later  came  the  case  of 
People  V.  Weaver,  100  U.  S.  539  (1879), 
reversing  67  N.  Y.  516,  overruling  Peo- 
ple V.  Dolan,  36  N.  Y.  59  (1867),  and  de- 
claring void  the  New  York  tax  of  na- 
tional-bank stock,  for  the  reason  that 
the  New  York  court  of  appeals  con- 
strued the  New  York  taxation  statute 
to  allow  persons  taxed  on  ordinary  se- 
curities a  deduction  for  debts,  while  a 
similar  deduction  was  not  allowed  to 
stockholders  in  banks,  state  or  national. 
Supervisors  v.  Stanley,  105  U.  S.  305 
(1881)  [see  People  v.  Dolan,  36  N.  Y. 
59  —  1867],  practically  modified  the  pre- 
ceding case,  however,  by  holding  that 
a  stockholder  who  owed  no  debts  could 
not  complain,  and  that  those  who  did 
owe  debts  were  entitled,  not  to  a  re- 
lease from  the  tax  altogether,  but  only 
to  the  extent  of  what  the  state  ought 
to  have  allowed  as  a  deduction.  States 
cannot  tax  national-bank  currency. 
Home  V.  Green,  52  Miss.  452  (1876).  Cf. 
RuflSn  V.  Orange  County  Com'rs,  69 
N.  C.  498  (1873);  Lilly  v.  Cumberland 
County  Com'rs,  69  N.  C.  300  (1873); 
Com'rs  V.  Elston,  32  Ind.  27  (1869). 

2  Austin  V.  Boston,  96  Mass,  359  (1867); 
First  Nat.  Bank  v.  Douglas  County,  3 
Dill.  330  (1874);  s.  C,  9  Fed.  Cas.  84; 
Stetson  V.  Bangor,  56  Ma  274  (1868). 

3  Van  Allen  v.  Assessors,  3  Wall.  573 
(1865);  People  v.  Com'rs,  4  Wall.  244 
(1866).  See  also  Home  Ins.  Co.  v.  New 
York,  119  U.  S.  129  (1886).  In  taxing 
the  stock  no  reduction  is  allowed  for 
bonds  held  by  the  corporation.  Home 
Ins.  Co.  V.  Board  of  Assessors,  42  La. 


1220 


CH.  XXXIV.]  TAXATION    OF    STOCK    AND    CORPOEATIONS. 


[§  570. 


banks  is  expressly  conferred  by  the  statutes  of  the  United  States 
which  create  and  regulate  these  banks.^ 

§  570.  Place  in  ivhich  shares  of  national-hanlc  stock  may  he  taxed. 
The  Eevised  Statutes  of  the  United  States  expressly  declare  that 
non-resident  stockholders  in  a  national  bank  are  to  be  taxed  at  the 
place  where  the  bank  is  located.^  Under  this  statute  a  non-resident 
of  the  state  within  which  the  bank  is  situated  can  be  taxed  on  his 
stock  onlv  where  the  bank  is  located.'  The  state  where  he  resides 
cannot  also  tax  him  on  such  stock.  As  regards  residents  of  the 
state  within  which  the  bank  is  located,  the  state  itself  determines 
where  the  tax  is  to  be  levied.*     If  the  state  statute  requires  that 


Ann.   1131  (1890);    Parker  v.  Sun  Ins. 
Co.,  42  La.  Ann.  1172  (1890). 

1 U.  S.  Rev.  Stat,  §  5219  (taken  from 
act  of  June  8,  1864,  as  amended  by  act 
of  Feb.  10,  1868).  The  case  of  People  v. 
Weaver,  100  U.  S.  539,  543  (1879),  says 
that  the  effect  of  the  act  of  congress, 
as  regards  the  taxation  of  national 
banks,  is  that  congress  says  to  the 
states:  "You  may  tax  the  real  estate 
of  the  banks  as  other  real  estate  is 
taxed,  and  you  may  tax  the  shares  of 
the  bank  as  the  personal  property  of 
the  owner  to  the  same  extent  you  tax 
other  moneyed  capital  invested  in  your 
state.  It  was  conceived  that  by  this 
qualification  of  the  power  of  taxation 
equality  would  be  secured  and  injus- 
tice prevented."  Wasson  v.  Indianap- 
olis Nat.  Bank,  107  Ind.  206  (1886).  New 
shares  cannot  be  taxed  until  the  in- 
crease has  been  approved  by  the  comp- 
troller of  the  currency.  Charleston  v. 
People's  Nat.  Bank,  5  S.  C.  103  (1873). 
A  state  tax  on  a  national  bank  giving 
a  lien  to  the  bank  on  the  stock  of  the 
stockholders  for  such  tax  is  not  legal 
where  the  bank  is  insolvent.  Stapylton 
V.  Thaggard,  91  Fed.  Rep.  93  (1898). 
Taxes  upon  the  capital  stock  of  a  na- 
tional bank  cannot  be  collected  from 
the  receiver  thereof.  Gray  v.  Logan 
County,  7  Okl.  321  (1898). 

-  Such  was  the  effect  of  the  amend- 
ment of  1866.  Previous  to  that  time 
there  was  controversy  herein  as  to  the 
meaning  of  the  act  of  1863.  See  Austin 
V.  Boston,  96  Mass,  359  (1867). 


3  See  Mclver  v.  Robinson,  53  Ala.  456 
(1875);  Williams  v.  Weaver,  75  N.  Y.  30 
(1878);  Kyle  v.  Fayetteville,  75  N.  C.  445 
(1876) ;  National  Bank  v.  Commonwealth, 
9  Wall  353  (1869);  Lionberger  v.  Rouse, 
9  Wall.  468  (1869). 

*  Austin  V.  Aldermen,  7  Wall.  694 
(1886).  The  tax  may  be  levied  on  resi- 
dent stockholders  in  the  city,  county, 
or  town  where  they  reside.  Austin  v. 
Boston,  96  Mass.  359  (1867).  And  the 
cashier  of  the  bank  may  be  required  by 
statute  to  send  to  the  clerks  of  the  vari- 
ous towns  the  names  of  such  stockhold- 
ers as  reside  in  those  towns.  Waite  v. 
Dowley,  94  U.  S.  527  (1876).  As  to  the 
taxation  of  national- bank  stock  in  Iowa, 
see  First  Nat.  Bank  v.  Albia,  52  N.  W. 
Rep.  334  (1892).  As  to  the  assessment 
of  bank  stock  in  West  Virginia,  see 
Bank  of  Bramwell  v.  Mercer  County 
Court,  36  W.  Va.  341  (1892).  Concern- 
ing the  taxation  of  national-bank  stock 
in  Nevada,  see  First  Nat.  Bank  v.  Kreig, 
21  Nev.  404  (1893).  National-bank  stock 
in  Delaware  may  be  taxed  by  the  state. 
First  Nat.  Bank  v.  Herbert,  44  Fed.  Rep. 
158  (1890).  As  to  the  taxation  of  bank 
stock  in  Washington,  see  First  Nat. 
Bank  v.  Hungate,  62  Fed.  Rep.  548 
(1894).  As  to  the  taxation  of  national- 
bank  stock  in  Indiana,  see  First  Nat. 
Bank  v.  Turner,  154  Ind.  456  (1900).  The 
Kentucky  tax  on  national-bank  stock 
is  legal.  First  Nat.  Bank  v.  Stone,  88 
Fed.  Rep.  409  (1898). 


1221 


§  570.J 


TAXATION    OF   STOCK    AND    OOKPORATIONS.  [OH.  XXXIV. 


the  whole  tax  shall  be  paid  in  the  city,  county,  or  town  where  the 
bank  is  located,  even  though  some  of  the  stockholders  reside  in 
other  counties  or  cities,  the  statute  must  be  obeyed.^  Generally, 
however,  the  statute  requires  that  stockholders  residing  in  the  state 
shall  be  taxed  at  their  place  of  residence  on  stock  owned  by  them 
in  a  national  bank  within  that  state.^  If  the  statute  is  silent  herein, 
then  the  state  statutes  regulating  the  taxation  of  stockholders  in 
other  corporations  are  to  apply  to  stockholders  in  national  banks 
situated  within  the  state.  A  state  statute  may  require  a  national 
bank  to  pay  a  tax  on  the  stock  of  non-resident  as  well  as  of  resident 
stockholders  in  the  bank,^  The  statute  may  require  the  bank  ta 
retain  from  dividends  the  tax  on  the  shares  of  stock,  such  tax  being 
determined  by  the  amount  of  dividends.*  The  collection  of  a  tax 
on  national-bank  stock  may  be  enforced  by  the  same  procedure 
through  which  taxes  on  other  personal  property  are  collected.^  A 
non-resident  holder  of  national-bank  stock  is  not  personally  liable- 
for  a  tax  thereon,  under  the  New  York  statute.® 


1  National  Bank  v.  Commonwealth,  9 
Wall.  353  (1869);  Tappan  v.  Merchants' 
Nat.  Bank,  19  Wall.  490  (1873);  Provi- 
dent Inst.  V.  Boston,  101  Mass.  575  (1869); 
McLaughlin  v.  Chad  well,  7  Heisk. 
(Tenn.)  389  (1872).  Craft  v.  Tuttle,  27 
Ind.  333  (1866),  holds  that,  if  a  munici- 
pality has  no  power  to  tax  shares  in 
state  banks,  it  cannot  tax  national-bank 
shares. 

2  Clapp  V.  Burlington,  43  Vt.  579  (1870). 
See  Trustees  of  Eminence  v.  Deposit 
Bank,  13  Bush  (Ky.),  538  (1877);  Farmers' 
Nat,  Bank  v.  Cook,  32  N.  J.  L.  347  (1867). 
Cf.  State  V.  Hart,  31  N.  J.  L.  434  (1866); 
State  V.  Haight,  31  N.  J.  L.  399  (1866). 
The  decision  in  North  Ward  Nat  Bank 
I'.  Newark,  39  N.  J.  L.  380  (1877),  how- 
ever, placed  New  Jersey  among  the 
states  which  levy  the  tax  in  the  most 
approved  manner,  residents  being  taxed 
where  they  reside,  non-residents  being 
taxed  at  the  domicile  of  the  corporation. 
See  also  Kyle  v.  Fayetteville,  75  N.  C.  445 
(1876);  Buie  v.  Fayetteville  Com'rs,  79 
N.  C.  267  (1878);  Austin  v.  Boston,  96 
Mass.  359  (1867);  First  Nat.  Bank  v. 
Smith,  65  111.  44  (1872);  Baker  v.  First 
Nat.  Bank,  67  IlL  297  (1873);  Clapp  v. 


Burlington,  42  Vt.  579  (1870);  Howell  v. 
Cassopolis,  35  Mich.  471  (1877).  Cf. 
Mintzer  v.  Montgomery  County,  54  Pa. 
St.  139  (1867).  For  taxation  of  national- 
bank  stock  under  the  Alabama  act,  see 
Maguire  v.  Board  of  Revenue,  71  Ala. 
401  (1882). 

3  Merchants',  etc.  Bank  v.  Pennsyl- 
vania, 167  U.  S.  461  (1897). 

*  Central  Nat.  Bank  v.  U.  S.,  137  U.  S. 
355  (1890).  C/.  First  Nat,  Bank  v.  Rich- 
mond, 39  Fed.  Rep.  309  (1889).  The  tax- 
ation of  the  capital  stock  of  a  national 
bank  against  the  bank  in  solido  is  in- 
valid. It  may  be  collected  from  the 
bank,  but  should  be  assessed  against 
the  stockholders.  Deductions  should 
also  be  allowed  when  allowed  on  other 
similar  property.  Leoti  Nat.  Bank  v, 
Fisher,  45  Kan.  726  (1891). 

5  Palmer  v.  McMahon,  133  U.  S.  660 
(1890).  A  tax  on  national-bank  stock, 
to  be  collected  in  the  first  instance  from 
the  bank,  cannot  be  collected  from  the 
receiver  of  the  bank,  the  bank  being 
insolvent.  Boston  v.  Beal,  51  Fed.  Rep. 
306  (1892). 

••City  of  New  York  v.  McLean,  170 
N.  Y.  374  (1902). 


1233 


CH.  XXXIV.]  TAXATION    OF    STOCK    AND    COKPOEATIONS. 


[§  571. 


§  571.  Tlib  tax  must  not  te  greater  than  that  imiwsed  on  otlier 
^^  moneyed  cajntat" — The  most  difficult,  unsettled,  and  litigated 
questions  connected  with  the  taxation  of  shares  of  stock  in  national 
banks  arise  from,  the  meaning  and  application  of  that  provision  of 
the  statutes  of  the  United  States  requiring  that  the  taxation  of  na- 
tional-bank shares  of  stock  shall  not  be  at  a  higher  'rate  than  the 
taxation  of  other  "  moneyed  capital  "  within  the  state.  The  term 
"moneyed  capital"  as  used  in  the  statute  authorizing  taxation  of 
national-bank  stock  refers  to  capital  which  comes  in  competition 
with  the  business  of  national  banks.^  The  words  "  moneyed  cap- 
ital "  have  been  construed  to  mean  "  not  only  bonds,  stocks,  and 
money  loaned,  but  all  credits  and  demands  of  every  character  in 
favor  of  the  taxpayer."  ^  This  has  been  the  subject  of  much  con- 
troversy, however;  and  the  decisions  go  very  far  in  upholding  the 
tax,  if  substantial  justice  has  been  done.^    Money  invested  in  rail 


1  First  Nat.  Bank,  etc.  v.  Chapman, 
173  U.  S.  205  (1899). 

2  Wasson  v.  Indianapolis  Nat.  Bank, 
107  Ind.  206  (1886);  Boyer  v.  Boyer,  113 
U.  S.  689  (1884).  Shares  of  stock  in 
banks  are  other  moneyed  capital,  but 
shares  of  stock  in  other  corporations 
are  not  necessarily  so.  "  Moneyed  cap- 
ital "  means  money  put  out  by  way  of 
loan,  discount,  etc.,  or  invested  in  stocks 
of  banks,  etc.,  which  put  out  money  by 
way  of  loan,  discount,  etc.  Trust  com- 
panies are  different  from  banks  herein. 
Mercantile  Bank  v.  New  York,  121  U.  S. 

138  (1887),  affirming  28  Fed.  Rep.  776.  A 
tax  on  national-bank  stock  is  legal 
although  stock  in  state  and  savings 
banks  is  not  taxed  directly,  but  the  cor- 
poration itself  is  taxed  in  another  way. 
Richards  v.  Rock  Rapids,  31  Fed.  Rep. 
505  (1887).  See  also  Hepburn  v.  School 
Directors,  23  Wall  480  (1874).  Other 
moneyed  capital  means  capital  em- 
ployed in  banking  or  loaning,  and  not 
in  business.    Talbott  v.  Silver  Bow  Co., 

139  U.  S.  438  (1891). 

3  People  V.  Commissioners,  4  Wall.  256 
(1866);  Adams  v.  Nashville,  95  U.  S.  19 
(1877).  Re  McMahon,  103  N.  Y.  176  (1886), 
holds  that  shares  of  stock  in  railroads, 
manufacturing,  and  other  corporations 
are  not  "  moneyed  capital  "  in  the  sense 
in  which  these  terms  are  used  in  the  act 


of  congress.  See  also  First  Nat.  Bank 
V.  Waters,  7  Fed.  Rep.  152  (1881).  Provi- 
dent Inst.  V.  Boston,  101  Mass.  575  (1869), 
holds  that  the  comparison  is  to  be  made 
with  other  moneyed  capital  in  the  same 
town  or  city  where  the  tax  is  levied. 
See  also  People  v.  Moore,  1  Idaho,  504 
(1873).  Subject  to  this  rule  the  shares 
of  national  banks  may  be  assessed  at 
their  value  even  above  par.  Hepburn 
V.  School  Directors,  23  Wall.  480  (1874); 
People  V.  Commissioners  of  Taxes,  94 
U.  S.  415  (1876);  S.  C,  67  N.  Y.  516  (1876), 
affirming  8  Hun,  536;  St,  Louis  Nat. 
Bank  v.  Papin,  4  Dill,  29  (1876);  S,  C,  21 
Fed.  Cas.  203,  the  court  saying,  also, 
that  the  assessors  may  ascertain  that 
value  by  including  "all  reserve  funds, 
profits,  earnings,  and  other  values" 
when  the  intent  of  the  statute  is  to 
base  the  tax  "  upon  an  inquiry,  inter 
alia,  into  the  actual  value  of  the  prop- 
erty of  the  banks  so  far  as  this  imparts 
or  confers  a  value  upon  the  shares."  A 
stockholder  cannot  enjoin  the  tax  un- 
less he  first  pays  such  part  of  it  as  he 
admits  is  legal.  Rosenberg  v.  Weekes, 
67  Tex.  578  (1887).  The  stock  is  listed 
against  the  stockholder,  not  against  the 
bank.  Miller  v.  First  Nat.  Bank,  46 
Ohio  St.  424  (1889).  The  statute  may 
authorize  taxation  for  years  past.  State 
V.  Simmons,  70  Miss.  485  (1893), 


1223 


§  571.] 


TAXATION   OF    STOCK   AND    CORPORATIONS.  [CH.  XXXIV. 


roads,  manufacturing,  mining,  or  mortgages  is  not  "  moneyed  cap- 
ital "  competing  witti  national-bank  capital,  and  hence  a  tax  on  the 
latter  need  not  be  at  the  same  rate  as  upon  the  former.'  The  fact 
that  by  statute  general  stocks  can  be  taxed  at  only  thirty  cents  on 
each  hundred  dollars  does  not  prevent  a  higher  rate  on  national- 
bank  stock.2 

The  method  of  taxing  shares  of  national-bank  stock  need  not 
correspond  to  that  followed  in  taxing  other  corporations  in  the 
state.^  The  material  point  is  that  national-banks  must  not,  as  a  re- 
sult, be  taxed  higher  than  other  moneyed  investments.  If  this  rule 
is  observed,  it  is  of  little  consequence  whether  the  tax  on  national- 
bank  stock  is  levied  and  assessed  in  the  same  way  as  other  corpo- 
rations are  taxed. 

If  the  state  laws  allow  a  deduction  to  a  person  taxed  on  bonds. 


'  Aberdeen  Bank  v.  Chelialis  County, 
166  U.  S.  440  (1897).  ♦'  Moneyed  capital 
means  money  employed  in  a  business 
whose  object  is  to  make  profit  by  in- 
vesting such  money  in  securities  by 
way  of  loan,  discount,  or  otherwise, 
which  from  time  to  time,  in  the  course 
of  business,  are  reduced  again  to  money 
and  reinvested."  Mercantile  Nat.  Bank 
V.  Shields,  59  Fed.  Rep.  953  (1894). 

'■^  National  Bank  v.  Mayor,  etc.,  100 
Fed.  Rep.  24  (1900). 

3  Davenport  Bank  v.  Davenport,  123 
U.  S.  83  (1887).  "There  is  no  reason  to 
suppose  that  congress  cared  at  all 
about  the  mode  the  states  might  adopt 
for  the  collection  of  their  taxes.  A  tax 
imposed  on  the  capital  or  property  of  a 
corporation  falls  as  effectually  on  the 
capital  of  the  shareholder  represented 
by  his  shares  as  does  a  tax  upon  the 
shares  directly;  and  although,  in  legal 
discrimination,  a  tax  upon  the  former 
is  not  a  tax  upon  the  latter,  practically 
and  substantially  taxation  of  the  capi- 
tal of  the  corporation  is  taxation  of  the 
capital  of  the  shareholder."  A  tax  on 
national-bank  stock  was  upheld,  though 
all  other  stock  except  bank  stock  was 
exempt,  the  tax  being  on  capital  stock, 
in  Mercantile  Nat.  Bank  v.  New  York, 
28  Fed.  Rep.  776  (1886);  aff'd,  121  U.  S. 
138.  The  mode  of  collection  need  not 
be  the  same.    The  state  may  compel 


the  bank  to  pay  the  tax.  National 
Bank  v.  Commonwealth,  9  Wall.  353, 
363  (1869),  per  Miller,  J.  But  if  the  as- 
sessment is  illegal,  in  that  no  notice 
and  opportunity  is  given  to  the  stock- 
holder to  appear  and  resist  the  tax,  it 
cannot  be  enforced.  Albany  City  Nat. 
Bank  v.  Maher,  9  Fed.  Rep.  884  (1882). 
In  general,  cf.  Van  Allen  v.  Assessors,  3 
Wall.  573  (1865);  Bradley  v.  People,  4 
Wall.  459  (1866);  Hubbard  v.  Johnson 
County,  23  Iowa,  130  (1807);  People 
V.  Assessors,  29  How.  Pr.  371  (1865): 
Wright  V.  Stelz,  27  Ind.  338  (1866),  over- 
ruling Whitney  v.  Madison,  23  Ind.  331 
(1864),  on  certain  points;  Cooley,  Taxa- 
tion (2d  ed.),  390.  Contra,  People  v. 
Bradley.  39  IlL  130  (1866).  See  also 
Frazer  v.  Siebern,  16  Ohio  St.  614  (1866); 
Smith  V.  First  Nat.  Bank,  17  Mich.  479 
(1869);  Van  Slyke  v.  State,  23  Wis.  655 
(1869);  Bagnall  v.  State,  25  Wis.  112 
(1869),  Where  a  state  and  also  a  local 
tax  are  levied  on  shares  of  stock  in  a 
state  bank,  and  the  local  tax  is  de- 
clared illegal,  the  same  local  tax  is  ille- 
gal as  regards  shares  in  national  banks. 
City  Nat.  Bank  v.  Paducah,  2  Flip.  61 
(1877);  s.  C,  5  Fed.  Cas.  755.  Even 
though  the  property  of  other  corpora- 
tions is  taxed  instead  of  the  stock,  yet 
it  may  be  legal  to  tax  stock  in  national 
banks.  Nevada  Nat.  Bank  v.  Dodge,  119 
Fed.  Rep.  57  (1902). 


1224 


■CH.  XXXIV.]  TAXATION    OF    STOCK    AND    CORPORATIONS. 


[§  5T1. 


notes,  and  similar  property  for  debts  due  from  him  to  others,  a 
similar  deduction  must  be  allowed  to  stockholders  taxed  on  their 
shares  in  a  national  bank.^     If  the  statute  does  not  allow  the  same 


1  Evansville  Bank  v.  Britton,  105  U. 
S.  323  (1881),  aflf-g  8  Fed.  Rep.  867.  But 
a  deduction  to  individuals  for  United 
States  bonds  held  by  them  will  not  in- 
validate a  tax  on  the  national-bank 
stock  without  a  deduction  for  bonds 
held  by  the  bank.  Bressler  v.  V/ayne 
County,  25  Neb.  468  (1889);  People  v. 
Commissioners,  4  Wall.  244  (1866);  First 
Nat.  Bank  v.  Ayers,  160  U.  S.  669  (1896). 
In  Wasson  v.  Indianapolis  Nat.  Bank, 
107  Ind.  206  (1886),  the  court  held  that 
the  deduction  allowed  to  others  is  fatal 
to  a  tax  on  national-bank  shares  with- 
■out  that  deduction  only  when  it  is 
"material  and  serious:  "  and  that  that 
depends  on  the  proportion  of  moneyed 
capital  which  is  allowed  the  deduction 
to  that  moneyed  capital  which  is  not 
allowed  it.  If  material,  the  national- 
bank-sliare  tax  is  to  be  allowed  a.  simi- 
lar deduction.  National-bank  stock 
cannot  be  taxed  at  a  higher  valuation 
on  its  actual  value  than  other  moneyed 
property  is  valued  at.  Deductions  al- 
lowed to  other  moneyed  capital  must 
also  be  allowed  on  national-bank  stock. 
Whitbeck  v.  Mercantile,  etc.  Bank,  127 
U.  S.  193  (1888).  A  stockholder  in  a  na- 
tional bank  is  entitled  to  the  same  de- 
ductions as  a  stockholder  in  a  state 
bank.  McHenry  v.  Downer,  116  Cal.  20 
(1897).  In  Ohio  the  debts  of  a  stock- 
holder in  a  national  bank  cannot  be  de- 
ducted from  the  value  at  which  the 
stock  is  taxed.  Niles  v.  Shaw,  50  Ohio 
St.  370  (1893).  In  Ohio  no  deduction  for 
the  debts  of  the  stockholder  is  made  in 
the  taxation  of  national-bank  stoc^k. 
Chapman  v.  First  Nat.  Bank,  56  Ohio 
St  310  (1897).  Deductions  allowed  gen- 
eral taxpayers  of  their  debts  from  cred- 
its taxed  against  them  give  to  national- 
bank  stockholders  theright  to  a  similar 
reduction  in  the  taxation  of  their  stock. 
Non-resident  stockholders  are  entitled 
•>to  the  same  deductions.     Mercantile 


Nat.  Bank  v.  Shields,  59  Fed.  Rep.  953 
(1894). 

Where  a  tax  on  stock  is  not  illegal 
except  in  that  the  assessors  have  pro- 
ceeded in  a  wrong  manner,  the  court 
will  not  enjoin  its  collection  unless  the 
plaintiff  stockholders  pay  in  such  a  tax 
as  would  have  been  legal.  Frazer  v. 
Siebern,  16  Ohio  St.  614  (1866);  Cum- 
mings  V.  Merchants'  Nat.  Bank,  101  U.  S. 
153  (1879);  Supervisors  v.  Stanley,  105 
U.  S.  305  (1881);  s.  c.  sub  nom.  Stanley' 
V.  Supervisors,  121  U.  S.  535  (1887),  hold- 
ing that  the  stockholder  cannot  recover 
back  the  excess  of  tax  where  he  has  not 
attempted  to  have  the  tax  remedied; 
Hills  V.  Exchange  Bank,  105  U.  S.  819 
(1881),  reversing  National  Albany  Exch. 
Bank  v.  Wells,  5  Fed.  Rep.  248.  In  con- 
sequence of  this  escape  of  the  stock- 
holders from  taxation,  a  special  statute 
was  passed  levying  a  back  tax.  See 
N.  Y.  Laws,  1883,  ch.  341.  Such  a  stat- 
ute is  constitutional.  See  McVeagh  v. 
Chicago,  49  IlL  318  (1868).  The  legisla- 
ture may  cure  any  defects  in  the  levy 
of  taxes  in  past  years,  provided  such 
defects  could  have  been  so  modified  be- 
fore the  levy  was  made.  Williams  v. 
Supervisors  of  Albany,  123  U.  S.  154 
(1887),  sustaining  cli.  345,  Laws  of  1883. 
Cf.  City  Nat.  Bank  v.  Paducah,  2  Flip. 

61  (1877);  s.  C,  5  Fed.  Cas.  755.  A  de- 
duction to  other  moneyed  corporations 
for  their  real  estate  must  be  allowed  in 
taxing  national-bank  shares.  Pollard 
V.  State,  65  Ala.  628  (1880),  overruling 
Mclver  v.  Robinson,  53  Ala.  456  (1875), 
and  Sumter  County  v.  National  Bank, 

62  Ala,  484  (1878).  In  general,  see  also 
Ruggles  V.  Fond  du  Lac,  53  Wis.  436 
(1881);  Miller  v.  Heilbron,  58  Cal.  133 
(1881);  St.  Louis  Nat.  Bank  v.  Papiu,  4 
Dill.  29  (1876);  Covington,  etc.  Bank  v, 
Covington,  21  Fed.  Rep.  484  (1884).  A 
deduction  for  debts,  if  allowed  to  per- 
sons taxed  generally,  must  be  allowed 


1325 


§  571.] 


TAXATION   OF    STOCK   AND   COEPOKATIONS.  [CH.  XXXIV. 


to  the  latter,  and  the  courts  of  the  state  refuse  to  allow  the  deduc- 
tion, then  the  tax  is  illegal.  Such  was  the  result  of  a  tax  in  New 
York  on  national-bank  stock.' 


national-bank  stockholders  who  are 
taxed  on  their  stock.  McAden  v.  Meck- 
lenburg County,  97  N.  C.  355  (1887). 
Deductions  are  to  be  allowed  the  na- 
tional-bank stockholder  for  debts  due 
from  him  to  others  where  the  state  stat- 
ute permits  its  citizens  to  deduct  their 
debts  from  the  valuation  of  their  per- 
sonal property.  Richards  v.  Rock  Rapids, 
31  Fed.  Rep.  505  (1887);  Peavey  v.  Green- 
field, 64  N.  H.  284  (1887).  As  regards 
deductions  for  surplus  funds  which  are 
already  taxed,  see  Strafford  Nat.  Bank 
V.  Dover,  58  N.  H.  316  (1878).  Cf.  North 
Ward,  etc.  Bank  v.  Newark,  39  N.  J.  L. 
380  (1877);  First  Nat.  Bank  v.  Peter- 
borough, 56  N.  H.  38  (1875).  As  regards 
its  realty,  see  Rice  County  Com'rs  v. 
Citizens'  Nat.  Bank,  23  Minn.  280  (1877). 
In  Indiana  the  national-bank  stock- 
holder may  recover  back  such  part  of 
the  tax  as  should  have  been  deducted 
by  reason  of  his  indebtedness.  Indian- 
apolis V.  Vajen,  111  Ind.  240  (1887);  Ex- 
change  Nat.  Bank  v.  Miller,  19  Fed. 
Rep.  372  (1884). 

1  People  V.  Weaver,  100  U.  S.  539 
(1879).  The  New  York  court  held  that 
"  the  effect  of  the  state  law  is  to  permit  a 
citizen  of  New  York,  who  has  moneyed 
capital  invested  otherwise  than  in 
banks,  to  deduct  from  that  capital  the 
sum  ot  all  his  debts,  leaving  the  remain- 
der alone  subject  to  taxation,  while  he 
whose  money  is  invested  in  shares  of 
bank  stock  can  make  no  such  deduc- 
tion." The  supreme  court  of  the  United 
States  declared  the  tax  on  the  national- 
bank  shares  to  be  invalid.  But  the 
case  of  Supervisors  v.  Stanley,  105  U. 
S.  305,  315  (1881),  holds  that  the  tax  is 
not  void  absolutely.  A  deduction  al- 
lowed to  individuals  for  national  and 
state  securities,  but  not  allowed  on 
national-bank  stock,  invalidates  a  tax 
on  the  latter.    Whitney  Nat.  Bank  v. 

1 


Parker,  41  Fed.  Rep.  402  (1890).  If  the 
stockholder  owed  no  debts  he  is  not  in- 
jured; and  even  if  he  owes  debts  he 
cannot  defeat  the  tax  altogether,  but 
is  allowed  a  similar  deduction.  No 
discrimination  is  allowable,  although 
the  state  taxes  banks  and  nothing  else. 
Gorgas'  Appeal,  79  Pa.  St.  149  (1875). 
No  discrimination,  though  a  deduction 
for  debts  is  allowed  to  those  whose 
property  consists  of  debts  due  them; 
but  no  deduction  otherwise.  First  Nat. 
Bank  v.  St.  Joseph,  46  Mich.  526  (1881). 
The  exemption  of  all  capital  which  is 
wholly  invested  in  mining  is  not  a  dis- 
crimination. Silver  Bow  County  v. 
Davis,  6  Mont.  306  (1887).  Exemption 
from  taxation  of  savings  banks,  munici- 
pal bonds,  and  shares  of  stock  in  all 
foreign  and  domestic  corporations  other 
than  banks  does  not  invalidate  a  tax 
on  shares  of  stock  in  national  banks. 
Mercantile  Bank  v.  New  York,  121  U. 
S.  138  (1887);  Newark,  etc.  Co.  v.  New- 
ark, 121  U.  S.  163  (1887);  Bank  of  Re- 
demption V.  Boston,  125  U.  S.  60  (1888). 
No  discrimination  exists  in  taxation  of 
national-bank  stock  in  territory  where 
the  shares  of  stock  in  corporations  pay- 
ing taxes  on  their  property  or  capital 
stock  are  exempted  from  taxation.  Sil- 
ver Bow  County  v.  Davis,  6  Mont.  306 
(1887).  In  Nebraska  the  owner  of 
national-bank  stock,  in  listing  his 
shares  for  taxation,  is  not  entitled  to 
deduct  his  bona  fide  indebtedness  from 
the  value  of  such  shares  of  stock.  The 
decision  on  the  former  hearing  of  the 
case,  reported  in  25  Neb.  468,  is  over- 
ruled. Bressler  v.  Wayne  County,  32 
Neb.  834  (1891).  National-bank  shares 
in  Massachusetts  are  taxed  at  their 
actual  value,  and  the  bank  may  peti- 
tion for  a  reduction  of  the  tax.  Na- 
tional Bank  of  Commerce  v.  New  Bed. 
ford,  155  Mass.  313  (1892). 
226 


CH.  XXXIV.]  TAXATION    OF    STOCK    AND    COKPOEATIONS. 


[§  571. 


A  refusal  to  allow  a  deduction  to  stockholders  in  national  banks 
similar  to  a  deduction  allowed  on  a  tax  levied  on  other  "  moneyed 
capital "  is  held  to  be  a  discrimination  in  contravention  of  the 
statute.  Special  exemptions,  however,  of  certain  stocks  or  other 
forms  of  "  moneyed  capital "  do  not  require  that  a  similar  exemp- 
tion should  be  made  on  national-bank  stock.' 

Again,  the  national  bank  act  cannot  be  evaded  by  an  unfair  as- 
sessment of  the  shares  in  national  banks  as  compared  with  the  as- 
sessment of  other  moneyed  capital.  It  is  a  well-known  fact  and  an 
understood  matter  in  nearly  all  localities  that  no  kinds  of  property 
are  valued  at  their  actual  selling  worth  in  making  the  valuation 
for  taxation  purposes.  Consequently  if  other  moneyed  capital  is 
valued  in  the  assessment  rolls  at  a  certain  proportion  of  the  actual 
value,  and  national-bank  stock  at  a  higher  proportion,  the  tax  is 
illegal  and  cannot  be  collected.^ 


1  Thus,  a  special  contract  exemption 
of  a  few  state  bonds  from  taxation  will 
not  exempt  the  national  bonds.  Lion- 
berger  v.  Rouse,  9  Wall  468  (1869);  Hep- 
burn V.  School  Directors,  23  Wall.  480 
(1874),  where  an  exemption  of  mort- 
gages, judgments,  and  contracts  to  sell 
land  were  immaterial  therein.  See 
also  Adams  v.  Nashville,  95  U.  S.  19 
(1877);  Supervisors  v.  Stanley,  105  U.  S. 
305,  317  (1881);  Be  McMahon,  103  N.  Y. 
176  (1886);  McLaughlin  v.  Chadwell,  7 
Heisk.  (Tenn.)  389(1872);  Bojerr.  Boyer, 
113  U.  S.  689  (1885);  Everitt's  Appeal, 
71  Pa.  St.  216  (1872);  Albany,  etc.  Bank 
V.  Maher,  19  Blatchf.  175  (1882).  See 
also  Richmond  v.  Scott,  48  Ind.  568 
(1874);  Mercantile  Nat.  Bank  v.  New 
York,  28  Fed.  Rep.  776,  785  (1886). 

2  Pelton  V.  National  Bank,  101  U.  S. 
143  (1879),  the  court  saying  that  "  any 
system  of  assessment  of  taxes  which 
exacts  from  the  owner  of  the  shares  of 
a  national  bank  a  larger  sum  in  propor- 
tion to  their  actual  value  than  it  does 
from  the  owner  of  other  moneyed  cap- 
ital valued  in  like  manner  does  tax 
them  at  a  greater  rate  within  the 
meaning  of  the  act  of  congress"  Where, 
however,  the  assessors  assess  ordinaiy 
securities  at  three-fifths  of  their  actual 
value,  and  assess  bank  stock  at  its  full 
actual  value,  and  such  method  of  un- 


equal assessment  is  contrary  to  the  con- 
stitution of  the  state,  the  court  will  re- 
lieve the  stockholders  only  upon  pay- 
ment by  them  of  such  a  tax  as  would 
have  been  legal.  Cummings  v.  Mer- 
chants' Nat  Bank,  101  U.  S.  153  (1879); 
Supervisors!;.  Stanley,  105  U.S.  305(1881). 
When  the  national-bank  stock  is  assessed 
too  low,  the  fact  that  another  bank  is 
assessed  still  lower  will  not  invalidate 
the  tax  against  the  former.  People  v. 
Assessors,  2  Hun,  583  (1874).  In  First 
Nat.  Bank  v.  Treasurer,  25  Fed.  Rep. 
749  (1885),  where  ordinary  monej^ed  cap- 
ital was  assessed  at  six-tenths  of  its 
actual  value,  while  shares  in  national 
banks  were  assessed  at  a  higher  propor- 
tion of  the  real  value,  the  collection 
thereof  was  enjoined  upon  the  com- 
plainant paying  the  tax  admitted  to  be 
due.  As  to  the  pleadings,  see  National 
Bank  v.  Kimball,  103  U.  S.  732  (1880). 
Lower  valuation  of  other  property  has 
been  held  to  be  immaterial.  Wagoner 
V.  Loomis,  37  Ohio  St  571  (1881).  As  re- 
gards taxation  of  national  banks,  a  cus- 
tom of  assessing  property  at  fifty  per 
cent  of  its  value  is  not  proved  by  a  few 
examples.  Engelke  v.  Schlenker,  75  Tex. 
559  (1890).  If,  as  a  matter  of  fact,  per- 
sonal property  and  capital  of  indi- 
viduals  escape  taxation,  and  little  ef- 
fort is  made  to  tax  such  capital,  then  a 


1227 


§  572.] 


TAXATION    OF    STOCK   AND   COKPOEATIONS.  [CH.  XXXIV. 


§  572.  The  hank  may  l)ring  suit  to  restrain  an  illegal  tax  on  its 
stockholders. —  There  has  been  some  doubt  as  to  whether  a  national 
bank  could  bring  suit  to  restrain  an  illegal  tax  on  its  stockholders. 
Ordinarily  a  corporation  cannot  do  so.  Each  stockholder  must 
protect  his  own  interests.  But  where,  as  in  the  case  of  national 
banks,  the  tax  is  paid  by  the  bank  itself,  and  collected  by  it  from 
its  stockholders,  if  the  latter  refuse  to  pay  the  bank  or  recognize 
its  payment  as  legal,  many  suits  would  result.  Accordingly,  in 
order  to  avoid  a  multiplicity  of  suits,  it  is  now  well  established  that 
the  bank  itself  may  file  a  bill  in  equity  to  prevent  and  enjoin  the  col- 
lection of  an  illegal  tax  on  its  stockholders.^  A  suit  to  declare  in- 
valid a  tax  levied  on  national-bank  stock  must  be  in  equity.'^  The 
New  York  court  of  appeals  hold,  however,  that  a  suit  in  equity 

tax  on  national-bank  stock  cannot  be    See  also  Union  Nat.  Bank  v.  Chicago,  3 


enforced.  If  such  stock  is  assessed  at 
two-thirds  of  its  actual  value,  and  other 
personal  property  at  one-half  their 
value,  the  assessment  is  illegal.  First 
Nat.  Bank  v.  Lindsay,  45  Fed.  Rep.  619 
(1891). 

1  Quoted  and  approved  in  Knopf  v. 
First  Nat.  Bank,  173  111.  331  (1898);  Cily 
Nat.  Bank  v.  Paducah,  2  Flip.  61  (1877); 
S.  C,  5  Fed.  Cas.  755,  where  the  court 
said:  "The  bank  is  so  far  the  trustee  of 
the  stockholders  and  the  custodian  of 
the  dividends  that  it  is  entitled  to 
maintain  the  bill.  It  might  be  sub- 
jected to  great  annoyance  by  stock- 
holders who  denied  the  legality  of  the 
tax,  and  gave  the  bank  notice  that  it 
would  pay  at  the  peril  of  being  sued  by 
them.  It  is  certainly  no  hardship  to 
permit  the  whole  question  to  be  liti- 
gated in  a  single  action."  This  case 
holds  also  that  an  injunction  against 
the  collection  of  the  illegal  tax  will  be 
granted.  In  general,  see  also  Albany 
City  Nat.  Bank  u  Maher,  20  Blatchf. 
341  (1882);  North  Ward  Nat.  Bank  v. 
Newark,  40  N.  J.  L.  558  (1878).  Cf.  Dows 
V.  Chicago,  11  Wall.  108  (1870);  Tappan 
V.  Merchants'  Nat.  Bank,  19  Wall.  490 
(1873);  Pelton  v.  National  Bank,  101 
U.  S.  143  (1879);  Cummmgs  v.  National 
Bank,  101  U.  S.  153  (1879).  Contra,  First 
Nat.  Bank  v.  Meredith,  44  Mo.  500  (lo7-J;. 


Biss.  82  (1871);  s.  c,  24  Fed.  Cas.  615. 
As  to  the  rule  in  New  York,  see  People 
V.  Wall  Street  Bank,  39  Hun,  525  (1886); 
People  V.  Coleman,  41  Hun,  344  (1886). 
The  same  rule  does  not  apply  to  a  cor- 
poration which  brings  suit  to  prevent 
the  levy  upon  and  sale  of  a  non-resi- 
dent stockholder's  stocks  for  non-pay- 
ment of  his  tax.     Waseca  Co.  Bank  v. 
McKenna,    32  Minn.    468  (1884).     The 
case  of  Farmers'  Nat.  Bank  v.  Cook,  32 
N.  J.  L.  347  (1867),  denies  the  right  of 
the  bank  to  bring  the  action,  and  says 
"The  corporation  is  not  the  agent  o 
the  stockholders  for  any  such  purpose.' 
A  national  bank  may  file  a  bill  to  re 
strain  the  imposition  of  a  tax  on  stock 
the  bank  having  to  pay  the  tax.     But 
the  injunction  against  collection  of  the 
tax  is  granted  only  as  to  the  excess  of 
tax.    Whitney  Nat.  Bank  v.  Parker,  41 
Fed.  Rep.  402  (1890).    The  bank  cannot 
file  a  bill  in  the  federal  court  unless 
the  tax  involved  is  over  $2,000.     Sioux 
Falls    Nat.  Bank  v.  Swenson,  48  Fed 
Rep.  621  (1892).    A  national  bank  may 
bring    suit  to  relieve  its  stockholder* 
from  an  excessive  tax.    Citizens',  etc 
Bank  v.  Columbia  County,  23  Wash.  441 
(1900). 

2  Lindsay  v.  First  Nat  Bank,  156  U.  S. 
485  (18951- 


1228 


CH.  XXXIV.]  TAXATION    OF    STOCK   AND    CORPORATIONS. 


[§  5T2«. 


does  not  lie  at  the  instance  of  a  national  bank  to  enjoin  the  collec- 
tion of  taxes  on  the  stock  of  the  bank,  excepting  in  a  case  involv- 
ing fraud  or  illegal  discrimination  or  classification.^ 

C.    OTHER   METHODS    OF   TAXING    CORPORATIONS. 

§  572a.  Gener((l  principles. —  A  state  may  tax  corporations,  and 
the  rate  of  taxation  may  be  greater  or  less  than  or  equal  to  the 
rate  at  which  individuals  are  taxed.^  The  method  of  assessing  taxes 
upon  corporations  varies  of  course  in  the  different  states.^  A  state 
may  legally  distribute  the  taxes  paid  by  a  railroad  on  its  rolling- 
stock  and  personalty  among  the  counties  traversed  by  the  railroad.^ 

Where  a  company  is  really  located  in  a  city  and  does  all  its  busi- 
ness there,  but  its  articles  of  incorporation  state  its  principal  place 
of  business  as  being  in  an  adjacent  town,  the  sole  object  being  to 
evade  taxation,  the  court  will  hold  that  for  taxation  purposes  its 
principal  place  of  business  is  in  such  city.^  "Where  the  capital  stock 


1  Mercantile,  etc.  Bank  v.  Mayor,  etc., 
173  N.  Y.  35  (1902).  A  national  bank 
cannot  maintain  an  injunction  against 
the  collection  of  taxes  on  its  stock  un- 
less some  ground  of  equity  jurispru- 
dence is  involved,  and  cannot  maintain 
such  a  suit  where  the  stockholders  do 
not,  and  where  the  bank  has  nothing 
to  do  with  the  tax  unless  they  desire  to 
pay  it.  People's,  etc.  Bank  v.  Marye,  107 
Fed.  Rep.  570  (1901). 

2  It  is  constitutional  to  tax  corpora- 
tions without  taxing  individuals.  Sin- 
ger Mfg.  Co.  V.  Wright,  33  Fed.  Rep. 
131  (1887);  State  R.  R.  Tax  Cases,  92  U. 
S.  575  (1875).  Cf.  Railroad  Tax  Cases, 
13  Fed.  Rep.  722  (1882);  Santa  Clara  Co. 
V.  Railroad,  18  Fed.  Rep.  385;  s.  C,  118 
U.  S.  396  (1885).  A  tax  on  railroads  may 
be  legal,  although  the  assessment  is 
for  eighty  per  cent,  of  the  value,  while 
on  other  property  in  the  state  the  as- 
sessment is  sixty  per  cent.  Chamber- 
lain V.  Walter,  60  Fed.  Rep.  788  (1894). 
It  is  legal  for  a  state  to  impose  a  larger 
tax  on  domestic  corporations  having 
their  principal  places  out  of  the  state 
than  upon  those  having  their  principal 
places  of  business  within  the  state. 
Blue  Jacket,  etc.  Co.  v.  Scherr.  40  S.  E. 
Rep.  514  (W.  Va.  1901).  The  Kentucky 
statute  imposing  a  tax  on  corporations 


exercising  any  special  franchise,  not 
allowed  by  law  to  natural  persons^ 
does  not  apply  to  a  tobacco  warehouse 
company.  Louisville,  etc.  Co.  v.  Com- 
monwealth, 49  S.  W.  Rep.  1069  (Ky. 
1899). 

•*  A  tax  on  a  gas  company  on  gross 
receipts  and  on  dividends  by  way  of 
license  for  the  right  to  act  as  a  corpo- 
ration is  not  a  tax  upon  the  property 
or  corporate  franchises,  but  is  a  license 
fee.  Jersey  City  Gas-Light  Co.  v. 
United  Gas,  etc.  Co.,  46  Fed.  Rep.  264 
(1891). 

4  Columbus  Southern  Ry.  v.  Wright, 
151  U.  S.  470  (1894),  the  court  holding 
that  the  rolling-stock,  choses  in  action, 
etc.,  of  a  railroad  have  their  situs  at 
the  domicile  or  place  of  business  of  the 
company,  but  the  legislature  may 
change  this  situs  for  purposes  of  taxa- 
tion. 

5  Milwaukee  Steamship  Co.  v.  Mil- 
waukee, 83  Wis.  590  (1892).  Where  the 
actual  place  of  business  of  a  corpora- 
tion is  at  one  place,  but  its  nominal 
place  of  business  is  fixed  elsewhere  iv 
order  to  evade  taxation,  the  actual 
place  of  business  is  the  place  where 
the  company  will  be  taxed  under  the 
Michigan  statutes.  Detroit  Transp.  Co. 
V.   Board    of  Assessors,  91    Mich.   382 


1229 


§  572a.] 


TAXATION    OF    STOCK    AND    CORPORATIONS.  [CH.  XXXIV. 


is  invested  in  patent-rights  it  cannot  be  taxed  b}^  the  state.^     A 

state  may  compel  corporations  to  pay  taxes  for  years  past.^  * 

A  tax  on  the  capital  stock  based  upon  the  amount  of  dividend 

declared  cannot  be  evaded  by  distributing  profits  without  declar- 


(1892),  distinguishing  the  New  York 
cases.  See  also  Galveston,  etc.  Ry.  v. 
Gonzales.  151  U.  S.  496  (1894),  relative 
to  domicile  and  residence  for  purposes 
of  jurisdiction  of  the  federal  courts.  In 
regard  to  a  corporation  being  taxed  in 
another  place  in  the  state  from  the 
place  vrhere  its  principal  office  is  lo- 
cated, see  also -Re  McLean,  66  Hun.  123 
(1893);  aff'd,  138  N.  Y.  158.  It  must  be 
the  principal  place  or  places  of  business 
for  the  purposes  of  taxation  and  service 
of  process;  and  in  New  York  under 
somewhat  similar  statutes  it  is  held 
that  the  certificate  is  conclusive  as  to 
this.  Western  Transp.  Co.  v.  Scheu,  19 
N.  Y.  408  (1859).  A  domestic  corpora- 
tion will  not  be  allowed  to  deny  that 
it  has  a  place  of  business  in  the  state. 
Chapman  v.  Doray,  89  Cal.  53  (1891). 
Generally,  the  statutes  prescribe  that 
a  corporation  shall  be  taxed  where  its 
principal  office  or  place  of  business  is 
located.  People  v.  McLean,  17  Hun,  204 
(1879);  Pelton  v.  Northern  Transp.  Co., 
87  Ohio  St.  450  (1883);  Baltimore  v. 
Baltimore,  etc.  Ry.,  57  Md.  31  (1881); 
Western  Transp.  Co.  v.  Scheu,  19  N. 
Y.  408  (1859);  Glaize  v.  South  Carolina 
R.  R..  1  Strobh.  (S.  C.)  70  (1846),  holding 
that  a  corporation  may  have  a  special 
or  constructive  residence  extending  to 
the  territorial  limits  of  the  jurisdiction 
which  granted  its  charter  for  purposes 
of  taxation. 

1  Commonwealth  v.  Westinghouse 
Electric,  etc.  Co.,  151  Pa.  St.  265  (1892). 
Where  the  entire  capital  stock  is  in- 
vested in  patent-rights  and  the  business 
of  the  company  is  granting  licenses  to 
use  the  same,  the  value  of  such  patent- 
rights  is  not  a  part  of  the  capital  to  be 
taxed  in  New  York.  People,  etc.  v. 
Knight,  67  N.  Y.  App.  Div.  333  (1901). 
In  Holt  V.  Indiana  Mfg.  Co.,  80  Fed. 
Rep.  1  (1897),  it  appears  that  the  corpo- 


1230 


ration  enjoined  state  officials  from  levy- 
ing a  tax  on  capital  stock  which  repre- 
sented patent-rights  and  nothing  else. 
The  capital  stock  of  a  corporation  can- 
not be  taxed  by  a  state  where  it  has 
been  issued  for  the  right  to  make,  use, 
or  license  certain  inventions  covered  by 
patents,  there  having  been  no  apparatus 
or  tangible  property  received  for  the 
stock.  This  is  on  the  principle  that  a 
patent-right  cannot  be  taxed  by  a  state. 
Commonwealth  v.  Philadelphia  Co.,  157 
Pa.  St.  527  (1893).  Compare  People  v. 
Campbell,  138  N.  Y.  543  (1893).  The 
New  Jersey  an  nual  tax  is  legal,  although 
nearly  the  entire  capital  stock  of  the 
company  was  issued  for  patents.  State 
V,  State  Board,  61  N.  J.  L.  461  (1898). 
Where  the  stock  is  issued  in  p&vment 
for  the  exclusive  right  to  use  certain 
patented  articles  within  certain  terri- 
tory, it  is  not  invested  in  patent-rights 
so  as  to  be  exempt  from  taxation  by 
reason  of  the  acts  of  congress.  Com- 
monwealth V.  Central,  etc.  Tel.  Ca,  145 
Pa,  St.  121  (1891);  Commonwealth  v. 
Brush,  etc.  Co.,  145  Pa.  St.  147  (1891).  In 
the  case  of  Crown,  etc.  Co.  v.  State,  87 
Md.  687  (1898),  the  court  held  that  pat- 
ent-rights owned  by  the  corporation 
might  be  included  in  an  estimate  of  its 
property  for  the  purpose  of  ascertain- 
ing the  taxable  value  of  its  shares  of 
stock;  also  in  174  N,  Y.  475. 

2  McVeagh  v.  Chicago,  49  111,  318  (1868). 
An  attempt  of  the  state  to  make  a  rail- 
road corporation  pay  $1,250,000  back 
taxes,  not  levied  under  an  alleged  mis- 
taken view  of  the  law  by  former  state 
officials,  failed  in  Commonwealth  v. 
Pennsylvania  Co.,  145  Pa.  St.  266  (1892). 
Where  the  charter  provides  for  "  a  tax 
not  exceeding  twenty-five  cents  per 
annum  per  share  on  each  share  of  the 
capital  stock  whenever  the  annual  prof- 
its thereof  shall  exceed  six  per  cent.," 


OH.  XXXIV.]  TAXATION    OF    STOCK    AND    CORPOEATIONS. 


[§  572a. 


ing  a  dividend.  But  a  stock  dividend  does  not  corae  within  the 
tax  statute.^  The  fact  that  a  company  has  declared  a  dividend 
does  not  show  that  the  capital  stock  has  a  value  subject  to  taxation 
under  the  New  York  statute.^  A  corporation  claiming  that  it  is 
taxed  too  much  cannot  enjoin  collection  unless  it  offers  to  pay  the 
amount  it  admits  to  be  due.*   The  court  will,  under  the  New  Jersey 


the  legislature  may  compel  the  com- 
pany to  pay  such  tax,  and  to  pay  it  for 
twenty -five  years  past,  during  which 
time  the  company  had  evaded  payment. 
State  V.  Seaboard,  etc.  R.  R.,  53  Fed.  Rep. 
450  (1892). 

'  Lehigh,  etc.  Co.  v.  Commonwealth, 
55  Pa.  St.  448  (1867);  Commonwealth  v. 
Pittsburg,  etc.  Ry.,  74  Pa.  St.  83  (1873). 
See  State  v.  Franklin  Bank,  10  Ohio,  91 
(1840);  People  v.  Home  Ins.  Co.,  92  N.  Y. 
328  (1888).  Where  taxes  are  based  upon 
dividends,  the  tax  must  be  paid,  even 
though  a  dividend  is  declared  nearly 
equal  to  the  capital  stock,  it  being 
shown  that  the  value  of  the  stock  after 
the  declaration  of  the  dividend  was 
practically  par,  and  hence  that  the  divi- 
dend was  not  a  distribution  of  the  capi- 
tal stock.  Commonwealth  v.  Western 
Land,  etc.  Co.,  156  Pa.  St.  455  (1893). 
Where  a  company  has  in  its  treasury 
stock  in  another  company,  and  distrib- 
utes it  among  its  stockholders,  this  is  a 
dividend.  Allegheny  v.  Pittsburgh,  etc. 
Ey.,  179  Pa.  St.  414  (1897).  Where  a 
consolidation  of  three  corporations  is 
made  by  increasing  the  capital  stock  of 
one,  and  issuing  the  increased  stock  to 
the  stockholders  of  all  three  corpora- 
tions in  the  proportion  agreed  upon,  this 
is  not  a  stock  dividend,  even  though  the 
aggregate  capital  stock  was  $400,000, 
but  by  the  consolidation  is  $1,000,000. 
AUegheneyuFederal.etc.  Ry.,179  Pa,  St. 
424  (1897).  Where  a  company  leases  its 
property  to  another  company  at  a  nomi- 
nal rental,  and  the  stockholders  of  the 
first  company  transfer  their  stock  to 
the  second  company  in  exchange  for 
stock  of  the  latter,  no  dividend  is  in- 
volved, and  a  tax  on  dividends  of  the 
first  corporation  does  not  attach.  Alle- 
gheny V.  Pittsburgh,  etc.  Ry.,  179  Pa. 


St.  414  (1897).  Where  the  dividends 
declared  during  the  year  were  partly 
earned  during  prior  years,  the  latter 
portion  are  not  taxable  under  the  Penn- 
sylvania statute  taxing  the  capital 
stock  according  to  the  dividends.  Com- 
monwealth v.  Brush,  etc.  Co.,  145  Pa. 
St.  147  (1891).  Where  all  the  shares  are 
reduced  in  par  value  from  $50  to  $38, 
and  the  $12  difference  is  paid  to  the 
stockholder  in  cash,  this  is  a  reduction 
of  capital  stock  and  not  a  dividend,  and 
cannot  be  taxed  as  a  dividend.  Com- 
monwealth V.  Central  Transp.  Co.,  145  Pa. 
St.  89  (1891).  A  tax  upon  the  receipts  of  a 
railroad  is  not  a  tax  upon  dividends. 
Com'rs,  etc.  v.  Buckner,  48  Fed.  Rep.  533 
(1891).  A  dividend  declared  and  ordered 
deposited  to  the  order  of  the  stockhold- 
ers, and  so  held  until  the  further  order 
of  the  court,  is  legal,  and  the  amount 
cannot  be  taxed  as  belonging  to  the 
bank.  Pollard  v.  First  Nat.  Bank,  47 
Kan.  406  (1891).  Profits  applied  to  bet- 
terments are  not  "  dividends  earned  " 
within  the  meaning  of  a  statute  impos- 
ing taxation.  State  v.  Comptroller,  54 
N.  J.  L.  135  (1891).  See  also  §  534,  supra. 
Where  all  the  stockholders  are  officers, 
and,  instead  of  dividends,  the  corpora- 
tion distributes  its  profits  by  large  sala- 
ries, there  is  danger  that  upon  the  death 
of  one  of  them  others  may  continue 
the  payment  of  such  salaries  to  them- 
selves, even  though  they  are  executors 
of  the  deceased  ofificer's  estata  Matter 
of  Schaefer,65  N.  Y.  App.  Div.  378(1901). 
•  2  People  V.  Barker,  141  N.  Y.  251  (1894). 
s  Smith  V.  Rude.  etc.  Co.,  131  Ind.  150 
(1892).  See  also  §  572,  notes,  supra.  An 
injunction  is  not  the  proper  remedy  to 
attack  a  tax  erroneously  laid  on  the 
capital  stock.  Jones  v.  Rushville  Nat. 
Gas  Co.,  135  Ind.  595  (1893). 


1231 


572a.] 


TAXATION    OF    STOCK    AND    CORPOEATIONS.  [CH.  XXXIV, 


statute,  enjoin  a  corporation  from  doing  business  if  it  does  not 
pay  taxes  levied  upon  it.^  A  purchaser  of  a  railroad  at  foreclosure 
sale  cannot  revive  an  action  begun  by  the  mortgagor,  after  the 
giving  of  the  mortgage,  to  enjoin  the  collection  of  taxes.^  "Where 
taxes  are  based  on  the  aggregate  value  of  all  the  shares  of  stock,  unis- 
sued stock  should  not  be  considered,  even  though  ten  per  cent,  has 
been  paid  on  the  subscription  to  the  latter.* 

In  ascertaining  the  actual  value  of  capital  stock  for  taxation,  the 
price  at  which  the  stock  is  selling  is  not  taken  as  the  actual  value 
where  the  market  value  is  due  to  speculation  and  market  influences.* 
Bonds  of  a  domestic  corporation  held  by  non-residents  are  not  tax- 


^Re  Electro-Pneumatic  Transit  Co., 
51  N.  J.  Eq.  71  (1893). 

2  Keokuk,  etc.  R.  R.  v.  Scotland 
County,  152  U.  S.  318  (1894). 

3  Boston,  etc.  R.  R.  v.  Commonwealth, 
157  Mass.  68  (1893).  Even  though  a  gas 
company  issues  stock  without  the  con- 
sent of  a  state  board,  as  required  by 
statute,  yet  this  is  no  defense  to  a  tax 
levied  on  the  corporation  based  on  the 
amount  of  its  capital  stock,  including 
such  tax.  Attorney  General  v.  Massa- 
chusetts, etc.  Co.,  179  Mass.  15  (1901). 
The  whole  capital  stock  may  be  taxed 
under  a  city  charter,  although  only  a 
part  of  it  has  been  paid  in.  Shelby 
County,  etc.  Co.  v.  Shelby  ville  Trustees, 
91  Ky.  578  (1891). 

*  Commonwealth  v.  Philadelphia,  etc. 
R  R.,  145  Pa.  St."  74  (1891).  The  statute 
of  1891  in  Pennsylvania  for  taxing  cor- 
porations according  to  the  value  of 
their  capital  stock  is  a  tax  on  the  prop- 
erty, franchises,  bonds,money,andassets 
of  the  corporation,  all  of  which  are  con- 
sidered in  arriving  at  the  tax,  and  the 
indebtedness  should  also  be  considered. 
Various  decisions  on  this  statute  are 
giv6n  in  Commonwealth  v.  N.  Y.  etc.  R 
R,  188  Pa.  St.  169  (1898);  Commonwealth 
V.  Manor,  etc.  Co.,  188  Pa.  St.  195  (1898); 
Commonwealth  v.  Beech  Creek  R.  R., 
188  Pa.  St.  203  (1898);  Commonwealth 
V.  Fall  Brook  R  R,  188  Pa.  St.  199 
(1898);  Commonwealths.  Ontario,  etc. 
Ry.,  188  Pa.  St.  205  (1898).  In  Louis- 
iana the  corporation  may  sue  to 
reduce    or    annul    taxation     of     the 


shares  of  stock.  The  value  of  the  stock 
may  be  ascertained  from  various 
sources,  including  that  of  stock  for 
which  it  has  been  exchanged.  Planters', 
etc.  Co.  V.  Assessor,  41  La.  Ann.  1137 
(1889).  Where  all  the  stockholders  sell 
their  stock  at  a  certain  time,  the  price 
received  may  be  the  basis  for  the  taxa- 
tion of  the  corporate  property.  Winne- 
piseogee,  etc.  Co.  v.  Gilford,  67  N.  H. 
514  (1894).  In  the  case  of  Chicago,  etc. 
Co.  V.  State  Board  of  Equalization,  112 
Fed.  Rep.  607  (1901),  the  court,  in  speak- 
ing about  the  unreliability  of  quota- 
tions of  stock  as  a  basis  for  its  intrinsic 
value,  said  (p.  612):  "The court  knows 
by  experience  and  observation  that 
railroad  properties,  when  sold  as  an  en- 
tirety, almost  without  exception,  yield 
nothing  to  the  stockholder,  although 
the  stock  may  have  been  sold  in  share 
lots  upon  the  stock  exchange  for  years 
previously  at  advanced  figures.  The 
court  knows,  also,  from  observation, 
that  these  stock  quotations  are  fre- 
quently advanced  by  contending  inter- 
ests for  control,  or  by  short  interests  in 
the  market,  such  as  ran  the  Northern 
Pacific  within  a  year  to  quotations  al- 
most ten-fold  its  real  value.  The  court 
also  knows  from  observation  that  the 
speculative  public,  dealing  in  stock 
sales,  and  making  its  quotations,  are 
governed  largely  by  the  prospect  of 
present  dividends,  and  not  by  any  gen- 
eral conception  of  permanent  earning 
capacity.  These,  and  other  consider- 
ations that  could  be  mentioned,  make 


1232 


CH.  XXXIV.]  TAXATION    OF    STOCK    AND    CORPORATIONS. 


[§  572a. 


able  by  the  state  creating  the  corporation.^  A  statute  by  which 
Pennsylvania  requires  a  New  York  railroad  corporation  doing 
business  in  Pennsylvania  to  pay  to  the  latter  a  part  of  coupons  due  to 
residents  of  Pennsylvania,  such  coupons  being  by  their  terms  pay- 
able in  Xew  York,  is  void.^  In  Kentucky  a  railroad  cannot  be 
taxed  to  aid  in  paying  a  municipal  subscription  to  its  construction.^ 
The  franchise  to  build  and  operate  a  street  railway  is  subject  to 
taxation.  A  license  fee  may  be  imposed  on  the  railway,  although, 
under  its  franchise,  it  is  also  bound  to  pay  other  taxes  annu- 
ally.^ The  taxation  of  unincorporated  associations  is  considered 
elsewhere.'^  Where  a  railroad  company  of  one  state  is  consolidated 
with  companies  of  other  states,  the  consolidated  company  is  consid- 
ered, for  the  purposes  of  taxation,  to  be  a  corporation  of  each  state 
to  the  extent  that  its  property  is  in  that  state.  It  is  taxed  in  the 
state  on  the  capital  stock  of  the  company  which  it  absorbed.^    The 


stock  quotations  an  indicia,  but  an 
unstable  indicia,  of  the  real  value  of 
tlae  capital  stock  as  an  entirety." 

1  Railroad  Co.  v.  Jackson,  7  Wall  263 
(1868);  StateTax  on  Foreign -held  Bonds, 
15    Wail.  300  (1873);  Davenport  v.  Mis- 
sissippi, etc.  R.  R,,  12  lovra,  539   (1861); 
Commonwealth    v.  Chesapeake,  etc.  R. 
R.,  27  Gratt.  344  (1876);  People  v.  East- 
man, 35  Cal.  603  (1864),  where  the  same 
principle  was  applied  between  counties 
in  the  same  state.     Contra,  Maltby  v. 
Reading,  etc.  R  R.,  52  Pa.  St.  140  (1866). 
As  to  the  rule  where  part  of  the  capital 
stock  is  used  out  of  the  state,  see  Com- 
monwealth V.  Standard  Oil  Co.,  101  Pa. 
St.  119   (1882);  State  Treasurer  v.  Au- 
ditor-General,   46    Mich.     224     (1881); 
People  V.   Equitable,  etc.  Co.,  96  N.  Y. 
387  (1884).     The  Pennsylvania  system 
of  taxing  against  corporations  all  bonds 
issued  by  them  and  owned  by  citizens 
of  the  state,  and  compelling  the  corpo- 
ration  to  pay   the  tax  and  deduct  it 
from  the  interest  on  the  bonds,  is  con- 
stitutional.    Bell's  Gap  R.  R  v.  Penn- 
sylvania. 134  U.  S.  232  (1890). 

2  New  York,  etc.  R  R  v.  Pennsylvania, 
15HU.  S.  628  (1894),  rev'g  150  Pa.  St.  245. 
Where  a  state,  by  charter  granted  to  a 
railroad  company,  limits  the  taxation  to 
a  certain  amount,  it  cannot  afterwards 
compel  the  company  to  deduct   from 


coupons  due  on  bonds  owned  by  resi- 
dents a  part  of  such  coupons,  and  pay 
that  part  to  the  state.  New  York,  etc 
R  R.  V.  Pennsylvania,  153  U.  S.  628 
(1894). 

3  Louisville,  etc.   R   R   u.   Common- 
wealth, 89  Ky.  531  (1890). 

4  New  Orleans,  etc.  Co.  v.  New  Or- 
leans, 143  U.  S.  192  (1893). 

5  See  ch.  XXIX,  supra. 

«  Ohio,  etc.  R  R  v.  Weber,  96  111.  443 
(1880);    Chicago,  etc  Ry.   v.   Auditor- 
General,  53  Mich.  79  (1884);    Railroad 
Co.  V.  Vance,  96  U.  S.  450  (1877).  In  this 
case  a  railroad  corporation  of  Indiana 
which  had  been  recognized  by  an  act 
of  the  Illinois  legislature  as  a  corpora- 
tion of  that  state  was  held  for  taxes 
upon   the  capital  and  franchises  of   a 
road  leased  by  it  in  Illinois  and  assessed 
to  the  lessor  company,  but  charged  to 
the  lessee  company  and  to  be  collected 
from  it.     Quincy  R  R  Bridge  Co.  v. 
Adams  County,  88  111.  615  (1878),  where 
a  bridge  company  originally  incorpo- 
rated by  two  states,  and  consolidated 
by  articles  which  were  confirmed  by 
the  legislature  of  one  of  them  (Illinois),, 
was  held  to  be  a  corporation  of  that 
state  for  purposes  of  taxation.     An  in- 
corporating fee  is  not  imposed  on  the- 
whole  consolidated  capital  under  the 
New  York  statute.  People  v.  New  York, 


(78) 


1233 


§  5T2J.] 


TAXATION    OF    STOCK    AND    CORPORATIONS.  [CH,  XXXIV. 


word  "  franchise  "  has  been  construed  to  mean  the  entire  property, 
tangible  and  intangible,  when  so  intended  in  a  taxation  statute.^ 

§  572J.  ExemiMons  from  taxation.—  A  state,  if  not  restricted  by 
its  constitution,  may  exempt  the  prpperty  of  a  corporation  from 
taxation.  Such  an  exemption  constitutes  a  contract  between  the 
state  and  the  corporation,  which  cannot  be  repealed  or  changed 
by  subsequent  legislation,  unless  the  right  to  alter  or  repeal  it  has 
been  reserved  by  the  state.^    Exemptions  from  taxation,  however, 

etc.  R.  R.,   129  N.  Y.  474  (1892).      The    county  taxation  will  not  prevent  tax- 

r^i-ni-n     rv-inrr     /^^m:.f i f n +i/->Ti a  1 1 TT      rAtafcrck    Q       Q finn    \w    ct    n\f\r         A     r»n Ti t vfl (^ f.    Vlf»t,T\"Pftn 


state  may  constitutionally  charge  a 
large  fee  as  a  condition  of  granting  a 
charter.  Edwards  v.  Denver,  etc.  R.  R., 
13  Colo.  59  (1889). 

1  Adams  Express  Co.  v.  Kentucky, 
166  U.  S.  171  (1897).  A  clause  that  a 
lessee  shall  pay  all  taxes  was  construed 
to  cover  a  franchise  tax  in  the  case  of 
Thomas  v.  Cincinnati,  etc.  Ry.,  93  Fed. 
Rep.  587  (1899). 

-  See  §  568,  supra.     An  exemption  of 
a  railroad  from  taxation,  except  when 
the  dividends  exceed  eight  per  cent,  is 
a   contract  protected   by  the  federal 
constitution.     Mobile  &  Ohio  R  R.  v. 
Tennessee,  153  U.  S.  486  (1894).     An  ex- 
emption from  state  taxation  is  a  con- 
tract between  the  state  and  the  corpo- 
ration which  cannot  be  impaired  by  a 
subsequent  statute.     Such  exemption, 
however,  will  not  be  extended  to  branch 
lines  thereafter  constructed.  Wilming- 
ton, etc.  R  R  V.  Alsbrook,  146  U.  S.  279 
(1892).     See,   in   general.  Tomlinson  v. 
Branch,  15  Wall.  460  (1872):    Home  of 
the  Friendless    v.  Rowse,  8  Wall.  430 
(1869);    Wilmington   R  R  v.  Reid,  13 
Wall.  264  (1871);  Mobile,  etc.  R  R  u 
Moseley,  52  Miss.  127  (1876);  Jefferson 
Bank  v.  Skelley,  1   Black,  436  (1861), 
where  the  charter  provided  for  the  pay- 
ment of    six   per  cent,  of  the   bank's 
profits  in   lieu    of  taxes;    Livingston 
County  V.  Hannibal,  eta  R  R,  60  Mo. 
516  (1875),  where,  however,  an  exemp- 
tion from  county  taxes  was  held  not  to 
include  a  school  tax  which  originated 
after   the    charter    was    granted;    St. 
Joseph  V.  Hannibal,  etc.  R  R,  39  Mo.  476 
(1867),  holding  that  an  exemption  from 


ation  by  a  city.    A  contract  between 
the  state  and  a  railroad,  that  the  latter 
shall  pay  a  certain  tax  and  no  more,  is 
not  repeal  able  by  the  state.  State  Board 
V.  Morris,  etc.  R  R,  49  N.  J.  L.  193(1886). 
Though  a  charter  may  be  repealable, 
yet  an  amendment  giving  an  exemption 
from    taxation    may    be    irrepealable, 
since  the  latter  may  be  a  contract  and 
not  a  franchise.     State  Board  v.  Morris, 
etc.  R  R,  49  N.  J.  L.  193  (1886).  A  bonus 
to  the  state  on  increase  of  capital  stock 
cannot  apply  to  previous  charters  hav- 
ing charter  right  to  increase.    Common- 
wealth V.  Erie,  etc.  Transp.  Co.,  107  Pa. 
St.  112  (1884;;  Railroad  Cos.  v.  Gaines, 
97  U.  S.  698  (1878),  holding  that  a  new 
corporation  invested  with  the  powers 
and  privileges  of,  and  subject  to  the 
obligations  of  the  charter  of,  another 
corporation,  does  not  take  an  exemption 
from  taxation.     To  same  eifect,  Rail- 
road Co.  V.  Commissioners,  103  U.  S.  1 
(1880);  Dauphin,  etc.  Ry.  v.  Kennerly, 
74  Ala.  583  (1883).     But  see  East  Ten- 
nessee, etc.  R  R  V.  Pickerd,  24  Fed.  Rep. 
614  (1885);  Delaware  Railroad  Tax,  18 
Wall.  206  (1873);  Dartmouth  College  v. 
Woodward,  4  Wheat  518  (1819);  Provi- 
dence Bank  v.  Billings,  4  Pet  514  (1830); 
Binghamton  Bridge,  3  Walk  51  (1865); 
Humphreys    v.   Pegues,   16   Wall.   244 
(1872);  Pacific  R.R.v.  Maguire,  20  Wall 
36  (1873):  North  Missouri  R  R  v.  Mar 
guire,   20   Wall.    46    (1873);    People  v. 
Soldiers'  Home,  etc.,  95  111.  561  (1880); 
University  v.  People,  99  U.  S.  309  (1878), 
holding  void  a  statute  limiting  a  gen- 
eral exemption  previously  conferred  to 
property  in  immediate  use  by  a  corpo- 


1234 


<3H,  XXXIV.]  TAXATION    OF    STOCK    AND    COEPORATIONS. 


L§  572?.. 


are  not  favored  by  the  courts,  and  are  strictly  limited  to  the  terms 
of  the  exemption.     An  amendment  exempting  a  corporation  from 


ration:  Farrinj^ton  v.  Tennessee,  95 U.  S. 
679  (1877):  Railway  Co.u  Pliiladelpliia, 
101  U.  S.  528  (1879);  Hoge  v.  Railway  Co., 
99  U.  S.  348  (1878);  Dodge  v.  Woolsey, 
18  How.  331   (1855),  holding  that  the 
adoption  of  a  new  constitution  declar- 
ing that  corporate  property  shall  be 
taxed  will  not  be  allowed  to  impair  the 
<;ontract;  Mobile,  etc.  RR.t>.  Kennedy, 
74  Ala,  566  (1883);  Richmond  v.  Rich- 
mond,  etc.  R.  R.,  21  Gratt.  (Va.)  604 
(1872).  holding  also  that  an  exemption 
of  corporate  property  in  a  city  from 
taxation,  which  conflicts  with  the  char- 
ter of  the  city  previously  granted,  is 
not  unconstitutional  if  the  city  has  re- 
maining ample  means  of  taxation  to 
•meet  its  needs;  Commonwealth  i\  Fay- 
ette R.  R.  55  Pa.  St  452  (1867),  hold- 
ing  that,  where  power  to  alter  or  repeal 
the  exemption  is  reserved,  the  exercise 
of  the  power  is  no  impairment  of  the 
contract;  State  v.  Miller,  30  N.  J.  L.  368 
(1863),  holding  that  the  repeal  may  be 
■made  by  a  general  law;  State  v.  Com- 
missioners of  Taxation,  37  N.  J.  K  240 
(1874),  holding  that,  where  a  general 
exemption  from  taxation  is  granted  to 
a  corporation    without  reserving  the 
power  to  alter  or  repeal  it,  and  there  is 
a  provision  for  a  special  mode  of  assess- 
ing its  property,  it  may  consent  to  an- 
other mode  of  assessment  without  sur- 
rendering or  altering    its    exemption 
from  general  taxation;  East  Tennessee, 
etc.  R  R.  V.  Pickerd,  24  Fed.  Rep.  614 
(1885);     Temple    Grove    Seminary   v. 
Cramer,  98  N.  Y.  121  (1885),  holding  that 
an  incorporated  academy  does  not  waive 
or  forfeit  its  exemption  from  taxation 
by  reason  of  having  leased  its  building 
for  a  boarding-house  during  vacations; 
Elizabethtown,  etc  R  R.  v.  Elizabeth- 
town,  12  Bush  (Ky.),  233  (1876),  holding 
that  an  exemption  of  railroad  property 
from  taxation  precludes  any  imposition 
of  taxes  by  the  state,  whether  for  state 
or  local  purposes.     In  Mott  v.  Pennsyl- 

1 


vania  R.  R.  30  Pa.  St  9  (1858),  a  sale  of 
a  railroad  and  canal  by  the  state  on 
terms  exempting  the  vendee  from 
future  taxes  was  enjoined.  The  exemp- 
tion was  held  to  be  unconstitutiouaL 
County  Com'rs  v.  Woodstock  Iron  Co., 
82  Ala.  151  (1886),  holding  that  an  ex- 
emption of  private  corporations  from 
taxation  made  by  a  general  law  was  not 
a  contract,  but  only  a  legislative  bounty, 
subject  to  be  repealed. 

The  act  by  which  the  exemption 
from  taxation  is  made  must  be  clear 
and  unequivocal:  the  intent  to  confer 
the  immunity  must  be  beyond  reason- 
able doubt.  Ohio,  etc.  Trust  Co.  v.  De- 
bolt  16  How.  416  (1853):  Delaware  Rail- 
road Tax,  18  Wall  206  (1873);  North 
Missouri  R  R  u.  Maguire,  20  Wall.  46 
(1873);  Mobile,  etc.  R.  R  v.  Kennedy, 
74  Ala,  566  (1883),  holding  that  a  reason- 
able doubt  is  to  be  construed  against 
the  exemption;  Dauphin,  etc.  Ry.  v. 
Kennerly,  74  Ala.  583  (1883);  Richmond 
V.  Richmond,  etc.  R  R.,  21  Gratt.  (Va.) 
604  (1872).  An  exemption  of  a  corpbra- 
tion  from  taxation  upon  payment  of  a 
fixed  annual  tax  on  the  capital  stock  is 
not  voidable.  State  v.  Butler,  86  Tenn. 
614  (1888).  A  particular  mode  of  taxa- 
tion may  be  changed  under  the  reserved 
right  to  amend  the  charter.  Detroit 
St  Rys.  V.  Guthard,  51  Mich.  180  (1883). 
See  also  Bank  of  Republic  v.  Hamilton 
County,  21  111.  53  (1858);  Mayor,  etc.  v. 
Twenty  third  Street  R  R,  113  N.  Y. 
311  (1889).  A  specific  rate  of  taxation 
prescribed  in  the  charter  raises  no  im- 
plication of  a  legislative  contract  to 
impose  no  further  burdens  by  way  of 
taxation.  Iron  City  Bank  v.  Pittsburgh. 
37  Pa,  St  340  (1860).  A  constitutional 
prohibition  as  to  exemptions  from  tax- 
ation does  not  apply  to  railroad  corpo- 
rations, they  being  quasi-public.  Yazoo, 
etc.  R  R  r.  Levee  Com'rs,  37  Fed.  Rep. 
24  (1888).  A  charter  exemption  from 
all  taxation  upon  payment  of  a  certain 
235 


§  5725.] 


TAXATION    OF    STOCK    AND    CORPORATIONS.  [CH.  XXXIV. 


taxation  may  be  repealed,  there  being  no  consideration  for  the  con- 
tract.^    Moreover,  under  a  reservation  of  power  to  alter,  amend,  or 

Franklin  County  Court  v.    uals,  this  does  not  exempt  the  capital 


tax  is  legal. 
Deposit  Bank,  87  Ky.  370  (1888).     An 
exemption    from   taxation  which  is  a 
gift  may  be  repealed.     Philadelphia  v. 
Pennsylvania  Hospital,  134  Pa.  St.  171 
(1890).     An   exemption   from   taxation 
may  be  repealed   under  the  reserved 
right  to  amend,  etc.     Wagner,  etc.  In- 
stitute V.  Philadelphia,  133  Pa.  St.  613 
(1890).     An  exemption  from  all  other 
taxation  is  an  exemption  from  local  as 
well  as  state  taxation.    People  v.  Cole- 
man, 121  N.  Y.  542  (1890).     A  railroad 
may  give  up  its  exemption  from  state 
taxation  and  still  retain  its  exemption 
from  county  taxation.     State  v.  Hanni- 
bal, etc.  R.  R.,  101   Mo.  136  (1890).     A 
railroad  that  is  divided  by  the  legisla- 
ture with  the  consent  of  the  stockhold- 
ers does  not  lose  its  exemptions.  Louis- 
ville, etc.   R  R.  V.  Commonwealth,  89 
Ky.   531   (1890).     An  exemption   from 
taxation  is  not  a  franchise.     Hence  quo 
warranto  does  not  lie  to  oust  the  corpo- 
ration from  such  exemption.     Interna- 
tional, etc.   Ry.  V.  State,  75  Tex.   356 
(1889).    The  decision  of  the  state  court 
that  an  exemption  does  not  apply  to 
certain  property  is  not  an  impairment 
of  a  contract.      St.   Paul,   etc!   Ry.  v. 
Todd    County,    142    U.   S.    282    (1892). 
Where  a  contract  of  exemption  from 
taxation  between  a  state  and  a  water- 
works company  is  declared  unconstitu- 
tional by  the  highest  court  of  the  state, 
there  is  no  impairment  of  the  contract 
by  subsequent    legislation    which   as- 
sumes the  old  contract  to  have  been 
invalid.     New  Orleans  v.  New  Orleans, 
etc.  Works,  142  U.  S.  79  (1891).     In  Citi- 
zens' Bank  v.  Board  of  Assessors,  54 
Fed.  Rep.  73  (1893),  an  exemption  from 
taxation  was  held  to  apply  to  exten- 
sions of  the  original  charter.  Although 
the  charter  provides  that  the  real  and 
personal  property  of  the  company  shall 
be  taxed  the  same  as  that  of  individ- 


stock  from  taxation.   State  v.  Simmons, 
70  Miss.  485  (1893).    An  exemption  from 
taxation  does  not  pass  to  a  company 
that   buys  out  the  company  which  is 
exempt.     Commonwealth  v.  Nashville, 
etc.  Co.,  93  Ky.  430  (1892).     A  company 
to  generate  and  sell  electric  power  is 
not  a  manufacturing  company  as  re- 
gards   taxation.       Commonwealth    v. 
Northern,  etc.  Co.,  145  Pa,  St.  105  (1891): 
Commonwealth  v.  Brush,  etc.  Co.,  145 
Pa.  St.   147   (1891).     An  exemption  of 
manufacturing  corporations  from  tax- 
ation was  construed  to  exempt  merely 
such  of  their  property  as  was  invested 
in  manufacturing,  in  Commonwealth's 
Appeal,  129  Pa.  St.  346  (1889);  Common- 
wealth V.  Mahoning   Rolling-Mill    Ca, 
129  Pa.  St.  360  (1889).     Where,  subse- 
quently to  the  incorporation  of  a  com- 
pany, a  general  act  reserves  to  the  leg- 
islature the  right  to  amend  or  repeal 
any  and  all  charters,  the   legislature 
may  repeal  any  amendments  to   the 
charter,  so  far  as  such  amendments  are 
passed  after  the  general  act.  where  the 
amendments  do  not   expressly  waive 
the  legislative  right  of  amendment  or 
repeal,  unless  the  amendment  is  worded 
"saving,  whenever  that  power  was  ex- 
erted, all  rights  previously  vested."  An 
exemption   from  taxation  may  be  re- 
pealed under  the  reserve  power.    (Ap- 
proving Tomlinson  v.  Jessup.  15  Wall. 
454  —  1872,  and  Railroad  Co.  v.  Maine,  96 
U.  S.  499  —  1877.)   Creditors  stand  upon 
the  same  footing  in  this  respect.  Louis- 
ville Water  Co.  v.  Clark,  143  U.  S.  1 
(1892).     A  contract  of  a  lessee  to 'pay 
taxes  upon  the  real  and  personal  prop- 
erty, franchises,  capital  stock,  or  gross 
receipts  does  not  bind  the  lessee  to  pay 
taxes  on  dividends.     Jersey  City  Gas- 
light Co.  V.    United  Gas  Imp.  Co.,  58 
Fed.  Rep.  323  (1893).     An  exemption  of 
a  corporation  may  not  exempt  also  its 


1  Manistee,  etc.  Co.  v.  Commissioner  of  Railroads,  118  Mich.  349  (1898). 

1236 


CH.  XXXIV.]  TAXATION    OF    STOCK    AND    CORPORATIONS. 


[§  572J. 


repeal  the  charter,  the  legislature  may  take  away  an  exemption, 
from  taxation.^ 

Where  a  corporation  whose  property  is  exempt  from  taxation  is 
merged  into  or  consolidated  with  another,  the  question  of  whether 
the  exemption  from  taxation  passes  with  its  property  to  the  lessee, 
vendee,  or  consolidated  company  is  a  question  which  turns  largely 
on  the  words  granting  the  exemption.^ 

Where  a  consolidation  is  effected  after  the  adoption  of  constitu- 
tional provisions  prohibiting  the  legislature  from  exempting  the 
property  of  corporations  from  taxation,  the  consolidated  company 
is  looked  upon  as  a  new  corporation,  which  is  not  entitled  to  ex- 
emptions from  taxation  possessed  by  the  companies  of  which  it  is 
composed.^  Consolidation,  being  a  dissolution  of  the  old  compa- 
nies, destroys  an  exemption  of  one  of  them  from  taxation.* 


timber  lands.  Todd  County  v.  St.  Paul, 
etc.  Ry.,  38  Minn.  163  (1888).  See  also, 
on  this  subject,  ^5  501,  supra,  and  §  689, 
infra. 

1  Louisville  Water  Co.  v.  Clark,  143 
U.  S.  1  (1893);  Pearsallr.  Great  Northern 
Ry.,  161  U.  S.  646,  663  (1896). 

2  An  exemption  from  taxation  per- 
tains to  the  franchise  as  a  corporation, 
and  does  not  pass  with  the  sale  of  the 
franchise  to  operate  the  road.  Chesa- 
peake, etc.  Ry.  V.  Miller,  114  U.  S.  176 
(1885);  Memphis  R.  R.  v.  Com'rs,  112 
U.  S.  609  (1884):  Tomlinson  v.  Branch, 
15  Wall.  460  (1872):  Branch  v.  Charles- 
ton, 92  U.  S.  677  (1875);  Central  R.  R.  v. 
Georgia,  92  U.  S.  665  (1875),  reversing 
s.  C,  54  Ga,  401;  Chesapeake,  etc.  R.  R. 
V.  Virginia,  94  .U.  S.  718  (1876);  Dela- 
ware Railroad  Tax.  18  Wall.  206  (1873). 
See  also  cases  in  preceding  note,  and 
§  897,  infra.  Where  by  statute  "all 
rights  "  of  a  railway  are  to  pass  to  an- 
other, an  exemption  from  taxation 
passes.  Atlantic,  etc.  R.  R,  v.  Allen,  15 
Fla.  637  (1876).  It  certainly  will  nob  be 
extended  to  the  property  of  other  cor- 
porations consolidated  with  it.  Phila- 
delphia, etc.  R  R,  V,  Maryland,  10  How. 
376  (1850);  Chesapeake,  etc.  R.  R.  v.  Vir- 
ginia, 94  U.  S.  718  (1876);  Delaware 
Railroad  Tax,  18  Wall.  206  (1873).  See 
also  Wait,  Insolv.  Corp.  381.  An  ex- 
emption of  railroad  lands  from  taxation 


may  pass  to  a  railroad  purchasing  the 
same.  Stevens  County  v.  St.  Paul,  etc. 
Ry.,  36  Minn.  467  (1887).  Consolidation 
in  Missouri  destroys  exemption  from 
taxation.  Keokuk,  etc  R.  R  v.  County 
Court,  41  Fed.  Rep.  305  (1890).  A  con- 
solidated company  under  the  Missouri 
statutes  relative  to  railroads  meeting  at 
the  state  line  is  a  new  corporation,  and 
the  old  one  is  dissolved.  An  exemption 
from  taxation  of  the  old  corporation  is 
thereby  lost.  State  v.  Keokuk,  etc.  R.  R., 
99  Mo.  30  (1889).  Although  an  exemp- 
tion from  taxation  is  to  pass  to  a  con- 
solidated company,  yet  this  is  a  gratuity 
to  the  new  company  and  may  be  re- 
pealed. Wilmington,  etc.  R.  R.  v.  Als- 
brook,  110  N.  C.  137  (1892). 

3  Memphis,  etc  R.  R.  r.  Berry,  112  U. 
S.  609  (1884);  St.  Louis,  etc.  R.  R.  v. 
Berry,  113  U.  S.  465  (1885);  Chesapeake, 
etc  R  R  r.  Miller,  114  U.  S.  176  (1885). 
Where  the  legislature  ceded  to  a  com- 
pany to  be  formed  "all  the  right,  in- 
terest, and  privileges  of  whatever  kind  " 
of  a  defunct  railroad  company,  it  was 
held  that  an  exemption  from  taxation 
conferred  on  the  old  company  was  not 
vested  in  the  new  ona  Railroad  Ca  v. 
Georgia,  98  U.  S.  359  (1878).  In  this 
case  the  restriction  upon  granting  ex- 
emptions was  in  a  statute  instead  of  a 
constitutional  provision. 

*  Keokuk,  etc.  R  R  t?.  Missouri,  152 


1237 


§  512k] 


TAXATION    OF    STOCK    AND    CORPORATIONS.  [CU,  XXXIV. 


If  the  franchises  and  property  of  a  corporation  be  transferred 
by  a  sale  in  foreclosure,  an  exemption  from  taxation  does  not  ac- 
company the  transfer.  The  exemption  is  a  personal  privilege  and 
not  a  franchise.^  A  statute  exempting  the  property  of  a  corpora- 
tion from  being  taxed  does  not  prevent  the  taxation  of  land  lield 
by  it  merely  for  convenience  and  not  necessary  to  its  operation.* 
Where  a  corporation  owns  property  in  excess  of  an  amount  speci- 
fied and  limited  by  the  charter,  an  exemption  from  taxation  does 


U.  S.  301  (1894),  reviewing  the  cases  on 
this  subject  of  dissolution,  and  holding 
that  the  presumption  is  always  against 
the  dissolution.  Where,  in  consolidat- 
ing, new  certificates  of  stock  are  issued, 
a  new  board  of  directors  elected,  and 
the  constituent  companies  cease  their 
functions,  the  old  companies  are 
thereby  dissolved  and  a  new  company 
is  formed,  even  though  the  name  of 
the  new  company  is  the  same  as  one  of 
th0  old  companies.  Hence  exemptions 
from  taxation  existing  under  the  old 
charters  cease  where  a  new  constitu- 
tion enacted  prior  to  such  consolidation 
prescribes  that  the  property  shall  be 
taxed  in  proportion  to  its  value.  Yazoo, 
etc.  Ry.  V.  Adams,  180  U.  S.  1  (1901), 
aff' g  77  Miss.  194,  187  U.  S.  258. 

1  Morgan  v.  Louisiana,  93  U.  S.  217 
(1876);  Louisville,  etc.  R.  R.  v.  Palmes, 
109  U.  S.  234  (1883);  Wilson  v.  Gaines, 
103  U.  S.  417  (1880),  where  the  transfer 
was  under  proceedings  to  enforce  a 
statutory  lien  of  a  state;  Arkansas 
Midland  R.  R.  v.  Berry,  44  Ark.  17  (1884). 
See  also  Picard  v.  East  Tennessee,  etc. 
R.  R.,  130  U.  S.  637  (1889),  and  cases 
supra.  Where  the  exemption  is  to  all 
the  property  of  a  railroad  its  franchise 
is  included.  Wilmington  R  R  u  Reid, 
13  Wall.  264  (1871).  As  to  whether  an 
exemption  from  taxation  is  a  franchise 
or  privilege,  see  Keokuk,  etc.  R.  R.  v. 
Missouri,  152  U.  S.  301,  311  (1894X 
Where  a  railroad  is  foreclosed  an  ex- 
emption from  taxation  does  not  pass  to 
the  purchaser  at  the  foreclosure  sale, 
even  though  the  statutes  give  to  such 
purchaser  all  the  rights,  immunities, 
privileges,  etc.,  of  the  former  company. 

1 


Baltimore,    etc.  Ry.  v.  Ocean  City,  89 
Md.  89  (1899). 

'^  State  V.  Commissioners,  23  N.  J.  L. 
510  (1852);  State  v.  Collectors,  25  N.  J.  L. 
315  (1855).  In  these  cases  lands  owned 
by  a  railroad  and  occupied  by  dwellings 
for  employees,  car  and  locomotive 
works,  coal  mines,  etc.,  were  held  to  be 
subject  to  taxation.  See  also  Toll- 
bridge Co.  V.  Osborn,  35  Conn.  7  (1868), 
where  lands  lield  for  wharves  by  a 
bridge  company  by  authority  of  law 
were  held  taxable  as  real  estate  —  a 
provision  in  its  charter  that  all  its  prop- 
erty should  be  considered  personal  prop- 
erty and  be  divided  into  shares  being 
construed  to  relate  to  the  property  of 
the  stockholders  as  represented  by  the 
shares;  Re  Swigert,  119  111.  83  (1886), 
holding  that  a  railroad  exemption  did 
not  exempt  its  elevator.  In  ascertain- 
ing, under  the  New  Jersey  taxation 
statute,  whether  one-half  of  the  capital 
is  employed  in  the  state  in  manufactur- 
ing, the  capital  employed  in  disposing 
of  the  manufactured  ■  product  in  the 
state  is  included.  lie  Consolidated 
Electric  Storage  Co.,  26  Atl.  Rep.  983 
(N.  J.  1893).  For  cases  passing  upon  the 
exemption  of  manufacturing  corpora- 
tions fi'om  taxation  in  Pennsylvania, 
see  Commonwealth  v.  Keystone  Bridge 
Co.,  156  Pa.  St.  500  (1893);  Common- 
wealth V.  J.  B.  Lippincott  Co.,  156  Pa. 
St.  513(1893);  Commonwealths.  Thack- 
ara  Mfg.  Co.,  156  Pa.  St.  510  (1893);  Com- 
monwealth V.  Pottsville  Iron,  etc.  Co., 
157  Pa.  St.  500  (1893);  Commonwealth 
V.  Juniata  Coke  Co.,  137  Pa.  St.  507 
(1893);  Commonwealth  v.  National  Oil 
Co.,  157  Pa.  St.  516  (1893). 
238 


OH.  XXXIV.]  TAXATION    OF    STOCK    AND    CORPORATIONS. 


[§  572c. 


not  apply  to  such  excess.^  In  general,  an  exemption  from  taxation 
by  the  state  is  not  an  exemption  also  from  municipal  taxation  for 
local  purposes,^  nor  from  assessments  for  improvements,'  nor  from 
a  license  fee.* 

§  572c.  Taxation  of  foreign  corporations. —  Any  state  may  tax 
foreign  corporations  doing  business  within  its  borders.* 


1  Seashore  House,  etc.  v.  City  of  At- 
lantic City,  48  Atl.  Rep.  243  (N.  J.  1900). 

2  Elizabethtown.  etc.  R  R  u.  Eliza- 
bethtown.  12  Bush  (Ky.),  233  (1876); 
Roosevelt  Hospital  v.  Maj-or  of  New 
York,  84  N.  Y.  108  (1881),  where  real  estate 
exempted  from  state  taxation  was  held 
to  be  subject  to  assessment  by  a  city 
for  the  construction  of  a  sewer.  C'f. 
Applegate  v.  Ernst,  3  Bush  (Ky.),  648 
(1868),  where  a  tax  by  a  county  upon  a 
railroad  to  obtain  money  to  pay  a  county 
subscription  for  the  purpose  of  com- 
pleting the  road  was  held  to  be  unlaw- 
ful. An  exemption  from  local  taxation 
is  not  an  exemption  from  state  taxa- 
tion. Wilkes  Barre,  etc.  Bank  v.  "Wilkes 
Barre,  148  Pa.  St.  601  (1892). 

3  New  Jersey,  etc.  R.  R.  u  Jersey  City, 
43  N.  J.  L.  97  (1880).  An  exemption 
from  taxation  does  not  apply  to  assess- 
ments for  improvements.  Illinois  Cent. 
R  R.  u.  Mattoon,  141  111.  32  (1893). 

*  An  exemption  of  the  capital  stock 
from  taxation  is  not  an  exemption  from 
a  license  fee,  inasmuch  as  a  tax  means 
a  tax  on  property,  while  a  license  fee 
is  a  form  of  tax  on  occupations.  State 
V.  Citizens'  Bank,  53  La.  Ann.  1086 
(1899). 

5  Liverpool  Ins.  Co.  v.  Massachusetts, 
10  Wall.  566  (1870);  s.  c,  Oliver  v.  Liver- 
pool, etc.  Co.,  100  Mass.  531  (1868).  Goods 
in  New  York  for  sale,  also  money  on 
deposit  in  New  York,  also  other  prop- 
erty in  the  state,  form  the  proper  basis 
for  taxation  of  such  part  of  the  capital 
stock  of  foreign  corporations  as  is  em- 
ployed in  the  state.  Taxation  for  such 
part  of  the  capital  stock  as  sales  in  New 
York  bear  to  all  the  sales  is  unjust, 
since  many  sales  may  be  by  sample. 
People  V.  Wemple,  133  N.  Y.  323  (1893). 


A  tax  on  foreign  manufacturing  corpo- 
rations to  the  extent  of  the  business 
which  they  do  in  the  state  is  constitu- 
tional and  enforceable.  People  v.  Wem- 
ple, 131  N.  Y.  64  (1892).  The  New  York 
statute  taxing  foreign  corporations 
doing  business  in  the  state  on  the  same 
basis  as  domestic  corporations  is  con- 
stitutional. Horn  Silver,  etc.  Co.  v. 
New  York,  143  U.  S.  305  (1892).  The 
New  York  tax  upon  the  business  of  all 
foreign  and  domestic  corporations  doing 
business  in  the  state  is  a  tax  on  the 
right  to  be  a  corporation  and  to  do 
business,  and  is  not  a  tax  upon  the  fran- 
chise, even  though  the  tax  is  measured 
by  the  dividends  declared.  The  tax  is 
legal  although  the  corporation  owns 
United  States  bonds.  Home  Ins.  Co. 
V.  New  York,  134  U.  S.  594  (1890). 
Where  foreign  corporations  are  re- 
quired to  report  stock,  bonds,  etc., 
owned  by  residents  for  taxation,  it  need 
report  only  such  as  its  books  disclose, 
and  is  not  to  be  held  liable  further. 
Commonwealth  v.  N.  Y.  etc.  R  R,,  145 
Pa,  St.  57  (1891).  Cf.  Commonwealth 
V.  American,  etc.  Teleph.  Co.,  129  Pa. 
St.  217  (1889).  Foreign  corporations  do- 
ing business  in  New  Jersey  are  subject 
to  taxation.  State  v.  Berry,  52  N.  J.  L. 
308  (1890).  Where  a  parent  corporation 
of  Massachusetts  owns  stock  in  a 
branch  corporation  of  New  York  and 
collects  royalties,  etc.,  from  the  latter, 
the  parent  corporation  is  not  subject 
to  taxation  in  New  York.  People  v. 
American,  etc.  Teleph.  Co.,  117  N.  Y. 
241  (1889).  Debts  due  to  a  foreign 
corporation  from  residents  cannot  be 
taxed  in  Louisiana.  Barber,  etc.  Co.  v. 
New  Orleans,  41  La.  Ann.  1015  (1889). 
The  New  York  statute  levying  a  tax  on 


1239 


§  572c.] 


TAXATION   OF    STOCK    AND    C0KP0KATI0N8.  [oH.  XXXIV. 


A  state  may  impose  on  foreign  insurance  companies  a  tax  equal 
to  the  tax  levied  by  the  state  creating  the  foreign  corporation  on 


foreign  corporations  doing  business  in 
the  state,  the  tax  being  upon  "the 
amount  of  capital  stock  employed 
within  the  state,"  is  legal,  and  a  New 
Jersey  corporation  is  liable  to  taxation 
for  maintaining  a  sales  agency  and 
office  and  bank  account  in  New  York 
City,  even  though  its  factories,  books 
of  account,  etc.,  are  in  other  states. 
Southern  Cotton  Oil  Co.  v.  Wemple,  44 
Fed.  Rep.  24  (1890). 


that  a  tax  may  be  imposed  upon  the 
business  done  by  a  foreign  corporation 
in  New  York,  but  not  upon  its  property 
in  other  states,  nor  upon  its  fi-anchisa 
A  foreign  corporation  doing  business 
in  and  taxed  in  New  York  is  not  en- 
titled to  a  deduction  for  its  debts. 
People  V.  Barker,  141  N.  Y.  118  (1894). 
Otherwise  as  to  domestic  corporations. 
People  V.  Barker,  141  N.  Y.  196  (1894). 
Under  the  New  York  act  in  arriving 


The  Pennsylvania  statute  imposing  a    at  the  basis  of  taxation  of  corporations. 


quarter  of  a  mill  license  tax  on  the 
capital  stock  of  foreign  corporations 
having  an  office  in  the  state,  and  pro- 
hibiting such  offices  unless  the  tax  is 
paid,  the  act  applying  to  all  foreign 
corporations  except  insurance  com- 
panies, is  constitutional  A  state  may 
exclude    or    impose    conditions    upon 


the  commissioners  are  bound  to  take 
the  statements  under  oath  of  the  cor- 
porate officers,  except  that  they  may 
call  for  further  information.  People  v. 
Barker,  139  N.  Y.  55  (1893).  A  foreign 
corporation  is  not  liable  to  taxation  in 
New  York,  where  its  business  is  con- 
ducted in  another   state,  and  all  the 


foreign    corporations  unless  tliey    are  parties  interested  in  it  and  its  officers 

engaged  in  interstate  or  foreign  com- .  reside    in   another   state,  and    all    its 

merce,  or  are  employed  by  the  govern-  contracts  made,  and  its  product  manu- 

ment.     Pembina  Min.  Co.  v.  Pennsyl-  factured,  sold  and  delivered  in  another 

vania,  125  U.  S.  181  (1888);  Blackstone  state;  and  where  it  transacts  none  of 

Mfg.    Co.   V.  Blackstone,   79   Mass.  488  its  corporate  business  in  the  state,  but 

(1859);  State  t'.  Lathrop,  10  La.  Ann.  402  merely    has    an    office    there,    with  a 

(1855);  State  v.  Fosdick,  21  La.  Ann.  434  salaried  agent,  as  a  convenient  place 

(1869);  Tatem  v.  Wright,  23  N.  J.  L.  429  to  discuss  with  patrons  questions  pre- 

(1852);  State  v.  Western  Union  Tel.  Co.,  liminary  to  the  making  of  contracts, 

73  Me.  518  (1882);    Commonwealth  v.  the    contracts    themselves    being    ex- 


Gloucester  Ferry  Co.,  98  Pa.  St.  105  (1881) ; 
Norfolk,  etc.  R.  R.  v.  Commonwealth, 
114  Pa.  St.  256  (1886):  Commonwealth 
V.  Milton,  12  B.  Mon.  (Ky.)  212,  218 
(1851);  Boston  Loan  Co.  v.  Boston,  137 
Mass.  332  (1884);  Singer  Mfg.  Co.  v. 
County  Com'rs,  139  Mass.  266  (1885); 
Att'y-Gen.  v.  Bay  State,  etc.  Co.,  99 
Mass.  148  (18G8);  Commonwealth  v. 
Texas,  etc.  R.  R.,  98  Pa.  St.  90  (1881), 
holding,  however,  that  a    corporation 


ecuted  out  of  the  state,  and  the  com- 
pany having  no  bank  account  in  the 
state.  People  v.  Campbell,  139  N.  Y. 
68  (1893).  For  the  New  York  act  which 
applies  to  foreign  corporations,  see 
Parker  Mills  v.  Commissioners,  23  N.  Y. 
242  (1861);  People  v.  Horn,  etc.  Co.,  105 
N.  Y.  76  (1887).  They  are  to  be  taxed 
where  their  principal  offices  in  the 
state  are  situated.  People  v.  McLean, 
17  Hun,  204  (1879).    A  corporation  char- 


created  by  the  United  States  congress  tered  by  the  federal  government  is  not 

is  not  a  foreign  corporation  within  the  such  a  foreign  corporation  as  is  obliged 

revenueactof  Pennsylvania;  Common-  to  pay  a  license  fee  under  the  Penn- 

wealth  V.  Gloucester,  etc  Ferry  Co.,  98  sylvania  statutes.     Commonwealth   v. 

Pa.  St.   105  (1881);  People  r.  Equitable  Texas,  etc.  R  R.,  98  Pa.  St.  90(1881). 

Trust  Co.,  96  N.  Y.  387  (1884),  holding  Unless  a  statute  otherwise  provides,  a 

1240 


en.  xxxiy.]        taxation  of  stock  and  corporations.  [§  572c?. 

corporations  foreign  to  the  latter  state.'  "Where  a  railroad  corpo- 
ration is  incorporated  by  the  United  States,-  a  state  cannot  tax  its 
franchises;  it  may  tax  the  tangible  property,  but  not  the  f ranchise.^ 
"Where  an  assessment  of  taxes  against  a  railroad  company  has  been 
affirmed  by  the  supreme  court,  mandamus  may  be  used  to  compel 
payment  of  them,  if  there  is  no  other  adequate  remedy.'  The  tax 
lien  on  a  railroad  may  by  delay  be  rendered  subordinate  to  a  mort- 
gage.* The  ISTew  York  statute  requiring  foreign  corporations  be- 
fore doing  business  in  that  state  to  pay  a  certain  license  tax  is  con- 
stitutional.^ 

§  572(^.  Taxation  must  not  interfere  ivitli  interstate  commerce. — 
"  It  is  not  and  cannot  be  doubted  that  each  state  of  the  Union  may 
tax  all  property,  real  and  personal,  within  its  borders,  belonging  to 
persons  or  corporations,  although  employed  in  interstate  or  foreign 
commerce,  provided  the  rights  and  powers  of  the  national  govern- 
ment are  not  interfered  with."^  A  state  statute  taxing  a  corpo- 
ration having  interstate  property  may  levy  the  tax  not  only  on  the 
tangible  property  within  the  state,  but  on  such  portion  of  the  earn- 
ing power  of  the  property  as  the  property  in  the  state  bears  towards 
the  whole  property.  This  is  not  interfering  with  interstate  com- 
merce by  levying  a  tax  for  the  privilege  of  transacting  such  com- 
merce.'' A  state  through  which  a  railroad  runs  may  require,  upon 
the  consolidation  of  the  company  with  companies  in  other  states  so 
as  to  make  an  interstate  railroad,  the  payment  of  a  tax  on  the 
whole  consolidated  capital  stock.^  But  a  state  cannot  tax  corpora- 
tions so  as  to  interfere  with  interstate  commerce.  The  Pennsyl- 
vania license  fee  which  all  foreign  corporations  keeping  an  office 
in  the  state  are  required  to  pay,  with  a  few  exceptions,  is  uncon- 

lien  upon  corporate  property  for  state  33  N.  J.  L.  173  (1868).  And  the  party- 
taxes  attaches  in  preference  to  pre-  making  return  to  an  alternative  wan- 
existing  judgments  or  decrees;  it  has  damzfs  must  show  that  he  has  complied 
been  held  that  a  sale  under  a  judg-  with  the  order  to  the  extent  of  his  abil- 
naent  or  decree  will  not  avoid  such  a  ity;  want  of  funds  is  not  a  suflBcient  re- 
lien.  Osterburg  v.  Union  Trust  Co.,  93  turn  where  it  is  the  result  of  the  vol- 
U.  S.  424  (1876).    See  TZ  Pac.  Rep.  268.  untary  act  of  the  party. 

1  Home  Ins.  Co.  v.  Swigert,  104  111.  653  *  Cooper  v.  Corbin,  105  IlL  224  (1883); 
(1883);  Phila.  Fire  Assoc,  v.  New  York,  Parsons  v.  East,  etc.  Co.,  108  111.  380 
119  U.  S.  110  (1886).  (1884). 

2  California  v.  Pacific  R.  R..  127  U.  S.  s  New  York  State  v.  Roberts,  171  U. 
1,  40  (1888).     A  county  ordinance   re-  S.  658  (1898). 

quiring    a   railroad  chartered   by  the  ^  Western  Union  Tel.  Co.  v.  Taggart, 

United  States  to  take  out  a  license  is  163  U.  S.  1  (1896). 

•void.     San  Benito  County  v.  Southern  "^  Adams  Express  Co.  v.  Ohio   State 

Pac.  R.  R.,  77  Cal.  518  (1888).  Auditor,  166  U.  S.  185  (1897). 

s  Person  v.  Warren  R.  R.,  33  N.  J.  L.  »  Ashley  v.  Ryan,  153  U.  S.  436  (1894). 
441  (1868);  Silverthorn  v.  Warren  R.  R.. 

1241 


§  572c?.]  TAXATION    OF    STOCK    AND   COKPORATIONS.  [cH,  XXXIV. 

stitutional  as  regards  a  foreign  railroad  corporation  which  otitis  a 
railroad  in  the  state,  such  railroad  being  part  of  an  interstate 
system  of  railroads.'  But  a  state  may  levy  a  tax  on  the  capital 
stock  of  a  foreign  sleeping-car  company,  which  runs  its  cars  through 
the  state,  the  tax  being  on  such  part  of  the  capital  stock  as  the 
number  of  miles  which  its  cars  run  in  the  state  bears  to  the  whole 
number  of  miles  which  its  cars  run  in  all  the  states.^ 

A  tax  on  interstate  telegraph  messages  is  unconstitutional.'  But 
a  state  may  tax  a  foreign  telegraph  company  engaged  in  interstate 
telegraph  business,  the  tax  being  graded  according  to  the  amount 
and  value  of  the  company's  property  in  the  state  measured  by  miles, 
and  the  tax  being  in  place  of  taxes  levied  directly  on  the  property. 
Such  a  tax  is  a  franchise  tax,"*  A  city,  under  authority  of  a  statute, 
may  compel  an  interstate  telegraph  company  to  pay  an  annual 
license  of  $500  for  the  privilege  of  doing  business  in  such  city. 
This  is  a  tax,  and  is  not  a  condition  or  restriction  on  the  privilege 
of  doing  business  in  the  state.^  A  state  cannot  prohibit  the  agents 
of  foreign  express  companies  from  doing  business  in  the  state, 
except  upon  obtaining  a  license.  Such  a  law  is  an  interference 
with  interstate  commerce."  A  tax  may  be  levied,  based  on  the 
gross  receipts,  and,  if  the  road  is  but  partly  in  the  state,  on  a  pro- 
portion of  the  gross  receipts  determined  by  a  mode  prescribed  by 
statute.'  A  state  may  tax  a  railroad  on  business  that  passes  out 
of  the  state  into  another  state  and  back  into  the  first  state  again. ^ 
Various  other  decisions  on  taxation  in  its  bearings  upon  interstate 
commerce  are  given  in  the  notes  below.^ 

1  Norfolk,  etc.  R  R.  v.  Penn,  186  U.  S.  Congress  of  1866  does  not  prevent  a 
114(1890).  state    taxing  an   interstate  telegraph 

2  Pullman's  Car  Co.  v.  Penn,  141  U.  S.  company  on  the  value  of  its  property 
18  (1891),  the  court  holding  that  a  tax  on  and  franchises  in  the  state.  Such  value 
the  capital  stock  on  account  of  the  may  be  ascertained  by  taking  sucb 
property  owned  is  a  tax  on  the  property  part  of  the  value  of  the  entire  system 
itself.  A  similar  decision  was  made  as  the  part  of  the  system  m  the  stat& 
concerning  a  tax  on  the  capital  stock  bears  to  the  entire  system.  State  v. 
of  a  foreign  telegraph  company,  the  Western  Union  Tel.  Co.,  165  Mo.  503 
capital  stock  being  valued  at  the  aggre-  (1901). 

gate  value  of  all  itssharesof  stock,  and  spostal  Tel.  Cable  Co.  v.  Charleston, 

the  proportion  of  its  lines  within  the  153  U.  S.  693  (1894). 

state  to  those  outside  of  it  being  the  ^Crutcher  v.  Kentucky,  141  U.  S.  47 

basis  of    taxation.     Massachusetts    r.  (1891). 

Western  Union  Tel.  Co.,   141  U.  S.  40  7  Maine  v.  Grand  Trunk,  etc.  Ry.,  143 

(1890).  U.  S.  217  (1891). 

3  Western  Union  Tel.  Co.  v.  Alabama,  8  Lehigh  Valley  R.  R  v.  Penn,  145 
133  U.  S.  473  (1889).  U.  S.  193  (1892). 

*  Postal  Tel.  Cable  Co.  v.  Adams,  155  *  A  tax  on  sleeping-car  companies 
U.  S.  688  (1895).    The  Post  Road  Act  of    may  be  illegal  as  interfering  with  inter- 

1342 


CH.  XXXIV.]  TAXATION    OF    STOCK    AND    CORPORATIONS. 


[§  572^. 


§  572^.  Inheritance  tax. —  During  the  past  fifteen  years  the  vari- 
ous states  of  the  Union,  in  their  eager  search  for  new  modes  of 
taxation,  in  order  to  meet  the  lavish  expenditures  of  state  and  mu- 
nicipal governments,  have  found  a  rich  source  of  income  in  an  in- 
heritance tax,  levied  upon  the  wealth  of  the  dead.  Indeed,  so  fruit- 
ful and  easy  is  this  mode  of  taxation,  it  is  being  adopted  throughout 
the  Union  and  will  soon  become  almost  universal.  Pennsylvania 
led  the  way  some  sixty  years  ago.^     The  Pennsylvania  inheritance 


state  commerce.  State  v.  Woodruff, 
etc.  Co.,  114  Ind.  155  (1888).  A  state 
tax  on  interstate  railroad  earnings  is 
unconstitutional.  Fargo  v.  Michigan, 
121  U.  S.  230  (1887);  Phila.  etc.  Ca  v. 
Pennsylvania,  122  U.  S.  326  (1887);  Del- 
aware, etc  Canal  Co.  v.  Commonwealth, 
17  Atl.  Rep,  175  (Pa.  1888);  Northern 
Pac.  Ry.  V.  Raymond,  5  Dak.  356  (1888). 
A  state  may  tax  a  foreign  telegraph 
company  on  such  a  proportion  of  its 
capital  stock  as  its  lines  in  the  state 
bear  to  all  of  its  lines;  but  the  state 
cannot  enjoin  the  operation  of  the  tel- 
egraph until  the  tax  is  paid.  Western 
Union  Tel.  Co.  v.  Massachusetts,  125 
U.  S.  530  (1888);  Erie  Ry.  v.  New  Jersey, 
31  N.  J.  L.  531  (1864),  holding  that  a 
state  tax  upon  foreign  corporations 
transporting  passengers  and  freight 
through  the  state,  graduated  by  the 
number  of  passengers  and  weight  of 
the  goods,  is  in  violation  of  that  clause 
of  the  United  States  constitution  giv- 
ing congress  the  right  to  regulate  com- 
merce between  the  states;  Indiana  v. 
American  Exp.  Co.,  7  Biss.  227  (1876); 
s.  C,  13  Fed.  Cas.  24,  where  a  tax  upon 
transportation  through  a  state  was  held 
to  be  an  interference  with  interstate 
commerce  and  unconstitutional  So 
held  also  of  a  tax  upon  locomotives, 
cars,  etc.,  of  a  foreign  railroad  company 
in  Minot  v.  Philadelphia,  etc.  R  R.,  2 
Abb.  (U.  S.)  323  (1870);  s.  G,  17  Fed.  Cas. 
458.  As  to  an  interstate  bridge,  see 
Anderson  v.  Chicago,  etc.  R.  R.,  117  111. 
26  (1886).  Pullman  cars  operated  wholly 
within  the  state  may  be  taxed  as  a 
privilege.  Gibson  County  v.  Pullman, 
etc.  Co.,  42  Fed.  Rep.  572  (1890).     A  for- 

1 


eign  corporation's  rolling  stock  used  in 
interstate  commerce  is  not  taxable  by 
the  state.  Bain  v.  Richmond,  etc.  R.  R., 
105  N.  C.  363  (1890).  Interstate  express 
companies  may  be  taxed  on  the  busi- 
ness which  they  do  within  the  state. 
Pacific  Express  Co.  v.  Seibert,  44  Fed. 
Rep.  310  (1890).  As  to  telegraph  com- 
panies, see  also  Western  Union  TeL  Co, 
V.  Lieb,  76  111.  172  (1875);  Western  Union 
Tel.  Co.  V.  Mayer,  28  Ohio  St.  521  (1876). 
As  to  fees  required  of  foreign  corpora- 
tions before  doing  business  in  the  state, 
see  ^^  696-700,  infra.  An  express  com- 
pany may  be  taxed  on  its  gross  receipts, 
although  it  pays  a  part  thereof  to  a 
railroad,  and  the  railroad  is  taxed  again 
on  the  same.  A  statute  against  double 
taxation  does  not  apply  to  this.  Com- 
monwealth V.  U.  S.  Express  Co.,  157  Pa. 
St.  579  aS93).  The  New  Jersey  annual 
tax  of  one-tenth  of  one  per  cent,  of  the 
capital  stock  is  not  unconstitutional  as- 
interfering  with  interstate  commerce, 
even  as  affecting  a  bridge  company 
which  operates  a  bridge  connecting  two 
states,  Lumberville,  etc.  Co.  v.  State 
Board  of  Assessors,  55  N.  J.  L.  529  (1893). 
An  express  company  may  be  compelled 
to  pay  a  license  fee  wherever  it  does 
business.  Osborne  v.  State,  33  Fla.  162 
(1894).  A  state  may  tax  the  rolling- 
stock  of  a  foreign  corporation  in  the 
proportion  which  the  number  of  miles 
within  the  state  bears  to  the  whole 
number  of  miles  of  the  road,  even 
though  the  rolling-stock  is  used  in  inter- 
state traffic.  Board  of  Assessors  v.  Pull- 
man's Palace  Car  Co.,  60  Fed.  Rep.  37 
(1894). 
1  See  the  brief  yet  comprehensive  and 
243 


§  572^.]  TAXATION    OF    STOCK    AND    OOKPORATIUNS.  [CH.  XXXIV. 

tax  law,  like  the  New  York  law,  does  not  require  payment  of  the 
tax  at  once  where  the  property  is  left  to  trustees  for  a  life  estate 
and  a  remainder  to  certain  persons  who  may  survive.^  The  New 
'  York  tax  on  inheritances  attaches  to  shares  of  stock  held  by  resi- 
dents in  foreign  corporations.^  But  the  fact  that  a  non-resident's 
certificates  of  stock  in  foreign  corporations  are  in  New  York  state 
does  not  render  them  subject  to  taxation  in  that  state.'  The  New 
York  inheritance  tax  applies  to  stock  in  domestic  corporations  al- 
though held  by  non-residents  at  the  place  of  their  residence,  but 
does  not  apply  to  bonds  issued  by  domestic  corporations  and  held 
by  non-residents  at  the  place  of  their  residence.*  This  statute 
covers  bonds  owned  by  a  non-resident,  but  kept  in  a  safe-deposit 
vault  in  New  York,  excepting  United  States  bonds.  The  statute 
also  covers  certificates  of  stock  of  domestic  corporations  owned  by 
non-residents,  but  deposited  in  New  York.^ 

A  gift  of  stock,  the  donee  to  have  the  possession  and  manage- 
ment of  the  same,  but  the  donor  to  have  the  income  during  his  life, 
makes  the  donee  trustee  until  the  death  of  the  donor,  and  hence 
such  gift  is  taxable  under  the  New  York  statutes  as  a  transfer  to 
take  effect  on  his  death.^  The  collateral  inheritance  tax  is  a  lien 
on  stock  owned  by  a  citizen  of  Connecticut  in  a  New  York  corpo- 
ration.'' Under  the  Massachusetts  statute  imposing  a  tax  on  inher- 
itances, stock  owned  by  a  citizen  of  New  York  in  a  Massachusetts 
corporation  is  subject  to  such  tax,  and  even  though  the  New  York 
executor  has  transferred  such  stock,  yet  upon  ancillary  administra- 
tion being  taken  out  in  Massachusetts  the  title  of  the  New  York 


'O 


clpar  statement  of  the  history  of  inher-  In  estimating  the  value  of  stock  under 

itance  taxation  statutes  in  Magoun  v.  an  inheritance  tax  statute,  the  earning 

Illinois  T.  &  Sav.  Bank,  170  U.  S.  283  capacity,  good-will,  and  income  of  the 

(1898),  upholding  the  Illinois  statute  on  corporation  may  be  considered.    Matter 

this  subject.      The  tax  for  that  state  of  Brandreth,  28  Misc.  Rep.  468  (1899). 

varies  according  to  the  size  of  the  es-  ^  Re  James,  144  N.  Y.  6  (1894);    Re 

tate,  and  in  case  it  is  over  $50,000  the  Whiting.  150  N.  Y.  27  (1896). 

tax  is  six  per  cent.  *  Re  Bronson,  150  N.  Y.  1  (1896).  Stock 

1  In  re  Coxe's  Estate,  193  Pa.  St.  100  in  a  domestic  corporation  is  subject  to 
(1899).  the  inheritance  tax,  although  owned 

2  Re  Merriam,  141 N.  Y.  479  (1894).  As  to  by  a  non-resident.  Matter  of  Fitch,  160 
the  constitutionality  of  a  progressive  in*  N.  Y.  87  (1899). 

heritance  tax,  see  Guthrie  on  the  Four-  ^  Re  Whiting,  150  N.'Y.  27  (1896). 

teenth  Amendment,  p.  123,  and  cases  "  Matter  of  Cornell,   170    N.   Y.   428 

cited  in  note  1  on  that  page.   In  estimat-  (1902).  A  sale  of  stock  in  consideration 

ing  the  value  of  stocks  under  the  inherit-  of  an  annuity  is  not  subject  to  the  New 

ance  tax  law  the  stock  exchange  prices  York  inheritance  tax.  Matter  of  Edger- 

therefor  may  be  taken   as   the  basis,  ton,  35  N.  Y.  App.  Div.  125  (1898). 

Walker  v.  People.  192  111.  106  (1901).    Cf.  ^  Matter  of  Fitch,  39  N.  Y.  App.  Div. 

•Chicago,   etc.    Co.  v.   State    Board  of  609  (1899), 
Equalization,  112  Fed.  Rep.  607  (1901). 

1244 


CH.  XXXIV.]  TAXATION    OF    STOCK    AND    COEPOKATIONS. 


[§  572^.. 


executor  is  subordinate  to  the  title  of  the  ancillary  administration. 
The  court  said  that  the  statute  assumed  that  in  such  cases  a  local 
administrator  or  executor  would  be  appointed.^ 

"Where  an  English  company  allows  the  American  executor  of 
the  estate  of  a  deceased  American  stockholder  to  transfer  the 
stock  to  himself  as  executor  on  the  company's  books  without  pay- 
ing the  English  succession  tax,  the  company  is  liable  to  the  Eng- 
lish government  for  such  tax.  The  court  held  that  such  is  the 
law,  although  the  statutes  do  not  expressly  render  the  company 
liable  for  the  tax.^  In  England  an  income  tax  is  collected.^  In 
this  country  such  a  tax  might  legally  be  levied  by  a  state,  but 
cannot  be  imposed  by  the  federal  government.'* 


1  Greeves  v.  Shaw,  173  Mass.  205 
(189Dj.  Stock  in  a  consolidated  inter- 
state railroad  holding  a  charter  in 
Massachusetts  and  also  in  New  York 
is  subject  to  the  Massachusetts  inher- 
itance tax.  Moody  v.  Shaw,  173  Mass. 
375  (1899). 

^  Attorney-General  v.  New  York,  eta 
Co.,  [1898J  1  Q.  B.  205;  aflf'd,  H.  of  L. 
[1899]  A.  C.  62.  In  this  case  the  court, 
in  holding  that  an  English  corporation 
was  liable  for  an  inheritance  tax  on 
shares  of  stock  which  it  had  allowed  to 
be  transferred  on  its  books  by  Ameri- 
can executors  of  the  estate  of  a  deceased 
American  owning  such  stock,  said: 
"  The  American  will,  as  regards  these 
English  assets,  had  no  validity  what- 
ever in  this  country,  nor  had  the  Amer- 
ican executors  any  right  under  it  to  re- 
ceive the  testator's  assets  here.  Until 
they  had  taken  out  representation  to 
their  testator  in  this  country,  they 
were  pure  strangers  to  the  English  as- 
sets. This  American  will,  to  the  knowl- 
edge of  all  parties,  was  never  to  come 
into  operation  as  a  will  in  this  country; 
the  American  executors  were  never  to 
become  executors  in  this   country,  it 


being  the  express  intention  of  all  par- 
ties that  they  should  not." 

3  Where  there  is  a  parent  company 
with  minor  companies  abroad,  and 
dividends  are  paid  abroad  to  stock- 
holders there  without  the  money  going 
to  England,  the  English  income  tax 
does  not  apply  to  such  moneys.  Bar- 
tholomew Brewing  Co.  v.  Wyatt.  [1893J 
2  Q.  B.  499.  Where  an  insurance  com- 
pany having  a  capital  stock  divides 
every  five  years  its  surplus  among  its 
policy-holders,  such  surplus  is  "annual 
profits  or  gains  "  and  is  subject  to  the 
English  income  tax,  although  the  com- 
pany is  an  American  corporation. 
Equitable,  etc.  Soc.  v.  Bishop,  [1900]  1 
Q.  B.  177,  aff'g  [1899J  2  Q.  B.  439.  Even 
though  an  English  corporation  owns 
ninety-five  per  cent,  of  the  stock  of  an 
American  corporation,  yet  the  separate 
identity  of  the  two  corporations  con- 
tinues, and  the  income  of  the  American 
corporation  cannot  be  taxed  in  Eng- 
land as  the  income  of  the  English  cor- 
poration. Kodak  Limited  v.  Clarke,  87 
L.  T.  Rep.  99  (1902). 

*  Pollock  V.  Farmers'  L.  &  T.  Co.,  158 
U.  S.  601  (1895);  s.  C,  157  U.  S.  429. 


1245 


CHAPTER  XXXY. 

FORMS  OF  ACTIONS  AND  MEASURE  OF  DAMAGES  WHERE  A  STOCK- 
HOLDER HAS  BEEN  DEPRIVED  OF  HIS  STOCK 


573.  Pleading  and  practice  in  actions 

relative  to  stock. 

574.  Assumpsit. 

575.  Trespass  on  the  case. 

576.  Trover. 

577.  Detinue  and  replevin. 

578.  Money  had  and  received. 

579.  Bill  in  equity. 

580.  Pleading  under  the  codes. 

581.  Measure  of   damages  —  (a)  The 

first  rule  —  Value  how  shown 
when  there  is  no  market  valua 


582.  (6)  The  second  rule. 

583.  (c)  The  third  rule. 

584.  Interest,  dividends,  and  accre- 

tions. 

585.  Nominal  damages. 

586.  Damages  for  failure  to  complete 

a  purchase  of  stock  or  for  fraud 
inducing  a  purchase  of  stock. 

587.  In  actions  between  stock-brokers 

and  their  customers 


§  573.  Pleading  and  practice  in  actions  relative  to  stoch — "When 
an  owner  of  stock  who  is  out  of  possession  brings  an  action  for  its 
recovery,  or  for  the  recovery  of  the  certificate,  or  for  damages  for 
the  detention  or  conversion  of  either  the  stock  or  the  certificate,  it 
is  important  to  determine  what  action  will  lie,  in  what  court  the 
action  is  to  be  prosecuted,  and  what  is  the  measure  of  damages. 
Similar  questions  arise  when  suits  are  brought  for  breach  of  con- 
tract to  subscribe  for  stock,  or  of  contracts  to  sell  and  convej''  stock. 
There  are  certain  well-settled  rules  as  to  the  form  of  action  in  these 
cases  which  are  deduced  from  the  older  common-law  pleading  and 
practice.  These  rules,  even  in  the  code  states,  where  the  old  ac- 
tions have  been  abolished  in  name,  are  still  partially  applicable. 
Some  knowledge,  therefore,  of  the  procedure  at  common  law  in 
stock  cases  is  necessary.^ 

§  574.  Assumpsit. —  An  action  of  assumpsit,  or  indebitatus  as- 
sumpsit at  common  law,  lies  against  a  corporation  for  unjustly  refus- 
ing to  register  a  transfer,  or  for  refusing  to  issue  a  certificate  to  one 
entitled  to  it.'^     So,  also,  assumpsit  lies  for  breach  of  contract  to 


^  On  this  subject  the  author  refers, 
for  more  particular  information,  to  the 
excellent  work,  Andrews'  Stephen's 
Pleadings,  especially  chapter  II. 

2  Rex  V.  Bank  of  England,  2  Doug. 
524  (1780);  Kortright  v.  Buffalo  Com- 
mercial Bank,  20  Wend.  91  (1838);  Ar- 
nold V.  Suffolk  Bank,  27  Barb.  424  (1857); 
Wyraan  v.  American  Powder  Co.,  62 


Mass.  168  (1851);  Sargent  v.  Franklin 
Ins.  Co.,  25  Mass.  90  (1829);  Hayden  r. 
Middlesex  Turnp.  Co., ,  10  Mass.  397 
(1813):  Piukerton  v.  Manchester,  etc. 
R.  R.,  42  N.  H.  424  (1861);  Hill  v.  Pine 
River  Bank,  45  N.  H.  300  (1864).  Cf. 
Fosters.  Essex  Bank.  17  Mass.  479(1821): 
Eastern  R.  R.  r.  Benedict,  76  Mass.  212 
(1857).    Assumpsit  does  not  lie  against 


1246 


•CH^  XXXV.] 


ACTIONS    AND    MEASURE    OF    DAMAGES. 


[§  575. 


return  boiTowed  bank  stock  on  demand.^  But  mandamus  is  not  a 
proper  remedy  in  these  cases,  and  it  generally  will  not  lie  to  compel 
a,  corporation  to  transfer  stock.^  The  form  of  a  complaint  or  declara- 
tion in  an  action  by  a  pledgor  against  a  pledgee  for  the  conversion  of 
the  stock  held  in  pledge  may  be  in  tort  or  in  assumpsit^  but  not  in 
both.'  A  corporation  may  sue  in  assumj?sit  its  treasurer  who  has 
illegally  issued  excessive  stock  and  converted  the  proceeds  to  his 
own  use.'*  In  a  suit  by  a  remainderman  to  recover  from  a  corpora- 
tion the  value  of  stock  which  the  corporation  had  transferred  to  the 
life  tenant  absolutely  and  which  had  been  lost,  the  statute  of  lim- 
itations does  not  begin  to  run  until  the  death  of  the  life  tenant,  even 
though  the  trust  was  created  in  1854  and  the  life  tenant  died  in 
1898.* 

§  575.  Trespass  on  the  case. — An  action  of  trespass  on  the  case 
may  be  brought  against  the  corporation  for  a  denial  to  a  stock- 
holder of  a  certificate  of  stock,^  and  an  action  on  the  case  lies  for  a 
conversion  of  shares  of  stock.^  The  appropriate  remedy  of  a  pur- 
chaser against  a  corporation  for  refusal  to  register  a  transfer  to 
himself  is  an  action  on  the  case,  wherein  the  measure  of  damages 


a  corporation  for  refusal  to  register  a 
transfer  of  stock.  Action  on  the  case 
is  the  remedy.  Telford,  etc.  Co.  v.  Ger- 
hab,  13  Atl.  Eep.  90  (Pa.  1888'. 

1  McKenney  v.  Haines,  63  Me.  74(1873). 

2  See  ^  390,  supra. 

3  Stevens  v.  Hurlbut  Bank,  31  Conn. 
146  (1862).    See  also  g  475,  supra. 

*  Rutland  E.  R.  r.  Haven,  63  Vt.  39 
<1889). 

5  Wooten  V.  Wilmington,  etc.  R.  R., 
128  N.  C.  119  (1901). 

6  Bank  of  Ireland  v.  Evans's  Charities, 
5  R  L.  Cas.  389  (1855);  Rex  v.  Bank  of 
England,  2  Daug.  534  (1780);  Davis  v. 
Bank  of  England,  2  Bing.  393  (1824); 
Coles  V.  Bank  of  England,  10  Ad.  &  K 
437  (1839);  Gray  v.  Portland  Bank,  3 
Mass,  364,  381  (1807);  North  America 
Building  Assoc,  v.  Sutton,  35  Pa.  St  463 
(1860);  Webster  v.  Grand  Trunk  Ry.,  3 
L.  Can.  Jur.  148  (1859);  s.  C,  3  L.  Can. 
Jur.  291  (construing  the  judicature  act, 
13  Vict,  cap.  38,  §  87);  Protection  Life 
Ins.  Co.  V.  Osgood,  93  IlL  69  (1879); 
Baker  v.  Wasson,  53  Tex.  150  (1880); 
Smith  V.  Poor,  40  Me.  415  (1855);  Catch- 
pole  V.  Ambergate,  etc.  Ry.,  1  El.  &  B. 
Ill  (1852);  Daly  v.  Thompson,  10  M.  &  W. 


309  (1843).  Cf.  Swan  v.  North  British, 
etc.  Co.,  7  H.  &  N.  603  (1863);  Kortright 
V.  Buffalo  Commercial  Bank,  20  Wend. 
91  (1838).  For  an  action  of  tort  with  a 
count  in  contract  for  refusal  to  transfer, 
see  Bond  v.  Mount  Hope  Iron  Ca,  99 
Mass.  505  (1868). 

7  Daggett  V.  Davis,  53  Mich.  35  (1884); 
Bank  of  America  v.  McNeil,  10  Bush 
(Ky.),  54  (1873);  Parsons  v.  Martin,  77 
Mass.  Ill  (1858);  Nabring  v.  Bank  of 
Mobile,  58  Ala.  204  (1877).  A  complaint 
which,  after  stating  that  shares  of 
stock  had  been  pledged  to  defendant, 
avers  that  "  defendant,  in  consideration 
of  the  premises,  then  and  there  under- 
took and  promised  to  plaintiff"  to  hold 
the  stock  only  as  pledgee,  but  that,  in 
violation  of  its  promise,  defendant  sold 
and  converted  the  stock  to  its  own  use, 
without  giving  plaintiff  notice  of  the 
sale,  and  in  which  plaintiff  seeks  to  re- 
cover as  damages  the  full  value  of  the 
shares  alleged  to  have  been  converted, 
though  informal,  is  good  as  a  complaint 
in  case.  Sharpe  v.  Birmingham  Nat. 
Bank,  87  Ala.  644  (1888).  This  case  dis- 
cussed also  the  difference  between  as- 
sumpsit and  case  in  such  an  action. 


1347 


§  576.] 


ACTIONS    AND    MEASLRK    OF    DAMAGLS. 


[CII.  XXXV, 


is  the  value  at  the  time  of  refusal  to  trani?fer.^  A  transferee's  ac- 
tion upon  the  case  for  damages,  instead  of  in  trover  for  conversion, 
against  the  corporation  for  refusal  to  register  the  transfer,  entitles 
him  to  nominal  damages  only,  unless  he  proves  special  damage.^ 
A  count  in  case  may  be  joined  with  one  in  trover,'  Trover  and 
case  lie  against  a  tax  collector  for  selling  bank  stock  for  an  illegal 
tax/ 

§  576.  Trover. —  It  is  a  very  generally  accepted  rule  that  trover 
will  lie  for  the  conversion  of  shares  of  stock,*  and  in  certain  cases 
the  party  guilty  of  the  conversion  may  be  arrested."     This  is  the 


1  German  Union,  etc.  Assoc,  v.  Send- 
meyer,  50  Pa.  St.  67  (I860);  Morgan  v. 
Bank  of  North  America,  8  Serg.  &  R. 
(Pa.)  73  (1822);  Presbyterian  Cong.  v. 
Carlisle  Bank,  5  Pa.  St.  345  (1847). 

2  McLean  v.  Charles  Wright  Med.  Co., 
96  Mich.  479  (1893).  See  also  §  585, 
infra. 

3  Nabring  v.  Bank  of  Mobile,  58  Ala. 
204  (1877). 

4  Sprague  v.  Fletcher,  69  Vt.  69  (1896). 

5  Hine  v.  Commercial  Bank,  etc.,  119 
Mich.  448  (1899);  Ayres  u  French,  41 
Conn.  143  (1874);  Payne  v.  Elliot,  54 
Cal.  339  (1880);  Kuhn  v.  McAllister,  1 
Utah,  273  (1875);  s.  c.  sub  nom.  McAl- 
lister V.  Kuhn,  96  U.  S.  87  (1877);  Bank 
of  America  v.  McNeil,  10  Bush  (Ky.), 
54  (1S73);  Boy  Ian  v.  Huguet,  8  Nev.  345 
(1873);  Morton  v.  Preston,  18  Mich.  60 
(1869);  Jarvis  v.  Rogers,  15  Mass.  389 
(1819)  —  a  case  where  trover  was  held 
to  lie  for  the  value  of  Mississippi  scrip, 
r^resenting  one  hundred  and  fifty 
thousand  acres  of  land.  Anderson  v. 
Nicholas,  28  N.  Y.  600  (1864);  Freeman 
V.  Harwood,  49  Me.  195  (1859);  Connor 
V.  Hillier,  11  Rich.  L.  (S.  C.)  193  (1857); 
Sturges  V.  Keith,  57  111.  451  (1870); 
Budd  V.  Multnomah  Street  Ry.,  12 
Oreg.  271  (1885).  Cf.  Atkins  v.  Gamble, 
42  Cal.  86,  100  (1871);  Maryland  F.  Ins. 
Co.  V.  Dalrymple,  25  Md.  242,  267  (1866). 
The  action  for  conversion  lies,  even 
though  the  plaintiff  uses  the  term 
"shares  of  stock"  and  "certificates  of 
stock "  interchangeably.  Godfrey  v. 
Pell,  49  N.  Y.  Super.  Ct.  226  (1883).  A 
party  whose  stock  has  been  converted 


may  sue  for  damages  instead  of  fol- 
lowing the  stock.  Moore  v.  Baker,  4 
Ind.  App.  115  (1892).  For  the  allega- 
tions in  an  action  for  the  conversion  of 
a  bond,  see  Saratoga,  etc.  Co.  v.  Hazard, 
55  Hun,  251  (1889);  aflf'd,  121  N.  Y.  677. 
Where  defendant  purchased  stock  for 
the  plaintiff  and  accounted  therefor, 
but  refused  to  account  for  dividends 
received  while  he  held  the  stock,  the 
defendant  is  guilty  of  conversion. 
Shaughnessy  v.  Chase,  7  N.  Y.  St.  Rep. 
293  (1887).  There  are  many  cases  in 
the  lower  courts  of  New  York  on  this 
subject.  A  refusal  to  return  a  jjledge 
after  payment  is  a  conversion.  See 
Roberts  v.  Berdell,  52  N.  Y.  644  (1873); 
s.  C,  15  Abb.  Pr.  (N.  S.)  177.  As  to  con- 
version of  railway  shares  in  a  foreign 
country,  see  Northern  Ry.  v,  Carpen- 
tier,  13  How.  Pr.  222  (1856). 

•>  Trover  and  arrest  lie  for  conversion 
of  certificates  of  stock.  Barry  v.  Cal- 
der,  48  Hun,  449  (1888);  aff'd,  111  N.  Y. 
684.  As  to  arrest  for  conversion,  re- 
plevin thereby  being  waived,  see  Chap- 
pel  V.  Skinner,  6  How.  Pr.  338  (1851); 
Person  v.  Civer,  29  How.  Pr.  432  (1865), 
rev'g  28  How.  Pr.  139;  Niver  v.  Niver, 
43  Barb.  411  (1864);  Dubois  v.  Thomp- 
son, 1  Daly,  309  (1863);  Cousland  r. 
Davis,  4  Bosw.  619  (1859).  In  Butts  v. 
Burnett,  6  Abb.  Pr.  (N.  S.)  302  (1869), 
involving  the  arrest  of  a  broker  who 
had  sold  the  pledge  before  the  note  was 
due,  the  court  said:  "It  is  very  ques- 
tionable, I  think,  whether  a  demand 
after  a  default  in  payment  of  the  debt 
for  which  property  is  pledged  as  secu- 


1248 


CH.  XXXV.] 


ACTIONS    AND   MEASUEE    OF   DAMAGES. 


[§  57(>. 


favorite  remedy  when  the  stockholder  has  been  unjustly  deprived 
of  his  stock;  audit  is  nowhere  denied,  except  in  Pennsylvania,^ 
that  this  form  of  action  is  proper.  But  even  there,  for  the  conver- 
sion of  a  certificate  of  stock,  trover  will  lie.^  For  the  maintenance 
of  the  action  of  trover  there  must  be  title  in  the  plaintiff  to  the 
subject  of  the  action,  and  an  actual  conversion  by  the  defendant. 
If  either  of  these  elements  is  wanting  the  action  will  not  lie.  Thus, 
trover  will  not  lie  for  the  conversion  of  a  certificate  where  the  title 
to  the  shares  is  divested.' 

And,  upon  the  other  hand,  withholding  possession  of  a  certifi- 
cate of  stock  cannot  amount  to  a  conversion  of  the  stock  itself  so 
long  as  the  certificate  is  not  indorsed;  but  it  may  amount  to  a 
technical  conversion  of  the  certificate.*     A  transfer  of  a  certificate 


rity  will  render  a  refusal  to  deliver  the 
pledged  property  a  tortious  conversion 
of  it.  No  doubt  the  pledgor  can  re- 
deem upon  a  tender  of  the  debt,  or  he 
may  recover  the  diffei'ence  between 
the  value  of  the  pledge  and  the  debt. 
But  to  lay  the  foundation  for  an  action 
for  conversion,  I  am  of  opinion  that  an 
offer  and  demand  must  be  made  on  the 
day,  and  is  not  sufficient  if  made  after 
the  day  on  which  the  debt  has  become 
payable.'"  See  also  §  457,  supra.  Where 
an  agent  writes  the  stockholder's  name 
on  the  back  of  the  certificate  of  stock, 
and  disposes  of  it  without  authority,  he 
is  guilty  of  conversion  and  may  be  ar- 
rested. Reigner  v.  Spang,  5  N.  Y.  App. 
Div.  237  (1896).  A  pledgee  of  bonds 
may  maintain  an  action  for  conversion 
thereof,  and  may  cause  the  arrest  of  a 
re-pledgee  who  has  disposed  of  such 
bonds.  Blanck  v.  Nelson,  39  N.  Y.  App. 
Div.  21  (1899). 

iSewall  V.  Lancaster  Bank,  17  S.  & 
R.  (Pa.)  285  (1828);  Neiler  v.  Kelley,  69 
Pa.  St.  403  (1871). 

2Biddle  v.  Bayard,  13  Pa.  St.  150 
(1850);  Neiler  v.  Kelley,  69  Pa.  St.  403 
(1871);  Sewall  v.  Lancaster  Bank,  17 
Serg.  &  R.  (Pa.)  285  a828).  Cf.  AuU  v. 
Colket,  2  W.  N.  Cas.  322  (1875).  So  in 
Michigan.  Daggett  v.  Davis,  53  Mich. 
o5  (1884).  In  trover  the  goods  ought  to 
be  set  out  with  some  degree  of  cer- 
tainty of  description;  but  the  same 
certainty  is  not  required  as  in  detinue 
(79)  1 


and  replevin,  damages  being  recovered 
in  trover,  the  very  articles  in  detinue 
and  replevin.  Neiler  v.  Kelley,  69  Pa. 
St.  403  (1871). 

3  Broadbent  v.  Farley,  12  C.  B.  (N.  S.) 
214  (1862).  Trover  does  not  lie  against 
a  person  to  whom  stock  is  given  to  sell 
and  use  the  proceeds  to  start  in  busi- 
ness. Borland  v.  Stokes,  120  Pa.  St.  278 
(1888).  Where  several  shareholders 
mutually  agree  to  contribute  a  num- 
ber of  shares  each, to  be  sold  for  the 
benefit  of  the  corporation,  one  of  them 
cannot,  after  the  rest  have  contributed 
their  proportion,  refuse  to  allow  his 
shares  to  be  sold  as  agreed;  and  if  the 
corporation  takes  them  under  the 
agreement  and  sells  them,  he  cannot 
have  an  action  of  trover.  Conrad  iv 
La  Rue,  52  Mich.  83  (1883).  In  trover 
for  a  certificate  of  stock,  the  accept- 
ance by  the  plaintiff  of  the  certificate 
ends  the  suit,  and  nothing  further  can 
be  recovered.  Collins  v.  Lowry,  78  Wis. 
329  (1890). 

4  Daggett  V.  Davis,  53  Mich.  35  (1884). 
Cf.  Morton  v.  Preston,  18  Mich.  60  (1869). 
Where  an  administrator  sells  stock 
pledged  to  the  deceased  in  his  life-time 
as  security  for  a  loan  of  money,  and  re- 
ceives the  proceeds  and  properly  ac- 
counts to  the  estate,  this  is  not  a  con- 
version of  the  shares,  and  the  pledgor 
cannot  have  an  action  of  trover.  If 
any  action  lies  it  is  for  money  had  and 
received.      Von  Schmidt  v.   Bourn,  50 

■249 


§  576.] 


ACTIONS    AND    MEASURE    OF    DAMAGES. 


[CH.  XXXV. 


of  stock  in  the  usual  form  may  constitute  a  transfer  of  the  right  to 
brinff  suit  for  the  conversion  of  such  stock.*  It  is  well  established 
that  a  refusal  of  a  corporation  to  register  a  transfer  in  the  name  of 
one  entitled  to  the  stock  is  a  conversion  of  the  shares.-  In  Kew 
York  a  transferee  may  try  his  right  to  registry  in  an  action  for 
dividends,'  but  not  after  commencing  an  action  for  conversion.* 
Where  the  corporation  has  been  held  liable  for  conversion,  it  can- 
not then  tender  the  stock  back  to  the  stockholder  and  avoid  the 
payment  of  the  damages.'  A  failure  or  refusal  by  the  corporation 
to  issue  a  certificate  to  an  original  subscriber,  when  by  the  terms 
of  the  contract  of  subscription  it  ought  to  be  issued,  may  be  treated 
as  a  conversion."  So,  also,  in  certain  cases,  a  failure  to  deliver  stock 
according  to  a  contract'  for  delivery,^  or  to  return  borrowed  stock 


Cal.  616  (1875).  For  an  example  of  an 
insuflScient  complaint  in  trover  for 
shares,  in  that  there  was  no  sufficient 
averment  of  a  conversion  or  of  facts 
from  which  a  conversion  might  be  in- 
ferred, see  Edwards  v.  Sonoma  Valley 
Bank,  59  Cal.  136  (1881);  and  see  also 
Cumnock  v.  Newburyport  Sav.  Inst., 
142  Mass.  342  (1886). 

iMahaney  v.  Walsh,  16  N.  Y.  A  pp. 
Div.  601  (1897). 

2 Allen  V.  American  Building,  etc. 
Assoc,  49  Minn.  544  (1892):  North 
America  Building  Assoc,  v.  Sutton,  35 
Pa.  St.  463  (1860);  West  Branch,  etc. 
Canal  Co.'s  Appeal,  81*  Pa.  St.  19  (1870); 
Baltimore,  etc.  Ry.  v.  Sewell,  35  Md.  238 
(1871);  McMurrich  v.  Bond  Head  Har- 
bor Co.,  9  U.  C.  Q.  B.  333  (1852).  Trover 
lies  against  a  corporation  at  the  in- 
stance of  a  purchaser  of  certificates  of 
stock  for  refusal  to  transfer  the  stock 
on  the  books  of  the  company.  Ralston 
V.  Bank  of  California,  112  Cal.  208  (1896). 
But  see  New  London  Nat.  Bank  v. 
Lake  Shore,  etc.  Ry.,  21  Ohio  St.  221,  232 
(1871).  The  corporation  may  interplead 
in  certain  cases.  See  §  387,  supra.  In 
suing  for  damages  for  conversion 
against  the  corporation  for  depriving 
a  person  of  his  stock,  the  latter  need 
not  tender  the  certificates.  Carpenter 
V.  American  Bldg.  etc.  Assoc,  54  Minn. 
403  (1893).  Where  the  transferee  of 
certificates  of  stock  in  a  bank  presents 


them  to  the  cashier  of  the  bank  for 
transfer,  and  the  cashier  and  a  director 
delay  transfer  until  a  debt  of  the  trans- 
ferx-er  to  the  bank  becomes  due,  and 
then  in  behalf  of  the  bank  levy  an  at- 
tachment on  the  stock  for  such  debt, 
tlie  transferee  may  hold  the  bank  and 
the  cashier  and  such  director  liable  in 
trover  for  conversion  of  the  stock,  and 
it  is  no  defense  that  the  transfer  of  the 
certificate  was  made  to  defraud  credit- 
ors. Hine  v.  Commercial  Bank,  etc., 
119  Mich.  448  (1899).  Where  the  pur- 
chaser of  a  certificate  of  stock  sends  it 
to  the  corporation  for  transfer,  and  the 
secretary  replies  that  the  corporation 
has  a  lien  on  the  stock,  the  corporation 
is  not  liable  for  a  conversion  of  the 
stock,  no  demand  for  the  return  of  the 
certificate  being  shown.  Cummins  v. 
Peoples',  etc.  Assoc,  61  Neb.  728  (1901). 

3  Robinson  r.  Nat.  Bank  of  New 
Berne,  95  N.  Y.  637  (1884). 

*  Hughes  V.  Vermont  Copper  Min.  Co., 
72  N.  Y.  207  (1878). 

5  Carpenter  v.  American  Bldg.  etc. 
Assoc,  54  Minn.  403  (1898). 

^  See  §  61,  supra.     • 

''Huntingdon,  etc.  Coal  Co.  v.  Englisli, 
86  Pa.  St.  247  (1878);  North  v.  Phillips, 
89  Pa.  St.  250  (1879);  Noonan  v.  Ilsley, 
17  Wis.  314  (1863);  Pinkerton  v.  Man- 
chester, etc  R.  R.  42  N.  H.  424  (1861). 
Trover  lies  against  a  vendor  for  the 
conversion  of  stock,  even  though  the 


1250 


CU.  XXXV.] 


ACTIONS    AND    MEASURE    OF    DAMAGES. 


[§  576. 


on  demand,  or  at  the  time  when  by  agreement  it  ought  to  be  re- 
turned/ and  an  unauthorized  sale  of  stock  by  a  pledgee  in  viola- 
tion of  the  terms  of  the  contract  of  bailment,^  or  by  a  broker  in 
violation  of  his  contract,'  are  examples  of  conversion  of  stock.  In 
Oregon  it  is  said  that  any  interference  subversive  of  the  right  of 
the  owner  of  stock  to  enjoy  and  control  it  is  a  conversion.*  Trover 
will  not  lie  by  a  trustee,  on  stock  which  stands  in  the  name  of  the 
cestui  que  trust,  against*a  person  taking  title  from  a  co-trustee.  A 
suit  in  equity  is  the  proper  remedy.^  Where  a  certificate  of  stock 
is  supposed  to  be  burned,  but  is  afterwards  found,  a  conversion  for 
refusal  to  deliver  dates  from  the  time  when  it  is  found.^  Proof  of 
demand  is  necessary  in  order  to  support  the  action  of  trover,  where 
the  defendant  came  into  lawful  possession  of  the  stock  and  had  an 
•interest  in  it.''  A  settlement  between  a  principal  and  his  agent  is 
no  bar  to  a  subsequent  suit  by  the  principal  against  the  agent  for 


certificate  was  not  transferred.  Maha- 
ney  v.  Walsh.  16  N.  Y.  App.  Dir.  601 
(1897;.  A  person  entitled  to  stock  on  a 
conti'act  cannot  maintain  trover  for 
failure  to  deliver.  Reid  v,  Caldwell,  40 
S.  E.  Rep.  712  (Ga.  1902). 

1  McKenney  v.  Haines,  63  Me.  74 
(1873);  Fosdick  v.  Greene,  27  Ohio  St. 
484  (1875):  Forrest  v.  Elwes,  4  Ves.  Jr. 
492  (1799).  Where  a  person  loans  stock 
to  another  to  borrow  money  upon,  con- 
version does  not  lie  for  a  failure  to  re- 
turn the  stock.  Barrowcliffe  v.  Cum- 
mins. 66  Hun,  1  (1892).  Where  bonds 
are  loaned  to  use  temporarily  upon  an 
agreement  to  return  them  when  called 
for,  and  the  member  of  the  firm  to 
whom  they  are  delivered  uses  them  for 
his  own  purposes,  he  converts  them. 
Birdsall  v.  Davenport,  43  Hun,  552 
(1887).  Where  a  stockholder  in  an  in- 
solvent corporation  turns  over  his 
stock  to  another  person  to  deposit  under 
a  i-eorganization  agreement,  the  latter 
agreeing  to  pay  the  assessment  on  the 
stock  and  to  deliver  to  the  stockholder 
the  new  securities  upon  repayment  of 
such  assessment,  and  he  refuses  so  to 
do  thereafter,  he  is  guilty  of  a  conver- 
sion aild  of  a  fraud  upon  the  stock- 
holder. Miller  v.  Miles,  58  N.  Y.  App. 
Div.  103  (1901). 


2  Maryland  F.  Ins.  Co.  v.  Dalrymple, 
25  Md.  242,  267  (1866);  Freeman  v.  Har- 
wood,  49  Me.  195  (1859);  Fisher  v.  Brown, 
104  Mass.  259  (1870).  An  illegal  sale  of  the 
pledge  by  pledgee  is  a  conversion,  and  a 
complaint  for  such  conversion  will  not 
be  construed  as  a  complaint  for  breach 
of  contract.  Smith  v.  Hall,  67  N.  Y.  48 
(1876),  distinguishing  Austin  v.  Raw- 
don,  44  N.  Y.  63  (1870).  For  refusal  of 
pledgee  to  return  property,  the  action 
of  pledgor  may  be  in  tort  or  contract. 
International  Bank  v.  Monteath.  39  N. 
Y.  297  (1868).  See  also  notes  5  and  6, 
p.  1248,  supra.  Conversion  lies  for  an 
unauthorized  sale  of  stock  and  also  for 
dividends  received  thereon.  Shaugh- 
nessy  v.  Chase,  7  N.  Y.  St.  Rep.  293 
(1887). 

'  See  ch.  XXV,  supra;  Sadler  v.  Lee, 
6  Beav.  324  (1843). 

<  Budd  V.  Multnomah  Street  Ry.,  13 
Greg.  271  (1885). 

5  Onondaga,  etc.  Co.  v.  Price,  87  N.  Y. 
542  (18S2);  s.  a,  in  a  court  of  equity,  as 
White  V.  Price,  39  Hun,  394  (1886);  aff'd, 
108  N.  Y.  661  (1888). 

•>  McDonald  v.  Mackinnon,  104  Mich. 
428  (1895). 

7  Moynahan  v.  Prentiss,  10  Colo.  App. 
295  (1897). 


1251 


§g  577-o7'J.J  ACTIONS    AMD    MEASLKE    OF    DAMAGES.  [CH.  XXXV. 

conversion  of  stock  where  the  principal  was  not  aware  of  the  facts 
when  he  made  the  settlement.^ 

§  577.  Detinue  and  replevin. —  The  common-law  action  of  det- 
inue will  lie  for  the  recovery  of  a  certificate  of  stock  unlawfully 
detained.^  In  this  action  the  judgment  is  conditional,  either  to 
restore  the  thing  detained,  or  pay  the  value  and  damages  for  the 
detention.  The  more  modern  action  of  replevin  or  its  equivalent 
will  doubtless  lie  for  the  recoverv  of  a  certificate,  the  same  as  for 
any  other  tangible  personal  property.  Replevin  lies  by  an  admin- 
istrator to  recover  a  certificate  of  stock  which  he  had  illegally 
pledged  as  administrator.* 

§  578.  Money  had  and  received. —  A  pledgor  whose  stock  has 
been  wrongfully  sold  by  the  pledgee,  in  violation  of  the  contract 
of  bailment,  may  have  an  action  against  the  pledgee  lor  money  . 
had  and  received.* 

§  579.  Bill  in  equity. —  A  bill  in  equity  may  be  maintained  by  a 
hona  fide  purchaser  of  stock  against  the  corporation  to  compel  a 
transfer  of  the  stock  upon  the  corporate  books.*  A  bill  in  equity 
may  be  filed  also  to  relieve  a  stockholder  from  an  unauthorized 
forfeiture;^  to  rescind  a  subscription  obtained  by  fraud ;^  to  com- 
pel a  specific  performance  of  an  agreement  to  sell  stock  ;^  to  rem- 
edy a  purchase,  sale,  or  transfer  of  stock  induced  by  fraud;**  and 
to  redeem  stock  held  in  pledge.'"  A  preliminary  injunction  against 
transferring   stock   is   also  frequently  granted.^^     An   injunction 

1  Ballard  v.  Beveridge,  171  N.  Y.  194  6  East.  182(1805).  In  an  old  caseacon- 
(1902).  trary  rule  is  laid  down.     Nightingal  v. 

2  Williams  v.  Peel  River,  etc,  Co.,  55  Devisme,  5  Burr.  2589  (1770,.  In  a  suit 
L.  T.  Rep.  689  (1886);  Williams  v.  Ar-  for  profits  received  by  defendant  as 
cher,  5  C.  B.  318  (1847),  where  it  was  agent  for  plaintiff  in  buying  and  selling 
held  that  detinue  lay  to  recover  two  stock,  the  value  of  the  stock  need  not 
hundred  and  fifty  scrip  certificates;  be  alleged  with  any  particular  definite- 
Peters  V.  Hey  ward,  Cro.  Jac.  683  (1624),  ness.  Herrlich  v.  McDonald,  80  CaL 
where  detinue  was  allowed  for  a  bond  460  (1889).  Where  a  corporation  repudi- 
detained.  As  to  replevin  in  cepit  for  ates  a  pledge  of  stock  made  by  its  treas- 
bonds  wrongfully  received  in  pledge  urer,  it  cannot  sue  the  pledgee  for  the 
from  a  pledgee,  see  Thompson  v.  St.  money  received  by  the  pledgee  upon  a 
Nicholas  Nat.  Bank,  113  N.  Y.  325  (1889).  sale  of  the  stock  by  the  latter.  Holdeu 
Concerning  the  nature  of  stock  and  a  v.  Metropolitan  Nat,  Bank,  151  Mass. 
certificate  of  stock,  and  as  to  whether  112  (1890). 

trover  or  replevin  will  lie,  see  1  Univer-  •''  See  §  391,  supra. 

sity  Law  Rev.  218  (1894).  6  See  §  134,  supra. 

3  Parks  V.  Mockenhaupt,  133  Cal.  424  ^See  §§  155,  156,  supra. 
(1901).  8  See  §  338,  sttpm. 

^  Von  Schmidt  v.  Bourn,  50  Cal.  616  ^See"^  356,  supra. 

(1875);  Marsh  v.  Keating,  1  Bing.  N.  C.  lOSee  §  475,  supra. 

198  (1834).  Cf.  Jones  v.  Brinley,  1  East.  ^Heck  v.  Bulldey,  1  S.  W.  Rep.  612 

1  (1800);  Rex  v.  St.  John  Maddermarket,  (Tenn.  1886),  holding  also  that  a  viola- 


CH.  XXXV.]  ACTIONS    AND    MEASURE    OF    DAMAGES. 


[§  579. 


against  a  pledgee  disposing  of  stock  owned  by  a  certain  party,  or 
an  attachment  upon  the  interest  of  that  party,  does  not  prevent 
the  pledgee  selling  the  stock  if  such  stock  really  belonged  to  the 
wife  of  that  party.^  A  stockholder  whose  stock  has  been  wrong- 
fully pledged  may  enjoin  the  corporation  from  allowing  a  transfer 
by  the  pledgee  who  has  applied  for  the  same,  and  the  pledgor  need 
not  allege  that  the  pledgee  took  with  notice.  It  is  for  the  pledgee 
to  intervene  and  prove  that  the  pledge  was  lona  fide}  A  court 
will  enjoin  a  party  from  voting  upon  or  disposing  of  his  stock  in  a 
corporation  pendente  lite  where  the  plaintiffs  show  that  they  trans- 
ferred the  stock  to  the  defendant  on  the  latter's  agreement  not  to 
sell  the  same,  except  with  the  consent  of  the  former,  and  that  when 
he  did  sell  the  stock  three-fourths  of  the  proceeds  should  belong  to 
the  former,  and  it  appearing  further  that  the  defendant  had  given 
the  stock  to  his  sister  without  consideration.^  A  bill  in  equity  is 
the  proper  remedy  to  obtain  possession  of  certificates  of  stock.*    A 


tion  of  the  injunction  is  a  bar  to  dam- 
ages upon  a  dissolution  of  it.  The  pre- 
liminary injunction,  being  an  equitable 
remedy,  is  not  granted  if  only  legal 
relief  is  sought  by  the  action.  See  Mc- 
Henry  v.  Jevvett,  90  N.  Y.  58  (1882).  A 
principal  who  is  suing  an  agent  to  ob- 
tain shares  of  stock  may  enjoin  the 
agent  from  transferring  the  same  'pen- 
dente lite.  Chedworth  v.  Edwards,  8 
Ves.  Jr.  46  (1802).  Where  a  proposed 
consolidation  is  attacked  by  a  stock- 
holder, a  preliminary  injunction, 
granted  so  as  not  to  render  useless  the 
whole  suit  in  case  it  is  successful,  will 
not  be  disturbed  by  the  court  of  ap- 
peals. Young  V.  Rondout,  etc.  Co..  129 
N.  Y.  57  (1891).  Where  a  stockholder 
has  delivered  his  stock  to  the  directors 
to  be  divided  into  smaller  certificates, 
and  the  directors  claim  that  it  was 
agreed  that  a  part  of  the  stock  should 
be  sold  for  the  benefit  of  the  corpora- 
tion, the  stockholder  may  have  a  pre- 
liminary injunction  against  such  sale 
pending  his  suit  to  compel  delivery  of 
the  stock.  Bedford  v.  American,  etc. 
Ca,  51  N.  Y.  App.  Div.  537  (1900).  A 
stockholder  cannot  prevent  other  stock- 
holders from  selling  their  stock  on  the 
ground  that  the  purchaser  may  man- 
age the  company  to  the  detriment  of 

12. 


minority  stockholders;  and  the  fact 
that  the  plaintiff's  stock  was  on  deposit 
with  the  trust  company  and  that  he 
cannot  get  the  stock  and  thus  accept 
the  order  to  purchase  his  stock  also,  is 
no  ground  for  an  injunction.  Ingrahara 
V.  National  Salt  Co.,  72  N.  Y.  App.  Div. 
582  (1902).  A  corporation  by  the  action 
of  its  boai-d  of  directors  and  consent  of 
all  its  stockholders  may  agree  that  a 
certain  percentage  of  its  profits  shall 
be  paid  annually  to  a  person  for  serv- 
ices already  rendered  by  him.  In  a 
suit  by  him  to  enforce  such  agreement 
and  asking  an  injunction  against  any 
sales  of  stock,  except  with  notice  of 
such  agreement,  stockholders  are  neces- 
sary parties  defendant.  Such  an  agree- 
ment is  not  an  exclusion  of  future 
boards  of  directors  from  the  manage 
ment  of  the  company.  Dupignac  v. 
Bernstrom,  76  N.  Y.  App.  Div.  105  (1902). 

1  Fourth  Nat.  Bank,  etc.  v.  Crescent, 
etc.  Co.,  52  S.  W.  Rep.  1021  (Tenn.  1897). 

2  Reynolds  v.  Touzalin  Imp.  Co.,  62 
Neb.  236  (1901). 

3  Weston  r.  Goldstein,  39  N.  Y.  App. 
Div.  661  (1899). 

4  This  rule  of  law  has  f i-equently  been 
applied  in  actions  by  a  pledgor  to  ob- 
tain from  a  pledgee  the  stock  which 
has    been  pledged.     The  rule  itself  is 


no 


579.] 


ACTIONS    AND    MEASURE   OF   DAMAGES. 


[CH. 


XXXV. 


bill  in  equity  filed  by  a  partner  to  hold  his  copartners  and  third 
persons  liable  for  a  misappropriation  of  stock  owned  by  the  firm 
cannot  be  sustained  where  it  is  not  alleged  that  the  third  persons 
knew  of  such  misappropriation  at  the  time  of  such  misappropria- 
tion.* In  a  suit  by  a  claimant  of  stock  to  obtain  the  stock  from 
another  person,  the  corporation  is  a  proper  but  not  a  necessary 
party .'^  In  a  suit  by  a  stockholder  to  hold  a  corporation  liable  for 
his  stock  and  dividends,  by  reason  of  its  allowing  a  transfer  b}'  an 
unauthorized  agent  of  the  stockholder,  the  subsequent  owners  of 
the  stock  are  not  necessary  parties.'  A  suit  by  the  purchaser  of  a 
certificate  of  stock  to  compel  delivery  may  be  brought  at  the  place 
where  the  certificate  is,  and  absent  defendants  may  be  served  by 
publication.*  In  a  suit  against  a  corporation  to  compel  it  to  issue 
stock  to  the  plaintiff  or  else  pay  the  value  thereof,  the  proper  form 
of  judgment  is  an  order  to  issue  the  stock.  A  money  judgment 
should  be  entered  only  after  proof  of  the  corporation's  failure  to 
comply  with  the  main  order.*^ 


well  established.  White  v.  Price,  39 
Hun,  394  (1886);  afif'd,  108  N.  Y.  GGl: 
Hasbrouck  v.  Vandervoort,  4  Sandf.  74 
(1850);  Bryson  v.  Rayner,  25  Md.  424 
(1866);  Conynghains  Appeal,  57  Pa.  St. 
474  (1868);  Koons  v.  First  Nat.  Bank,  89 
Ind.  178  (1883).  Where  a  stockholder 
transfers  the  certificate  on  the  back  to 
a  person,  and  leaves  it  in  his  own  safe- 
deposit  box,  and  writes  a  letter  to  such 
person  directing  him  to  distribute  it 
among  a  list  of  charitable  corporations, 
but  no  list  is  attached,  the  latter  takes 
no  title,  and  tlie  executors  may  com- 
pel him  to  transfer  the  certificate  to 
them.  Bliss  v.  Fosdick,  76  Hun,  508 
(1894).  In  the  case  of  Lamb,  etc.  Co.  v. 
Lamb,  119  Mich.  568  (1899),  where  a 
party  claiming  to  be  the  real  owner  of 
stock  filed  a  bill  to  compel  the  holder 
of  such  stock  to  deliver  up  the  same, 
but  it  appeared  that  the  defendant  had 
already  disposed  of  the  stock  before  the 
commencement  of  the  suit,  the  court 
refused  to  grant  relief,  even  though  it 
further  appeared  that  the  defendant 
had  other  stock  in  the  same  corporation 
equal  in  amount  to  the  stock  in  issue. 

1  Wall  V.  Old  Colony,  etc.  Trust  Co., 
174  Mass.  340  (1899). 

2  Williamson  v  Krohn,  66  Fed.  Rep. 


655  (1895);  Johnson  v.  Kirby.  65  Cal. 
482  (1884).  Cf.  Rogers  v.  Van  Nort- 
wick,  45  Fed.  Rep.  513  (1891).  In  a  suit 
between  stockholders  as  to  the  title  to 
stock  the  corporation  is  a  proper  party 
defendant,  but  is  a  nominal  party,  and 
is  not  considered  in  determining 
whether  the  suit  is  removable  to  the 
United  States  court.  Higginsr.  Balti- 
more, etc.  R.  R.,  99  Fed.  Rep.  640  (1900). 
And  see  §g  338,  356,  361,  supra. 

3  St,  Romes  v.  Levee,  etc.  Co.,  127  U.  S. 
614  (1888).  In  this  case  the  bill  of  a 
claimant  of  stock  against  the  company 
to  hold  it  liable  for  allowing  a  transfer 
of  the  stock  in  fraud  of  his  rights  was 
barred  by  laches,  the  suit  having  been 
brought  thirty-five  years  after  the 
cause  of  action  had  accrued.  Cf.  %  392, 
supra. 

*  Ryan  v.  Seaboard,  etc.  R.  R.,  83  Fed. 
Rep.  889  (1897).  See  also  cases  in  g  363, 
supra. 

5  Consolidated,  etc.  Co.  v.  Huff,  62 
Kan.  405  (1901).  Where  a  transaction 
is  adjudged  to  be  a  loan  and  not  a  sale, 
and  the  defendant  is  ordered  to  return 
the  stock,  it  is  error  to  add  an  alterna- 
tive money  judgment  for  the  value  of 
the  stock.  Fanny  Rawlings  Min.  Co.  t>. 
Tribe,  68  Pac.  Rep.  284  (Colo.  1902). 


1254 


CH.  XXXV.] 


ACTIONS    AND    MEASURE    OF    DAMAGES.  [§§  5 SO,  581. 


Where  stock  is  deposited  with  one  trust  company  as  additional 
security  for  a  mortgage  given  to  another  trust  company,  and  upon 
default  the  former  company  refuses  to  deliver  the  stock,  and  the 
latter  trust  company  then  commences  a  suit  in  equity  to  compel 
the  former  trust  company  to  deliver  the  stock,  and  during  that  suit 
the  stock  declines  in  value,  a  bondholder  secured  by  such  mortgage 
cannot  hold  liable  the  trust  company  holding  the  stock,  on  account 
of  the  decline  in  value,  inasmuch  as  the  suit  in  equity  determined 
all  questions,  including  the  amount  of  damage.* 

§  580.  Pleading  under  the  codes. —  In  general,  a  pleading  under 
the  code  is  not  a  safe  pleading,  unless  it  conforms  substantially  to 
the  rules  of  pleading  at  common  law.  Some  verbiage  may  be 
omitted,  but  the  relief  granted  by  the  various  common-law  actions 
cannot  be  obtained  even  under  the  code  without  the  necessary 
averments  entitling  the  plaintiff  to  that  relief.  It  is  the  allegation 
of  the  facts,  and  not  the  method  of  alleging  them,  that  constitutes 
a  sufficient  pleading  under  the  code.^ 

§  581.  The  measure  of  damages  —  {a)  The  first  rule — Yalue  lioiv 
shown  wlien  there  is  no  marliet  value. —  Great  difficulty  has  been 
experienced  in  determining  what  shall  be  the  measure  of  damages 
for  the  conversion  of  stock.     As  the  manner  and  conditions  of  the 


1  Bracken  v.  Atlantic  T.  Co.,  167  N.  Y. 
510  (1901).  Where  stock  is  tied  up  by 
an  injunction  which  is  afterwards  va- 
cated, and  in  the  meantime  the  stock 
depreciates  in  value,  the  loss  can  be  re- 
covered from  the  enjoining  party  if  the 
stocks  could  and  would  have  been  sold 
before  the  depreciation  if  they  had  not 
been  so  tied  up.  But  if  such  stocks  are 
in  pledge,  and  the  pledgor  does  not  pay 
the  loan  while  the  stocks  are  so  tied 
up,  no  damages  can  be  recovered. 
Fourth  Nat.  Bank,  etc.  v.  Crescent,  etc. 
Co.,  53  S.  W.  Rep.  1021  (Tenn.  1897).  See 
also  i?  388,  supra. 

2  Burrall  v.  Bushwick  R.  R.,  75  N.  Y. 
211  (1878).  Cf.  Tockerson  v.  Chapin,  53 
N.  Y.  Super.  Ct.  16  (1885).  In  Nevada 
there  is  a  statutory  action  of  claim  and 
delivery.  Bercich  v.  Marye,  9  Nev.  313 
(1874).  See  Webster  v.  Grand  Trunk 
Ry.,  3  L.  Can.  Jur.  148  (1859);  s.  C,  2  L. 
Can.  Jur.  291,  for  a  construction  of  that 
provision  of  the  judicature  act  (12  Vict., 
c.  38,  §  87)  which  governs  actions  of  this 
nature  in  the  Canadian  provinces.  In 
Kuhn  V.  McAllister.  1  Utah,  273  (1875), 

1 


it  is  held  that  the  language  used  in  the 
pleadings  in  these  actions  is  not  ma- 
terial, or  that  the  language  is  that  of 
one  form  of  action  or  another,  or  of  no 
form,  but  that  the  question  is  whether 
the  facts  entitle  the  plaintiff  to  recover. 
A  declaration  in  an  action  for  the 
wrongful  conversion  of  the  shares  of  the 
capital  stock  of  a  corporation  is  suffi- 
cient for  the  purposes  of  pleading 
if  it  states  the  ultimate  facts  to  be 
proven.  The  circumstances  which  tend 
to  prove  those  facts  may  be  used  for 
the  purpose  of  evidence,  but  they  have 
no  place  in  the  pleadings.  McAllister 
V.  Kuhn,  96  U.  S,  87  (1877),  affirming 
Kuhn  V.  McAllister,  1  Utah,  273  (1875). 
As  to  a  misjoinder  of  causes  of  ac- 
tion under  the  California  code,  where 
the  plaintiff  sues  to  recover  certain 
stock,  see  Jolinson  v.  Kirby,  65  Cal.  483 
(1884).  Upon  the  question  of  what  is, 
in  New  York,  a  sufficient  pleading  in 
an  action  to  compel  delivery  of  stock, 
see  Burrall  v.  Bushwick  R.  R.,  75  N.  Y. 
211  (1878).  See  also  3  Chitty,  Pleadings, 
p.  618;  Lowell,  Transfers,  §11. 


zoo 


§  581.] 


ACTIONS    AND    MEASURE    OF    DAMAGES. 


[CH.  XXXT. 


conversion  vary,  so  also  will  the  measure  of  damages  vary  from 
nominal  damages  to  the  highest  value  of  the  stock  with  dividends 
and  interest,  and  also  any  special  damages  which  the  plaintifif  can 
establish.  In  general,  the  courts  incline  to  the  rule  that  the  true 
measure  of  damages  is  the  value  of  the  stock  at  the  time  of  the 
conversion,'  or  a  reasonable  time  after,^  B3'"the  phrase  "the  value 
of  the  stock"  is  usually  to  be  understood  the  market  value.'    The 


I  Re  Bahia,  etc.  Ry..  L.  R.  3  Q.  B.  584 
(1868);  Williams  v.  Archer,  5  C.  B.  318 
(1847);  Tempest  v.  Kilner,  3  C.  B.  249 
(1846);  Shaw  v.  Holland,  15  M,  &  W. 
136  (1846);  Pott  v.  Flather,  5  Railw.  & 
Can.  Cas.  85  (1847);  Davidson  v.  Tulloch, 
6  Jur.  (N.  S.)  543  (1860);  Wells  v.  Aber- 
nethy,  5  Conn.  223  (1824);  O'Meara  v. 
North  American  Min.  Co.,  2  Nev.  112 
(1866);  Ormsby  v.  Vermont  Copper  Min. 
Co.,  56  N.  Y.  623  (1874);  Pinkerton  v. 
Manchester,  etc.  R,  R.,  42  N.  H.  424 
(1861);  McKenney  v.  Haines,  63  Me.  74 
(1873);  Sturges  v.  Keith,  57  111.  451  (1870); 
Noonan  v.  Ilsley,  17  Wis.  314  (1863);  Bull 
V.  Douglas,  4  Munf.  (Va.)  303  (1814);  En- 
ders  V.  Board  of  Public  Works,  1  Gratt. 
(Va.)  364  (1845);  White  v.  Salisbury,  33 
Mo.  150  (1862);  Connor  ?7. -Hillier,  11 
Rich.  L.  (S.  C.)  193  (1857);  Eastern  R  R. 
V.  Benedict,  76  Mass.  212  (1857);  Boylan 
V.  Huguet,  8  Nev.  345  (1873);  Bercich  v. 
Marye,  9  Nev.  312  (1874);  Sargent  v. 
Franklin  Ins.  Co.,  25  Mass.  90  (1829); 
Fisher  v.  Brown,  104  Mass.  259  (1870): 
Wyman  v.  American  Powder  Co.,  62 
Mass.  168  (1851);  North  v.  Phillips,  89 
Pa.  St  250  (1879);  Huntingdon, etc.  Coal 
Co.  V.  English,  86  Pa.  St.  247  (1878); 
Neiler  v.  Kelley,  39  Pa,  St.  403  (1871); 
Randall  v.  Albany  City  Nat.  Bank,  1 
N.  Y.  St.  Rep.  592  (1886);  Douglas  v. 
Merceles,  25  N.  J.  Eq.  144  (1874).  See 
also  Eicholz  v.  Fox,  12  Phila.  (Pa.)  382 
(1878);  Larrabee  v.  Badger,  45  111.  440 
(1867);  Barned  v.  Hamilton,  2  Railw.  & 
Can.  Cas.  624  (1841).  Cf.  Moody  v.  Caulk, 
14  Fla.  50  (1872);  Orange,  etc.  R.  R.  v. 
Fulvey,  17  Gratt.  (Va.)  366  (1867);  Jef- 
ferson V.  Hale,  31  Ark.  286  (1876);  Third 
Nat.  Bank  v.  Boyd,  44  Md.  47  (1875); 
Thomas    v.    Sternheimer,   29    Md.    268 


(1868).  The  measure  of  damages  to  a 
customer  by  reason  of  a  broker  illegally 
selling  his  stock,  the  broker  having  be- 
come bankrupt,  is  the  value  of  the  stock 
on  the  day  of  filing  the  petition  in  bank- 
ruptcy, the  exact  time  of  the  sale  not 
being  ascertainable.  In  re  Graflf,  117 
Fed.  Rep.  343  (1902). 

«Colt  V.  Owens,  90  N.  Y.  368  (1882); 
Baker  r.  Drake.  53  N.  Y.  211  (1873);  S.  C, 
66  N.  Y.  518  (1876);  Gruman  v.  Smith, 
81  N:  Y.  25  (1880);  Douglas  v.  Merceles, 
25  N.  J.  Eq.  144  (1874);  Brewster  v.  Van 
Liew,  119  111.  554  (1886);  Budd  v.  Mult- 
nomah Street  Ry.,  15  Oreg.  413  (1887). 
Upon  what  is  reasonable  time  herein  in 
transactions  on  the  stock  exchanges, 
see  Stewart  v.  Cauty,  8  M.  &  V.'.  160 
(1841);  Field  v.  Lelean,  6  HurL  &  N..617 
(1861). 

3  By  the  "  market  value  of  stock  "  is 
meant  the  actual  price  at  which  it  is 
commonly  sold.  That  price  may  be  fixed 
by  sales  of  the  stock  in  market  at  or 
about  a  given  time.  If  no  sales  can  be 
shown  on  the  precise  day,  recourse  may 
be  had  to  sales  before  or  after  the  day, 
and  for  that  inquiry  a  reasonable  range 
in  point  of  time  is  allowable.  Douglas 
V.  Merceles,  25  N.  J.  Eq.  144  (1874).  Cf. 
Stewart  v.  Cauty,  8  M.  &  W.  160  (1841); 
Sturges  V.  Keith,  57  III.  451  (1870);  Sey- 
mour V.  Ives,  46  Conn.  109  (1878).  The 
measure  of  (iamages  for  non-delivery 
of  stock  at  a  certain  date  is  presump- 
tively the  par  valua  The  defendant  is 
obliged  to  prove  differently  if  this  price 
is  incorrect.  Harris's  Appeal,  12  At!. 
Rep.  743  (Pa.  1888).  If  there  is  no  mar- 
ket value  of  stock,  -proof  of  a  few  sales 
is  competent.  Brown  v.  Lawton,  6 
N.  Y.  Supp.  137  (1889). 


1256 


•Cfl.  XXXV.  J 


ACTIONS    AND    MEASURE    OF    DAMAGES. 


[§  581. 


fact  that  the  shares  of  stock  have  no  known  market  value  will  not  pre- 
vent recovery,  where  the  actual  value  is  ascertainable,  in  an  action  to 
recover  damages.  The  value  may  be  proven  by  showing  the  value 
of  the  property  and  business  of  the  corporation,  less  the  amount  of 
the  liabilities.^     The  question  of  what  was  the  market  value  at  the 


1  Vail  V.  Reynolds,  118  N.  Y.  297  (1890); 
Patterson  v.  Plummer,  10  N.  Dak.  95 
(1901).  Where  there  is  no  market  value  to 
stock  its  value  may  be  shown  by  show- 
ing the  value  of  the  property  of  the  cor- 
poration as  compared  with  the  liabili- 
ties. Beaty  v.  Johnston,  66  Ark.  529 
(1899).  In  determining  the  value  of 
stock  which  has  no  market  value,  the 
actual  value  of  the  assets  of  the  corpo- 
ration is  considered,  but  not  the  good- 
will, where  the  companj'^  never  did  a 
pi'ofitable  business.  Even  thougla  the 
assets  are  subsequently  sold,  yet,  if  the 
sale  was  a  forced  sale,  the  price  realized 
is  not  admissible  to  prove  such  actual 
value.  Feige  v.  Burt.  124  Mich.  565 
(1900).  In  estimating  the  value  of  stock 
under  an  inheritance  tax  statute,  the 
•earning  capacity,  good-will  and  income 
of  the  corporation  may  be  considered. 
Matter  of  Brandreth,  28  Misc.  Rep.  468 
(1899).  Where  the  stock  has  no  market 
value,  the  value  of  the  property  of  the 
corporation  in  excess  of  its  debts  is  ad- 
missible. McDonald  v.  Danahy,  196  IlL 
133  (1902).  The  value  of  stock  may  be 
ascertained  by  comparing  the  corporate 
assets  with  the  liabilities.  Nelson  v. 
First  Nat.  Bank,  69  Fed.  Rep.  798  (1895). 
The  value  of  stock  may  be  shown  "  by 
proof  of  the  value  of  the  property  and 
business  of  the  corporation,  its  good- 
will and  dividend-earning  capacity." 
State  u  Carpenter,  51  Ohio  St.  83  ;1894). 
The  value  of  the  stock  may  be  deter- 
mined "from  all  the  facts  and  circum- 
stances of  the  case."  McCloy  v.  Cox,  12 
Ind.  App.  27  (1895).  "  In  the  absence  of 
better  evidence,  the  market  value  of 
all  the  property  of  the  corporation  may 
•be  shown,  with  the  view  to  arriving  at 
the  proportional  value  of  the  shares  in 
controversy."  Hewitt  v.  Steele,  118  Mo. 
463  (1893).     Where  there  is  no  market 


value,  value  may  be  shown  by  past  divi- 
dends, the  value  of  the  corporate  assets, 
and  the  price  of  individual  sales  not 
under  compulsion.  If  there  is  no  mar- 
ket value,  it  is  presumed  to  be  worth 
par.  Brinkerhoff-Farris,  etc.  Co.  v.  Home 
Lumber  Co.,  118  Mo.  447  (1893).  The 
value  of  stock  may  be  shown  by  its 
dividend-paying  qualities.  Greer  v.  La- 
fayette County  Bank,  128  Mo.  559(1895). 
The  actual  value  of  the  tangible  prop- 
erty of  the  corporation  cannot  be  re- 
sorted to,  to  ascertain  the  value  of  the 
stock,  if  there  is  any  better  evidence  of 
the  value  of  the  stock.  State  v.  Sattley, 
131  Mo.  464(1895).  Where  stock  has  no 
market  value  its  actual  value  may  be 
shown,  and  proof  may  be  given  of  the 
value  of  the  corporate  assets  and  divi- 
dends paid,  and  the  character  and 
permanency  of  the  business,  and  the 
control  of  the  stock,  and  other  circum- 
stances. A  sale  of  a  single  share  of 
stock  which  carries  the  control  does  not 
fix  the  market  value,  but  a  sale  two 
5'ears  prior  may  be  shown.  If  there  is 
no  evidence  the  par  value  is  presumed 
to  be  the  actual  value.  Moffitt  v.  Here- 
ford, 132  Mo.  513  (1896).  Tl'.e  value  of 
the  stock  for  four  years  afterwards, 
without  a  showing  as  to  the  relative 
condition  of  the  company  on  the  two 
dates,  is  not  admissible.  Jones  v.  Ellis, 
68  Vt.  544  (1896).  The  fact  that  there 
is  no  market  value  for  stock  does  not 
show  that  the  stock  is  without  value. 
Pabst,  etc.  Co.  v.  Montana,  etc.  Co.,  19 
•Mont.  294  (1897).  The  value  may  be 
proved  by  other  sales.  Kuhn  v.  McKay, 
7  Wyo.  42  (1897).  In  ascertaining  the 
value  of  stock  in  a  corporation  owning 
undeveloped  property,  where  the  stock 
has  no  market  value,  particular  sales, 
prices,  and  options  on  the  stock  may  be 
shown.     Moynahan  v.  Prentiss,  10  Colo. 


1257 


J  581.] 


ACTIONS   AND   MEASURE    OF   DAMAGES. 


[CH.  XXXV. 


time  of  the  conversion  is  generally  a  question  for  the  jury; '  and  it 
may  be  shown  by  tables  of  prices  current  published  in  the  news- 
papers or  otherwise  at  the  time  of  the  conversion,  and  these  may 
be  read  in  evidence.-     But  market  quotations  are  evidence  of  the 


App.  295  (1897).  In  ascertaining  the 
value  of  stock  for  the  purposes  of  taxa- 
tion, the  amount  paid  in  on  the  stock 
may  be  taken  as  the  value  if  there  have 
been  no  sales  of  the  stock,  and  if  there 
is  no  other  evidence  as  to  its  value. 
Commonwealth  v.  People's,  etc.  Co.,  183 
Pa.  St.  405  (1898).  "  In  actions  for  con- 
version of  personal  property,  such  as 
these  shai'es  are,  the  damages  are  not 
limited  to  the  market  value  of  tiie  stock* 
Its  actual  value,  to  be  determined  under 
all  the  circumstances,  such  as  the  divi- 
dend-making capacity,  the  good-will, 
etc.,  is  the  measure  of  damages."  Freon 
V.  Carriage  Co.,  42  Ohio  St.  30,  38  (1884). 
In  Hitchcock  v.  McElrath,  72  Cal.  565 
(1887),  the  court  allowed  evidence  to  be 
given  showing  the  market  value  of  all 
the  property  of  the  corporation,  there 
being  no  other  method  of  ascertaining 
the  value  of  the  stock.  See  also  Mc- 
Guflfey  V.  Humes,  8."3  Tenn.  26  (1886).  The 
value  of  stock  may  be  shown  by  show- 
ing the  value  of  the  property  of  the 
corporation,  the  amount  of  capital  stock, 
and  the  amount  of  debts.  It  may  be 
shown,  also,  by  proving  how  much  could 
be  borrowed  on  the  stock  at  the  place 
where  the  company's  headquarters 
were.  Smith  v.  Traders'  Nat.  Bank,  83 
Tex.  368  (1891).  See  also  Simpkins  v. 
Low,54N.  Y.  179(1873).  Where  a  vendor 
of  stock  in  a  corporation  which  has  a 
franchise,  but  nothing  else,  is  entitled 
to  two  thousand  shares  of  full-paid 
stock  at  a  later  date,  according  to  the 
contract  of  sale,  his  measure  of  dam- 
ages for  failure  of  the  vendee  to  delivei? 
the  two  thousand  shares  is  nominal 
damages,  where  there  was  no  market 
or  actual  value  for  the  stock.  Barnes 
V.  Brown,  130  N.  Y.  372  (1892).  The  value 
of  stock  may  be  shown  by  the  value  of 
its  assets,  where  there  is  no  known 
market  value.     Redding  v.  Godwin,  44 


Minn.  355  (1890).  The  president  and 
managing  agent  renders  his  corpora- 
tion liable  for  a  bonus  of  stock  in  an- 
other corporation  which  he  gives  se- 
cretly and  corruptly  to  the  agent  of 
the  latter  corporation  in  order  to  get  a 
contract  for  the  former  corporation. 
Grand  Rapids,  etc.  Co.  v,  Cincinnati, 
etc.  Co.,  45  Fed.  Rep.  671  (1891),  holding 
the  former  corporation  liable  for  the 
par  value  of  the  stock,  inasmuch  as  it 
was  the  original  issue  of  that  stock. 
Not  the  nominal  but  the  true  value  of 
the  shares  is  what  the  plaintiff  is  enti- 
tled to  recover.  Bull  v.  Douglas,  4  Munf. 
(Va.)  303  (1814);  Enders  v.  Board  of 
Public  Works,  1  Gratt.  (Va.)  364  (1845). 
Where  a  railroad  is  sold  to  be  paid  for 
in  bonds,  a  failure  to  deliver  the  bonds 
enables  the  vendor  to  recover  their  par 
value  from  the  vendee.  Texas  Western 
Ry.  V.  Gentry,  69  Tex.  625  (1888). 

1 1  Sedgw.  Damages  (7th  ed.),  585,  and 
cases  cited;  Dos  Passos,  Stockbrokers 
801.  See  Cameron  v.  Durkheim,  55 
N.  Y.  425  (1874);  Fowler  v.  New 
York  Gold  Exch.  Bank,  67  N.  Y.  138 
(1876);  Harris  v.  Tumbridge,  83  N.  Y. 
92  (1880),  and  notes  supra.  Where 
there  is  no  evidence  that  the  stock  is 
worthless,  the  question  of  value  should 
be  submitted  to  the  jury;  the  rule  of 
damages  in  a  case  for  fraud  as  to  repre- 
sentations as  to  the  value  of  the  stock 
being  the  difference  between  the  value 
of  the  stock  as  represented,  and  what 
it  was  in  fact  worth.  Maxted  v.  Fow- 
ler, 94  Mich.  106  (1892). 

2Cliquot's  Champagne,  3  Wall.  114 
(1865);  Whelan  v.  Lynch,  60  N.  Y.  469 
(1875).  A  price-current  or  market  re- 
port is  admissible  in  certain  cases  to 
prove  the  fluctuations  and  value  of 
stock.  Seligman  v.  Rogers,  113  Mo.  642 
(1893). 


1258 


CH.  XXXV.] 


ACTIONS    AND   MEASURE    OF    DAMAGES. 


[§  oSl, 


value  of  stock  only  when  such  quotations  are  based  on  actual 
sales.  "Where  there  have  been  no  sales,  evidence  of  a  bid  for  the 
stock  is  not  admissible,  unless  it  is  shown  under  what  circumstances 
tjae  bid  was  made,  and  Avhether  it  was  in  good  faith  and  with 
intent  to  fulfill.^ 

A  conversion  arises  at  the  time  when  the  stockholder,  being 
entitled  to  the  immediate  possession  or  delivery  of  the  stock  or  the 
certificate,  makes  a  demand  for  it  which  is  refused.^  Accordingly, 
where  a  demand  has  been  made  and  refused,  the  measure  of  dam- 
ages is  the  value  of  stock  on  the  day  of  the  demand  and  refusal.^ 


1  Wildes  V.  Robinson,  50  N.  Y.  App. 
Div.  192  (1900).  In  estimr.ting  the 
value  of  stocks  under  the  inlieritance 
tax  law  the  stock  exchange  prices 
therefor  may  be  taken  as  the  basis. 
Walker  v.  People,  192  111.  106  (1901).  In  the 
case  of  Chicago,  etc.  Co.  v.  State  Board 
of  Equalization,  112  Fed.  Rep.  607  (1901), 
the  court,  in  speaking  about  the  unre- 
liability of  quotations  of  stock  as  a 
basis  for  its  intrinsic  value,  said  (p.  612): 

,  "  The  court  knows  by  experience  and 
observation  that  railroad  properties 
when  sold  as  an  entirety,  almost  with- 
out exception,  yield  nothing  to  the 
stockholder,  althoug4i  the  stock  may 
have  been  sold  in  share  lots  upon  the 
stock  exchange  for  years  previously  at 
advanced  figures.  Tlie  court  knows 
also,  from  observation,  that  these  stock 
quotations  are  frequently  advanced  by 
contending  interests  for  control,  or  by 
short  interests  in  the  market,  such  as 
ran  the  Northern  Pacific  within  a  year 
to  quotations  almost  tenfold  its  real 
value.  The  court  also  knows  from  ob- 
servation that  the  speculative  public, 
dealing  in  stock  sales,  and  making 
its  quotations,  are  governed  largely 
by  the  prospect  of  present  dividends, 
and  not  by  any  general  conception  of 
permanent  earning  capacity.  These, 
and  other  considerations  tliat  could  be 
mentioned,  make  stock  quotations  an 
indicia,  but  an  unstable  indicia,  of  the 
real  value  of  the  capital  stock  as  an  en- 
tirety." 

2  Blair  Ck).  v.  Rose,  26  Ind.  App.  487 
(1901). 

12 


'So  when  stock  held  as  collateral  is 
improperly  sold  by  the  pledgee,  the 
value  on  the  day  when  the  pledgor  pays 
his  debt  and  demands  his  stock  is  to  be 
taken.  Fisher  v.  Brown,  104  Mass.  259 
(1870).  In  Freeman  v.  Harwood,  49  Ma 
195  (1859),  shares  of  stock  standing  in 
the  name  of  the  defendant  as  collateral 
security  for  a  debt  which  had  been 
paid  were  sold  for  non-payment  of  an 
assessment  and  bought  by  defendant. 
It  was  held  that  the  defendant  was 
liable  in  trover  for  the  value  of  the 
shares  at  the  time  of  the  sale,  with  in- 
terest, and  all  dividends  received 
thereon,  deducting  theamount  of  the  as- 
sessment and  the  expenses  of  the  sale. 
In  Sturges  v.  Keith,  57  IlL  451  (1870  ,  it 
is  held  that  where  the  demand  and  re- 
fusal constitute  the  conversion,  or 
afford  presumptive  evidence  of  it,  the 
date  of  such  demand  and  refusal  is  the 
proper  time  for  estimating  the  value. 
Again,  where  the  corporation  wrong- 
fully refuses  to  register  a  transfer  and 
to  issue  a  certificate,  the  measure  of 
damages  is  the  value  of  the  stock  on 
the  day  when  the  transfer  was 
demanded  and  refused.  Wyman  v. 
American  Powder  Co.,  62  Mass.  168 
(1851);  Eastern  R  R.  v.  Benedict,  76 
Mass.  212  (1857);  West  Branch,  etc. 
Canal  Co.'s  Appeal,  81*  Pa,  St.  19  (1870); 
Baltimore  Ry.  v.  Sewell,  85  Md.  238 
(1871):  McMurrich  v.  Bond  Head  Har- 
bor Co.,  9  Up.  Can.  Q.  B.  333  (1852), 
where  it  is  said  that  while  the  rule  as 
announced  above  is  the  proper  one, 
yet,  when  the  jury  allows  a  larger  sum, 
o9 


§  5S1.] 


ACTIONS    AND    MEASURE    OF    DAMAGES. 


[cn.  XXXV. 


Where  the  pledgee  of  stock  TvrongfuUy  sells  it,  the  injured  party 
may  recover  the  highest  market  price  between  the  time  of  notice 
of  sale  and  a  reasonable  time  within  which  he  might  have  bought 
the  stock  elsewhere.^  In  a  suit  against  a  corporation  for  refusal  to 
transfer  stock  on  its  books,  "  the  rule  of  damages  is  the  highest  in- 
termediate value  of  the  stock  between  the  time  of  conversion  and 
a  reasonable  time  after  the  owner  has  received  notice  of  the  con- 


the  question  of  the  measure  of  damages 
not  having  been  pressed  at  the  argu- 
ment, the  court  will  not  reduce  the 
verdict.  So  also  where  there  is  a  fail- 
ure to  return  borrowed  stock  on  de- 
mand, or  according  to  the  terms  of  the 
bailment,  the  value  on  the  day  of  de- 
mand, or  on  the  day  when  tlie  stock 
ouglit  by  contract  to  have  been  re- 
turned, is  the  measure  of  damages. 
McKenney  v.  Haines.  63  Me.  74  (1873); 
Fosdick  V.  Greene,  27  Ohio  St.  484 
(1875):  Day  v.  Perkins,  2  Sandf.  Ch.  359 
(1845).  Cf.  Gortelyou  u  Lansing,  2 
Gaines'  Cas.  200  (1805);  West  v.  Went- 
worth,  3  Cow.  82  (1824);  Clark  v.  Pinney, 
7  Cow.  681  (1827);  Wilson  r.  Mathews, 
24  Barb.  295  (1857);  2  Sedgwick,  Dam- 
ages (7th  ed.),  141,  365,  n.  In  an  old 
case,  where  borrowed  stock  was  not 
returned,  the  plaintitf  was  allowed  to 
recover  the  value  at  the  time  of  the 
transfer  to  the  borrower,  no  account 
being  taken  of  an  increase  in  value. 
Forrest  v.  Elwes,  4  Ves.  Jr.  492  (1799). 
See  also  McKenney  v.  Haines,  63  Ma 
74  (1873).  In  McArthur  v.  Seaforth,  2 
Taunt.  258  (1810),  it  was  held  that,  upon 
the  failure  to  replace  stock,  the  meas- 
ure of  damages  was  the  price  on 
tlie  day  of  such  failure  or  the  price  on 
the  day  of  the  trial,  at  plaintiffs  option. 
Upon  a  failure  to  deliver  stock  accord- 
ing to  contract  or  on  demand,  the 
value  at  the  time  of  the  demand  is  the 
value  to  be  taken.  Noonan  v.  Ilsley,  17 
Wis.  314  (1863);  Pinkerton  v.  Man- 
chester, etc.  R.  R.,  42  N.  H.  424  (1861); 
North  V.  Phillips,  89  Pa.  St.  250  (1879); 
Huntingdon,  etc.  Coal  Co.  v.  English, 
86  Pa.  St.  247  (1878).  Cf.  Pott  v.  Flather, 
5  Railw.  &  Can.  Cas.  85  (1847);  Earned  v. 
HamUton,2  Railw.  &  Can.  Cas.  624  (1S41); 


Shaw  V.  Holland,  15  Mees.  &  W.  136 
(1846);  Tempest  v.  Kiluer,  2  C.  B,  300 
(1845);  s.  a,  3  C.  B.  249  (1846);  Gainsford 
V.  Carroll,  2  Barn.  &  C.  624  (1824).  Will- 
iams V.  Peel  River,  etc.  Co.,  55  L.  T. 
Rep.  689  (1886),  holds  that  suit  for  dam- 
ages for  wrongful  detention  lies  against 
a  party  who  has  wrongfully  obtained 
possession  of  stock,  and  that  the  meas- 
ure of  damages,  where  the  defendant 
afterwards  abandons  his  claim,  is  the 
intervening  fall  in  the  value  of  the  stock. 
Bankers  of  trustees  wrongfulU'  sold 
out  stock  and  applied  the  proceeds  to 
their  own  purpose.s.  The  measure  of 
their  liability  is  the  amount  paid  in 
replacing  the  stock.  Sadler  v.  Lee.  6 
Beav.  324  (1843).  As  to  damages  in 
cases  of  trust,  see  Story's  Eq.  (13th  ed.). 
g§  1263,  1264. 

1  Wright  17.  Bank  of  Metropolis,  110 
N.  Y.  237  (1888);  Galigher  v.  Jones,  129 
U.  S.  193  (1889),  the  court  saying  in  the 
latter  decision  that  the  measure  of 
damages  is  "the  highest  intermediate 
value  of  the  stock  between  the  time  of 
its  conversion  and  a  reasonable  time 
after  the  owner  has  received  notice  of 
it  to  enable  him  to  replace  the  stock."' 
For  an  illegal  sale  the  pledgor  may  re- 
cover the  "highest  price  which  his 
stock  reached  within  a  reasonable  time 
after  its  illegal  sale  by  defendants." 
Smith  V.  Savin,  141  N.  Y.  315  (1894), 
where  five  weeks  were  held  to  be  rea- 
sonable, the  pledgor  not  having  dis- 
covered the  sale  for  some  tima  Tlie 
measure  of  damages  in  a  suit  against  a 
pledgee  for  selling  stock  illegally  is  the 
highest  market  price  between  the  time 
of  default  and  a  reasonable  time  after 
notice  to  the  pledgor.  In  re  Swift,  114 
Fed.  Rep.  947  (1902). 


1260 


CH,  XXXV.]  ACTIONS    AND   MEASURE    OF   DAMAGES.  [§§  5S2,  583. 

version  to  enable  him  to  replace  the  stock."  ^  A  bondholder  who 
has  agreed  to  sell  his  bonds  to  a  reorganizer  in  exchange  for  new 
bonds  and  stock  may  sue  for  the  value  of  the  new  bonds  and  stock 
if  the  reorganizer  refuses  to  perforin,  and  the  measure  of  damages- 
is  the  hig'hest  value  of  the  new  bonds  for  a  reasonable  time  after 
the  breach  of  contract.^ 

The  New  York  court  of  appeals,  after  many  variations,  has  set- 
tled on  the  rule  that  "  in  the  absence  of  special  circumstances,  in 
an  action  for  conversion  of  personal  property  as  well  as  one  for 
failure  to  deliver  it  in  performance  of  a  contract,  where  considera- 
tion has  been  received,  the  value  of  the  property  at  the  time  of  such, 
conversion  or  default,  with  interest,  is  the  measure  of  compensa- 
tion." *  Where  directors  have  issued  stock  to  themselves  at  a  price 
less  than  the  market  price,  they  may  be  held  liable  at  the  instance 
of  a  stockholder  suing  for  the  benefit  of  the  corporation,  for  the 
difference  between  the  price  they  paid  and  the  price  of  the  stock 
when  it  was  issued  to  them.  The  highest  market  price  since  that 
day  for  small  amounts  of  stock  is  no  basis  for  the  measure  of  dam- 
ages.* 

§  582.  (h)  The  second  rule. —  In  another  line  of  cases  the  true- 
measure  of  damages  in  these  actions  is  said  to  be  the  value  of  the 
stock  on  the  day  of  the  trial.^  In  an  Englisii  case  it  is  said  that 
this  is  a  sound  rule  m  the  ordinary  cases  of  conversion  of  stock, 
but  that  in  cases  of  failure  to  deliver  stock  the  true  measure  of 
damages  is  the  value  when  the  demand  is  made  and  refused.^  This 
second  rule  has  found  little  favor,  and  there  is  believed  to  be  no 
sound  reason  for  its  adoption. 

§  583.  (c)  The  third  rule. —  It  has  been  held  in  still  another  class 
of  decisions  that  the  measure  of  damages  for  the  conversion  of 
stock  is  the  highest  market  value  of  the  stock  between  the  date  of 

^  And  a  general  allegation  of  damage  to  whether  this  may  not  be  the  better 

is  sufficient,  inasmuch  as  the  plaintiff  rule.     In  Fowle  v.  Ward,  113  Mass.  548 

is    entitled  to  nominal  damages  any-  (1873),  it   is  held  that  the  measure  of 

way.  Blair  Co.  v.  Rose,  26  Ind.  A  pp.  487  damages  is  the  value  of  the  stock  upon 

(1901).  the  day  when  the  bill  in  equity  is  filed, 

2  Turner  v.  Jackson,  63  S.  W.  Rep.  511  it  being  an  equitable  action  by  a  pledgor 
(Tenn.  1899).  against    a  pledgee.    The    measure   of 

3  Barnes  v.  Brown,  130  N.  Y.  372  damages  may  be  the  price  at  which  the 
(1892).  defendant  sold  the  securities,  if  already 

*Shaw  V.  Holland,  [1900]  2  Ch.  305.  sold,  and,  if  not  sold,  then  the  amount 

5  Owen  V.  Routh,  14  C.  B.  327  (1854);  of  depreciation  in  value  since  plaintiff 

Shepherd  u.  Johnson,  2  East,  211  (1802);  demanded  them,  together  with  inter- 

Bercich  v.  Marye,  9  Nev.  312  (1874).  Cf.  vening  dividends.     Simmons  v.  London 

Williams  v.  Archer.  5  C.  B.  318  (1847);  Joint  Stock  Bank,  [1891]  1  Ch.  270. 
and  see  Wilson  v.  Little,  2  N.  Y.  443,        « Shaw  v.  Holland,  15  M.  &  W.  136,. 

450  (1849),  wherein  there  is  a  quere  as  145  (1846). 

1261 


•§  5S3.] 


ACTIONS    AND    MEASURE    OF    DAMAGES. 


[CH. 


XXXV. 


the  conversion  and  the  day  of  the  trial.  This  is  the  rule  in  Cali- 
fornia in  some  cases.^  So,  also,  in  South  Carolina,^  Georgia;'  and 
it  was  formerly  the  rule  in  New  York^  and  Pennsylvania.'  The 
courts  of  the  two  latter  states  have,  however,  in  later  cases  whoU}' 
receded  from  this  position;  and  in  both  the  rule  is  now  established, 
in  such  actions,  that  the  measure  of  damages  is  not  the  highest  price 
of  the  stock,  but  the  value  at  the  date  of  the  conversion.**     Where 


'  Cal.  Code,  §  3336.  is  as  follows:  "  The 
detriment  caused  by  tbe  wrongful  con- 
version of  personal  property  is  pre- 
sumed to  be:  1.  The  value  of  the  prop- 
erty at  the  time  of  the  conversion,  with 
the  interest  from  that  time;  or,  where 
the  action  lias  been  prosecuted  with 
reasonable  diligence,  the  highest  mar- 
ket value  of  the  property  at  any  time 
between  the  conversion  and  the  ver- 
dict, without  interest,  at  the  option  of 
the  injured  party."  This  is  held  to 
apply  to  the  conversion  of  the  shares 
of  stock.  Fromm  v.  Sierra  Nevada,  etc. 
Co.,  61  Cal.  629  (1882);  Dent  v.  Hol- 
brook,  54  Cal.  145  (1880).  C/.  Thompson 
V.  Toland,  48  Cal.  99  (1874).  The  courts 
have  held  that  this  section  of  the  code 
ajjplies  to  the  conversion  of  shares  of 
t^tock,  but  they  have  not  worked  out  a 
very  consistent  rule  on  the  subject.  In 
Douglass  V.  Kraft.  9  Cak  562  (1867).  the 
"highest  value"  rule  is  adopted,  but  in 
later  cases  the  court  seems  to  incline 
toward  the  modern  New  York  rule. 
Hamer  v.  Hathaway,  33  Cal.  117  (1867); 
Page  r.  Fowler,  39  Cal.  412  (1870);  Dent 
V.  Hoi  brook,  54  Cal.  145  (1880);  Tulley 
V.  Tranor.  53  Cal.  274  (1878);  Thompson 
V.  Toland,  48  Cal.  99  (1874);  Fromm  v. 
Sierra  Nevada,  etc.  Co.,  61  Cal.  629 
(1882). 

2  Kid  V.  Mitchell,  1  Nott  &  M.  (S.  C.) 
384  (1818). 

3  Central  R.  R  etc.  Co.  v.  Atlantic, 
etc.  R.  R,  50  Ga.  444  (1873).  For  failure 
to  deliver  bonds  as  called  for  by  a  con- 
tract, the  vendee  may  recover  the  high- 
est market  price  between  the  date  of 
the  breach  of  the  contract  and  the  date 
•of  the  trial.  San  Antonio,  etc.  Ry.  v. 
Wilson,  4  Tex.  Civ.  App.  178  (1893). 


<Markham  v.  Jaudon,  41  N.  Y.  235 
(1869);  Romaine  v.  Van  Allen,  26  N.  Y. 
309  (1863).  In  an  action  to  recover 
damages  for  the  unlawful  conversion 
of  grain,  the  rule  in  New  York  was 
held  to  be  the  highest  price  up  to  the 
time  of  trial.  Lobdell  v.  Stowell,  51 
N.  Y.  70  (1872).  To  same  effect,  Kent 
V.  Ginter,  23  Ind.  1  (1864).  See  1  Sedg- 
wick, Damages  (7th  ed.),  578.  and  note 
(a).  Cf.  Burt  v.  Dutcher,  34  N.  Y.  493 
(1866);  Scott  v.  Rogers,  31  N.  Y.  676 
(1864);  Devlin  v.  Pike,  5  Daly  (N.  Y.).  85 
(1874).  For  the  modern  rule  in  New 
York,  see  §  581,  svpra. 

5  Bank  of  Montgomery  v.  Reese,  26 
Pa.  St.  143  (1856);  Musgrave  v.  Becken- 
dorflf,  53  Pa.  St.  310  (1866):  Reitenbaugh 
V.  Ludwick,  31  Pa.  St.  131,  141  (1858). 
In  Pennsylvania,  where  one  was  ac- 
countable for  stock  as  trustee,  and  con- 
verted it,  he  was  held  chargeable  with 
the  highest  market  value.  Reitenbaugh 
V.  Ludwick,  31  Pa.  St.  131  (1858);  North 
V.  Phillips,  89  Pa.  St.  250  (1879).  Cf. 
Bates  V  Wiles,  1  Handy  (Ohio),  533 
(1855).  Where,  upon  a  reorganization, 
an  old  stockholder  is  wrongfully  refused 
his  stock  in  the  new,  he  may  recover 
the  highest  market  price  of  the  same 
up  to  the  time  of  the  insolvency  of  the 
corporation.  Reading  Trust  Co.  v.  Read- 
ing Ironworks,  137  Pa.  St.  282  (1890). 

6  North  V.  Phillips,  89  Pa.  St.  250  (1879); 
Huntingdon,  etc.  Coal  Co.  v.  English, 
86  Pa.  St.  247  (1878);  Work  v.  Bennett, 
70  Pa.  St.  484  (1872);  Neiler  v.  Kelley, 
69  Pa.  St.  403  (1871).  Cf.  Wilson  v. 
Whitaker,  49  Pa.  St  114  (1865).  So  also 
in  the  later  New  York  cases.  Baker  v. 
Drake,  53  N.  Y.  211  (1873);  s.  c,  66  N.  Y. 
518  (1876);  White  v.  Smith,  54  N.  Y.  522 


1262 


CH.  XXXV.] 


ACTIONS    AND    MEASUKE    OF    DAMAGES. 


[§  58i. 


an  agent  conceals  from  his  principal  the  amount  of  stock  received 
by  the  agent  for  property,  and  keeps  a  part  of  the  stock,  the  prin- 
cipal may  hold  him  liable  for  the  highest  market  value  of  the  stock 
reached  between  the  act  and  a  reasonable  time  after  discovery  of 
the  act  by  the  principal.* 

§  584.  Interest,  dividends,  and  special  damages. —  It  is  settled  law 
that,  in  addition  to  the  value  of  the  stock  at  the  date  of  conversion, 
the  plaintiff  may  recover  legal  interest  upon  such  valuation  from 
the  date  of  the  conversion  to  the  day  of  the  trial.  It  follows  as  of 
course  that,  if  the  plaintiff  has  been  damaged  in  an  ascertained 
sum,  he  may,  in  an  action  for  damages,  recover  not  only  that  sum, 
but  interest  thereon  in  the  meantime.^    There  are  also  authorities 


(1874);  Harris  v.  Tumbridge,  83  N.  Y.  93    2  Nev.  112  (1866):  Boylan  v.  Huguet.  8 


(1880);  Colt  V.  Owens,  90  N.  Y.  368  (1882); 
Randall  v.  Albany  City  Nat.  Bank,  1 
N.  Y.  St.  Rep.  593  (1886).  Cf.  Suydam 
V.  Jenkins,  3  Sandf.  (N.  Y.)  614  (1850); 
Matthews  v.  Coe,  49  N.  Y.  57  (1872); 
Bryan  v.  Baldwin,  52  N.  Y.  232  (1873). 
See  also  Seymour  v.  Ives,  46  Conn.  109 
(1878);  McGuffey  v.  Humes,  85  Tenn. 
■  26  (1886).  It  is  now  held  in  Pennsyl- 
vania that  where  a  corporation,  through 
innocent  mistake,  permits  a  transfer  on 
its  books  of  shares  of  stock  under  a 
forged  power  of  attorney,  the  owner's 
measure  of  damages  is  the  value  of  the 
stock  at  the  time  of  the  transfer,  with 
interest  from  the  date  of  the  verdict, 
and  not  the  highest  price  reached  by 
the  stock  between  the  date  of  the  con- 
version and  the  time  of  bringing  suit, 
with  the  dividends  since  declared. 
Pennsylvania  Co.  v.  Philadelphia,  etc. 
R.  R.  153  Pa.  St.  160  (1893). 

iMcKinley  v.  Williams,  74  Fed.  Rep. 
94  (1896).  "Where  a  person  holds  land 
for  himself  and  a  partner,  and  trans- 
fers the  same  to  a  corporation  for  stock 
and  conceals  all  the  facts  from  his 
partner,  the  latter  may  recover  the 
value  of  his  share  of  the  stock,  and  the 
measure  of  the  value  is  the  highest 
value  between  the  day  of  receiving  the 
stock  and  the  day  when  the  plaintiff 
received  notice  thereof.  Morris  v.  Wood, 
85  S.  W.  Rep.  1013  (Tenn.  1896). 

2  O'Meara  v.  North  American  Min.  Co., 


Nev.  345  (1873);  Fisher  v.  Brown,  104 
Mass.  259  (1870);  Sargent  v.  Franklin 
Ins.  Co..  25  Mass.  90  (1829):  Seymour  v 
Ives,  46  Conn.  109  (1878):  McKenney  "v 
Haines,  63  Me.  74  (1873):  Freeman  v. 
Harwood,  49  Me.  195  (1859);  Ormsby 
V.  Vermont  Copper  Min.  Co.,  56  N.  Y. 
623  (1874);  White  v.  Smith,  54  N.  Y.  522 
(1874) ;  Sturges  v.  Keith,  57  111.  451  (1870); 
Baltimore,  etc.  Ry.  v.  Sewell.  35  Md.  238, 
257  (1871);  Pinkerton  v.  Manchester,  etc. 
R.  R,  42  N.  H.  424  (1861);  North  v.  Phil- 
lips, 89  Pa.  St.  250  (1878);  Huntingdon, 
eta  Coal  Co.  v.  English,  86  Pa.  St.  247 
(1878);  North  America  Building  Assoc. 
V.  Sutton,  35  Pa.  St.  463  (1860);  Noonan 
u  Ilsley,  17  Wis.  314  (1863);  Forrest  v. 
Elwes,  4  Ves.  Jr.  492  (1799):  Be  Bahia. 
etc.  Ry..  L.  R.  3  Q.  B.  584  (1868);  Blyth 
V.  Carpenter.  L.  R,  2  Eq.  501  (1866);  Mc- 
Murrich  v.  Bond  Head  Harbor  Co..  9 
Up.  Can.  Q.  B.  333  (1852).  In  the  Civil 
Code  of  California,  §  3336,  interest  in 
these  cases  is  expressly  provided  for. 
Fromm  v.  Sierra  Nevada,  etc.  Co.,  61 
Cal.  629  (1882);  2  Sedgwick,  Damages 
(7th  ed.),  391.  The  measure  of  damages 
is  the  market  value  at  the  time  of  con- 
version, with  interest.  Darling  v.  Potts, 
118  Mo.  506  (1893).  For  refusal  of  the 
corporation  to  deliver  stock  which  the 
plaintiff  bought  of  it,  the  measure  of 
damages  is  the  value  at  the  time  of 
such  refusal,  with  interest.  Salt,  etc. 
Co.  V.  Hickey,  36  Pac.   Rep.  171  (Ariz. 


1263 


i'o 


85.] 


ACTIONS    AND    MEASL'ItE    OF    DAMAGES. 


[CH.  XXXV. 


to  the  effect  that  in  addition  to  interest  the  plaintiff  may  recover 
also  all  dividends  paid  upon  the  stock  between  the  date  of  the  con- 
version and  the  day  of  the  trial;'  but, aside  from  unusual  cases,  the 
rule  would  seem  to  be  a  harsh  one,  except  in  those  jurisdictions 
where  the  measure  of  damages  is  the  value  at  the  time  of  the  trial. 
The  better  rule  is  that  the  plaintiff  may  also  recover  any  special 
damages  which  he  has  sustained  by  reason  of  the  detention  of  his 
stock.^ 

§  585.  Nominal  damages. —  In  certain  cases,  where  the  plaintiff 
has  been  guilty  of  laches,  or  where  the  stock  is  of  no  actual  value, 
or  where  the  stock  could,  for  a  reasonable  time  after  the  conver- 
sion, have  been  purchased  in  the  market  for  the  same  or  a  lower 
price,  or  in  any  other  case  where  the  plaintiff  has  suffered  only  a 
technical  conversion  without  any  actual  pecuniary  loss,  only  nom- 
inal damages  can  be  recovered.^    Thus,  the  measure  of  damages  for 


1894).  Where  the  measure  of  damages 
is  based  upon  the  market  value  of  stock, 
interest  may  be  added.  Kuhn  v.  Mc- 
Kay, 7  Wyo.  42  (1897). 

iBull  V.  Douglas,  4  Muuf.  (Va.)  303 
(1814);  Baltimore,  etc.  Ry.  v.  Sewell,  35 
Md.  238  (1871);  Bercich  v.  Marye,  9  Nev. 
312  (1874);  Bank  of  Montgomery  r. 
Reese,  26  Pa.  St.  143  (1856).  Cf.  Boston, 
etc.  R.  R.  V.  Richardson,  135  Mass.  473. 
477  (1883).  Where  a  broker,  a  gratuitous 
bailee  of  corporate  stock,  delivers  the 
same  to  the  company  without  author- 
ity, and  the  stock  is  converted  to  the 
use  of  the  company,  the  bailee  is  liable 
for  its  value,  irrespective  of  what  his 
intentions  were  in  the  premises.  Tn 
such  case  the  bailor  may  recover  the 
value  of  the  stock  at  the  time  of  con- 
version, with  all  dividends  paid  from 
the  time  of  delivery,  together  with  in- 
terest on  the  value  of  the  stock  from 
date  of  conversion,  and  on  the  divi- 
dends from  date  of  respective  pay- 
ments. Hubbell  V.  Blandy,  87  Mich.  209 
(1891).  Where  several  years  elapse  be- 
tween the  commencement  of  the  suit 
and  the  trial,  the  case  not  having  been 
prosecuted  with  reasonable  diligence, 
the  value  at  the  time  of  the  conversion, 
with  interest,  is  the  measure  of  dam- 
ages. Dividends  are  not  to  be  added 
unless  a  separate  demand  for  them  is 


alleged  and  a  separate  cause  of  action 
therefor  set  forth.  Ralston  v.  Bank  of 
California,  112  Cal.  208  (1896).  In  an 
action  for  the  conversion  of  stock  the 
measure  of  damages  is  the  highest  in- 
termediate value  between  the  time  of 
conversion  and  a  reasonable  time  after 
the  owner  has  received  notice  of  the 
conversion  to  enable  him  to  replace  the 
stock.  Dividends  accruing  after  the 
conversion  are  not  added,  nor  interest 
on  such  dividends.  Citizens',  etc.  R.  R. 
V.  Robbins,  144  Ind.  671  (1896). 

2  Boylan  v.  Huguet,  8  Nev.  345  (1873); 
2  Sedgwick,  Damages  (7th  ed.),  391 ;  Bod- 
ley  V.  Reynolds,  8  Q.  B.  779  (1846);  Davis 
V.  Oswell,  7  Car.  &  P.  804  (1837).  Cf. 
Seymour  v.  Ives,  46  Conn.  109  (1878). 

^  Thus,  where  a  borrower  of  shares 
fails  to  return  them  until  after  the  cor* 
poration  is  dissolved,  the  lender  having 
made  no  demand  during  the  existence 
of  the  company,  the  measure  of  dam- 
ages, in  an  action  to  recover  the  shares, 
will  be  the  market  value  of  them  at 
the  time  the  cause  of  action  accrued: 
that  is,  at  the  time  of  demand.  And 
if  at  that  time  the  stock  is  worthless, 
only  nominal  damages  are  recoverable. 
Fosdick  V.  Greene,  27  Ohio  St.  484 
(1875).  See  Cameron  v.  Durkheim,  -55 
N.  Y.  425  (1874);  Hope  v.  Lawrence,  50' 
Barb.    258  (1867).      In  an  action    by  a 


1264 


CH.  XXXV.] 


ACTIONS    AND    MEASURE    OF   DAMAGES. 


[§  586. 


the  conversion  of  a  mere  certificate  of  stock  cannot  be  placed  at 
the  value  of  the  shares  themselves  which  the  certificate  represents, 
if  the  ownership  of  the  shares  is  not  affected.^  Where  a  pledgee's 
debt  has  really  been  paid  and  he  retains  the  stock,  and  by  reason 
thereof  the  pledgor  is  unable  to  enter  a  reorganization,  the  pledgor 
may  recover  the  actual  damages  sustained,  but  the  value  of  the 
stock  must  be  shown  by  him,  otherwise  it  will  be  inferred  that  it 
had  little  or  no  value.- 

§  5S6.  Damages  for  failure  to  complete  a  'purchase  of  stoch  and 
for  fraud  inducing  ajmrchase  of  stock. —  The  measure  of  damages 
for  the  failure  of  a  purchaser  of  stock  to  complete  his  contract  is 
considered  elsewhere;^  as  is  also  the  purchaser's  measure  of  dam- 
ages for  a  refusal  of  the  vendor  to  deliver.*  The  measure  of  dam- 
ages  for  fraud  inducing  the  purchase  of  stock  "  is  the  difference  be- 
tween the  value  of  the  stock  at  the  time  it  was  purchased  and  the 
price  paid  for  it."  ^      A  misrepresentation  by  promoters  as  to  the 


vendee  on  a  contract  for  the  sale  of 
specific  stock,  which,  without  the 
knowledge  of  the  vendor,  had  already- 
been  sold  to  another  by  his  agent,  the 
plaintiff  may  be  able  to  recover  only 
nominal  damages.  Wilson  v.  Whit- 
aker,  49  Pa.  St.  114  (1865);  Skinner  v. 
City  of  London,  etc.  Corp.,  L.  R.  14  Q. 
B.  D.  883  (1885).  See  Fowler  v.  New 
York  Gold  Exch.  Bank,  67  N.  Y.  133 
(1876).  A  transferee's  action  upon  the 
case  for  damages  instead  of  in  trover 
for  conversion,  against  the  corporation 
for  refusal  to  register  the  transfer,  en- 
titles him  to  nominal  damages  only, 
unless  he  proves  special  damage.  Mc- 
Lean r.  Charles  Wright  Med.  Co.,  96 
Mich.  479  (1893).  See  also  Blair  Co.  v. 
Rose,  26  Ind.  App.  487  (1901). 

1  Daggett  V.  Davies,  53  Mich.  35  (1884), 
by  Cooley,  C.  J. 

2  Griggs  V.  Day,  158  N.  Y.  1  (1899).  This 
preceding  case  arose  out  of  a  contro- 
versy between  a  contractor  in  the  con- 
struction of  a  railroad  and  the  chief 
stockholder  and  promoter  who  ad- 
vanced money  on  the  security  of  stock 
and  corporate  notes.  It  was  many  years 
in  the  courts. 

3  See  §  336,  supra. 
*  See  §  336,  supra. 

5  Redding  v.   Godwin,  44  Minn.   355 


(1890).  In  an  action  for  damages  for 
fraud  inducing  the  plaintiff  to  pur- 
chase stock,  the  measure  of  damages  is 
'•  not  the  difference  between  the  con- 
tract price  and  the  reasonable  market 
value  if  the  property  had  been  as  rep- 
resented to  be,  even  if  the  stock  had 
been  worth  the  price  paid  for  it;  nor, 
if  the  stock  were  worthless,  could  the 
plaintiff  have  recovered  the  value  it 
would  have  had  if  the  property  had 
been  equal  to  the  representations. 
What  the  plaintiff  miglit  have  gained 
is  not  the  question,  but  what  he  had 
lost  by  being  deceived  into  the  pur- 
chase." The  defendant  "was  bound 
to  make  good  the  loss  sustained,  such 
as  the  moneys  the  plaintiff  had  paidou<: 
and  interest,  and  any  other  outlay 
legitimately  attributable  to  defendantV 
fraudulent  conduct;  but  this  liability 
did  not  include  the  expected  fruits  of 
an  unrealized  speculation,"  Smith  v. 
Bolles,  133  U.  S.  125  (1889).  The  true 
measure  of  the  damages  suffered  by  one 
who  is  fraudulently  induced  to  make  a 
contract  of  sale,  purchase,  or  exchange 
of  property  is  the  difference  between 
the  actual  value  of  that  which  he  parts 
with  and  the  actual  value  of  that  which 
he  receives  under  the  contract.  Rocke- 
feller V.  Merritt,  76  Fed.  Rep.  909  (1896X 


(80) 


1265 


§  586.] 


ACTIONS    AND   MEASUEE    OF    DAMAGES. 


[CH.  XXXV. 


amount  of  money  they  paid  to  the  corporation  for  stock  may  sus- 
tain an  action  by  the  purchaser  of  such  stock  from  them  for  dam- 
ages.' The  measure  of  damages  for  deceit  in  inducing  a  party  to 
purchase  stock  is  the  difference  between  the  price  and  the  real 
value  at  the  time  of  the  purchase.  Subsequent  events  growing  out 
of  the  then  existing  condition  of  things  ma}''  be  introduced  in  evi- 
dence.^ The  measure  of  damages  for  fraud  in  inducing  a  person  to 
sell  stock  at  less  than  its  real  value  is  the  difference  between  the 
value  of  the  stock  as  represented  and  the  actual  value.^     At  com- 


In  Smith  v.  Duffy,  57  N.  J.  L.  679  (1895), 
the  measure  of  damages  for  fraud  in 
the  sale  of  stock  was  held  to  be  the  act- 
ual   loss  suffered  by  the  vendee,  irre- 
spective of  tlie   market   price   of  the 
stock.     As  to  the  measure  of  damages 
in  an  action  against  a  broker  for  fraud 
inducing    the    plaintiff    to    invest    in 
"  Grant  and  Ward  "  securities,  see  James 
V.  Work,  70  Hun,  296  (1893).  Tlie  measure 
of  damages  in  an  action  b}'  a  vendee 
for  fraud  in  the  sale  of  stock  is  the  dif- 
ference between  the  selling  price  and 
tlie  real  value  at  the  time  of  the  sale. 
High  V.   Berret,  148  Pa.  St.  261  (1892). 
Where,  in  an  action  by  a  vendee  of  stock 
for  fraud  in  inducing  purchase,  the  jury 
find  that  the  stock  had  no  value  what- 
ever and  render  a  verdict  for  the  pur- 
chase price,  it  is  immaterial  that  the 
court  erred  in  regard  to  the  measure 
of  damages.     Honsucle   v.  Ruffin,   172 
Mass.  420  (1899).    The  vendee  may  bring 
an  action  for  damages  for  deceit  even 
where  he  has  paid   part  of  the  price 
and   given    security  for   the   balance. 
He  may  recover  damages  to  the  extent 
only  that  the  representations  were  false. 
Weaver  u  Shriver,  79  Md.  530  (1894). 
If  a  director  misrepresents  the  financial 
condition  of  the  company  and  thus  in- 
duces a  stockholder  to  sell  his  stock  to 
him,  he  is  liable  to  the  vendor  for  the  dif- 
ference between  the  actual  value  of  the 
stock  and  the  price  paid.  Hume  v.  Steele, 
59  S.  W.  Rep.  812  (Tex.  1900).    The  meas- 
ure of  damages  is  the   difference  be- 
tween the  actual  value  of  the  stock  and 
the  value  it  would  have  had  if  the  repre- 
sentations as  to  the  financial  condition 

1 


of  the  company  had  been  true.  Drake  v. 
Holbrook.  66  S.  W.  Rep.  512  (Ky.  1902). 
And  where  one  with  intent  to  cheat 
and  defraud  induces  another,  by  false 
and  fraudulent  representations,  to  pur- 
chase shares  for  value  which  he  knows 
to  be  worthless,  he  is  liable  for  the  dam- 
ages sustained,  whether  the  purchase 
was  made  from  him  or  from  another 
at  his  instance.  Hubbell  v.  Meigs,  50 
N.  Y.  480  (1872);  28  N.  Y.  App.  Div.  1 
(1898).     See  88  L.  T.  Rep.  431. 

1  Honsucle  v.  Ruffin,  173  Mass.  420 
(1899). 

2  Hindman  v.  First  Nat.  Bank,  112 
Fed.  Rep.  931  (1902). 

3  Potter  V.  Necedah,  etc.  Co.,  105  Wis. 
25  (1899).  Where  there  is  no  market 
value  for  stock  the  measure  of  damages 
in  an  action  for  deceit,  causing  a  party 
to  purchase  the  stock,  is  the  difference 
between  the  value  of  the  stock  and  its 
value  if  the  corporation  had  had  the 
amount  of  property  represented,  that 
being  the  subject  of  the  misrepresenta- 
tion. Boddy  V.  Henry,  113  Iowa,  465 
(1901).  In  a  suit  by  a  purchaser  of  stock 
to  hold  the  directors  liable  for  a  false 
annual  report  which  caused  him  to  pur- 
chase, the  measure  of  damages  is  the 
difference  between  the  value  of  the 
stock  as  it  is  and  as  it  would  have  been 
had  the  annual  report  been  true.  Par- 
sons V.  Johnson,  28  N.  Y.  App.  Div.  1 
(1898).  The  measure  of  damages  for 
fraud  in  the  sale  of  stock  is  the  differ- 
ence between  the  real  value  of  the 
stock  at  the  time  of  sale  and  what  the 
value  would  have  been  had  the  repre- 
sentations been  true.   The  market  value 

266 


CH.  XXXV.] 


ACTIONS    AND    MEASURE    OF    DAMAGES. 


[§  587. 


mon  law  an  action  to  recover  back  the  whole  of  the  purchase-money 
upon  a  rescission  for  fraud  is  virtually  a  suit  for  money  had  and 
received.^ 

§  587.  Damages  in  actions  between  stoch-lroJcers  and  their  cus- 
tomers. —  This  subject  is  considered  elsewhere.'' 


may  be  shown  as  bearing  upon  the  real 
value.  Warner  v.  Benjamin,  89  Wis. 
290  (1895);  Titus  v.  Poole,  73  Hun,  383 
(1898);  aff'd,  145  N.  Y.  414.  A  person 
who  purchases  bank  stock  from  the 
bank  itself  may  hold  the  bank  liable 
for  damages,  where  the  public  state- 
ment of  the  bank  which  he  relied  on  in 
purchasing  was  false.  The  measure  of 
damages  is  the  difference  between  the 
value  of  the  stock  if  the  statement  had 
been  true  and  its  actual  value.  Ex- 
change Bank  v.  Gaitskill,  37  S.  W.  Rep. 
160  (Ky.  1896).  In  an  action  for  dam- 
ages for  deceit  inducing  the  plaintiff  to 
purchase  stock,  the  measure  of  dam- 
ages is  "  a  sum  of  money  equal  to  the 
difference  between  the  value  of  the 
property  as  it  was  in  fact  and  the  value 


as  it  would  have  been  if  the  represen- 
tations had  been  true."  In  this  kind  of 
action  no  tender  of  the  stock  is  neces- 
sary or  proper.  Testimony  as  to  the  value 
of  the  property  of  the  corporation  and  of 
a  sale  of  stock  by  a  witness  is  admissible. 
Vail  V.  Reynolds,  118  N.  Y.  297  (1890). 
Where  one  has  been  induced  by  fraud- 
ulent misrepresentations  to  buy  or  sub- 
scribe for  shares  of  stock,  the  measure 
of  damages,  in  an  action  against  the 
vendor,  is  the  difference  between  the 
value  of  the  stock  as  represented  and 
the  actual  value.  Miller  v.  Barber,  66 
N.  Y.  558,  568(1876). 

1  Gassett   v.   Glazier,    165    Mass.  473 
(1896). 

2  See  g?i  460-462,  supra. 


1267 


CHAPTER  XXXVI. 

STOCKHOLDERS' MEETINGS  — CALLS,  TIME,  PLACE,  AND  CLASSES  OF 

MEETINGS. 


g  58S.  Introductory. 

589.  The  place  of  meetinp:  of  stock- 

liolders  must    be    witliin  the 
state  creating  the  corporation. 

590,  591.  First      meeting      under     a 

special  charter. 

592.  Meetmgs  of  directors — Place  — 

Notice  —  Action     w  i  t  li  o  u  t 
meeting  —  (Quorum. 

593.  By   whom   and  when    meetings 

are   to    be    called  —  Manda- 
mus—  Fraud  in  the  calL 

594.  When  the  stockhoMers  are  en- 

titled  to  notice  of  corporate 
meetings. 


§  595. 


59G. 
597. 

598. 

590. 
GOO. 

001. 


The  essential  elements  of  a  no- 
tice of  a  meeting  are  time, 
place,  and  business. 

Service  of  the  notice. 

Notice  must  be  served  a  reason- 
able time  before  the  meeting. 

The  division  of  meetings  inta 
ordinary  and  extraordinary. 

Waiver  of  notice. 

Notice  is  presumed  to  have  been 
regularly  given. 

Adjourned  meetings. 


§  588.  Introductory. —  The  stockholders  of  a  corporation  consti- 
tute the  origin,  existence,  and  continuance  of  the  corporation 
itself.  They  elect  the  directors,  control  the  general  policy  through 
them,  and  within  the  charter  limits  may  prolong  or  dissolve  the 
corporate  existence  at  their  pleasure.  All  these  vital  powers  of  the 
stockholders  can  be  exercised  by  them  only  in  corporate  meetings, 
duly  convened  and  properly  organized  for  the  transaction  of  busi- 
ness. Accordingly,  the  method  of  calling  together  a  corporate 
meeting,  the  time  and  place  of  that  meeting,  the  notice  to  be  given 
to  the  stockholders,  and  the  various  incidents  relative  to  a  proper 
convening  of  the  members  of  the  corporation,  are  of  great  impor- 
tance.    They  constitute  the  subject  of  this  chapter. 

§  589.  The  ])l(ice  of  meeting  of  stockholders  must  he  tcithin  the 
state  creating  the  corporation. —  The  first  and  most  general  rule  as 
to  the  place  where  stockholders  may  hold  corporate  meetings  is 
that  the  place  of  meeting  should  be  -within  the  boundaries  of  the 
state  which  created  the  corporation,  although  through  its  agents, 
of  course,  the  corporation  may  make  contracts,  carry  on  business, 
sue  and  be  sued,  and  buy  and  sell  property  in  another  state.^ 

There  is  a  difference  of  opinion  as  to  the  effect  of  business  trans- 
acted at  a  stockholders'  meeting  held  be3'^ond  the  borders  of  the 
state  creating  the  corporation.  Upon  the  one  hand,  it  is  held  that 
all  the  acts  and  proceedings  of  such  a  meeting  are  wholly  invalid 


» See  chs.  XIII,  §§  237-240,  mpra,  and  XLI,  g§  696-700,  infra, 

1268 


CH.  XXXVI. 


stockholders'    meetings  —  CALLS. 


[§  589. 


and  void ;  that  the  corporation  is  not  bound  thereby,  and  that  the 
meeting  is  as  though  it  had  never  been  held.^ 

But  it  is  the  sounder  view  to  regard  the  votes  and  proceedings 
at  such  a  meeting  as  voidable  rather  than  void.  The  corporation 
itself  cannot  allege  that  such  proceedings  are  void.  It  is  estopped 
from  so  doing.2     So  also  are  the  stockholders  who  participate  in* 


the  meeting.^ 


As  to  the  creditors  of  the  corporation  the  authori- 


1  Craig  Silver  Co.  v.  Smith,  163  Mass 
262  (ISgo),  citing  the  above  text.     Di- 
rectors elected  at  a  stockholders'  meet- 
ing held  out  of  the  state,  and  to  which 
all  did  not  agree,  are  not  directors.   The 
old  board  holds  over.    Hodgson  v.  Du- 
luth,   etc.    R.    R,   46   Minn.  454  (1891); 
Miller  v.  Ewer,  27  Me.  509  (1847;,  -where 
a  mortgage  executed  by  the  authority 
of  directors  who  were  elected  at  the  or- 
ganization meeting  of  corporators  held 
outside  of  the  state  which  granted  the 
charter  was  declared  void.     Cited  and 
followed  in  Freeman  v.  Machias  Water, 
etc.  Co.,  38  Me.  343  (1854),  where  a  for- 
feiture of  stock  was  declared  illegal; 
Ormsby  v.  Vermont  Copper  Min.  Co.,  56 
N.  Y.  623  (1874),  where  it  was  held  that 
a  forfeiture  of  stock  by  authority  of  a 
by-law  adopted   by  stockholders  of  a 
Vermont  corporation  at  a  meeting  held 
in  New  York  was  not  valid;  Mitchell 
V.  Vermont  Copper  Min.  Co.,  40  N.  Y. 
Super.  Ct.  406  (1876);  aflE'd,  67  N.  Y.  280; 
Smith  I".  Silver  Valley  Min.  Co.,  64  Md. 
85  (1885),  the  organization  being  held 
out  of  the  state;  Camp  v.  Byrne,  41  Mo. 
525  (1867),  to  the  same  effect.     Stock- 
holders cannot  legally  meet  out  of  the 
state.     Harding  v,  American,  etc.  Ca, 
182  111.  551  (1899).     In  Copp  v.  Lamb,  12 
Me.  312  (1S35),  thirty  years'  user  was 
held  to  have  cured  any  defect.     A  Vir- 
.    ginia  corporation  cannot  be  organized 
by  an  organization   meeting  in  New 
York.     Nor  can  the  charter  be  assigned 
by  a  blank  assignment  after  an  organi- 
zation  in   Virginia.      The  assignment 
must  be  of  the  stock.     The  corporation 
is  neither  de  facto  nor  de  jure.     Suits 
against  it  fail.     Welch  v.  Old  Domin- 
ion, etc  Ry.,  10  N.  Y.  Supp.  174  11890). 

1 


Stockholders'  meetings  held  out  of  the 
state  are  voidable  if  not  void,  and  at 
the  instance  of  minority  stockholders 
may  be  good  ground  for  an  injunction. 
Jones  r.   Pearl  ]\lin.  Co.,  20  Colo.  417 
(1894).     Where  a  charter  is  taken  out 
in  one  state  and  the  organization  meet- 
ings are  held  in  another  state,  the  pre- 
sumption is  that  no  corporation  is  or- 
ganized; and  unless  proof  is  given  that 
the  statutes  of  the  first-named  state  au- 
thorized the  holdingof  the  organization 
meeting  in    another  state,  the  stock- 
holders are  liable  as  partners.     Duke  v. 
Taylor,  37  Fla,  64  (1896).    Where  par- 
ties take  out  a  charter  in  Tennessee, 
but,  instead  of  holding  their  organiza- 
tion meetings  in  Tennessee,  hold  them 
in  Florida,  where  they  do  all  their  busi- 
ness, they  are  liable  in  Florida  as  part- 
ners.    Taylor  v.  Branham,  35  Fla.  297 
(1895).     The  dicta  in  this  decision  as  to 
the  liability  of  stockholders  generally 
in  foreign  corporations  doing  business 
in  Florida  are  startling,  to  say  the  least. 
2  Heath  v.  Silverthorn,  etc.    Co.,   39 
Wis.  146  (1875),  holding  that  the  corpo- 
ration may  be  estopped  to  deny  the  va- 
lidity of  acts  done  outside  the  state, 
when  the  rights  of  third  parties  inter- 
vene,  even  though  that  meeting  was 
the  organization  meeting.     The  legisla- 
ture  may  validate  the  acts  passed  at 
such  a  meeting.    Graham  v.  Boston,  etc. 
R.  R.,  118  U.  S.  161,  176  (1886),  aff'g  s.  c, 
14  Fed.  Rep.  753  (1883).     Cf.  Grenada 
County  u  Brogden,  112  U.  S.  261  (1884), 
and  the  various  cases  of  municipal  sub- 
scriptions, ch.  VI,  §  94,  n.,  supra. 

3  A  bona  fid^  holder  of  a  note  given 
by   a   stockholder   in   payment  of   his 
subscription    may    enforce     it,    even 
269 


§  589.] 


STOCKHOLDERS     MEETINGS  —  CALLS. 


[CH.  XXXVI. 


ties  differ.'  If  the  corj)oration  has  been  incorporated  in  two  or 
more  states,  it  is  hiwful  to  hold  meetings  of  the  stockholders  in 
either  state.^  And  proceedings  at  a  meeting  in  any  one  of  the 
states  are  valid  in  respect  to  the  property  of  the  corporation  in  all 
of  them,  without  a  repetition  of  the  meeting  in  any  other  Of  those 
states.'  Where  the  statute  allows  elections  to  be  held  at  a  place 
fixed  by  the  by-laws,  the  election  need  not  be  held  at  the  city 
where  the  principal  place  of  business  is,  but  may  be  held  at  any 
other  place  in  the  state.* 


though  the  organization  and  all  other 
meetings  of  the  company  were  held  out 
of  the  state.  Camp  v.  Byrne.  41  Mo.  525 
(1867).  In  Ohio,  etc.  li.  R.  v.  McPherson, 
35  Mo.  13  (1864),  the  cliarter  declared 
the  directors  to  be  the  corporation. 
They  met  out  of  the  state  and  organ- 
ized and  made  a  call  on  subscriptions. 
The  court  upheld  the  call.  But  the 
mere  neglect  on  the  part  of  a  stock- 
holder, who  did  not  attend  a  meeting 
of  this  kind,  or  a  mere  failure  to  take 
aflSriuative  action  for  a  period  of  time 
short  of  that  prescribed  by  the  statute 
of  limitations,  will  not  deprive  that 
stockliolder  of  his  right  to  attack 
the  proceedings  as  irregular  and  in 
fraud  of  his  rights.  Ormsby  v.  Ver- 
mont Copper  Min.  Co..  56  N.  Y.  023 
(1874).  A  stockholders'  meeting  held 
outside  of  the  state  cannot  be  attacked 
by  those  who  participate  in  it  or  re- 
ceive the  benefits  of  it.  A  statute 
against  holdmg  elections  out  of  the 
state  does  not  prevent  stockholders' 
meetings  for  other  purposes.  Handley 
V.  Stutz,  139  U.  S.  417  (1891).  An  in- 
crease of  capital  stock  which  is  voted 
at  a  stockholders'  meeting  held  out  of 
the  state  is  valid  if  all  the  stockholders 
assent.  "No  valid  objection  can  be 
made  to  a  stockholders'  meeting  held 
in  a  foreign  jurisdiction,  provided  all 
the  shareholders  give  their  consent  to 
such  meeting  or  ratify  its  action." 
Stutz  V.  Handley,  41  Fed.  Rep.  531,  538 
(1890).  By-laws  enacted  by  a  board  of 
directors  of  a  Texas  corporation  at  a 
meeting  of  stockholders  held  in  Paris 
are  void,  and  a  stockholder  may  dis- 


regard them,  although  he  was  repre- 
sented by  proxy  at  the  meeting.  The 
directors  are  not  even  de  facto.  Franoo- 
Texan  Land  Co.  v.  Laigle,  59  Tex.  339 
(1883).  A  special  charter  must  be  ac- 
cepted before  the  corporation  exists, 
and  such  acceptance  cannot  be  at  a 
meeting  held  out  of  the  state.  Hence 
a  bill  by  a  stockholder  to  set  aside  a 
forfeiture  of  his  stock  was  dismissed  by 
the  court.  Smith  v.  Silver  Valley  Miil. 
Co..  64  Md.  85(1885).  A  stockholders' 
meeting  out  of  the  state  is  "  irregular, 
if  not  void."  Mack  v.  De  Bardeleben, 
etc.  Co.,  90  Ala.  396  (1890). 

1  Where  a  meeting  of  stockholders 
other  than  the  first  organization  meet- 
ing is  held  out  of  the  state,  and  direct- 
ors are  elected,  the  acts  of  those  direct- 
ors cannot  be  attacked  by  corporate 
creditors  on  the  ground  that  the  elec- 
tion was  illegal.  Wright  v.  Lee,  2  S.  D. 
590  (1892).  For  cases  to  the  contrary 
see  notes  supra.  Where  a  person  takes 
title  to  land  for  a  corporation  to  be 
formed,  and  thereafter  he  joins  in  the 
formation  of  the  corporation,  he  can- 
not defend  an  action  against  the  cor- 
poration to  obtain  title  by  setting  up 
that  its  organization  meetings  were 
held  outside  of  the  stata  Tuckasegee 
Mrn.  Co.  v.  Goodhue,  118  N.  C.  981  (1896). 

2  Graham  v.  Boston,  etc  R.  R.,  118  U. 
S.  161  (1886);  Covington,  etc  Co.  v. 
Mayer,  31  Ohio  St.  317  (1877).  See  also 
Ohio,  etc  Ry.  v.  People,  123  111.  467 
(1888);  and  ch.  LHI,  §  910,  infra. 

3  Same  cases. 

*  Union,  etc.  P>ank  v.  Scott,  53  N.  Y. 
App.  Div.  65  (1900). 


1270 


CH.  XXXVI.] 


STOCKHOLDEES'    MEETINGS GALLS.  [§§  590,  591. 


§§  590,  591.  First  meeting  under  a  special  cltarter. —  Where  an 
act  incorporates  three  specified  persons  and  their  "associates," 
those  three  alone  organize  the  company  and  are  entitled  to  sub- 
scribe the  capital  stock  or  to  allow  others  to  subscribe.^ 

Statutory  provisions  as  to  notice  of  the  first  meeting  are  direct- 
ory.    They  need  not  be  observed  if  the  stockholders  acquiesce.^ 

"Where  several  persons,  their  associates  and  successors,  are  de- 
clared to  be  a  corporation,  one  of  them  with  new  parties  may  meet, 
organize,  and  adopt  by-laws,  without  the  capital  being  first  sub- 
scribed and  without  the  others  if  they  do  not  object.^  As  to  an 
over-subscription  for  stock,  the  rules  that  govern  the  subject  are 
considered  elsewhere.^  The  survivors  of  those  who  by  special  act 
are  made  a  corporation  may  call  the  first  meeting  many  years 
after  the  act  was  passed,  and  may  open  books  for  subscription  to 


1  Lechmere  Bank  v.  Boynton,  65  Mass. 
369  (1853);  Hughes  v.  Parker,  20  N.  H. 
58  (1849).  See  also  p.  525,  supra.  The 
grant  of  corporate  powers  to  one  per- 
son and  his  associates  and  successors 
does  not  require  of  such  person  that 
he  should  take  associates  before  the 
act  can  take  effect  or  corporate  powers 
be  exercised,  but  confers  upon  him 
alone  the  pgwers  of  the  corporation, 
a,nd  his  acts  within  the  grant  of  such 
powers  become  the  acts  of  the  corpora- 
tion. Penobscot  Boom  Corp.  v.  Lamson, 
16  Me.  234  (1839).  Where  a  special  char- 
ter named  the  incorporators  and  com- 
missioners, and  the  notice  called  for  by 
the  charter  of  the  opening  of  the  books 
of  subscription  was  given,  and  all  in- 
corporators attended  the  meeting  and 
verbally  subscribed  for  stock,  and  gave 
checks  to  apply  on  the  same,  and  a 
meeting  of  the  stockholders  was  held 
and  directors  elected,  and  the  directors 
held  their  meeting  and  elected  officers, 
and  annual  meetings  were  held  there- 
after for  five  years,  when  the  company 
was  practically  abandoned,  and  the 
checks  were  never  used, —  all  this 
amounted  to  a  legal  organization  of  the 
corporation.  ISIoreover,  the  corporation 
existed  by  the  charter  itself,  without 
action  on  the  part  of  the  incorporators. 
A  company  thus  organized  may  erijoin 


from  exercising  its  franchises  a  subse- 
quent attempted  organization  of  the 
company  made  sixteen  years  thereafter, 
the  subsequent  organization  havmg 
been  made  by  part  only  of  the  incorpo- 
rators. The  incorporators  cease  to  have 
any  powers  after  the  first  organization 
meeting.  The  remedy  may  be  in  equity, 
and  need  not  be  in  quo  warranto. 
Union  Water  Co.  v.  Kean,  52  N.  J.  Eq. 
Ill  (1893).  Where  the  incorporators 
named  in  a  special  charter  organize  by 
subscribing  one  share  each  and  allow- 
ing another  person  to  subscribe  for 
the  remainder,  he  at  the  same  time  en- 
tering into  a  personal  contract  with 
them  that  he  would  construct  the 
street  railway  called  for  by  the  charter 
within  a  certain  time,  and  for  failure 
so  to  do  he  was  to  "  return  the  charter," 
a  suit  by  the  original  incorpoi'ators  to 
cancel  his  subscription  and  to  obtain 
control  of  the  board  of  directors  will 
not  lie.  inasmuch  as  the  contract  was 
an  attempt  to  transfer  the  corporate 
franchise.  Simonds  v.  East  Windsor, 
etc.  Ry.,  73  Conn.  513  (1901). 

2Braintree,  etc.  Co.  v.  Braintree,  146 
Mass.  482  (1888). 

3  McGinty  v.  Athol,  etc.  Ca,  155  Mass. 
183  (1892). 

■*  See  §g  57,  58,  supra. 


1271 


§§  r>92,  593.]  stockholders'    MEETINGS — CALLS.  [CH.  XXXVI. 

the  stock.'  But  where  a  company  is  chartered  in  ISCO,  and  does 
not  organize  until  1884,  an  exemption  from  taxation  contained  in 
the  charter  is  lost  by  reason  of  a  constitutional  provision  enacted 
in  1870  forbidding  such  exemptions.- 

§  592.  Directors'  meetim/s. —  The  various  questions  connected 
with  directors'  meetings,  the  place  where  such  meetings  may  be 
hold,  the  notice  that  is  required,  the  question  of  whether  the  direct- 
ors may  act  without  meeting,  and  the  requirements  as  to  a  (juorum, 
are  discussed  elsewhere.'  "Where  a  statute  provides  that  the  char- 
ter may  be  amended  in  certain  respects  upon  the  directors  or  a 
majority  of  them  making  and  signing  a  certificate,  such  making 
and  signing  need  not  be  at  a  meeting  of  the  directors.  Xo  meet- 
ing is  required.'* 

§  593.  Bif  whom  mpftings  are  to  he  called— Mandamus  —  Fraud 
in  the  call. —  Where  the  time  and  place  of  a  meeting  ami  the  busi- 
ness to  be  transacted  at  that  meeting  are  not  so  lixed  by  charter  or 
otherwise  that  the  stockholders  are  bound  to  take  notice  of  them, 
it  is  necessary  that  the  meeting  bo  called  in  accordance  with  the 
by-laws,  or,  in  the  absence  of  a  by-law,  by  the  highest  existing  cor- 
porate authority.* 

In  the  absence  of  any  special  authority  to  any  particular  person 
to  call  meetings,  it  has  been  held  that  the  general  agent  of  the 
corporation  may  make  the  call,^  but  that  the  secretary  cannot; ' 
yet  even  though  the  secretary  calls  a  stockholders'  meeting  with- 

1  Marmora,  etc.  Ca  v.  Murney,  1  C.  P.  elections,   but    no    by-laws  had   been 

Rep.  (Can.)  29  (ISoO).  made  fixing  the  time.     The  authority 

2Phinters'  Ins.  Co.  v.  Tennessee,  IGl  to  call  an  election  being  in  the  direct- 

U.  S.  193  (1896).  ors,  it  was  held  not  sufficient  for  a  ma- 

3 See  §  713a,  infra.  jority  of  these  to  sign  the  notice  with- 

<  Burden    v.   Burden,  159  N.  Y.  287  out  stating  that  it  was  given  by  order 

{^'^^%  of  the  board,  and  without  designating 

5  Evans  V.  Osgood,  18  Me.  213  (1841),  themselves  as  directors.  See  also  Ste- 
holding  that,  where  a  proprietors'  meet-  vens  v.  Eden  Meeting-house  Soc,  12  Vt, 
ing  could  be  called  "  by  a  petition  688  (1839),  holding  tliat  notices  of  meet- 
signed  by  twelve  of  them  at  least,"  it  ings  could  not  be  proved  by  parol 
was  not  a  legal  call  if  eleven  signed,  al-  where  there  was  a  by-law  requiring  the 
tliough  they  owned  twelve  shares;  Con-  clerk  to  post  written  notice, 
gregational  Soc.  of  Bethany  v.  Sperry,  6  Stebbins  v.  Merritt,  64  Mass.  27 
10  Conn.  200  (1834);  State  v.  Pettineli,  (1852). 

10  Nev.  141  (1875),  where  the  by-laws  of  7  The  secretary  and  a  person  holding 

a    corporation    provided    that     meet-  proxies  on  stock  owned  by  the  state 

ings   of  the    stockholders    should    be  cannot  call  a  meeting  to  elect  officers; 

called  by  the  trustees,  and  it  was  held  nor  can  a  statute  order  an  election  in 

that  any  other  mode  of  calling,  such  as  a  brief  time.     Cassell  v.  Lexington,  etc. 

by  the  president,  was  insufficient     In  Co.,  9  S.  W.  Rep.  502,   701  (Ky.  1888). 

Johnston   v.   Jones,   23   N.   J.    Eq.    216  The  secretary  has  no  inherent  right  to 

(1872),  the  charter  provided  for  annual  call  a  meeting    of  the    stockholders, 

1272 


■CH.  XXXVI.] 


STOCKHOLDERS     MEETINGS 


CALLS. 


[§  593. 


out  authority  of  the  board,  nevertheless,  if  the  next  day  the  board 
rati  lies  the  proceedings,  the  notice  is  good.^  The  president  and 
secretary  have  no  power  to  call  a  stockholders'  meeting.'-  The 
board  of  directors  may  always  call  a  meeting  of  the  stockholders.' 
Although  a  meeting  of  the  board  of  directors  at  which  a  quorum 
is  not  present  calls  a  stockholders'  meeting,  and  the  stockholders' 
meeting  takes  action,  yet  where  no  stockholders  object  until  six 
months  thereafter  the  court  will  not  interfere*  And  even  though, 
on  account  of  vacancies  in  the  board  of  directors,  it  cannot  act, 
yet  the  remaining  directors  may  call  a  stockholders'  meeting  to 
hold  an  election.'^ 

Statutory  provisions  as  to  who  shall  call  the  meeting,  whether 
it  be  the  first  and  organization  meeting,  or  a  subsequent  one,  may 
be  waived  by  unanimous  consent  of  the  incorporators  or  stock- 
holders.^ 


especially  where  the  statute  provides 
that  the  directors  may  call  a  stock- 
holders' meeting.  Re  State  of  Wyom- 
ing Syndicate,  [1901]  2  Ch.  431. 

1  Hooper  v.  Kerr,  etc.  Co.,  83  L.  T. 
Rep.  729  (1900). 

2Dusenbery  v.  Looker,  110  Mich.  58 
aS9G). 

^Cassell  V.  Lexington,  etc.  Co.,  9  S. 
W.  Rep.  502,  701  (Ky.  1888).  The  board 
of  directors  may  fix  the  time  if  the 
charter  or  by-laws  do  not.  Common- 
wealth V.  Smith,  45  Pa.  St.  59  (1863). 

•*  Southern,  etc.  Bank  r.  Rider,  73  L. 
T.  Rep.  374  (1895). 

5  Toronto,  etc.  Co.  v.  Blake,  2  Ont  Rep. 
(Can.)  175  (1882).     Cf.  %  713a,  infra. 

*See  ^  234,  notes,  supra,  also  §.^  590, 
599,  infra;  Angell  &  Ames,  Corp.,  §  491, 
to  the  effect  that  "  want  of  authority 
may  be  waived  by  the  presence  and 
consent  of  all  who  have  a  right  to  vote." 
Although  the  charter  prescribes  that 
the  commissioners  who  receive  the 
subscriptions  shall  call  the  first  meet- 
ing by  publishing  a  notice,  yet  this  call 
may  be  waived,  and  the  stockholders 
may  meet  and  organize  without  a  call, 
if  all  assent.  Judah  v.  American,  etc.- 
Co..  4  Ind.  333  (1853);  Chamberlain  v. 
Painesville.  etc.  R  R.,  15  Ohio  St.  225 
(1S64),  where  the  statute  provided  that, 
as  soon  as  ten  per  cent,  on  the  capital 

1 


stock  should  be  subscribed,  the  persons 
named  in  the  certificate  of  incorpora- 
tion, or  any  three  of  them,  might  give 
notice  of  an  election  of  directors.  It 
was  held  simply  directory,  and  not  in- 
dispensable to  an  election,  that  the  no- 
tice be  so  given.  In  Newcomb  v.  Reed, 
94  Masa  362  (1866),  the  court  declared 
the  purpose  of  such  statutes  to  be  to 
avoid  such  difficulty  as  would  arise 
where  two  parties  should  attempt  to 
organize  separately  under  the  same 
charter.  It  was  there  held  that  per- 
sons elected  officers  at  a  meeting  held 
in  variance  with  such  statutory  direc- 
tion were  directors  nevertheless,  and 
were  subject  to  the  statutory  liability 
for  corporate  debts.  Where  three  i^er- 
sons  are  appointed  to  make  a  call,  and 
one  of  them  calls  the  meeting  of  incor- 
poration, the  other  two  making  no  ob- 
jection, the  organization  of  the  com- 
pany at  the  meeting  so  called  is  valid. 
Walworth  v.  Brackett,  98  Mass.  98 
(1867);  Hardenburgh  v.  Farmers',  etc 
Bank,  3  N.  J.  Eq.  68  (1834),  holding  that 
if  the  call  for  the  meeting  to  elect  the 
first  directors  be  signed  by  the  com- 
missioners authorized  to  make  the  call 
individually,  and  not  by  virtue  of  a 
formal  order  of  the  commissioners,  or 
if  their  names  be  signed  to  such  a  call 
by  the  secretary  without  objection  by 
273 


^   oOo.] 


STOCKIIOLDEKS     MEETINGS  —  CALLS. 


[cn.   XXXVI. 


If,  upon  the  organization  of  a  corpor.ition,  a  majority  of  the  sub- 
scribers refuse  to  proceed  in  calling  a  meeting,  the  minority  may 
call  it,  and  bind  the  corporation. • 

"Where  the  statute  requires  due  notice  to  be  given,  it  need  not  bo 
given  by  any  particular  person  nor  in  any  particular  form.'  A 
charter  provision  or  by-law  authorizing  the  calling  of  a  meeting  in 
a  certain  way  does  not  necessarily  prevent  the  meeting  being  called 
in  a  dififerent  way,  but  unless  waived  the  rule  is  otherwise,  where 
the  charter  or  by-law  is  peremptory.'  The  president  and  cashier 
of  a  bank  have  no  authority  to  call  a  stockholders'  meeting,  where 
the  charter  provides  that  stockholders'  meetings  may  be  called  by 
the  board  of  directors  or  any  three  stockholders.'  The  ollicers  or 
agents  of  a  corporation  whose  duty  it  is  to  call  meetings  may,  in 
case  they  neglect  or  refuse  to  issue  the  call,  be  compelled  by  //icrn- 
damvfi  to  call  a  meeting  at  the  instance  of  a  stockholder  who  is  in- 
jured by  reason  of  their  failure.'  Courts  have  no  power  to  call 
corporate  meetings  except  by  mandamus} 


them,  these  irregularities  will  not  affect 
the  validity  of  tlie  proceedings  at  the 
meeting. 

1  Busey  v.  Hooper,  35  Md.  15  (1S71). 

'^  West  Koshkonong  Cong.  v.  Ottesen, 
80  Wis.  02(1891). 

3  Where  a  by-law  provides  that  spe- 
cial meetings  may  be  called  by  the 
president,  or  in  his  absence  by  the  sec- 
retary, on  application  made  by  ten 
members  in  writing,  the  directors  may 
call  a  special  meeting  without  such  an 
application.  Citizens'  Mut,  F.  Ins.  Co. 
V.  Sortwell.  90  Mass.  217  (1864).  But 
where  a  by-law  authorizes  the  trustees 
to  call  a  meeting,  a  meeting  called  by 
the  president  is  irregular.  State  v.  Pet- 
tineli,  10  Nev.  141  (1875).  Wlien  the 
by  laws  require  a  call  to  be  posted  in 
writing,  a  call  by  parol  is  insufficient. 
Stevens  v.  Eden  Meeting-house  Soc,  13 
yt.  688  (1889).  The  manner  of  making 
the  call  may  be  prescribed  by  by-law; 
and  when  so  prescribed,  provided  the 
by-law  is  reasonable,  calls  made  in  that 
way  are  valid,  even  though  the  charter 
said  that  three  stockholders  might  call 


a  meeting.  Taylor  v.  Griswold,  14  N. 
J.  I*  222  (1834). 

*  Matthews  v,  Columbia  Nat.  Bank,  79 
Fed.  Rep.  558  (1897V 

'People  V.  Cummings,  72  N.  Y,  433 
(1878);  State  v.  Wright,  10  Nev.  167 
(1875);  People  v.  Governors  of  Albany 
Ilo-spital,  61  Barb.  397  (1871);  McNeely 
V.  Woodruff,  13  N.  J.  L.  352  (1833); 
Regina  v.  Aldham,  etc.  Soc,  6  Eng.  L. 
&  Eq.  365  (1851).  A  wa7?d«7n«s  to  com- 
pel the  calling  of  a  meeting  of  the 
stockholders  to  elect  directors  should 
be  against  the  board  of  directors  and 
not  against  the  president  and  secre- 
tary. Dusenbury  v.  Looker,  110  Mich. 
58  (1890).  Nandamus  lies  to  compel  the 
calling  of  a  special  stockholders'  meet- 
ing in  accordance  with  the  by-laws. 
Bassett  v.  Atwater,  65  Conn.  355  (1895). 
The  court  will  not  order  the  directors 
to  call  a  meeting  for  business  other 
than  an  election  when  tliey  or  a  cer- 
tain proportion  ofthe  stockholders  may 
call  it.  MacDougall  v.  Gardiner,  L.  R. 
10  Ch.  App  606  (1875).  In  Goulding  'v. 
Clark,  34  N.   H.   148  (1856),  it  is  held 


^The  fact  that  foreclosure  proceed-  diction  to  call  a  stockholders'  meeting 
ings  are  pending  and  a  receiver  is  in  to  hold  an  election.  Taylor  v.  Phila- 
possession  does  not  give  the  court  juris-    delphia,  etc.  R.  R.,  7  Fed.  Rep.  381  (1881X- 

1274 


en.  xxxvi.j 


STOCKHOLDEES     MEETINGS 


CALLS. 


[§  594. 


If  there  is  any  fraud  in  the  calling  of  the  meeting,  the  proceed- 
ings of  the  meeting  may  be  attacked  in  the  courts.  The  fraud  may 
consist  in  concealing  the  notice,'  or  in  changing  the  time  of  the 
meeting,^  or  in  misstating  the  business.^  A  court  of  equity  may 
restrain  the  directors  from  fixing  the  time  for  an  annual  meeting 
at  a  date  when  many  members  are  in  the  country,  the  purpose 
being  to  prevent  them  from  exercising  their  right  to  vote.* 

§  5^4:.  When  the  stocl'holders  are  entitled  to  notice  of  corj)orate 
mectinr/s. —  If  the  time  and  place  at  which  a  corporate  meeting  is  to 
be  held  and  the  business  to  be  transacted  are  distinctly  fixed  in  the 
charter  or  by  a  by-law,  this  is  of  itself  sufficient  notice  to  all  the 
stockholders,  and  no  further  call  or  notice  of  that  meeting  is  neces- 
sary, unless  the  charter  or  by-laws  require  it.'^     But  an  annual  meet- 


that,  where  there  is  no  oflScer  compe- 
tent to  call  a  meeting,  there  is  no  way 
of  convening  except  by  reorganization 
of  the  company  or  a  published  notice 
given  under  the  statutes.  All  the  stock- 
holders, of  course,  could  convene  and 
thereby  waive  notica  See  ^  599,  infra. 
The  proper  officer  may  be  commanded 
by  mandamus  to  send  out  notices  of 
the  annual  election.  People  v.  Hart,  11 
N.  Y.  Supp.  670,  673  (1890j.  Mandamus 
lies  to  compel  a  meeting  of  vestrymen. 
People  V.  Winans,  9  N.  Y.  Supp.  249 
(1890).  Where  those  who  have  the  right 
to  call  a  meeting  of  the  shareholders 
refuse  to  exercise  that  right,  for  the  ex- 
jiress  purpose  of  preventing  th»  share- 
holders from  duly  assembling,  the  court 
will,  if  necessary,  interfere  to  protect 
the  shareholders  against  an  abuse  of 
power  on  the  part  of  those  intrusted 
with  the  management  of  the  affairs  of 
the  company.  Foss  v.  Harbottle,  2 
Hare,  461  (1843);  Isle  of  Wight  R,  Ca  v. 
Tahourdin,  L.  R  25  Ch.  D.  320  (1883). 
Mandauius  lies  to  compel  the  annual 
election  of  the  entire  body  of  directors 
or  trustees.  Commonwealth  v.  Keim, 
38Leg.  Int  32  (1881);  People  v.  Fair- 
bury,  51  111.  149  (1869).  Dictum  that 
mandamus  lies  to  compel  election.  Re 
Union  Ins.  Co.,  22  Wend.  591  (1840). 

1  See  §  596,  infra. 

2  In  a  stockholder's  suit  to  enjoin  a 
consolidation  the  court  will  consider 
the  legality  of  an  election,  the  time  of 

127 


holding  which  was  illegally  changed 
by  the  board  of  directors.  Nathan  v. 
Tompkins,  82  Ala.  437  (1887). 

3  If  directors  convene  a  meeting  to 
pass  resolutions  favorable  to  themselves 
on  questions  in  which  the  interests  of 
the  directors  are  opposed  to  those  of  the 
shareholders,  by  a  circular  which  is 
misleading,  and  which  contains  state- 
ments calculated  to  obtain  proxies  in 
their  favor  without  giving  the  share- 
holders the  information  necessary  to 
enable  them  to  form  a  just  judgment 
as  to  who  are  the  proper  persons  ta 
whom  to  intrust  their  votes,  the  court 
will  grant  an  injunction  to  restrain  th*i 
holding  of  the  meeting  or  to  restrain 
the  directors  from  laying  such  resolu- 
tions before  the  meeting.  Jackson  v, 
Munster  Bank,  13  L.  E.  Ir.  118  (1884). 

4  Cannon  v.  Trask,  L.  R.  20  Eq.  669 
(1875).  A  majority  of  the  board  of 
directors  cannot  lengthen  their  term 
of  office  by  shortening  the  time  of  the 
annual  meeting  of  the  stockholders,  in 
violation  of  the  stockholders'  by-laws, 
so  that  the  election  is  held  when  they 
control  the  stock.  Nathan  v.  Tomp- 
kins, 82  Ala.  437  (1887). 

sW^arner  r.  Mower,  11  Vt.  385,  393 
(1839):  State  v.  Bonnell,  35  Ohio  St.  10, 
15  (1878).  If  the  charter  or  by-laws  of 
a  corporation  fix  the  time  and  place  at 
which  regular  meetings  shall  be  held, 
this  is  itself  sufficient  notice  to  stock- 
holders, and  no  further  notice  is  neces- 
5 


§  5<J-A  ] 


STOCKHOLDERS     MEETINGS  —  CALLS. 


[CH.  XXXVI. 


ing  of  the  stockholders  has  no  power  to  change  the  b3Maws  by 
increasing  the  number  of  directors,  where  no  notice  of  such  pro- 
posed change  was  given,  the  change  itself  being  of  vital  importance 
and  outside  the  usual  business  transacted  at  an  annual  meeting.^  A 
by-law  which  fixes  the  day  of  meeting  without  also  fixing  the  hour 
and  place  is  insufficient  as  a  notice  of  the  meeting.^  And  it  is  a  gen- 
eral and  settled  rule  of  law  that  notice,  in  some  way  or  other,  must  be 
given  to  every  person  entitled  to  be  present  at  a  corporate  meet- 
ing.* When,  therefore,  no  suiJicient  notice  is  given  by  charter  or 
statute  or  by-law,  each  stockholder  is  entitled  to  an  express  notice 
of  every  corporate  meeting.^  No  usage  can  operate  to  excuse  a 
failure  to  give  such  a  notice.'    These  rules  are  based  on  the  neces- 


sary. Morrill  v.  Little  Falls  Mfg.  Co., 
53  Minn.  371  (1893).  As  to  whether  no- 
tice is  necessary  of  the  annual  meeting, 
where  the  corporation  has  long  been 
defunct,  see  Morrill  v.  Little  Falls  Mfg. 
Co.,  60  Minn.  405  (1895).  Where  the 
by-laws  fix  the  time  and  place  for  the 
annual  meeting  no  notice  is  necessarj% 
and  even  jf  a  notice  was  misleading, 
yet  if  a  majority  met  and  elected  a 
trustee,  a  suit  instituted  by  the  corpo- 
ration under  control  of  such  trustee  is 
legally  instituted.  Jones  v.  Hilldale, 
etc.  Soc,  65  S.  W.  Rep.  838  (Ky.  1901). 

1  Bagley  v.  Reno.  etc.  Co.,  201  Pa,  St. 
78  (1903). 

'  The  fact  that  one  of  the  by-laws  of 
the  corporation  fixes  the  day  upon 
which  the  annual  meeting  of  the  cor- 
poration shall  be  held  is  not  of  itself  a 
sufficient  notice  of  the  l;our  and  place 
at  which  the  meeting  is  to  be  held. 
There  must  be  an  e.xpress  notice  of  the 
hour  and  place  of  meeting.  Otherwise, 
unless  all  the  stockholders  are  present 
and  consent,  either  in  person  or  by 
proxy,  the  meeting  cannot  legally  be 
held.  San  Buenaventura,  etc.  Co.  v. 
Vassault,  50  Cal.  534  (1875).  Though 
the  by-laws  of  a  corporation  fix  the 
date  of  the  annual  meeting,  that  of 
itself  will  not  be  notice  of  the  meeting. 
Notice  must  be  given  of  the  place  of 
the  meeting;  and  a  provision  of  the 
charter  for  the  calling  of  all  meetings 
is  a  mandatory  provision,  applicable 
alike  to  general  and  special  meetings. 

12 


U.  S.  V.  McKelden,  M  Mac  Arthur  &  M. 
1G2  (D.  C.  1879). 

8  "  To  support  the  validity  of  corpo- 
rate acts,  each  member  must  be  actu- 
ally summoned."  Angell  &  Ames,  Corp., 
§  492.  A  member  who  is  expelled  at  a 
meeting  of  which  he  had  no  notice  may 
cause  the  proceedings  to  be  set  aside. 
Medical,  etc.  Soc.  v.  Weatherly,  75  Ala. 
S48  (1883).  "Due  notice  of  the  time 
and  place  of  a  corporate  meeting  is,  by 
the  English  law,  essential  to  its  valid- 
ity, or  its  power  to  do  any  act  which 
shall  bind  the  corpoi'ation."  Dillon, 
Mun.  Corp..  §  200. 

4  Stow  V.  Wyse,  7  Conn.  214  (1828), 
the  court  saying,  in  a  dictum:  "  If  no 
particular  mode  of  notifying  the  stock- 
holders be  provided,  either  in  the  char- 
terer in  any  by-law,  yet  personal  notice 
might  be  given;  and  this,  in  such  case, 
would  be  indispensable."  Wiggin  v. 
Freewill  Baptist  Church,  49  Mass.  301 
(1844),  a  dictum;  Jackson  v.  Hampden, 
20  Me.  37  (1841);  Rex  v.  Langhorn,  4 
Ad.  &  El.  538  (1836);  S.  C,  6  Nev.  &  M. 
203  (1836);  Smyth  v.  Darley,  2  H.  L. 
Cas.  789  (1849),  the  last  four  cases  being 
munjcipal  corporation  cases.  See  also 
Stebbins  v.  Merritt,  64  Mass.  27  (1852) 
where  a  meeting  called  by  a  general 
agent  in  the  absence  of  a  statute  or 
by-law  was  upheld  though  one  member 
was  mentally  incapable  of  receiving 
notice. 

5  Wiggin  V.  Freewill  Baptist  Church, 
49  Mass.  301  (1844);  Rex  v.  Hill,  4  Barn. 

76 


CH.  XXXVI.]  STOBKHOLDERS'    MEETINGS — CALLS.  [§595. 

sity  of  protecting  the  rights  of  stockholders,  and  especially  of  the 
minority.  A  stockholder  who  takes  part  in  a  meeting  cannot  raise 
the  objection  that  other  stockholders  were  not  notified  of  the 
meeting.' 

§595.  Tlie  essential  elements  of  a  notice  of  a,  meeting  are  time^ 
place,  anil  business. —  The  contents  of  the  notice  depend  upon  the 
character  of  the  meeting.  There  are  three  matters  concerning 
every  corporate  meeting  of  which  the  members  are  entitled  to  no- 
tice, namely:  the  time,  the  place,  and  the  business  proposed  to  be 
transacted.  Some  or  all  of  these  may  be  known  to  him  by  virtue  of 
a  charter  provision  or  a  by-law  or  a  statute.  But  if  any  one  of  them 
is  not  known  in  that  way,  the  stockholders  are  entitled  to  an  actual 
notice  thereof.  Accordingly,  it  is  the  rule  that,  in  the  absence  of 
other  valid  notice,  the  call  must  specif}''  the  time  and  place  of 
meeting  and  the  business  to  be  considered.  Although  the  time  of 
a  meeting  is  fixed  by  charter,  nevertheless  the  meeting  may  be  held 
at  a  subsequent  time  and  be  valid.-  The  precise  hour  at  which  the 
meetins:  is  to  be  held  must  be  stated  in  the  notice.* 

In  general,  the  notice  need  not  specify  the  business  to  be  consid- 
ered where  the  meeting  is  one  prescribed  by  charter,  or  where  the 
business  is  prescribed  by  charter  or  statute  or  by-law,  and  no  other 
business  is  to  be  transacted.^  But  if  the  meeting  is  to  be  held  at  a 
time  not  provided  by  the  charter,  the  call  must  specify  particularly 
the  time  and  also  the  business;^  and  the  better  rule  is  that,  where 

&  C.  426  (1825),  where  an  ancient  cus-  meeting  need  not  specify  tliat  the  offi- 

toni  of  calling  a  meeting  for  an  election  cers  are  to  be  elected,  even  though  the 

of  burgesses  by  ringing  a  bell  was  held  by-laws  require  the  notice  to  state  th& 

not  to  be  sufficient  notica  business;  Warner  v.  Mower,  11  Vt.  385 

1  See  j;  599,  infi'a.  (1839),  where  a  provision  of  the  by-laws 

2  People  V.  Cummings,  73  N.  Y.  433  relating  to  notices  was  considered  as  not 
(1878);  Hughes  v.  Parker,  20  N.  H.  58  alTecting  those  for  stated  meetings,  and 
(1849).  Elections  need  not  be  held  on  holding  that  a  notice  of  a  stated  annual 
the  day  fixed  by  the  by-laws.  They  meeting  need  not  specify  the  business 
may  be  held  at  any  subsequent  time,  to  be  transacted,  there  being  nothing 
Beardsley  v.  Johnson,  121  N.  Y.  224  in  the  by-laws  limiting  or  specifying 
(1890),  aff'g  s.  C,  1  N.  Y.  Supp.  608  (1888).  the  business.     It  is  believed,  however, 

3  San  Buenaventura,  etc.  Co.  v.  Vas-  that  the  rights  of  stockholders  will  be 
sault,  50  Cal.  534  (1875).  best  preserved  by  requiring  notice  to  be 

*  Quoted  and  approved  in  Bagley  v.  given    of  any  extraordinary   business 

Reno,  etc.  Co.,  201  Pa.  St.  78  (1902).    No-  that  may  come  before  an  annual  meet- 

tice  need  not  be  given  of  special  busi-  ing. 

ness  to  be  transacted  at  the  regular  5i2e  Bridpoi-t  Old  Brewery  Co.,  L.  K. 
annual  meeting  of  the  stockholders.  2  Ch.  191  (1866);  Re  Silkstone  Fall  Col- 
Chicago,  etc.  Ry.  V.  Union  Pac.  Ry.,  47  liery  Co.,  L.  R.  1  Ch.  D.  38  (1875).  Cf. 
Fed.  Rep.  15  (1891);  Sampson  v.  Bowdo-  Wright's  Case,  L.  R.  12  Eq.  335,  n.,  345, 
inham  Steam  Mill  Co.,  36  Me.  78  (1853),  u.  (1868);  Tuttle  v.  Michigan  Air  Line^ 
holding  that  the  notice  of  the  annual  35  Mich.  247  (1877),  holding  that  at  c  cm- 

1277 


I  505.] 


STOCKHOLDERS     MEETINGS CALLS. 


[CH.  XXXVI. 


unusual  business  is  to  be  transacted,  even  at  a  regular  meeting,  the 
notice  of  that  meeting  should  state  the  unusual  business.^  Thus, 
at  a  meeting  called  to  alter  the  by-laws  and  transact  other  busi- 
ness, an  election  cannot  lawfully  be  held.^  Nor  can  an  assessment 
be  levied  at  a  special  meeting  when  the  stockholders  were  not 
duly  notified  that  that  matter  would  come  up  for  consideration.^ 
A  notice  of  a  meeting  to  increase  stock  need  not  specify  what  the 


ruon  law  all  notices  of  meetings  for 
special  or  exceptional  purposes  were 
required  to  state  the  object  of  the  call. 
Citing  Ang.  &  A.,  Corp.,  §  492.  A  meet- 
ing to  organize  and  elect  directors  is 
invalid  where  no  notice  of  the  business 
is  given.  Re  London,  etc.  Co.,  L.  R.  31 
Ch.  D.  223  (1885);  Shelby  R.  R.  Co.  v. 
Louisville,  etc.  R.  R.,  12  Bush  (Ky.),  62 
(1876),  in  which  a  sale  of  a  railroad  was 
set  aside  because  authorized  at  a  meet- 
ing of  stockholders  called  by  a  notice 
not  sufiScient  in  point  of  time,  and  de- 
fective in  not  stating  the  object  of  the 
meeting;  Zabriskie  v.  Cleveland,  etc. 
R.  R,  23  How.  381,  400  (1859),  holding 
that,  though  the  notice  was  insufficient, 
yet  one  who  was  represented  by  proxy 
cannot  object,  especially  where  he  de- 
layed a  long  time  in  complaining.  A 
notice  of  a  meeting  of  a  benevolent  so- 
ciety called  to  dissolve  must  state  the 
object  of  the  meeting.  St.  Mary's,  etc. 
Assoc.  V.  Lynch,  64  N.  H.  213  (1886).  A 
resolution  passed  at  an  extraordinary 
meeting,  upon  a  matter  for  the  consid- 
eration of  which  it  was  not  avowedly 
called,  or  which  was  not  specified  in 
the  notice  convening  the  meeting,  is 
altogether  inoperative.  Imp.  Bank  of 
China  v.  Bank  of  Hindustan,  L.  R.  6 
Eq.  91  (1868);  Anglo-Californian  Gold 
Min.  Co.  V.  Lewis,  6  H.  &  N.  174  (1860); 
Stearic  Acid  Co.,  9  Jur.  (N.  S.)  1066 
(1863).  Notice  of  a  meeting  to  consider 
the  giving  of  a  mortgage  is  sufficient 
to  enable  the  meeting  to  authorize  a 
mortgage.  Evans  v.  Boston  Heating 
Ca,  157  Mass.  37  (1892).  One  and  the 
same  meeting  may  be  both  ordinary 
.and    extraordinary;    ordinary   for  the 


purpose  of  transacting  the  usual  busi 
ness  of  the  company,  and  extraordinary 
for  the  transaction  of  some  particular 
business  of  which  special  notice  may 
have  been  given.  See  Cutbill  v.  King- 
dom, 1  Exch.  494  (1847);  Graham  v. 
Van  Diemen's  Land  Co.,  1  H.  &  N.  541 
(1856). 

lAn  annual  meeting  of  the  stock- 
holders has  no  power  to  change  the  by- 
laws, increasing  the  number  of  directors, 
where  no  notice  of  such  proposed  change 
was  given,  the  change  itself  being  of 
vital  importance  and  outside  of  the 
usual  business  transacted  at  an  annual 
meeting.  Bagley  v.  Reno,  etc  Co.,  201 
Pa.  St.  78  (1902),  citing  the  above  text. 
The  annual  meeting  cannot  vote  an 
increase  of  the  capital  stock  unless 
special  notice  of  that  business  has  been 
given,  even  though  the  by-laws  provide 
that  any  business  may  be  transacted 
at  the  annual  meeting  without  special 
notice;  the  statute,  however,  prescrib- 
ing that  an  increase  of  capital  stock 
may  be  at  "any  meeting  called  for 
the  purpose."  Jones  u  Concord,  etc. 
R.  R,  67  N.  H.  234  (1892).  By  custom 
any  business  may  be  transacted  at  the 
annual  meeting  without  special  notice 
thereof  being  given,  but  any  specific 
restriction  as  to  any  particular  business 
modifies  such  rule.  Mutual  F.  Ins.  Co. 
V.  Farquhar,  86  Md.  668  (1898). 

2  People's  Ins.  Co.  v.  Westcott,  SO 
Mass.  440  (1860).  Nor  an  amotion  made. 
Rex  V.  Liverpool,  2  Burr.  723  (1759);  Rex 
V.  Doncaster,  2  Burr.  738  (1759). 

3  Atlantic  De  Laine  Co.  v.  Mason,  5 
R  L  463  (1858). 


1278 


CH.  XXXVI.] 


STOCKHOLDEES     MEETINGS  —  CALLS. 


[§  595. 


money  is  to  be  used  for,^  "Where  a  special  meeting  is  called  to  re- 
scind the  by-laws  and  adopt  others  in  their  place,  the  notice  of  the 
meeting  may  state  that  a  copy  of  the  proposed  by-laws  can  be  in- 
spected at  the  company's  office  and  will  be  submitted  at  the  meet- 
ing.2  At  a  special  meeting  which  has  been  called  for  a  particular 
purpose,  onl}'-  the  business  specified  in  the  call  can  lawfully  be 
transacted.^  The  transaction,  however,  of  business  other  than  that 
for  which  the  meeting  was  called  will  not  invalidate  the  entire 
proceedings  at  that  meeting.  There  is  only  an  invalidity  pro 
tanto} 

The  notice  of  the  business  to  be  transacted  must  "  be  a  fair  no- 
tice, intelligible  to  the  minds  of  ordinary  men.  .  .  .  The  court 
does  not  scrutinize  these  notices  with  a  view  to  excessive  criticism 
to  find  out  defects,  but  it  looks  at  them  fairly."*  An  explanatory 
circular  accompanying  a  notice  may  be  considered  a  part  of  it.*  A 
notice  of  a  stockholders'  meeting  to  approve  of  the  sale  of  the  prop- 


1  Jones  V.  Concord,  etc.  R.  R,  67  N.  H. 
119(1891);  S.C.,  67N.  H.  234. 

-  Young  r.  South  African,  etc.  Synd., 
[1896J  2  Ch.  268.  Although  a  notice  of 
a  corporate  meeting,  and  proxies  given 
for  a  corporate  meeting,  add  to  the 
name  of  the  corporation  the  place 
where  it  is  located,  this  is  immaterial 
Langan  v.  Francklyn,  20  N.  Y.  Supp.  404 
(1892). 

3  Warner  v.  Mower,  11  Vt.  385  (1839). 

4  Re  British  Sugar  Ref.  Co.,  3  Kay  & 
J.  408,  413  (1857);  Re  Irrigation  Co.  of 
France,  L.  R.  6  Ch.  176  (1871).  But  it  is 
held  that  at  a  special  meeting,  all  the 
members  being  present  and  consenting, 
business  other  than  that  specified  in 
the  call  may  lawfully  be  transacted. 
Rex  V.  Theodorick,  8  East,  543  (1807). 

5  Henderson  v.  Bank  of  Australasia, 
62  L.  T.  Rep.  869  (1890),  reversed  on  an- 
other point  in  L.  R.  45  Ch.  D.  330;  South 
School  District  v.  Blakeslee,  13  Conn. 
227  (1839).  A  notice  that  in  case  cer- 
tain things  happen  a  meeting  will  be 
held  is  not  good.  It  is  conditional  and 
not  absolute.  Alexander  v.  Simpson, 
L.  R.  43  Ch.  D.  139  (1889).  Where  one 
company  buys  out  another,  the  former 
may  agree  to  pay  a  certain  sum  to  the 
directors  and  secretary  of  the  latter 
"as  compensation   for  loss  of  office." 

12 


This  agreement  is  legal  if  the  stock- 
holders of  the  selling  company  ratify 
the  same.  The  notice  of  a  meeting  of 
the  stockholders,  however,  to  ratify 
such  an  agreement  must  specify  such 
payment,  in  addition  to  stating  that 
the  object  of  the  meeting  is  to  ratify 
the  agreement  generally.  A  circular 
subsequently  sent  to  the  stockholders 
referring  to  the  payment  to  the  direct- 
ors and  secretary  is  not  suflBcient,  even 
though  it  was  sent  before  the  meeting 
was  held.  Kaye  v.  Croydon,  etc.  Co., 
[1898]  1  Ch.  358.  A  resolution  relative 
to  directors'  pay  passed  at  a  special 
stockholders'  meeting  may  differ  from 
the  resolution  specified  in  the  notice  of 
the  meeting;  but  if  the  meeting  ad- 
journs and  such  resolution  is  confirmed 
at  the  adjourned  meeting,  it  must  not 
differ  from  the  resolution  as  first 
passed.  Torbock  v.  Lord  Westbury,  87 
L.  T.  Rep.  165  (1902). 

♦> "  There  is  no  inconvenience,  irreg- 
ularity or  impropriety  in  supplement- 
ing, as  is  often  done,  a  notice  by  an 
explanatory  circular;  and  the  share- 
holder, though  perhaps  strictly  he 
might  say,  "Why  trouble  me  with  the 
circular?  What  I  am  entitled  to  is  a 
notice,'  still  I  think  ought  fairly  to 
look  at  the  two  as  one  document,  and 
79 


S  59G.] 


STOCKHOLUEKS     ilEETINGS 


CALLS. 


[CIL  X\XVI. 


erty  of  the  company  for  stock  in  another  company  should  disclose 
the  fact  that  the  directors  of  the  selling  company  are  to  receive  a 
personal  advantage  in  the  new  company  for  underwriting  its  de- 
bentures, if  such  is  a  part  of  the  agreement.*  In  a  meeting  called 
to  affirm  the  action  of  a  prior  meeting  sucii  action  may  be  affirmed 
in  part  and  rejected  in  part.'^ 

§  59G.  Service  of  the  notice. —  If  the  particuhir  form  of  the  notice 
or  the  manner  in  which  it  shall  be  served  is  prescribed  by  charter 
or  by-law  or  by  statute,  the  notice  must  be  given  in  that  manner, 
unless  notice  is  waived  by  unanimous  consent;  otherwise  all  the 
proceedings  of  the  meeting  are  invalid.'  Under  a  statute  requir- 
ing "  fourteen  days'  public  notice  at  the  least  ...  by  advertise- 
ment," it  has  been  held  tiiat  fourteen  clear  days'  notice  must  be 
given.*     The  New  York   statutes^  on  the  contrary,  exclude  the 


he  has  both  before  him  for  his  consid- 
eration." Tiessen  v.  Henderson,  [1899] 
1  Ch.  8G1. 

1  Tiessen  v.  Henderson,  [1899]  1  Ch. 
861. 

^iJeTrench,  etc.  Co.  Ltd,  [1900]  1  Ch. 
408. 

*  Shelby  R.  R  v.  Louisville,  etc.  R  R, 
12  Bush  (Ky.).  62  (187G),  where  there 
wasnosuch  publication  as  was  required 
by  statute,  and  there  was  no  waiver; 
Tuttle  V.  Michigan  Air  Line,  35  Mich. 
247  (1877),  where  a  consolidated  com- 
pany sued  a  subscriber  to  stock  in  one 
of  the  old  companies,  and  he  defeated 
the  action  by  showing  that  the  statu- 
tory notice  of  the  proposed  consolida- 
tion had  not  been  given;  Reilly  v.  Ogle- 
bay,  25  W.  Va.  36  (1884).  where  a  notice 
by  the  secretary,  when  the  statute  re- 
quired to  be  given  by  the  board  of  di- 
rectors or  by  stockholders  holding  one- 
tenth  of  the  capital,  was  held  insuffi- 
cient, although  it  was  shown  that  he 
had  the  authority  from  stockholders 
holding  the  required  amount  of  stock; 
Stevens  v.  Eden  Meeting-house  Soc,  12 
Vt.  688  (1839),  holding  that,  where  a  by- 
law required  notice  to  be  posted,  parol 
proof  of  such  posting  was  incompetent 
unless  the  written  notice  was  shown  to 
have  been  lost;  Swansea  Dock  Co.  v. 
Levien,  20  L.  J.  (Exch.)  447  (1851),  where 
a    notice   was    held    bad   because  the 


12S0 


statute  declared  it  should  be  printed  in 
a  newspaper  circulating  in  the  district 
of  the  principal  place  of  business,  while 
in  this  case  there  was  no  proof  tiiat  tiie 
paper  selected  ever  circulated  there. 
Hence  the  removal  of  directors  at  such 
a  meeting  was  illegal.  Swansea  Dock 
Ca  r.  Levien,  20  L.  J.  (Exch.)  447  (1851). 
As  to  waiver,  see  ^  599,  infra. 

*  Re  Railway  Sleepers  Supply  Co.,  L. 
R  29  Ch.  D.  204  (1885,  holding  that 
where  by  statute  a  second  meeting  to 
confirm  the  action  of  a  first  meeting 
must  be  held  "  at  an  interval  of  not  less 
than  fourteen  days."  both  of  the  days 
on  which  the  meetings  were  held  must 
be  excluded;  Reg.  v.  Aberdare  Canal 
Co.,  14  Q.  B.  854  (1850).  holding  that 
where  notice  must  be  published  "at 
least  sixteen  days  before  such  meeting  " 
in  condemnation  proceedings,  a  notice 
published  January  27th  for  a  meeting 
February  12th  was  insufficient;  Reg. 
V.  Justices  of  Shropshire,  8  Ad.  &  E.  173 
(1838),  not  a  corporation  case,  but  hold- 
ing that  notice  of  appeal  to  be  "  four- 
teen days  at  least  "  before  the  opening 
day  must  be  fourteen  days  exclusive  of 
the  day  of  serving  notice  and  of  the  day 
of  the  event.  To  same  effect,  Norton  v. 
Salisbury  Town  Clerk,  4  C.  B.  32  (1846). 
A  notice  for  four  weeks  successively, 
once  a  week,  next  preceding  the  time, 
requires  publication  for  four  full  weeks 


CH.  XXXVI.]  stockholders'    meetings  —  CALLS.  [§  596. 

day  of  publication  and  include  the  day  of  the  event.^  In  the  ab- 
sence of  an  express  provision  as  to  the  manner  of  serving  a  notice 
of  a  meeting,  it  is  the  common-law  rule  that  each  member  of  the  cor- 
poration is  entitled  to  notice,  either  personal  or  by  a  writing,  act 
ually  received.-  Notice  of  a  call  for  the  payment  of  a  subscription 
must  be  served  personally,  and  service  by  mail  is  insufficient,  unless 
the  b3Maws  authorize  service  in  that  manner,'  The  phj^sical  or 
mental  incapacity  of  one  of  the  stockholders  will  not  excuse  a  fail- 
ure to  give  him  notice  of  a  meeting;  but  it  is  very  clear  that  the 
meeting  may  lawfully  convene  and  transact  business,  although  one 
of  the  members  is  incapable,  by  reason  of  imbecility,  of  receiving 
the  notice.'*  The  absence  of  a  stockholder  from  home  does  not  ex- 
cuse a  failure  to  leave  the  notice.^  And  where  one  of  the  stockhold- 
ers dies  after  notice  of  a  meeting,  but  before  the  meeting  convenes, 
and  no  administrator  is  appointed  in  time  to  act  at  that  meeting, 
there  is  on  this  account  no  ground  to  impeach  the  regularity  of  the 
meeting.^  A  by-law  that  no  representative  of  a  deceased  stock- 
holder shall  have  a  right  to  notice  of  meetings,  unless  the  stock 
has  been  registered  in  his  name,  is  valid,''  It  has  been  held  that  a 
pledgee  of  shares  is  not  entitled  to  a  notice  of  corporate  meetings 
if  the  pledgor  receives  notice.^  Where  stock  is  owned  by  a  firm, 
notice  to  one  of  the  firm  is  sufficient.^  If  the  notice  is  fraudulently 
concealed  from  the  owner  of  a  majority  of  the  stock,  even  where 
the  notice  is  published  in  accordance  with  statute,  the  election  will 
be  set  aside.^" 

.once  a  week,  and  such  publication  must  (1841),  In  Porter  v.  Robinson,  30  Hun, 
begin  four  weeks  next  before  such  time,  209  (1883),  it  is  held  that  notice  need 
and  four  full  weeks  must  elapse  be-  not  be  given  to  a  member  of  a  board  of 
tween  the  first  publication  and  such  school  trustees,  the  board  being  a  body- 
time,  Hodge  V.  United  States  Steel  corporate  who  is  absent  from  the  state 
Corp.,  54  Atl.  Rep.  1  (N.  J.  1903).  and  cannot  attend  the  meeting,  and 

*  L.  1892,  ch.  677,  §  27;  Code  Civ.  Proc,  that  a  failure  to  notify  such  a  member 
§  787.  will  not  render  the  proceedings  at  the 

2 Notice    to    non-residents  by   letter  meeting  irregular  or  invalid.   Members 

was  upheld  in  Stebbins  v.  Merritt,  64  of  English  joint-stock  companies  resid- 

Mass.  27  (1852).     For  dicta  to  the  effect  ing  abroad  are  not  entitled  to  any  no- 

that  the  notice  must  be  personal,  see  tice  of  corporate  meetings.      Re  Union 

Tuttle  V.  Michigan  Air  Line,  35  Mich.  Hill  Silver  Co.,  22  L.  T.  Rep.  400  (1870). 

247  (1877);  Stow  v.  Wyse,  7  Conn.  214  6  Freeman's  Nat.  Bank   v.  Smith,  13 

(1828).    See  also  §  713a,  infra,  as  to  the  Blatchf.  220  (1875);  &  c,  9  Fed.  Cas,  760. 

kind  of  notice   required  of  directors'  ^ Allen  v.  Gold  Reefs,  etc.  Limited^ 

meetings.     See  also  §  594,  supra,  and  [1900]  1  Ch.  656,  rev'g  [1899]  2  Ch,  40, 

notes.  8  McDanielsv.  Flower  Brook  Mfg.  Co.,. 

3  North,  etc  Co.  v.  Bishop,  103  Wis.  22  Vt.  274  (1850). 

492  (1899).  9  Kenton  Furnace,  etc.  Co.  v.  McAlpin, 

« Stebbins  v.  Merritt,  64  Mass.  27  (1852).  5  Fed.  Rep.  737,  747  (1880). 

*  Jackson    v.   Hampden,   20    Me.    37  i"  where,  in  addition  to  irregularities, 

(81)  1281 


§§  597-599.]  STOCKHOLDEKS'    MEETINGS  —  CALLS. 


[oh.  XXXVI. 


§  597.  Notice  must  he  served  a  reasonalle  time  hcfore  the  meet- 
l^ig^ — The  notice  must  be  served  upon  the  stockholders  at  such 
time  as  is  prescribed  b}"  the  statutes  or  if  the  statutes  are  silent;  by 
the  by-laws,  or  if  both  are  silent  on  the  subject  a  reasonable  time 
before  the  day  of  the  meeting.^ 

§  598.  The  division  of  meetings  into  ordinary  and  extraordinary. 
Corporate  meetings  of  stockholders  are  frequently  divided,  both 
by  the  judges  and  the  text-writers,  into  two  classes  —  the  first 
being  special  or  extraordinary,  and  the  second  being  ordinary, 
regular,  stated,  or  general.  By  reason  of  this  attempt  at  classifi- 
cation much  confusion  has  been  introduced  into  the  law  without  any 
corresponding  advantage.  The  terms  employed  to  distinguish  the 
various  kinds  of  meetings  are  used  in  different  senses  by  different 
writers,  so  that  it  is  difficult  to  define  them  in  such  a  way  as  to 
avoid  confusion.^ 

§599.  Waiver  of  notice. —  A  stockholder  may  expressly  or  by 
his  acts  waive  his  right  to  have  a  notice  of  a  corporate  meeting 
duly  served  upon  him.'     For  instance,  an  admission  at  a  stock- 


the  notice  of  the  election  at  a  deferred 
day,  which  is  published  in  accordance 
with  the  charter,  is  concealed  from  the 
leading  stockholder,  the  court  will  set 
the  election  aside.  Johnston  v.  Jones, 
23  N.  J.  Eq.  216  (1872). 

1  Re  Long  Island  R.  R,  19  Wend.  37 
(1837).  See  also  Covert  v.  Rogers,  38 
Mich.  363  (1878),  where  a  similar  rule  is 
declared  as  to  notice  to  directors  of 
their  meetings.  The  legislature  cannot 
unreasonably  shorten  the  time  of  the 
next  meeting.  Cassell  v.  Lexington, 
etc.  Co.,  9  S.  W.  Rep.  503  and  701  (Ky. 
1888).  A  reorganization  under  the 
English  statute  will  not  be  sustained 
as  against  American  stockholders, 
where  the  entire  business  of  the  Eng- 
lish company  is  to  own  and  work 
American  mines,  and  the  by-laws  of 
the  company  provide  for  a  longer  no- 
tice than  is  specified  in  the  English 
statute.  The  notice  of  the  meeting  to 
reorganize  not  having  reached  the 
American  stockholders  in  time  to  at- 
tend the  meeting,  the  American  courts 
■will  not  sustain  the  reorganization. 
Brown  v.  Republican,  etc.  Mines,  55  Fed. 
Rep.  7  (1893).  Where  by  statute  it  is 
provided  that  thirty  days'  notice  shall 

1 


be  given  of  certain  corporate  meetings, 
that  length  of  time  may  apply  to  notices 
of  other  meetings  of  the  same  corpora- 
tion. Shelby  R.  R,  v.  Louisville,  etc.  R 
R,  12  Bush  (Ky.),  62  (1876). 

i^For  instance,  in  England,  all  meet- 
ings of  stockholders  are  called  "  gen- 
eral" meetings,  and  are  either  "ordi- 
nary "  (i  e,,  regular)  or  "  extraordinary  " 
{i.  e.,  special).  In  England  the  same 
meeting  may  be  both  ordinary  and  ex- 
traordinary. See  Lindley  on  Compa- 
nies, pp.  425,  426  (6th  ed.). 

3  The  acts  of  a  meeting  are  valid, 
though  held  without  notice,  if  all  are 
present  or  subsequently  ratify  and  ap- 
prove of  the  action.  Stutz  v.  Handley, 
41  Fed.  Rep.  531  (1890);  affirmed  as  to 
this  point,  but  reversed  as  to  others,  in 
Handley  v.  Stutz,  139  U.  S.  417  (1891). 
A  party  accepting  the  benefit  of  a  con- 
tract for  a  long  time  cannot  repudiate 
it  on  the  ground  that  the  calls  for  the 
meetings  of  the  executive  committee 
and  of  the  stockholders  which  author- 
ized the  contract  were  insuflBcient; 
nor  can  he  set  up  in  such  a  case  that 
the  directors  had  not  authorized  the 
contract.  Union  Pac.  Ry.  v.  Chicago, 
etc.  Ry.,  51  Fed.  Rep.  309  (1892).  A 
282 


CH.  XXXVI.]  STOCKHOLDEES'    MEETINGS CALLS.  [§  599. 

holders'  meeting  of  the  validity  of  a  claim  against  the  company  is 
valid,  even  though  the  meeting  was  not  called  in  accordance  with 
the  statutes,  it  not  appearing  that  any  stockholder  has  ever  ob- 
jected.^ Although  a  stockholder  is  present  at  a  meeting  at  which 
an  increase  in  capital  stock  is  voted,  yet  he  may  object  thereto  on 
the  ground  that  special  notice  was  not  given  that  the  question  of 
the  increase  would  be  voted  on  at  that  meeting,  inasmuch  as  if 
such  notice  had  been  given  other  stockholders  might  have  at- 
tended and  changed  the  result.^  But  the  court  will  refuse  to  set 
aside  an  election  where  every  share  of  stock  was  represented  at 
the  election,  even  though  the  minority  refuse  to  vote  on  the  ground 
that  the  meeting  had  been  called  on  less  than  ten  da3's'  notice,  re- 
quired by  the  statute.' 

Difficulty  as  to  waivers  has  been  encountered  where  by  statute 
or  by  charter  the  notice  must  be  published  or  must  be  given  a 
specified  length  of  time  before  the  meeting  is  held.  This  question 
arises  often  in  regard  to  the  first  and  organization  meeting  of  the 
company,  or  in  regard  to  a  meeting  to  increase  the  capital  stock, 
or  to  issue  bonds,  or  to  give  a  mortgage,  or  to  effect  a  consolida- 
tion. The  rule,  however,  is  now  well  established  that  such  statu- 
tory notice  is  for  the  benefit  of  the  stockholders  themselves,  and,  if 
they  waive  it,  the  meeting  and  all  the  proceedings  are  as  valid  as 
they  would  be  had  the  full  statutorj^  notice  been  given.* 

stockholder  who  takes  part  in  a  meet-  without  the  capital  being    first    sub- 

ing  cannot  afterwards  object  that   it  scribed  and  without  the  others,  if  they 

was  not  properly  called.     Weinburgh  do  not  object.     McGinty  v.  Athol,  etc. 

V.   Union,  etc.   Co.,   55  N.   J.   Eq.  640  Co.,  155  Mass.  183  (1892).     Notice  may 

(1897).     Objections  to  the  regularity  of  be  waived.  People  v.  Twaddell,  18  Hun, 

the  notice  which  was  given  are  waived  427  (1879);  54  AtL  Rep.  254. 

if  all  are  present  at  the  meeting  and  '  Clark  v.  Warwick,  etc  Co.,  174  Mass. 

do  not    object    to    such    irregularity.  434  (1899). 

Stebbins  v.  Merritt,  64  Mass.  27  (1852);  2  Jones  v.  Concord,  etc.  R.  R.,  67  N. 
Richardson  v.  Vermont,  etc.,  44  Vt.  613  H.  119  (1891);  aflf'd,  67  N.  H.  234  (1892). 
(1872),  holding  that  objections  to  the  ^  In  re  Grifiing  Iron  Co.,  63  N.  J.  L. 
proceedings  of  a  meeting  called  by  a  168  (1898);  aff'd,  63  N.  J.  L.  357  (1899). 
notice  which  did  not  state  what  its  *  A  constitutional  and  statutory  re- 
object  was,  had  been  waived  by  a  quirement  that  bonded  debt  shall  only 
ratification  at  a  later  meeting;  Jones  be  incurred,  when  voted  at  a  meeting 
V.  Milton,  etc.  Turnp.,  7  Ind.  547  (1856).  called  on  sixty  days'  notice,  does  not 
where  the  stockholders  not  notified  ap-  prevent  a  waiver  of  such  notice  by  all 
peared  and  voted  by  proxy;  Kenton  the  stockholders  either  by  express 
Furnace  Co.  v.  Mc Alpin,  5  Fed.  Rep.  737  waiver  or  by  attendance  without  such 
(1880).  See  also  §  606,  infra.  Where  notice.  Riesterer  v.  Horton,  etc.  Co., 
several  persons,  their  associates  and  160  Mo.  141  (1901).  A  provision  that 
successors,  are  declared  to  be  a  corpo-  notice  must  be  given  to  stockholders 
ration,  one  of  them  with  new  parties  thirty  days  before  they  vote  in  favor 
may  meet,  organize,  adopt  by-laws,  etc.  of  a  mortgage  may  be  waived  by  them, 

1283 


§  599.] 


STOCKUOLOEKS      MEKTINGS 


CALLS. 


[CII.  XXXVI. 


Participation  as  an  officer  in  issuing  the  call  is  a  waiver  by  him 
of  informalities  as  to  that  call  ;^  and  recognition  of  an  agent  ap- 
pointed at  a  certain  meeting,  by  dealing  and  offering  to  deal  with 


and  a  waiver  may  be  by  failure  to  ob- 
ject. Bridgeport  Electric,  etc  Co.  u 
Header,  72  Fed.  Rep.  115  (1895).  Even 
though  the  statutory  notice  of  a  stock- 
holders' meeting  is  not  given,  a  mort- 
gage autliorized  by  the  board  of  direct- 
ors elected  at  such  a  meeting  is  legal, 
where  the  corporation  receives  the 
benefit  therefrom,  without  any  stock- 
holder objecting.  Atlantic  Trust  Co. 
V.  The  Vigilancia,  73  Fed.  Rep.  452 
(1896).  Where  a  mortgage  is  approved 
by  the  representatives  of  all  the  stock 
except  two  shares,  it  is  good  as  an 
equitable  mortgage,  even  though  the 
meeting  of  stockholders  authorizing  it 
was  not  called  by  advertisement,  as  re- 
quired by  statute.  Central  Trust  Co.  v. 
Bridges,  57  Fed.  Rep.  753  (1893).  A 
statutory  provision  that  a  certain 
notice  must  be  given  of  a  meeting  to 
authorize  a  mortgage  may  be  waived. 
Central  Trust  Ca  v.  Condon,  67  Fed. 
Rep.  84(1895).  Although  the  statutes 
of  Montana  require  that  a  mortgage 
may  be  given  only  after  a  stockhold- 
ers' meeting  convened  by  publication 
of  notice,  etc.,  has  voted  it,  yet  all  the 
stockholders,  by  voting  therefor,  waive 
the  required  notice,  and  no  one  can 
complain.  The  mortgage  is  valid. 
Campbell  v.  Argenta,  etc.  Co.,  51  Fed. 
Rep.  1  (1892).  Although  the  constitu- 
tion provides  that  there  shall  be  sixty 
days'  notice  of  the  meeting  to  author- 
ize the  issue  of  bonds,  yet  where  all  the 
stockholders  assemble  and  authorize 
the  issue  without  any  notice,  and  the 
bonds  pass  into  bona  fide  hands,  they 
may  be  enforced.  The  absence  of  a 
nominal  stockholder  whose  stock  is 
really  owned  by  one  of  those  present  is 
immaterial.    Wood  v.  Corry,  etc.  Co., 


44  Fed.  Rep.  146  (1890).  A  consti- 
tutional provision  in  regard  to  notice 
being  given  of  a  meeting  for  increasing 
the  stock  or  bonds  of  a  corporation  is 
for  the  benefit  of  the  stockholders  and 
may  be  waived  by  them,  or  the  omis- 
sion of  it  may  be  ratified  by  them. 
Nelson  v.  Hubbard,  96  Ala.  238  (1892). 
The  voluntary  dissolution  of  a  com- 
pany under  the  statute,  but  without 
the  ten  days'  notice  required  by  tlm 
charter,  is  not  such  a  dissolution  as  to 
prevent  creditors  from  attaching  tho 
property  of  the  company  as  though  no 
dissolution  had  been  had.  Cleveland, 
etc.  Co.  V.  Taylor,  etc.  Co..  54  Fed.  Rep. 
82  (1893).  But  the  dissolution  cannot 
be  enjoined  by  creditors  in  the  absence 
of  fraud.  Cleveland,  etc.  Co.  v.  Taylor, 
etc.  Co.,  54  Fed.  Rep.  85  (1893).  In  gen- 
eral, see  Columbia  Nat.  Bank's  Appeal, 
16  W.  N.  Cas.  (Pa.)  357  a885);  Manhat- 
tan Hardware  Co.  v.  Phalen.  128  Pa.  St. 
110  (1889);  Kenton  Furnace  Co.  v.  Mc- 
Alpin,  5  Fed.  Rep.  737  (1880),  where  no 
notice  was  given,  although  prescribed 
by  the  charter  and  by-laws.  It  wa' 
held  to  have  been  waived  by  the  pres- 
ence of  all  the  stockholders  at  th& 
meeting  and  their  participation  in  its 
action;  Re  British  Sugar  Ref.  Co.,  3^ 
Kay  &  J.  408  (1857),  where  it  was  ad- 
judged that  a  shareholder  who  had  re- 
ceived a  circular  notice  of  the  meeting 
and  was  present  could  not  question  th& 
legality  of  the  meeting  on  the  ground 
that  the  charter  required,  in  addition 
to  the  circular,  publication  in  a  news- 
paper, which  was  not  made. 

A  person  who  takes  part  in  a  meet- 
ing cannot  object  that  it  was  held  on 
five  days'  notice  instead  of  fourteen,  as 
required  by  the  charter.     Bucksport, 


1  Bucksport,  etc.  R.  R.  v.  Buck,  68  Me. 
81  (1878);  Schenectady,  etc.  Plank  Road 
Co.  V.  Thatcher,  11  N.  Y.  102  (1854).  The 
stockholder  who,  as  a  director,  votes 


to  call  the  annual  meeting  at  an  irregu- 
lar time  cannot  question  the  acts  of 
such  meeting.  Christopher  v.  Noxon,  4 
Ont.  Rep.  (Can.)  672  (1883). 


1284 


CH.  XXXVI.] 


STOCKHOLDERS     MEETINGS  —  CALLS. 


[§  599. 


him  as  the  agent  of  the  company,  is  a  waiver  of  the  right  to  notice 
of  that  meeting.^  One  stockholder  cannot  avail  himself  of  the 
neglect  of  the  corporate  officers  to  give  due  notice  to  another  stock- 
holder who  does  not  himself  complain.^  But  the  failure  of  a  stock- 
holder to  attend  the  stockholders'  meeting  is  not  a  waiver  of  his 
right  to  object  to  the  acts  of  the  meeting  as  ultra  vires,  even  though 


etc.  R  R  u  Buck,  68  Me.  81    (1878); 
Chamberlain  v.   Painesville,  etc,  R.  R., 
15  Ohio  St.  225  (1864).  A  failure  to  give 
the  statutory  notice  of  the  first  meet- 
ing is    immaterial  where  all  but  one 
stockholder  were  present  and  he  after- 
wards ratified  all  that  was  done.     Bab- 
bitt V.  East,  etc.  Co.  (N.  J.,  1876);  Stew. 
Dig.,    p.  208,  §  la      To    same    effect, 
p.  525,  supra,  and  §  593,  supra;  also 
:?  288,  supra.  A  stockholder  who  knows 
■>f  and  approves  of  a  proposed  sale  of  a 
railroad  by  a  stockholders'  vote  as  al- 
lowed by  statute  cannot  have  the  sale 
set  aside  on  the  ground  that  he  was 
not  notified  of  nor  present  at  the  meet- 
ing voting  such  sale,  but  he  must  be 
paid  the  value  of  his  stock.     Young  v. 
Toledo,  etc.  R,  R.,  76  Mich.  485  (1889). 
The  constitutional  provision  that  bonds 
or  stock  shall  not  be  increased  except 
in  a  certain  way  does  not  apply  to  an 
original  issue  of  bonds.    Union,  etc.  Co. 
V.  Southern,  etc.  Co..  51  Fed.   Rep.  840 
(1892).     Directors  elected  at  a  meeting 
called  on  thirteen  days'  notice  instead 
of  fourteen,  as  required  by  statute,  may 
make  calls,  where  their    election   has 
been  confirmed  by  a  subsequent  annual 
general  meeting.     Briton,  etc.  Assoc,  u. 
Jones,  61  L.  T.  Rep.  384  (1889);   People 
V.  Peck,  11   Wend.  604  (1834),  holding 
that  a  failure  to  comply  with  a  statu- 
tory requirement  regarding  notice  will 
not  affect  the  proceedings  of  a  meeting 
of  a  religious  corporation  where  there 
is  no  claim  that  every  voter  was  not 
present,  or  that  evil  resulted  from  the 
omission,  and  no  fraud  was  involved. 
If  all   parties  attended,  they  thereby 
admitted  notica     See  also  Stebbins  v. 
Merritt.  64  Mass.  27  (1852);  Rex  v.  Chet- 
wynd,  7  Barn.  &,  C.  695  (1828),  where 


the  election  of  a  burgess  at  a  meeting 
of  which  no  notice  was  given  was  held 
valid,  because  it  appeared  that  all  the 
members  of  the  electing  body  were 
present;  Rex  v.  Theodorick,  8  East,  543 
(1807).  Cf.  U.  S.  V.  McKelden.  11  Mac- 
Arthur  &  M.  162  (D.  C.  1879),  where  it 
was  held  that,  although  the  date  for 
the  annual  meeting  is  fixed  by  a  by-law, 
the  notice  by  publication  provided  for 
by  the  charter  is  necessary.  See  also 
Re  Long  Island  R  R,  19  Wend.  37  (1837), 
in  which  it  was  said  in  a  dictum  that  a 
notice  regulated  by  statute  "  of  course 
cannot  be  modified,  or  dispensed  with." 
If  all  the  incorporators  meet  and  or- 
ganize, a  statutory  requirement  as  to 
notice  is  waived  and  is  not  necessary. 
Ratification  afterwards  by  one  who 
was  not  present  is  equally  sufficient. 
Benbow  v.  Cook,  115  N.  C.  324  (1894).  A 
corporation  cannot  defend  a  mortgage 
on  the  ground  that  the  consent  of  the 
stockholders  was  not  obtained,  as  re- 
quired by  statute.  Atlantic  T.  Co.  v. 
Crystal  Water  Co.,  72  N.  Y.  App.  Div. 
539  (1902).    See  also  §  808,  infra. 

1  Bryant  v.  Goodnow,  22  Mass.  228 
(1827). 

'^  Nickum  v.  Burckhardt,  30  Oreg.  464 
(1897);  Schenectady,  etc.  Plank  Road 
Co.  V.  Thatcher,  11  N.  Y.  102  (1854).  In 
this  case  the  court  said:  "  The  court  re- 
jected the  offer  of  the  defendant  to 
prove  that  no  notice  had  been  given  of 
the  first  election  of  directors.  I  think 
this  was  properly  rejected,  on  the 
ground  that  the  defendant  could  not 
avail  himself  of  a  neglect  to  give  notice 
to  any  other  stockholder.  The  defend- 
ant himself  was  present  at  that  meeting 
and  voted,  and  was  elected  a  director. 
He  has  not  suffered  by  an  omission  to 


1285 


§§  600,  601.]  stockholders'  meetings  —  calls. 


[CH.  XXX VI.. 


the  notice  of  the  meeting  stated  what  was  to  be  done.^  A  stock- 
holder in  a  corporation  may  be  estopped  from  questioning  the 
validity  of  a  stockholders'  meeting  by  reason  of  his  participation 
in  the  proceedings  b}''  prox}'-,  where  his  agent  was  authorized  to  act 
at  lawful  meetings.^  The  waiver  of  all  the  stockholders  is  essential 
in  order  to  validate  an  election  held  at  a  meeting  not  properly 
called.'  But  where  the  treasurer  has  acted  as  such  for  several 
months  without  objection,  notes  signed  by  the  treasurer  cannot  be 
repudiated  on  the  ground  that  his  election  was  invalid  because  the 
stockholders'  meeting  was  not  properly  called.*  He  is  a  de  facto 
officer.^ 

§  600.  Notice  is  'presumed  to  have  leen  regularly  given. —  It  is  a 
presumption  of  law  that  proper  and  valid  notice  of  a  corporate 
meeting  has  been  duly  given  to  every  stockholder,  and  that  the 
meeting  itself  was  regularly  and  lawfully  held.  The  burden  of 
proof  is  therefore  upon  him  who  alleges  want  of  notice  or  insuffi- 
ciency of  notice,  or  attacks  the  regularity  and  validity  of  the  pro- 
ceedings.^ 

§  601.  Adjourned  meetings. — An  adjourned  meeting  is  but  a  con- 
tinuation of  the  meeting  which  has  been  adjourned,  and  when  that 
meeting  was  regularly  called  and  convened  and  duly  adjourned, 


serve  notice,  and  he  is  not  in  a  situation 
to  object  as  to  others."  A  stockholders' 
meeting  held  without  notice  or  call 
cannot  be  objected  to  by  those  who 
participate  or  receive  the  benefits  of  it. 
Handley  v.  Stutz,  139  U.  S.  417  (1891). 
A  stockholder  who  takes  part  cannot 
object  that  another  stockholder  had  no 
notice.  Re  Union  Hill  Silver  Co.,  23 
L.  T.  Rep.  400  (1870);  Re  British,  eta  Co., 
3  Kay  &  J.  408  (1857).  A  party  who  did 
not  attend  the  meeting  cannot  object 
that  the  inspectors  were  not  sworn.  Re 
Mohawk  &  Hudson  R  R,  19  Wend.  135 
(1838).    See  also  §  620,  infra. 

1  McFadden  v.  Leeka,  48  Ohio  St.  513 
(1891). 

2  Columbia  Nat.  Bank  v.  Mathews,  85 
Fed.  Rep.  934  (1898).  Even  though  the 
action  taken  at  a  special  meeting  is 
broader  than  as  specified  in  the  notice 
of  the  meeting,  yet  if  a  proxy  votes  and 
the  stockholder  delays  for  over  a  year 
in  objecting,  the  stockholder  is  bound. 
Synnott  v.  Cumberland,  etc.  Assoc,  117 
Fed.  Rep.  379  (1902) 

li 


estate  V.  Pettineli,  10  Nev.  141  (1875). 

*  Merchants'  Nat.  Bank  r.  Citizens' 
Gas  Light  Co  ,  159  Mass.  505  (1893). 

5See§623,  in/ra. 

•»McDaniels  v.  Flower  Brook  Mfg.  Co.. 
22  Vt.  274  (1850);  Porter  v.  Robinson,  30 
Hun,  209  (1883);  Sargent  v.  Webster,  54 
Mass.  497  (1847);  South  School,  etc.  v. 
Blakeslee,  13  Conn.  227,235  (1839);  Lane 
V.  Brainerd,  30  Conn.  565  (1862);  Pitts 
V.  Temple,  3  Mass.  538  (1807);  Wells  v. 
Rodgers,  60  Mich,  525  (1886),  holding 
that  notice  is  presumed,  and  the  burden 
of  proof  in  attacking  the  legality  of  the 
meeting  is  on  the  plaintiff.  See  also 
§  606,  infra.  All  the  stockholders  are 
presumed  to  have  had  notice  of  a  meet- 
ing that  has  been  held.  Beardsley  v. 
Johnson,  121  N.  Y.  224  (1890).  Cf  Wig- 
gin  V.  Freewill,  etc.  Church,  49  Mass. 
301,  312  (1844).  Notice  of  the  meeting 
and  participation  therein  is  presumed. 
Synnott  v.  Cumberland,  etc.  Assoc,  117 
Fed.  Rep.  379  (1902). 


;86 


CH.  XXXVI.] 


STOCKHOLDERS     MEETINGS  —  CALLS. 


[§  601. 


the  stockholders  may,  at  the  adjourned  meeting,  consider  and  deter- 
mine any  corporate  business  that  might  lawfully  have  been  trans- 
acted at  the  original  meeting.^ 

But  where  there  is  an  absence  of  good  faith,  and  an  adjourned 
meeting  is  held  in  such  a  way  as  to  prevent  certain  of  the  stock- 
holders from  knowing  of  it,  the  proceedings  are  invalid.'  "Where 
the  orio-inal  meetino;  was  dulv  called  and  convened,  the  stockhold- 
ers  are  not  entitled  to  any  other  notice  of  the  adjourned  meeting 
than  that  which  is  implied  in  the  adjournment.'  But  nothing  can, 
without  notice,  be  transacted  at  an  adjourned  meeting  except  the 
business  which  might  have  been  transacted  at  the  first  meeting  if 
a  quorum  had  been  present.*  Even  though  notice  of  an  adjourned 
meeting  is  unnecessary,  yet  if  one  is  given  and  it  is  less  broad  as 


1  Quoted  and  approved  in  Synnott  v. 
Cumberland,  etc.  Assoc,  117  Fed.  Rep. 
379  (1902),  and  in  St^te  v.  Cronan,  23 
Nov.  437  (1897);  Granger  v.  Grubb,  7 
Phila,  350  (1870):  Farrar  v.  Perley,  7 
Me.  404  (1831);  Scadding  v.  Lorant,  3 
H.  L.  Cas.  418  (1851).  Cf.  People  v. 
Batchelor,  22  N.  Y.  128-  (I860),  where 
the  New  York  city  board  of  aldermen 
appointed  a  day  for  the  election  of  a 
city  oflScer.  At  a  subsequent  stated 
meeting  this  resolution  was  rescinded, 
and  then  an  election  was  thereupon 
held.  Held,  that  the  election  wag  void, 
as  some  members  were  absent  from  the 
former  meeting  and  had  no  notice  of 
the  election.  A  board  of  aldermen  can- 
not elect  an  assessor  and  then  at  an  ad- 
journed meeting  reconsider  and  elect 
some  one  else.  State  v.  Phillips,  79  Me. 
506  (1887).  See  also  Harden  burgh  v. 
Farmers',  etc.  Bank,  3N.  J.  Eq.  68  (1834), 
where  the  stockholders  at  the  first 
meeting  proceeded  to  an  election  in 
spite  of  an  adjournment  by  the  com- 
missioners, and  the  election  was  upheld. 
A  meeting  adjourned  for  want  of  a 
quorum  may  at  the  adjourned  meeting 
proceed  to  business,  if  a  quorum  is 
present,  and  no  notice  of  the  adjourned 
meeting  is  necessary  where  the  charter 
or  by-laws  provided  for  such  adjourn- 
ment. Smith  V.  Law,  21  N.  Y.  296  (1860), 
involving  a  meeting  of  the  board  of 
directors. 

^  State  V.  Bonnell,  35  Ohio  St.  10  >  1878). 


Where  an  election  is  held,  after  many 
adjournments,  and  a  minority  are  pres- 
ent and  elect  directors,  who  repudiate 
a  contract  which  exists  with  the  holder 
of  a  majority  of  the  stock,  the  latter 
being  ignorant  of  the  intent  to  elect 
officers,  equity  will  enjoin  the  repudia- 
tion of  the  contract.  New  York,  etc. 
Co.  V.  Parrott,  36  Fed.  Rep.  462  (1888). 

3  Smith  V.  Law,  21  N.  Y.  296  (1860): 
Warner  v.  Mower,  11  Vt.  385  (1839).  In 
U.  S.  V.  McKelden,  11  Mac  Arthur  &  M. 
162  (D.  C.  1879),  it  was  held  that  the 
proceedings  of  an  original  meeting 
being  invalid  by  reason  of  insufficient 
notice,  the  adjourned  meetings  were 
invalid  also,  they  being  merely  continu- 
ations of  the  original.  To  same  effect, 
Wiggin  V.  Freewill,  etc.  Church,  49  Mass. 
301  (1844) . 

4Regina  v.  Grimshaw,  10  Q.  B.  747 
(1847).  No  business  can  be  done  at  an 
adjourned  meeting  that  could  not  have 
been  done  at  the  original  meeting. 
Christophers.  Noxon,  4  Ont.  Rep.  (Can.) 
672  (1883).  Where  a  meeting  of  the 
board  of  directors  could  not  authorize 
suit  to  collect  assessments  because  the 
assessments  were  not  yet  due,  an  ad- 
journed meeting  of  that  meeting  can- 
not authorize  such  suit,  all  of  the  direct- 
ors not  being  present  at  the  adjourned 
meeting  and  no  new  notice  thereof 
having  been  given.  Bank  of  National 
Citv  r.  Johnston,  133  Cal.  185  (1901). 


1287 


§601.]  stockholders'    MEETINGS CALLS.  [CH.  XXXVI. 

to  the  business  to  be  transacted  than  the  original  notice,  the  second 
notice  governs.^  Where  the  president  and  a  portion  of  the  mem- 
bers of  an  unincorporated  association  withdraw  from  a  meeting, 
the  remaining  members  may  adjourn  the  meeting  and  at  the  ad- 
journed meeting  may  take  action,  a  quorum  being  present.-  A 
minority  of  an  unincorporated  voluntary  association  may  adjourn 
from  time  to  time,  even  if  a  majority  of  all  the  members  is  neces- 
sary to  constitute  a  quorum  in  order  lawfully  to  transact  business.' 

^Synnott.?;.  Cumberland,  etc.  Assoc,  to  every  member  was  unnecessary,  for 

117  Fed.  Rep.  379  (1902).  it  was  the  same  in  effect  as  if  the  asso- 

2  Ostrom  1?.  Greene,  161  N.  Y.  353  (1900).  ciation  had  sat  in  continuous  session 

sOstrom  v.   Greene,   161    N.   Y.   353  and   had  adjourned    each   day  to  the 

(1900),  the  court  saying  in  regard  to  the  next." 

adjourned  meeting:  "  Personal  notice 

128S 


CHAPTEE  XXXYII. 


ELECTIONS  AND  OTHER  CORPORATE  MEETINGS. 


§  602.    Scope  of  the  subject. 

603.  Elections  are  to  be  by  the  stock- 

holders, and  may  be  com- 
pelled by  mandamus, 

604.  The  meeting  must  be  held  at 

the  prescribed  hour,  which 
must  be  reasonable. 

605.  Inspectors    of    election  —  Con- 

ductina;  and  closing  elections. 

606.  Conducting  and  closing  meet- 

ings generally  —  Irregulari- 
ties and  informalities  —  Min- 
utes of  meeting. 

607.  The  quorum  —  A   majority   of 

the  stockholders  attending  a 
meeting  may  transact  busi- 
ness. 

608.  The  majority  of  votes  cast  con- 

stitutes an  election. 

609.  Is  every  share  of  stock  entitled 

to  one  vote? 
609a.  Cumulative  voting. 

610.  Proxies. 

611.  The  transfer  book  as  evidence 

of  a  right  to  vote. 

612.  The  right  of  trustees,  pledgees, 

administrators,  etc.,  to  vote. 

613.  The    corporation    cannot   vote 

upon  shares  of  its  own  stock. 

■614.  Issuing  stock  in  order  to  carry 
an  election. 

^15.  Where  one  corporation  owns  a 
majority  of  the  stock  of  a 
rival  company,  may  it  vote 
the  stock  and  control  the  lat- 
ter company  V 

616.  Illegal  or  fraudulent  elections  — 
The  remedy  of  injunction 
against  elections  and  against 
voting  particular  stock. 

■617.  Illegal  or  fraudulent  elections  — 
The  remedies  of  quo  warranto 
and  mandamiis. 

618.  Illegal  or  fraudulent  elections  — 
The  remedy  by  injunction 
against  directors  acting,  and 
the  remedy  of  a  suit  in  equity 
where  the  validity  of  the 
election  arises  incidentally. 

^19.     Illegal  or  fraudulent  elections  — 


§  620. 


621. 
622, 


Statutory  remedy  by  petition 
to  a  court  of  equity. 

Who  may  complain  of  an  illegal 
election  —  A  new  election  is 
not  granted  if  the  i-esult  will 
be  the  same. 

"Corners"  in  stock. 

Voting  trusts  and  pooling  agree- 
ments —  Restrictions  on  right 
to  vote  or  sell  stock  —  Con- 
tracts as  to  voting,  elections, 
directors,  and  control  sell- 
ing—  Contracts  as  to  direct- 
ors, elections,  voting,  and  con- 
trol —  Combinations  of  stock- 
holders. 
(a )  Con  tracts  between  stock- 
holders  to  vote  together  — 
Contracts  involving  changes 
of  officers  and  payment  of 
salaries. 
(ft)  Restrictions  on  the  right  to 
vote. 

(c)  Conti-acts  between  stockhold- 
holders  not  to  sell  their  stock, 
except  to  each  other. 

(d)  Charter  provisions  and  by- 
laws restricting  the  right  to 
sell  stock  —  Unincorporated 
associations. 

(e)  Irrevocable  proxies. 

(/)  Deposit  of  certificates  of  stock 
with  trustees,  either  with  or 
without  a  transfer  of  same  to 
the  trustees. 

(g)  One  corporation  owning  and 
holding  the  stock  of  other 
corporations. 

623.  Who  may  be  a  director  or  cor- 

porate officer? — Qualification 
shares. 

624.  Acceptance  and  resignation  of 

office  and  failure  to  elect  of- 
ficers—  Removal  of  directors. 

625.  Stockholders  can   act  only  at 

corporate  meetings. 
626,627.     Stockholders  cannot  carry 
on  the  business  of  or  enter 
into  contracts  for  the  corpora- 
tion. 


1289 


§§  G02,  603.]  ELECTIONS  —  COKPORATE    MEETINGS.  [CH,  XXXVII^ 

^  602,.  Scojye  of  the  subject. —  The  business  which  the  stocl<hold- 
ers  of  a  corporation  in  meeting  assembled  have  the  power  to  trans- 
act is  not  extensive,  but  it  is  of  great  importance.  They  elect  the 
directors,  pass  upon  amendments  to  the  charter,  determine  whether 
any  increase  of  the  capital  stock  shall  be  made,  make  the  by-laws, 
and  dissolve  or  continue  the  corporation.  These  constitute  the  chief 
functions  of  a  stockholders'  meeting.  They  are  extraordinary  in 
their  character,  and  although  they  are  exercised  at  long  intervals- 
are  of  vital  importance.  This  chapter  treats  of  the  business  which 
may  be  transacted  at  stockholders'  meetings  and  of  the  methods  of 
its  transaction. 

§  603.  Elections  are  to  he  hi/  the  stoclihoJders,  and  may  he  com- 
pelled hy  mandamus. —  At  common  law  the  directors  of  a  corpora- 
tion are  to  be  elected  by  the  stockholders  in  corporate  meeting  as- 
sembled.^ Generally  this  is  declared  to  be  the  law  bv  charter  or 
statutory  provisions.  A  contract  and  by-law  giving  a  voting  power 
to  bondholders  at  corporate  elections  is  void  as  against  public  pol- 
icy and  the  statutes,  where  the  statutes  prescribe  that  the  direct- 
ors shall  be  elected  by  the  stockholders  and  shall  not  be  elected  in 
any  other  manner.'-  In  most  corporations  the  president,  and  also 
the  vice-president,  secretary,  treasurer,  and  agents  of  the  corpora- 
tion, are  elected  or  appointed,  not  by  the  stockholders,  but  by  the 
directors.  All  these  matters,  however,  are  generally  regulated  by 
the  charter  or  a  statute. 

At  common  law  mandamus  lies  to  compel  an  election  of  corpo- 
rate officers.* 

All  corporations  for  profit  have  power  to  elect  a  board  of  direct- 
ors.'' 

The  legislature  may  amend  the  charter  so  as  to  increase  the  num. 

lit  has  been  held  that  stockholders  590(1885).     "The  power  inheres  in  the 

cannot  fill  vacancies  in  the  board  of  corporation  to  hold  an  election,"  where 

directors  at  a  special   meeting,  when  the    charter    or    statutes    are    silent, 

elections  can  only  be  at  annual  meet-  Wright  v.  Commonwealth,  109  Pa.  St. 

ings.     Moses  v.  Tompkins,  84  Ala.  613  560(1885).  "The  power  of  electing  both 

(1887).     The  soundness,  however,  of  this  officers  and  members  is  an  incident  to 

decision  may  well  be  doubted.    The  by-  every  corporation.     It  is  not  necessary 

laws  may  and  generally  do  give  this  that  such  a  power  should  be  expressly 

power  to  the  directors.  And  see  dictum  conferred  by  the  charter."'     Common- 

in  Re  Union   Ins.    Co.,   22  Wend.  591  wealth   v.  Gill,  3  Whart.  (Pa.)  228,  247 

(1840),  and  §  624,  infra.  (1837).  Authority  in  a  charter  to  a  cem- 

2  Durkee  v.  People,  15!^  lU.  354  (1895).  etery  corporation  to  do  all  things  inci< 

'  See  §  593,  supra.  dent  to  a    corporation  does  not  give 

*  A  bank  may  have  directors  though  power  to  issue  stock,  and  hence  an  elec- 

the  statute  does  not  provide  for  them,  tion  by  so-called  stockholders   is   not 

All  private  corporations  may  have  di-  legal.     Cooke  v.  Marshall,   196  Pa.  St^ 

rectors.     Hurlbut  v.  Marshall.  62  Wis.  200  (1900). 

1290 


CH.  XXXVII.]  ELECTIONS  —  CORPOEATE   MEETINGS. 


[§  604. 


ber  of  directors;^  but  it  cannot  deprive  the  members  of  the  corpo- 
ration of  the  privilege  of  electing  its  directors.^ 

Although  the  corporation  is  not  a  going  concern,  nevertheless  it 
may  have  an  election  of  directors.^ 

§  604.  Tlie  meeting  must  he  held  at  tlie  prescribed  lioiir,  wMcli 
must  he  reasonahle. —  The  particular  time  at  which  corporate  meet- 
ings shall  be  held  is  often  prescribed  in  the  charter  or  a  statute  or 
in  the  by-laws  of  the  corporation.  "When  not  so  prescribed  it  is 
fixed  by  the  officers  who  call  together  the  corporate  meeting.  But, 
in  whatever  way  it  is  decided  upon,  the  meeting  must  be  convened 
at  the  time  decided  upon,  or  within,  a  reasonable  time  thereafter.^ 
Accordingly  if  a  meeting  is  convened  before  the  hour  at  which  it  is 
called  and  business  is  transacted,  the  proceedings  will  be  invalid.^ 


1  Mower  v.  Staples,  32  Minn.  284  (1884). 
See  also  Gray  v.  Coffin,  63  Mass.  192 
(1852);  Longley  v.  Little,  26  Me.  163 
(1846);  Payson  v.  Withers,  5  Biss.  269 
(1873);  s,  o.,  19  Fed.  Cas.  29:  Joy  v.  Jack- 
son,  etc.  Co.,  11  Mich.  155  (1863);  Lincoln, 
etc.  Bank  v.  Richardson,  1  Me.  79(1820); 
Greenville,  etc.  R.  R.  v.  Johnson,  8  Baxt. 
(Tenn.)  833  (1874);  Fall  River  Iron 
Works  V.  Old  Colony,  etc.  R.  R,  87 
Mass.  221  (1862).  See  also  g§  499,  500, 
supra. 

2  The  legislature  cannot  arbitrarily 
name  and  appoint  trustees  of  an  edu- 
cational corporation,  the  charter  pro- 
viding that  vacancies  shall  be  filled  by 
the  remaining  trustees.  Sheriff  v. 
Lowndes,  16  Md.  357  (1860).  It  cannot 
give  to  the  city  of  Louisville  the  power 
to  elect  the  trustees  of  the  University 
of  Louisville,  an  educational  corpora- 
tion. Louisville  v.  President,  etc.,  15  R 
Mon.  (Ky.)  642  (1855).  It  cannot  vest 
the  government  of  an  incorporated 
academy  in  a  new  board  of  trustees. 
Norris  v.  TriLstees,  etc.,  7  Gill  &  J.  (Md.) 
7  (1834).  Under  the  reserved  power  to 
amend  or  repeal  a  charter,  the  legisla- 
ture may  amend  the  charter  of  an  agri- 
cultural college  which  has  private  stock- 
holders, but  to  which  the  state  con- 
tributes funds,  so  that,  instead  of  the 
state  having  four  directorsout  of  eleven, 
the  state  shall  have  seven  out  of 
twelve.     Jackson  v.  Walsh,  75  Md.  304 


(1892),  But  see  Sage  v.  Dillard,  15  B. 
Mon.  (Ky.)  340,  357  (1854),  and  §§  500, 
501,  notes,  supra;  67  N.  E.  Rep.  207. 

3  Beardsley  v.  Johnson,  121  N.  Y.  224 
(1890). 

*  Where  a  meeting  was  held  by  a 
minority  of  the  stockholders  several 
hours  after  the  time  fixed  in  the  notice* 
and  an  adjournment  made  until  the 
following  day,  at  which  adjourned 
meeting,  without  the  knowledge  of  the 
other  members,  an  election  was  held, 
the  election  was  unfair  and  invalid. 
State  y.  Bonnell,  35  Ohio  St.  10  (1878). 
But  a  delay  of  an  hour  and  five  min- 
utes after  the  time  specified  in  the  no- 
tice is  not,  as  a  matter  of  law,  an  un- 
reasonable delay  which  will  vitiate  the 
proceedings.  South  School  District  v. 
Blakeslee,  13  Conn.  227,  235  (1839).  The 
court  will  not  sustain  an  election  where 
the  majority  were  given  to  understand 
that  the  election  would  go  over  to  a 
later  hour  in  the  day,  even  though  no 
formal  adjournment  was  had.  State  v. 
Smalley,  7  Ohio  C.  C.  400  (1893). 

*  So,  where  a  meeting  was  called  for 
twelve  o'clock,  but  was  called  to  order 
and  organized  fifteen  minutes  before 
twelve,  it  was  held  to  be  a  surprise  and 
a  fraud  upon  such  of  the  stockholders 
as  were  not  actually  present  at  that 
hour,  and  that  in  consequence  the  pro- 
ceedings were  irregular  and  void.  Peo- 
ple V.  Albany,  etc.  Pu  R.,  55  Barb.  344 


1291 


§  605.] 


ELECTIONS  —  CORPORATE    MEETINGS. 


[CU.  XXXVII, 


A  meeting  called  to  order  at  sun  time  and  then  postponed  to  stand- 
ard time,  before  any  proceedings  are  had,  is  legal.* 

Frequently  the  particular  office  or  place  for  meeting  within  the 
state  is  specified  in  tlie  charter  or  by-laws  of  the  corporation.  In 
that  event  a  meeting  held  at  a  different  place  will  be  irregular, 
and  the  proceedings  at  such  a  meeting  void  and  ineffectual,  if  ob- 
jected to.- 

§  605.  Inspectors  of  election  —  Conducting  and  closing  elections. 
Ordinarily  a  chairman  and  inspectors  of  election  are  elected  or  ap- 
pointed by  the  stockholders.'  The  presiding  officer  at  a  stock- 
holders' meeting  need  not  be  a  stockholder,*  and  he  need  not  be 
elected  with  any  particular  formality.* 

The  inspectors  of  election  need  not  be  stockholders.^     If  inspect- 


(1869).  Where  commissioners,  after 
calling  a  meeting  of  subscribers,  ordered 
the  election  postponed,  but  the  sub- 
scribers nevertheless  refused  to  post- 
pone and  proceeded  with  the  election, 
the  election  is  not  void,  unless,  in  the 
opinion  of  the  court,  a  postponement 
was  clearly  necessary.  Harden  burgh 
V.  Farmers',  etc.  Bank,  3  N.  J.  Eq.  68 
( 1834).  Quaere,  in  this  case,  whether  the 
election  might  not  have  been  avoided 
if  any  considerable  number  of  the 
stockholders  were  deprived  of  their 
election  franchise  by  the  failure  to 
postpone.    See  also  §  605,  infra. 

1  Proctor,  etc.  Co.  v.  Finley,  98  Ky. 
405  (1895). 

2  Where  the  customary  place  of  meet- 
ing of  a  corporation  is  abandoned,  and 
a  new  place  fixed  upon  in  a  regular 
and  lawful  manner,  a  meeting  at  the 
old  place  is  irregular,  and  the  proceed- 
ings at  such  a  meeting  are  invalid. 
Miller  r.  English,  21  N.  J.  L.  317  (1848). 
The  meeting  must  be  held  at  the  usual 
place.  American  Primitive  Soc.  v. 
Pilling,  24  N.  J.  L.  653  (1855).  Cf.  Mc- 
Daniels  v.  Flower  Brook  Mfg.  Co.,  22 
Vt.  274  (1850).  holding  that  a  meeting 
at  a  residence  is  good,  if  all  assent,  even 
though  the  statute  requires  the  meet- 
ings to  be  at  the  counting-room  of  the 
company, 

3  Where  the  statutes  give  each  share 
a  vote,  a  by-law  of  the  directors,  pre- 
scribing who  shall   preside    and   pass 


1292 


upon  the  qualification  of  voters  at  the 
annual  meeting,  will  not  be  presumed 
to  be  in  violation  of  the  statute,  the  di- 
rectors having  power  to  make  the 
by-laws.  Hence,  an  injunction  will  not 
be  granted  at  the  instance  of  a  stock- 
holder against  the  by-law  being  carried 
out  Mitchell  v.  Colorado,  eta  Co.,  117 
Fed.  Rep.  723  (1902).  The  same  transac- 
tion was  involved  in  Bartlett  v.  Gates. 
118  Fed.  Rep.  66,  and  a  different  con- 
clusion was  reached. 

*  Stebbins  v.  Merritt.  64  Mass.  27 
(1852). 

5  Acquiescence  in  a  person's  assum- 
ing to  act  as  chairman  of  a  stockholders' 
meeting  validates  his  acting  as  such. 
Re  Argus  Printing  Co.,  1  N.  D.  434 
(1891). 

6  People  V.  Albany,  etc.  R.  R,  55  Barb 
344,  373  (1869),  holding  also  that,  al 
though  an  inspector  is  required  by 
by-law  to  be  a  stockholder,  yet  the  elec- 
tion of  one  who  is  not  a  stockholder  is 
voidable  and  not  void.  An  inspector 
may  be  a  candidate  for  directorship. 
Ex  parte  Willcocks,  7  Cow.  402  (1827). 
A  stockholder  may  be  an  inspector,  but 
it  is  better  to  have  an  outside  disin- 
terested person.  Dickson  v.  McMurray, 
28  Grant's  Ch.  Rep.  (Can.)  533  (1881). 
Where  the  scrutineers  or  inspectors  are 
also  candidates  for  election  as  directors, 
and  they  pass  upon  an  instrument 
which  affects  the  right  to  vote  a  ma- 
jority of  the  stock,  such  stock  being  in 


CH.  XXXVTI.]  ELECTIONS COEPORATE    MEETINGS 


[§605. 


ors  are  provided  for  by  the  charter,  and  they  do  not  act  or  are 
enjoined  from  acting,  the  stockholders  may  appoint  others  to  take 
their  place.^  The  duties  of  the  inspectors  are  ministerial  and  not 
judicial.  Their  discretion  and  powers  of  investigation  are  very 
limited.^  Even  though  by  the  by-laws  the  decision  of  the  inspect- 
ors of  election  is  made  final  and  conclusive,  yet  their  decision  may 
be  attacked  for  fraud  in  rejecting  proxies.^  The  exclusion  of  a 
vote  at  an  election  may  be  upheld  by  the  court  on  grounds  differ- 
ent from  those  given  at  the  election  itself.* 

A  requirement  that  the  election  shall  be  by  ballot  does  not  in- 
validate an  election  by  show  of  hand  if  no  one  objects.^  Where  a 
ballot  contains  the  names  of  both  candidates,  one  in  print  and  one 
in  writing,  it  is  defective  and  is  not  counted  for  either  candidate.® 
After  the  ballot  has  been  counted  and  announced,  it  is  too  late  to 
permit  the  ballot  to  be  opened  to  receive  the  votes  of  any  who 
have  not  voted. ^ 

Where  no  time  is  specified  by  law  during  which  the  polls  must 
be  kept  open,  it  rests  within  the  sound  discretion  of  the  inspectors 
to  say  when  the  polls  shall  close.^  So  also  it  is  held  that  holding 
the  polls  open  after  the  hour  specified  in  the  notice  for  them  to 
close  will  not,  where  the  inspectors  exercise  a  reasonable  discre- 
tion, invalidate  an  election.^     Failure  to  file  in  the  office  of  the 


the  name  of  another  person,  but  they 
claiming  the  right  as  beneficial  owners 
to  vote  it,  their  decision  practically 
controls  the  election,  and  if  they  de- 
cide in  their  own  favor  the  court  may 
set  the  election  aside.  Dickson  v,  Mc- 
Murray,  28  Grant's  Ch.  Rep.  (Can.)  533 
(1881). 

1  People  V.  Albany,  etc.  R.  R.,  55 
Barb.  344,  357  (1869).  See  also  Re 
Wheeler,  2  Abb.  Pr.  (N.  S.)  361  (1866). 
The  failure  of  the  inspector  so  ap- 
pointed to  take  the  prescribed  oath 
will  not  invalidate  the  election.  Re 
Mohawk,  etc.  R.  R.,  19  Wend.  135  (1838); 
Re  Chenango,  etc.  Ins.  Co.,  19  Wend. 
635  (1839).  Where  by  statute  an  elec- 
tion is  to  be  conducted  by  "inspect- 
ors," one  inspector  is  insufficient.  Re 
Lighthall,  etc.  Co.,  47  Hun,  258  (1888); 
but  see  N.  Y.  L.  J.,  June  29,  1889. 

2  See  §  611,  infra;  Re  Mohawk,  etc. 
R.  R,  19  Wend.  135  (1838).  The  office 
of  the  inspectors  's  ministerial  rather 
than  judicial.  Commonwealth  v.  Woel- 


per,  3  Serg.  &  R.  (Pa.)  29  (1817).  In- 
spectors at  elections  having  once  ac- 
cepted a  vote  and  declared  the  result 
cannot  then  reject  it  and  declare  a  dif- 
ferent result.  Hartt  v.  Harvey,  32  Barb. 
55  (1860). 

3Triesler  v.  Wilson,  89  Md.  169  (1899). 

*  Christopher  v.  Noxon,  4  Ont.  Rep. 
(Can.)  672  (1883). 

5  Christ  Church  v.  Pope,  74  Mass.  140 
(1857).  It  is  not  necessary  that  the  vot- 
ing be  by  ballot,  even  though  the  stat- 
ute so  prescribes.  San  Joaquin  Land, 
etc.  Co.  r.  Beecher,  101  Cal.  70  (1894). 

*•  People  V.  Pangburn,  3  N.  Y.  App. 
Div.  456  (1896). 

7  Forsyth  v.  Brown,  2  Pa.  Dist.  765 
(1893). 

^Re  Chenango  County  Ins.  Co.,  19 
Wend.  634  (1839). 

^Re  Mohawk  &  Hudson  R,  R.,  19 
Wend.  135  (1838).  An  election  is  not 
vitiated  by  the  fact  that  the  polls  are 
kept  open  after  the  designated  hour 
and  votes  received.     Rudolph  i\  Soutb- 


1298 


§  606.] 


ELECTIONS  —  CORPORATE    MEETINGS. 


[CII.  XXXVII. 


county  clerk  the  oath  of  the  inspectors  of  election,  as  required  by 
statute,  does  not  invalidate  the  election.' 

§606.  Conducting  and  closing  meetings  generally  —  Irregular- 
ities and  informalities  —  Minutes  of  meeting. —  The  form  or  mode 
of  conducting  an  election  is  in  general  not  material,  provided  it 
violates  no  positive  provision  of  the  charter  or  of  a  statute  regulat- 
ing it,  is  orderly  and  in  good  faith,  and  is  conducted  by  author- 
ized or  proper  persons.'^  And  as  a  general  rule  of  law,  where,  in 
the  election  of  corporate  officers,  no  particular  mode  of  proceeding 
is  prescribed  by  law,  if  the  wishes  of  the  stockholders  have  been 
fairly  expressed,  and  the  election  was  conducted  in  good  faith,  it 
will  not  be  set  aside  on  account  of  any  informality  in  the  manner 
of  conducting  it.' 

In  the  transaction  of  the  business  of  a  corporation  the  motions 
should  be  put  in  an  intelligible  way  and  then  voted  upon.*  Xever- 
theless,  even  though  no  formal  resolutions  are  passed  or  record 
made,  yet  if  all  the  stockholders  and  directors  are  present,  and  it 
is  agreed  that  certain  things  shall  be  done,  this  may  bind  the  corpo- 
ration.* 

The  parliamentary  usages  are  the  same  as  in  other  bodies,  and 
mere  irregularities  in  the  manner  of  conducting  the  business  are 
immaterial  if  the  sense  of  the  meeting   has   been   fairly  expressed.*^ 


-ern,  etc.  League,  23  Abb.  N.  Cas.  199 
'1889);  People  v.  Albany,  etc.  R.  R.,  55 
Barb.  344,  356,  360  (1869). 

1  Union,  etc.  Bank  v.  Scott,  53  N.  Y. 
App.  Div.  65  (1900). 

2  Fox  V.  Allensville,  etc  Turnp.  Co.,  46 
Ind.  31  (1874). 

3  Philips  V.  Wickham,  1  Paige,  590 
(1829).  Quoted  and  approved  in  Titus- 
ville,  etc.  Dissolution,  8  Pa,  Sup.  Ct.  304, 
309  (1898). 

•*  A  general  understanding  or  assent 
or  want  of  dissent  is  not  equivalent  to 
a  question  being  put  and  voted  upon. 
The  statement  by  a  minister  of  what 
salary  he  wished  and  the  failure  of 
members  to  object  is  not  a  sufficient 
expression  of  the  meeting.  Landers  v. 
Frank,  etc.  Church,  114  N.  Y.  626(1889). 

s  Burke  v.  Sidra  Bay  Co.,  92  N.  W. 
Rep.  568  (Wis,  1902).  where  it  was 
agreed  that  a  stockholder  should  loan 
money  to  the  company.  The  stock- 
holders may  agree  among  themselves 
informally  to  distribute  a  certain  sum 


as  dividends  without  going  through 
the  form  of  corporate  action.  No 
formal  declaration  is  necessary  either 
by  the  stockholders  or  board  of  direct- 
ors, and  a  distribution  of  profits  by 
unanimous  consent  without  corporate 
action  i.s  legal.  Groh's  Sons  v.  Groh,  80 
N.  Y.  App.  Div.  85(1903).  See  also  ^  714, 
infra. 

*>  Philips  V.  Wickham,  1  Paige,  590 
(1829);  i2e  Wheeler,  2  Abb.  Pr.  (N.  S.) 
361  (1866);  Downing  v.  Potts,  23  N.  J. 
L.  66  (1851),  in  which  it  was  held  that 
non-compliance  with  a  statute  requir- 
ing a  list  of  stockholders  entitled  to 
vote  to  be  made  out  ten  days  before  an 
election  will  not  of  itself  make  void  an 
election,  such  provision  being  only  di- 
rectory. A  motion  may  be  put  by  the 
chairman,  although  it  has  neither  been 
made  nor  seconded.  Re  Horbury,  etc. 
Co.,  L.  R.  llCh.  D.  109(1879).  Although 
the  meeting  has  voted  down  two  mo- 
tions to  make  calls,  it  may  then  pass 
another  motion  for  a  larger  one.    Re 


1294 


•CH.  XXXVII.] 


ELECTIONS  —  CORPORATE    MEETINGS. 


[§  606. 


After  the  meeting  is  organized  the  majority  cannot  withdraw 
and  organize  another  meeting.^  Where  a  part  of  the  stockholders 
secede  from  the  meeting,  and  hold  another  on  the  pretext  of  dis- 
order, but  in  fact  by  reason  of  a  previously  devised  plan,  the  elec- 
tion by  the  seceders  is  not  legal."  The  chairman  cannot  adjourn  a 
meeting  against  the  will  of  the  stockholders.  The  stockholders 
may  proceed  to  hold  the  meeting  without  him.' 

Where  the  chairman  refuses  to  entertain  an  amendment,  the  party 
proposing  it  need  not  object  to  the  ruling  or  leave  the  meeting, 
and  even  though  he  then  votes  against  the  main  question,  he  does 
not  waive  his  right  to  object  to  the  resolution  as  passed.*  Although 
the  chairman  declares  a  resolution  duly  carried,  yet  the  court  may 
review  his  decision.^    Where  the  chairman  refuses  to  poll  the  vote 


British,  eta  Co.,  3  Kay  &  J.  408  (1857). 
In  England,  by  statute,  any  five  stock- 
holders may  demand  a  poll.  Re  Phoenix, 
etc.  Co.,  48  L.  T.  Rep.  260(1883);  Hurrell 
&  Hyde,  Directors  and  Officers,  78.  In 
general,  see  also  Gorham  v.  Campbell,  2 
Cal.  135  (1852);  Hardenburgh  v.  Farm- 
ers', etc.  Bank,  3  N.  J.  Eq.  68  (1834);  Peo- 
ple V,  Peck,  11  Wend.  604  (1834).  See 
also  §  605,  supra.  In  State  v.  Pettineli, 
10  Nev.  141  (1875),  the  court  held  that 
an  election  was  illegal  where  there  was 
no  presiding  officer  and  no  inspectors. 
Although  the  notice  of  a  special  stock- 
holders' meeting  states  that  the  reso 
lution  will  be  presented  and  passed 
upon,  to  give  to  each  share  one  vofe, 
provided  such  share  has  been  held  by 
the  party  for  six  months  prior  to  an 
election,  an  amendment  proposed  at 
the  meeting  striking  out  the  latter  part 
of  the  resolution  must  be  considered 
and  put  to  a  vote  by  the  chairman. 
Henderson  v.  Bank  of  Australasia,  L. 
R  45  Ch.  D.  330  (1890).  A  provision  in 
the  charter  to  the  effect  that  the  rights 
of  preferred  stockholders  may  be  modi- 
fied by  a  three-fourths  vote  in  interest 
at  a  meeting  of  the  preferred  stock- 
holders only,  is  strictly  construed,  and 
where  the  statute  provides  for  the 
mode  of  holding  such  meeting  the  pro- 
cedure must  be  strictly  observed.  He- 
mans  V.  Hotchkiss,  etc.  Co.,  [1899]  1  Ch. 
115.  Where  a  voluntary  unincorpo- 
rated association  has  no  constitution  or 


by-laws  or  rules,  the  conduct  of  its 
meetings  may  be  in  accordance  with 
the  ordinary  parliamentary  rules  of 
deliberative  assemblies.  Ostrom  v 
Greene,  161  N.  Y.  353  (1900). 

1  Re  Argus  Printing  Co.,  1  N.  D.  434 
(1891). 

2  Langdon  v.  Patterson.  158  Pa.  St.  476 
(1893). 

3  State  V.  Cronan,  23  Nev.  437  (1897), 
holding  also  that  if  the  president  ille- 
gally adjourns  the  meeting  and  ex- 
cludes the  stockholders  from  the  room, 
they  may  adjourn  to  another  room  and 
hold  the  meeting.    67  N.  E.  Rep.  17. 

^  Henderson  v.  Bank  of  Australasia, 
45  Ch.  D.  330  (1890),  reversing  the  court 
below.  Where  a  special  meeting  is 
called,  under  the  English  statutes,  to 
confirm  or  i*eject  a  resolution  that  had 
been  adopted  by  a  previous  meeting,  no 
amendment  is  in  order.  Wall  v.  Lon- 
don, etc.  Corporation,  [1898]  2  Ch.  469. 

5  Young  V.  South  African,  etc.  Synd., 
[1896]  2  Ch.  268.  In  England  by  statute 
the  decision  of  the  chairman  as  to  a 
vote  is  conclusive,  unless  shown  to  be 
fraudulent.  Wall  v.  London,  etc.  Cor- 
poration, [1899]  1  Ch.  550.  Where  the 
chairman  declares  a  motion  carried  and 
there  is  no  demand  to  poll  the  votes, 
the  court  will  not  inquire  into  the  ques- 
tion of  whether  it  was  carried.  Arnot 
V.  United,  etc.  Lands,  [1901]  1  Ch.  518. 
A  decision  of  the  chair  as  to  whether  a 


vote  was  carried  or  not  is  not  binding 


1295 


§  600.] 


ELECTIONS  —  CORPORATE    MEETINGS. 


[CH.  XXXVII, 


and  declares  the  meeting  adjourned,  the  courts  will  not  necessarily 
interfere.^  If  any  fraud,  surprise,  or  deceit  has  been  practiced  in 
conducting  the  meeting  a  different  rule  prevails.-  There  should  be 
applied  to  stockholders'  meetings  the  rule  in  directors'  meetings 
that  the  majority  cannot  exclude  the  minority  from  being  heard, 
by  delegating  power  to  a  committee;  and  "even  if  the  minority 
had  a  voice  given  to  them,  still,  if  there  existed  a  combination 
among  the  majority,  before  that  voice  was  heard,  to  overbear  it," 
the  acts  of  such  a  body  would  be  illegal.^  The  chairman  may  ter- 
minate the  discussion  after  a  reasonable  time  when  the  majority 
vote  so  to  do.'*  The  right  to  object  to  an  informality  may  be  waived, 
and  a  failure  upon  the  part  of  those  members  not  present  to  pro- 
test promptly,  upon  learning  of  th'«^  informality,  is  a  waiver.'  The 
presumption  is  that  all  proceedings  were  regular  and  lawful.^  The 
minutes  of  a  meeting  duly  signed  are  the  best  evidence  of  what  the 
meeting  did.^    Where  no  written  minutes  are  kept  of  the  proceed- 


where  on  the  face  of  his  statement  his    receive  reports  of  what  takes  place  at 


conclusion  was  incorrect.  *  Re  Caratal 
Mines,  87  L.  T.  Rep.  437  (1902). 

iThe  courts  will  not  interfere  al- 
though the  chairman  of  the  meeting 
refused  to  poll  the  vote  on  a  motion  to 
adjourn,  but  declared  the  meeting  ad- 
journed  on  a  viva  voce  vote  and  left. 
In  regard  to  the  right  to  be  heard  the 
court  refused  to  sustain  a  bill  "  for  the 
purpose  of  enabling  one  particular 
member  of  the  company  to  have  an  op- 
portunity of  expressing  his  opinion  viva 
voce  at  a  meeting  of  the  shareholders." 
MacDougall  v.  Gardiner,  L.  R.  1  Ch.  D. 
13  (1875);  National  Dwellings  Soc.  v. 
Sykes,  [1894J  3  Ch.  159. 

2  Johnston  v.  Jones,  23  N.  J.  Eq.  216 
(1872);  People  v.  Albany,  etc  R.  R.,  55 
Barb.  344  (1869);  State  v.  Pettineli,  10 
Nev.  141  (1875);  Commonwealth  r.  Woel- 
per,  3  Serg.  &  R.  (Pa.)  29  (1817).  See 
also  §§  596,  604,  605,  supra, 

3  Great  Western  Ry.  v.  Rushout,  5  De 
G.  &  Sm.  290,  310  (1852).  Cf.  McDou- 
gall  V.  Gardiner,  L.  R.  1  Ch.  D.  13  (1875). 

■1  Wall  v.  London,  etc.  Corporation, 
[1898]  2  Ch.  469. 

5  State  v.  Lehre,  7  Rich.  L.  (S.  C.)  234, 
325  (1854);  Re  Mohawk,  etc.  R.  R.,  19 
Wend.  135  (1838):  Rex  v.  Trevenen,  2  B. 
&   Aid.  339  (1819).    Stockholders  who 


meetings,  and  who  do  not  object  to 
what  is  being  done,  will  be  considcjred 
as  acquiescing  therein  if  what  is  done 
might  have  been  validly  sanctioned  by 
them  if  present;  but  not  if  what  is  done 
is  altogether  illegal,  and  beyond  the 
power  of  even  all  the  stockholders.  See 
Re  Phoenix  Life  Ass.  Co.,  2  J.  &  H.  441 
(1862);  Irvine  v.  Union  Bank  of  Aus- 
tralia, L.  R.  2  App.  Cas.  366(1877).  Com- 
pare Evans  v.  Smallcombe,  L.  R.  3  H. 
L.  249  (1868);  Spackman  v.  Evans,  L.  R. 
3H.  L.  171  (1868);  Houldsworthu  Evans, 
L.  R.  3  H.  L.  263  (1868);  Phosphate  of 
Lime  Co.  v.  Green,  L.  R.  7  C,  P.  43 
(1871).  See  also  g  607,  infra.  A  ratifi- 
cation by  the  stockholders  of  directors' 
acts  cannot  be  made  by  a  general  reso- 
lution ratifying  "  all  of  the  acts  of  the 
officers. "  Farmers'  L.  &  T.  Co.  v.  San 
Diego,  etc.  St.  Ry.,45  Fed.  Rep.  518  (1891). 

«  Blanchard  v.  Dow,  32  Me.  557  (1851). 
where  it  was  presumed  that  the  elec- 
tion was  by  ballot;  Ashtabula,  etc.  R.  R. 
v.  Smith,  15  Ohio  St.  328  (1864),  where  it 
was  presumed  that  the  requisite  amount 
of  stock  was  subscribed  before  the  elec- 
tion took  place.  See  also  §§  599,  600, 
supra. 

'>  Harrison  v.  Morton.  83  Md.  456  (1896). 
See  also  §  714,  infra.    The  failure  of  in- 


1296 


CH.  XXXVII.]  ELECTIONS  —  CORPORATE    MEETINGS. 


[§  607. 


ings  of  stockholders  they  may  be  proved  by  parol.^  Although  the 
record  does  not  show  that  certain  stock  was  voted,  yet  it  may  be 
proved  by  parol  evidence  that  it  was  voted.-  In  a  meeting  called 
to  affirm  the  action  of  a  prior  meeting,  such  action  may  be  affirmed 
in  part  and  rejected  in  part.^  Stockholders  may  at  a  meeting 
called  for  that  purpose  amend  the  by-laws  so  as  to  increase  the 
number  of  directors,  and  may  elect  such  additional  directors.^ 

§607.  The  quorum  —  A  majority  of  the  stocJcholclers  attending 
a  meeting  may  transact  business.  —  The  right  of  the  majority  to 
rule  in  the  management  of  the  affairs  of  a  private  corporation  is 
fully  established.^  They  may  control  the  company's  business,  pre- 
scribe its  general  policy,  make  themselves  its  agents,  and  take  rea- 
sonable compensation  for  their  services  as  agents.^ 


corporators  or  stockholders  to  make  a 
record  of  their  proceedings  at  that  time 
does  not  invalidate  their  action.  Ben- 
bow  V.  Cook,  20  S.  E.  Rep.  453  (N.  C. 
1894).  The  corporate  minutes  may  be 
signed  after  the  meeting  has  been  held. 
Miles u.  Bough,  3  Q.  B.  845  (1842):  South- 
ampton, etc.  Co.  t'.  Richards,  1  M.  &  Gr. 
448  (lS40j;  Lindley,  Partn.  551.  Con- 
cerning the  mode  of  proving  the  corpo- 
rate minutes,  see  )^  714,  infra. 

'Birmingham,  etc.  Co.  V.  Birming- 
ham Traction  Co.,  128  Ala,  110  (1900). 
A  by-law  may  be  proved  by  oral  evi- 
dence wliere  there  was  no  written 
entry  of  the  same  in  tire  corporate  rec- 
ords. Masonic,  etc.  Assoc,  v.  Severson, 
71  Conn.  719  (1899). 

-  Franklin  T.  Co.  v.  Rutherford,  etc. 
Co.,  57  N.  J.  Eq.  42  (1898). 

3  Re  Trench,  etc.  Co.,  Ltd.,  [1900]  1  Ch. 
408. 

4  In  re  Griffing  Iron  Co.,  63  N.  J.  L. 
168  (1898);  aff'd,  63  N.  J.  L.  357  (1899). 

5  Durfee  v.  Old  Colony,  etc.  R.  R.,  87 
Mass.  230  (1862);  Covington  v.  Coving- 
ton, etc.  Bridge  Co..  10  Bush  (Ky.).  69, 
76  (1873);  East  Tennessee,  etc.  R.  R  v. 
Gammon,  5  Sneed  (Tenn.),  5j67  (1859); 
McBrider.  Porter,  17  Iowa,  SOS  (1864); 
Faulds  V.  Yates.  57  111.  416  (1870);  Leo  v. 
Union  Pacific  R  R,  19  Fed.  Rep.  283 
(1884):  s.  c,  17  Fed.  Rep.  273  (1883); 
Barnes  v.  Brown,  80  N.  Y.  527  (1880); 
Gifford  V.  New  Jersey  R.  R,  10  N.  J. 
Eq.    171   (1854);     Dudley  v.    Kentucky 

(82)  1 


High  School,  9  Bush  (Ky.),  576  (1873). 
See  also  Livingstone  v.  Lynch,  4  Johns. 
Ch.  573  (1820),  in  which  Chancellor 
Kent  clearly  states  that  the  right  of 
the  majority  to  rule  is  one  of  the  chief 
differences  between  a  corporation  and 
a  partnership.  The  majority  rule  at 
common  law.  Commonwealth  v.  Nick- 
erson,  10  Phila.  (Pa.)  55  (1875) ;  New  Or- 
leans, etc.  R  R  V.  Harris,  27  Miss.  517, 
537  (1854).  A  majority  of  the  stock- 
holders control  the  policy  of  the  corpo- 
ration, and  regulate  and  govern  the 
lawful  exercise  of  its  franchise  and 
business,  even  though  the  management 
may  not  seem  to  be  wise.  The  majority 
rule.  Wheeler  1'.  Pullman  Iron,  etc.  Co., 
143  111.  197  (1892).  Where  a  statute  re- 
quires a  three-fourths  vote  in  value  for 
a  reorganization  of  a  company,  the 
stock  not  voted  is  not  counted  to  make 
up  the  three-fourths,  even  though  the 
trustees  who  represent  the  stock  refuse 
to  assent  or  dissent.  Re  Neath,  etc. 
Ry.,  [1892]  1  Ch.  349.  Where  stockhold- 
ers in  an  apartment-house  corporation 
are  entitled  to  rent  apartments  at  a 
rental  to  be  fixed  by  a  majoi'ity  vote  of 
the  stockholders,  an  increased  rental  sO' 
voted  is  legal.  The  by-laws  providing, 
for  such  a  vote  override  a  general  state- 
ment in  a  prospectus  to  the  contrary^ 
the  stockholders  knowing  of  the  by-law. 
Compton  f.  Chelsea,  128  N.  Y.  537  (1891). 
6  Meeker  v.  Winthroplron  Co.,  17  Fed. 
Rep.  48  (1883);  s.  c.  sub  nom.  Winthrop 
297 


GOT.] 


ELECTIONS  —  CORPORATE    MEETINGS. 


[CU.  XX.WII. 


The  question  has  arisen  whether  a  meeting  can  be  held  and  busi- 
ness transacted  when  a  majority  in  interest  of  the  stockholders 
are  not  present.  But  the  law  is  clear  that  those  stockholders  who 
attend  a  duly-called  stockholders'  meeting  may  transact  the  busi- 
ness of  that  meeting,  although  a  majority  in  interest  or  in  number 
of  the  stockholders  are  not  present.^  Where  by  statute  the  quorum 
is  to  be  a  majority  of  the  stockholders,  this  means  a  majority  in  in- 
terest.2 

Of  those  who  attend  the  stockholders'  meeting  a  majority  rule. 
Their  acts  are  as  valid  as  though  they  constituted  a  majority  of  all 
the  stockholders,  or  constituted  a  majority  at  a  meeting  in  which 
a  majority  of  the  stockholders  were  present.'  The  presumption 
always  is  that  a  legal  majority  voted  for  any  act  or  proceeding  that 
appears  to  have  been  passed/ 


Iron  Co.  V.  Meeker,  109  U.  S.  180  (1883).    stockholders,   held    a  meeting,  "  voted 


Cf.  g  662,  mfra. 

^  Tliose  of  the  stockholders  who  at- 
tend the  meeting  constitute  a  quorum, 
although  they  are  a  minority.  Morrill 
V.  Little  Falls  Mfg.  Co.,  53  Minn.  371 
(1893);  Granger  v.  Grubb,  7  Phila.  350 
(1870);  Craig  v.  First,  etc.  Church,  88 
Fa.  St.  42  (1878),  where  the  principle  is 
laid  down  that  this  is  the  rule  for  a 
meeting  composed  of  an  indefinite 
number  of  persons,  like  stockholders, 
but  that  where  a  definite  number  is  in- 
volved, as  in  a  board  of  directors,  then, 
a  majority  must  be  present.  Brown  v. 
Pacific  Mail,  etc.  Co.,  5  Blatchf.  525 
(1867);  S.  C,  4  Fed.  Cas.  420;  Field  v. 
Field,  9  Wend.  394  (1832);  Gowen's 
Appeal.  10  W.  N.  Cas.  85  (Pa.  1880j; 
Madison  Ave.  Bapt.  Church  v.  Oliver 
St.  Bapt.  Church,  5  Robt.  (N.  Y.)  649 
(1867);  Everett  v.  Smith,  23  Minn.  53 
(1875).  As  to  the  rule  concerning  di- 
rectors, see  ^  713a,  infra.  It  has  been 
held  that  one  person  cannot  constitute 
a  quorum;  that  at  least  two  members 
are  necessary  to  make  a  corporate 
meeting.  Sharpe  v.  Dawes,  2  Q.  B.  D. 
26  (1876).  In  this  case  one  stockholder 
"met,"  did  all  necessary  business,  and 
then  voted  himself  a  vote  of  thanks. 
In  Re  Sanitary  Carbon  Co.,  12  W.  N., 
p.  223(1877),  where  one  stockholder,  hav- 
ing also  proxies  of  the  remaining  three 


himself  into  the  chair,  proposed  a  reso- 
lution to  wind  up  voluntarily,  declared 
the  resolution  passed,  and  appointed  a 
liquidator,"  the  court  reluctantly  fol- 
lowed the  preceding  case  and  declared 
the  '"meeting  "  invalid.  In  the  case  of 
Ostrom  V.  Greene,  161  N.  Y.  353  (1900), 
the  court  stated  that  it  was  open  to 
question  as  to  wlielher  a  majority  of 
all  the  members  in  an  unincorporated 
association  was  necessary  in  order  to 
constitute  a  quorum. 

^  Weinburgh  v.  Union,  etc.  Co.,  55  N.  J. 
Eq.  640  (1897).  A  by-law  that  states  a 
quorum  shall  be  one-third  of  the  stock- 
Jiolders  holding  one-third  of  the  shares 
of  stock  refers  to  stock  issued  and  not 
to  the  authorized  capital  stock.  Cast- 
ner  v.  Twitchell,  etc.  Co.,  91  Me.  524 
(1898). 

3  Austin  Min.  Co.  v.  Gemmel,  10  Ont. 
Rep.  (Can.)  698  (1886);  Columbia,  etc.  Co. 
V.  Meier,  39  Mo.  53  (1866),  and  same  cases 
as  in  the  preceding  notes;  Gowen's  Ap- 
peal, 10  W.  N.  Cas.  85  (1881).  Such  of 
the  stockholders  as  attend  a  duly  called 
stockholders'  meeting  constitute  a  quo- 
rum, and  a  majority  of  that  quorum 
control  the  meeting.  Ee  Rapid,  etc.  Co., 
15  N.  Y,  App.  Div.  530  (1897). 

*  Citizehs'  Mutual,  etc.  Ins.  Co.  v.  Sort- 
well,  90  Mass.  217  (1864). 


1298 


CH.  XXXVII.]  ELECTIONS  —  CORPORATE   MEETINGS.  [§  608. 

Two  important  limitations  and  exceptions  to  the  above  principles 
are  to  be  borne  carefully  in  mind. 

First,  the  majority  cannot  bind  the  minority  to  submit  to  an  act 
by  the  corporation  where  such  act  is  beyond  the  express  and  im- 
plied powers  of  the  corporation  as  given  to  it  by  its  charter.  Such 
an  act  is  ultra  vires.  A  large  amount  of  litigation  has  arisen  from 
the  attempt  of  the  majority  to  carry  out  ultra  vires  acts.  The  mi- 
nority may  object,  and  even  a  single  stockholder  may  have  the 
ultra  vires  act  enjoined  or  set  aside.'  The  failure  of  a  stockholder 
to  attend  the  stockholders'  meeting  is  not  a  waiver  of  his  right  to 
object  to  the  acts  of  the  meeting  as  ultra  vires,  even  though  the 
notice  of  the  meeting  stated  what  was  to  be  done.^ 

The  second  exception  arises  where  the  legislature  amends  the 
-charter  of  the  corporation,  and  the  majority  of  the  stockholders 
attempt  to  accept  that  amendment  and  act  upon  it.  In  such  a  case, 
if  the  amendment  materially  changes  the  scope  and  purpose  of  the 
enterprise,  the  minority  may  object  and  may  prevent  the  accept- 
ance of  the  amendment.' 

The  question  of  how  far  the  majority  rule  when  that  majority 
are  interested  in  a  coi^^tract  which  the  corporation  has  made,  and 
which  is  being  passed  upon  by  a  stockholders'  meeting,  is  consid- 
ered elsewhere.* 

§  608.  The  majority  of  votes  cast  constitutes  an  election. — It  is  the 
well-settled  rule  in  corporations  having  a  capital  stock  divided  into 
shares  that  a  majority  of  the  votes  cast  at  an  election  constitutes 
an}'^  election.^  And  this  majority,  moreover,  need  not  be  an  actual 
numerical  majority  of  all  the  votes  represented  at  the  meeting,  but 
only  a  majority  of  the  votes  cast.^  Accordingly,  a  majority  of  the 
votes  cast  will  elect,  even  though  a  majority  of  the  shares  of  stock 
are  not  voted  at  all,  and  even  though  the  owners  are  present  at  the 
meeting  and  refuse  to  vote.^ 

1  This  subject  is  fully  treated  in  Part  32  (1875),  a  municipal  corporation  case. 

IV,  infra.  See  also  §  607,  supra. 

^McFadden  v.  Leeka,  48  Ohio  St.  513  ^See  g  607,  supra;  Craig  u  First  Pres. 

(1891).  Where  the  stockholders  consent  Church,  88  Pa.  St.  48  (1878);  Re  Union 

to  the  company  buying  property  owned  Ins.  Co.,  23  Wend.  591  (1840),  holding 

by  one  of  the  directors,  a  stockholder  also    that   a    plurality    elects.     At    a 

who  was  present  and  did  not  object  municipal   corporation    meeting   only 

cannot  complain.     Steinway  v.  Stein-  those  who  vote  are  counted.     Persons 

way.  2  N.  Y.  App.  Div.  301  (1896);  aff'd,  not   voting  at    all    are    not    counted. 

157  N.  Y.  710,  and  in  163  N.  Y.  183.  Smith  v.  Proctor,  130  N.  Y.  319  (1891). 

3  See  ch.  XXVIII,  supra.  In  regard  to  voting  in  church  elections 

*See  ch.  XXXIX,  infra,  in  New  York,  see  People  v.  Keese,  27 

5  People  V.  Albany,  etc.  R.  R.,  55  Barb.  Hun.  483  (1882). 

544,  368(1869);  State  n  Fagan,  42  Conn.  ^Gowen's  Appeal,  10  W.  N.  Cas.  85 

1299 


§  6U8.] 


ELECTIONS CORPORATE    MEETINGS. 


[CH.  XXXVII. 


Althouo-h  less  than  the  full  number  of  directors  to  be  elected  re- 
ceive a  majority  or  plurality,  yet  those  receiving  such  majority  or 
plurality  are  elected,  and  another  ballot  or  election  may  be  had  to 
elect  the  remainder.^  Kot  only  in  the  elections,  but  in  voting  on 
any  other  subject,  the  majority  controls,  unless  there  is  a  statutory 
provision  to  the  contrary.'- 


(1881),  where  the  supreme  court  held 
that  "those  who  voluntarily  absent 
themselves  from  a  meeting  duly  called 
for  an  election  must  recognize  the 
validity  of  the  election  regularly  made 
by  those  who  do  attend."  The  question 
was  whether  an  election  held  by  a 
meeting  of  railroad  stockholders  at 
which  a  majority  of  all  votes  was  not 
cast  could  be  considered  valid.  State 
V.  Green,  37  Ohio  St.  227  (1881),  was  a 
case  of  election  of  clerk  by  a  city  coun- 
cil, and  it  was  held  that,  all  being 
present  and  engaged  in  holding  the 
election,  half  the  members  may  not  de- 
feat an  election  by  refusing  to  vote 
and  then  objecting  because  a  quorum 
had  not  voted.  Commonwealth  v. 
Wickersham,  G6  Pa.  St.  13-1  (1870),  in- 
volved the  election  of  a  county  school 
superintendent,  which  was  required  to 
be  "viva  voce  by  a  majority  of  the 
whole  number  of  directors  present." 
A  person  receiving  exactly  half  that 
number  could  not  be  declared  elected, 
although  one  director  refused  to  vote 
on  the  last  ballot.  "He  remained,  and 
being  present,  was  entitled  to  be 
counted."  The  legal  intendment  [of 
his  action]  was  that  he  voted  for  neither 
or  for  the  minority  candidate."  But, 
under  a  by-law  requiring  a  majority  of 
the  stock  to  be  present,  it  has  been  held 
that  the  majority  must  be  a  majority 
of  the  whole  stock,  and  not  merely  of 
the  stock  subscribed  for.  Ellsworth, 
etc.  Co.  V.  Faunce,  79  Me.  440  (1887).  If 
the  statute  requires  a  majority  of  the 
directors  to  elect  a  director  or  presi- 
dent, one  who  is  present  but  does  not 
vote  must  be  counted.  People  v.  Conk- 
lin,  7  Hun,  188  (1876).  See  also  §  713a 
infra,  on  this  point.  Stockholders  may 
vote  for  less  than  the  whole  number  of 


directors  to  be  elected.  Vandeburgh 
V.  Broadway  Ry.,  29  Hun,  348  (1883). 
But  where  a  meeting  was  called  to 
elect  three  directors  and  a  majority  of 
the  stockholders  voted  for  five  direct- 
ors, only  a  small  minority  voting  foi 
three,  the  latter  votes  were  held  thts 
only  valid  ones,  and  the  three  voted  fot- 
were  declared  elected.  State  v.  Thomp- 
son, 27  Mo.  365,  369  (1858).  Where 
twenty-three  directors  are  to  be  elected,^ 
a  vote  electing  twenty -two  is  effectual 
to  elect  those  twenty-two.  A  new  elec- 
tion may  be  held  to  elect  the  remain- 
ing one.  Re  Union  Ins.  Co.,  23  Wend. 
591  (1840).  This  case  holds  also  that  a 
plurality  is  sufficient  to  elect. 

ii?e  Union  Ins.  Co.,  22  Wend.  591 
(1840).  Less  than  the  full  board  may 
be  elected.  The  old  board  goes  out» 
however,  and  none  of  them  hold  over. 
People  V.  Fleming,  59  Hun,  518  (1891). 
Where  five  candidates  receive  a  plural- 
ity and  three  others  receive  a  less  num- 
ber, but  the  latter  are  a  tie,  the  board 
being  seven,  the  five  are  duly  elected 
and  may  act  as  a  board,  even  though 
no  second  ballot  has  been  taken  to  vote 
off  the  tie.  Wright  v.  Commonwealth, 
109  Pa.  St.  560  (1885).  W^here  at  an 
election  four  persons  received  the  nec- 
essary votes,  they  will  be  elected  di- 
rectors, although  the  whole  number  of 
directors  to  be  elected  is  seven.  A 
subsequent  election  cannot  elect  the 
whole  seven,  but  can  elect  only  the  re- 
maining three.  Forsyth  v.  Brown,  2  Pa. 
Dist.  765  (1893).     See  also  §  620,  infra. 

'i  See  §  684,  infra,  and  ch.  XXVIII, 
supra.  A  consolidation  under  the 
Georgia  statute  need  not  be  approved 
bj' every  stockholder.  A  majority  vote 
is  sufficient.  Dady  v.  Georgia,  etc.  Ry., 
112  Fed.  Rep.  838  (1900).     A  committee 


1300 


CH.  XXXYII.]  ELECTIONS  —  COEPOKATE    MEETINGS. 


[§  C09. 


§  609.  Is  every  sliare  ofstocic  entitled  to  one  vote?  —  At  common 
law,  in  public  or  municipal  corporations,  each  qualified  elector  has 
one  vote,  and  only  one.  This  was  a  natural  rule,  since  each  duly- 
qualified  citizen  voted  as  a  citizen  and  not  as  the  holder  of  stock. 
But  the  same  rule  should  not  appl}^  to  private  corporations.  Stock- 
holders are  interested  not  equally,  but  in  proportion  to  the  number 
of  shares  held  by  them.  Naturally  and  reasonably  each  share 
should  be  entitled  to  one  vote.  It  has  been  held,  however,  that  at 
common  law  each  stockholder  had  but  one  vote,  irrespective  of  the 
muraber  of  shares  held  by  hira.^  Where  the  statutes  are  silent  on 
the  subject,  a  by-law  may  give  to  each  shareholder  one  vote  for 
each  share  up  to  ten,  and  may  fix  the  proportion  of  votes  which  he 
may  cast  in  excess  of  that  number.'^ 

Generally  the  charter  or  statutes  prescribe  that  each  share  of 
stock  shall  be  entitled  to  one  vote.^  And  a  statutory  or  charter 
provision  to  this  effect  applies  not  onl}'  to  elections,  but  also  to  all 
other  questions  that  may  come  before  the  stockholders'  meetings.* 
An  election  to  be  held  by  a  "majority  of  stockholders"  means  a 
majority  in  interest.**  A  stock  vote  need  not  be  taken  unless  called 
for.*^     And  although  each  voter  is  given  one  vote,  when  in  fact 


of  arbitration  may  act  by  a  majority    St.  614  (1890).     A  by-law  may  authorize 


vote  unless  the  agreement  provides 
otherwise.  The  resignation  of  one  mem- 
ber just  before  the  award  is  made  does 
not  invalidate  the  award.  Republic  of 
Colombia  v.  Cauca  Co.,  106  Fed.  Rep. 
337  (1901). 

>  Taylor  v.  Griswold,  14  N.  J.  L.  223 
(1834),  declaring  that  a  by-law  to  the 
contrary  is  void.  This  decision  in  the 
latter  respect  is  wrong,  and  in  the  for- 
mer respect  is  unfortunate.  At  com- 
mon law  stockholders  voted  by  show  of 
hands,  and  a  large  stockholder  had  no 
greater  vote  than  a  small  one.  Re  Hor- 
bury.  etc.  Co.,  L.  R.  11  Ch.  D.  109  (1879). 
Stockholders  each  have  one  vote:  not 
even  a  special  provision  in  the  articles 
filed  under  a  general  act  can  change 
this  rule.  Commonwealth  v.  Nicker- 
son,  10  Phiia,  (Pa.)  55  (1873).  For  an  in- 
teresting statement  of  the  origin  of  the 
practice  of  giving  each  stockholder  one 
vote  only,  and  of  the  gradual  changes 
made  in  the  rule,  see  Harvard  Law  Rev., 
Nov.,  1888,  p.  156.     See  §  621.  infra, 

2  Commonwealth  v.  Detwiller,  131  Pa. 


one  vote  for  each  share  of  stock,  and  a 
provision  to  this  effect  allows  such  vote 
on  all  questions.  Proctor,  etc.  Co.  v. 
Finley,  98  Ky.  405  (1895),  approving  the 
text  above. 

3  Hays  V.  Commonwealth,  82  Pa.  St. 
518  (1876).  Where,  by  statute,  two- 
thirds  of  the  stockholders  are  author- 
ized to  do  an  act,  this  is  construed  to 
mean  two-thirds  of  the  stock  —  at  least 
long  acquiescence  therein  has  that  ef- 
fect. Fredericks  v.  Pennsylvania  Canal 
Co.,  109  Pa.  St.  50  (1885). 

*Re  Rochester,  etc.  Co.,  40  Hun,  172 
(1886),  construing  a  statute  which  is 
applicable  to  all  New  York  corpora- 
tions. 

6  Wein burgh  v.  Union,  etc.  Co.,  55 
N.  J.  Eq.  640  (1897). 

6  Jones  V.  Concord,  etc.  R  R,  67 
N.  H.  234  (1892).  Even  if,  on  a  poll  de- 
manded by  five  members,  each  share 
has  one  vote,  yet  until  such  poll  is  de- 
manded voting  is  by  show  of  hands. 
Re  Horbury.  etc.  Co.,  L.  R  11  Ch.  D.  109 
(1879). 


1301 


§  609a.]  ELECTIONS CORPORATE    MEETINGS.  [cil.  XXXVII. 

each  share  of  stock  is  entitled  to  one  vote,  3'et  if  for  eight  months 
the  stockholders  acquiesce  in  the  election,  the  court  will  not  bj 
mandamus  order  Si  new  election} . 

§  G09(Z.  Cumulative  voting. —  In  the  constitutions  of  several  of 
the  states  there  are  provisions  for  enabling  a  minority  in  interest 
of  the  stockholders  to  elect  a  minority  of  the  directors.  This  is 
effected  by  what  is  known  as  a  system  of  cumulative  voting.  By 
it  each  stockholder  is  entitled  to  as  many  votes  for  directors  as 
equal  the  number  of  shares  he  owns  multiplied  by  the  number  of 
directors  to  be  elected.  Thus,  if  there  are  six  directors  to  be 
elected,  a  stockholder  who  owns  one  hundred  shares  may  poll  sis 
hundred  votes,  and  these  votes  he  may  give  entirely  to  one  or  two 
or  more  of  the  six  candidates,  as  he  may  see  fit.  In  this  way  any 
minority  of  the  stockholders  owning  one-sixth  of  the  stock,  acting 
together,  may  elect  one  member  of  a  board  of  six  directors,  and 
thus  secure  a  representation  in  that  body.  A  larger  minority 
might  secure  the  election  of  two  members  of  such  a  board,  the  pos- 
sibility of  increasing  the  minority  representation  increasing  as  the 
minority  increases,  without  it  ever  becoming  possible  for  a  minority, 
upon  a  full  vote,  to  secure  more  than  its  equitable  proportion  of 
the  whole  board  of  directors.  The  larger  the  number  of  directors 
the  smaller  would  be  the  minority  which  would  be  able  to  elect 
one  member  of  the  board;  and  the  larger  the  minority  the  greater 
the  representation  possible  to  be  secured.^  Constitutional  or  statu- 
tory provisions  which  are  designed  to  secure  such  a  minority  rep- 
resentation are  found  in  California,  Pennsylvania,  Illinois,  West 
Virginia,  Missouri,  Nebraska,  Michigan,  Kansas,  Idaho,  Kentucky, 
Mississippi,  Montana,  North  Dakota,  and  South  Dakota.'     These 

1  J2e  Moore,  etc.  Co.,  14  Q.  B.  Rep.  (Can.)  each  of  the  six  candidates."  Pierce  v. 
365  (1856).  Commonwealth,  104  Pa.  St.  150  (1883). 

2  Cumulative  voting  given  by  the  con-  ^Xhe  Pennsylvania  provision  is  con- 
stitution is  an  absolute  right,  and  does  strued  in  Wright  v.  Commonveealth, 
not  require  notice  of  the  intent  to  so  109  Pa.  St.  560  (1885).  holding  that  part 
vote,  nor  any  by-laws,  to  give  it  effi-  of  the  directors  so  elected  by  a  plural- 
cacy.  By  this  provision,  "  if  there  are  ity  and  declared  elected  may  act,  al- 
six  directors  to  be  elected,  the  single  though  the  remaining  directors  are  not 
shareholder  has  six  votes,  and,  con-  elected  by  reason  of  the  vote  as  to  them 
trary  to  the  old  rule,  he  may  cast  these  being  a  tie.  See  also  Commonwealth 
six  votes  for  a  single  one  of  the  candi-  v.  Lintsman,  6  Pittsb.  L.  J.  (N.  S.)  123 
dates,  or  he  may  distribute  them  to  (1875).  Cumulation  of  votes  was  up- 
two  or  more  of  such  ca^ididates,  as  he  held  in  Commonwealth  v.  Yetter,  190 
may  think  proper.  He  may  cast  two  Pa.  St.  488  (1899),  a  case  where  a  school 
ballots  for  each  of  three  of  the  pro-  was  incorporated  as  a  joint-stock  cor- 
posed  directors, —  three  for  two,  or  two  poration.  The  Ohio  statute  prescribing 
for  one,  and  one  each  for  four  others;  that  "each  share  shall  entitle  the  owner 
or  finally,  he  may  cast  one  vote  for  to  as  many  votes  as  there  are  directors 

1302 


CH.  XXXVII.]  ELECTIONS  —  COEPOKATE    MEETINGS. 


[§  GOda. 


provisions,  if  designed  to  be  retroactive,  have  been  held  unconsti- 
tutional and  void.  They  can  only  apply  to  corporations  chartered 
after  their  enactment.  So  far  as  they  concern  corporations  char- 
tered before  the  adoption  of  such  a  constitutional  provision  they 
impair  the  obligation  of  the  contract  between  the  corporation,  the 
stockholders,  and  the  state,  and  infringe  the  vested  rights  of  the 
stockholders.^  But,  under  its  reserved  power  to  alter,  amend,  or 
repeal  a  charter  the  legislature  may  allow  cumulative  voting.^     A 


to  be  elected"  does  not  authorize  cu-    N.  Y.  616  (1883);  State  u  Constantine. 


mulative  voting.  State  v.  Stockley,  45 
Ohio  St.  304  (1887).  The  Ohio  statute 
of  1898  provides  for  cumulative  voting. 
Schwartz  v.  State,  6-1  QhioSt.  497  (1900). 
Where  cumulative  voting  pi-evails,  and 
the  statutes  require  three  directors  to 
be  residents,  and  all  the  votes  are  cu- 
mulated on  non-residents  excepting 
thirty-two  which  are  cast  for  three 
residents,  the  three  residents  are 
elected,  and  the  remaining  directors 
are  those  of  the  non-residents  who  re- 
ceived the  highest  number  of  votes. 
Horton  v.  Wilder,  48  Kan.  233  (1893). 
In  Wright  v.  Central  Cal.  etc.  Co.,  67 
Cal.  532  (1885),  the  court  said  that  this 
provision  conferred  "  upon  the  individ- 
ual stockholder,  entitled  to  vote  at  an 
election,  the  right  to  cast  all  the  votes 
which  his  stock  represents,  multiplied 
by  the  number  of  directors  to  be 
elected,  for  a  single  candidate,  should 
he  think  proper  to  do  so,  .  .  .  or  by 
distributing  them,  upon  the  same  prin- 
ciple, among  as  many  candidates  for 
directors  as  he  shall  think  fit."  The 
court  held  also  that  this  constitutional 
right  as  to  voting  could  not  be  changed 
by  a  resolution  of  the  directors. 

1  State  V.  Greer,  78  Mo.  188  (1883); 
Hays  V.  Commonwealth,  83  Pa.  St.  518 
(1876);  Baker's  Appeal,  109  Pa.  St.  461 
(1885).  See  also,  on  this  subject,,  ch. 
XXVIII,  supra.  Upon  the  question  of 
the  constitutionality  of  statutes  pro- 
viding for  minority  representation  or 
cumulative  voting  in  the  election  of 
public  officers,  a  matter  germane  to  the 
present  subject,  see  People  v.  Kenney, 
96  N.  Y.  294  (1884);  People  v,  Crissey,  91 


43  Ohio  St.  437  (1884).  In  Loewenthal 
V.  Rubber  Reclaiming  Co.,  53  N.  J.  Eq. 
440  (1894),  the  court  held  that  the  orig- 
inal by-laws  constituted  a  contract  be- 
tween the  stockholders,  and  that  a 
by-law  providing  for  cumulative  voting 
could  not  be  repealed.  In  Michigan  it 
has  been  decided  that  a  statute  provid- 
ing for  the  cumulative  plan  of  voting 
at  public  elections  is  unconstitutional. 
Maynard  v.  Board,  etc.,  84  Mich.  328 
(1890). 

2  Under  the  reserved  right  of  the  leg- 
islature to  alter  or  amend  a  charter,  the 
legislature  may  pass  a  statute  allowing 
stockholders  to  cumulate  their  votes  in 
elections,  thus  enabling  minority  stock- 
holders to  elect  a  minority  of  the  board 
of  directors.  Looker  v.  Maynard,  179 
U.  S.  46  ( 1900).  Where  by  statute  the 
state  retains  power  to  amend  charters 
subsequently  granted,  a  subsequent 
constitutional  provisipn  for  cumulative 
voting  applies  to  all  such  corporations, 
whether  organized  by  special  charter 
or  under  the  general  act,  and  does  not 
impair  the  validity  of  a  contract.  So 
also  where  a  corporation  amends  its 
charter  under  an  act  providing  for 
cumulati%'e  voting,  such  cumulative 
voting  applies  to  it.  Gregg  v.  Granby, 
etc.  Co.,  164  Mo.  616  (1901).  The  legisla- 
ture has  no  power  to  amend  the  charter 
so  as  to  allow  cumulative  voting,  even 
though  in  the  original  charter  the  leg- 
islature reserved  the  right  to  alter, 
amend,  or  repeal.  Such  reserved  right 
is  only  for  matters  which  concern  the 
public.  In  re  Election  Newark  Assoc, 
etc.,  64  N.  J.  L.   217  (1899);  Attorney- 


1303 


§  CO'Jrt.J 


ELECTIONS COKPORATE    MEETINGS. 


[CH.  XXXVII. 


Statute  giving  the  right  to  cumulate  votes  does  not  apply  to  cor- 
porations then  existing,  even  though  such  corporations  accept  the 
benefits  of  subsequent  statutes,  such  statutes  not  imposing  any  con- 
ditions.^  There  are  certain  dangers  about  this  mode  of  votin":,  and 
an  unwary  majority  may  find  that  a  smart  minority  has  deprived 
the  majority  of  the  control.^  And  where,  in  cumulating  votes,  the 
voter  spreads  his  votes  over  so  many  persons  that  none  of  those 
particular  persons  are  elected,  he  cannot  have  the  election  set  aside 
on  the  ground  that  by  cumulating  on  a  less  number  of  persons  he 
can  certainly  elect  them,  nor  on  the  ground  that  there  "was  an  oral 
contract  as  to  who  should  be  elected.'    Where  a  state  is  a  stock- 


General  V.  Looker,  111  Mich.  498  (1897). 
See  §  501,  supra.  In  West  Virginia  it 
is  held  that  where  the  legislature  has 
the  right  to  amend  or  repeal  a  cliarter, 
the  statute  giving  the  right  to  cumu- 
late the  votes  applies  to  a  corporation 
already  existing  as  well  as  later  corpo- 
rations. Cross  V.  West  Virginia,  etc. 
Ry.,  35W.  Va.  174(1891). 

1  Smith  V.  Atchison,  etc.  R.  R,  64  Fed. 
Rep.  272  (1894);  Commonwealth  v.  But- 
terworth,  IGO  Pa.  St.  55  (1894).  Cf.  Gregg 
V.  Granby,  etc.  Co.,  164  Mo.  616  (1901),  as 
to  a  constitutional  change.  A  corpora- 
tion organized  prior  to  the  constitu- 
tion of  1874  of  Pennsylvania,  which 
gave  the  right  of  cumulative  votmg, 
becomes  subject  to  such  right  if  it  after- 
wards asks  for  and  acquires  new  fran- 
chises. Commonwealth  v.  Flannery,  52 
Atl.  Rep.  129  (Pa.a902). 

'^  Thus,  suppose  there  are  1,000  shares, 
and  ten  directors  to  be  elected,  and  one 
person  holds  600  shares.  Clearly  he 
should  be  able  to  elect  a  majority  of 
the  ten  directors.  Suppose  he  votes  his 
600  votes  for  six  of  his  friends  (A,  B,  C, 
D,  E,  and  F)  and  for  four  of  the  mi- 
nority (G,  H,  I,  and  J);  and  suppose  at 
the  same  time  the  400  shares  of  the 
minority  are  cumulated  on  three  other 
parties  (K,  L,  and  M),  with  ten  votes 
for  the  four  directors  mentioned  above 
(G,  H,  I,  and  J).  The  result  will  then 
be  as  follows: 

A,  B,  C,  D,  E,  and  F,  have  600  votes  each 

G,  H,  I,  and  J  "     610      " 

K,  L,  and  M  "  1,32 )      "       " 

In  other  words,  the  minority  have  se- 


cured a  majority  of  the  directors.  Again, 
suppose  the  holder  of  the  600  shares 
does  not  vote  for  any  minority  candi- 
date at  all,  but  casts  600  votes  for  each 
of  his  six  candidates.  A,  B.  C,  D,  E,  and 
F.  Even  then  he  may  lose  the  election. 
Tiie  minority  400  may  cumulate  their 
4,000  votes  on  six  candidates,  and  give 
each  of  the  six  6663  votes.  Under  the 
cumulative  system  the  majority,  in 
order  to  be  safe,  must  not  only  abandon 
the  idea  of  electing  the  whole  board, 
but  must  cumulate  their  votes  on  such 
a  proportion  of  the  board  as  their  stock 
bears  to  the  whole  stock,  and  must  not 
cast  complimentary  votes  for  repre- 
sentatives of  the  minority.  In  the  case 
of  Schwartz  v.  State,  61  Ohio  St.  497 
(1900),  a  majority  of  the  stock  was  voted 
in  favor  of  a  full  board  consisting  of 
nine  members.  The  minority  cumu- 
lated their  votes  on  five  other  candi- 
dates, thus  giving  each  of  those  five 
more  votes  than  any  of  the  nine  for 
whom  the  majority  voted.  The  result 
was  that  the  five  were  elected,  thus 
giving  to  the  minority  the  control  of 
the  board,  by  reason  of  the  failure  of 
the  majority  to  cumulate  their  votes. 
3  Dulin  V.  Pacific,  etc.  Co.,  103  Cal.  357 
(1894).  The  court  said  that  the  party 
"had  in  his  own  hands  enough  stock 
to  have  elected  himself  and  one  other 
director,  in  the  face  of  any  combina- 
tion that  could  have  been  made:  and 
the  court  had  no  power  to  release  him 
from  his  error,  or  do  that  for  him  which 
he  had  power  to  do  for  himself."  67 
N.  E.  Rep.  17. 


1304 


»CH.  XXXVII,] 


ELECTIONS 


CORPORATE    MEETINGS. 


[§  610. 


holder,  and  bv  statute  is  entitled  to  a  certain  vote  at  elections,  a 
■subsequent  statute  cannot  give  to  the  state  a  larger  vote.^  Even 
though  the  stockholders  are  entitled  to  vote  on  the  cumulative  plan, 
yet  they  are  not  obliged  to  do  so.^ 

S  610.  Proxies. —  At  common  law  a  stockholder  has  no  riffht  to 
cast  his  vote  by  proxy.^  This  rule  was  evolved  from  the  analogous 
rule  governing  municipal  corporations,  which  requires  all  votes  to 
be  given  in  person.  The  right  to  vote  by  proxy  is  often  given  by 
the  charter  itself.  Even  if  not  so  given  the  right  may  be  created 
by  by-law.*  Where  the  statutes  give  the  right  to  vote  by  proxy, 
•the  by-laws  of  the  corporation  cannot  restrict  that  right  by  provid- 
dng  that  only  stockholders  shall  act  as  proxies.^ 

The  ordinary  proxy,  being  intended  to  be  for  an  election  merely, 
•does  not  enable  the  proxy  to  vote  to  dissolve  the  corporation  or  to 
•sell  the  entire  corporate  business  and  property,  or  to  vote  upon 
■other  important  business,  unless  the  proxy  itself  in  general  or  spe- 
cial terms  gives  the  proxy  the  power  to  vote  on  such  questions.^ 


J  Tucker  v.  Russell,  83  Fed.  Rep.  2G3 
(1897). 

^Schmidt  v.  Mitchell,  101  Ky.  570 
(1897). 

3  Taylor  v.  Griswold,  14  N.  J.  L.  223 
(1834);  Philips  V.  Wickham,  1  Paige,  590 
(1829);  Brown  v.  Commonwealth,  3 
Grant  (Pa.),  209  (1856),  where  the  charter 
allowed  only  those  present  to  vpte;  Craig 
V.  First  Presbyterian  Church,  88  Pa.  St. 
42(1878);  Commonwealth  v.  Bringhurst, 
il03  Pa.  St.  134  (1883);  People  v.  Twad- 
dell,  18  Hun,  427,  430  (1879);  Re  Dean 
and  Chapter  of  Femes,  Davies,  116,  129 
(1608);  Attorney -General  v.  Scott,  1 
Vesey.  413  (1749);  Harben  v.  Phillips, 
L.  R.  23  Ch.  D.  14,  22,  36  (1882).  Where 
'the  statute  allows  citizens  to  vote  by 
proxy,  an  alien  is  not  within  its  terms, 
and  cannot  do  so.  Re  Barker,  6  Wend. 
509  (1830). 

^  Quoted  and  approved  in  Market 
Street  Ry.  v.  Hell  man,  109  Cal.  571 
(1895);  Worth,  etc.  Co.  v.  Bingham,  116 
Fed.  Rep.  785  (1902):  People  v.  Crossley, 
•69  111.  195  (1873):  Phillips  r.  Wickham, 
1  Paige,  590,  598  (1829);  State  v.  Tudor, 
5  Day  (Conn.),  329  (1812);  2  Kent,  Comm., 
294,  295.  A  contrary  rule  is  laid  down 
.in  New  Jersey.  Taylor  v.  Griswold,  14 
^\  J.  L.  222  (1834).     Where  the  charter 


authorizes  voting  by  proxy  at  elections 
for  directors,  and  also  empowers  direct- 
ors to  make  by-laws  not  inconsistent 
with  the  laws  of  the  commonwealth,  a 
by-law  adopted  by  the  board  of  direct- 
ors allowing  voting  by  proxy  at  all 
stoc^  elections  was  held  valid.  Wilson 
V.  Academy  of  Music,  43  Leg.  Int.  86 
(1886).  A  by-law  may  allow  voting  by 
proxy.  Commonwealth  v.  Detwiller, 
131  Pa.  St.  614  (1890).  A  corporation  as 
a  stockholder  may  of  course  give  a 
proxy  where  proxies  are  allowed.  Re 
Indian,  etc.  Co.,  L.  R.  26  Ch.  D,  70  (1884). 
A  by-law  may  authorize  voting  by 
proxj^  and  such  a  by-law  may  arise  by 
long  continuation  and  unbroken  prac- 
tice. Walker  v.  Johnson,  17  App.  Cas. 
Dist.  of  Col.  144  (1900). 

•''People's,  etc.  Bank  v.  San  Francisco 
Super.  Ct,  104  Cal.  649  (1894).  Where 
the  statute  gives  a  right  to  vote  by 
proxy,  a  by-law  to  the  effect  that  only 
a  stockholder  can  act  as  proxy  is  illegal 
and  void.  Re  Lighthall,  etc.  Co.,  47 
Hun,  258  (1888). 

*>  Abbot  V.  American  Hard  Rubber 
Co.,  33  Barb.  578,  584  (1861);  Cumber- 
land Coal  Co.  V.  Sherman,  30  Barb.  553, 
577  (1859);  Re  Wheeler,  2  Abb.  Pr.  (N.  S.) 
361  (1866),  where  the  proxy,  being  au- 


130 -) 


§610. 


ELECTIONS — CORPORATE   MEETINGS. 


[CH.  XXXVII. 


But  where  the  stockholder  does  not  promptly  object,  he  may  be 
bound. ^  A  proxy  authorized  to  vote  at  a  corporate  meetin«^  is  not 
authorized  to  vote  to  discharge  a  mortgage  which  secures  the  stock- 
holder, who  gave  the  proxy,  as  a  creditor  of  the  corporation.'  A 
proxy  authorizing  the  holder  to  vote  "  in  the  same  manner  as  I 
should  do  were  I  there  personally  present ''  estops  the  stockholder 
giving  the  proxy  from  questioning  the  call  of  the  meeting  or  the 
reo:ularity  of  an  increase  of  stock  voted  for  at  such  meeting.'  A 
proxy  authorizing  the  proxy  to  vote  as  fully  as  a  stockholder  could 
were  he  personally  present  gives  the  prox}'^  the  right  to  vote  on  the 
question  of  adjournment  and  of  opening  the  ballots.*  A  proxy  has 
a  right  to  vote  on  a  viva  voce  vote  or  show  of  hands.'^  Where  a 
vote  is  taken  by  show  of  hands  each  person  is  entitled  to  only  one 
vote,  even  though  as  a  proxy  he  represents  several  persons,  and  a 
person  who  is  a  proxy  only  may  vote.^  A  proxy  cannot  vote  when 
the  owner  of  the  stock  is  present  and  votes."  In  England  proxies 
deposited  abroad  have  been  allowed  a  vote  by  telegraph.^  The  sale 
of  proxies  is  forbidden  by  statute  in  Xew  York.^ 

Directors  may  be  enjoined  from  using  the  funtls  of  the  company 
to  obtain  proxies  for  themselves  or  their  nominees.'" 


thorized  to  vote  for  increasing  the  stock, 
voted  also  to  issue  tlie  new  stock  in  ex- 
change for  the  stock  of  another  com- 
pany. Marie  v.  Garrison,  13  Abb.  N. 
Cas.  210,  235  (1883).  Where  directors 
are  authorized  by  charter  to  vote  by 
proxy,  the  proxy  cannot  authorize  a 
borrowing  of  money  —  an  ultra  vires 
and  void  act  in  England.  Brown  v. 
Byers,  16  M.  &  W.  253  (1847).  A  proxy 
to  vote  is  not  a  proxy  to  demand  a  poll. 
Re  Haven,  etc.  Co.,  L.  R  20  Ch.  D.  151 
(1881);  Regina  v.  Government,  etc.  Co., 
L.  R.  3  Q.  B.  D.  442  (1878).  See  also  De- 
catur Bldg.  etc.  Co.  V.  Neal,  97  Ala,  717 
(1893).  A  proxy  for  an  election  does  not 
extend  to  an  election  four  months  later, 
the  first  election  not  having  been  held, 
the  proxy  being  by  a  director,  the  di- 
rectors being  authorized  to  vote  "as  di- 
rectors by  proxy.  Howard  v.  Hull,  5  Ry. 
&  Corp.  L.  J.  255  (Eng.  1888). 

1  Where  a  proxy  votes  in  favor  of 
making  all  the  stock  common  stock, 
the  stockholder  himself,  if  he  wishes  to 
object,  must  do  so  promptly.  Synnott 
V.  Cumberland,  etc.  Assoc,  117  Fed.  Rep. 
379  (1902).    See  also  §  599,  supra. 


2  Moore  v.  Emsley,  112  Ala.  228  (1898). 

3  Columbia  Nat.  Bank  v.  Mathews,  85 
Fed.  Rep.  934  (1898). 

4  Forsyth  v.  Brown,  3  Pa.  Dist.  765 
(1893). 

^Re  Bidwell,  [1893]  1  Ch.  603.  But 
under  the  English  statutes  proxies  are 
not  counted  where  the  vote  is  by  a  show- 
ing of  hands.  Re  Caratal  Mines,  87  L. 
T.  Rep.  437  (1902). 

■  6  Ernest  v.  Loma,  etc.  Mines,  [1896]  2- 
Ch.  572;  aff'd,  [1897]  1  Ch.  1. 

7  Commonwealth  v.  Patterson,  158  Pa. 
St.  476  (1893). 

8  In  Re  English,  etc.  Bank,  [1893]  3 
Ch.  385,  the  court  allowed  foreign  cred- 
itors to  vote  abroad  by  proxy  deposited 
abroad,  and  to  telegraph  such  vote  to 
the  home  meeting,  on  a  scheme  of  reor- 
ganization, holding  also  that  a  proxy 
need  not  state  the  day  of  meeting. 

9  Laws  1892,  ch.  692,  §  613,  and  L.  1901, 
ch.  588.  It  is  illegal  for  a  stockholder 
to  sell  his  right  to  vote.  Hafer  v.  New 
York,  etc.  R.  R.,  14  Week.  L.  Bui.  68 
(1885).     See  also  §  622,  infra. 

10  Studdert  v.  Grosvenor,  L.  R.  33  Ch^ 
D.  528  (1886). 


1306 


CH.  XXXVII.]  ELECTIONS  —  CORPORATE    MEETINGS. 


[§  610'. 


"Where  a  will  directs  that  of  three  executors  two  shall  give  prox- 
ies to  the  third  on  stock  owned  by  the  estate,  a  court  of  equity  will 
compel  the  two  to  give  the  proxies,  although  the  third  intends  to 
use  the  proxy  to  continue  himself  as  president,  and  the  manage- 
ment of  the  company  is  alleged  to  be  improvident  and  ruinous.^ 
Where  there  are  several  executors,  and  only  one  of  them  is  present 
at  the  election,  he  may  cast  the  vote,  even  though  a  proxy  has  been 
given  by  another  of  the  executors.^ 

A  proxy  should  be  in  writing,  but  it  need  not  be  in  any  partic- 
ular form;  it  ne^d  not  be  acknowledged  or  proved,  but  it  must  be 
in  such  a  shape  as  reasonably  to  satisfy  the  inspectors  of  election 
of  its  genuineness  and  validity.^  And  to  this  end  the  corporate  of- 
ficers may  insist  upon  reasonable  evidence  of  the  regularity  and 
genuineness  of  the  proxy  before  allowing  it  to  be  voted.*  The 
proxy  should  be  dated,  but  the  common  law  did  not  require  a  date. 


1  This  case  was  affirmed  on  an  even 
division  of  the  court.  Lafiferty's  Estate, 
154  Pa.  St.  430  (1893);  Tunis  v.  Heston- 
ville,  etc.  R.  R,  149  Pa.  St.  70  (1892). 

2  Schmidt  v.  Mitchell,  101  Ky.  570 
(1897). 

,  ^Re  St.  Lawrence  Steamboat  Co.,  44 
N.  J.  L.  529  (1882);  Ee  Indian,  etc.  Co., 
L.  R.  26  Ch.  D.  70  (1884).  No  particular 
form  of  words  is  necessary  to  consti- 
tute a  proxy.  Smith  v.  San  Francisco, 
etc.  Ry.,  115  Cal.  584  (1897).  See  the 
form  of  proxy  in  Marie  v.  Garrison,  13 
Abb.  N.  Gas.  210,  234  (1883).  Proxies 
need  not  be  acknowledged,  proved,  or 
witnessed.  Re  Cecil,  36  How.  Pr.  477  ■ 
(1869).  A  proxy  need  not  state  the  day 
upon  which  the  election  is  to  be  held. 
Re  Townshend,  18  N.  Y.  Supp.  905 
(1892).  A  proxy  is  good,  although  the 
date  when  it  is  given  is  left  blank  and 
has  not  been  filled  in.  Re  St.  Lawrence 
Steamboat  Co.,  44  N.  J.  L.  529  (1882). 
Where  one  gave  a  proxy  to  vote  at  an 
annual  election,  it  was  held  prima 
facie  evidence  that  he  was  a  stock- 
holder just  before  such  election.  Har- 
ger  V.  McCullough,  2  Denio,  119,  122 
(1846).  A  proxy  which  had  been  exer- 
cised and  voted  upon  for  many  years 
without  renewal  was  sustained  in  Mons- 
seaux  V.  Urquhart,  19  La,  Ann.  482 
(1867).     Although  a  notice  of  a  corpo- 


rate meeting,  and  proxies  given  for  a 
corporate  meeting,  add  to  the  name  of 
the  corporation  the  place  where  it  is 
located,  this  is  immaterial.  Langan  v. 
Franckiyn,  20  N.  Y.  Supp.  404  (1892). 
Under  the  Alabama  statutes  author- 
izing personal  property  owned  by  the 
wife  to  be  disposed  of  by  the  husband 
and  wife  by  parol,  a  wife's  proxy  to  a 
husband  to  vote  her  stock  may  be  oral. 
Hoene  v.  Pollak.  118  Ala.  617  (1898), 
holding  also  that  a  stockholder  who 
knows  that  her  stock  has  been  voted 
by  her  husband  in  favor  of  selling  all 
the  corporate  property  for  stock  in  an- 
other corporation  cannot  object  thereto, 
where  she  afterwards  disposes  of  part 
of  the  new  stock  so  issued. 

*  Re  St.  Lawrence  Steamboat  Co.,  44 
N.  J.  L.  529  (1882).  But  the  inspectors 
have  no  right  to  refuse  a  vote  by  proxy 
or  to  assume  a  judicial  power  to  try  its 
genuineness,  if  it  is  apparently  exe- 
cuted by  the  stockholder  and  is  regu- 
lar in  form.  Re  Cecil,  36  How.  Pr.  477 
(1869).  Neither  the  stockholder  nor  his 
proxy  can  be  compelled  by  a  by-law  to 
take  an  bath  that  the  former  is  the 
owner  of  the  stock.  People  v.  Tibbits, 
4  Cow.  358  (1825);  People  v.  Kip,  4  Cow. 
382  (1822).  The  by-laws  may  require 
the  proxies  to  be  witnessed.  Harben 
V.  Phillips,  L.  R.  23  Ch.  D.  14  (1SS2). 


1307 


§  CIO.] 


ELECTIONS  —  COKPORATE    MEETINGS. 


[cn.  xxxvri. 


In  New  Jersey,  by  statute,  proxies  are  good  for  only  three  years 
from  their  date;^  and  in  Xew  York  for  only  eleven  months  from 
their  date,  unless  some  other  definite  time  is  specified,' 

Where  certificates  of  proxies  are  destroyed  after  use,  parol  evi- 
dence is  admissible  to  prove  their  former  existence  and  sufficiency.^ 

A  stockholder  who  signs  a  form  of  proxy  in  blank,  and  hands  it 
over  to  another  to  be  used  in  the  ordinary  way,  impliedly  author- 
izes that  other  to  fill  up  the  blank  with  his  own  name.*  Although 
a  proxy  contains  blanks  as  to  the  day  and  hour  of  the  meeting,  yet 
these  may  be  filled  in  by  the  party  using  the  proxy.' 

A  proxy  is  always  revocable.  Even  when  by  its  terms  it  is 
made  "irrevocable,"  the  law  allows  the  stockholder  to  revoke  it. 
Frequently  an  attempt  is  made  to  permanently  unite  the  voting 
power  of  several  stockholders  and  thus  control  the  corporation  by 
giving  irrevocable  proxies  to  specified  persons.  But  the  law  allows 
the  stockholder  to  revoke  the  proxy  at  any  time.^    Where  the  gen- 


1  Laws  1896,  ch.  185,  S  36. 

2  Laws  1892,  ch.  687.  §21. 

3  Haywood  &  Pittsborough  P.  R  Co. 
V.  Bryan,  6  Jones,  L.  (N.  C.)  82  (18/58). 
Although  the  record  does  not  show 
that  certain  stock  was  voted,  yet  it 
may  be  proved  that  it  was  voted  by 
proxy.  Franklin  T.  Co.  v.  Rutherford, 
eta  Co.,  57  N.  J.  Eq.  42  (1898). 

<  Ex  parte  Duce,  L.  R  13  Ch.  D.  429 
(1879);  Ex  parte  Lancaster,  L.  R  5  Ch. 
D.  911  (1877).  As  to  whether  a  blank 
proxy  may  be  filled  in  by  the  agent, 
see  quaere  in  Wliite  v.  New  York,  etc. 
Soc,  45  Hun,  580  (1887).  citing  cases. 

5  Ernest  v.  Loraa,  etc.  Mines,  [1896]  2 
Ch.  572:  aff'd,  [1897]  1  Ch.  1. 

« Schmidt  v.  Mitcliell,  101  Ky,  570 
(1897);  Woodruff  v.  Dubuque,  etc,  R  R, 
30  Fed.  Rep.  91  (1887).  In  this  case  the 
stock  certificates  were  turned  over  to 
trustees  to  transfer  to  themselves,  with 
power  to  vote,  hold,  or  sell  the  same. 
"Trust"  certificates  were  issued.  The 
court  held  that  at  any  time  previous  to 
an  actual  sale  by  the  trustees  a  certifi- 
cate holder  might  revoke  his  interest  in 
the  "  trust  "  and  demand  back  hig  part 
of  the  stock.  To  same  effect  and  on  very 
similar  facts,  see  Griffith  v.  Jewett,  15 
Week.  L.  Bull,  419  (1886);  Vanderbilt  v. 
Bennett,  6  Pa,  Co.  Ct,  Rep.  193   (1887), 


Such  irrevocable  proxies  are  not  neces- 
sarily void  as  against  public  policy. 
Brown  v.  Pacific  Mail  Steamship  Co.,  5 
Blatchf,  525  (1867);  s,  C,  4Fed.  Cas.  420. 
They  simply  are  revocable.  A  proxy 
given  for  a  valuable  consideration  may 
nevertheless  be  revoked  if  it  is  about  to 
be  used  for  a  fraudulent  purpose.  Reed 
V.  Bank  of  Newburgh,  6  Paige.  337 
(1837).  An  agreement  not  to  revoke  a 
power  which  from  its  nature  or  by  law 
is  revocable  is  not  binding.  People  v. 
Nash,  111  N.  Y.  310,  315  (1888).  A  writ- 
ten contract  not  to  vote  by  proxy, 
entered  into  by  certain  stockholders 
mutually  for  the  purpose  of  preventing 
the  board  of  directors  from  consum- 
mating a  proposed  sale  of  the  franchises 
of  the  corporation,  has  been  held  a  per- 
nicious and  unlawful  compact.  Fisher 
V.  Bush,  35  Hun,  641  (1885).  An  irrev- 
ocable proxy  is  prohibited  by  statute 
in  New  York.  It  may  be  revoked  even 
though  coupled  with  an  interest,  in 
this  case  being  to  a  pledgee.  Re  Germi- 
cide Co,,  65  Hun,  606  (1892).  A  proxy, 
for  five  years,  given  so  as  to  unite 
enough  stock  to  control  the  corporation, 
the  holder  of  tlie  proxy  agreeing  that 
the  person  giving  the  proxy  shall  have 
an  office  at  a  salary  of  $2,500  a  year,  is 
void.      At  the   instance  of  the   latter 


1308 


CH.  XXXVII.]  ELECTIONS  —  CORPOEATE   MEETINGS. 


[§  611. 


eral  manager  attempts  to  obtain  proxies  for  the  purpose  of  ousting- 
the  existing  management,  and  uses  methods  calculated  to  deceive 
the  persons  giving  the  proxies,  he  is  guilty  of  a  breach  of  trust  and 
his  contract  with  the  company  may  be  canceled.^  Where  the 
directors  cause  a  clerk,  who  is  in  the  employ  of  the  company,  to 
send  out  a  circular  to  the  stockholders  representing  himself  as  a 
large  stockholder  and  asking  proxies,  with  a  view  to  thoroughly 
investigating  the  affairs  of  the  company,  and  such  proxies  when 
obtained  are  used  to  prevent  such  investigation  by  taking  the  prop- 
erty out  of  the  hands  of  the  court,  the  court  may  disregard  the  vote 
of  such  proxies.-  A  few  forms  of  proxies  are  given  in  the  notes 
below.^ 

§  611.  The  transfer  loolc  as  evidence  of  a  right  to  vote. —  The 
question  who -is  entitled  to  vote  upon  a  particular  share  of  stock  is. 


person  a  court  of  equity  will  enjoin 
voting  thereunder.  Cone  v.  Russell,  48 
N.  J.  Eq.  208  (1891). 

^  Townsley  v.  Bankers',  etc.  Co.,  56  N. 
Y.  App.  Div.  233  (1900). 

2  Re  Septimus  Parsonage  &  Co.,  [1901] 
2  Ch.  4-24. 

'  I, ,  of  ,  do  hereby  make,  con- 
stitute, and  appoint  William  Rockefeller,  and 
George  F.  Baker,  of  New  York  (or  either  of 
them),  my  lawful  proxies  and  attorneys  for  me 
and  in  ray  name,  place,  and  stead,  to  appear  at 
a  meeting  of  the  stockholders  of  the  Delaware, 
Lackawanna  and  Western  Railroad  Company  to 
be  held  at  the  office  of  said  company,  at  26  Ex- 
change Place,  in  the  city  of  New  York,  on  the 
nineteenth  day  of  February,  A.  D.  1901,  and 
then  and  there  to  cast  the  number  of  votes  to 
which  I,  as  holder  of  stock  in  said  company, 
shall  be  entitled  in  the  election  of  ofQcers  and 
managers  of  said  company. 

Witness  my  hand  and  seal  this day  of 

A.  D.  1901.  . 

In  presence  of . 

Know  all  men  by  these  presents,  that  I, 

,  of ,  hereby  appoint to  be  my 

substitute  and  proxy  for  me  and  in  my  

name  and  behalf  to  vote  at  any    election  by 

the    stockholders  of   the    Company    for 

directors,  or  other  purposes,  occurring  within 

months   from    the  date  hereof,  and  also 

to  vote  on  any  and  all  matters  and  questions 
which  may  be  presented  and  considered  at 
any  annual  or  special  meeting  of  the  stock- 
holders of  said  company  occurring  within 
said  period,  as  fully  and  with  like  effect  as  I, 

,  might  or  could  have  done  if  I  had  been 

personally  present  and  voting  thereat. 

In  witness  whereof,  I,  ,  have  here- 
unto set  my hand  and  seal  this day  of 


UNITED  STATES  STEEL  CORPORATION. 
Proxy  for  Meeting  in  February  17,  1902. 

Know  all  men   by  these  presents,  that  the 

undersigned, ,  a  stockholder  in  United 

States  Steel  Corporation,  do  hereby  constitute 
and  appoint  Abram  S.  Hewitt,  WilUam  E. 
Dodge,  Francis  H.  Peabody,  Myles  Tierney,  and 
Henry  W.  De  Forest,  and  each  of  them,  true  and 
lawful  attorneys,  agents,  and  proxies  of  the  un- 
dersigned, with  power  of  substitution,  for  and 
in  the  name,  place,  and  stead  of  the  unders  gned, 
to  vote  upon  all  common  stock  and  all  preferred 
stock,  or  either,  held  or  owned  by  the  under- 
signed, at  the  first  annual  meeting  of  the  stock- 
holders of  the  United  States  Steel  Corporation, 
to  be  held  at  the  oflflce  of  said  corporation  at 
Hoboken,  New  Jersey,  on  Monday,  the  seven- 
teenth day  of  February,  1902,  and  at  any  and 
all  adjournments  thereof,  for  the  transaction  of 
any  and  all  business  that  may  come  before  th© 
meeting,  including  considering  and  voting  upon 
the  approval  of  the  by-laws  as  amended;  con- 
sidering and  voting  upon  the  approval  and  rati- 
fication of  all  contracts,  acts,  proceedings,  elec- 
tions, and  appointments  by  the  board  of  direct- 
ors or  by  the  executive  committee  or  by  the 
finance  committee  since  the  organization  of  the 
corporation,  including  the  agreements  with 
Messrs.  J.  P.  Morgan  &  Co.,  syndicate  managers, 
dated,  respectively,  March  1  and  April  1,  1901, 
and  January  3,  1902,  the  last  being  the  agree- 
ment of  final  settlement  and  release,  which  are 
referred  to  in  the  notice  of  said  meeting  and  in 
the  preliminary  report  to  stockholders;  the 
election  of  eight  directors  to  hold  office  for  three 
years;  the  election  of  independent  auditors; 
and  upon  any  and  all  matters  that  may  come 
before  the  meeting,  according  to  the  number  of 
votes  the  undersigned  would  be  entitled  to  vote 
if  then  personalli'  present,  hereby  revoking  any 
proxy  or  proxies  heretofore  given  to  vote  upon 
such  stock,   and  ratifying  and  confirming  aU 


130'J 


611.] 


ELECTIONS  —  CORPORATE    MEETINGS. 


[oh.   XXXVII. 


as  a  general  rule,  answered  by  a  reference  to  the  corporate  transfer 
book.  He  who  is  there  registered  as  the  owner  of  the  stock  is 
entitled  to  vote  upon  it.^  It  is  not  necessary  that  the  owner  of 
stock  produce  his  certificate,  or  even  have  a  certificate,  in  order  to 
vote.2  JS'either  will  indebtedness  for  the  subscription  price  prevent 
the  stockholder  from  voting.'     So,  also,  it  is  immaterial  that  the 


that  said  attorneys,  agents,  or  proxies  may  do 
by  virtue  hereof.  A  majority  of  all  or  of  any 
of  said  attorneys,  agents,  and  proxies  who  shall 
be  present  and  shall  act  at  the  meeting  (or  if 
only  one  shall  be  present  and  act,  then  that  one ) 
shall  have,  and  may  exercise,  all  of  the  powers 
of  all  of  said  attorneys,  agents,  and  proxies  here- 
under, and  they  are  instructed  to  vote  in  favor 
of  the  re-election  of  the  present  directors  and  in 
favor  of  approving  the  amended  by-laws  atid  in 
favor  of  the  approval  and  ratification  of  each 
and  every  of  said  three  agreements  and  said 
contracts,  acts,  proceedings,  elections,  and  ap; 
pointments. 

Witness  hand  and  seal,  this  day  of 

,  1902. 

1  As  between    pledgor  and    pledgee 
the  right  to  vote  is   in  the  one  who  is 
registered  as  a  stockholder  on  the  cor- 
porate books,  unless  there  is  an  agree- 
ment between  them  to  the  contrary, 
and  this  rule  prevails  even  though  the 
stock  stands  in  the  name  of  the  pledgee 
"  as  trustee."  Commonwealth  v.  Dalzell, 
152  Pa.  St.  217  (1898),  the  court  saying: 
^'The  general  rule  is  that  as  between 
the  corporation  and  the  person  offering 
to    vote,    the  right   follows  the   legal 
title,  of  which  the  certificates  and  the 
stock  books  are   the  prima  facie  evi- 
dence.    By-laws  may  establish  a  differ- 
ent rule,  and  there  may  be  special  cir- 
cumstances to  change  the  equities  as 
to  individuals  or  even  as  to  the  corpo- 
ration."   Where  stock  is  transferable 
only  on  the  books  of  the  corporation, 
the  person  in  whose  name  the  stock 
stands  on  such  books  is  entitled  to  vote 
it,  and  the  books  of  the  company  are 
conclusive  upon  the  question  as  to  who 
is  entitled  to  vote  stock  legally  issued. 
Morrill  u  Little  Falls  Mfg.  Co.,  53  Minn. 
371  (1893);   Ex  parte  Willcocks,  7  Cow. 
402  (1827),  stating,  however,  that  in  cer- 
tain cases,  like  that  of  stock  held  for 


the  corporation  itself,  a  different  rule 
prevails;  State  v.  Ferris,  42  Conn.  560, 
568  (1875),  sustaining  a  vote  by  a  bank- 
rupt,  the  court  saying:    "The    party 
who  appears  to  be  the  owner  by  the 
books  of  the  corporation  has  the  right 
to  be  treated  as  a  stockholker  and  to 
vote  on  whatever  stock  stands  in  his 
name:"  Hoppin  v.  Buffum,  9  R  I.  513, 
518  (1870),  the  court  sa3Mng:  "  In  a  case 
of  a  dispute  as  to  a  right  to  vote,  the 
books  of  the  corporation  are  the  prima 
facie  evidence;  at  any  rate,  the  corpo- 
ration cannot  be  required  to  decide  a 
disputed  right.     .    .   .    Upon  any  other 
rule  it  could  never  be  known  who  were 
entitled  to  vote,  until  the  courts  had 
decided  the  dispute."    Allen  v.  Hill,  16 
Ca-1.  113  (1860);  Re  St.  Lawrence  Steam- 
boat Co.,  44  N.  J.   L.  529   (1882).     The 
president  has  no  power  to  decide  what 
stock  should  be  allowed  to  vote.    The 
transfer  book  governs  as  to  that.     State 
V.  Cronan.  23  Nev.  437  (1897).     See  also 
next  section  for  various  cases  on  the 
conclusiveness  of  the  transfer  book. 
^  Beckett  v.  Houston,  32  Ind.  393  (1869). 
3  Birmingham,  etc.  Ry.  v.  Locke,  1  Q. 
B.  256  (1841);  Savage  v.  Ball,  17  N.  J.  Eq. 
142  (1864);  American,  etc.  Co.  v.  State 
Board.  56  N.  J.  L.  389  (1894);  People  v. 
Albany,  etc.  R,   R.,   55  Barb.   344,  386 
(1869);  Downing  v.  Potts,  23  N.  J.  L.  66 
(1851).    So  held  in  this  case,  even  though 
the  subscriber  had  paid  nothing  on  his 
stock.       In    General     Electric    Co.    v. 
Wightman.  3  N.  Y.  App.  Div.  118  (1896), 
it  is  stated  that  under  the  New  York 
statutes  subscribers  for  stock  are  not 
entitled   to  any  voice  in  the  manage- 
ment until  the  stock  has  been  paid  up. 
It  has  been  held  in  Maryland  that  a  sub- 
scriber to  the  increased  capital  stock 


1310 


•CH.  XXXVII.] 


ELECTIONS  —  CORPORATE    MEETINGS. 


[§  611. 


person  in  whose  name  the  stock  is  registered  is  merely  a  nominal 
holder,  and  that  another  person  reall}^  owns  the  stock.'  A  sub- 
scriber upon  a  condition  not  yet  performed  may  vote  upon  the 
question  whether  that  condition  shall  or  shall  not  be  performed.- 
And  stock  issued  for  construction,  the  work  not  having  been  per- 
formed, may  nevertheless  be  voted.^ 

Persons  who  are  not  registered  stockholders  on  the  day  an  elec- 
tion is  held  cannot  vote,  though  they  were  stockholders  on  the  day 
the  election  should  have  been  held.*  The  holders  of  stock  issued 
bv  a  stock  dividend  are  entitled  to  vote.^ 

Where  the  corporation  keeps  a  stock-certificate  book  but  no  trans- 
fer book,  a  transfer  on  the  back  of  a  certificate,  which  is  then  can- 
celed and  pasted  back  in  the  certificate  book,  and  a  new  certificate 
issued  to  the  transferee,  is  a  sufiicient  transfer  to  constitute  the 
transferee  a  stockholder.^  Although  votes  are  challenged,  and 
the  inspectors  call  for  the  stock  books,  and  such  books  cannot  be 


of  a  company  is  not  entitled  to  the  cer- 
tificate until  he  has  paid  for  the  stock 
in  full,  and  such  subscriber  is  not  en- 
titled to  the  rights  of  a  stockholder 
until  he  has  paid  in  full.  The  court 
stated  that  such  stockholders  are  not 
entitled  to  dividends  equally  with  other 
stockholders.  The  basis  of  the  decision 
was  the  difference  between,  original 
stock  and  increased  stock.  The  court 
refused  to  compel  the  corporation  to  is- 
sue a  certificate.  Baltimore,  etc.  Ry.  v. 
Hambleton,  77  Md.  341  (1893).  Where 
a  mortgage  must  be  authorized  by  a  vote 
of  two-thirds  in  value  of  the  stock- 
holders this  means  a  stocklvote,  irrespect- 
ive of  the  fact  that  some  of  the  stock  is 
only  partly  paid  up.  Purdom  v.  Ontario- 
etc.  Deb.  Co.,  23  Ont.  Rep.  (Can.)  597 
(1893);93N.W.  Rep.  997. 

1  State  V.  Leete,  16  Nev.  242  (1881), 
where  a  man  put  stock  in  the  name  of 
his  son  in  order  to  qualify  him  to  serve 
as  a  director.  Where,  however,  the 
statute  prescribes  that  only  bona  fide 
stockholders  shall  vote,  a  stockholder 
of  record  who  is  really  a  dummy  for 
the  real  owner  in  order  to  enable  the 
latter  to  avoid  the  statutory  liability 
cannot  vote.  Smith  v.  San  Francisco, 
•etc.  Ry.,  115  CaL  584  (1897).  See  also 
g  612,  infra. 


2  Greenville,  etc.  E.  R.  v.  Coleman,  5 
Rich.  L.  (S.  C.)  118,  135  (1851). 

5  Savage  v.  Ball,  17  N.  J.  Eq.  142  (1864). 
Where  a  sale  of  bonds  having  a  voting 
power  is  made  subject  to  the  ratifica- 
tion of  another  party,  the  vendor  has 
the  right  to  vote  such  bonds  until  the 
sale  is  so  ratified.  State  v.  McDaniel, 
22  Ohio  St.  354  (1872).  Stock  issued  to 
a  contractor  for  money  to  be  paid  may 
be  voted  by  him^at  least  to  the  extent 
or  proportion  of  such  part  of  his  liabil- 
ity as  he  has  fulfilled.  Price  v.  Hol- 
comb,  89  Iowa,  123  (1893). 

4  Johnston  v.  Jones,  23  N.  J.  Eq.  216 
228  (1872). 

6  Bailey  v.  Railroad  Co..  22  Wall.  604, 
637  (1874),  holding  also  that  the  rule  is 
otherwise  as  regards  the  holders  of  a 
scrip  dividend,  where  the  scrip  was  re- 
deemable by  the  company  in  cash  or 
convertible  into  stock. 

6  He  may  vote  at  elections,  and  an 
assignment  by  the  corporation  on  the 
direction  of  officers  elected  by  such  a 
transferee  is  valid.  Such  a  transfer  is 
valid  also,  although  a  by-law  provided 
that  before  selling  his  stock  a  stock- 
holder must  offer  it  to  other  stock- 
liolders  for  purchase.  American  Nat. 
Bank  v.  Oriental  Mills,  17  R.L  551  (1891). 
See  also  §  382,  supra. 


1311 


§  Gil.]  ELECTIONS COKI'OIiATE    MEETINGS.  [cH.  XXXVII, 

obtained,  yet  this  does  not  invalidate  the  election.^  If  the  stock 
book  is  lost,  the  directors  may  substitute  a  new  one,  filled  out  as- 
accurately  as  possible.^  Where  the  corporation  has  kept  no  regular 
stock  books,  and  the  secretarj^  by  order  of  the  directors,  prepares 
a  stock  book,  getting  the  information  from  various  sources,  this- 
book  governs.^  Where  the  transfer  book  differs  from  the  stock 
ledger  the  former  governs,*  A  by-law  authorizing  the  administra- 
tion of  an  oath  to  examine  the  stockholders  as  to  their  title  is  ille- 
gal and  void  where  the  charter  regulates  the  right  to  vote.^ 

There  are  some  exceptions,  however,  to  the  rule  that  the  trans- 
fer book  is  conclusive  on  the  question  of  who  is  entitled  to  vote. 
Thus,  the  inspectors  of  election  may  inquire  whether  the  stock 
which  is  about  to  be  voted  belongs  to  the  corporation,  and  if  it 
does  they  may  reject  the  vote.^  So,  also,  they  may  allow  an  ad- 
ministrator to  vote,  although  the  stock  stands  in  the  name  of  the 
deceased  person.^ 

In  some  courts  this  rule  is  carried  still  further,  and  it  is  held  that 
the  inspectors  of  election  may  allow  the  pledgor  to  vote,  although 
the  stock  stands  in  the  name  of  the  pledgee  on  the  books  of  the 
company;^  and  it  has  also  been  held  that  the  purchaser  of  certifi- 
cates of  stock  may  vote  thereon,  although  the  stock  stands  on  the 
books  of  the  company  in  the  name  of  the  vendor.^   It  has  been  held 

^Re  Argus  Co.,  138  N.  Y.  557  (1893),  istry  of  transfers,  and  the  vendee  pro 

^Re  Schoharie,  etc.  R  R.,  12  Abb.  Pr.  duces  his  certificate  of  stock  duly  trana 

(N.  S.)  394  (1872).  ferred  on  the  back.     People  v.  Devin, 

^Re  Election,  etc.  Grove  Gem.  Go.,  61  17  111.  84  (1855).    In  a  stockholders'  vote 

N.  J.  L.  422  (1898).  ratifying  the  acts  of  directors,  a  stock- 

••  Downing  v.  Potts,   23  N.  J.  L.  66  holder  has  no  I'ight  to  vote  stock  which 

(1851).  he    has    transferred    to    others,    even 

5  People  V.  Kip,  4  Govt.  882,  note  (1822).  though  it  still  stands  in  his  name  on  the 

6  See  §  613,  infra.  books.  Graves  v.  Mono  Lake,  etc.  Go., 
^See  g  612,  infra.  81  Gal.  303  (1889).  Where,  however,  the 
^  See  §  612,  infra.  unregistered  transferee  did  not  chal- 
9  In  the  case  of  Allen  v.  Hill,  16  Gal.  lenge   the   right  of  his   transferrer  to 

113, 119  (1860),  the  court  said:  "Itwould  vote  and  did  not  claim  the  right  to- 
seem,  upon  principle,  that  the  real  vote,  but  attacked  the  election  after- 
owner  of  stock  should  be  entitled  to  wards  by  quo  warranto,  his  suit  failed, 
represent  it  at  the  meetings  of  the  cor-  People  v.  Robinson,  64  Gal.  373  (1883). 
pofation,  and  that  the  mere  fact  that  State  v.  Smith,  15  Greg.  98,  118  (1887), 
he  does  not  appear  as  owner  upon  the  contains  a  dictum  that  the  purchaser 
books  of  the  company  should  not  ex-  of  a  certificate  of  stock  cannot  vote  on 
elude  him  from  the  privilege  of  doing  the  stock  until  it  has  been  transferred 
so."  In  Illinois  it  is  held  that  the  cor-  into  his  name.  Where  both  the  legal 
poration  must  allow  the  real  owner  of  and  equitable  owners  of  stock  agree  as 
tb.e  stock  to  vote,  whether  he  be  the  to  how  stock  shall  be  voted,  other  stock- 
registered  owner  or  not,  where  the  cor-  holders  cannot  complain  that  the  vote 
poration  has  no  by-law  requiring  a  reg-  was  not  cast  in  accordance  with  law.. 

1312 


CH.  XXXVII.]  ELECTIONS  —  CORPOEATE    MEETINGS. 


[§  611. 


in  Georgia  that  where  a  stockolder  has  sold  his  stock  and  delivered 
the  certificates,  he  has  no  right  to  give  a  proxy  on  the  stock  to 
some  other  person,  even  though  the  stock  still  stands  in  his  name, 
and  the  giving  of  such  prox}^  may  constitute  a  tort  for  which  the 
purchaser  of  the  stocli  may  sue  for  damages.^  The  vendor  and 
vendee  of  stock  may  agree  between  themselves  as  to  who  shall  vote 
the  stock.  Where  the  vendor  expressly  parts  with  the  right  to 
vote  the  stock,  he  cannot,  under  the  statutes  of  Pennsylvania,  vote 
it,  even  though  he  appears  as  a  stockholder  on  the  corporate  books.^ 
In  New  York,  by  statute,  the  corporate  transfer  book  is  made 
conclusive  upon  the  question  who  may  vote.'  The  inspectors  can- 
not go  back  of  it,  but  the  court  may;*  There  are  various  other 
statutory  provisions  in  New  York  regulating  voting,  and  the  vote 
may  by  by-law  be  limited  to  those  who  are  registered  stockholders 
for  a  period  not  exceeding  forty  days  before  the  election.* 


State  V.   Ferris,   42    Conn.   560    (1875),    R.  R,  19  Wend.  37  (1837);  Re  Mohawk, 


where  a  bankrupt  voted  stock  still 
standing  in  his  name.  State  v.  Petti- 
neli,  10  Nev.  141  (1875).  In  this  last 
case  the  registered  holder  had  trans- 
ferred the  certificate,  but  obtained  it 
again  and  exhibited  it  at  the  meeting. 
If  a  vote  is  not  challenged,  an  objection 
to  it  afterwards  may  not  meet  with 
much  favor.  Re  Long  Island  R.  R.,  19 
Wend.  37,  44  (1837).  See  also  §  620, 
infra.  The  vendor  of  stock  may  give 
the  vendee  a  proxy  to  vote  on  the  stock 
which  still  stands  in  the  name  of  the 
vendor  on  the  books.  Stephenson  v. 
Vokes,  27  Out.  Rep.  (Can.)  691  (1896). 

1  Witham  v.  Cohen,  100  Ga.  670  (1897). 

-  Commonwealth  v.  Patterson,  158  Pa. 
St.  476  (1893).  As  between  pledgor  and 
pledgee  the  right  to  vote  is  in  the  one 
who  is  registered  as  a  stockholder  on 
the  corporate  books,  unless  there  is  an 
agreement  between  them  to  the  con- 
trary, and  this  rule  prevails  even  though 
the  stock  stands  in  the  name  of  the 
pledgee  "  as  trustee."  Commonwealth 
V.  Dalzell,  152  Pa.  St.  217  (1893).  The 
registered  stockholder  may  vote  even 
though  he  has  transferred  his  certifi- 
cates to  another.  Re  Argus  Printing 
Co.,  1  N.  D.  434  (1891). 

'  Vandeburgh   v.   Broadway  Ry.,  29 
Hun,  348,  355  (1883);   Re  Long  Is'and 


etc.  R  R,  19  Wend.  135  (1838).  The  reg- 
istered stockholder  is  entitled  to  vote 
although  he  has  assigned  his  certificate 
of  stock.  Schoharie  Valley  R  R.  Case, 
12  Abb.  Pr.  (N.  S.)  394  (1872). 

*  Strong  V.  Smith,  15  Hun,  222  (1878). 

5  See  Laws  1901,  ch.  355,  §  20.  Strong 
V.  Smith,  15  Hun,  222  (1878),  holding 
that  the  transfer  book  is  conclusive 
upon  the  inspectors,  but  that  the  court 
has  power  to  go  back  of  the  entries 
therein  and  inquire  -Whether,  as  for  in- 
stance in  this  case,  a  transfer  of  shares 
was  an  absolute  sale  or  a  pledge,  and 
thus  whether  the  transferrer  or  trans- 
feree has  the  right  to  vote  them;  citing 
Ex  parte  Holmes,  5  Cow.  426  (1826);  Re 
Long  Island  R  R,  19  Wend.  37  (1837); 
and  see  N.  Y.  L.  J.,  June  29,  1889.  Al- 
though only  stockholders  who  still  own 
their  stock  are  allowed  to  vote,  a  per- 
son who  has  given  an  option  on  his 
stock  is  nevertheless  entitled  to  vote 
on  it.  Re  Newcomb,  18  N.  Y.  Supp.  16 
(1891).  In  New  York  when  for  any  rea- 
son the  corporation  fails  to  hold  an  elec- 
tion at  the  stated  time  as  provided  in. 
the  charter  or  by-laws,  and  the  election 
is  held  subsequently,  only  those  stock- 
holders are  entitled  to  vote  who  were 
qualified  electors  at  the  time  when  the 
election  ought  to  have  been  held.  Van- 


(83) 


1313 


§  612.] 


ELECTIONS  —  CORPORATE    MEETINGS. 


[on.  XXXVII. 


§  612.  The  right  of  trustees,  pledgees,  achninistrators,  etc.,  to 

^Qte. It  is  the  general  rule  that  a  person  holding  stock  as  trustee 

is  entitled  to  vote  upon  the  stock,  not  only  where  he  is  duly  regis- 
tered as  a  holder  of  stock  in  trust,  but  also  where  he  is  registered 
absolutely  as  a  stockholder  upon  the  books  of  the  corporation.^  If 
the  trustees  disagree  as  to  how  the  stock  shall  be  voted,  the  courts 
have  power  to  direct  them.^  A  trustee  of  stock  has  the  right  to 
vote  thereon  even  for  a  consolidation,  and  even  though  he  holds  it 


denburgh  v.  Broadway  R.  R.,  29  Hun, 
348  (1883);  People  v.  Tibbets,  4  Cow. 
358  (1825).  Where  the  statute  limits 
the  votes  to  stock  that  for  ten  days  has 
been  entered  on  the  stock  book,  a  stock- 
holder cannot  vote  who  mailed  a  cer- 
tificate for  transfer  the  day  before  the 
ten  days  began,  if  the  corporation  did 
not  receive  the  same  until  six  days 
thereafter.  The  object  of  the  statute 
is  to  enable  persons  to  ascertain  during 
the  ten  days  who  are  entitled  to  vote. 
Under  the  New  York  statute  a  person 
who  has  sold  his  certificate  of  stock  can- 
not vote.  Re  Glen  Salt  Co.,  17  N.  Y. 
App.  Div.  234  (1897);  aff'd,  153  N.  Y.  688. 
As  to  closing  the  books,  see  also  §  538, 
supra.  Where  a  statute  forbids  the 
voting  of  stock  which  has  been  trans- 
ferred within  twenty  days  prior  to  an 
election,  and  in  a'  corporation  having 
Bixty  shares  of  stock  thirty-two  shares 
are  voted,  four  of  which  were  trans- 
ferred on  the  day  of  election,  the  court 
will  declare  the  election  void.  Re  Ver- 
non, 1  Pennewill  (Del),  202  (1898). 

1  Conant  v.  Millaudon,  5  La.  Ann.  542 
(1850);  Wilson  v.  Central  Bridge,  9  R.  L 
590  (1870);  Hoppin  v.  Buffum,  9  R.  L 
513,  519,  (1870),  the  court  saying:  "If 
the  trust  was  of  such  a  nature  that  the 
trustee  has  the  control  and  manage- 
ment of  the  property,  and  is  to  exercise 
his  discretion  concerning  it,  then  lie  is 
the  proper  person  to  represent  and  vote 
upon  it.  And  the  corporation  cannot 
be  required  to  examine  into  the  nature 
of  the  trust,  with  a  view  to  decide 
as  to  the  right  to  vote;  "  Re  Barker,  6 
Wend.  509  (1831);   Re  Mohawk,  etc.  R, 


R.,  19  Wend.  135  (1838);  Re  North  Shore, 
etc.  Ferry  Co.,  63  Barb.  556  (1872),  hold- 
ing also  that  the  administrator  of  the 
trustee  may  vote  the  stock;  Pender  v. 
Lushington,  L.  R  6  Ch.  D.  70  (1877).  In 
Clarke  v.  Central  R.  R.,  50  Fed.  Rep.  338 
(1892),  it  was  held  that  a  trust  company 
has  no  power  to  hold  as  trustee  and 
vt)te  the  majority  of  the  stock  of  a 
great  railroad  system,  especially  where 
it  is  also  the  trustee  in  a  trust  deed  of 
the  company,  the  court  saying:  "There 
are  many  situations  in  which  stock 
may  be  so  placed  that  it  becomes  in- 
equitable or  illegal  for  it  to  be  voted. 
The  law  places  the  voting  power  of 
pledged  stock  in  the  pledgor  or  mort- 
gagor, even  where  there  is  no  express 
stipulation  to  tjiat  effect.  And  where 
the  pledgor  or  mortgagor  is  disqualified 
to  vote  the  stock,  the  disqualification 
extends  as  well  to  the  pledgee  or  trus- 
tee." In  this  case,  however,  on  the 
final  hearing,  the  bill  was  dismissed. 
See  62  Fed.  Rep.  328  (1894).  Even  though 
a  statute  requires  that  certificates  run- 
ning to  trustees  shall  state  who  is  the 
cestui  que  trust,  yet  an  election  may  be 
legal  though  stock  is  voted  by  trustees 
and  such  stock  does  not  state  who  is 
the  real  owner.  State  v.  Cronan,  23 
Nev.  437  (1897). 

2Wanneker  v.  Hitchcock,  38  Fed. 
Rep.  383  (1889).  Where  stock  is  held  in 
trust  by  two  trustees  and  they  disagree, 
the  stock  cannot  be  voted  except  that 
the  court  may  remove  a  trustee  if  he  is 
guilty  of  bad  faith.  Mannhardt  v.  Illi- 
nois, etc.  Co.,  90  IlL  App.  315  (1899). 


1314 


CH.  XXXVII.]  ELECTIONS  —  COKPORATE    MEETINGS. 


[§  612. 


for  another  corporation.^  A  trustee  holding  stock  and  electing 
himself  the  president  of  a  company  and  receiving  a  salary  must 
not  allow  his  personal  interest  in  the  salary  to  conflict  with  his 
duty  as  a  stockholder  to  favor  the  sale  of  the  corporate  property 
at  a  high  price.^  Where  a  mortgage  covers  shares  of  stock  and 
the  trustee  has  the  voting  power,  its  discretion  cannot  be  controlled 
by  the  majority  of  the  bondholders.^  A  mortgage  on  shares  of 
stock  does  not  prevent  the  corporation  controlled  by  such  stock 
from  issuing  a  mortgage  on  its  property;  and  it  is  no  breach  of 
trust  for  the  trustee  of  the  first  mortgage  to  be  the  trustee  of  the 
second  mortgage  where  the  first  mortgage  does  not  prohibit  such 
second  mortgage,  the  stock,  by  the  terms  of  the  mortgage,  remain- 
ing'in  the  name  of  the  mortgagor.'* 

In  California  the  real  owner  of  stock  may  vote  on  it,  although 
it  stands  on  the  books  of  the  company  in  the  name  of  a  "dummy" 
as  "  trustee."^ 

A  pledgor  of  stock  is  entitled  to  vote  upon  it  in  all  cases  where 
the  stock  continues  to  stand  on  the  books  of  the  company  in  the 


109 


1  Market  Street  Ry.  v.  Hell  man, 
Cal.  571  (1895). 

^Elias  V.  Schweyer,  13  N.  Y.  App. 
Rep.  836  (1897).  Where  a  trustee  hold- 
ing stock  votes  himself  into  office  and 
illegally  votes  to  himself  a  large  salary, 
the  cestuis  que  trust  may  in  a  suit  for 
his  removal  ask  also  that  he  account  to 
such  cestuis  que  trust  for  such  salary. 
Elias  V.  Schweyer,  27  N.  Y.  App.  Div. 
69  (1898).  Where  a  majority  of  the 
stock  of  the  corporation  passes  by  will 
to  a  trustee  of  the  estate,  and  he  makes 
himself  president,  and  increases  his  sal- 
ary, and  pays  little  attention  to  the 
business,  and  tries  to  sell  the  company 
out  to  a  consolidation,  and  does  not 
properly  divide  the  income  between 
life  tenant  and  remaindermen,  and 
causes  the  company  to  sell  its  reserve, 
and  is  responsible  for  the  company 
losing  its  most  valuable  contract,  and 
is  unable  to  agree  with  a  cestui  que 
trust,  the  court  will  remove  him  from 
the  trusteeship.  Lister  v.  Weeks,  60 
N.  J.  Eq.  215  (1900).  See  S.  C,  47  Atl. 
Rep.  588  (N.  J.  1900).  Even  though  a 
trustee  of  stock  who  has  been  an  offi- 
cer and  stockholder  in  the  corporation 
is  voted  a  salary,  this  is  no  ground  for 

1315 


removing  him  as  trustee,  there  being 
no  proof  that  he  voted  in  favor  of  the 
salary.  Neither  is  the  fact  that  the 
company  did  not  pay  as  large  dividends 
as  it  formerly  did  any  ground  for  the 
removal  of  the  trustee.  Dailey  v.  Wight, 
51  AtL  Rep.  38  (Md.  1902). 

3  Toler  V.  East  Tennessee,  etc.  Ry.,  67 
Fed.  Rep.  168  (1894). 

4  Gasquet  v.  Fidelity,  etc.  Co.,  75  Fed. 
Rep.  343  (1896). 

5  Under  the  California  statute,  stock 
placed  by  the  secretary  in  the  name  of 
a  "  dummy,"'  as  trustee,  cannot  be  voted 
by  such  dummy,  the  real  owners  of  the 
stock  not  having  assented  thereto,  even 
though  for  business  reasons  they  did 
not  wish  to  have  the  stock  issued  to 
themselves.  Stewart  v.  Mahoney  Min. 
Co.,  54  Cal.  149  (1880);  Smith  v.  San 
Francisco,  etc.  Ry.,  115  Cal.  584  (1897). 
See  also  Ex  parte  Holmes,  5  Cow.  426 
(1826):  American  Nat.  Bank  v.  Oriental 
Mills,  17  R.  L  551  (1891),  holding  that 
the  beneficial  owners  are  entitled  to 
say  how  the  vote  shall  be  cast.  In  the 
last  case  the  stock  had  been  surren- 
dered and  new  certificates  issued,  but 
no  transfer  book  was  kept. 


§  G12.] 


ELECTIONS  —  CORPORATE    MEETINGS.  [CH.  XXXVII. 


name  of  such  pledgor.'  And  even  where  the  pledgee  has  caused 
the  stock  to  be  transferred  into  his  own  name,  as  by  law  he  is  al- 
lowed to  do,-  it  has  been  held  that  the  pledgor  may  demand  the 
right  to  vote  at  elections,  and  that  upon  proof  of  the  facts  the  in- 
spectors of  election  must  allow  the  pledgor  to  vote  the  stock.' 

It  must  be  conceded,  however,  that  the  established  rule  is  to  the 
contrary ."*  Where  the  stock  is  transferred  to  the  pledgee  on  the 
books  of  the  company  the  corporation  is  not  bound  to  allow  the 
pledgor  to  vote,  although  a  court  of  equity  may  have  power  to  com- 
pel the  pledgee  to  give  the  pledgor  a  proxy.'*  Under  the  Xew  York 
statute  making  the  transfer  book  conclusively  binding  upon  the  in- 
spectors of  election,  the  inspectors  cannot  exclude  the  vote  of  the 


1  Re  Barker,  6  Wend.  509  (1831);  Ex 
parte  Willcocks,  7  Cow.  402  (1827);  Re 
Cecil,  36  How.  Pr.  477  (1869);  Schofield 
V.  Union  Bank,  2  Cranch.  C.  C.  115 
(1815);  Re  St.  Lawrence  Steamboat  Co., 
44  N.  J.  L.  529,  540  (1882),  a  dictum. 
Although  the  pledgor  of  stock  votes 
the  stock  in  favor  of  a  lease  of  the  cor- 
porate property  on  such  terms  tliat  no 
dividends  on  the  stock  are  possible,  yet 
in  the  absence  of  fraud  the  pledgee  is 
bound.  Gibson  v.  Richmond,  etc.  R.  R., 
37  Fed.  Rep.  743  (1889). 

2  See  §  466,  supra. 

3  In  Oregon  it  is  held  that  at  common 
law  the  real  owner  of  stock  is  entitled 
to  vote  it,  even  though  it  stands  on  the 
corporate  books  in  the  name  of  his 
pledgee.  It  is  denied  that  the  transfer 
book  is  binding  upon  the  inspectors  of 
election,  and  the  decisions  to  that  effect 
in  New  York  are  stated  to  be  based  on 
the  New  York  statutory  law.  State  v. 
Smith,  15  Oreg.  98  (1887).  See  also  Allen 
V.  Hill,  16  Cal.  113  (1860),  to  substan- 
tially the  same  effect.  It  has  been  held 
that  the  pledgee  of  stock  is  not  even 
entitled  to  notice  of  meetings.  Mc- 
Daniels  v.  Flower  Brook  Mfg.  Co.,  22 
Vt.  274  (1850). 

■iThe  pledgor  and  pledgee  of  stock 
may  agree  between  themselves  as  to 
who  should  vote  the  stock.  If  there  is 
no  agreement,  the  right  to  vote  should 
follow  the  legal  title;  in  other  words, 
the  title  as  it  appears  on  the  corporate 
books.    Even  under  a  statute  author- 

13 


izing  inspectors  of  election,  upon  a 
challenge,  to  determine  whetiier  the 
party  who  appears  to  be  the  owner  is 
really  the  owner,  the  pledgee  is  entitled 
to  vote  the  stock  standing  in  his  name 
where  there  is  no  agreement  to  the 
contrary,  and  even  though  the  stock 
stands  in  the  pledgee's  name  "as  trus 
tee."  Commonwealth  v.  Dalzell,  15'J 
Pa.  St.  217  (1893).  A  pledgee  into 
whose  name  the  stock  has  been  trans 
ferred  may  vote  it.  He  is  a  "  bona  fide  '■ 
stockholder  as  required  by  the  statute. 
The  pledgor  cannot  apv)ear  at  the  meet- 
ing and  vote  the  stock.  Re  Argus  Print- 
ing Co.,  1  N.  D.  434  (1891).  It  is  not  a 
conversion  for  one  who  holds  stock  as 
pledgee  to  attend  corporate  meetings 
and  vote  upon  the  stock.  Heath  v. 
Silverthorn  Lead  Min.  etc.  Co.,  39  Wis. 
146  (1875). 

5  J.  H.  Wentworth  Co.  v.  French,  176 
Mass.  442  (1900),  holding  also  that  the 
Massachusetts  statute  that  a  certificate 
of  stock  issued  as  a  pledge  shall  state 
that  fact  on  its  face,  enables  the  pledgor 
to  vote  without  such  proxy.  If  the  cer- 
tificate merely  states  that  it  is  given  in 
pledge,  without  stating  the  name  of  the 
pledgor,  the  pledgee  to  whom  the  cer- 
tificate runs  may  vote  the  stock.  The 
court  may.  however,  refuse  to  grant  a 
mandamus  declaring  certain  persons 
duly  elected  directors  where  they  were 
elected  by  the  vote  of  the  pledgee  as 
against  the  wishes  of  the  pledgor.  See 
54  Atl.  Rep.  783. 
6 


OH.  XXXVIL]  elections  —  CORPORATE    MEETINGS. 


[§  C12. 


registered  stockholder,  although  he  holds  the  stock  merely  as 
pledgee;  but  under  the  N'ew  York  statute  allowing  the  courts  to 
summarily  review  the  election,  the  court  has  power  to  go  back  of 
the  transfer  book  and  set  the  election  aside,  where  the  statute  gave 
the  pledgor  the  right  to  vote.^  In  many  of  the  states  there  are 
statutes  which  give  to  the  pledgor  the  right  to  vote  the  stock.-  And 
even  where  there  is  no  statute  to  protect  the  pledgor's  right  to 
vote,  it  has  been  held  that  the  courts  will  intervene,^  and  that  by 
a  bill  in  equity  the  pledgor  may  compel  the  pledgee  to  give  him  a 
proxy  to  vote  the  stock.*  But  in  order  to  invoke  the  extraordinary 
powers  of  a  court  of  equity  in  this  respect,  the  pledgor  must  show 
that  the  interests  of  the  company  have  been  or  will  be  prejudiced, 
or  that  the  value  of  the  stock  has  been  or  will  be  impaired,  and 
that  the  intervention  of  the  court  is  necessary  to  protect  the  pledg- 
or's rights.'^  A  pledgor  may  enjoin  a  pledgee  from  transferring 
stock  into  his  name  for  the  purpose  of  controlling  an  election, 
which  otherwise  the  pledgor  would  control,  where  the  statutes  of 
the  state  provide  for  recording  of  such  pledge  without  a  transfer 
of  the  stock  itself.^    The  pledgee  of  a  majority  of  the  corporate 


1  Strong  V.  Smith,  15  Hun,  222  (1878). 

2  strong  V.  Smith,  15  Hun,  222  (1878). 
•Concerning  a  similar  statute  in  Rhode 
Island,  see  Sayles  v.  Brown,  40  Fed.  Rep. 
8  (1889).  Under  the  Colorado  statutes 
an  owner  who  has  pledged  his  stock 
may  represent  the  stock  at  all  meet- 
ings of  the  stockholders  and  vote  ac- 
cordingly. Miller  t\  Murray,  17  Colo. 
408  (1892).  See  also  as  to  the  Colorado 
statute.  Nat.  Bank  of  Commerce  v. 
Allen.  90  Fed.  Rep.  545  (1898). 

3  Scholfield  V.  Union  Bank,  2  Cranch, 
•C.  C.  115  (1815);  S.  C,  21  Fed.  Cas.  723; 
Stater.  Smith,  15  Oreg.  98  (1887),  where 
the  pledgor  obtained  an  injunction 
against  the  pledgee  voting  the  stock, 
and  the  pledgor  was  allowed  by  the  in- 
spectors to  vote. 

*  Vowell  V.  Thompson,  3  Cranch,  C.  C. 
428  (1829);  S.  C,  28  Fed.  Cas.  1308.  See 
also  Hoppin  v.  Buffum,  9  R.  I.  513  (1870), 
holding  that  although  the  pledgor  may 
by  a  bill  in  equity  compel  the  pledgee, 
in  whose  name  the  stock  stands,  to 
make  a  retransfer  or  to  give  a  proxy  to 
the  pledgor,  yet  where  the  pledgor  for 
many  years  allows  the  pledgee  to  vote 


the  stock  and  claims  the  right  at  an 


election  only  after  the  ballots  are  cast 
and  are  being  counted,  the  court  will 
not  set  the  election  aside. 

sMcHenry  v.  Jewett,  90  N.  Y.  58 
(1882).  Where  the  owner  of  a  majority 
of  the  stock  has  been  fraudulently  de- 
prived of  her  stock  by  her  pledgee,  who 
has  thereby  deprived  her  of  the  control 
and  claims  the  stock  as  his  own,  the 
court  will  enjoin  him  from  voting  the 
stock  and  will  appoint  a  receiver  of 
such  stock  pendente  lite.  Ayer  v.  Sey- 
mour, 5  N.  Y.  Supp.  650  (Com.  PI.  1889). 
Where  a  person  pledges  his  stock  as 
additional  security  to  a  corporate  cred- 
itor who  has  bonds  of  the  company  in 
pledge  for  the  same  debt,  such  pledge 
of  bonds,  however,  being  illegal,  the 
pledgor  of  the  stock  cannot  compel  the 
creditor  to  resort  to  the  bonds  first; 
nor,  although  a  fictitious  sale  of  the 
stock  is  alleged,  can  he  compel  the 
transferee  of  the  stock  to  return  the 
stock  so  that  the  pledgor  may  vote  it, 
unless  the  pledgor  pays  the  amount 
due.  Hinckley  v.  Pfister,  83  Wis.  64 
(1892);  93N.W.  Rep.  997. 

^Spreckels  v.  Nevada  Bank,  113  CaL 
272  (1896). 


1317 


§  C12.] 


ELECTIONS  —  CORPORATE    MEETINGS. 


[CII.  XXXVII. 


stock,  who  by  voting  their  stock  cause  men  of  their  choice  to  be 
elected  directors,  are  not  liable  for  the  misconduct  of  such  direct- 


ors/ 

An  administrator  or  executor  may  vote  on  the  stock  of  the  de- 
ceased stockholder,  even  though  such  stock  has  not  been  trans- 
ferred to  the  executor  or  administrator  on  the  books  of  the  com- 
pany.^ Stock  held  jointly  by  three  executors  cannot  be  voted  un- 
less they  all  agree  u^wn  the  vote.^  "Where  a  will  gives  to  one  of 
three  executors  the  power  to  vote  the  stock,  and  directs  the  other 
two  executors  to  give  him  a  proxy  to  that  purpose,  the  court  will 
order  the  proxy  to  be  given,  even  though  he  intends  to  vote  him- 
self into  office,  and  he  may  not  be  a  good  manager.*  A  partner 
may  vote  upon  stock  belonging  to  the  firm  and  registered  in  the 
partnership  narae.^  Where  stock  is  entered  on  the  corporate  books 
in  the  name  of  a  person  as  an  officer  of  another  corporation,  the 
successor  in  office  of  that  person  may  vote  the  stock  without  a 
transfer  on  the  corporate  books.**  Where  a  corporation  is  author- 
ized to  hold  stock  in  another  corporation  it  is  entitled  to  vote  such 
stock.'  A  corporation  as  a  stockholder  may  vote  its  stock  by  an 
agent.*    When  a  municipal  corporation  is  a  stockholder  in  a  private 


1  Higgins  V.  Lansingh,  154  111.  301 
(1895).    See  also  ^  468,  supra. 

2 Quoted  and  approved  in  Schmidt  v. 
Mitchell,  101  Ky.  570  (1897);  Market 
Street  Ry.  v.  Hellman,  109  Cal.  571  (1895). 
A  foreign  executor  may  vote  stock  be- 
longing to  the  estate,  even  though  the 
stock  stands  in  the  name  of  the  deceased 
stockholder.  Re  Cape  May,  etc.  Co.,  16 
Atl.  Rep.  191  (N.  J.  1888);  Re  North 
Shore,  etc.  Ferry  Co.,  63  Barb.  556  (1872), 
holding  that  an  administrator  may  vote 
upon  stock  standing  in  the  name  of  the 
deceased  person,  even  though  the  latter 
held  the  stock  as  trustee.  In  a  proceed- 
ing to  dissolve  a  corporation  the  ad- 
ministrator is  the  proper  representative 
of  stock  owned  by  the  estate.  Wolfe  v. 
Underwood.  97  Ala.  375  (1893).  The 
administrator  and  not  the  heirs  at  law 
have  the  right  to  vote.  Schoharie  Val- 
ley R.  R.  Case,  13  Abb.  Pr.  (N.  S.)  394 
(1873). 

3  Tunis  V.  Hestonville,  etc.  R.  R.,  149 
Pa.  St.  70  (1893),  aff'g  s.  a,  1  Pa.  Dist. 
207  (1892).  Where  there  are  but  two 
stockholders  and  one  dies,  and  his  ad- 


ministrator takes  possession  of  the  cor- 
porate property  as  though  it  belonged 
to  the  estate,  the  other  stockholder  may 
have  a  receiver  appointed.  Re  Belton, 
47  La,  Ann.  1614  (1895). 

^Laflferty's  Estate,  154  Pa.  St.  430 
(1893).  See  also  Tunis  v.  Hestonville, 
etc.  R.  R.,  149  Pa.  St.  70  (1892). 

6  Kenton  Furnace  R.  R.  etc.  Co.  v. 
McAlpin,  5  Fed.  Rep.  737  (1880).  In  Cali- 
fornia he  may  vote  such  stock  where 
the  stock  belongs  to  the  firm,  but  is 
registered  in  the  name  of  the  other 
partner,  who  is  dead.  Allen  v.  Hill,  16 
CaL  113  (1860). 

*>  Farmers',  etc.  Co.  v.  Chicago,  etc. 
Ry.,  27  Fed.  Rep.  146,  156  (1886);  Mons- 
seaux  V.  Urquhart,  19  La.  Ann.  482 
(1867).  Contra,  Re  Mohawk,  etc.  R.  R., 
19  Wend.  135,  146  (1838),  holding  that 
the  word  "  cashier  "  attached  to  a  stock- 
holder's name  does  not  authorize  a  suc- 
ceeding cashier  to  vote  the  stock. 

'  Davis  V.  U.  S.  etc.  Co.,  77  Md.  35 
(1893).     Cf.  %  615,  infra. 

estate  v.  Rohlfifs.  19  AtL  Rep.  1099 
(N.  J.  1890). 


1318 


CH.  XXXVII.]    .  ELECTIONS  —  CORPOKATE    MEETINGS, 


[§  613. 


corporation,  it  is  entitled  to  vote  upon  its  stock  in  the  same  way  as 
any  other  stockholder.'  The  fact  that  the- government  or  a  single 
person  owns  all  the  stock  of  a  company  does  not  put  an  end  to  the 
corporate  existence.-  Where  joint  owners  of  stock  disagree  as  to 
its  vote,  the  vote  is  to  be  rejected.' 

A  receiver,  who  is  in  possession  of  shares  of  stock,  generally 
votes  such  stock  without  his  right  to  do  so  being  questioned.  Some- 
times the  court,  upon  appointing  a  receiver  of  stock,  expressly 
authorizes  him  to  vote  the  stock,  and  sometimes  directs  him  how 
to  vote  it.^ 

It  seems  that  a  stockholder  may  lease  his  stock.  He  may,  for  a 
certain  sum,  assign  to  another  all  dividends  during  the  specified 
time,  and  give  to  the  lessee  the  right  to  vote  the  stock  during  that 
time.^  A  gift  of  stock  on  condition  that  the  dividends  should  all 
go  to  the  owner  and  that  he  should  vote  it  is  a  gift  of  a  remainder 
with  a  life  interest  in  the  donor.^ 

§  613.  The  corporation  cannot  vote  iqwn  shares  of  Us  otvn  stock. 
Shares  of  stock  owned  by  the  corporation  itself  cannot  be  voted 
either  directly  by  the  corporate  officers  or  indirectly  by  a  trustee 
of  the  corporation.  This  is  the  established  rule,  whether  the  stock 
is  registered  in  the  name  of  the  corporation  or  not,'' 


1  See  §  99,  supra.^  Where  stock  in  a 
railroad  is  owned  by  a  part  of  a  county, 
that  part  becomes  a  municipality  for 
the  purpose  of  owning  and  voting  the 
stock.  Hancock  v.  Louisville,  etc.  R.  R., 
145  U.  S.  409  (1892). 

-  The  United  States  government, 
though  the  owner  of  all  the  stock  of  a 
canal  company,  may  continue  as  a 
stockholder  and  keep  up  the  corporate 
existence  by  allowing  the  directors  to 
retain  one  share  each  as  a  qualification 
share.  U.  S.  v.  Louisville,  etc.  Canal 
Co.,  4  Dill.  601  (1878);  s.  a.  26  Fed.  Cas. 
1002.     See  also  §  709,  infrcu 

3  Ee  Pioneer  Paper  Co.,  36  How.  Pr. 
Ill  (1865);  Tunis  v.  Hestonville,  etc. 
Ry.,  1  Pa.  Dist.  207  (1892),  Cf.  S.  C,  149 
Pa.  St.  70. 

*  A  court  may  appoint  a  receiver  to 
hold  an  election,  etc.,  where  the  entire 
interests  in  the  corporation,  including 
the  stock,  belong  to  parties  who  have 
been  defrauded.  King  v.  Barnes,  51 
Hun,  550  (1889);  afE'd,  113  N.  Y.  655. 
See  also  dictum  in  Wanneker  v.  Hitch- 


cock, 38  Fed.  Rep.  383  (1889),  where  the 
trustees  of  stock  disagi'eed  as  to  voting; 
People  V.  Albany,  etc.  R  R,  55  Barb. 
344,  371  (1869),  where  a  receiver's  vote 
was  set  aside,  fraud  being  involved  and 
the  appointment  being  invalid;  Ameri- 
can Inv.  Co.  V.  Yost.  25  Abb.  N.  Cas.  274 
(1890),  where  a  receiver  of  stock  was  in- 
structed how  to  vote,  the  action  being 
to  enforce  an  agreement  to  place  stock 
in  the  hands  of  trustees  until  the  debts 
of  the  company  and  chief  stockholder 
were  paid. 

sZachry  v.  Nolan,  66  Fed.  Rep.  467 
(1895). 

6  Matter  of  Brandreth,  169  N.  Y.  437 
(1902). 

T  Ex  parte  Holmes,  5  Cow.  426  (1826); 
McNeely  v.  Woodruff.  13  N.  J.  L.  352 
(1833);  American  Ry.  Frog  Co.  v.  Haven, 
101  Mass.  398  (1869);  Commonwealth  v. 
Boston,  etc.  R  R,  142  Mass.  146  (1886); 
State  V.  Smith,  48  Vt.  266  (1876):  Mons- 
seaux  V.  Urquhart,  19  La.  Ann.  482 
(1867);  U.  S.  V.  Columbian  Ins.  Co.,  2 
Cranch,  C.  C.  266  (1821);  New  England, 


1319 


§  014.] 


ELECTIONS  —  CORPORATE   MEETINGS.  [CH.  XXXVIL. 


Where  the  directors,  just  before  the  election,  issue  or  sell  stock 
owned  b}'  the  corporation,  the  purpose  of  such  issue  or  sale  being 
to  control  the  election,  the  courts  will  interfere  at  the  instance  of 
other  stockholders  where  an  actual  fraud  is  involved.^ 

§  614.  Issuing  stoclc  in  order  to  carry  an  election. —  Where  the 
directors  cause  treasury  stock  to  be  sold  to  themselves  at  less  than 
its  real  value  and  for  the  purpose  of  carrying  an  election,  the  court 
will  set  the  sale  aside  as  fraudulent.^  In  a  proper  case  the  court 
will  enjoin  the  issue  of  the  new  stock.'  So  also  where  directors 
issue  new  stock  to  their  friends  at  less  than  par  and  without 
offering  it  to  the  existing  stockholders,  the  object  being  to  control 


etc.  Ins.  Co.  v.  Phillips,  141  Mass.  535 
(1880),  where  income  bonds  entitled  to 
vote  were  held  to  have  lost  that  right 
when  they  were  paid;  Brewster  u  Hart- 
ley, '67  Cal.  15  (1869),  where  the  com- 
pany had  pledged  its  stock.  If  all  the 
stockholders  consent,  the  stock  owned 
by  the  corporation  may  be  voted.  Far- 
well  V.  Houghton,  etc  Works,  8  Fed. 
Rep.  66  (1881).  Where  a  mortgage  can 
be  given  only  upon  the  vote  of  the 
stockholders,  stock  owned  by  the  cor- 
poration cannot  be  voted,  but  the 
pledgee  of  such  stock  from  the  corpo- 
ration was  allowed  to  vote.  Vail  v. 
Hamilton,  85  N.  Y.  453  (1881).  Directors 
elected  by  votes  upon  stock  owned  by 
the  corporation  are  illegally  elected. 
Ex  parte  Desdoity,  1  Wend.  98  (1828). 
Where  the  statute  requires  the  vote  of 
the  holders  of  a  certain  amount  of  the 
stock,  only  the  outstanding  stock  is 
considered.  The  unissued  stock  and 
treasury  stock  are  not  counted.  Market 
Street  Ry.  v.  Hellman,  109  Cal.  571 
(1895). 

1  See  §  614,  infra,  on  this  subject. 

2  Hilles  V.  Parrish,  14  N.  J.  Eq.  380 
(1862).  Where  the  stock  of  a  cemetery 
company  of  the  par  value  of  $50  is 
worth  but  $5,  the  directors  may  issue 
it  for  land  which  is  liable  to  come  into 
competition  with  the  company,  even 
though  one  motive  of  the  directors  is 
thereby  to  control  an  election.  Rural, 
etc.  Co.  V.  Wildes,  54  N.  J.  Eq.  668  (1896), 
rev'g  53  N.  J.  Eq.  453  (1895).  A  stock- 
holder who  was  not  present  at  a  stock- 

13 


holders'  meeting  is  not  bound  by  the 
ratification  by  such  meeting  of  the 
issue  of  a  large  amount  of  the  original 
capital  stock  to  the  directors  them- 
selves, who  were  illegally  elected,  but 
who  thereby  acquire  control  of  the 
company.  Morris  v.  Stevens,  178  Pa. 
St.  563  (1897).  Where  de  facto  direct- 
ors, immediately  after  the  election, 
order  an  issue  of  a  large  amount  of  the 
original  unissued  capital  stock  of  the 
company,  and  most  of  it  is  taken  by 
one  of  their  number,  who  thereby  ac- 
quires a  majority  of  the  stock  of  the 
company,  and  subsequently  the  elec- 
tion is  declared  illegal,  such  directors 
may  be  enjoined  from  voting  the  stock 
so  issued,  and,  if  they  have  sold  it,  may 
be  enjoined  from  voting  other  stock 
equal  in  amount  to  the  stock  so  sold  by 
them.  The  existing  stockholders  are  en- 
titled to  subscribe  for  their  proportion 
of  the  unissued  original  capital  stock. 
Morris  v.  Stevens,  178  Pa.  St.  563  (1897). 
See  a.\so  post,  p.  1333,  note  1. 

3  The  court  will  enjoin  the  board  of 
directors  from  issuing  new  stock  on  the 
verge  of  an  election  and  for  the  sole 
purpose  of  carrjnng  that  election, 
where  the  directors  reallj"  represent  a 
minority  of  the  stock,  and  where  the 
power  to  issue  the  new  stock  is  very 
doubtful.  Such  an  injunction  was 
granted,  even  though  the  charge  was 
made  that  the  complainant  was  inter- 
ested in  rival  companies  and  was  exer- 
cising control  in  their  behalf.  Eraser 
V.  Whalley,  2  Hem.  &  M.  10  (1864). 
20 


•CH.  XXXVII.]  ELECTIONS  —  COKPOKATE    MEETINGS.  [§  615. 

a  coming  election,  the  election  will  be  enjoined  and  the  issue  set 
aside. ^  Dissenting  stocliholders  may  file  a  bill  to  obtain  a  cancel- 
lation of  stock  issued  in  payment  for  patents  to  engage  in  business 
outside  of  the  territory  described  in  the  charter,  the  real  purpose 
being  to  obtain  the  vote  on  the  stock.^ 

But  an  election  is  valid,  although  it  is  carried  by  treasury  stock 
of  the  corporation,  which  is  sold  by  the  directors  just  before  the 
election  in  order  to  carry  the  election,  so  long  as  the  sale  is  not  at- 
tacked and  set  aside  for  fraud.''  Where  the  stock  is  not  treasury 
stock,  but  is  new  increased  capital  stock,  all  the  existing  stock- 
holders have  a  right  to  subscribe  for  their  proportion  of  the  new  * 
stock,  and  may  protect  that  right  by  injunction.*  A  court  of  equity 
may  set  aside  an  election  of  directors  carried  by  a  trick,  whereby 
an  irresponsible  person  was  allowed  to  subscribe  for  a  large  amount 
of  stock,  which  he  then  voted,  nothing  being  paid  on  the  stock. 
Such  a  suit  may  be  brought  by  some  of  the  stockholders  in  behalf 
-of  all.^  Even  though  stock  has  been  issued  irregularly  to  a  di- 
rector, yet  where  he  has  held  it  for  a  year  the  board  of  directors 
cannot  just  before  an  election  arbitrarily  cancel  such  stock  in  order 
-to  carry  the  election.^  It  is  of  course  legal  to  purchase  stock  from 
stockholders  in  order  to  control  an  election.^ 

§  615.  Where  a  corporation  owns  a  majority  of  the  stock  of  a 
rival  company,  may  it  vote  the  stock  and  control  the  latter  com- 
pany f  —  It  has  been  held  in  several  cases  that  where  one  corpora- 
tion owns  a  majority  of  the  stock  of  a  rival  company,  the  tempta- 
tion to  manage  the  latter  company  for  the  benefit  of  the  former 
company  will  be  so  great  that  a  minority  stockholder  of  the  latter 
company  may  enjoin  the  former  company  from  voting  the  stock.^ 

1  Way  V.  American,  etc.  Co.,  60  N.  J.  of  unissued  stock  to  a  director  whereby 
Eq.  363  (1900);  94  N.  W.  Rep.  69.  he  acquires  control,  such  issue  is  legal. 

2  Kimball  v.  New  England,  etc.  Co.,  Christopher  n  Noxon,  4  Ont.  Rep.  (Can.) 
69  N.  H.  485  (1899).  672  (1883). 

3  State  V.  Smith,  48  Vt.  266  (1876).   In        *  %  286,  supra. 

the  case   of  Taylor  v.  Miami  Export-  5  Davidson  v.  Grange,  4  Grant's  Ch. 

ing  Co.,  6  Ohio,  176,  223  (1833),  a  bill  Rep.  (Can.)  377  (1854). 

by  a  stockholder  to  compel  a  person  to  «  Hall  v.  Lay,  27  N.  Y.  Misc.  Rep.  603 

take  back  from    the    corporation  cer-  (1899). 

tain  stock  which  he  had  purchased  of  "^  Toronto,  etc.    Co,   v.   Blake,  2  Ont. 

it  just  before    the    election,  and  had  Rep.  (Can.)  175  (1882). 

voted  at  the  election  and  then  imme-  sphere   one   railroad   company  ac- 

diately  sold  again  to  the  corporation,  quires  a  majority  of  the  stock  of  an- 

failed.     The  vote  on  these  shares,  how-  other  having  so  substantially  similar  a 

ever,  did  not  affect  the  result.    But  see  field  of  operations  that  tliere  is  a  neces- 

§§  65,  70,  386  (notes),  supra,  and  §  653,  sary  conflict  of  interests  between  the 

infra.    Where    the    stockholders    are  two,  the  former  may  be  enjoined  from 

,present  and  no  one  objects  to  the  issue  voting  its  stock  on  the  question  of  an- 

13?1 


§  015.] 


ELECTIONS  —  OOKPOKATE   MEETINGS. 


[CH.  XXXVIT. 


In  Xew  York,  however,  the  more  logical  rule  is  laid  down  that 
a  court  of  equity  has  no  power  to  restrain  a  railroad  corporation, 
which  has  legally  purchased  a  majority  of  the  stock  of  another 
railroad  corporation,  "from  voting  on  the  stock  so  purchased,  upon 
the  allegation,  or  proof,  that  it  intends  to  cause  a  board  of  direct- 
ors to  be  elected,  who,  by  their  action  or  non-action,  may  injure  or 
prejudice  the  interests  of  the  minority  stockholders  of  the  corpora- 
tion whose  stock  has  been  so  purchased."  ^  Such  also  is  the  law  in 
New  Jersey. 2     It  has  been  held  in  Ohio  that  one  railroad  corpora- 


nulling  a  lease  from  one  to  the  other, 
even  though  both  companies  are  in  the 
hands  of  a  receiver.  George  v.  Central 
R.  R  etc.  Co.,  101  Ala.  607  (1894).  In 
Memphis,  etc.  R  R.  u  Woods,  88  Ala.  630 
(1889),  it  was  held  that  where  one  rail- 
road company  has  acquired  a  majority 
of  the  stock  of  another  railroad  com- 
pany, and  has  elected  the  board  of  direct- 
ors, and  oppressed  and  defrauded  such 
latter  company  by  buying  unnecessary 
rolling  stock,  making  unnecessary  re- 
pairs at  exorbitant  prices,  unduly  appor- 
tioning the  earnings  as  between  the  two 
roads,  and  in  other  ways  increasing  its 
ovrn  profits  at  the  expense  of  the  Fatter 
company,  a  minority  stockholder  in 
such  latter  company  may  enjoin  the 
former  company  from  voting  such 
stock  at  an  election.  A  request  to  the 
company  to  bring  the  action  was  first 
made  by  the  stockholder  who  brought 
the  suit.  A  transportation  company 
owning  a  majority  of  the  stock  of  an 
ice  company  may  be  enjoined  from 
voting  the  stock,  if  the  former  com- 
pany intends  to  purchase  ice  from  the 
latter  company,  but  otherwise  no  such 
injunction  will  issue.  American,  etc. 
Co.  V.  Linn,  93  Ala.  610  (1890).  A  stock- 
holder in  one  mining  and  manufactur- 
ing company  may  enjoin  another  rival 
company  from  voting  the  majority  of 
stock  in  the  former  company,  such 
majority  being  owned  by  the  latter 
company.  Mack  v.  De  Bardeleben,  etc. 
Co.,  90  Ala.  396  (1890).  Where  an  elec- 
tric light  company  purchases  a  major- 
ity of  the  stock  of  a  competing  electric 
light  company  in  the  same  city,  and 


elects  the  board  of  directors,  and  fraud- 
ulently uses  its  power  to  make  the  lat- 
ter subservient  to  and  as  a  feeder  to  the 
former,  and  intends  to  destroy  the  lat- 
ter, the  court,  at  the  instance  of  a 
minority  stockiiolder  of  the  latter,  will 
appoint  a  receiver  of  the  company;  but 
the  proof  of  such  intent  must  be  clear. 
The  fact  that  the  directors  so  elected 
are  stockholders  in  the  controlling  com- 
pany is  not  sufficient.  Davis  v.  U.  S.- 
etc.  Co.,  77  Md.  35  (1893).  It  is  illegal 
for  an  Ohio  corporation  to  purchase  a 
majority  of  the  stock  of  a  Tennessee 
corporation  for  the  purpose  of  control- 
ling the  latter,  even  though  they  are  en- 
gaged in  a  similar  business,  the  object 
being  to  form  a  monopoly.  Hence  the 
purchasing  company  cannot  enforce 
the  contract  as  to  certain  things  which 
were  to  be  done  by  the  vendor  of  the 
stock.  Marble  Co.  v.  Harvey,  92  Tenn. 
115  (1892).  See  also  Alexander  v.  Searcy, 
81  Ga.  536  (1889).  A  stockholder's  suit 
to  restrain  another  corpoi*ation  from 
voting  stock  in  his  corporation  does  not 
lie  where  such  other  corporation  is  not 
made  a  party  defendant.  Hollifield  v. 
Wrightsville,  etc.  R.  R.,  99  Ga.  362 
(1896). 

1  Oelbermann  v.  New  York,  eta  R  R., 
77  Hun,  332  (1894). 

2  A  stockholder  will  not  be  enjoined 
from  voting  on  the  ground  that  he  is 
not  a  bona  fide  stockholder,  but  that 
his  stock  was  paid  for  by  rival  com- 
panies, and  that  he  intends  to  control 
the  company  for  the  advantage  of  those 
companies.  Camden,  etc.  R.  R  v.  El- 
kins,  37  N.  J.  Eq.  273  (1883).     The  New- 


1322 


en.  XXXVII.]  ELECTIONS COKPORATE    MEETINGS. 


[§  615. 


tion  has  no  power  to  acquire  the  bonds  of  another  railroad  corpo- 
ration in  order  to  control  the  elections  of  the  latter,  such  bonds 
having  a  voting  power.^  "Where  a  railroad  company  acquires  con- 
trol of  the  bonds  and  stock  of  a  competing  company,  and  allows  a 
foreclosure  to  take  place,  the  minority  stockholders  may  defend 
against  such  foreclosure  on  the  ground  that  the  earnings  had  been 
kept  down  and  also  diverted.^ 

The  reasonable  rule  would  seem  to  be  that  where  one  company, 
having  no  power  to  purchase  the  stock  of  a  rival  company,^  ille- 
gally purchases  a  controlling  interest  in  such  stock,^  or  where  one 
company,  having  legally  purchased  the  majority  of  the  stock  of  a 
rival  company,  has  managed  the  latter  company  fraudulently  in 


Jersey  courts  will  at  the  instance  of 
a  stockholder  enjoin  a  New  Jersey 
corporation  from  owning  and  voting 
stook  in  a  Washington  corporation 
where  the  Washington  courts  hold 
that  a  Washington  corporation  has 
no  power  to  own  stock  in  another 
Washington  corporation,  and  may  be 
enjoined  from  voting  such  stock.  Coler 
V.  Tacoma,  etc.  Co.,  54  Atl.  Rep.  41B 
(N.  J.  1903).  A  federal  court  has  held 
that  where  a  corporation  is  organized 
to  own  and  vote  the  stock  of  two  com- 
peting railroads,  the  courts  will  enjoin 
the  voting  of  the  stock,  the  combina- 
tion itself  being  forbidden  by  law. 
Clarke  v.  Central  R.  R.  etc.,  50  Fed. 
Rep.  338  (1892).  In  this  case,  however, 
on  the  final  hearing,  the  bill  was  dis- 
missed.    See  62  Fed.  Rep.  328  (1894). 

•  State  V.  McDaniel,  22  Ohio  St.  354, 
368  (1872;.  Where  the  state  has  brought 
suit  to  forfeit  the  charter  of  a  railroad 
company  on  the  ground  that  a  major- 
ity of  its  stock  is  held  contrary  to  the 
statutes  and  constitution  of  the  state 
by  another  railroad  company,  the  case 
may  be  removed  to  the  federal  court  if 
the  latter  company  is  an  instrument 
of  interstate  commerce,  and  purchased 
the  stock  for  interstate  commerce  pur- 
poses. It  is  also  removable  where  the 
latter  company  claims  that  its  charter 
existed  before  such  constitution  and 
statutes,  and  gives  it  a  right  to  own 


such  stock.  South  Carolina  v.  Port 
Royal,  etc.  Ry.,  56  Fed.  Rep.  333  (1893). 

2  Farmers'  L.  &  T.  Co.  v.  New  York, 
etc.  Ry.,  150  N.  Y.  410  (1896). 

8  See  !;§  314-317,  siqora. 

^Milbank  v.  New  York,  etc  R.  R.,  64 
How.  Pr.  20  (1882),  where  the  court,  at 
the  instance  of  a  minority  stockholder, 
enjoined  another  railroad  company 
from  voting  a  majority  of  the  stock  in 
his  company,  although  fraud  and  par- 
tiality in  the  management  for  the  bene- 
fit of  the  majority  stockholder  was  a 
fear  of  the  future  instead  of  a  fact  in 
the  past.  The  court  said:  "It  is  against 
public  policy  to  have  or  permit  one  cor- 
poration to  embarrass  and  control  an- 
other and  perhaps  competing  corpora- 
tion in  the  management  of  its  affairs, 
as  may  be  done  if  it  is  permitted  to 
purchase  and  vote  upon  the  stock."  In 
Louisiana  it  is  held  that  where  one  cor- 
poration acquires  stock  in  another  cor- 
poration without  authority  so  to  do,  the 
former  may  collect  the  dividends  on 
such  stock  and  may  sell  it,  but  cannot 
vote  it,  and  hence  that  directors  elected 
by  such  vote  may  be  ousted  by  quo 
ivarranto  proceedings.  State  v.  New- 
man, 51  La.  Ann.  833  (1899).  A  smelt- 
ing company  has  no  inherent  power  to 
purchase  stock  in  another  smelting 
company,  and  hence  may  be  enjoined 
by  a  stockholder  of  the  latter  com- 
pany from  voting  such  stock.  Parsons 
V.  Tacoma,  etc.  Co.,  25  Wash.  492  (1901). 


1323 


§  615.] 


ELECTIONS  —  CORPORATE    MEETINGS. 


[CH.  XXXVIT. 


its  own  interest,  a  court  of  equity  should  enjoin  it  from  voting  the 
stock  at  the  next  election.  But  if  the  purchase  of  the  stock  was 
legal  and  there  has  as  yet  been  no  fraud  in  the  management,  such 
an  injunction  should  not  be  granted.'  Moreover,  even  though  a 
railroad  purchases  the  stock  of  another  railroad,  in  violation  of  the 
charter  of  the  former,  yet,  if  subsequently  the  legislature  passes  a 
law  authorizing  any  corporation  to  purchase  and  own  the  stock  of 
other  corporations,  the  illegality  of  the  above-mentioned  purchase 
is  cured,  and  the  disability  to  hold  such  stock  is  removed,  there 
being  no  longer  any  statute,  rule  of  law,  or  principle  of  public 
policy  forbidding  such  purchase.^  A  stockholder  cannot  maintain 
a  suit  against  the  corporation  to  enjoin  other  stockholders  from 
selling  their  stock  to  a  second  corporation,  such  second  corporation 
and  the  other  stockholders  not  being  parties  to  the  suit.*  An  in- 
dividual may  of  course  own  a  controlling  interest  in  two  corpora- 
tions, although  they  compete  in  business,*  but  the  courts  will  care- 
fully scrutinize  any  contracts  between  two  such  corporations  so 
controlled.*  A  corporation  that  owns  stock  in  another  corporation 
may  vote  such  stock  in  favor  of  dissolution  of  the  latter,  even 
though  it  was  influenced  so  to  vote  by  the  fact  that  it  has  guaran- 
teed dividends  on  the  stock  of  the  latter  so  long  as  the  latter  ex- 
ists.^   An  able  New  Jersey  court  has  recently  held  that  a  scheme 


1  The  right  of  one  railroad  corpora- 
tion to  own  stock  in  another  railroad 
corporation  carries  with  it  the  right 
to  vote  for  the  directors  and  on  all 
other  questions,  unless  such  vote  is  for 
the  purpose  of  perpetrating  an  actual 
fraud.  Rogers  i'.  Nashville,  etc.  Ry.,  91 
Fed.  Rep.  299  (1898).  In  this  case  the 
court  held  that  where  one  railroad 
owns  a  majority  of  the  stock  and  con- 
trols the  board  of  directors  of  another 
railroad  and  causes  the  latter  to  lease 
its  road  to  the  former,  a  stockholder  of 
the  former  may  file  a  bill  in  equity  to 
set  aside  such  lease  on  the  ground  that 
its  terms  were  so  inequitable  as  to  con- 
stitute a  fraud,  and  that  in  such  case 
no  demand  need  be  made  to  the  board 
of  directors  to  bring  the  suit,  if  the 
facts  alleged  in  the  biU  sliow  that  the 
board  of  directors  is  controlled  by  the 
guilty  party.    See  also  §  6,  supra. 

^Inre  Buffalo,  etc.  R  R.,  37  N.  Y. 
Supp.  1048  (1896),  involving  the  same 
transaction  as  was  involved  in  Milbank 

13 


V.  N.  Y.  etc.  R  R.,  64  How.  Pr.  20.  See 
also  ^§  314-317,  supra. 

^  Ingraham  v.  National  Salt  Co.,  36  N. 
Y.  Misc.  Rep.  646  (1902);  aff'd,  73  N.  Y. 
App.  Div.  582.    See  123  Fed.  Rep.  147. 

^  See  p.  681,  note,  supra.  Cf.  §  317,  supra, 

5See§663,  infra. 

''WindmuUer  v.  Standard,  etc.  Co., 
114  Fed.  Rep.  491  (1902).  In  the  case  of 
Robotham  v.  Prudential  Ins.  Co.,  53 
Atl.  Rep.  842  (N.  J.  1903),  the  court  ap- 
proved the  decision  m  WindmuUer  v. 
Standard,  etc.  Co.,  114  Fed.  Rep.  491, 
but  said  that  if  the  complaint  had  been 
framed  on  a  different  theory,  and  "  if  the 
complainants  had  attacked  the  action 
of  the  directors  in  instituting  the  pro- 
ceedings for  dissolution  as  the  product 
of  bribery  or  improper  influence  of  any 
kind,  or  of  favoritism  to  the  majority 
stockholder,  who  had  appointed  the 
directors,  a  vex'y  different  case  would 
have  been  presented.  If  the  complain- 
ants liad  also  charged  that  the  direct- 
ors, their  trustees,  had  not  only  com- 
24 


CH.  XXXVII.]  ELECTIONS  —  COEPOKATE   MEETINGS. 


[§  616. 


whereby  an  insurance  company  purchases  a  majority  of  the  stock 
•of  a  trust  company,  and  the  trust  company  purchases  a  majority 
of  the  stock  of  an  insurance  company,  is  illegal,  and  will  be  set 
aside  at  the  instance  of  a  dissenting  stockholder,  inasmuch  as  it 
results  in  self-perpetuating  boards  of  directors,  without  the  respon- 
sibility which  would  exist  if  those  directors  represented  their  own 
stock,  and  the  court  pointed  out  that  the  "Voting  Trust  Cases  "  in 
New  Jersey  had  established  the  principle  of  law  that  agreements- 
which  sever  the  ownership  of  stock  from  the  voting  power  are,  in 
many  instances,  a  violation  of  another  principle  of  law,  that  "  every 
stockholder  is  entitled  to  the  benefit  of  the  judgment  of  every  other 
stockholder  in  the  management  of  the  affairs  of  the  corporation."  ^ 
§616.  Illegal  or  fraudulent  elections  —  The  remedy  of  injunc- 
tion against  elections  and  against  voting  particular  stoch — A  court 
of  equity  has  power  to  enjoin  the  holding  of  an  election  by  a  cor- 
poration during  the  pendency  of  a  suit.^ 


mitted  a  gross  and  flagrant  breach  of 
duty,  but  that  the  majority  stockholder 
had  instigated  them  to  do  it,  a  strong 
case,  apparently,  would  have  been 
made  out  in  which  to  hold  the  major- 
ity stockholder  liable  for  damages." 

iRobotham  v.  Prudential  Ins.  Co.,  53 
Abl.  Rep.  842  (N.  J.  1903).  The  counsel 
in  this  case  claimed  that  the  following 
situation  was  legal:  "One  man  con- 
trols a  company  of  $10,000,000  capital. 
He  may  form  a  new  company,  with  a 
capital  of  $5,100,000,  to  hold  a  majority 
of  the  stock.  He  may  then  sell  all  but 
$•2,600,000  of  the  stock  in  company  No. 
2,  and  transfer  his  remaining  stock  to 
a  new  company  with  a  capital  of 
$2,600,000.  He  may  then  sell  to  com- 
pany No.  3  all  but  $1,400,000  and  trans- 
fer that  to  a  new  company.  This  pro- 
cess may  go  on  until  the  power  of  the 
whole  chain  of  corporations  is  vested 
in  the  holder  of  a  few  thousand  dol- 
lars of  stock  in  the  ultimate  company, 
and  the  same  chain  can  be  used  for  an 
unlimited  number  of  companies."  In 
reply  to  this  the  court  said  that  such  a 
situation,  if  it  should  arise,  might  lead 
to  the  following  questions:  "First. 
Whether  the  holders  of  the  $4,900,000 
of  stock  could  not  disfranchise  the  new 
irresponsible  adventurers  who  assumed 


to  wield  the  voting  power  of  the 
$5,100,000  of  stock. —  disfranchise  this 
stock  until  the  beneficial  owners  of  it 
should  take  control  of  their  own  prop- 
erty and  use  its  voting  power.  Second. 
Whether  the  actual,  beneficial  owners 
of  the  $5,100,000  of  stock  could  not 
break  through  the  chain  of  corporate 
fictions  which  separated  them  from 
their  property,  and  dictate  how  its 
voting  power  should  be  exercised. 
Tliird.  Whether  it  would  not  be  the 
duty  of  the  attorney-general  of  the 
state  to  take  proceedings  to  dissolve 
the  holding  companies,  as  an  abuse  of 
corporate  franchises, —  as  a  fraud  upon 
the  extremely  liberal  provisions  of  our 
corporate  act,  which,  however,  permit 
the  incorporation  of  companies  only  for 
a  'lawful  purpose.'" 

-  In  Walker  v.  Devereaux,  4  Paige, 
229,  247  (1833),  Chancellor  Walworth 
said:  "This  court  unquestionably  has 
the  power  to  prevent  this  election  by 
an  injunction  operating  upon  the  com- 
missioners, restraining  them  from  act- 
ing as  inspectors  of  the  election,"  In 
Haight  V.  Day,  1  Johns.- Ch.  18  (1814), 
Chancellor  Kent  dissolved  the  injunc- 
tion, but  did  not  question  the  power  of 
the  court  to  grant  it.  High  on  Injunc- 
tions,   §  1230,  says:    "While  the  pro- 


1325 


016.] 


J:LECTI0NS  —  CORrORATE    MEETINGS. 


[CH.   XXXVII. 


A  court  of  equity  may  enjoin  the  majority  stockholders  from 
holding  a  new  election,  even  though  they  claim  that  the  former 
■election  was  invalid.^ 


priety  of  equitable  interference  by  in- 
junction with  the  election  of  officers  of 
private  corporations  has  been  fre- 
quently criticised,  and  witii  no  incon- 
siderable show  of  justice,  the  jurisdic- 
tion itself,  although  sparingly  exer- 
cised, is  too  firmly  established  to  be 
readily  shaken  without  the  interven- 
tion of  legislative  authority.  The  ju- 
risdiction is,  however,  almost  entirely 
of  American  growth,  the  English  au- 
thorities affording  few  instances  of  its 
exercise."  A  court  of  equity  has  juris- 
diction on  a  bill  in  equity  to  enjoin  an 
election,  although  the  statute  provides 
for  a  summary  remedy  by  application 
to  the  court,  where  the  relief  asked  for 
by  the  bill  involves  also  the  transfer 
of  stock.  Archer  v.  American,  etc.  Co., 
50  N.  J.  Eq.  83  (1893).  The  holding  of 
an  election  may  be  enjoined  pending  a 
suit  which  has  been  commenced  to  re- 
strain the  voting  the  stock  which  has 
been  illegally  issued  at  less  than  par  to 
friends  of  the  directors  in  order  to  con- 
trol the  election.  Way  v.  American, 
etc.  Co.,  60  N.  J.  Eq.  263  (1900).  Where 
a  corporation  has  brought  suit  against 
its  president  for  an  accounting  for 
money  misappropriated  by  him,  and 
where  the  president  owns  a  majority 
of  the  stock,  the  court  may  enjoin  the 
holding  of  an  election,  it  being  shown 
that  the  president  has  power  to  elect  a 
board  of  directors  who  may  defeat  the 
purpose  of  the  suit.  Coxe  v.  Huntsville, 
etc.  Co.,  129  Ala,  496  (1900). 

The  court  may  enjoin  the  company 
from  receiving  any  votes  at  an  election 
unless  the  votes  of  the  plaintiff  are  re- 
ceived. Brown  v.  Pacific  Mail,  etc.  Co., 
5  Blatchf.  525  (1867);  s.  c,  4  Fed.  Cas. 
420.  In  the  latter  case  Judge  Blatch- 
ford  said:  "As  to  the  character  of  the 
injunction  asked  for,  it  is  laid  down  in 


Judge  Redfield's  Treatise  on  the  Law 
of  Railwaj's  (vol.  2,  sec.  221)  that  'it  has 
been  common  to  produce  a  positive 
effect,  through  an  injunction  out  of 
chancery,  by  means  of  a  prohibitory 
order,'  and  that  a  mandatory  order  is, 
in  courts  of  equity,  seldom  denied,  un- 
less the  remedy  at  law  is  perfectly  ad- 
equate." In  this  case  Judge  Blatch- 
ford  enjoined  the  election  inspectors 
from  holding  any  election  until  the 
further  order  of  the  court,  unless  cer- 
tain persons  should  first  be  permitted 
to  vote  certain  stock;  and  also  enjoined 
certain  persons  from  voting  any  stock 
until  after  certain  other  persons  had 
been  afforded  an  opportunity  to  vote 
their  stock.  In  Shelmerdine  v.  Welsh, 
47  Leg.  Int.  26  (Phila.  Com.  PI.,  Janu- 
ary, 1890),  the  court  did  not  deny  its 
power  to  enjoin  the  election,  but  said: 
"The  ease  is  not  sufficiently  clear  to 
warrant  a  preliminary  injunction  that 
would  prevent  an  election  on  the  day 
named  in  the  charter,  and  might  cause 
the  irreparable  injury  which  such  rem- 
edies are  given  to  prevent."  If  the 
election  is  held  in  violation  of  an  in- 
junction, this  fact  will  be  considered 
in  quo  wmTanto  proceedings.  People 
V.  Albany,  etc.  R  R.,  55  Barb.  344,  384 
(1869).  The  injunction  generally  runs 
against  the  inspectors,  president,  di- 
rectors, officers,  agents,  servants,  etc. 
Campbell  v.  Poultney,  6  Gill  &  J.  (Md.) 
94  (1834).  It  has  been  held  that  an  in- 
junction permanently  forbidding  the 
holding  of  any  election  whatever  is  an 
interference  with  the  management  of 
corporate  affairs,  to  which  the  courts 
will  decline  to  be  a  party;  and  such  an 
injunction  would,  if  granted,  be  void. 
People  V,  Albany,  etc.  R.  R.,  55  Barb. 
344  (1869),  holding  also  that  while  an 
injunction    forbidding     inspectors    to 


1  Chiera  v.  Brevoort,  97  Mich.  638  (1893). 
1326 


•CH,  XXXVII.]  ELECTIONS  —  COKPOKATE    MEETINGS. 


[§  616. 


A  court  of  equity  may  also  enjoin  the  voting  of  particular  stock. 
In  order  to  obtain  such  an  injunction,  however,  the  complainant 
must  show  that  the  defendant  intends  to  vote  the  stock;  that  he 
has  no  equitable  right  to  do  so;  that  the  effect  of  the  vote  will  be 
to  control  the  election;  and  that  irreparable  and  permanent  injury 
will  come  to  the  corporation  or  to  the  stockholders  unless  the  in- 
junction is  granted.^ 

Thus,  an  injunction  has  been  granted  where  there  was  a  conspir- 
acy to  obtain,  on  the  eve  of  the  election,  an  injunction  against  the 
•complainants  from  voting  their  stock  ;^  also  where  the  directors 


hold  an  election  at  all,  or  to  receive 
and  count  the  votes  thereof,  is  entirely 
void,  since  a  court  of  equity  has  no 
power  to  restrain  permanently  an  offi- 
cer of  a  corporation  from  performing 
the  ordinary  duties  of  his  office,  yet 
they  may  be  enjoined  from  holding  an 
election  until  the  further  order  of  the 
court,  or  from  receiving  the  votes  of 
certain  stockholders  until  the  votes  of 
'Others  are  deposited.  An  injunction 
may  be  granted  staying  an  election. 
Scholfield  V.  Union  Bank,  2  Cranch,  C. 
C.  115  (1815);  &  G,  21  Fed.  Cas.  723. 
whex'e  the  inspectors  denied  the  right 
of  pledgors  to  vote.  If  directors  con- 
vene a  meeting,  to  pass  resolutions  fa- 
vorable to  themselves  on  questions  in 
which  the  interests  of  the  directors  are 
opposed  to  those  of  the  siiareholders, 
by  a  circular  which  is  misleading,  and 
which  contains  statements  calculated 
to  obtain  proxies  in  their  favor  with- 
out giving  the  shareholders  the  infor- 
mation necessary  to  enable  them  to 
form  a  just  judgment  as  to  who  are 
the  proper  persons  to  whom  to  intrust 
their  votes,  the  court  will  grant  an  in- 
junction to  restrain  the  holding  of  the 
meeting,  and  to  restrain  the  directors 
from  laying  such  resolutions  before  the 
meeting.  Jackson  v.  Munster  Bank, 
13  L.  R.  Ir.  118  (1884).  For  other  in- 
stances in  which  a  court  of  equity  in- 
terfered, see  §  593,  supra,  and  §  618, 
infra. 

iReed  v.  Jones,  6  Wis.  680  (1858), 
holding  that  a  preliminary  injunction 
against  a  stockholder  voting  his  stock 

132 


cannot  be  granted  on  the  ground  that 
he  had  no  title  to  the  land  which  he 
conveyed  in  payment  of  the  stock. 
The  stock  had  not  been  canceled  by 
the  company,  and  no  action  was  pend- 
ing to  cancel  it.  In  McHenry  v.  Jew- 
ett,  90  N.  Y.  58  (1882),  a  preliminary 
injunction  was  denied,  inasmuch  as 
the  complaint  showed  no  equitable 
cause  of  action.  Where  the  owner  of 
a  majority  of  the  stock  has  been  fraud- 
ulently deprived  of  her  stock  by  her 
pledgee,  who  has  thereby  deprived  her 
of  the  control  and  claims  the  stock  as 
his  own,  the  court  will  enjoin  him  from 
voting  the  stock  and  will  appoint  a  re- 
ceiver of  such  stock  pendente  lite.  Aj-er 
V.  Seymour,  5  N.  Y.  Supp.  650  (Com. 
PI.  1889)..  •  An  injunction  against  a 
stockholder's  voting  certain  stock  is  not 
an  injunction  to  "  suspend  the  general 
and  ordinary  business  of  a  corpora- 
tion." An  election  is  not  such  busi- 
ness. Reed  v.  Jones,  6  Wis.  680  (1858). 
2  Brown  v.  Pacific  Mail,  etc.  Co.,  5 
Blatchf.  525  (1867);  S.  C,  4  Fed.  Cas. 
4'20,  in  which  the  allegation  was  that 
the  defendants  contemplated,  through 
improper  means,  to  obtain  an  injunc- 
tion preventing  plaintiffs,  who  were 
large  stockholders  in  a  corporation, 
from  voting  at  an  approaching  elec- 
tion, and  that  defendants  were  improp- 
erly obtaining  proxies  from  other 
stockholders  in  order  to  control  the 
election  for  their  private  purposes. 
The  complainant  alleged  that  defend- 
ants intended  to  obtain  control  for  the 
benefit  of  rival  companies,  and  intended 


§  G16.]  ELECTIONS  —  CORrORATE    MEETINGS,  [CH.  XXXVII. 

propose  to  postpone  the  election  in  order  to  prolong  their  term  of 
office;'  also,  in  certain  cases,  where  a  stockholder  has  transferred 
part  of  his  stock  in  order  to  increase  the  voting  power  of  the  stock, 
the  charter  limiting  the  number  of  votes  one  stockholder  may  cast;- 
also  where  a  majority  of  stock  is  owned  by  a  competing  company 
which  has  acquired  control  for  the  purpose  of  diverting  business  to 
itself;'  also  where  "trustees,"  who  are  mere  agents,  refuse  to  trans- 
fer the  stock  to  their  principals  or  to  give  proxies.* 

Where  the  owner  of  a  majority  of  the  stock  sells  it,  the  purchase 
price  being  only  paid  in  part,  and  retains  the  stock  in  his  name  until 
the  full  price  is  paid,  he  cannot  be  compelled  to  deliver  the  stock 
or  to  refrain  from  ousting  the  vendee  from  the  presidency  of  the 
corporation,  where  the  vendee  fails  to  meet  the  other  payments, 
even  though  the  vendee  has  proceeded  to  improve  the  property.^ 

Equity  has  jurisdiction  to  compel  the  transfer  of  stock  as  be- 
tween parties.  Hence  where  stock  is  issued  in  payment  for  prop- 
erty, and  the  party  to  whom  the  certificate  is  issued  refuses  to 
divide  it  among  the  owners  of  the  property,  as  provided  by  con- 
tract, a  court  of  equity  may  compel  the  division  and  may  enjoin 
any  election  of  the  corporation  until  such  division  is  made.® 

The  general  rule  is  that  one  stockholder  has  nothing  to  do  with 
the  motive  of  another  stockholder.  The  injunction  must  be  based 
on  damage  reasonably  certain  to  ensue.^  Accordingly,  an  injunc- 
tion will  not  be  granted  upon  the  ground  that  the  stockholders 
against  whom  the  injunction  is  sought  are  likely  to  obtain  control 
of  the  affairs  of  the  company,  and  that  then  they  will  probably 

fraudulently  to  prevent  the  complain-  continued  where  it  failed  to  accomplish 

ants  from  voting.     The  court  enjoined  its  purpose  at  one  annual  meeting  and 

defendants  from  participating  in  any  will  fail  in  the  next  meeting.     Ryan  v. 

election   unless  plaintiffs'   votes   were  Seaboard,  etc.  R.  R,  89  Fed.  Rep.  385 

received  thereat,  and  from  restraining  (1898). 

plaintiffs  in  their  right  to  vote.  •''  Stockton  v.  Russell,  54  Fed.  Rep,  324 

1  A  stockholder  may  enjoin  directors  (1893). 

from   postponing  an   annual    election  6  Archer  v.  American,  etc.  Co.,  50  N. 

which   comes  in  February,  but  which  J.  Eq.  33  (1893).    Where  by  reason  of  an 

the  directors  by  by-law  have  changed  order  of  the  court  stock  is  issued  to  a 

to  October,  thereby  endeavoring  to  ex-  party  and  the  certificate  deposited  in 

tend  their  term.     Elkins  v.  Camden,  court  to  abide  an  appeal,  the  party  to 

etc.  R.  R.,  36  N.  J.  Eq.  467  (1883).     See  whom  such  stock  runs  cannot  vote  the 

also  Camden,  etc.  R.  R.  v.  Elkins,  37  N.  same  pending  the  appeal.     Durfee  v. 

J.  Eq.  373  (1883).  Harper,  33  Mont.  373  (1899). 

2  See  §  621,  infra.  i  Ryder  u  Alton,  etc.  R.  R,  18  111.  516 

3  See  §  615,  supra.  (1851),  where  a  subscriber  failed  in  his 
*  See  ^  Q22,  infra.  An  injunction  pen-  defense  against  a  subscription  by  at- 

dente  lite  against  the  voting  of  certain    tacking  the  policy  of  the  majority  in 
stock  in  connection  with  the  formation    control 
of  an  alleged  illegal  pool  will  not  be 

1328 


CH.  XXXVII.] 


ELECTIONS 


CORPOKATE    MEETINGS. 


[§  61(3. 


misuse  their  power.^  The  form  of  the  injunction  order  varies,  of 
course,  with  the  circumstances  of  the  case.  The  federal  courts 
have  sanctioned  a  form  which,  while  drastic  in  its  terms,  is  effective 
in  reaching  the  desired  result,  and  is  none  too  severe  when  the  diffi- 
culties are  considered.^ 

Where  a  party  is  enjoined  from  voting,  the  court  will  enjoin  his 
proxy  from  voting.* 

The  proxy  may  be  enjoined  although  his  principal  is  not  made 
a  party  and  is  not  served.^  But  stockholders  who  are  not  made 
parties  will  not  be  enjoined.^  The  injunction  against  certain  per- 
sons voting  certain  stock  does  not  prevent  the  election  from  taking 
place.  On  the  contrary,  the  election  goes  on  and  is  valid,  even 
though  it  happen  that  what  would  have  been  a  minority  of  the 
votes,  had  not  the  injunction  issued,  becomes,  by  reason  thereof,  a 
majority,  and  elects.^  Where  the  injunction  is  applied  for  at  a 
time  so  near  the  election  that  the  opposition  will  have  no  reason- 
able opportunity  to  be  heard,  the  court  may  refuse  the  application 
on  that  ground.^  The  practice  of  serving  an  injunction  after  the 
meeting  has  assembled  is  not  looked  upon  with  favor  by  the  courts.^ 


'  Camden,  etc.  R.  R.  v.  Elkins,  37  N. 
J.  Eq.  273  (1883).  Cf.  Brown  v.  Pacific 
Mail,  etc.  Co.,  5  Blatchf.  535  (1867);  s.  C, 
4  Fed.  Cas.  420. 

-See  tlie  form  of  injunction  granted 
in  Brown  v.  Pacific  Mail,  etc.  Co.,  5 
Blatchf.  525  (1867);  S.  C,  4  Fed.  Cas.  420. 
Approved  in  People  v.  Albany,  etc.  R. 
R.,  55  Barb.  344,  383  (1869).  An  injunc- 
tion against  a  corporation  recognizing 
a  transfer  of  stock  was  held  not  to  pre- 
vent the  transferee's  voting,  in  Com- 
monwealth V.  Stevens,  168  Pa.  St.  582 
(1895). 

3  Clarke  v.  Central  R.  R.  etc.  Co.,  50 
Fed.  Rep.  338  (1892).     In  this  case,  how- 


nority  meet  and  adjourn  to  the  next 
day  and  conceal  such  adjournment 
from  the  majority  and  elect  directors, 
the  court  will  oust  them  from  office. 
State  V.  Bonnell,  35  Ohio  St.  10  (1878). 
''Where  a  bill  was  filed  to  restrain 
certain  stockholders  from  selling  or  as- 
signing their  stock,  or  from  voting  upon 
it  at  an  ensuing  election,  which  was  to 
be  held  within  three  days  from  the 
date  of  the  filing  of  the  bill,  the  court 
held  that  inasmuch  as  the  probable  ef- 
fect of  the  injunction  would  be  to 
change  the  result  of  the  election,  and 
the  consequent  control  of  the  affairs 
of  the  company,  without  allowing  the 


ever,  on  the  final  hearing,  the  bill  was    stockholders  sought  to  be  restrained  to 


dismissed.     See  62  Fed.  Rep.  328  (1894). 

*  Brown   v.  Pacific   Mail,  etc.    Co.,  5 

Blatchf.  525  (1867);  s.  C,  4  Fed.  Cas.  420. 

5  Brown  v.  Pacific  Mail,  etc.  Co.,  5 
Blatchf.  525  (1867);  s.  C,  4  Fed.  Cas.  420. 

6  Brown  v.  Pacific  Mail,  etc.  Co..  5 
Blatchf.  525  (1867);  s.  G.,  4Fed.  Cas.  420. 
Where  by  reascm  of  an  injunction 
against  votmg  certain  stock  the  meet- 
ing is  not  held  at  the  time  specified  in 
the  notice,  but  later  in  the  day  a  mi- 


(84) 


be  heard  in  their  own  defense,  the  in- 
junction ought  to  be  denied.  Hilles  v.. 
Parrish,  14  N.  J.  Eq.  380  (1862).  It  ap- 
pears, however,  that  counsel  stipulated 
for  a  new  election  in  case  the  com- 
plainant succeeded,  and  the  court  so 
ordered. 

8  The  practice  of  procuring  an  injunc- 
tion and  serving  it  after  the  meeting 
had  assembled  is  not  to  be  commended, 
and  should  only  be  tolerated  in  cases 


1329 


§617.]  ELECTIONS — COKPOKATE    MEETINGS.  [CH.  XXXVII. 

"Where  an  injunction  has  been  obtained  on  false  affidavits  and  bill 
to  control  an  election,  and  the  proceedings  in  court  are  discontinued 
immediately  after  the  election,  the  court  will  summarily  vacate 
and  set  aside  the  election  by  reason  of  the  abuse  of  the  process  of 
the  court  and  the  fraud  on  the  rights  of  the  stockholders.^  An  ap- 
peal from  an  injunction  against  voting  certain  stock  will  be  dis- 
missed where  the  parties  may,  under  a  statute,  apply  to  the  court  to 
review  the  election  on  affidavits.-  Where  the  statutes  require  a  cor- 
poration to  keep  a  book  containing  the  names  of  the  stockholders 
and  the  stock  held  by  each,  and  it  fails  to  do  so,  a  stockholder  can- 
not obtain  a  mandatory  injunction  to  the  effect  that  voting  at  the 
annual  election  shall  be  in  accordance  with  a  list  of  stockiiolders, 
as  certified  by  the  transfer  agent  and  registrar  of  the  corporation.^ 
The  federal  court  has  no  jurisdiction  of  a  suit  by  a  stockholder  to 
enjoin  a  corporation  from  allowing  certain  stock  to  be  voted  on 
various  grounds,  where  there  is  no  allegation  that  the  complainant's 
holdings  of  stock  are  worth  upwards  of  two  thousand  dollars.* 

§  617.  Illegal  or  fraudulent  elections  —  The  remedies  of  quo 
ivarranto  and  mandamus. —  There  are  various  ways  in  which  an 
illegal  or  fraudulent  election  of  directors  or  managers  of  an  incorpo- 
rated compan}'^  may  be  investigated  and  remedied.  The  natural 
and  proper  remedy  in  all  cases  is  the  old  remedy  of  qiio  warranto  to 
test  the  title  to  office.  In  England  quo  warranto  does  not  lie  to 
test  the  legality  of  the  election  of  officers  of  a  private  corporation^ 
but  in  this  country  a  contrary  rule  prevails.^     An  information  in 

where  the  right  thereto  is  clearly  es-  annual  meeting,  but  enact  by-laws  to 

tablished."     Re  Rochester,  etc.  Co.,  40  aid  them  in  this  purpose,  and  cause  a 

Hun,  172,  175  (188Q).  stockholder  to  have  the  annual  meeting 

i  Putnam  v.  Sweet,  1  Chand.  (Wis.)  enjoined,  other  stockholders  may  file  a 

286,  334  (1849).  cross-bill  in  such  injunction  suit,  and  it 

2  Where  an  injunction  against  post-  appearing  to  the  court  that  a  fair  elec- 
poning  an  election  is  granted,  and  the  tion  could  not  otherwise  be  held,  the 
election  is  held,  and  the  next  day  an  ap-  court  will  modify  the  injunction  so  as 
peal  is  taken  from  the  injunction  order,  to  allow  the  election  to  be  held  at  a 
the  appeal  will  be  dismissed,  inasmuch  time  fixed  by  the  court  and  under  the 
as  the  parties  have  the  remedy  under  the  supervision  of  a  master  in  chancery  ap- 
statute  of  applying  to  the  court  to  re-  pointed  by  the  court  Bartlett  u.  Gates, 
view  the  election.    Camden,  etc.  R.  R.  v.  118  Fed.  Rep.  66  (1902). 

Elkins,  37  K  J.  Eq.  273  (1883).  Where  an  <  Harvey  v.  Raleigh  &  G.  R.  R.,   89 

injunction    against  voting    particular  Fed.  Rep.  115  (1898). 

stock  has  been  refused,  and  the  election  ^  Commonwealth  v,  Arrison,  15  Serg. 

held,  an  appeal  will  be  dismissed.  Foster  &  R.  (Pa.)  127  (1827),  a  case  of  church 

V.  Smith,  115  Cal.  611  (1897).  trustees;  Commonwealth  v.  Graham,  64 

3  Mitchell  V.  Colorado,  etc.  Co.,  117  Pa.  St  339  (1870),  the  same;  People  r. 
Fed.  Rep.  723  (1902).  But  where  the  Tibbits,  4  Cow.  358  (1825),  an  insurance 
directors  and  oflicers,  in  order  to  con-  company;  State  v.  Farris,  45  Mo.  183 
tinue  in  office,  do  not  give  notice  of  an  (1869),  college  trustees;  Creek  v.  State, 

1330 


CH.  XXXVII.]  ELECTIONS  —  COKPOKATE    MEETINGS. 


[§  617. 


the  nature  of  a  quo  warranto  is  not  allowed  of  course,  but  is  a  sub- 
ject for  the  exercise  of  a  sound  discretion.^  3Iandamus,  instead  of 
quo  warranto,  lies  when  the  title  de  jure  has  been  adjudicated.-  In 
West  Virginia  mandamus  is  held  to  be  the  proper  remedy  to  place 
a  de  jure  director  in  the  place  of  the  de  facto  director,  and  service 
on  the  latter  may  be  by  publication ;"  and  mandamus  lies  at  the 
instance  of  a  corporation  to  compel  illegally  elected  directors  to 
turn  over  the  books  to  the  legally  elected  directors.*    Under  the 


77    Ind.   180    (1881),    church    trustees; 
State  V.   Kupferle,  44   Mo.   154    (1869), 
an  insurance    company;    State  v.  Mc- 
Daniel,  22  Ohio  St.  354  (1872),  directors 
of  a  railroad;  Commonwealth  v.  Smith, 
45  Pa.  St.   59  (1863);   High,   Extraord. 
Remedies,  §  653,  etc.;  Shortt,  Informa- 
tions, 129  (Eng.  18S7);  Commonwealth 
V.  Gill,  3  Whart.  (Pa.)  228  (1837),  giving 
the  pleadings  herein :  People  v.  Albany, 
etc  R.  R,  55  Barb.  344,  354  (1869).     Quo 
warranto  is  a  proper  remedy  to  deter- 
mine the  right  of  a  relator  claiming  to 
have  been  elected  a  director  of  a  cor- 
poration.    Attorney-General  v.  Looker, 
111  Mich.  498  (1897).     For  a  clear  state- 
ment of  the  nature  of  an  information 
in  the  nature  of  a  quo  warranto  filed 
by  a  claimant  for  an  office  in  the  name 
of   the  attorney-general,  see  Gibbs  v. 
Somers  Point,  49  N.  J.  L.  515  (1887  >    A 
stockholder  may  institute  quo  warranto 
proceedings.     Commonwealth  v.  Stev- 
ens, 168  Pa.  St  582  (1895).    See  also  §  713, 
infra,  concerning  de  facto  officers.    The 
validity  of  the  charter  of  a  school  incor- 
porated as  a  joint-stock  incorporation 
cannot  be  tested  in  quo  warranto  pro- 
ceedings   brought    to    determine  the 
rights  of  parties  claiming  to  be  trustees. 
Commonwealth  v.  Yetter,  190   Pa.  St. 
488  (1899).    Where  there  is  a  contest  as 
to  who  are  the  legal  officers,  the  at- 
torney for  the  defeated  party  cannot 
■  hold  the  corporation  liable  for  his  serv- 
ices.    Commonwealth    v.    Order,    etc., 
192  Pa.  St.  487  (1899).    See  s.  a,  193  Pa. 
St.  240  (1899). 

1  State  V.  Lehre,  7  Rich.  L.  (S.  C.)  234 
(1854).  The  court  in  its  discretion  may, 
in  Minnesota,  decline  to  allow  a  private 


person  to  file  an  information  in  the  nat- 
ure of  quo  wan'anto  to  test  the  title  to 
office  of  directors.  Whitcomb  v.  Lock- 
erby,  59  N.  W.  Rep.  495  (Minn.  1894). 
Quo  tcarranto  does  not  lie  against  a 
superintendent  who  may  be  removed 
at  any  time  by  the  directors.  State  v. 
Cronan,  23  Nev.  437  (1897).  A  newly 
elected  president  may  file  a  petition  to 
be  allowed  to  file  an  information  in  the 
nature  of  a  quo  warranto  to  compel  a 
de/acto  president  to  surrender  the  office 
where  the  basis  of  the  petition  is  that 
the  meeting  of  the  board  of  directors 
which  elected  the  de  facto  president 
was  held  out  of  the  state  in  violation  of 
the  statutes  of  Illinois.  Place  v.  People, 
192  111.  16Q  (1901). 

'^  Leeds  v.  Atlantic  City,  52  N.  J.  L.  333 
(1890).  The  Massachusetts  statute  that 
a  certificate  of  stock  issued  as  a  pledge 
shall  state  that  fact  on  its  face  enables 
the  pledgor  to  vote  without  such  proxy. 
If  the  certificate  merely  states  that  it 
is  given  in  pledge,  without  stating  the 
name  of  the  pledgor,  the  pledgee  to 
whom  the  certificate  runs  may  vote  the 
stock.  The  court  may,  however,  refuse 
to  grant  a  mandamus  declaring  certain 
persons  duly  elected  directors,  where 
they  were  elected  by  the  vote  of  the 
pledgee  as  against  the  wishes  of  the 
pledgor.  J.  H.  Wentworth  Co.  v.  French, 
176  Mass.  442  (1900). 

3  Cross  V.  West  Va.  etc.  Ry.,  35  W.  Va. 
174  (1891).  Compare  S.  C,  34  W.  Va.  742, 
and  People  v.  New  York,  etc.  Asylum, 
122  N.  Y.  190  (1890). 

*  American  Ry.  Frog  Co.  v.  Haven,  101 
Mass.  398  (1869).  After  the  courts  have 
decided  that  certain  persons  are  direct- 


1331 


§618.]  ELECTIONS COEPOKATE    MEETINGS.  [CH.  XXXVII. 

Xevada  statute  mandamus  lies  at  the  instance  of  a  superintendent 
to  oust  a  person  who  is  illegally  holding  that  office.^  The  courts 
of  one  state  will  consider  the  board  of  directors  as  legally  elected 
until  the  courts  of  the  state  wherein  the  company  was  organized 
decide  to  the  contrary.-  Hence  mandamus  does  not  lie  in  one  state 
at  the  instance  of  persons,  claiming  to  be  directors  in  a  foreign  cor- 
poration, commanding  other  persons  from  refraining  to  act  as  di- 
rectors, even  though  all  the  persons  are  residents.^  Where  the 
corporate  property  is  being  wasted  by  reason  of  a  contest  between 
two  rival  boards  of  directors,  one  board  having  been  declared  ille- 
gal by  the  court  and  the  other  refusing  to  act,  the  court  will,  at  the 
instance  of  a  minority  stockholder,  appoint  a  receiver  to  protect  the 
property  until  a  recognized  board  is  elected,  and  the  stockholder 
need  not  request  the  directors  to  bring  suit  before  he  himself  brino-s 
suit.'* 

§  618,  Illegal  or  fraudulent  elections  —  The  remedy  hy  injunction 
against  directors  acting^  and  the  remedy  of  a  suit  in  equity  where 
the  validity  of  the  election  arises  incidentally. —  A  court  of  equity 
ma}'-,  prior  to  the  holding  of  an  election,  enjoin  such  election.'^  But 
a  different  rule  prevails  after  the  election  has  actually  taken  place. 
A  court  of  equity  has  no  inherent  power  or  jurisdiction  to  enter- 
tain a  bill  for  the  purpose  of  reviewing  a  corporate  election  and 
ousting  the  parties  who  claim  to  have  been  elected.^ 

ors,  wiancZamtfs  will  be  granted  that  the  with   its   business,  where  the  contro- 

defeated  parties  turn  over  the  books  versy  turns  upon   the  validity  of  an 

and  papers  to  the  former,     flatter  of  election.     Washington,  etc.  Co.  v.  Dim- 

Jourual  Pub.  Club,  30  N.  Y.  Misc.  Rep.  mick,  etc.,  41  N.  Y.  App.  Div.  596  (1899). 

326  (1900).     Where  a  director  was  not  See  also  i?  734,  infra. 

qualified  and  a  new  director  has  been        3  Wason  v.  Buzzell,  63  N,  E.  Rep.  903 

elected  in    his  place,  he  cannot  have  (Mass.  1902). 

mandamws  to  allow  him  to  inspect  the        ^  jasper,  etc.  Co.  u  Wallis,  123  Ala. 

company's  books    and  exercise  other  652  (1899).    See  also  §§  629,  746,  infra. 

rights  of  a  director,  even  though  for  a        5  See  g  616,  supra. 

time  he  was  permitted  to  act  as  di-        6  The  title  of  de/acfo  officers  to  their 

rector.  People  v.  N.  Y.  etc.  Co.,  34  N,  Y.  office  cannot  be  tested  by  an  injunction 

Misc.  Rep.  326  (1901).  or  bill  in  equity.     Quo  icarranto  or  a 

1  State  V.  Cronan,  23  Nev.  437  (1897).  proceeding  under  the  statute  is  neces- 

2  State  V.  Cronan,  23  Nev.  437  (1897).  sary.  People  v.  Albany,  etc.  R.  R.,  57 
The  summary  statutory  remedy  in  New  N.  Y.  161,  171  (1874).  A  court  of  equity 
York  to  review  elections  does  not  apply  has  no  power  to  decide  which  set  of  offi- 
to  foreign  corporations.  Matter  of  North  cers  was  duly  elected,  unless  that  ques- 
Am.  Rice  Co.,  N.  Y.  L.  J.,  April  23,  1902.  tion  arises  incidentally  in  connection 
It  is  doubtful  whether  a  Maine  corpora-  with  some  other  equitable  matter.  St. 
tion  may  institute  a  suit  in  New  York  Patricks,  etc.  v.  Byrne,  59  N.  J.  Eq.  26 
to  enjoin  certain  persons  from  repre-  (1899).  A  court  of  equity  has  no  juris- 
senting  themselves  as  officers  in  such  diction  to  decide  which  board  of  direct- 
Maine  corporation  and  from  interfering  ors  was  elected.     Kean  v.  Union  Water 

1332 


CH.  XXXVII.]  ELECTIONS COKPORATE 


MEETINGS. 


[§  618. 


Nevertheless,  where  there  has  been  a  palpable  fraud  practiced  in 
the  election,  and  usurpers  are  about  to  take  possession  of  the  prop- 
erty in  violation  of  all  justice,  a  court  of  equity  will  enjoin  them 


from  doing  so.^ 

Co.,  52  N.  J.  Eq.  813  (1895),  rev'g  Union 
Water  Co.  v.  Kean,  52  N.  J.  Eq.  111.   An 
ex  parte  injunction  against  a  director 
continuing  his  duties  as  a  director  is 
void  in  New  York  as  being  contrary  to 
the    statute.     Ciancimino    v.   Man,   20 
N.  Y.  Supp.  702  (1892).     Where  there 
are  two  rival  boards  of  directors,  each 
claiming  to  have  been  legally  elected, 
the  remedy  of  one  against  the  other  is 
not  an  injunction,  but  a  quo  warranto 
proceeding.      Carmel,  etc.  Co.  v.  Small, 
150  Ind.  427  (1897).     No  injunction  lies 
against  officers  acting  as  such,  on  the 
ground  of  illegal  election.     Quo  war- 
ranto lies.     Hartt  v.  Harvey,  32  Barb. 
55  (1860).     Equity  has  no  power,  except 
as  incidental  to  other  relief,  to  review 
an  election.     Perry  v.  Tuskaloosa,  etc. 
Co.,  93  Ala.  3G4:  (1891);  Hullmany.  Hon- 
comp,  5  Ohio  St.  237  (1855):   New  Eng- 
land, etc.  Co.  V.  Phillips,  141  Mass.  535 
(1880),  where  an  injunction  was  sought 
to    restrain    persons    from    acting    as 
directors  who  had  been  illegally  elected. 
Allen,  J.:  "This  course  is  open  to  the 
objection  that  suits  to  remove,  or  to  in- 
stitute corporation  officers  do  not  be- 
long to  the    original    jurisdiction    in 
chancery;  and  that  the  right  to  be  such 
officer  cannot,  in  geileral,  and  in  the 
absence  of  special  legislation  allowing 
this  remedy,  be  tested  by  means  of  an 
injunction."     1  Pomeroy,  Eq.,  §  171:  3 
Pomeroy,  Eq.,  §  1345.     See  also,  to  same 
effect,  Owen  v.  Whitaker,  20  N.  J.  Eq. 
122   (1869),  where   the  legality  of  the 
first  election  was   the   only  thing   in- 
volved: Hughes  V.  Parker,  20  N.  H.  58 
(1849);  Johnston  v.  Jones,  23  N.  J.  Eq. 
216  (1872);    Mickles  v.  Rochester   City 
Bank,  11  Paige,  118  (1844);  Mechanics' 
Nat.  Bank  v.  Burnet  Mfg.  Co.,  32  N.  J. 
Eq.   236   (1880),   where  a   third    person 
sumg  the  corporation  sought  to  have 
its  answer  stricken   out   because    the 


officers  were  not  duly  elected;  Fadness 
V.  Braunborg,  73  Wis.  257  (1889),  a  re- 
ligious corporation  case;  Wandsworth, 
etc.  Co.  V.  Wright.  18  W.  R.  728  (1870), 
where  fraud  was  charged  on  the  part 
of  the  inspectors:  Davidson  v.  Grange, 
4  Grant,  Ch.  (U.  C.)  377  (1854),  where 
the  court  refused  an  injunction,  but 
said  in  a  dictum  that  the  election  might 
be  set  aside  on  account  of  fraudulent 
voting  of  shares  subscribed  for  by 
"dummies"  to  get  control  of  the  elec- 
tion on  the  promise  that  the  subscrip- 
tions would  afterwards  be  canceled. 
Self-constituted  directors  without  a  reg- 
ularly organized  meeting  have  not  a 
good  title  to  their  office;  and  where 
subsequently  the  incorporators  elected 
other  directors,  the  latter  may  cause  to 
be  stayed  an  action  brought  in  the 
name  of  the  company  by  the  self-con- 
stituted directors.  John  Morley  Bldg. 
Co.  V.  Barras,  [1891]  2  Ch.  386.  The 
Pennsylvania  statute  giving  the  court 
power  to  control  and  supervise  elec- 
tions where  fraud,  violence,  or  unlaw- 
ful conduct  prevents  a  fair  and  honest 
election  does  not  sustain  an  injunction 
obtained  by  majority  stockholders  — 
who  withdrew  from  the  annual  meet- 
ing and  held  a  separate  election  because 
a  stock  vote  was  not  allowed  on  the 
election  of  chairman — against  the 
board  elected  by  the  minority.  Quo 
warranto  is  the  only  remedy.  Jenkins 
V.  Baxter,  160  Pa.  St.  199  (1894). 

1  Where  the  owners  of  the  whole  stock 
sell  it,  and  part  of  them  resign  and  place 
the  representatives  of  the  vendee  in 
possession,  and  those  who  remain  in  the 
board  do  so  at  his  request,  but  transfer 
to  him  their  certificates  of  stock,  and 
then  subsequently,  when  the  time  for 
the  annual  meeting  has  gone  by,  they 
publish  a  notice  of  a  meeting  and  con- 
ceal the  notice  from  him,  and  elect  a 


1333 


618.] 


ELECTIONS 


CORPOKATE    MEETINGS. 


[CH.   XXXVII. 


-  The  de  facto  directors  may  enjoin  the  claimants  to  office  from 
attempting  to  take  forcible  possession  or  exercising  the  duties  of 
the  office.^  If  the  validity  of  a  corporate  election  arises  incidentally 
in  connection  with  a  suit  in  equity,  the  court  will  pass  upon  the 
election.     This  may  occur  where  a  bill  is  filed  to  enjoin  a  forfeit- 


board,  and  attempt  to  take  possession, 
a  court  of  equity  will  enjoin  them. 
Equity  is  not  obliged  "to  leave  the 
corporation  and  its  lawful  directors  to 
the  remedy  at  law,  always  taking  at 
least  months,  and  in  the  meantime 
suffer  the  road  to  be  operated  and  per- 
haps ruined  by  the  depredators,  because 
they  claim  to  be  directors  de  facto  or 
dejure."  Johnston  v.  Jones,  23  N.  J.  Eq. 
216,  229  (1872).  Where  the  pledgee  of 
stock  sells  it  out  and  buys  it  in  himself, 
and  at  the  annual  election  votes  the 
stock  by  proxy,  even  though  the  stock 
still  stands  on  the  corporation  books  in 
the  name  of  the  pledgor,  and  the  pledgor 
claims  that  the  sale  is  illegal  and  that 
the  directors  elected  by  the  pledgee's 
vote  intend  to  take  action  detrimental 
to  the  corporation,  such  pledgor  is  en- 
titled to  an  injunction  against  such 
directors  acting  as  directors.  Reynolds 
V.  Bridenthal,  57  Neb.  280  (1898).  In 
Clarke  v.  Central,  etc.  Co.,  54  Fed.  Rep. 
556  (1893),  it  appeared  that,  the  board  of 
directors  having  been  illegally  elected, 
"the  voting  power  of  the  stock  was  en- 
joined, a  new  election  ordered,  and  the 
court  appointed  receivers,  not  for  the 
purpose  of  subjecting  the  properties  to 
the  claims  of  creditors,  but  to  protect 
and  to  preserve  them  until  they  could 
be  turned  over  to  a  legally  elected  board 
of  directors,  as  proper  trustees,  who 
would  have  the  right  under  the  law  to 
take  and  operate  the  railroad  in  the 
interest  of  all  concerned.  The  court 
further  directed  thal^,  when  this  new 
election  should  have  caken  place,  said 
new  board  of  directors  might  apply  to 
the  court  to  have  the  property  returned 
to  the  control  of  the  properly  consti- 
tuted officers  of  the  corporation."  In 
this  case,  however,  on  the  final  hearing. 


the  bill  was  dismissed.  See  62  Fed.  Rep. 
328  (1894).  Where  a  corporation  has  an 
authorized  capital  of  $5,000,  but  only 
$2,500  are  directed  by  the  stockholders 
to  be  issued,  it  is  illegal  and  fraudulent 
to  issue  the  remaining  authorized  capi- 
tal without  giving  the  existing  stock- 
holders a  prior  right  to  subscribe  to 
such  increased  capital  pro  rata.  Direct- 
ors elected  by  reason  of  such  illegal  issue 
will  be  enjoined  from  acting,  where 
they  are  about  to  change  the  whole 
policy  of  the  company.  Humboldt,  etc. 
Assoc.  V.  Stevens,  34  Neb.  528  (1892).  A 
suit  in  Kentucky  between  rival  claim- 
ants to  office  to  have  an  adjudication 
as  to  the  same  and  to  have  a  receiver 
does  not  prevent  one  of  the  parties  f  I'om 
foreclosing  a  mortgage  on  the  corporate 
property  in  another  state  and  having  a 
receiver  thereof  appointed.  Kelly  v. 
Mitchell,  98  Ky.  218  (1895).  A  suit  by  a 
state  to  enjoin  the  defendant  railroad 
company  from  being  managed  by  di- 
rectors elected  by  the  votes  of  stock  of 
the  company  owned  by  a  foreign  rail- 
road corporation  ultra  vires,  and  also  to 
declare  such  votes  and  elections  void, 
and  also  for  a  receiver,  or  in  lieu  of  all 
this  for  a  forfeiture  of  the  charter,  is 
not  demurrable.  State  i\  Port  Royal, 
etc.  Ry.,  45  S.  G.  470  (1895).  For  other 
instances  in  which  a  court  of  equity 
interfered,  see  §§  593  and  616,  supra, 

iReis  V.  Rohde,  34  Hun,  161  (1884). 
Although  there  is  a  controversy  as  to 
the  legality  of  an  election,  yet  the 
newly-elected  president,  who  takes 
peaceable  possession  of  the  property, 
may  enjoin  the  old  president,  who 
claims  to  hold  over  and  who  has  forcibly 
taken  possession.  Toronto,  etc.  Co.  v., 
Blake,  2  Ont.  Rep.  (Can.)  175  (1882). 


1334 


CH.  XXXVII.]  ELECTIONS  —  CORPORATE    MEETINGS. 


[§  618. 


ure  of  stock '  or  a  consolidation  of  corporations,^  or  to  set  aside 
an  illegal  assessment;^  but  not  in  a  suit  to  enjoin  the  sale  of 
stock,*  nor  in  a  suit  to  compel  the  directors  to  turn  over  the  prop- 
erty.* 

A  court  of  equity  may  appoint  a  master  to  hold  an  election  of  a 
corporation  when  by  reason  of  fraud,  violence,  or  unlawful  con- 
duct on  the  part  of  some  stockholder  a  fair  election  cannot  other- 
wise be  held.®  Where  a  claimant  to  the  oflBce  of  the  director  has 
with  violence  illegally  taken  possession  of  the  corporate  property, 
the  court  may  appoint  a  custodian  of  the  property,  and  direct  the 
custodian  to  deliver  it  to  the   proper  officers.^     But  generally  an 


1  In  an  injunction  suit,  brought  by  a 
stockholder  to  prevent  the  corporate 
officers  from  forfeiting  stock,  the  court 
will  pass  upon  the  legality  of  an  elec- 
tion of  directors,  but  of  course  will  not 
and  cannot  remove  them.  Moses  v. 
Tompkins,  84  Ala.  613  (1888);  Garden, 
etc.  Co.  V.  McLister,  L.  R  1  App.  (Pas. 
39  (1875);  93  N.  W.  Rep.  997. 

2  Where  the  directors  are  about  to 
make  an  illegal  consolidation,  and  a 
stockholder  files  a  bill  to  enjoin  it,  the 
court  will  pass  also  upon  the  legality  of 
the  election  of  the  de  facto  directors. 
Nathan  v.  Tompkins,  83  Ala.  437  (1887). 

3  An  assessment  upon  stock  levied  by 
a  board  of  directors  illegally  elected, 
and  a  sale  of  the  stock  thereunder,  does 
not  put  an  end  to  the  stockholders'  suit 
to  oust  such  board  of  directors  and  to 
set  aside  such  assessment  and  to  set 
aside  contracts  made  by  such  board. 
The  complaint  is  not  multifarious. 
Whitehead  v.  Sweet,  126  Cal.  67  (1899). 

•'In  an  action  to  enjoin  the  sale  of 
stock  by  a  corpoi'ation  under  a  lien 
which  the  corporation  has  upon  the 
stock,  a  court  of  equity  will  not  inquire 
into  the  regularity  of  the  election  of 
the  directors.  Elliott  v.  Sibley,  101  Ala. 
344  (1893). 

^  The  legality  of  the  election  of  di- 
rectors cannot  be  tested  by  a  suit  in 
equity,  even  though  the  suit  is  osten- 
sibly brought  to  compel  the  directors 
to  turn  over  the  property.  Bedford 
Springs  Co.  u  McMeen,  161  Pa.  St.  639 


(1894).  Where  newly-elected  directors 
bring  suit  in  the  name  of  the  company 
for  the  corporate  books,  the  legalitj'  of 
the  election  cannot  be  questioned  by 
way  of  defense.  The  question  of  such 
legality  can  be  raised  only  by  a  direct 
proceeding  for  that  purpose.  Austin, 
etc.  Co.  V.  Gemmell,  10  Ont.  Rep.  (Can.) 
696  (1886);  71  Pac.  Rep.  766. 

*  Tunis  V.  Hestonville,  etc.  R.  R.,  149 
*  Pa.  St.  70  (1892).  Where  the  directors 
and  officers,  in  order  to  continue  in  of- 
fice, do  not  give  notice  of  an  annual 
meeting,  but  enact  by-laws  to  aid  them 
in  this  purpose,  and  cause  a  stockholder 
to  have  the  annual  meeting  enjoined, 
other  stockholders  may  file  a  cross-bill 
in  such  injunction  suit,  and  it  appear- 
ing to  the  court  tha-t  a  fair  election 
could  not  otherwise  be  held,  the  court 
will  modify  the  injunction  so  as  to  al- 
low the  election  to  be  held  at  a  time 
fixed  by  the  court  and  under  the  super- 
vision of  a  master  in  chanceiy  ap- 
pointed by  the  court.  Bartlett  v.  Gates, 
118  Fed.  Rep.  66  (1902).  A  decree  to 
the  effect  that  stockholders  entitled  to 
vote  were  forcibly  prevented  from  vot- 
ing, and  to  the  effect  that  a  commis- 
sioner should  conduct  another  election 
and  report  to  the  court  the  vote  and 
the  objections,  is  not  a  final  decree. 
National,  etc.  Co.  v.  United,  etc.  Co., 
180  Pa.  St.  324  (1897).  See  also  §  613, 
supra. 

T  Ciancimino  v.  Man,  20  N.  Y.  Supp. 
703  (1893).  _ 


1335 


g  619.] 


ELECTIONS  —  CORPOKATE    MEETINGS. 


[CH.  XXXVII. 


injunction  and  a  receiver  are  not  the  proper  remedies  for  a  claim 
that  the  directors  were  illegally  elected.^ 

§  619.  Illegal  or  fraudulent  elections  —  Statutory  remedy  Jyy  j;e- 
tition  to  a  court  of  equity. —  In  consequence  of  the  delays  and  dif- 
ficulties attending  the  remedy  of  quo  warranto,  statutes  have  been 
enacted  in  many  of  the  states  which  give  courts  of  equity  the 
power  to  review  corporate  elections  at  the  instance  of  the  parties 
aggrieved.  Such  statutes  are  found  in  New  York,  Xew  Jersey, 
California,  and  other  states.  By  these  statutes  the  court,  sitting 
as  a  court  of  chancery,  is  empowered  to  review  corporate  elections, 
and  to  grant  such  relief  as  the  particular  circumstances  and  justice 
of  the  case  seem  to  require.^ 

These  statutes  have  proven  to  be  among  the  wisest  and  best  that 
legislatures  ever  enacted  in  regard  to  corporations.  They  furnish 
a  speed}^,  simple,  just,  and  effective  remedy  for  all  complaints,  and 
are  free  from  useless  technicalities  and  expense.  Various  decisions 
under  these  statutes  are  given  in  the  notes  below.^    Although  by 


J  Ulmer  v.  Maine,  etc.  Co.,  93  Me.  324 

(1899). 

2  Under  a  statute  authorizing  a  court 
to  review  elections,  the  proceeding  may 
be  in  equity.  Whitehead  v.  Sweet,  126 
Cal.  67  (1899).  See  also  the  cases  in  the 
next  note. 

"For  various  cases  in  New  York, 
showing  the  wide  powers  exercised  by 
the  court  under  this  statute,  see  Ex 
parte  Holmes,  5  Cow.  426  (1826);  Scho- 
harie Valley  R.  R.  Case,  12  Abb.  Pr. 
(N.  S.)  394  (1872);  Ex  parte  Desdoity,  1 
Wend.  93  (1828);  Vandeburgh  v.  Broad- 
way, etc.  R.  R.,  29  Hun,  348  (1883); 
Strong  V.  Smith,  15  Hun,  222  (1878);  Ex 
parte  Wilcocks,  7  Cow.  402  (1827);  Mick- 
les  V.  Rochester  City  Bank,  11  Paige, 
118  (1844);  Re  Long  Island  R.  R.,  19 
Wend.  37  (1837).  In  this  case  an  elec- 
tion was  set  aside  because  the  direct- 
ors had  illegally  declared  certain  shares 
forfeited  for  non-payment  of  instal- 
ments, and  refused  to  record  an  assign- 
ment thereof  so  as  to  entitle  the  as- 
signee to  vote.  In  a  proceeding  under 
the  New  York  statute  the  strict  rules 
as  to  the  reception  of  evidence  in  civil 
actions  do  not  apply.  Re  Argus  Co., 
138  N.  Y.  557  (1893),  holding  also  that 
the  application  will  be  heard  by  the 


1336 


court  under  the  New  York  statute,  al- 
though another  party  is  joined  as  pe- 
titioner without  authority.  Under  these 
statutes  an  election  may  be  declared 
void  by  reason  of  the  conspiracy,  frauds, 
or  trickery  of  a  part  of  the  stockhold- 
ers. People  V.  Albany,  etc.  R.  R.,  55 
Barb.  344  (1869).  A  statute  repealing 
the  statutory  remedy  in  chancery  to 
review  elections  operates  retrospect- 
ively as  well  as  prospectively.  Re 
New  York,  etc.  Co.,  23  Hun,  615  (1881). 
The  statute  authorizing  a  court  of 
chancery  to  review  elections  and  order 
new  ones  does  not  authorize  the  courts 
to  issue  a  mandamus  to  the  inspectors 
of  election  in  regard  to  counting  votes 
by  proxy  and  amending  the  return. 
People  V.  Simonson,  61  Hun,  338  (1891). 
•'  Surprise  and  fraud  upon  part  of  the 
electors  is  ground  for  avoiding  an  elec- 
tion." People  V.  Albany,  etc.  R  R.,  55 
Barb.  344,  363  (1869).  In  this  case  the 
place  of  an  election  was  filled  by  one 
party  with  roughs  as  proxies  brought 
there  for  purposes  of  intimidation,  and 
for  voting  on  viva  voce  votes,  and  for 
crowding  out  the  regular  voters.  Peo- 
ple V.  Albany,  etc.  R.  R,  55  Barb.  379 
(1869).  In  this  case  also,  under  the  New 
York    statute,    in   an    equitable    suit 


CH.  XXXVII.]  ELECTIONS COEPOKATE    MEETINGS. 


[§  619. 


the  award  of  arbitrators  stock  is  transferred  to  a  certain  party, 
and  such  party  votes  the  stock  at  the  next  election,  and  thereafter 
the  award  is  set  aside  and  the  stock  retransferred,  yet  the  party  so 


brought  by  the  state,  the  court  ap- 
pointed a  receiver  and  issued  an  injunc- 
tion pending  the  suit,  and  finally  de- 
clared elected  persons  who  would  have 
received  the  most  votes  of  all  votes 
that  had  been  legally  cast,  althougli 
there  had  been  two  elections  held  at 
the  same  time  by  the  two  parties  at 
different  places  in  the  same  town. 
Under  the  New  York  statute  making 
the  transfer  book  conclusively  binding 
upon  the  inspectors  of  election,  the  in- 
spectors cannot  exclude  the  vote  of  the 
registered  stockholder  although  he 
holds  the  stock  merely  as  pledgee;  but 
under  the  New  York  statute  allowing 
the  courts  to  summarily  review  the  elec- 
tion, the  court  has  power  to  go  back  of 
the  transfer  book  and  set  the  election 
aside,  where  the  statute  gave  the 
pledgor  the  right  to  vote.  Strong  v. 
Smith,  15  Hun,  223  (1878).  The  above 
remedy  does  not  apply  to  foreign  cor- 
porations. See  §  617,  supra.  "  Where 
no  allegation  of  fraud  or  deceit  is  made, 
the  court  cannot  interfere  under  the 
power  vested  in  it  by  the  Revised  Stat- 
utes to  nullify  or  set  a^ide  the  will  of 
the  shareholders  as  expressed  by  their 
votes."  lie  Wellman,  etc.  v.  Cianci- 
mino,  eta  Co.,  N.  Y.  L.  J.,  May  13, 
1890.  The  corporation  itself  may  apply 
under  the  statute  for  an  order  to  the 
effect  that  the  persons  declared  elected 
were  legally  elected.  ^Re  Pioneer  Paper 
Co.,  36  How.  Pr.  Ill  ^865).  Although 
officers  in  possession  of  the  corporate 
property  and  management  may,  in  pro- 
ceedings to  have  defendant's  election 
declared  illegal,  obtain  an  injunction 
against  the  defendant's  interfering 
with  the  management  of  property,  yet 
where  the  plaintiff  obtained  the  prop- 
erty and  management  by  violence  on 
the  dayof  the  commencement  of  the  suit 
notwithstanding  an  injunction  against 
such  violence,  his  injunction  will  be 


dissolved.  Ciancimino  v.  Man,  20  N.  Y. 
Supp.  702  (1892).  The  above  remedy 
does  not  apply  to  the  legality  of  an 
election  of  the  president  by  the  direct- 
ors. Ee  Caguey,  N.  Y.  L.  J.,  Sept.  15. 
1891.  As  to  the  California  statute  see 
Brewster  v.  Hartley,  37  Cal.  15  (1869); 
Wright  f.  Central  California,  etc.  Water 
Co.,  67  Cal.  532  (1885).  The  statutory 
power  of  the  court  to  inquire  into  the 
legality  of  corporate  elections  does  not 
apply  to  the  "appointment"  of  a  di- 
rector by  the  board  to  fill  a  vacancy 
due  to  a  resignation.  Wickersham  v. 
Brittau,  93  Cal.  34  (1892).  Nor  does 
such  a  statute  enable  the  director  so 
"appointed"  to  settle  the  question  of 
the  legality  of  the  election  by  applying 
to  the  court.  Wickersham  v.  Murphy, 
93  Cal.  41  (1892).  Where  two  groups  of 
stockholders  ai'e  contesting  for  control, 
the  expenses  of  the  litigation  should 
not  be  borne  by  the  company.  Wicker- 
sham V.  Crittenden,  106  Cal.  329  (1895  >. 
The  statute  in  New  Jersey  giving  the 
chancery  court  power  to  adjudicate 
elections  is  unconstitutional,  inasmuch 
as  the  constitution  vests  that  power  in 
the  supreme  court  only.  Goldstein  v. 
Ewing,  62  N,  J.  Eq.  69  (1901).  Where 
the  stockholders  disagree,  and  two  elec- 
tions are  held  in  adjoining  rooms  at 
the  same  time,  the  court  may  consider 
the  ballots  cast  at  both  meetings  in 
order  to  arrive  at  the  proper  result  of 
the  election.  lie  Election,  etc.  Grove 
Cem.  Co.,  61  N.  J.  L.  422  (1898).  See 
also,  in  general,  BeSt.  Lawrence  Steam- 
boat Co.,  44  N.  J.  L.  529  (1882),  a  case 
where  proxies  were  illegally  rejected. 
Although  the  inspectors  admitted  votes 
on  insufficient  evidence,  yet  if  addi- 
tional and  sufficient  evidence  is  pre- 
sented to  the  court  the  election  will 
stand.  Conant  v.  Millaudon,  5  La,  Ann. 
542  (1850).  In  attacking  the  validity  of 
a  vote  the  burden  of  proof  is  on  him 


1337 


§  620.]  ELECTIONS  —  COKPORATE    MEETINGS.  [CH.  XXXVII. 

deprived  of  the  stock  during  the  election  cannot  have  the  election 
set  aside.^ 

§  620.  Wlio  may  complain  of  an  illegal  election  —  A  new  ejec- 
tion is  not  granted  if  tlie  result  U'ill  he  the  same. —  Only  a  stock- 
holder whose  rights  h^ve  been  infringed,  and  who  is  equitably 
entitled  to  complain,  may  institute  the  proceedings.  Persons  con- 
tracting with  the  corporation  and  creditors  of  the  corporation  can- 
not interfere;  neither  can  the  corporation  ordinarily  defend  against 
its  contracts  on  the  ground  that  its  officers  were  not  duly  elected. 
If  they  are  de  facto  officers,  third  persons  may  deal  with  them  as 
such.2  jstqj,  |g  'I-  gygpy  stockholder  who  may  complain.  A  transferee- 
of  one  of  the  stockholders  who  participated  in  the  fraud  will  not 
be  heard  to  impeach  the  result  of  that  fraud.'  And  in  general  tho 
plaintiff,  a  relator  seeking  to  set  aside  a  corporate  election,  is  barred 
of  relief  if  he  himself  was  guilty  of  misconduct  or  neglect,  or  if  it- 
appears  that  he  has  subsequently  acquiesced  with  knowledge  of  the 
facts.^  It  is  a  principle  of  law,  also,  that  the  legality  of  an  election 
will  not  be  inquired  into  upon  the  ground  that  illegal  votes  wera 
cast,  unless  those  votes  were  challenged  at  the  election  at  the  time 
when  they  were  cast.^  The  failure  of  a  stockholder  to  attend  the 
stockholders'  meeting  is  not  a  waiver  of  his  right  to  object  to  the 
acts  of  the  meeting  as  ultra  vires^  even  though  the  notice  of  the 
meeting  stated  what  was  to  be  done.^     The  court  will,  however, 

who  attacks  it.    Re  Indian,  etc.  Co.,  L.  also  People  v.   Robinson,   64  Cal.   373 

R.  26  Ch.  D.  70  (1884).  (1883);  Re  Long  Island,  etc.  R.  R,  19 

1  i2e  Leslie,  58  N.  J.  L.  609(1896).  Wend.   37,   44  (1837),  and  §§  599,   594,. 

2  See  §  718,  infra.  supra. 

^Re  Syracuse,  etc.  R.  R.,  91  N.  Y.  1 "      «McFadden  v.  Leeka,  48  Ohio  St.  513 

(1883).  (1S91).      Under  a  statute    authorizing 

*  Wiltzt'.  Peters,  4  La.  Ann.  339  (1849),  one  company  to  sell  out  to  another  for 

where  a  commissioner  of  election  at-  any  consideration  that  may  be  agreed 

tacked  the  legality  of  votes  which  he  upon  between  them,    it  is  legal   that 

himself  had  admitted  as  commissioner,  the  consideration  be  a  right  extended 

^  Re  Chenango,  etc.  Ins.  Co.,  19  Wend,  by  the  new  company  to  the  old  stock- 

635  (1839),  wherein  the  court  said:  "  It  holders  to  demand  partly  paid  up  stock 

is  quite  clear,  generally  speaking,  that  of  the  new  company  within  a  limited 

an  illegal  vote  not  challenged  will  not  time,  a   dissenting   stockholder   being 

invalidate  an  election,  nor  will  even  be  given  the  right  to  have  the  fairness  of 

inquired  into."   See  also  Schoharie  Val-  the  proposed  sale  passed  upon  by  the 

ley  R.  R.  Case,  12  Abb.  Pr.  (N.  S.)  394  court.  It  is  the  duty  of  the  stockholder 

(1872).     A  stockholder  who  attends  the  in  such  a  case  to  attend  the  meeting 

election  and  votes,  and  does  not  object  and  vote  against  it  if  he  objects.  It  was 

to  others  voting,  although  he  knows  no  excuse  that  he  was  ill  or  abroad  or 

they  are  doing  so  in  violation  of  a  by-  negligent  in  dissenting,  under  the  Eng- 

law,  cannot  himself  afterwards  object  lish  statute.      Burdett  Coutts  v.  True 

to  the  legality  of  the  election.     State  v.  Blood,  etc.  Ltd..  [1899]  2  Ch.  616.   Cf.  54- 

Lehre,  7  Rich.  L.  (S.  C.)  234  (1854).     See  AtL  Rep.  88:3. 

1338 


CH.  XXXVII.]  ELECTIONS  —  COKPOKATE    MEETINGS. 


[§  620. 


refuse  to  set  aside  an  election  where  every  share  of  stock  was 
represented  at  the  election,  even  though  the  minority  refuse  to  vote 
on  the  ground  that  the  meeting  had  been  called  on  less  than  ten 
days'  notice  required  by  statute.^ 

Where  a  candidate  at  a  corporate  election  receives  a  majority  of 
the  votes  cast,  the  receipt  of  illegal  votes  in  his  favor  does  not  de- 
feat his  election.^  An  election  will  not  be  set  aside  if  it  be  shown 
that  after  throwing  out  the  invalid  votes  the  officers  declared 
elected  would  still  have,  according  to  the  return,  a  valid  majority 
of  the  votes  cast;  ^  and  a  new  election  will  not  be  ordered  if,  after 
rejecting  all  the  illegal  votes,  and  after  admitting  the  opposition 
legal  votes  which  were  rejected,  it  still  appears  that  the  directors 
returned  as  elected  had  a  majority  of  the  votes.* 

The  court  may  declare  a  candidate  elected  who  received  only  a 
minority  of  the  votes  actually  cast,  when  such  candidate  plainly 
received  a  majority  of  all  the  legal  votes  cast.*    But  where  the 


1  In  re  Griffing  Iron  Co.,  63  N.  J.  L. 
168  (1898);  aff'd,  63  N.  J.  L.  357  (1899). 

2i2e  Argus  Co.,  138  N.  Y.  557  (1893). 

3 People  V.  Tuthill,  81  N.  Y.  550  (1864); 
Ex  parte  Murphy,  7  Cow.  153  (1827); 
Re  Chenango,  etc.  Ins.  Co.,  19  Wend. 
635  (1839);  State  v.  Lehre.  7  Rich.  L. 
(S.  C.)  234,  325  (1854);  McNeeley  v. 
Woodruff,  13  N.  J.  L.  352(1833);  First 
Parish  v.  Stearns,  38  Mass.  148  (1838): 
School  District  v.  Gibbs.  56  Mass.  39 
(1848);  Christ  Cliurch  v.  Pope,  74  Mass. 
140  (1857).  Even  though  certain  stock 
is  illegally  issued  and  voted,  yet,  if, 
after  deducting  that  stock,  the  pre- 
vailing party  would  still  prevail,  the 
election  will  not  be  set  aside.  Kimball 
V.  New  England,  etc.  Co.,  69  N.  H.  485 
(1899).  The  court  will  not  consider  the 
legality  or  illegality  of  votes,  where 
those  votes  will  not  change  the  result, 
whatever  the  decision  might  be.  Co- 
nant  v.  Millaudon,  5  La.  Ann.  542  (1850). 
Where  the  officers  declared  elected  re- 
ceived a  majority  of  the  original  stock 
as  well  as  a  majority  of  the  alleged 
illegal  increased  stock,  they  will  not  be 
ousted.  Byers  v.  Rollins,  13  Colo.  22 
(1889).  Where,  after  rejecting  all  votes 
illegally  cast  by  proxy,  there  is  still  a 
majority  for  the  persons  who  were  de- 
clared elected,  the  court  will  not  dis- 


turb the  election.  Craig  v.  First  Pres, 
Church,  88  Pa.  St.  42  (1878). 

*  McNeeley  v.  Woodruff,  13  N.  J.  L. 
352  (1833);  Ex  parte  Desdoity,  1  Wend. 
98  (1828). 

5  Where  the  whole  number  of  votes 
is  five  hundred  and  ninety-three,  and 
there  were  present  five  hundred  and 
thirty-seven,  and  the  candidates  de- 
clared not  elected  received  three  hun- 
dred votes,  one  hundred  and  fifty  of 
which  were  illegally  rejected  by  the 
inspectors,  the  court,  under  the  New 
Jersey  statute,  declared  those  candi- 
dates elected  and  did  not  order  a  new 
election.  Re  St.  Lawrence  Steamboat 
Co.,  44  N.  J.  L.  529  (1882):  Monsseaux 
V.  Urquhart,  19  La.  Ann.  482  (1867);  Ex 
parte  Desdoity,  1  Wend.  98  (1828);  Van- 
deburgh  v.  Broadway  Ry.,  29  Hun,  348 
(1883);  Downing  v.  Potts,  23  N.  J.  L.  66, 
84  (1851),  where  an  election  was  set 
aside  and  a  new  one  ordered  because 
votes  were  illegally  rejected  on  one 
side  and  illegally  accepted  on  the  other, 
which  changed  the  result,  but  two  di- 
rectors who  were  on  both  tickets  and 
received  all  the  votes  cast  were  held 
elected.  The  court  said  that  unless 
the  legal  votes  rejected  and  the  illegal 
votes  received  were  sufficient  to  change 
the  result  of  the  election,  the  election 


1339 


§  621.] 


ELECTIONS  —  CORPORATE    MEETINGS.  [CH.  XXXVII. 


person  declared  elected  received  a  minority  of  the  votes,  he  will  be 
ousted  even  though  the 'other  candidate  was  not  qualilied  to  act  as 
a  director.*  Where  qno  warranto  proceedings  are  pursued,  the 
can  only  oust  the  party  who  is  in  office.  It  cannot  declare  another 
person  elected.^ 

§  621.  "  Corners"  in  stocli. —  The  courts  will  not  aid  either  party 
in  carrjnng  out  an  agreement  for  advancing  the  price  of  stock  by 


would  not  be  set  aside.  Hence  where 
of  two  thousand  three  hundred  and 
ninety-two  votes  for  certain  candidates 
seven  hundred  and  ninety-nine  were 
illegal,  and  there  were  illegally  re- 
jected one  thousand  eight  hundreil  and 
ninety-four  votes  for  the  defeated  can- 
didate, who  received  forty -six  votes,  the 
court  ordered  a  new  election.  In  Re 
Long  Island  R.  R.,  19  Wend.  37  (1837), 
where  the  votes  illegally  rejected 
would  have  elected  other  persons,  the 
court  set  the  election  aside,  and  did  not 
declare  elected  those  who  would  have 
been  elected  if  the  rejected  votes  had 
been  counted,  there  being  one  thousand 
seven  hundred  votes  not  represented, 
and  eleven  thousand  that  were  disqual- 
ified under  the  statute.  The  court  may 
declare  part  of  the  directors  illegally 
elected,  and  order  a  new  election  as  to 
them,  without  affecting  the  title  of  the_ 
others  to  their  offices.  People  v.  Flem- 
ing, 59  Hun,  518  (1891).  In  Monsseaux 
V.  Urquhart,  19  La.  Ann.  482  (1867),  the 
court  ousted  a  director  and  declared 
elected  another  person  in  his  stead. 
Where  the  presiding  officer  illegally  re- 
jects certain  Votes,  declares  certain  per- 
sons elected,  and  adjourns  the  meeting, 
and  the  dissatisfied  party  continue  the 
meeting  and  hold  another  election,  the 
court  will  consider  merely  the  question 
as  to  who  received  a  majority  of  the 
votes  which  were  legally  offered  to  be 
cast.  State  v.  Smith,  15  Oreg.  98  (18S7). 
A  court  will  not  force  upon  the  com- 
pany directors  who  are  technically  en- 
titled to  be  declared  elected,  certain 
proxies  being  irregularly  executed,  but 
will  order  a  Qew  election.  Harben  v. 
Phillips,  L.  R.  23  Ch.  D.  14  (1882).     In 


New  Jersey  it  has  been  held  that,  if 
the  illegally  rejected  votes  would  have 
given  the  defeated  candidate  a  major- 
ity of  all  the  stock,  the  court  will  de- 
clare him  elected,  and  will  oust  the  one 
that  was  declared  elected.  Re  Cape 
May,  etc.  Co.,  16  AtL  Rep.  191  (N.  J. 
1888). 

1  "Votes  cast  for  a  candidate  who  is 
disqualified  for  the  office  will  not  be 
thrown  away  so  as  to  make  the  election 
fall  on  a  candidate  having  a  minoritj'- 
of  votes,  unless  the  electors  casting 
such  votes  had  knowledge  of  the  fact 
on  which  the  disqualification  of  the 
candidate  for  whom  they  voted  rested, 
and  also  knew  that  the  latter  was,  for 
that  reason,  disabled  by  law  from  hold- 
ing the  office."  Re  St.  Lawrence  Steam- 
boat Co..  44  N.  J.  L.  529  (1882),  citing 
cases.  See  also  People  v.  Clute,  50  N.  Y. 
451  (1872).  Unless  the  stockholders 
know  that  they  are  voting  for  an  in- 
eligible candidate,  a  candidate  who  re- 
ceives a  minority  of  the  stock  cannot 
be  declared  elected;  in  other  words,  the 
votes  cast  for  the  ineligible  person  are 
not  to  be  ignored,  but  a  new  election 
must  be  held.  Schmidt  v.  Mitchell,  101 
Ky.  570  (1897). 

estate  V.  McDaniel,  22  Ohio  St.  354 
(1872),  where  a  number  of  legal  votes 
were  rejected  which  would  have  suf- 
ficed to  elect  certain  directors  who  with- 
out such  votes  had  only  a  minority  of 
the  votes  cast.  The  court  held  that  per- 
sons cannot  be  declared  elected  and  in- 
ducted into  office  upon  quo  tvarranto 
information;  People  v.  Phillips,  1  Denio. 
388  (1845).  making  the  same  ruling  as  to 
a  church  corporation. 


1340 


CH.  XXXVII.]  ELECTIONS — COr.i'OKATE    MEETINGS. 


[§  C21. 


means  of  fictitious  dealings  designed  to  deceive  others  concerning 
the  real  value  of  such  stock.'  "Where  both  the  vendor  and  vendee 
of  stock  know  that  the  purpose  of  the  vendee  is  to  control  the  cor- 
poration and  illegally  issue  corporate  paper,  the  sale  is  illegal  and 
void.'  An  agreement  to  make  a  "corner"  in  stock,  by  buying  it. 
up  so  as  to  control  the  market  and  then  purchasing  for  future  de- 
liveries, is  illegal.^  It  is  not  necessarily  unlawful  to  form  a  "  pool" 
for  the  purpose  of  dealing  in  a  particular  stock,*  and  the  person, 
who  does  the  buj^ng  and  selling  must  account  to  the  others.^ 


1  Livermore  v.  Bushnell,  5  Hun,  285 
(1875).  See  also,  in  general,  §  445,  note, 
siq^ra,  and  §  622,  infra. 

2  Newark  v.  Elliott,  5  Ohio  St  113 
(1855). 

3  Sampson  U.Shaw,  101  Mass.  145  (1869); 
Raymond  v.  Leavitt,  46  Mich.  447  (1881); 
Morris  Run  Coal  Co.  v.  Barclay  Coal  Co., 
68  Pa.  St.  173  (1871);  Arnot  v.  Pittston, 
etc.  Coal  Co.,  68  N.  Y.  558  (1877):  Keene 
V.  Kent,  N.  Y.  D.  Reg.,  March  15,  1887. 
Cf.  Petrie  v.  Hannay,  3  T.  R  418  (1789). 
No  suit  lies  against  a  broker  for  fraud 
in  carrying  out  a  pool  or  combination 
to  "corner  "and  advance  the  price  of 
lard.  Leonard  v.  Poole,  114  N.  Y.  371 
(1889).  See  also  §  445,  supra.  A  person 
making  a  "  corner "  in  wheat  is  not 
subject  to  a  criminal  prosecution  there- 
for. Raymond  v.  Leavitt,  46  Mich.  447 
(1881).  It  is  not  fraud  for  the  owner  of 
the  larger  part  of  the  capital  stock  of  a 
corporation  to  "  corner  "  the  market, 
that  is,  to  enter  into  contracts  with  va- 
rious parties  to  purchase  stock  of  the 
corporation,  although  he  knew  that 
such  contracts  could  not  be  fulfilled  by 
such  parties  by  reason  of  the  fact  that 
he  himself  held  such  stock,  and  it  could 
not  be  obtained  elsewhere.  The  same 
rule  prevails  although  such  person 
offered  the  stock  for  public  subscription 
and  purchased  the  greater  part  of  it 
himself.  Salaman  v.  Warner,  64  L.  T. 
Rep.  598  (1891);  aff'd,  65  L.  T.  Rep.  133 
(1891).  Cf.  Barry  v.  Croskey,  2  Jones  & 
H.  1  (1861),  holding  that  tlie  victim  of 
the  "  corner  '"  may  file  a  bill  in  equity 
to  recover  back  the  money  lost.  For 
an  interesting  statement  of  the  modus 


operandi  of  a  "corner,"  see  "An  Invest- 
or's Notes  on  American  Railroads,"  by 
Swann,  ch.  XII  (1886). 

4  Quincey  v.  White,  63  N.  Y.  370,  383 
(1875),  modifying  Quincey  v.  Young,  5 
Daly,  327  (1874). 

5  Where  several  parties  buy  a  certifi- 
cate of  stock  in  fixed  proportions  and 
the  certificate  is  taken  by  one  for  the 
the  benefit  of  all,  he  is  a  bailee  for  the 
others  and  not  a  vendor.  Coquard  u 
Wernse,  100  Mo.  137  (1889).  The  gen- 
eral rule  that  an  action  affecting  a  joint 
enterprise  for  the  purchase,  upon  spec- 
ulation, of  certain  mining  stocks,  must 
join  all  the  parties  who  enter  the  "pool," 
does  not  necessitate  the  joinder  of  one 
who  is  out  of  the  jurisdiction.  Angell 
V.  Lawton,  76  N.  Y.  540  (1879).  The  rep- 
resentative of  a  syndicate  after  selling 
the  stock  cannot  modify  the  contract. 
He  is  liable  to  the  others  if  he  does  so. 
Kountz  V.  Gates,  78  Wis.  415  (1891). 
Where  there  is  a  joint  operation  in 
stocks,  a  "  pool,"  the  transactions  being 
carried  on  in  the  name  of  one  only,  the 
others  may  have  specific'  performance 
leading  to  a  division  of  the  stocks. 
Johnson  v.  Brooks,  46  N.  Y.  Super. 
13  (1880);  Thorntons  St.  Paul, etc.  Ry., 
45  How.  Pr.  416  (1873);  s.  C,  dismissed, 
6  N.  Y.  Week.  Dig.  309  (1878).  A  vendor 
of  stock  may  collect  the  price  even 
though  the  agreement  contains  a  pro- 
vision for  pooling  the  stock  which  is 
illegal.  Edgerton  v.  Power,  18  Mont. 
350  (1896).  See  also  §  320,  supra.  An 
agreement  with  brokers  by  which  a 
person  is  to  cause  a  legislative  investi- 
gation, and  in  case  certain  stock  de- 


1341 


§§  622,  622a.]       elections  —  corporate  meetings.  [ch.  xxxvii. 

§  622.  Toting  trusts  and  lyool'ing  agreements  —  Ii(Strictions  on 
right  to  vote  or  sell  stocic —  Contracts  as  to  voting,  elections,  direct- 
ors, and  control. —  The  control  of  a  corporation  generally  deter- 
mines its  success  or  failure.  The  control  also  gives  power,  patronage, 
perquisites,  salaries,  and  position.  IJence  it  is  sought  for.  In  a  large 
corporation  the  absolute  control  generally  requires  more  money 
than  one  man  is  able  or  willing  to  invest.  Consequently,  for  man}' 
reasons,  various  stockholders  unite  to  obtain  and  retain  the  control. 
There  is  always  danger,  however,  that  some  of  these  stockholders 
may  die,  or  sell  their  stock,  or  unite  with  some  other  parties  to  ob- 
tain control.  Hence,  for  twenty  years  last  past,  the  business  com- 
munity and  the  lawyers  have  been  trying  to  find  some  legal  way 
of  so  tying  up  a  majority  of  the  stock  of  a  corporation  as  to  pre- 
vent its  being  lost.  Various  plans  have  been  tried,  some  of  which 
have  failed,  some  have  been  partiallv  successful,  and  some  almost 
a  complete  success.    This  whole  subject  may  be  divided  as  follows: 

{a)  Contracts  betw^een  stockholders  to  vote  together.  Contracts 
involving  changes  of  officers,  and  payment  of  salaries. 

(b)  Restrictions  on  the  right  to  vote. 

(c)  Contracts  between  stockholders  not  to  sell  their  stock  except 
to  each  other. 

{d)  Charter  provisions  and  by-laws  restricting  the  right  to  sell 
the  stock.     Unincorporated  associations. 

{e)  Irrevocable  proxies. 

{f)  Deposit  of  certificates  of  stock  with  trustees,  either  with  or 
without  a  transfer  of  same  to  the  trustees. 

{g)  One  corporation  owning  and  holding  the  stock  of  other  cor- 
porations. 

Taking  up  those  various  modes  of  uniting  the  majority  of  the 
stock,  the  first  is 

§  622a.  Contracts  lettveen  stoclholders  to  vote  together — Con- 
tracts involving  changes  of  officers,  and  imyment  of  salaries. —  It  is 
elementary  law  that  stockholders  owning  a  majority  of  the  stock 
have  a  right  to  combine  and  control  the  election  of  the  board  of 
directors.' 

clined  such  person  was  to  share  in  the  could  lawfully  agree  among  themselves 
profits  of  short  sales,  is  illegal  and  not  to  vote  as  a  unit  to  control  an  election; 
enforcible.  Veazey  v.  Allen,  173  K  Y.  and  that  their  agreement  that  their 
859  (1903).  votes  should  be  cast  as  should  be  de- 
1  Havemeyer  v.  Havenieyer,  48  N.  Y.  cided  by  the  majority  of  their  own 
Super.  Ct.  506,  513  (1878);  s.  C,  45  N.  Y.  votes  was  not  void  as  being  against  pub- 
Super.  Ct.  464  (1879);  aff'd,  86  N.  Y.  618  lie  policy.  See  also  Pender  v.  Lushing- 
(1881):  Faulds  v.  Yates.  57  III.  416(1870),  ton,  L.  R.  6  Ch.  D.  70  (1877),  where  the 
where  it  was  held  that  persons  holding  court  said:  "There  is,  if  I  may  say  so, 
the  majority  of  stock  in  a  corporation  no  obligation  on  a  shareholder  of  a  com- 

1342 


■CH.  XXXVII.]  ELECTIONS  —  CORPORATE    MEETINGS. 


[§  Q22a. 


Several  parties  in  purchasing  stock  may  agree  that  each  one's 
share  shall  be  transferred  to  him,  but  that  all  the  stock  shall  be 
voted  for  five  years  in  one  way,  that  way  to  be  determined  by  a 
majority  of  the  stock  so  included  in  the  agreement.  Such  an  agree- 
ment is  legal,  especially  as  it  provides  that  during  that  time  the 
parties  shall  retain  the  power  to  vote  such  stock. ^ 

Thus,  executors  holding  a  majority  of  the  stock  of  a  corporation 
may,  in  order  to  sell  a  portion  thereof,  agree  with  the  purchaser 
that  they  will  vote  for  two  persons  named  by  the  purchaser  to  act 
as  directors  so  long  as  the  executors  hold  the  remainder  of  the  stock, 
and  the  court  will  grant  an  injunction  against  the  executors  voting 
in  violation  thereof.^  An  executory  contract,  however,  between 
stockholders  that  they  will  vote  in  a  certain  way  or  elect  certain 
persons  as  directors  will  rarely  be  enforced  specifically  by  the  courts, 
and  an  action  at  law  for  damages  for  breach  of  contract  is  unsatis- 
factory in  that,  as  a  rule,  no  substantial  damages  can  be  proven.^ 


pany  to  give  his  vote  merely  with  a 
view  to  what  other  persons  may  con- 
sider the  interests  of  the  company  at 
large.  He  has  a  right,  if  he  thinks  fit, 
to  give  his  vote  from  motives  or  prompt- 
ings of  what  he  considers  his  own  in- 
dividual interest."  A  stockholder  who 
signs  an  agreement  with  others  to  vote 
their  stock  as  a  unit  cannot  afterwards 
complain  of  acts  of  the  board  of  direct- 
ors, which  acts  were  in  accordance  with 
the  policy  of  the  pooling  agreement. 
Ziegler  v.  Lake  St.  El.  R.  R..  69  Fed. 
Rep.  176  (1895),  giving  portions  of  the 
agreement.  "  It  is  not  per  se  unlawful 
for  a  number  of  persons,  by  previous 
agreement,  to  buy  shares  of  the  stock 
of  a  corporation  for  the  purpose  of  con- 
trolling its  policy,  electing  its  officers, 
etc."  Beitman  v.  Steiner,  98  Ala.  241 
(1893).  Where  two  partners  desire  to 
incorporate,  and  each  to  have  the  same 
interest,  and  a  third  party  to  have  a 
smaller  interest,  thereby  holding  the 
balance  of  power,  and  such  arrange- 
ment is  carried  out,  and  the  third  party 
is  really  a  dummy  of  one  of  the  part- 
ners, and  thereby  gives  the  control  of 
the  corporation  to  that  partner,  yet  the 
other  partner  has  no  legal  cause  of  com- 
plaint, notwithstanding  the  general  un- 
derstanding as  to  the  division  of  con- 


trol. Baumgarten  v.  Nichols,  69  Hun, 
216  (1898).  Although  a  contract  of  cer- 
tain stockholders  to  vote  together  is 
legal,  yet  a  conspiracy  to  obtain  an  ille- 
gal injunction  against  others  voting 
will  not  be  countenanced  by  the  court. 
People  V.  Albany,  etc.  R  R,  55  Barb. 
344.  368  (1869). 

1  The  court  consequently  held  that  a 
member  of  the  syndicate  who  refused 
to  vote  in  accordance  with  a  decision  of 
the  majority  had  no  right  to  vote  (by 
reason  of  the  California  statute  pre- 
scribing that  only  bona  fide  holders  of 
stock  should  vote),  the  court  holding 
that  the  original  purchase  of  the  block 
of  stock  bound  that  stock  in  its  vote. 
Smith  V.  San  Francisco,  etc.  Ry.,  115 
CaL  584  (1897). 

2  Greenwell  v.  Porter,  [1903]  1  Ch.  530. 
Whei'e  by  contract  between  two  stock- 
holders owning  an  equal  share  in  the 
corporation,  future  stock  acquired  by 
either  of  them  is  to  belong  one-half  to 
each,  such  contract  may  be  specifically 
enforced.  Stewart  v.  Pierce,  89  N.  W. 
Rep.  234  (Iowa,  1902).  See  on  this  point 
§g  320,  338,  supra. 

3  An  agreement  that  a  certain  person 
shall  be  president  for  two  years  will 
not  be  specifically  enforced  by  the 
courts.     Dulin  v.  Specific,  etc.  Co..  103 


1343 


§  C22...] 


ELECTIONS  —  COin'ORATE    MEETINGS.  [cil.  XXXVII. 


A  contract  by  which  the  directors  who  own  a  majority  of  the 
stock  sell  such  stock  and  agree  to  substitute  the  vendees  as  direct- 
ors of  the  company  is  legal.^ 


Cal.  357  (1894),  holding  also  that  an  elec- 
tion in  which  the  party  is  not  even 
elected  a  director  will  not  be  set  aside, 
even  under  the  statutory  power  of  the 
courts  to  set  aside  elections  on  equi- 
table grounds.  A  court  of  equity  will 
not  grant  specific  performance  of  a  con- 
tract to  vote  stock  as  the  complainant 
stockholder  wishes,  with  a  view  to  con- 
trolling the  corporation.  Hence  where 
the  promisee  of  such  a  contract  knows 
the  promisor  will  not  fultill  his  con- 
tract, and  consequently  the  promisee 
buys  the  promisor's  stock  at  a  high 
price,  he,  the  promisee,  cannot  rescind 
such  purchase,  but  must  pay  the  stipu- 
lated price.  Gage  v.  Fisher,  5  N.  D.  297 
(1895). 

An  agreement  to  elect  a  certain  per- 
son president  is  waived  if  he  partici- 
pates in  electing  others.  American, 
etc.  T.  Co.  V.  Toledo,  etc.  Ry.,  47  Fed. 
Rep.  343  (1890).  A  contract  between  a 
stockholder  and  a  third  person  by 
which  the  third  person  is  to  be  made  a 
director,  and  agrees  to  devote  his  time 
and  attention  to  the  business,  and 
develop  the  property,  and  procure  the 
construction  of  a  railroad,  and  cause 
various  lots  of  land  owned  by  the  cor- 
poration to  be  sold,  will  not  sustain  an 
action  at  law  for  damages  by  the  stock- 
holder for  breach  of  the  contract.  An 
action  in  such  a  case  may  be  main- 
tained only  by  the  corporation  or  by 
the  stockholder  in  its  behalf.  So  far  as 
the  contract  intended  to  control  the 
action  of  the  board  of  directors  it  was 
illegal.  Kountze  v.  Flannagan,  19  N.  Y. 
Supp.  3o  (1892).  An  agreement  that 
certain  persons  should  have  control  of 
the  corporation  until  certain  debts  were 
paid  must  be  clearly  proved  before  it 
will  be  sustained  by  the  courts.  Proctor, 
etc.  Co.  V.  Finley,  98  Ky.  405  (1895).  A 
contract  between  two  companies  by 
which  one  is  to  name  four  of  the  six 


directors  of  the  other  (and  is  also  to  sell 
the  stock  of  the  latter,  carry  out  its 
contract,  and  pay  dividends  on  its 
stock)  is  illegal.  James  v.  Eve,  L.  R.  6 
H.  L.  335(1873). 

Even  though  a  partnership  transfers 
its  assets  to  a  corporation, each  partner 
taking  an  equal  proportion  of  the  stock, 
except  that  a  third  party  was  given  the 
balance  of  power,  and  such  third  jiartj'' 
afterwards  acts  with  one  of  tiie  part- 
ners and  controls  the  corporation,  yet 
this  is  not  sufficient  to  set  aside  a  trans- 
fer of  the  assets  to  the  corporation  at 
tiie  instance  of  the  other  partner. 
Baumgarten  v.  Nichols,  69  Hun,  210 
(1893). 

1  A  contract  to  sell  one's  stock  in  a 
corporation  and  to  resign  a  directorship 
and  the  presidency,  and,  having  done 
so,  to  endeavor  to  induce  other  direct- 
ors to  resign,  in  order  that  the  purchasers 
of  the  stock  may  come  in  and  take 
their  places  and  so  control  the  manage- 
ment of  the  company,  there  being  no 
evidence  of  fraud,  has  been  held  a  con- 
tract not  void  as  against  public  policy. 
Barnes  v.  Brown,  80  N.  Y.  527  (1880).  A 
contract  whereby  a  manufacturing 
corporation  and  all  of  its  stockholders 
agreed  to  sell  a  certain  proportion  of  the 
capitalstockof  said  company  and  to  sub- 
stitute two  persons  nominated  by  the 
vendee  as  directors  in  such  corporation 
is  not  presumed  to  be  ultra  vires,  and  a 
provision  in  such  contract  that  the 
purchaser  will  carry  on  the  business 
and  divide  profits  every  six  months 
may  be  enforced  by  the  corporation. 
Rider  Life  Raft  Co.  v.  Roach,  97  N.  Y. 
378  (1884).  An  agreement  by  which  the 
directors  of  a  company  sell  their  stock 
and  resign  their  offices  and  substitute 
the  purchasers  in  their  places  is  not 
illegal  or  objectionable  if  all  the  stock- 
holders assent  and  if  the  corporation  is 
not  injured.  The  assent  of  a  few  minor 


1344 


CH.  XXXVII.]  ELECTIONS CORPOKATE   MEETINGS. 


[§  622«. 


Such  a  transaction,  however,  is  closely  scrutinized  by  the  courts, 
and  if  fraudulent,  as  a  matter  of  fact,  the  retiring  directors  are  per- 
sonally responsible  for  any  losses.^ 

A  sale  of  his  vote  by  a  stockholder  is  illegal.^ 

A  contract  in  regard  to  elections  in  private  corporations  is  not 
legal  if  it  provides  that  a  lucrative  corporate  position  shall  be 


stockholders  whose  stock  was  given  to 
them  will  be  presumed,  in  case  they 
have  not  objected.  Raymond  v.  Colton, 
104  Fed.  Rep.  219  (1900).  Where  a  di- 
rector, who  is  also  treasurer,  sells  his 
stock  to  the  other  directors,  it  being  a 
part  of  the  sale  that  he  give  up  his  of- 
fices, the  corporation  may  treat  his  of- 
fices as  vacant.  Anderson,  etc.  Co.  v. 
Pungs,  127  Mich.  543  (1901).  In  the 
case  of  Ryan  v.  McLane,  91  Md.  175 
(1900).  the  court  seemed  to  doubt  some- 
what this  statement  that  it  is  legal  for 
the  board  of  directors  who  own  a  ma- 
jority of  the  stock  to  agree  to  sell  it  and 
substitute  the  vendees  as  directors  of 
the  company.  It  would  seem,  however, 
as  if  such  a  contract  would  in  its  effect 
be  no  different  from  the  common  pro- 
vision which  appears  in  the  statutes  of 
many  of  the  states  and  in  the  by-laws 
of  many  corporations,  that  a  majority 
in  interest  of  the  stock  may  at  any 
time  remove  any  of  the  directors  and 
elect  others  in  their  place.  A  sale  of 
the  majority  of  the  stock,  together 
with  a  statutory  power  to  remove  the 
directors,  is  the  same  as  a  sale  of  the 
majority  of  the  stock  with  a  voluntary 
agreement  to  have  the  directors  resign 
and  new  ones  substituted. 

^Where  the  officers  and  directors,  in 
a  conspiracy,  resign  their  offices  and 
substitute  other  officers  who  are  irre- 
sponsible and  untrustworthy,  in  con- 
sideration of  unlawful  payments  made 
to  the  former  directors,  and  the  assets 
of  the  corporation  are  thereby  lost,  the 
first  named  directors  are  personally  re- 
sponsible for  their  action  and  a  receiver 
of  the  corporation  may  hold  them 
liabla  Bosworth  v.  Allen,  168  N.  Y.  157 
(1901).  A  director  of  an  assessment  life 
insurance  company  who  receives  money 


for  causing  a  person  and  his  friends  to 
be  elected  directors,  thereby  giving 
them  the  control  of  the  company,  to- 
gether with  its  property,  may  be  held 
liable  by  the  receiver  of  the  company 
for  the  money  so  received.  McClure  v. 
Law,  161 N.  Y.  78  (1899).  See  also  Gilbert 
V.  Finch,  173  N.  Y.  455  (1903).  Money  re- 
ceived by  a  director  of  a  co-operative 
insurance  company  for  substituting 
other  directors  and  transferring  its 
business  to  another  company  can  be 
recovered  back  on  the  ground  of  fraud, 
and  such  director  is  chargeable  with 
notice  of  the  facts  which  he  knew  or 
might  have  learned  by  the  exercise  of 
reasonable  care.  McClure  v.  Wilson,  70 
N.  Y.  App.  Div.  149  (1902).  Where  a 
trustee  retires  from  office  in  considera- 
tion that  his  successor  pay  him  a  sum 
of  money,  the  money  so  paid  belongs 
to  the  trust  estate.  Perry  on  Trusts 
(8d  ed.),  §  427.  Specific  performance 
will  not  be  granted  of  an  agreement  of 
the  vendors  of  sto.ck  that  they  will  re- 
sign as  directors  and  substitute  the 
vendee's  representatives  instead.  Fre- 
mont V.  Stone,  42  Barb.  169  (1864),  the 
court  stating  that  such  a  contract  is 
unfair  towards  the  minority  stockhold- 
ers. See  also  Jacobs  v.  Miller,  15  Alb. 
L.  J.  188  (1877).  Directors  have  no 
power  to  contract  with  an  outsider  that 
he  shall,  upon  purchasing  certain  stock, 
be  made  a  director  in  the  company,  but 
a  sale  of  stock  with  an  agreement  that 
the  vendee  should  be  elected  superin- 
tendent may  be  rescinded  if  the  latter 
part  of  the  agreement  is  not  carried 
out.  Seymour  v.  Detroit  Copper,  etc. 
Mills,  56  Mich.  117  (1885). 

2  Hafer  v.  New  York,  etc.  R.  R,,  14  W. 
L.  Bull.  68  (1886).  See  also  Yale  Law 
Journal,  vol.  1,  p.»7,  and  §  610,  supra. 


(85) 


1345 


622a.] 


ELECTIONS CORPORATE    MEETINGS. 


[CH.  XXXVII. 


given  to  one  or  more  of  ttie  parties  to  the  contract.^  Thus,  an  agree- 
mentof  a  large  stockholder  holding  a  majority  of  the  stock,  that  upon 
the  purchase  and  absorption  of  plaintiff's  business  by  the  corpora- 
tion the  plaintiff  should  be  engaged  for  a  terra  of  years  as  vice- 
president  and  general  manager  of  the  corporation  at  a  specified 
salary,  is  contrary  to  public  policy  and  is  void.^    An  agreement  of 


1  Quoted  and  approved  in  Withers  v. 
Edwards,  63  S.  W.  Rep.  795  (Tex.  1901), 
where  the  court  held  that  a  contract 
between  the  president  and  the  teller  of 
a  bank,  providing  means  to  secure  the 
re-election  of  the  same  board  and  their 
own  re-election  as  officers,  is  illegal  as 
involving  their  election  to  lucrative 
positions. 

2  West  V.  Camden,  135  U.  S.  507  (1890). 
A  contract  made  by  a  stockholder  for 
a  consideration  to  vote  for  a  particular 
person  for  manager  of  the  company, 
and  in  the  event  of  his  election  to  vote 
for  an  increase  of  the  salary  attacJiing 
to  that  position,  is  illegal  and  cannot 
be  enforced.  Woodruff  v.  Wentworth, 
133  Mass.  309  (1882).  An  agreement  of 
persons  holding  a  majority  of  the  stock, 
they  being  directors  also,  that  a  person 
purchasing  stock  from  them  shall  be 
general  manager,  and  may  at  the  end 
of  two  years  sell  the  stock  back  to  them 
at  a  stated  price,  is  contrary  to  public 
policy  and  void.  The  vendors  need  not 
repurchase.  The  arrangement  is  un- 
fair to  the  corporation.  Wilbur  v. 
Stoepel,  82  Mich.  344  (1890).  A  proxy 
for  five  years,  given  so  as  to  unite 
enough  stock  to  control  the  corporation, 
the  holder  of  the  proxy  agreeing  that 
the  person  giving  the  proxy  shall  have 
an  ofiQce  at  a  salary  of  $2,500  a  year,  is 
void.  At  the  instance  of  the  latter  per- 
son a  court  of  equity  will  enjoin  voting 
thereunder.  Cone  v.  Russell,  48  N.  J. 
Eq.  208  (1891),  Where  a  stockholder  in 
a  raih'oad  company  is  induced  to  take 
part  in  the  formation  of  a  land  com- 
pany, and  is  to  receive  a  certain  sum  of 
money  when  a  depot  is  located  on  such 
land,  he  cannot  enforce  the  agreement. 
It  is  practically  a  sale  of  his  vote.   Ful- 


ler u  Dame.  35  Mass.  472  (1836),  A  con- 
tract of  the  vendor  of  bank  stock  that 
he  would  make  the  vendee  the  cashier 
is  illegal  and  void.     Noel  v.  Drake,  28 
Kan.  265  (1882).     Where  the  president 
of  a  corporation  brings  about  a  sale  of 
all  its  stock  and  a  change  of  its  oflScers, 
under  a  contract  by  which  the  corpo- 
i-ation  is  to  pay  him  a  certain  sum,  he 
cannot  collect  that  sum  from  the  cor- 
poration itself.     Wood  v.  Manchester, 
etc.  Co.,  54  N.  Y.  App.  Div.  523  (1900). 
A    contract    between    promoters,   by 
which  one  of  them  is  to  be  employed 
by  a  proposed  insurance  company  on  a 
salary  and  a  percentage  of  premium,  is 
too  indefinite    to    be    enforced,    even 
though    some    of  the    promoters  pro- 
ceeded to  form  the  company.    It  seems 
also  that  such  a  contract  is  contrary  to 
public  policy.     Flaherty,  v.  Gary,  63  N. 
Y.   App.  Div.  116  (1901).     A  contract 
whereby  a  stockholder  sells  his  stock 
to  an  individual  who  guarantees  that 
the  former  will  be  employed  at  a  stated 
salary  by  the  corporation  for  two  years 
is  enforcible  against  the  person  so  pur- 
chasing   the   stock,  even   though  the 
corporation  passes  into  the  hands  of  a 
receiver  before  the  expiration  of  the 
two   years    and    the    employment    is 
thereby  stopped.     Kinsman  v.  Fisk,  37 
N.  Y.  App.  Div.  443  (1899).     An  agree- 
ment to  vote  in  a  particular  way,  in 
consideration  of  some  personal  benefit, 
is  illegal;  for  a  vote  ought  to  be  an  im- 
partial and  honest    exercise    of  judg- 
ment.    Elliott  V.  Richardson,  L.  R.  5  C. 
P.  744  (1870).    See  also  Moffatt  v.  Farqu- 
harson,  2  Bro.  C,  C.  338  (1788);  Card  v. 
Hope,  2  B.  &  Cr.  661  (1824).     Compare 
Bolton   V.    Madden,   L.    R   9  Q.   B.  .^5 
(1873),  where  an   agreement    betwppn 


1346 


€H.  XXXVIL] 


ELECTIONS 


CORl'OKATE    MEETINGS. 


[§  G22a. 


persons  as  a  condition  of  their  election  that  the  bank  should  extend 
to  a  certain  party  credit  for  loans  at  a  specified  rate  of  interest  is 
illegal.^  But  a  stockholder  in  a  bank  in  selling  some  of  his  stock 
ma}'^  agree  that  the  purchaser  shall  be  cashier  five  years,  and  may 
agree  to  take  back  the  stock  at  the  end  of  that  time  at  the  same 
price,  where  such  agreement  is  in  good  faith  and  for  the  purpose  of 


two  subscribers  to  a  charity  to  vote  for 
each  other's  nominees  was  held  not  to 
be  illegal  A  contract  by  which  a  stock- 
holder in  a  corporation  agrees  to  se- 
cure to  the  purchaser  of  his  stock  a 
corporate  office  at  a  stated  salary,  and 
in  case  of  his  removal  to  repurchase 
the  stock,  is  void  as  against  public  pol- 
icy and  as  a  fraud  on  other  stockholders, 
unless  it  is  proved  that  the  transaction 
is  not  for  the  private  benefit  of  the 
vendor,  or  that  it  was  consented  to  by 
the  other  stockholders.  Guernsey  v. 
Cook.  120  Mass.  501  (1876);  Noyes  v. 
Marsh,  123  Mass.  286  (1877).  A  contract 
to  preserve  the  control  and  status  quo 
was  involved  in  Harris  v.  Scott,  67  N. 
H.  437  (1893).  The  contract  provided 
for  voting  on  all  subjects,  for  salaries, 
and  for  sales  of  stock  before  and  after 
death.  The  court  refused  to  grant 
specific  performance  for  sale  after 
death.  Where  three  persons,  being  the 
owners  of  a  majority  of  the  stock, 
agree  that  they  will  vote  their  stock  to 
elect  as  directors  three  persons  to  be 
named  by  one  of  them,  and  two  persons 
to  be  named  by  the  others,  and  that 
one  of  them,  who  received  a  salary  of 
$2,500,  should  receive  a  salary  of  $5,000, 
and  that  two  of  such  directors  should 
receive  a  salary  of  $500  each,  the  agree- 
ment is  illegal.  Snow  v.  Church,  13  N. 
Y.  App.  Div.  108  (1897).  A  contract  by 
which  a  purchaser  of  a  majority  of  the 
stock  of  three  corporations  agrees  that 
the  corporations  ^should  employ  the 
seller  of  the  stock  at  a  fixed  salary  for 
a,  certain  time,  and  after  a  certain  time 
the  seller  to  have  a  salary  and  one-half 
of  the  directors,  is  illegal,  and  cannot 
be  enforced  by  the  vendor  as  against 
the  vendee,  even  though  the  stock  has 
been  delivered  and  paid  for  under  such 

134' 


agreement.  Fennessy  v.  Ross,  5  N.  Y. 
App.  Div,  342  (1896),  A  contract  of  sale 
of  stock  whereby  the  vendee  is  to  be 
voted  a  certain  salary  and  an  equal 
representation  in  the  board,  and  in  case 
either  party  wishes  to  sell  stock  it  is 
first  to  be  offered  to  the  other  party  at 
a  fixed  price,  is  void  as  an  atteinpt  to 
barter  away  the  offices.  Fennessy  v. 
Ross,  90  Hun,  298  (1895).  Where  a  part 
of  the  consideration  of  a  contract  in 
regard  to  voting  stock  in  a  certain  way 
is  that  one  of  the  parties  shall  be  given 
an  official  position  in  the  corporation 
at  a  salary,  the  contract  is  void  and  un- 
enforceable. Gage  V.  Fisher,  5  N.  D. 
297  (1895).  In  the  case  of  Witham  v. 
Cohen,  100  Ga,  670  (1897),  a  stockholder 
who  had  obtained  proxies  from  most 
of  the  other  stockholders,  on  an  agree- 
ment by  which  he  was  to  become  pres- 
ident on  a  certain  salary,  was  held  to 
have  a  right  of  damages  against  a 
stockholder  whose  stock  he  had  pur- 
chased, but  who,  nevertlieless,  had 
given  a  proxy  to  some  other  person.  A 
person  who  contracts  to  purchase  stock 
may  defend  against  an  action  for  the 
price  by  setting  up  that  the  vendor 
falsely  repre.sented  that  the  vendee  was 
about  to  be  deprived  of  the  presidency 
of  the  company;  and  that  thereby  the 
vendee  was  induced  to  make  the  con- 
tract of  purchase  at  an  unconscionable 
price.  Delano  v.  Rice,  23  N.  Y.  App, 
Div.  327  (1897).  Where  the  agreement 
was  to  keep  the  vendor  in  a  professor- 
ship, the  court  will  not  aid  the  parties. 
The  agreement  is  against  public  policy. 
Jones  V.  Scudder,  2  Cin.  Super.  Ct.  178 
(1872). 

1  Blue  V.  Capital  Nat  Bank,  145  Ind. 
518  (1896). 


§  622J.]  ELECTIONS  —  CORPOKATE   MEETINGS.     ,  [CH.  XXXVII. 

benefiting  the  bank  and  does  benefit  it.^  "Where  part  of  the  con- 
sideration in  the  sale  of  stock  is  that  the  vendor  resign  an  office  in 
the  company,  and  the  vendee  be  elected  in  his  place,  and  this  has 
been  carried  out,  the  vendee  cannot  rescind  for  fraud  unless  he  re- 
signs the  position  or  does  something  towards  restoring  the  vendor 
to  his  former  position.^  An  agreement  by  a  stockholder  to  give  a 
person  part  of  his  stock  if  such  person  accept  the  position  of  a  di- 
rector is  not  necessarily  against  public  policy.'  A  contract  by 
which  stock  is  contributed  for  the  purpose  of  developing  the  busi- 
ness of  the  company  is  legal.*  But  the  common  undertaking  must 
be  a  legal  one.*  The  vendor  of  stock  may  of  course  agree  to  vote 
as  the  vendee  wishes.® 

Closely  connected  with  the  above  principles  of  law  is  the  question 
whether  a  director  or  stockholder  may  vote  his  stock  in  favor  of  a 
sale  of  corporate  property  to,  or  a  purchase  of  property  for  the 
corporation  from,  another  corporation  in  which  such  director  or 
stockholder  is  interested  as  a  stockholder.  The  general  rule  is  that 
a  contract  between  two  corporations  having  certain  stockholders 
or  directors  in  common  will  be  sustained  by  the  courts  if  the  con- 
tract is  fair  towards  the  minority  stockholders.  If  it  is  so  unfair 
as  to  amount  to  a  fraud,  the  courts  will  set  it  aside  upon  the  com- 
plaint of  the  minority  stockholders.'' 

§  6225.  Restrictions  on  the  right  to  vote. —  At  common  law  it  is 
legal  for  a  corporation,  upon  issuing  preferred  stock,  to  impose  a 
condition  that  such  stock  shall  not  have  any  right  to  vote.^  It  is 
legal  also  for  the  corporation,  with  the  assent  of  all  stockholders, 
to  give  to  bonds  a  voting  power,^  although  a  contrary  rule  has 
been  reached  in  Illinois  under  a  statute  to  the  effect  that  elections 

1  Bonta  V.  Gridley,  77  N.  Y.  App.  Div.     former.     Tonawanda,  etc.  R.  R.  r.  New 
33  (1903).  York,  etc.  R.  R,  42  Hun,  496  (1886). 

2  Gassett  v.   Glazier,   165    Mass.    473        ^  See  §  662,  infra. 

(1896).  8  It  is  legal,  upon  the  issue  of  pre- 

3  Almy  V.  Orne,  165  Mass.  126  (1896).  ferred  stock,  to  provide  that  it  shall  not 
*  See  §i;  76,  334,  supra.  vote  at  corporate  elections.  Such  a 
5  If  the  purpose  is  to  rob  a  railroad  provision  will  be  upheld.   Miller  v.  Rat- 

and  bribe  a  judge,  the  court  will  aid  no  terman,  47  Ohio  St.  141  (1890).  See  also 
one.  Tobey  v.  Robinson,  99  III.  222  (1881).  §  269,  supra.  Cf.  67  N.  E.  Rep.  207. 
Cf.  §  39,  supra.  9  In  State  v.  McDaniel,  22  Ohio  St.  354 
<>  An  agreement  by  a  vendor  of  stock,  (1872),  the  bondholders  on  a  reorganiza- 
which  is  to  be  delivered  after  an  elec-  tion  were  given  by  contract  the  power 
tion,  that  he  will  vote  as  the  vendee  to  vote,  and  the  court  upheld  such  con- 
desires,  is  legal  Mobley  u  Morgan,  6  tract  right.  In  Phillips  v.  Eastern  R. 
Atl.  Rep.  694  (Pa.  1886).  One  corpora-  R.,  138  Mass.  122  (1884),  the  court  passed 
tion  issuing  its  stock  as  security  to  an-  upon  a  statutory  scheme  in  which  the 
other  may  agree  that  the  latter  shall  creditors  of  a  railroad  company,  by  the 
hold  and  vote  the  stock  of  and  in  the  terms  of  a  mortgage,  chose  two-thirds 

1348 


CH.  XXXVII.] 


ELECTIONS 


COKPORATE    MEETINGS. 


[§  G2iVa 


shall  be  by  the  stockholders  and  not  otherwise.^  There  is  no  rule 
of  public  policy  which  forbids  a  corporation  and  its  stockholders 
from  making  any  contract  they  please  in  regard  to  restrictions  on 
the  voting  power.  If  the  agreement  is  made  by  unanimous  con- 
sent it  is  legal.  Such  restrictions,  however,  generally  are,  and  al- 
ways should  be,  printed  on  the  certificates  of  stock,  so  that  a  pur- 
chaser may  take  with  full  notice.  A  by-law  passed  at  the  time  of 
the  organization  of  the  company  may  limit  the  number  of  votes 
which  a  single  stockholder  may  cast;^  unless,  of  course,  the  stat- 
utes provide  to  the  contrary.'  Under  the  partnership  association 
statute  of  Pennsylvania,  a  by-law  may  be  enacted  taking  away  the 
voting  power  from  any  stock  which  is  sold,  even  though  it  is  pur- 
chased by  an  existing  member.*  All  this  is  a  matter  of  private 
contract.  Where  the  charter  limits  the  number  of  votes  which 
one  stockholder  may  cast,  the  provision  cannot  be  evaded  by  trans- 
fers to  various  persons.  The  courts  will  enjoin  the  voting  of  the 
stock.^    Under  the  reserved  right  to  amend,  the  legislature  may 


cf  the  directors  and  the  stockholders 
chose  one-third  until  the  debt  was  re- 
duced to  a  certain  figure. 

1 A  contract  and  by-law  giving  a 
voting  power  to  bondholders  at  corpo- 
rate elections  is  void  as  against  public 
policy  and  the  statutes,  where  the  stat- 
utes prescribe  that  the  directors  shall 
be  elected  by  the  stockholders  and  shall 
not  be  elected  in  any  other  manner. 
Durkee  v.  People,  155  111.  354  (1895),  aff'g 
S.  C,  53  III  App.  396  (1893). 

2  A  by-law  may  provide  that  stock- 
holders shall  have  one  vote  for  each 
share  held  by  them  up  to  ten  shares, 
and  may  fix  the  proportion  which  their 
votes  shall  bear  to  their  shares  above 
that  number.  Commonwealth  v.  Det- 
willer,  131  Pa.  St.  614  (1890).  Cf.  notes 
below. 

3  A  by-law  restricting  the  right  of 
members  of  a  church  to  vote  as  author- 
ized by  statute  is  void.  People  v.  Phil- 
lips, 1  Denio,  388  (1845).  A  by-law  re- 
stricting the  right  of  electors  in  a  town 
to  vote  is  not  good.  Rex  v.  Spencer,  3 
Burr.  1827  (1766);  Rex  tJ.  Head,  4  Burr. 
2515,  2521  (1770).  See  also  §  4o,  supra; 
People  V.  Kip,  4  Cow.  382,  note  (1822), 
holding  that  a  corpoi'ation  has  no  power, 
by  a  by-law,  to  demand  an  oath  of  a 

1 


stockholder  in  order  to  test  his  qualifi- 
cations as  a  voter.  Where  the  charter 
authorizes  the  depositors  and  stock- 
holders to  elect  new  members,  the  di- 
rectors cannot  by  by-law  exclude  the 
former  from  elections  and  give  a  vote 
to  stockholders  only.  Commonwealth 
V.  Gill,  3  Whart  (Pa)  228  (1837). 

4  Carter  v.  Producers'  Oil  Co.,  182  Pa. 
St.  551  (1897). 

5  Mack  V.  De  Bardeleben,  etc.  Co.,  90 
Ala.  396  (1890).  Where  stock  has  been 
transferred  in  order  to  give  it  a  vote, 
the  transferrer  having  already  all  the 
stock  that  the  charter  allows  one  stock- 
holder to  vote,  the  transfer  being 
merely  nominal  and  for  voting  pur- 
poses only,  an  injunction  will  issue 
against  its  being  voted.  Webb  v. 
Ridgely,  38  Md.  364  (1873),  where  stock 
had  been  colorably  transferred  without 
consideration  for  the  purpose  of  con- 
trolling an  election,  there  being  a  pro- 
vision in  the  charter  prohibiting  a 
single  stockholder  from  voting  on  more 
than  twenty  shares.  Where  valuable 
privileges  other  than  voting  attach  to 
stock,  a  nominal  transfer  to  obtain 
these  privileges  will  not  be  sustained 
as  regards  them.  Baker's  Appeal.  108 
Pa.  St.  510  (1885),  where  free  admission 

349 


§  622c.] 


ELECTIONS CORPORATE    MEETINGS. 


[CH.  XXXVIl. 


change  the  charter  of  a  library  corporation,  so  that  each  share 
shall  have  one  vote,  instead  of  restricting  the  vote  of  those  who 
held  more  than  five  shares.^  A  by-law  that  all  purchasers  of  stock- 
shall  agree  that  the  stock  shall  be  voted  in  favor  of  increasing  the 
capital  stock  is  void  as  in  restraint  of  trade  and  as  an  unreasonable 
limitation  on  the  voting  power  of  a  stockholder." 

A  statute  prohibiting  a  stockholder  from  voting  "whose  liabil- 
ity is  past  due  and  unpaid"  refers  to  a  subscription  liability  and 
not  to  a  commercial  liability.'  Even  though  the  purchaser  of  for- 
feited stock  may  not  be  liable  for  unpaid  calls,  yet,  under  the 
charter,  he  may  be  unable  to  vote  such  stock,  unless  he  pays  such 
unpaid  calls.'*  The  right  to  vote  is  generally  restricted  by  the 
charter  to  those  who  are  registered  stockholders.'*  In  some  states 
the  right  to  vote  is  limited  to  those  who  have  been  stockholders  of 
record  for  a  certain  number  of  days  before  the  election.*  Where  a 
company  attaches  conditions  to  its  acceptance  of  a  subscription,  the 
subscriber  is  not  entitled  to  vote  until  the  conditions  are  complied 
with.' 

§  622c.  Contracts  between  stocltlwlders  not  to  sell  their  stoclc  except 
to  each  other. —  A  stockholder  has  a  right  to  sell  his  stock  at  any 


to  a  theatre  was  given  to  stockholders. 
Although  a  person  transfers  stock  to 
another  in  order  to  evade  a  statute 
which  prohibits  any  one  stockholder 
from  voting  on  any  more  than  one- 
eighth  of  the  capital  stock,  yet  the 
person  to  whom  it  is  transferred  may 
make  a  valid  agreement  to  retransfer 
the  same  and  the  court  will  enforce 
this  agreement.  Scott  r.  Scott,  68  N. 
R  7  (1894).  Although  the  charter  lim- 
its each  person  to  one  hundred  votes, 
yet  a  person  voting  a  hundred  votes  in 
his  own  name  may  vote  another  hun- 
dred as  proxy  for  his  wife,  if  it  is  bona 
fide  her  property.  Conant  ?'.  Millaudon, 
5  La.  Ann.  543  (1850).  A  statute  which 
confines  the  right  to  vote  to  stockhold- 
ers who  are  citizens  of  the  state  by 
which  the  corporation  is  chartered  can- 
not be  evaded  by  colorable  transfers  of 
shares  to  residents  of  the  state  merely 
for  the  purpose  of  having  them  voted 
upon.  State  v.  Hunton,  28  Vt.  594  (1856). 
•Such  a  statute  would  now,  however, 
probably  be  held  to  be  unconstitutional. 
Sje  §    813,   infra,  relative  to  statutes 


prohibiting  citizens  of  other  states  from 
being  trustees.  But  see  Campbell  v. 
Poultney,  6  G.  &  J.  94  (1834).  In  England 
it  is  not  illegal  to  transfer  or  procure 
shares  before  a  meeting  so  as  to  multi- 
ply votes  at  it;  nor  can  votes  so  ob- 
tained be  disregarded.  They  may  be 
cast.  Pender  v.  Lushington,  L.  R.  6  Ch. 
D.  70  (1877);  Re  Stranton  Iron,  etc.  Co.. 
L.  R.  16  Eq.  559(1873);  Cannon  u  Trask, 
L.  R.  20  Eq.  669  (1875);  Moflfatt  v.  Far- 
quhar,  L.  R.  7  Ch.  D.  591  (1877);  and  see 
North-West  Transp.  Co.  v.  Beatty,  L.  R. 
12  App.  Cas.  589  (1887). 

1  Rankin  v.  Newark,  etc  Assoc,  64  N. 
J.  L.  625  (1900). 

2  McNulta  V.  Corn  Belt  Bank,  164  III. 
427  (1897). 

3U.  S.  V.  Barry,  36  Fed.  Rep.  246 
(1888). 

*  Randt,  etc  Co.  v.  Wainwright,  [1901J 
1  Ch.  184. 

5  See  §  611.  supra. 

<'See  §  611,  supra. 

^  Spitzel  V.  Chinese  Corporation,  80  L. 
T.  Rep.  347  (1899). 


1350 


CH.  XXXVII.]  ELECTIONS  —  CORPORATE   MEETINGS. 


[§  622c. 


time  and  to  whomsoever  he  pleases  without  regard  to  other  stock- 
holders. Even  though  he  owns  a  majority  of  the  stock  there  is  no 
principle  of  law  obliging  him  to  provide  for  the  sale  of  others' 
stock  when  he  sells  his  own.^  Hence,  contracts  are  often  entered 
into  between  a  portion  or  all  of  the  stockholders  of  a  corporation 
to  the  effect  that  they  will  hold  and  sell  their  stock  together.  Such 
a  contract  is  legal.^  The  difficulty  with  such  a  contract,  however, 
is  that  upon  a  breach  thereof  only  the  actual  loss  suffered  and  not 
the  full  value  of  the  stock  of  the  injured  party  is  recoverable  in 
damages.^  Hence,  such  a  contract  should  contain  a  provision  obli- 
gating the  selling  stockholder  to  buy  the  stock  of  the  others.* 

Another  form  of  contract  is  to  the  effect  that  before  any  of  the 
stockholders  sell  their  stock  they  shall  first  offer  it  to  the  other 


1 "  We  do  not  understand  that  one 
stockholder  is,  by  virtue  of  his  owner- 
ship of  stock,  bound  to  continue  in  the 
holding  of  it  in  order  to  allow  another 
stockholder  to  make  a  profit  out  of  ne- 
gotiations then  pending.  .  .  .  We 
do  not  understand  that  a  stockholder 
is  under  obligations,  legal  or  moral,  to 
sacrifice  his  personal  interests  in  order 
to  secure  the  welfare  of  the  corpora- 
tion of  which  be  is  a  stockholder,  or  to 
enable  another  stockholder  to  make 
gains  and  profits."  Farmers'  L.  «fe  T. 
Co.  V.  Chicago,  etc.  Ry.,  163  U.  S.  31,  44 
(1896). 

2  In  Havemeyer  v.  Havemeyer,  43 
N.  Y.  Super.  Ct.  506  (1878);  s.  C,  45  N.  Y. 
Super.  Ct.  464  (1879);  aflf'd,.86  N.  Y.  618 
(1881),  it  was  held  that  an  agreement 
of  several  stockholders  not  to  sell  their 
own  stock  except  in  connection  with 
that  of  the  other  parties  to  the  contract 
was  not  in  restraint  of  trade  and  was 
not  contrary  to  public  policy,  as  re- 
stricting the  right  of  alienation,  but  the 
measure  of  damages  for  breach  of  such 
a  contract  is  only  the  actual  loss  suf- 
fered by  a  decline  in  the  value  of  the 
stock  by  reason  of  the  breach.  See  also 
Griffith  V.  Jewett,  15  W.  L.  Bull.  419 

.  (1886). 

3  See  p.  1353,  infra. 

*  The  following  is  a  form  of  contract 
on  this  subject: 

Whereas, ,  party  of  the  first  part,  is 

the  owner  of shares  of  the  capital  stock  of 


the Company,  and ,  party  of  the 

second  part,  is  the  owner  of shares  of  said 

capital  stock;  and 

Whereas,  said  party  of  the  first  part  has 
agreed  that  in  case  he  hereafter  sell  any  or  all 
of  the  said  stock  owned  by  him,  he  will  at  the 
same  time  make  it  a  part  of  such  contract  of 
sale  that  the  party  purchasing  shall  extend  to 
said  party  of  the  second  part  the  option  to  sell 
his  said  — '—  shares  of  stock,  or  any  part  thereof, 
to  said  purchaser  at  the  same  price  and  on  the 
same  terms: 

Now,  therefore,  it  Is  hereby  agreed  between 
said  parties  for  a  valuable  consideration,  re- 
ceipt of  which  is  hereby  acknowledged  by  said 
party  of  the  first  part,  that  in  case  said  party  of 
the  first  part  sell  or  cause  to  be  sold  his  said 
shares  of  stock  or  any  part  thereof,  he  will  at 
the  same  time  make  it  a  part  of  such  contract 
of  sale  that  the  party  purchasing  shall  purchase 
from  said  party  of  the  second  part  at  the  same 
price  and  on  the  same  terms  such  part  of  said 
shares  of  stock  belonging  to  said  party  of  the 
second  part  as  the  party  of  the  second  part  may 
care  to  sell  at  that  time  at  that  price  and  on 
those  terms.  In  case  said  party  of  the  first 
part  fails  to  make  such  provision  in  any  sale  or 
transfer  made  by  said  party  of  the  first  part, 
said  party  of  the  second  part  may  tender  to 
the  party  of  the  first  part  the  certificates  for 

any  or  all  of  said shares  of  stock  owned  by 

the  party  of  the  second  part,  and  thereupon 
may  demand  and  collect  therefor  from  the 
party  of  the  first  part,  by  suit,  a  sum  per  share, 
for  the  stock  so  tendered,  equal  to  the  highest 
price  per  share  at  which  said  party  of  the  first 
part  may  have  prior  thereto  sold  the  shares  of 
stock,  or  any  part  thereof,  belonging  to  the 
party  of  the  first  part.  This  agreement  shall 
bind  the  heirs,  representatives,  agents,  and  as- 
signs of  the  party  of  the  first  part,  and  shall 

continue  in  force  for  the  period  of  years 

from  the  date  hereef. 
Dated,  New  York, ,  1904. 


1351 


§  622c.] 


ELECTIONS  —  CORPOKATE    MEETINGS. 


[CH.  XXXVII. 


stockholders.     This  kind  of  a  contract  also  is  legal  and  will  be  en- 
forced by  the  courts.^ 

An  agreement,  however,  between  the  stockholders  of  a  corpora- 
tion that  no  one  of  them  will  sell,  assign  or  dispose  of  his  stock 


iln  the  ease  of  Jones  v.  Brown,  171 
Mass.  318  (1898),  in  a  close  corporation, 
the  stockholders  made  a  contract,  the 
essential  parts  of  which  are  set  forth 
in  the  opinion  of  the  court,  providing 
for  the  purchase  of  the  stock  of  a  cer- 
tain stockholder  in  case  of  his  death, 
and  for  the  purchase  of  the  stock  of 
any  other  stockholder  who  ceased  to  be 
connected  with  the  corporation.  The 
former  stockholder  having  died,  the 
court  granted  specific  performance  of 
the  contract  and  compelled  his  estate 
to  deliver  the  stock  upon  payment  of 
the  specified  price.    54  Atl.  Rep.  488. 

Where  one  person  advances  money  to 
another  to  purchase  a  certain  stock  on 
an  agreement  that  they  will  co-operate, 
and  in  case  the  latter  wislies  to  sell  he 
will  not  sell  to  unfriendly  parties  with- 
out giving  the  former  the  first  chance 
to  purchase,  and  the  stock  is  in  the  pos- 
session of  the  former  as  security  for  the 
loan,  a  sale  by  the  latter  to  an  un- 
friendly party  with  notice  of  the  facts 
is  not  sufficient  to  sustain  a  bill  in 
equity  to  compel  the  first-named  party 
to  transfer  the  stock  to  such  purchaser. 
The  court  said:  "One  or  more  stock- 
holders in  a  corporation  may  agree  to 
stand  together  in  carrying  out  an  hon- 
est business  policy  consistent  with 
what  they  believe  to  be  to  the  best  in- 
terests of  all  the  stockholders.  This 
•was  not  a  pooling  agreement,  to  vest 
the  government  of  the  corporation  for 
a  time  in  certain  members  of  it,  or  to 
yield  the  control  to  a  few  who  might 
dominate,  regardless  of  the  interests  of 
the  many.  It  was  intended  to  maintain 
a  status  of  independence  for  the  rail- 
way company  that  it  might  be  operated 
under  the  purposes  of  its  charter." 
Rigg  V.  Reading,  etc.  Ry.,  191  Pa.  St. 
298  (18991 

Wiiere,  in  order  "  to  enable  the  com- 


pany to  keep  its  stock  in  the  ownership 
of  stockholders  of  its  own  choosing," 
each  stockholder  enters  into  an  agree- 
ment with  the  corporation  that  in  case 
he  wishes  to  sell  his  stock  it  shall  first 
be  appraised  and  then  offered  to  the 
corporation  before  it  is  offered  to  any 
one  else,  the  refusal  of  the  board  of  di- 
rectors to  make  an  appraisal,  in  accord- 
ance with  the  agreement,  does  not 
render  the  corporation  liable  in  dam- 
ages, inasmuch  as  it  is  clear  that,  even 
though  the  stock  were  appraised,  the 
corporation  would  not  buy  it.  Whiton 
V.  Batchelder,  etc.  Corp.,  179  Mass.  169 
(1901).  A  court  will  enjoin  a  party 
from  voting  upon  or  disposing  of  his 
stock  in  the  corporation  pendente  lite 
where  the  plaintiffs  show  that  they 
transferred  the  stock  to  the  defendant 
on  the  latter 's  agreement  not  to  .sell  the 
same,  except  with  the  consent  of  the 
former,  and  that  when  he  did  sell  the 
stock  three-fourths  of  the  proceeds 
should  apply  to  the  former,  and  it  ap- 
pearing further  that  the  defendant  had 
given  the  stock  to  his  sister  without 
consideration.  Weston  v.  Goldstein,  39 
N.  Y.  App.  Div.  661  (1899).  Where  the 
majority  stockholders  agree  in  writ- 
ing that  for  three  years  they  will  give 
each  other  proxies  on  their  stock  to 
vote  at  elections,  and  during  that  time 
•will  not  sell  their  stock  unless  all  agi'ee 
thereto,  and  further,  that  if  any  one  de- 
sires to  sell  he  will  first  offer  his  stock 
to  the  others,  specific  performance  by 
way  of  injunction  against  a  sale  with- 
out the  consent  of  the  others  will  not  be 
granted  where  at  the  time  of  trial  the 
three  years  have  already  elapsed.  The 
remedy,  if  there  is  any,  is  at  law.  Brown 
V.  Britton,  41  N.  Y.  App.  Div.  o7  (1899). 
Where  a  partnership  is  transformed 
into  a  corporation  and  the  two  partners 
agree  that  one  shall  have  1,000  shares 


1353 


CH.  XXXVII.]  ELECTIONS  —  COKPORATE   MEETINGS. 


[§  622c. 


without  having  first  given  the  other  parties  to  the  agreement  an 
opportunity  to  purchase,  does  not  disable  a  party  from  transfer- 
ring a  legal  title  to  the  stock  without  the  consent  of  the  other  par- 
ties and  in  violation  of  the  agreement,  and  this  although  the  trans- 
feree was  cognizant  of  the  agreement  at  the  time  of  the  transfer.^ 
It  is  a  breach  of  contract,  but  the  remedy  is  usually  at  law  for  dam- 
ages. Such  also  is  the  rule  as  to  a  contract  that  a  stockholder, 
before  selling  his  stock  to  others,  shall  first  offer  the  stock  to  the 
corporation  itself.  A  personal  agreement  between  the  incorpora- 
tors, promoters,  and  proposed  subscribers  to  the  stock  of  a  proposed 
corporation,  by  which  agreement  the  corporation  is  to  have  the 
first  right  to  buy  the  stock  of  any  one  who  wishes  to  sell,  does  not 
prevent  a  sale  by  a  stockholder  without  offering  the  stock  to  the 
corporation.  .  Hence  the  corporation  cannot  refuse  to  transfer  the 
:Stock.2 


of  the  stock  and  the  other  998  shares 
and  a  third  person  two  shares,  and  the 
first  partner  agrees  that  in  case  he  sells 
his  998  shares  he  will  transfer  the  other 
two  shares  to  his  partner,  such  agree- 
ment does  not  prevent  the  first  partner 
from  transferring  single  shares  to  qual- 
ify new  trustees,  inasmuch  as  the 
agreement  does  not  prohibit  his  selling 
less  than  99S  shares.  Burden  v.  Burden, 
159  N.  Y.  287  (1899).  Where  a  cor- 
poration having  treasury  stock  ir,  its 
treasury  sells  all  its  assets  to  ar other 
corporation,  excepting  its  patent  rights, 
such  sale  is  not  a  sale  of  the  treasury 
stock  within  the  meaning  of  a  prior 
stock-pooling  contract  of  the  old  corpo- 
ration that  certain  other  stock  should 
be  sold  before  such  treasury  stock  was 
-sold.  Myers  v.  Buell,  67  N.  Y.  App. 
Div.  290  (1901).  Even  though  stock- 
holders agree  not  to  offer  their  stock  to 
others  without  first  offering  it  to  each 
other,  yet.  if  subsequently  some  of  them 
authorize  the  others  to  do  as  they  think 
best  in  regard  to  the  matter,  and  the 
latter  dispose  of  some  of  the  joint  stock, 
they  are  protected  in  so  doing.  Smith 
V.  Bierce.  104  La.  96  (1900). 

1  The  enforcement  of  specific  perform- 
ance of  such  an  agreement  by  a  court  of 
•equity  rests  in   the   discretion  of  the 
court;   it  mav  not  be  demanded  as  a 


right  The  fact  that  the  transferee 
holds  the  stock  subject  to  the  enforce- 
ment of  the  equitable  remedy  does  not 
in  any  way  interfere  with  his  legal  title, 
nor  does  it  preclude  the  corporation 
from  treating  him  as,  and  according  to 
him  all  the  rights  of.  a  stockholder,  in- 
cluding the  right  to  vote  upon  the 
stock  at  a  stockholders'  meeting.  Be 
Argus  Co.,  1.38  N.  Y.  557  (1893).  An 
agreement  of  the  holder  of  a  majority 
of  the  stock  that  he  will  retain  control 
is  no  defense  by  the  corporation  to  an 
action  by  the  receiver  of  such  stock- 
holder to  transfer  the  stock  on  the  cor- 
porate books.  Weller  v.  Pace  Tobacco 
Co.,  25  N.  Y.  Week.  Dig.  531  (1886).  A 
contract  of  a  stockholder  not  to  trans- 
fer or  sell  his  stock  does  not  bind  a 
bona  fide  purchaser.  Brinkerhoff-Far- 
ris.  etc.  Co.  v.  Home  Lumber  Co.,  118 
Mo.  447  (1893). 

2  Ireland  v.  Globe,  etc  Co..  20  R.  I.  190 
(1897);  s.  G,  21  R.  L  9  (1898).  Where, 
according  to  contract,  stock  sold  to  the 
corporation  is  appraised  by  the  corpo- 
ration, and  the  appraised  price  is  actu- 
ally paid  to  and  received  by  the  stock- 
holder, he  cannot  maintain  a  bill  to 
obtain  a  larger  price,  but  must  either 
rescind  or  sue  at  law.  Tuttle  v.  Batch- 
elder,  etc.  Co.,  170  Mass.  315  (1898), 
Where,  in  order  "to  enable  the  com- 


1-S5J 


§  622c.] 


ELECTIONS  —  CORPORATE    MEETINGS. 


[CH.  XXXVII. 


Specific  performance  of  such  a  contract,  however,  will  be  granted 
by  the  courts,  where  there  are  special  reasons  therefor  and  per- 
formance is  possible.* 

It  has  been  held  by  a  lower  New  York  court  that  an  agreement 
of  several  stockholders  not  to  sell  their  stock,  except  upon  the  con- 
current consent  of  all  the  signers  to  the  agreement,  is  illegal  and 
void  as  in  restraint  of  trade  and  against  public  policy.^ 

The  JSTew  York  court  of  appeals,  however,  reached  a  different 
conclusion.' 

A  contract  whereby  a  stockholder  desiring  to  sell  must  first  offer 
his  stock  to  the  other  stockholders  is  not  contrary  to  public  policy.* 

pany  to  keep  its  stock  in  the  ownership        'Williams  v,  Montgomery,  148  N.  Y. 

519  (1896),  practically  reversing  68  Hun, 
416,  and  74  Hun,  427.  See  also  p.  1360, 
infra.  Thus,  where  two  patentees  agree 
to  own  their  patents  in  common,  and 
then  contract  with  a  corporation  to 
convey  the  patents  to  it  for  stock  to  be 
issued  to  them  jointly,  each  to  have 
one- half,  and  each  to  have  one-half  the 
dividends  thereof,  the  certificates  not 
to  be  changed,  sold,  or  pledged  for  ten 
years,  except  upon  their  joint  consent, 
the  instrument  may  also  provide  that 
one  of  them  shall  vote  the  stock  as 
proxy  for  the  ten  years,  unless  both 
agree  otherwise.  The  court  held  that 
such  a  contract  is  legal,  being  practi- , 
cally  a  contract  to  become  partners  in 
the  ownership  of  stock  for  ten  yeara 
Hey  V.  Dolphin,  92  Hun,  230  (1895). 

^  The  various  stockholders  of  a  com- 
l)any  may  give  interchangeably  a  first 
option  of  thirty  days  to  purchase  their 
shares  of  stock  whenever  any  one  de- 
sires to  sell,  each  contracting  for  him- 
self, the  contract  further  providing 
that  such  thirty  days  were  to  com- 
mence in  case  of  the  death  of  a  stock- 
holder, so  far  as  his  stock  was  con- 
cerned; and  they  may  further  contract 
that  another  person  is  to  have  a  simi- 
lar option  in  case  the  first  option  is  not 
exercised.  A  party  entitled  to  such 
option  may  have  specific  performance 
of  it.  The  mutual  covenants  of  the 
contract  are  a  sufficient  consideration 
to  support  it.  The  court  said:  "It  is 
contended  that  the  contract  is  void  as 


of  stockholders  of  its  own  choosing,' 
each  stockholder  enters  into  an  agree- 
ment with  the  corporation  that  in  case 
he  wishes  to  sell  his  stock  it  shall  first 
be  appraised  and  then  offered  to  the 
corporation  before  it  is  offered  to  any 
one  else,  the  refusal  of  the  board  of  di- 
rectors to  make  an  appraisal,  in  accord- 
ance with  the  agreement,  does  not  ren- 
der the  corporation  liable  in  damages, 
i  ismuch  as  it  is  clear  that,  even  though 
the  stock  were  appraised,  the  corpora- 
tion would  not  buy  it.  Whiton  v. 
Batchelder,  etc.  Corp.,  179  Mass.  169 
(1901).    See  78  N.  Y.  App.  607. 

1  Where  a  stockholder  agrees  to  trans- 
fer his  stock  to  the  company  at  an  ap- 
praisal to  be  made  by  the  directors,  the 
decision  of  the  directors  cannot  be  im- 
peached bj'  showing  that  they  commit- 
ted errors  of  judgment  in  the  appraisal. 
A  stockholder  may  be  forced  to  spe- 
cifically perform  a  contract  to  convey 
his  stock  to  the  corporation,  according 
to  an  appraisal  made  by  the  directors, 
to  be  disposed  of  by  them  as  they  may 
see  fit,  where  the  evidence  shows  that 
none  of  the  stock  of  said  corporation 
has  ever  been  sold  on  the  market  or 
otherwise  than  by  transfer  to  the  di- 
rectors, and  no  fraud  in  the  appraisal  is 
charged,  and  the  remedy  by  an  action 
for  damages  would  be  inadequate.  New 
England  Trust  Co.  v.  Abbott,  162  Mass. 
148  (1894). 

2  Fisher  v.  Bush,  35  Hun,  641  (1885). 
See  also  §  330,  supra. 


1354 


CH.  XXXVII.] 


ELECTIONS COEPOKATE    MEETINGS. 


[§  6226Z. 


It  is  to  be  borne  in  mind  that  an  oral  contract  on  this  subject  may 
be  void  by  the  statute  of  frauds,*  and  that  a  unilateral  contract, 
amounting  to  an  option  without  consideration  already  paid,  may 
not  be  leo^allv  bindin^.^ 

§  622c7.  Cliarter  provisions  and  dy-Iaws  restricting  the  right  to 
sell  stock — Unincorporated  associations. —  The  by-laws  of  a  cor- 
poration cannot  legally  prohibit  or  limit  the  right  of  a  stock- 
holder to  sell  his  stock.^ 


prohibiting  the  right  to  alienate  this 
stock.  Such  is  not  the  fact.  The  right 
to  sell  it  was  not  fettered  for  an  in- 
stant. Indeed,  by  the  terms  of  the  con- 
tract provision  is  made  for  the  exercise 
of  such  right.  The  only  limitation,  if 
there  was  a  determination  to  sell,  was 
the  privilege  by  the  other  party  to  buy 
upon  certam  conditions,  and  such  con- 
ditions have  never  been  held  invalid. 
This  case  does  not  fall  within  the  prin- 
ciple announced  in  Fisher  v.  Bush  (35 
Hun,  641)  and  similar  cases.  Therein 
there  was  an  express  agreement  not  to 
sell  for  any  purpose,  and  it  was  held 
void  as  against  public  policy.  Here 
there  was  no  limitation  of  the  right  te 
sell;  it  was  only  subject  for  a  limited 
period  to  the  right  of  the  other  party 
to  buy.  And  an  agreement  which 
seeks  to  control  the  stock  of  a  corpora- 
tion for  purposes  of  management,  law- 
ful in  itself,  is  not  subject  to  any  in- 
firmity, but  is  the  exercise  of  a  legal 
right."  Scruggs  v.  Cotterill,  67  N.  Y. 
App.  Div.  583  (1902). 

1  An  oral  agreement  whereby  one 
party  makes  a  loan  to  the  corporation 
in  consideration  of  the  other  party 
keeping  the  former  in  control  and  giv- 
ing him  an  option  on  the  latter's  stock 
does  not  sustain  a  suit  for  damages, 
even  if  broken  by  the  latter,  inasmuch 
as  it  is  void,  under  the  statute  of 
frauds,  as  not  to  be  performed  within  a 
year.  Gazzam  v.  Simpson,  114  Fed. 
Rep.  71  (1902). 

2  A  unilateral  contract  is  not  binding. 
A  consideration  must  exist  or  the  cove- 
nants be  mutual.  Jordan  v.  Indian- 
apolis, etc.  Co.,  61  N.  E.  Rep.  12  (Ind. 


1901).  As  to  options,  see  §  334,  supra. 
An  option  to  sell  mining  stock  with  no 
definite  time  fixed  as  to  the  duration 
of  the  option  may  be  revoked  three 
months  later,  no  sale  having  been 
made  in  the  meantime,  and  a  subse- 
quent sale  by  the  owner  of  the  stock  at 
an  advanced  price  to  a  party  whom  the 
party  receiving  the  option  had  been 
negotiating  with,  does  not  entitle  such 
party  receiving  the  option  to  any  inter- 
est in  the  sale.  Rees  v.  Fellow.  97  Fed. 
Rep.  167  (1899),  the  court  holding  that 
such  an  option  may  be  terminated  at 
any  time  in  good  faith. 

3  Morgan  r.  Struthers,  131 U.  S.  246, 252 
(1889);  Feckheimer  v.  National  Exch. 
Bank,  79  Va.  80  (1884),  where  a  by-law 
prohibiting  transfers  except  with  the 
consent  of  the  directors  was  declared 
void:  Bank  of  Attica  v.  Manufacturers', 
etc.  Bank,  20  N.  Y.  501  (1859);  Orr  r. 
Bigelow,  14  N.  Y.  556  (1856',  aff'g  s.  C, 
20  Barb.  21  (1854);  Sargent  v.  Franklin 
Ins.  Co.,  25  Mass.  90  (1829);  Moore  v. 
Bank  of  Commerce,  52  Mo.  377  (1873). 
A  by-law  to  the  effect  that  a  transfer 
of  stock  shall  be  allowed  only  upon  con- 
sent of  all  the  other  stockholders  is  void 
as  in  restraint  of  trade.  JRe  Klaus,  67 
Wis.  401  (1886).  As  regards  corporate 
liens  herein,  see  ch.  XXXI,  supra.  See 
also,  as  to  the  general  policy  of  the  law 
to  discountenance  restrictions  on  right 
to  sell,  Moffatt  v.  Farquhar,  L.  R.  7  Ch. 
D.  591  (1877).  In  this  case  the  directors 
were  compelled  to  allow  a  transfer,  al- 
though the  purpose  of  the  transfer  was 
to  multiply  votes.  A  secretary  cannot 
refuse  to  register  a  transfer  on  account 
of  the  motive  of  the  transferrer.    Re 


1355 


§  GG2d.] 


ELECTIONS  —  CORPORATE    MEETINGS.  [CH.  XXXVII. 


It  has  been  held  in  Massachusetts,  however,  that  a  by-law,  recited 
on  the  face  of  a  certificate  of  stock,  to  the  effect  that  a  stockholder 
will  not  sell  his  stock  without  first  offering  it  to  the  directors  at 
the  same  price,  prevents  the  stockholder  transferring  the  stock  to 


Klaus,  67  Wis.  401  (18S6).      A  by-law 
pro%'iding  that,  if  any  stockholder  shall 
desire  to  dispose  of  his  stock,  he  shall 
give  written  notice  of  his  intention  to 
sell,  and  that  the  other  stockholders 
shall  thereupon  have  the  option  to  pur- 
chase the  stock  at  the  price  named,  is 
an  invalid  restraint  on  alienation.  Vic- 
tor, eta  Co.  V.  Bloede,  8i  Md.  129  (1896). 
A  by-law  that  no  stockholder  shall  sell 
his  stock  or  have  a  transfer  of  it  unless 
he  shall  first  have  offered  it  for  sale  to 
the  directors  is  illegal  and  void.  Brinker- 
hoff-Farris.  etc.  Ca  v.  Home  Lumber 
Co..  lis  Mo.  447  (1893).     A  by-law  that 
all  purchasers  of  stock  shall  agree  that 
the  stock  shall  be  voted  in  favor  of  in- 
creasing the  capital  stock  is  void  as  in 
restraint  of  trade  and  as  attempting  to 
limit  the  voting  power  of  a  stockholder. 
McNulta  V.  Corn  Belt  Bank,  164  111.  427 
(1897).    Where  a  stockholder  purchases 
certificates  of  stock  which  provide  that 
they  are  transferable  only  to  the  com- 
pany, and  at  an  appraisal  to  be  made 
by  its  directors,  as  provided  in  the  by- 
laws printed  on  the  back  of  the  certifi- 
cates,   and    signs    a    receipt  therefor, 
"subject  to  the  conditions,aud  restric- 
tions therein  referred  to,  and  to  the  by- 
laws of  the  company,  to  which  I  agree 
to  conform,"  he  is  bound  by  the  provis- 
ions of  the  certificates,  though,  when 
considered  as   by-laws,    they  may   be 
void.    In  such  case  the  records  of  a  di- 
rectors' meeting  showing  that,  by  vote 
of  the  directors  present,  a  stockholder's 
shares  were  appraised  at  a  certain  price 
and  taken  for  the  use  of  the  company, 
sufiiciently  show  an  appraisal,  although 
no   notice  of  hearing  was    given  the 
stockholder.     New  England  Trust  Co. 
V.  Abbott,  162  Mass.  148  (1894).     Where 
by  the  by-laws  any  stockholder  wish- 
ing to  sell  his  stock  must  first  offer  it 
to  the  other  stockholders,  and  a  stock- 

13 


holder  dies  and  one  of  his  heirs  brings 
suit  against  the  executors  for  his  pro- 
portion of  the  stock,  and  anotlier  heir 
claims  that  the  stock  should  be  sold, 
the  corporation  itself  and  all  the  other 
stockholders    are     necessary     parties. 
Champollion  v.  Corbin,  51  Atl.  Rep.  674 
(N.  H.  1901).    The  fact  that  the  by-laws 
require  a  stockholder,  in  case  he  wishes 
to  sell,  to  first  offer  the  stock  to  the 
corporation    or  other  stockholders  be- 
fore selling  to  others,  does  not  affect 
the  validity  of  another  by-law  author- 
izing assessments  on  the  stock.    Farm- 
ers', etc.  Co.  V.  Smith,  51  Atl.  Rep.  609 
(Conn.  1902).  A  by-law  requiring  stock- 
holders to  offer  their  stock  to  the  cor- 
poration itself  before  selling  such  stock 
elsewhere  is  illegal,  and  a  purchaser  of 
a  certificate   of  stock  is  entitled  to  a 
transfer  on  the  books,  even  though  his 
transferrer  agreed  to  the  by-law  and 
did  not  comply  therewith.    Ireland  v. 
Globe,  etc.  Co.,  21  R.  L  9  (1898).    Where 
a   stockholder  in  a  national  bank  in- 
dorses his    certificate    in    blank,   and 
causes  it  to  be  sold  at  public  auction, 
and  the  auctioneer  sells  it  to  the   cash- 
ier of  the   bank,  and  takes  it  to  the 
bank,  and  presents  it  to  such  cashier 
for  transfer,  and  for  four  years  divi- 
dends thereon  are  paid  to  the  cashier, 
the   vendor  is  no  longer  liable,    even 
though  the  stock  was  not  transferred 
on  the  bank  books,  and  even  though  a 
by-law  of  the  bank  prohibited  any  of- 
ficer from  holding  stock  in  the  bank 
except  by  permission  of  the  board  of 
directors.    Earle  v.  Coyle,  97  Fed.  Rep. 
410'  (1899).     A  by-law   that  the  stock 
shall  not  be  transferable  except  to  the 
corporation      itself     is     illegal,     even 
though  it  is  expressed  on  the  face  of 
the    stock   certificates;   and    hence    a 
stockholder  cannot  compel  a  corpora- 
tion to  purchase  his  stock,  eveu  though 
56 


CH.  XXXVII.]  ELECTIONS — CORPOKATE    MEETINGS. 


[§  622^. 


his  principal,  he  not  having  disclosed  that  he  was  acting  as  agent. 
Such  a  by-law  is  legal,  and  the  corporation  may  refuse  to  transfer 
the  stock  in  violation  of  the  by-law.^  A  resolution  of  the  stock- 
holders that  the  company  should  not  allow  any  further  transfers  of 
stock  until  the  company  is  out  of  financial  difficulties  does  not  bind 
a  stockholder  who  did  not  take  part  in  the  meeting.^ 

The  right  of  transfer  is  sometimes  limited  by  statute,  as  where  stock 
cannot  be  transferred  until  all  calls  thereon  shall  have  been  fully 
paid.  Where  the  charter  or  a  statute  forbids  transfers  before  the  full 
capital  stock  is  paid  in,  any  transfer  before  such  payment  has  beeo 
held  to  be  void.^  The  Illinois  statute  against  options  does  not  apply 
to  a  contract  by  which  the  vendor  of  stock  agrees  to  buy  it  back  at 
the  end  of  five  years  if  the  vendor  so  desires,  the  vendee  on  his  part 
agreeing  not  to  sell  the  stock  to  any  one  in  the  meantime,  without 
first  offering  it  to  the  vendor.^ 

In  England  sometimes  express  authority  is  given  to  the  directors, 
by  the  articles  of  association,  to  refuse  to  permit  a  transfer  unless 
the  same  is  satisfactory  to  them.^  They  have  this  power,  however, 
only  by  express  authority,  and  it  is  not  extended  by  implication.* 


the  corporation  has  purchased  the 
stock  of  other  members,  and  even 
though  the  corporation  is  essentially  a 
community  of  property  affair,  having 
a  capital  stock.  Herring  v.  Ruskin,  etc. 
Assoc,  53  S.  W.  Rep.   327  (Tenn.  1899). 

1  Barrett  v.  King,  63  N.  E.  Rep.  934 
(Mass.  1902). 

^  Smith  V.  Bank,  etc.  Scotia,  8  S.  C. 
Rep.  (Can.)  558  (1883). 

3  Merrill  u  Call,  15  Me.  428  (1839). 
The  case  of  Quiner  v.  Marblehead  Social 
Ins.  Co.,  10  Mass.  476  (1813).  holds  that, 
nevertheless,  such  a  transfer  vests  in 
the  transferee  all  the  transferrer's  in- 
terest in  the  stock.  Cf.  Kahn  v.  Bank 
of  St  Joseph,  70  Mo.  263  (1879).  The 
statutes  of  a  state  cannot  restrict  or 
interfere  with  the  transferability  of 
certificates  of  stock  in  national  banks. 
Doty  V.  First  Nat.  Bank,  3  N.  Dak.  9 
(1892). 

4  Ubben  v.  Binnian,  182  111.  508  (1899). 

5  Shortridge  v.  Bosanquet,  16  Beav.  84 
(1852);  Bargate  v.  Shortridge,  5  H.  L. 
Cas.  297  (1855);  i2e  Joint-stock  Discount 
Co.,  Shepherd's  Case,  L.  R.  2  Eq.  564 
(1866). 

e  Weston's  Case,  L.  R  4  Ch.  A  pp.  20 


(1868);  Gilbert's  Case,  L.  R.  5  Ch.  App. 
559  (1870);  Chappell's  Case,  L.  R.  6  Ch. 
App.  903  (1871);  Be  Stranton  Iron,  etc. 
Co.,  L.  R.  16  Eq.  559  (1878);  Moffatt  v. 
Farquhar,  L.  R.  7  Ch.  D.  591  (1878);  Slee 
V.  International  Bank,  17  L.  T.  Rep.  425 
(1867).  Judge  Dillon,  in  Johnson  v. 
Laflin,  5  Dill.  65,  78;  S.  C,  13  Fed.  Cas. 
758,  763;  aff'd,  103  U.  S.800  (1880),  said: 
"  Such  a  power  is  so  capable  of  abuse, 
and  so  foreign  to  all  received  notions, 
and  the  universal  practice  and  mode  of 
dealing  in  these  stocks,  that  it  cannot 
in  the  absence  of  legislative  expression, 
be  held  to  exist."  See  also  Farmers', 
etc.  Bank  v.  Wasson,  48  Iowa,  336  (1878), 
the  court  holding  that  a  by-law  that 
transfers  of  stock  shall  not  be  valid 
unless  approved  by  the  board  of  direct- 
ors cannot  restrain  transfers.  "  Its  en- 
forcement would  operate  as  an  infringe- 
ment upon  the  property  rights  of  others, 
which  the  law  will  not  permit.  It 
would,  besides,  operate  as  a  restraint 
upon  the  disposition  of  property  in  the 
stock  of  the  corporation,  in  the  nature 
of  restraint  of  trade,  which  the  courts 
will  not  tolerate." 


1357 


<§  6226?.] 


ELECTIONS OOEPOEATE    MEETINGS. 


[CH.  XXXVII. 


The  power  must  be  reasonably  exercised,  and  its  exercise  must  be 
free  from  fraud,  caprice,  and  arbitrary  power.^  The  corporation 
cannot  refuse  to  allow  a  registry  on  the  ground  that  there  was  no 
consideration  for  the  transfer;^  nor  because  a  claimant  of  the  stock 
notified  it  not  to  make  the  registry.^ 

Similar  to  a  charter  restriction  on  the  sale  of  stock  is  a  provision 
in  the  articles  of  association  of  an  unincorporated  joint-stock  associa- 
tion to  the  effect  that  no  stockholder  shall  sell  his  stock  except  on 
specified  conditions  or  that  he  shall  not  sell  it  at  all,  except  to  a 
party  satisfactory  to  the  other  stockholders.  Such  provisions  are 
legal,  being  merely  matters  of  private  contract.* 


1  They  cannot  refuse  to  allow  any 
transfers.   Robinson  v.  Chartered  Bank, 
L.  R.  1  Eq.  32  (18G5).     And  an  objection, 
not  to  the  transferee,  but  to  tiie  purpose 
of  the  transferrer   in   respect  to   the 
voting,   is    not    sufficient.     Moffatt    v. 
Farquhar,   L.    R.   7  Cli.   D.  591    (1878). 
But  the  board  may  refuse  to  give  its 
reasons  for  refusing  to  allow  the  trans- 
fer, and  in  that  case  it  will  be  presumed 
to  have  had  sufficient  reason  for  the 
refusal.    Ex  parte  Penney,  L.  R.  8  Ch. 
App.    446   (1872).     Where  the  by-laws 
limit  the  right  of  transfer  of  stock,  and 
give  the  directors  the  power   to  pass 
upon  the  same,  the  court  will  presume 
that  their  action  in  refusing  a  transfer 
was  based  on  good  reasons,  even  though 
no   reason    was    given.    Re    Coalport 
China  Co.,  [1895]  2  Ch.   404     If  mis- 
representations are  made  ia  inducing 
the  directors  to  allow  transfer,  they, 
having  discretion,  may  avoid  the  same. 
Payne's  Case,  L.  R.  9  Eq.  223   (1869); 
Master's  Case,  L.  R  7  Ch.   292   (1872); 
Bishop's  Case,  L.  R.  7  Ch.   296  (1869). 
Although  a  transfer  is  rejected  by  the 
directors,  the  transferee  is  nevertheless 
entitled  to  dividends  and  the  title  to 
the  stock.   Poole  v.  Middleton,  29  Beav. 
646  (1861).    Where  the  company  may 
accept  or  reject  a  transferee,  and  re- 
jects him,  the  transferee  cannot  recover 
back  from  the  transferrer  the  consider- 
ation of  the  transfer.  London  Founders' 
Assoc.  V.  Clarke,  20  Q.  B.  576  (1888).   See 
Healey,  Companies  Law  (3d  ed.),  p.  90. 
Where  the  directors  are  authorized  by 


the  articles  of  incorporation  to  reject  a 
transfer  of  stock  on  the  ground  that 
they  do  not  approve  of  the  transferee, 
•'the  discretionary  power  is  of  a  fiduciary 
nature  and  must  be  exercised  in  good 
faith;  that  is,  legitimately  for  the  pur- 
pose for  which  it  is  conferred.  It  must 
not  be  exercised  corruptly,  or  fraudu- 
lently, or  arbitrarily,  or  capriciously,  or 
wantonly.  It  may  not  be  exercised  for 
a  collateral  purpose.  In  exercising  it 
the  directors  must  act  in  good  faith  in 
the  interest  of  the  company  and  with 
due  regard  to  the  shareholder's  right  to 
transfer  his  shares,  and  they  must  fairly 
consider  the  question  of  the  transferee's 
fitness  at  a  board  meeting."  It  is  not  a 
sufficient  reason  that  the  transferee  is 
not  a  member  of  a  particular  family, 
and  the  directors  will  be  ordered  to 
make  the  transfer.  Re  Bell,  65  L.  T. 
Rep.  245  (1891). 

2  Helm  V.  Swiggert,  12  Ind.  194  (1859). 

a^-ajparfe  Sargent,  L.  R.  17  Eq.  273 
(1874).     Cf.  %  387,  mprcu 

*Thus  where  the  articles  prohibited 
sales  of  the  stock,  a  purchaser  has  no 
right  to  vote  or  participate  in  the  asso- 
ciation, but  is  merely  entitled  to  the 
dividends.  Harper  v.  Raymond,  8  Bosw. 
(N.  y.)  29  (1858).  See  Kingman  v.  Spurr, 
24  Mass.  235  (1828).  See  also  Taft  v. 
Harrison,  10  Hare,  489  (1853),  as  to  lia- 
bility after  an  offer  to  sell  to  the  com- 
pany. Under  the  Pennsylvania  statutes 
relative  to  joint-stock  companies  to  the 
effect  that  a  purchaser  of  stock  who  is 
not   thereafter  elected  to  partnership 


1358 


^H.  XXXVII.]  ELECTlO^sS CORPORATE    MEETINGS. 


[§  022^. 


§  622^.  Irrevocalle  2>roxi('S.—  The  plan  of  trying  to  tie  up  the  con- 
tract of  a  corporation  by  obtaining  irrevocable  proxies  from  the 
holders  of  a  majority  of  the  stock  had  to  be  abandoned,  because 
the  so-called  "irrevocable"  proxies,  although  irrevocable  by  their 
terras,  were  held  bv  the  courts  to  be  revocable  at  anv  time.^  This 
plan  of  depositing  the  certificates  of  stock  with  trustees,  without  a 
transfer  on  the  books  of  the  corporation,  and  then  giving  irrevo- 
cable proxies  to  the  trustees,  was  one  of  the  first  plans  tried.  The 
courts,  however,  held  that  inasmuch  as  the  proxies  were  revocable, 
the  plan  of  the  trust  itself  had  failed,  and  hence  the  certificates 
might  be  demanded  back.^ 


shall  be  paid  the  value  of  his  stock,  the 
company,  by  admitting  hira  as  to  some 
of  the  stock,  admits  him  as  to  all,  but 
the  fact  that  he  is  already  a  holder  of 
some  stock  does  not  entitle  him  to  be 
admitted  as  to  new  stock  purchased  by 
him.  Carter  v.  Producers'  Oil  Co.,  200  Pa. 
St.  579  (1901).  Where  an  unincorporated 
partnership  issues  so-called  certificates 
of  stock  representing  a  specified  interest 
in  such  partnership,  and  one  of  the  part- 
ners assigns  his  certificates  as  collateral 
security  and  afterwards  sells  them,  the 
purchaser  is  entitled  to  his  share  of  the 
partnership  property  and  to  demand  an 
accounting,  even  though  the  certificates 
provided  that  they  were  not  transfer- 
able. The  transfer  of  such  certificates 
as  security  need  not  be  recorded  as  a 
chattel  mortgage.  Rommerdahly.  Jack- 
eon,  102  Wis.  444  (1899).  Although  an 
unincorporated  association's  articles 
provide  that  transfers  of  stock  shall  be 
made  only  with  consent  of  the  direct- 
ors, yet,  where  such  provision  is  for 
many  years  disregarded,  a  stockholder 
who  so  transferred  his  stock  at  a  time 
when  the  assets  equaled  the  liabilities 
cannot  be  held  liable  as  a  stockholder. 
Wadsworth  v.  Duncan,  164  111.  360  (1896); 
Wadsworth  v.  Laurie,  164  111.  42  (1896). 
The  foreclosure  and  sale  of  a  pledge  of 
stock  in  the  Western  Associated  Press 
has  been  refused  where  it  was  shown 
that  the  stock  merely  entitled  the 
holder  to  receive  news;  that  no  trans- 
fer was  allowed  except  by  consent  of 
the  association,  and  such  consent  had 


never  been  given,  and  the  association 
was  not  made  a  party  to  the  suit.  Met- 
ropolitan Nat.  Bank  v.  St.  Louis  Dis- 
patch Co.,  36  Fed.  Rep.  722  (1888).  In 
tills  case  it  is  to  be  noticed  that  no 
profits  or  dividends  could  arise  from 
the  stock. 

1  See  §  610,  supra.  "  It  is  against  the 
settled  rules  governing  the  control  of 
corporations  that  an  irrevocable  power 
of  voting  or  directing  votes  on  stock 
should  be  vested  in  a  person  who  is 
neither  interested  in  the  stock  nor  a 
representative  of  persons  interested." 
Clowes  V.  Miller,  60  N.  J.  Eq.  179  (1900). 
A  stockholder  may  transfer  his  certifi- 
cate to  his  children  who  at  the  same 
time  may  give  him  an  irrevocable 
power  to  vote  the  stock  during  his  life 
and  to  receive  and  keep  the  dividends 
on  the  stock.  Such  an  agreement  is  en- 
forcible,  even  though  the  stock  is  trans- 
ferred into  the  name  of  the  children, 
the  certificates,  however,  not  being  act- 
ually delivered  to  them.  Matter  of 
Brandreth,  58  N.  Y,  App.  Div.  575(1901), 
rev'd  on  another  point  in  169  N.  Y.  437. 

2  Woodruff  V.  Dubuque,  etc.  R.  R.,  30 
Fed.  Rep.  91  (1887);  Hafer  v.  New  York, 
etc.  R  R.,  14  W.  L.  Bull  68  (1885).  See 
Griffith  v.  Jewett,  15  W.  L.  Bull.  419 
(1886);  Vanderbilt  v.  Bennett,  6  Pa. 
Co.  Ct  Rep.  193  (1887);  Starbuck  v. 
Mercantile  Trust  Co.,  60  Conn.  553 
(1891).  See  also  an  excellent  article 
and  careful  review  of  the  cases  by 
Professor  Baldwin  in  1  Yale  L.  J.  1 
(1891). 


1359 


§  622/".]  ELECTIOrS  —  CORPOKATE   meetings.  [cH.  XXXVII.. 

§  622/1  Deposit  of  certificate  of  stock  with  trustees,  either  with  or 
without  a  transfer  of  same  to  the  trustees. —  This  is  the  usual  and 
most  important  method  of  tying  up  the  control  of  a  majority  of  the 
stock  of  a  corporation.  It  has  given  rise  to  much  litigation  and 
more  or  less  conflicting  decisions.  Each  case  turns  largely  on  the 
peculiar  form  of  the  particular  contract  under  consideration,  and 
yet  there  are  certain  general  features  and  principles  of  law  appli- 
cable to  this  form  of  contract,  which  are  gradually  defining  the 
limit  between  legal  and  illegal  contracts  of  this  nature.  It  has  been 
objected  that  this  mode  of  tying  up  the  stock  of  a  corporation 
violates  the  statute  against  restraint  on  the  alienation  of  personal 
property;  that  it  is  contrary  to  public  policy,  which  favors  a  free 
transfer  of  property;  that  it  is  unfair  towards  minority  stock- 
holders, and  that  it  separates  the  voting  poAver  from  the  ownership 
of  the  stock.     The  leading  cases  on  this  subject  are  as  follows: 

The  New  York  court  of  appeals  has  held  that  an  agreement  of 
several  holders  of  stock  to  deposit  their  stock  in  a  trust  company 
for  a  term  of  six  months  and  not  to  sell  it  during  that  time  is  legal, 
there  being  no  provision  depriving  any  party  of  his  right  to  vote 
on  the  stock.  The  court  held  also  that  where  compensation  in 
damages  for  a  breach  would  be  inadequate,  a  court  of  equity  might 
grant  specific  performance  of  such  a  contract  by  enjoining  a  breach 
thereof.  Such  a  contract  is  not  void  as  suspending  the  power  of 
alienation,  nor  is  it  against  public  policy  as  being  a  restraint  upon 
trade,  the  purpose  of  the  contract  being  to  prevent  a  sacrifice  of 
the  stock.^ ! 

1  Williams  v.  Montgomery,  148  N.  Y.  come  into  the  agreement  and  execute 

519  (1896),  practically  reversing  68  Hun,  similar    proxies,   and    the    agreement 

416,  and  74  Hun,  425.     See  §  812,  infra,  further  providing  that  before  any  party 

The   following  decisions    have    also  sold  his  stock  he  should  first  offer  it  to 

been  rendered  in  New  York  state.     In  the  others  at  the  same  price  at  which 

the  case  of  Sullivan  v.  Parkes,  69  N.  Y.  he  intended  to  sell.     The  two  proxies 

App.  Div.  221  (1902),  the  holders  of  a  failed  to  agree  and  could  not  agree  on 

majority  of  the  stock  of  a  Delaware  an  arbitrator,  and  one  of  them  filed  a 

corporation    entered    into    a    written  bill  for    an  injunction  to  prevent  the 

agreement,  by  which    the  certificates  other  from  voting  his    own    stock  in 

■were  deposited  witli  a  trust  company  violation  of  the  agreement.     The  court 

for  fifteen  years,  together  with  irrevo-  held  that  the  injunction  would  not  lie 

cable  proxies  to  two  specified  persons  because  the  contract  had  become  im- 

to  vote  the  stock  during  that  time,  and  '  possible  of  performance,  by  reason  of 

in  case  they  disagreed  they  were  to  the  arbitrator  not  being  provided  for, 

select  a  third  party  who  was  to  decide  and  on  the  further   ground   that  the 

between  them,  the  proxies  to  be  re-  agreement  did  not  prohibit  each  stock- 

newed  every  three  years,  the  owners  holder  votmg    his  own  stock,  in  case 

retaining    the  right  to  sell  or  pledge  the  proxies  could  not  agree,  and  the 

their  stock,  subject  always,  however,  court  douoced  the  validity  of  the  irrev- 

to  the  agreement,  and  the  purchaser  to  ocable  proxies,  and  doubted  the  valid- 

1360 


CH.  XXXTII.]  ELECTIONS  —  CORPORATE    MEETINGS. 


[§  622/. 


In  1901  the  legislature  of  the  state  of  New  York  declared  the 
public  policy  of  that  state,  as  to  the  "  pooling  "  of  stock,  by  enact- 
ing a  statute  under  which  stockholders  may  pool  their  stock  by 
transferring  the  same  to  a  person  to  vest  in  him  the  right  to  vote 


ity  of  a  provision  against  the  stock- 
holder voting  his  stock,  even  if  there 
had  been  such  a  provision.  The  court 
intimated  also  that  an  agreement  pre- 
venting the  sale  of  stock  for  fifteen 
years  would  be  void  under  the  Personal 
Property  Law  of  New  York  (L,  1897, 
ch.  417,  §  2),  and  that  the  spirit  of  the 
statute  militated  against  an  agreement 
to  give  proxies  for  that  length  of  time. 
A  court  will  enjoin  a  party  from  vot- 
ing upon  or  disposing  of  his  stock  in  a 
corporation  pendente  lite  where  the 
plaintiffs  show  that  they  transferred 
the  stock  to  the  defendant  on  the  lat- 
ter's  agreement  not  to  sell  the  same, 
except  with  the  consent  of  the  former, 
and  that  when  he  did  sell  the  stock 
three-fourths  of  the  proceeds  should  be- 
long to  the  former,  and  it  appearing 
further  that  the  defendant  had  given 
the  stock  to  his  sister  without  consid- 
eration. Weston  V.  Goldstein,  39  N.  Y, 
App.  Div.  661  (1899).  In  the  case  of 
United,  etc.  Co.  v.  Omaha,  etc.  Co.,  164 
N.  Y.  41  (1900),  where  a  reorganization 
committee,  in  carrying  out  the  reor- 
ganization agreement,  tied  up  the  stock 
by  giving  to  the  committee  the  power 
to  vote  the  same  until  certain  divi- 
dends were  paid,  the  court  held  that 
the  committee  had  no  such  power  under 
the  original  reorganization  agreement. 
Trustees  under  a  reorganization  who 
are  to  hold  a  majority  of  the  stock  and 
vote  the  same  for  five  years,  unless 
they  decide  to  distribute  the  same  be- 
fore that  time,  are  not  precluded  from 
selling  stock  owned  by  themselves  indi- 
vidually, and  the  fact  that  they  sell  their 
own  stock  is  no  ground  for  compelling 
a  distribution  of  the  remaining  stock. 
Haines  v.  Kinderhook,  etc.  Ry.,  33  N. 
Y.  App.  Div.  154  (1898).  An  agreement 
of  stockholders  not  to  sell  their  stock 
except  by  concvirrent  consent  of  all  the 


signers  to  the  agreement  is  void  as  in 
restraint  of  trade  and  against  public 
policy.  Fisher  v.  Bush,  35  Hun,  641 
(1885). 

The  trustees  are  not  purchasers  and 
owners  of  the  stock.  People  v.  North 
River  Sugar  Ref.  Co.,  121  N.  Y.  582 
(1890).  An  outside  stockholder  cannot 
object  to  other  stockholders  uniting 
their  interests  in  a  "  trust,"  and  thereby 
obtaining  control  of  the  corporation. 
Zimmerman  v.  Jewett,  19  Abb.  N.  Cas. 
459  (1886).  An  agreement  of  the  holder 
of  a  majority  of  the  stock  that  he  will 
retain  control  is  no  defense  by  the  cor- 
poration to  an  action  by  the  receiver  of 
such  stockholder  to  transfer  the  stock 
on  the  corporate  books.  Weller  v.  Pace 
Tobacco  Co.,  25  N.  Y.  Week.  Dig.  531 
(1886).  Where  stock  is  deposited  with 
a  trustee  for  purposes  of  reorganization, 
and  transferable  certificates  are  issued 
therefor  by  the  trustee,  a  claimant  of 
stock  which  another  person  has  de- 
posited, and  for  which  such  other  per- 
son has  the  trustee's  certificate,  cannot 
compel  the  trustee  to  deliver  up  the 
stock  until  the  trustee's  certificate  is 
returned,  even  though  the  party  holding 
it  is  a  party  defendant.  Bean  v.  Ameri- 
can Loan,  etc.  Co.,  122  N.  Y.  623  (1890). 
As  to  the  nature  of  trustees'  certificates 
in  general,  see  §  888,  infra. 

Where  a  trustee  holding  stock  votes 
himself  into  ofiSce  and  illegally  votes  to 
himself  a  large  salary,  the  cestuis  que 
trust  may  in  a  suit  for  his  removal  ask 
also  that  he  account  to  such  cestuis  que 
trust  for  such  salary.  Elias  v.  Schweyer, 
27  N.  Y.  App.  Div.  69  (1898).  Where  the 
stockholders  transfer  a  portion  of  their 
stock  to  one  of  their  number  to  be  dis- 
posed of  by  him  for  the  interests  of  the 
company,  and  to  raise  money  to  carry 
on  business,  he  may  use  a  portion  of  the 
same  to  reimburse  one  of  the  stock- 


(86) 


1361 


§  622/.]  ■  ELECTIONS COKPOEATE    MEETINGS.  [CH.  XXXVII. 

the  stock  for  a  time  not  exceeding  five  years,  on  such  terms  and 
conditions  as  therein  set  forth,  provided  other  stockholders  are  al- 
lowed to  come  into  the  agreement.  The  stock  may  be  transferred 
for  that  purpose  on  the  books  of  the  company,  the  new  certificates 
and  the  corporate  books  to  refer  to  such  agreement,  and  the  agree- 
ment itself  to  be  filed  with  the  corporation  and  to  be  open  to  the 
inspection  of  other  stockholders.^ 

The  supreme  court  of  Massachusetts  has  rendered  a  logical  and 
clear  decision  on  this  question.  It  holds  that  an  agreement  of 
various  persons  to  purchase  a  majority  of  the  stock  of  a  corpora- 
tion, the  stock  when  purchased  to  be  voted  by  a  committee  of  five 
of  the  subscribers  for  at  least  three  years,  is  not  illegal  even  though 
the  title  to  the  stock  is  given  to  a  trustee  during  that  time.  The 
court  said:  "We  know  nothing  in  the  policy  of  our  law  to  prevent 
a  majority  of  stockholders  from  transferring  their  stock  to  a  trustee 
with  unrestricted  power  to  vote  upon  it.  ...  A  stockholder 
has  a  right  to  put  his  shares  in  trust,  whatever  his  motive.  If  the 
trust  is  an  active  one  he  cannot  terminate  it  at  will;  and  the  at- 
tempt to  cut  himself  off  by  contract,  instead  of  by  the  imposition  of 
duties,  from  ending  it,  certainly  is  not  enough  to  poison  the  cove- 
nant with  the  plaintiff.  It  might  be  held  that  the  duty  of  voting 
incident  to  the  legal  title  made  such  a  trust  an  active  one  in  all 
cases.  As  to  the  arrangement  for  the  trustees  uniting  to  elect 
their  candidates,  the  decisions  of  other  states  show  that  such  ar- 
rangements have  been  upheld,  and  we  do  not  think  that  it  needs 
argument  to  prove  that  they  are  lawful.  If  stockholders  want  to 
make  their  power  felt  they  must  unite.  There  is  no  reason  why  a 
majority  should  not  agree  to  keep  together."^ 

holders  for  stock  which  the  latter  used  Second  Street,  etc.  R.  R,  37  N.  Y.  App. 

in  the  interest  of  the  company.    Playa,  Di v.  500  (1899). 

etc.  Co.  V.  Gage,  60  N.  Y.  App.  Div.  1  i  L.  1901,  ch.  355. 

(1901).    Where  a  trustee  or  agent  with  2Brightman  v.  Bates,  175  Mass.   105 

whom  bonds  are  deposited  issues  his  (1900),  enforcing  a  contract  for  com- 

certificate  to  the  effect  that  he  holds  missions   for   services    in    purchasing 

bonds  specified  in  such  certificate  to  be  such  stock. 

delivered  to  a  person  specified  in  such  An  unincorporated  joint-stock  asso- 
certificate,  all  coupons  on  such  bonds  ciation  to  buy,  lease,  and  sell  land  is 
belong  to  the  person  named  in  the  cer-  legal,  even  though  the  title  to  the  land 
tificate,  although  the  certificate  itself  is  is  held  in  the  name  of  trustees  who  can- 
not actually  delivered  until  several  not  act  except  upon  a  three-fourths 
years  after  the  date  of  the  certificate,  vote  of  the  stockholders.  A  stockholder 
If  such  coupons  have  been  canceled  and  cannot  have  a  receiver  appointed  and 
returned  to  the  corporation  issuing  the  the  business  wound  up  on  the  ground 
bonds,  and  the  trustee  is  held  liable  for  of  its  being  illegal.  Howe  v.  Morse,  174 
such  coupons,  the  trustee  may  hold  the  Mass.  491  (1899).  The  contract  of  an 
corporation    liable.      Kelly   v.    Forty-  agent  to  sell  stock  does  not  give  the 

1362 


OH.  XXXVII.]  ELECTIONS CORPOKATE    MEETINGS. 


[§  622/ 


In  ITew  Jersey,  also,  the  highest  court  has  upheld  a  pooling 
agreement  of  stock  of  a  terminal  corporation,  whereby  for  two  and 
one-half  years  the  stockholders  turned  over  their  certificates  to 
certain  persons,  together  with  proxies,  with  power  to  vote  on  any 
question,  including  the  sale  of  the  property,  and  to  exchange  the 
stock  for  stock  in  other  corporations  or  to  hypothecate  it,  the 
stockholders  agreeing  in  the  meantime  not  to  sell  their  stock,  the 
object  being  to  finance  and  complete  the  enterprise,  and  hence  a 
bill  filed  b}^  one  of  the  depositing  stockholders  to  reclaim  his  stock 
was  held  not  to  lie.^ 

It  has  also  been  held  in  New  Jersey  that  an  agreement  between 
two  stockholders  by  which  certain  stock  is  issued  to  a  trustee  to 

principal  a  right  to  damages  for  failure    from  giving  an  irrevocable  power  of 

attorney  to  vote  at  stockholders'  meet- 
ings, subject  to  the  time  limit  as  to 
elections,  nor  can  we  see  any  reason 
why  a  stockholder  may  not  give  such  a 
proxy  if  he  chooses,  and  be  bound  by 
it.  He  can  easily  avoid  the  effect  of  it 
by  appearing  and  voting  in  person  at 
all  meetings.  There  is  no  statutory 
provision,  nor  can  we  perceive  any 
reason  offensive  to  public  policy,  pre- 
venting a  stockholder  from  giving 
another  powers  over,  or  rights  in,  his 
shares  in  a  corporation  to  the  same  ex- 
tent that  he  might  give  in  any  prop- 
erty." The  court  also  said:  "No  illegal, 
purpose  is  manifest  upon  the  face  of 
this  agreement,  nor  has  any  been 
alleged  in  the  bill.  It  appears  to  be 
consistent  with  the  purposes  for  which 
the  company  was  created,  and  which 
continuance  appears  to  be  necessary 
for  the  advantage  of  all  who  are  inter- 
ested in  the  development  of  the  prop- 
erty. It  is  expressly  declared  to  be  for 
the  benefit  of  all  who  join  in  it.  No 
stockholder  is  prevented  from  joining 
in  this  agreement,  and  no  stockholder 
who  has  not  availed  himself  of  the 
opportunity  to  join  in  it  is  excluded 
from  the  benefit  of  it.  No  one  appears 
to  have  been  injured  by  it.  The  com- 
plainant does  not  allege  in  what  way 
he  is  damaged  by  its  continuance." 
Chapman  v.  Bates,  47  Atl.  Rep.  638  ( N. 
J.  1900),  afif'g  60  N.  J.  Eq.  17  (1900;. 


to  sell,  where  the  principal  delivered 
trustees'  receipts  instead  of  the  stock 
itself,  the  stock  having  been  "pooled." 
Simmons  v.  Brooks,  159  Mass.  219(1893). 
The  fact  is  that  Massachusetts  has  de- 
veloped and  elaborated  this  plan  of 
pooling  stock  much  more  than  in  other 
states.  In  that  state  the  trustees  often 
issue  trustees'  certificates  of  stock  in 
the  usual  form  of  stock  certificates. 
That  practically  amounts  to  an  unin- 
corporated joint-stock  association,  own- 
ing stock  in  one  or  more  corporations, 
a  subject  already  considered.  See 
pp.  1061,  1358,  supra.  In  fact  it  is  diffi- 
cult to  draw  the  line  where  such  an 
unincorporated  association  ends  and  a 
"  pooling "  trusteeship  begins.  The 
courts  are  beginning  to  consider  them 
as  much  the  same,  and  both  are  legal 
modes  of  tying  up  stock. 

iThe  court  said:  "This  instrument, 
which  gave  the  defendants  control  over 
the  complainant's  stock,  appears  to 
have  been  for  a  common  interest,  it  is 
consistent  with  the  purposes  for  which 
the  corporation  was  created,  and  its 
continuance  appears  to  be  necessary 
for  the  advantage  of  all  who  are  inter- 
ested in  the  development  of  the  prop- 
erty. A  power  of  attorney  may  become 
irrevocable  whenever  the  object  is  to 
create  an  interest;  and  this  is  so,  even 
if  it  is  not  stated  in  the  instrument 
itself  to  be  irrevocable. .  . .  The  statute 
does  not  in  terms  prevent  a  stockholder 


1363 


§  622/.] 


ELECTIONS  —  CORPORATE    MEETINGS. 


[CH.  XXXVII. 


be  held  by  the  trustee  for  eighteen  months,  unless  sooner  disposed 
of  by  consent  of  the  parties,  the  stock  in  the  meantime  to  be  voted 
as  directed  by  one  of  the  parties,  the  stock  at  the  termination  of 
that  period  to  be  divided  between  them  in  a  certain  way,  is  legal.^ 
On  the  other  hand  it  has  been  held  by  the  lower  court  in  New 
Jersey  that  a  stock-pooling  agreement  by  which  for  five  years  the 
holders  of  a  majority  of  the  stock  transfer  it  to  trustees  in  exchange 
for  certificates  of  the  trustees  themselves,  and  the  trustees  are  given 
power  to  formulate  a  plan  for  financing  the  company  and  submit 
the  same  to  such  stockholders,  who  shall  be  bound  thereby  unless 
they  object  in  a  certain  way,  and  the  trustees  are  then  given  power 
to  carry  out  such  plan,  and  stockholders  who  do  not  come  into  the 
agreement  should  not  be  entitled  to  any  rights  or  benefits  there- 
under, the  trustees  to  elect  such  directors  as  they  see  fit,  is  illegal, 
and  a  stockholder  who  has  not  come  into  the  agreement  may  enjoin 
the  trustee  from  voting  such  stock,  even  though  some  of  the  trus- 
tees are  beyond  the  jurisdiction  of  the  court.^ 


1  If  one  of  the  parties,  who  had  a  right 
to  prescribe  how  the  stock  should  be 
voted,  subsequently,  but  prior  to  the 
expiration  of  the  agreement,  sells  his 
interest  in  the  stock,  such  sale  being 
made  subject  to  the  agreement,  his 
right  in  regard  to  the  voting  of  the 
stock  does  not  pass  to  the  purchaser, 
but  vests  in  the  trustee.  "It  is  against 
the  settled  rules  governing  the  control 
of  corporations  that  an  irrevocable 
power  of  voting  or  directing  the  votes 
on  stock  should  be  vested  in  a  person 
who  is  neither  interested  in  the  stock 
nor  a  representative  of  persons  inter- 
ested." The  court  said  in  regard  to  the 
duty  of  the  trustee  in  holding  the  stock, 
"  it  must  exercise  this  right  and  power 
honestly  and  in  its  best  judgment  as 
trustee,  giving  such  weight  as  in  its 
judgment  it  is  entitled  to,  to  the  fact 
that  the  complainant,  the  owner  ben- 
eficially interested  in  the  majority  of 
the  stock  held  in  trust,  is  opposed  to 
the  change."  The  court  said:  "  It  must 
be  observed  that  the  trust  agreement 
is  not  simply  a  deposit  for  the  purpose 
of  voting,  but  is  a  trust  to  hold  the 
stock  for  a  limited  period,  to  await  the 
result  of  certain  options  of  purchase, 
which  affect  the  ultimate  disposal  of 


the  stock."    Clowes  v.  Miller,  60  N.  J. 
Eq.  179  (1900). 

2 The  court  said:  "If,  however,  tht 
stockholder  undertakes  to  make  irrev 
ocable  his  grant  of  power,  and  to  de- 
nude himself  for  a  fixed  period  of  the 
power  to  judge  and  determine  and  vote 
as  to  the  proper  management  and  con- 
trol of  the  affairs  of  the  corporation, 
then  whether  the  grant  of  power  is 
good  or  not  must  depend  on  the  pur- 
poses for  which  it  is  given.  When  the 
scheme  devised  does  not  embrace  a 
grant  of  irrevocable  powers  by  proxy, 
but  seeks  a  similar  object  by  the  crea- 
tion of  a  trust  and  the  appointment  of 
a  trustee,  to  whom  the  title  of  the  stock 
is  conveyed,  a  like  doctrine  must  be 
applied.  If  no  provision  is  made  for  the 
conduct  of  the  trustee,  at  least  he  would 
be  bound  to  vote  on  the  stock  held  in 
trust  in  accordance  with  the  expressed 
wishes  of  the  cestui  que  trust;  but  if  the 
transfer  of  the  legal  title  to  the  stock  is 
made  and  accepted  under  an  agreement 
of  the  stockholder  which  deprives  him 
of  all  power  to  direct  the  trustee,  and 
all  opportunity  to  exercise  his  own  judg- 
ment in  respect  to  the  management  of 
the  affairs  of  the  corporation,  then, 
whether  the  transaction  is  open  to  the 


1364 


CH.  XXX VI I. J 


ELECTIONS 


CORPORATE    MEETINGS. 


[§^22/: 


It  has  been  held  in  Missouri  that  where  a  person  sells  stock  to 
two  others,  and  the  three  agree  to  pool  their  stock  so  that  all  bene- 
fits should  be  shared  equally,  including  the  sales  thereof  and  in- 
eluding  any  dividends  received  within  a  specified  time  on  certain 
other  stock  owned  by  one  of  the  parties,  the  agreement  is  valid 
and  a  suit  for  an  accounting  may  be  maintained  thereon;^  and  in 
California,  that  where  the  holder  of  a  majority  of  the  stock  had 
contracted  to  transfer  it  to  a  specified  person  with  proxy  irrevo- 
cable, authorizin'?  the  latter  to  vote  thfe  stock  for  five  years  for  the 
benefit  and  protection  of  the  corporation,  and  the  party  so  con- 
tracting- refused  to  fulfill  and  voted  the  stock  himself  and  elected 
a  board  of  directors,  the  court,  having  taken  jurisdiction  under  the 
California  statute  authorizing  the  court  to  review  elections,  had  ju- 
risdiction to  grant  specific  performance  of  such  contract;^  and  in 
Maryland,  that  specific  performance  will  not  be  granted  at  the  in- 
stance of  the  purchaser  of  stock  where  the  purchase  is  from  the 
committee  of  a  pool  of  such  stock,  and  it  is  shown  that  the  pooling 
agreement  required  a  vote  of  three-fourths  of  the  stock  in  the  pool 
before  a  sale  could  be  made,  and  it  is  also  shown  that  the  contract 
of  purchase  was  partly  an  option,  in  that  the  purchaser  was  to  for- 


objection  of  other  stockholders,  as  de- 
priving them  of  the  right  they  have  to 
the  aid  of  their  co-stockholders,  must 
be  dependent  upon  the  purposes  for 
which  the  trust  was  created,  and  the 
powers  that  were  conferred.  If  stock- 
holders, upon  consideration,  determine 
and  adjudge  that  a  certain  plan  for 
conducting  and  managing  the  affairs  of 
the  corporation  is  judicious  and  advis- 
able, I  have  no  doubt  that  they  may,  by 
powers  of  attorney,  or  the  creation  of  a 
trust,  or  the  conveyance  to  a  trustee  of 
their  stock,  so  combine  or  pool  their 
stock  as  to  provide  for  the  carrying  out 
of  the  plan  so  determined  upon.  But  if 
stockholders  combine  by  either  mode 
to  intrust  and  confide  to  others  the 
formulation  and  execution  of  a  plan 
for  the  management  of  the  affairs  of 
the  corporation,  and  exclude  them- 
selves by  acts  made  and  attempted  to 
be  made  irrevocable  for  a  fixed  period, 
from  the  exercise  of  judgment  thereon, 
or  if  they  reserve  to  themselves  any 
benefit  to  be  derived  from  such  plan, 
to  the  exclusion  of  other  stockholders 
who  do  not  come  into  the  combination. 


then,  in  my  judgment,  such  combina- 
tion, and  the  acts  done  to  effectuate  it, 
are  contrary  to  public  policy,  and  other 
stockholders  have  a  right  to  the  inter- 
position of  a  court  of  equity  to  prevent 
its  being  put  into  operation."  The  court 
also  said:  "The  agreement  discloses  an 
intent  to  exclude  stockholders  who  do 
not  enter  into  it  from  whatever  benefits 
could  be  claimed  thereunder.  This,  in 
my  judgment,  shows  a  combination 
contrary  to  public  policy,  and  one  to 
which  any  non-assenting  stockholder 
may  object."  Kreissl  v.  Distilling  Co., 
etc.,  61  N.  J.  Eq.  5  (1900).  An  agreement 
whereby  $83,000  of  stock  is  pooled  in  a 
trustee's  hands,  the  latter  issuing  trus- 
tee's certificates  therefor,  and  electing 
such  directors  as  the  certificate  holders 
may  direct,  according  to  the  trust  agree- 
ment, may  be  annulled  and  set  aside  at 
the  instance  of  purchasers  of  the  remain- 
ing $17,000  of  stock  and  of  a  majority 
of  the  trustee's  certificates.  White  v. 
Thomas,  etc.  Co.,  52  N.  J.  Eq.  178  (1893). 

1  Green  u  Higham,  161  Mo.  333  (1901). 

2  Whitehead   v.  Sweet,   126    CaL   67 
(1899). 


1365 


§  (;22/:] 


ELECTIONS COEPOKATE    MEETINGS. 


[CH.  XXXVII. 


feit  a  deposit  he  had  already  made  in  case  he  did  not  fulfill,  and  it 
being  further  shown  that  in  another  suit  the  complainant  had 
stated  the  value  of  the  stock,  and  it  being  further  shown  that  the 
purpose  of  the  contract  was  to  obtain  control  of  a  large  system  of 
railroads,  including  the  board  of  directors.^ 

In  Ohio  it  is  held  that  it  is  legal  for  the  stockholders  to  deposit 
their  stock  with  a  depositary,  to  be  transferred  to  such  depositary 
and  voted  by  him  as  directed  by  a  committee  of  the  stockholders, 
such  committee  being  named,  the  object  of  the  deposit  being  to 
effect  an  adjustment  of  differences  between  the  common  and  pre- 
ferred stockholders; 2  and  in  Alabama  that  where,  in  order  to  pre- 
vent the  foreclosure  and  sale  of  a  railroad,  a  reorganization  agree- 
ment is  entered  into  by  the  creditors  and  stockholders,  whereby 
the  claims  of  the  creditors  and  the  voting  power  of  the  stockhold- 
ers are  vested  in  trustees,  the  voting  power  to  be  exercised  by  the 
trustees  until  certain  debts  were  paid,  the  stockholders  cannot 
withdraw  from  the  agreement  and  claim  the  right  to  vote  upon 
their  stock,^  This  decision  was  entirely  correct,  and  in  fact  many 
of  the  voting  trusts  have  been  created  as  a  part  of  the  plans  of  re- 
organization of  insolvent  railroad  systems.* 


•  Ryan  v.  McLane,  91  Md.  175  (1900).  to  oust  the  board  of  directors  wlio 
Where  an  agreement  for  the  pooling  were  elected  by  the  vote  of  the  deposit- 
and  voting  of  stock  provides  that  any    ary,  but  whose  title  to  office  was  denied 


holder  of  trustee's  certificates  may  on 
six  months'  notice  demand  from  the 
trustee  repayment  of  the  price  which 
he  paid  for  the  stock,  such  demand 
may  be  enforced  by  a  suit  and  the 
money  collected  from  the  trustee. 
Waggaman  v.  Nutt,  88  Md.  265  (1898). 


by  the  company.  Ohio,  etc.  Co.  v.  State, 
49  Ohio  St.  668  (1893);  State  v.  O.  &  M. 
Ry.,  6  Ohio  Circ.  Ct.  415  (1892).  Cf. 
Hafer  v.  N.  Y.  etc.  R  R.,  14  W.  L.  Bull. 
68  (1886). 

3  Not  even  a  subsequent  change  in 
the  agreement  so  as  to  issue  first-mort- 


2  The  agreement  did  not  prevent  any  gage  bonds  to  take  up  some  of  the  debt 
stockholder  from  demanding  back  his  will  enable  the  stockholders  to  claim 
stock  whenever  he  saw  fit.  The  court  the  right  to  vote  upon  their  stock  be- 
held that  this  was  not  a  "voting  trust,"  fore  the  debts  specified  above  have 
and  that  it  was  merely  "a  convenient  been  paid.    Mobile,  etc.  Co.  v.  Nicholas, 


98  Ala.  92  (1893).  See  also  Shelmerdine 
V.  .Welsh,  47  Leg.  Int  26  (Phi la.  Com. 
PL  1890). 

*  The  following  from  "  Bradstreets  " 


method  by  which  distant  and  widely- 
separated  shareholders  became  enabled, 
indirectly,  to  participate  in  the  control 
and  management  of  the  company,  and 

from  which  each  could  recede  at  any    of  September  6,  1902,  is  in  point: 
time  and  demand  return  of  his  stock  voting  trusts. 

without  violating  any  terra  of  the  Recent  events  in  'the  financial  world  have 
agreement.  The  depositary  is  a  proxy  given  rise  to  a  good  deal  of  discussion  about  the 
required  to  vote  the  stock  as  directed  nature  and  bearings  of  what  is  known  as  voting 
by  the  committee."  The  contract  of  trusts  in  connection  with  the  stocks  of  railroads 
deposit  is  given  in  the  report.  The  T^  °*''''  ^^'Torations  The  definition  of  the 
'  *  ^  °     term  is  a  delegation  of  the  right  to  elect  direct- 

suit  arose  on  quo  warranto  proceedings     ors  and  officers  of  such  companies  to  certain 

1366 


CH.  XXXVII.]  ELECTIONS  —  CORPORATE    MEETINGS.  [§  622/. 

On  the  other  hand,  it  has  been  held  in  Alabama  that  although 
many  stockholders  transfer  their  stock  to  a  trustee  to  hold  and 
vote  for  it  three  years,  and  agree  not  to  sell  until  they  have  offered 
to  sell  to  each  other,  yet  any  one  may  sell  to  an  outsider,  and  the 
latter  may  demand  back  his  stock  from  the  trustee.^ 

In  Maine  it  is  held  that  a  transfer  of  a  controlling  interest  of 
stock  of  a  railroad  company  to  trustees  to  hold  until  the  road  is 
completed,  and  then  to  return  the  same  to  the  transferrers,  the 
object  being  to  secure  the  co-operation  of  municipalities  in  obtain- 
ing an  extension  of  the  charter  and  the  granting  of  municipal  aid, 
is  legal,  the  transaction  being  a  fair  one,  and  being  known  to  the 
public,  and  insisted  upon  by  the  public  before  aid  would  be  given,'* 

The  federal  court  as  early  as  1867  held  that  an  agreement  by 
which  various  owners  of  stock  place  their  stock  in  the  hands 
of  one  person  as  trustee  or  agent  to  hold  for  a  certain  period  of 
time,  the  parties  agreeing  not  to  sell  their  stock  without  having 
first  offered  to  sell  it  to  the  rest  of  their  associates  at  a  price  not 
above  the  then  current  market  value,  and,  in  case  of  their  declin- 
ing to  take  it,  without  next  offering  it  to  the  trustee,  but  any  one 
of  the  parties  to  be  at  liberty  to  withdraw  at  any  time  on  those 
terms,  is  not  "  contrary  to  public  policy,  or  any  wise  open  to  ob- 
jection;"* and  there  have  been  many  recent  decisions  in  the  fed- 
eral courts  on  various  "  pooling  "  agreements.'*     Most  of  the  decis- 

trustees,  either  for  a  specified  period  or  a  length  like  those  of  the  Northern  Pacific,  Erie,  Reading, 
of  time  contingent  upon  other  events,  com-  and  so  forth,  the  plans  under  which  the  finances 
monly  the  payment  of  dividends  on  the  stocks  of  the  companies  were  readjusted  included  pro- 
held  in  trust.  Arrangements  of  this  kind  are  visions  by  which  the  stocks  of  the  reorganized 
the  outcome  for  the  most  part  of  the  railroad  road  were  to  be  deposited  with  three  or  more 
reorganizations  which  have  been  so  frequent  voting  trustees,  who  would  issue  against  the 
during  the  past  decade.  When  modern  and  stock  their  certificates,  carrying  a  beneficial  in- 
correct principles  began  to  be  applied  to  the  terest  to  the  holders  of  such  certificates  in  tho 
reconstruction  of  bankrupt  corporations,  it  was  stocks  so  deposited.  In  most  cases  the  voting 
found  that  one  of  the  primary  requirements  was  trust  was  arranged  to  last  for  from  three  to  five 
that  bankers  and  capitalists  should  provide  very  years,  or  until  dividends  had  been  paid  on  at 
large  sums  of  money  for  the  purpose  of  buying  least  the  preferred  stock,  either  for  a  year  or 
up  claims  against  the  company,  for  extinguish-  longer,  at  a  specified  rate.  It  was  also  gener- 
ing  the  rights  of  non-assenting  holders  of  stocks  ally  set  forth  that  the  voting  trustees  them- 
and  bonds,  and  for  the  purchase  of  the  equip-  selves  might  terminate  the  voting  trust  of  their 
ment  and  completion  of  the  improvements  own  volition,  and  in  at  least  two  notable  cases, 
needed  to  put  the  plants  in  condition  for  profit-  those  of  the  Northern  Pacific  and  the  Baltimore 
able  operation.  The  natural  sequence  of  this  &  Ohio,  the  voting  trustees  did  actually  end 
was  that  the  bankers  or  syndicates  who  supplied  their  trusteeship  and  dehver  the  stock  itself  to 
the  capital  desired  to  retain  the  management  of  the  holders  of  the  voting  trustees' certificates 
the  company  in  their  own  hands  for  a  certain  prior  to  the  time  when  the  arrangement  would 
length  of  time,  so  that  they  might  have  the  as-  have  been  terminated, 
surance  that  their  plans  would  be  carried  out  by 

a  management  nominated  by  themselves  and  in  ^  Moses  V.  Scott,  84  Ala.  608  (1888). 

sympathy  with  their  views.    In  matters  of  that  2  Greene  V.  Nash,  85  Me.  148  1 1892). 

kind  continuity  of  management  and  an  absence  3  3^.^^^^^  uPacific  IMail  S.Co.,5  Blatchf. 

of  liability  to  sudden  changes  in  the  control  or  iqcj                a  Ta"  a    r       Aon 

policy  are  very  important.     Consequently,  in  ^-"^  '18b7);  S.  C,  4  i^ed.  Cas.  4>.U. 

nearly  all  of  the  large  raUroad  reorganizations,  *  In  tlie  case  of  Levi  V.  Evans,. 57  Fed. 

1367 


§  622/] 


ELECTIONS  —  CORPOKATE    MEETINGS. 


[CH.  XXXVII. 


ions  on  this  subject,  however,  have  been  in  the  state  courts,  and, 
as  shown  above,  those  decisions  have  quite  uniformly  sustained 
this  mode  of  tying  up  for  a  term  of  years  the  control  of  a  majority 


Rep.  677  (1893),  three  stockholders,  by 
an  instrument  similar  to  a  bill  of  sale, 
sold  their  stock  to  a  fourth  stockholder 
"for  and  during  the  period  of  six 
months,  ...  in  trust  for  the  use 
and  benefit  of  the  grantors,"  with 
power  to  sell  the  same  on  certain  terms, 
yet  the  court  held  that  this  instrument 
was  not  a  sale  or  trust  agreement,  but 
merely  a  power  of  attorney.  It  did  not 
prevent  the  fourth  stockholder  from 
selling  his  own  stock  on  such  terms  as 
he  chose,  even  though  he  did  not  sell 
the  stock  of  the  others,  it  not  appear- 
ing that  the  sale  of  his  stock  prevented 
his  selling  the  stock  of  the  others.  The 
instrument  conveyed  merely  at  most 
"only  a  dry  legal  title  for  the  mere 
purpose  of  sale,  and  with  the  power  of 
sale  carefully  circumscribed." 

In  the  case  of  Ryan  v.  Seaboard  &  R. 
R,  R,  89  Fed.  Rep.  397  (1898),  there  was 
involved  a  pooling  agreement  by  which 
the  signers  agreed  for  five  years,  or 
until  thirty  days  after  the  agreement 
should  be  abrogated,  not  to  sell  nor  dis- 
pose of  their  stock  nor  to  delegate  the 
voting  power  thereof  to  any  person 
other  than  three  specified  persons  and 
without  the  written  consent  of  three- 
fourths  of  the  aggregate  shares  of  the 
signers  to  the  agreement,  and  the  agree- 
ment also  authorized  these  three  per- 
sons to  vote  as  proxy  for  all  signers  of 
the  agreement  who  should  not  be  per- 
sonally present  at  any  meeting  of  the 
stockholders.  The  essential  features  of 
the  agreement  were  that  no  stock- 
holder would  sell  his  stock  for  five 
years  except  upon  the  consent  of  three- 
fourths  of  the  stock  in  pool,  and  in  the 
meantime  he  would  vote  in  person  or 
through  specified  proxies.  One  of  the 
signers,  after  sending  in  his  certificate 
indorsed  in  blank,  sold  the  same  to  the 
complainant  in  this  suit  without  de- 
livery of  the  certificate  itself,  such  cer- 


tificate having  been  canceled  and  a 
new  certificate  issued  to  the  chairman 
of  the  pooling  committee.  This  suit 
was  instituted  to  compel  the  delivery 
of  the  stock  called  for  by  such  certifi- 
cate and  sale  and  for  other  relief.  The 
court  held  that  the  suit  would  lie,  but 
that  all  the  parties  signing  the  agree- 
ment were  necessary  parties  defendant 
in  this  suit  to  determine  the  validity  of 
the  agreement,  excepting  such  of  them 
as  had  sold  their  stock.  The  court  held 
also  that  the  suit  was  not  multifarious, 
although  it  joined  the  company  as  a 
party  defendant  in  order  to  obtain  a 
transfer  of  the  stock. 

An  injunction  pendente  lite  against 
the  voting  of  certain  stock  in  connec- 
tion with  the  formation  of  an  alleged 
illegal  pool  will  not  be  continued  where 
it  failed  to  accomplish  its  purpose  at- 
one annual  meeting  and  will  fail  at  the 
next  meeting.  Ryan  v.  Seaboard  &  R, 
R.  R,  89  Fed.  Rep.  385  (1898).  The  fact 
that  one  of  the  trustees  of  a  voting 
trust  is  an  officer  in  a  certain  railroad 
does  not  render  illegal  the  voting  of 
the  stock  in  favorof  consolidating  with 
that  railroad,  there  being  no  proof  of 
wrong-doing  or  unfair  terras.  Dady  v. 
Georgia,  etc.  Ry.,  112  Fed.  Rep.  838 
(1900). 

Where  two  stockholders  make  a  con- 
tract by  which  the  stock  is  placed  in 
the  name  of  one  of  them  to  be  held  in 
trust  and  voted  by  him  as  they  agree, 
and  in  case  of  disagreement  an  arbi- 
trator is  to  decide,  and  the  stock  is  not  to 
be  sold  until  they  agree  to  sell,  the  one  so 
placing  stock  in  the  name  of  the  othet 
as  trustee  cannot  sue  tiie  latter  for  re- 
fusal to  deliver  to  the  former  his  part 
of  the  stock.  Louisville  Trust  Co.  v. 
Stockton,  75  Fed.  Rep.  62  (1896).  Where 
stock  is  transferred  to  a  trustee  to  sell 
with  the  stock  of  other  persons,  the 
trustee's  power  of  sale  is  not  revoked 


1368 


€H.  XXXVII.]  ELECTIONS  —  CORPORATE    MEETINGS. 


[§  622/ 


of  the  stock  of  a  corporation.     There  are  a  few  decisions  to  the 
contrary.^ 

The  above  decisions  seem  to  lead  to  the  conclusion  that  a  deposit 
of  certificates  of  stock  with  trustees  for  a  specified  period  of  time, 


by  the  death  of  the  transferrer.    Hiller 
V.  Ladd,  80  Fed.  Rep.  794  (1897). 

A  contract  to  combine  to  control  the 
majority  of  the  stock  of  a  railroad 
company  may  be  violated  by  a  party  to 
it,  although  by  its  terms  it  is  irrevo- 
cable. Clarke  v.  Central  R,  R.  etc.,  50 
Fed.  Rep,  338  (1892).  In  this  case, 
however,  on  the  final  hearing,  the  bill 
•was  dismissed.  See  62  Fed.  Rep.  328 
(1894).  Where  stock  is  placed  in  a 
trustee's  hands,  and  a  trustee's  certifi- 
cate is  taken  therefor,  a  pledge  of  the 
trustee's  certificate  is  not  a  pledge  of 
the  stock  sufficient  to  cut  off  subse- 
quent attachments  of  the  stock.  Bid- 
strup  V.  Thompson,  45  Fed.  Rep.  452(1891). 
A   "trust"  of  stock  was  involved   in 

■  Farmers'  Loan,  etc.  Co.  v.  Chicago,  etc. 
Ry.,  27  Fed.  Rep.  146  (1886),  where  Hugh 
J.  Jewett,  president  of  the  Erie  Railway, 
held  as  trustee  the  stock  of  the  Chicago 
&  Atlantic  Railroad,  the  western  con- 
nection of  the  former  company.  The 
court  did  not  pass  on  the  permanency 
of  the  trust. 

Where  a  depository  of  stock  to  vote 
the  same  for  five  years  agrees  to  return 

•  the  stock  at  the  end  of  that  time,  or  an 
equal  amount  of  stock,  together  with 
dividends,  any  future  assessments  on 
the  stock  to  be  paid  by  the  person  mak- 
ing the  deposit,  and,  if  not  paid,  then  the 
depository,  in  case  he  pays  the  assess- 
ment, to  be  entitled  to  repayment  from 
the  dividends,  with  interest,  and  the 
assessments  are  not  paid  and  the  stock 
is  sold,  and  at  the  end  of  five  years  the 
depository  tenders  back  other  stock 
with  assessments  paid,  the  depository  is 
entitled  to  repayment  of  such  assess- 
ments.. Moore  .  Bank  of  British 
Columbia,  106  Fed.  Rep.  574  (1901).  A 
syndicate  operation  was  involved  in 
Hogg  V.  Hoag,  107  Fed.  Rep.  807  (1901), 
where  certain  stocks  and  property  were 


transferred  to  a  trustee,  who  issued 
certificates  therefor  to  the  members  of 
the  syndicate.  A  part  of  the  subscribers 
did  not  pay,  and  the  vendor  of  the  prop- 
erty took  the  trustee's  certificates  of 
such  non-paying  subscribers,  and  on  the 
death  of  the  trustee  a  bill  was  filed  to 
have  the  court  substitute  a  new  trustee 
and  one  of  the  subscribers  filed  a  cross- 
bill for  an  accounting.  The  court  de- 
creed a  winding  up  of  the  syndicate 
and  appointed  a  receiver.  The  court 
held  that  a  partial  payment  made  to 
the  vendor  of  the  stocks  was  legal, 
even  though  all  the  property  was  not 
conveyed  to  the  trustee,  as  contem- 
plated, and  that  the  vendor's  acceptance 
of  the  certificates  of  non-paying  sub- 
scribers obligated  him  to  pay  therefor, 
although  such  trustee's  certificates  had 
become  worthless,  the  transaction  being 
in  connection  with  the  Oregon  Pacific 
Railroad  Company.  The  court  said  that 
the  syndicate  was  in  substance,  though 
not  technically,  a  joint-stock  company. 
^  An  agreement  between  stockholders 
holding  a  majority  of  the  shares  to  pool 
their  stock  by  transferring  it  to  trus- 
tees, and  authorizing  them  to  vote  all 
such  stock  at  corporate  meetings,  and 
to  pledge  it  as  collateral  for  loans,  is 
void,  as  against  public  policy.  Hence 
the  holder  of  one  of  the  trustee's  cer- 
tificates may  demand  his  stock  and 
may  enjoin  the  trustee  from  voting  his 
stock  or  disposing  of  it.  Harvey  u 
Linville  Imp,  Co.,  118  N.  C.  693  (1896). 
A  vendor  of  stock  may  collect  the  pi-ice 
even  though  the  agreement  contains  a 
provision  for  pooling  the  stock  which 
is  illegal.  Edgerton  v.  Power,  18  Mont 
350  (1896).  A  trust  of  stock  for  the 
benefit  of  both  the  bondholders  and  the 
stockholders  cannot  be  broken  up  by 
one  of  the  stockholders  only.  Shelmer- 
dine  v.  Welsh.  47  Leg.  Int.  26  (Phila. 


1369 


§  622/] 


ELECTIO^rs  —  CORPORATE    MEETINGS. 


[cn.  XXXVII. 


either  with  or  without  a  transfer  of  the  same  to  the  trustees,  is 
leo-al,  and  is  not  in  violation  of  the  usual  statute  against  restraints 
on  the  alienation  of  personal  property; '  and  is  not  opposed  to  pub- 
lic policy  as  a  restraint  upon  trade ;^  and  is  not  an  implied  fraud 
upon  stockholders  who  are  not  allowed  to  participate;  and  is  not 
an  illegal  separation  of  the  voting  power  from  the  ownership  of 
the  stock;  provided  always  that  no  actual  fraud  is  involved  in  the 


Com.  PL  1890).  A  pool  of  stock  does  not 
prevent  a  creditor  of  one  of  the  partici- 
pants causing  to  be  sold  on  execution 
his  debtor's  interest  in  the  stock,  such 
sale  to  be  subject  to  the  pooling  con- 
tract if  it  is  lawful.  Hardin  v.  White, 
etc.  Co.,  26  Wash.  583  (1901).  Where 
one  street  railway  company  takes  a 
lease  of  the  street  railways  of  three 
other  companies  on  an  agreement 
whereby  the  stock  of  the  latter  com- 
panies is  deposited  with  a  trustee,  and 
the  lessee  issues  "stock  trust  certifi- 
cates" therefor,  being  its  obligation  to 
pay  a  fixed  rate  of  interest  per  year, 
with  an  option  on  its  part  to  pay  the 
principal  sum  or  not  at  its  option  at  a 
specified  time,  the  stock  being  security 
therefor,  to  be  sold  by  the  trustee  in 
case  the  principal  and  interest  are  not 
paid,  this  form  of  financing  does  not 
create  a  debt,  and  hence  such  certifi- 
cates are  not  subject  to  taxation  as  a 
bond  and  mortgage,  the  transaction 
being  really  a  guaranteed  dividend  or 
rental.  Commonwealth  v.  Union,  etc. 
Co.,  192  Pa.  St.  507  (1899). 

1  Williams  v.  Montgomery,  148  N.  Y. 
519,  526  (1896),  where  the  court  said  that 
under  the  New  York  statute  the  power 
of  alienation  is  suspended  only  when 
there  are  no  persons  in  being  by  whom 
an  absolute  title  can  be  conveyed,  and 
that  "  the  test  of  alienability  of  real  or 
personal  property  is  that  theie  are  per- 
sons in  being  who  can  give  a  perfect 
title."  and  that  "  where  there  are  living 
parties  who  have  unitedly  the  entire 
right  of  ownership,  the  statute  has  no 
application,"  and  that  inasmuch  as  the 
agreement  of  several  persons  not  to  sell 
for  a  specified  time  may  at  any  time  be 


waived  or  canceled  by  unanimous  con- 
sent, the  statute  does  not  apply.  A  trust 
deed  is  not  void  as  suspending  the  power 
of  alienation,  inasmuch  as  by  payment 
the  mortgage  may  cease,  or  by  agree- 
ment of  all  parties  interested  it  may  be 
canceled.  Balfour-Guthrie,  etc.  Co.  v. 
Woodworth,  124  Cal.  169  (1899).  See  to 
same  effect,  §  812,  infra. 

2  Williams  v.  Montgomery,  148  N.  Y. 
519,  526  (1896),  where  the  agreement  not 
to  sell  for  six  months  was  upheld,  the 
court  saying:  "  Nor  was  the  agreement 
opposed  to  public  policy,  for  a  reason- 
able regulation  as  to  the  mode  of  sell- 
ing the  stock,  so  as  to  prevent  the  sacri- 
fice thereof,  was  not  a  restraint  upon 
trade.  As  an  incident  to  the  contract, 
making  partition  ©f  the  shares,  it  was 
competent  for  the  parties  to  agree  that 
the  stock  donated  to  the  corporation, 
in  which  they  had  a  common  interest, 
should  be  first  offered  for  sale.  This  was 
no  restraint  upon  the  business  freedom 
of  the  parties,  but  a  promotion  of  the 
general  interest,  by  temporarily  with- 
holding from  the  market  shares  owned 
by  individuals  in  order  to  afford  a  rea- 
sonable opportunity  to  sell  shares  indi- 
rectly owned  by  all.  The  protection  of 
the  interests  of  all  concerned,  by  pre- 
venting the  market  from  suddenly  be- 
coming overcrowded  and  ruinously  de- 
pressed, was  a  reasonable,  just,  and 
honest  purpose,  which  the  law  does  not 
condemn.  There  was  no  evil  tendency 
in  the  arrangement,  as  'it  simply  pre- 
vented a  course  of  action  that  would 
have  brought  loss  both  to  the  common 
and  the  personal  interests."  See  also 
cases  on  pp.  1363,  1365,  supra;  alsa 
p.  1061,  note  1,  supra. 


1370 


CH.  XXXYII.] 


ELECTIONS COKPOKATE    MEETINGS. 


[§  622^, 


transaction.  In  other  words,  such  a  pooling  of  stock  is  not  illegal 
in  itself,  but,  like  all  contracts,  may  be  illegal  if  actual  fraud  is  in- 
volved. 

It  remains  to  add  that  while  the  agreement  of  the  holder  of  a 
trustee's  certificate,  like  the  agreement  of  a  holder  of  a  certificate 
of  stock,  not  to  sell  the  same  during  a  specified  time,  is  legal,  just 
as  the  agreement  of  a  partner  in  a  copartnership,  not  to  sell  his 
interest  therein  or  dissolve  the  partnership  for  a  term  of  years,  is 
legal,^  nevertheless  such  contracts  do  not  actually  prevent  a  sale. 
A  sale  made  in  violation  of  such  a  contract  is  upheld  by  the  courts, 
but  the  party  making  such  a  sale  in  violation  of  his  contract  is  lia- 
ble in  damages  to  the  other  parties.- 

§  622(7.  One  corporation  oivning  and  lioMing  the  stock  of  other 
corporations. —  The  latest  method  of  tying  up  the  majority  of  the 
stock  of  a  corporation  and  thereby  securing  control  is  by  organizing 
another  corporation  to  purchase,  own,  hold,  and  vote  the  stock  of 
the  former  corporation.*  This  plan  is  especially  used  where  it  is 
desired  to  unite  the  control  of  two  or  more  competing  railroad  cor- 
porations or  manufacturing  corporations.  Such  was  the  plan 
adopted  in  the  Northern  Securities  Company,  which  acquired  a  ma- 
jority of  the  stock  of  the  Northern  Pacific  Kailroad  Company  and 


» Bagley  v.  Smith,  10  N.  Y.  489  (1853). 
A  contract  to  continue  a  partnership 
for  a  definite  period  of  time  is  valid. 
Greenhood  on  Public  Policy,  p.  503. 

2  Dart  V.  Laimbeer,  107 N.  Y.  669  (1887); 
Bagley  v.  Smith,  10  N.  Y.  489  (1853); 
Skinner  v.  Dayton,  19  John.  513,  537 
(1822),  where  the  court  said:  "Even 
where  partners  covenant  with  each 
other  that  the  partnership  shall  continue 
seven  years,  either  partner  may  dissolve 
it  the  next  day  by  proclaiming  his  de- 
termination for  that  purpose;  the  only 
consequence  being  that  he  thereby  sub- 
jects himself  to  a  claim  for  damages 
for  a  breach  of  his  covenant."  Mar- 
quand  v.  New  York,  etc.  Co.,  17  John. 
511,  529  (1819),  where  the  court,  in  an- 
swer to  the  argument  that  a  sale  by  a 
partner  in  violation  of  the  partnership 
agreement  should  be  declared  void,  said : 
"According  to  the  doctrine  on  the  part 
of  the  appellants  a  party  may  lock  up 
his  capital  in  a  mercantile  house  by 
such  an  agreement  as  the  one  in  this 
case,  and  it  must  remain  untouched, 


without  the  consent  of  his  copartners, 
during  his  life.  If  the  creditors  take  it 
by  assignment  they  must  become  part- 
ners in  the  firm,  and  can  only  touch 
the  yearly  profits,  and  must  be  liable  to 
the  yearly  losses,  and  for  all  the  engage- 
ments of  the  firm.  This  doctrine  ap- 
pears to  me  to  be  too  unreasonable,  and 
too  inconvenient,  to  be  endured."  See 
also  Bishop  v.  Breckles,  Hoffman,  Ch. 
534  (1840);  3  Kent,  Com.  58;  Parsons 
on  Partnership  (4th  ed.),  sees.  280,  309, 
note;  Am.  &  Eng.  Ency.  of  Law,  voL 
XVII,  pp.  1099,  1100. 

3  An  agreement  of  various  stockhold- 
ers in  several  street  railway  companies 
to  form  a  new  corporation  and  transfer 
their  interest  thereto  and  divide  the 
new  stock  in  a  certain  proportion  does 
not  constitute  such  a  partnership  as  to 
entitle  one  to  sue  the  others  for  an  ac- 
counting of  profits  where  the  others 
had  formed  such  a  corporation  with 
other  parties,  leaving  out  the  first- 
named  party.  Schantz  v.  Oakman,  163 
N.  Y.  148  (1900). 


1371 


§  623.]  ELECTIONS CORPOKATE    MEETINGS.  [CH.  XXXVII. 

the  Great  ISTorthern  Eailroad  Company.  Such  also  was  the  plan  of 
the  United  States  Steel  Corporation,  which  acquired  the  control  of 
a  large  number  of  competing  steel  manufacturing  corporations. 
Ordinarily  one  corporation  has  no  charter  power  to  purchase  the 
stock  of  another  corporation,*  but  the  statutes  of  most  of  the  states 
now  allow  incorporation  for  any  legal  purpose,  and  hence  it  is 
possible  to  organize  a  corporation  for  the  purpose  of  owning  and 
holding  the  stock  of  other  corporations.  The  advantage  of  this 
plan  is  that  the  absolute  title  to  the  stock  passes,  whereas,  in  a 
pooling  or  trustee  agreement,  the  stock  is  to  be  returned  to  the  par- 
ticipating parties,  and  there  is  always  danger  that  one  or  more  of 
the  participating  parties  may  at  any  time  bring  suit  to  recover 
back  such  stock.  The  objection  to  the  plan,  however,  is  that  it 
enables  the  directors  of  the  stockholding  corporation  to  sell  the 
stock  at  any  time,  and  it  involves  not  merely  temporary  pooling  of 
the  stock,  but  the  permanent  parting  with  the  title.  Another 
objection  is  that  the  stockholding  corporation  itself  is  liable  to  be 
attacked  by  the  state,  on  the  ground  that  it  is  an  illegal  combina- 
tion of  competitors,  in  restraint  of  trade,  and  in  violation  of  statutes 
prohibiting  such  combinations.  Such  was  the  result  of  the  forma- 
tion of  the  Northern  Securities  Company.^ 

§  623.  Wlio  may  .he  a  director  or  corporate  officer —  Qualification 
shares. —  If  the  charter  or  statutes  require  a  director  to  be  a  stock- 
holder, one  who  holds  stock  transferred  to  him  in  trust  for  the  ex- 
press purpose  of  qualifying  him  for  the  position  may  serve.^     And 

1  See  §§314-316,  supra.  purpose  of  qualifying  him.    Ee  Leslie, 

2  See  §317,  swpra.  58  N.  J.  L.  609  (1896).     In  a  stockhold- 

3  Budd  V.  Munroe,  18  Hun,  316  (1879).  er's  suit  to  enjoin  the  corporation  from 
Contra,  Bartholomew  v.  Bentley,  1  entering  into  a  consolidation,  he  can- 
Ohio  St.  37  (1853).  Where  an  agent  of  not  question  the  right  of  the  directors 
a  corporation  purchases  with  corporate  to  hold  ofBce  on  the  ground  that  the 
funds,  without  authority,  stock  in  an-  qualification  shares  did  not  really  be- 
other  company,  and  sells  one  of  the  long  to  them.  Langan  v.  Francklyn, 
shares  to  a  person  in  order  to  enable  20  N.  Y.  Supp.  404  (1893).  Stock  may 
the  latter  to  qualify  as  a  director  in  be  given  to  a  person  to  qualify  him  as 
such  company,  the  person  receiving  the  a  director.  Louisville,  etc.  Co.  v.  Kauf- 
one  share  is  protected  in  his  title,  and  man,  105  Ky.  131  (1898).  Where  four 
the  first-named  corporation  cannot  shares  of  stock  are  transferred  to  a  per- 
compel  him  to  give  it  up,  even  though  son  by  the  corporation  to  qualify  him 
the  agent  had  no  power  to  sell,  the  pur-  as  a  director,  and  he  agrees  to  return 
chaser  having  purchased  in  good  faith,  the  same  to  the  corporation  when  ceas- 
Hence,  his  acts  as  a  director  are  valid,  ing  to  be  a  director,  but  thereafter,  and 
Scarlett  v.  Ward,  52  N.  J.  Eq.  197  (1893>  befcre  he  ceases  to  be  a  director,  he 
Although  the  statute  requires  a  di-  agrees  with  the  indorsers  of  his  note 
rector  to  be  a  stockholder,  it  is  no  ob-  that  they  shall  have  the  stock  as  col- 
jection  that  a  qualification  share  was  lateral  security,  they  are  protected, 
put  in  a  director's  name  merely  for  the  even  though  the  stock  was  actually  de- 

1372 


CH.  XXXVII.] 


ELECTIONS 


CORPORATE    MEETINGS. 


[§  623. 


where  a  person  has  the  right  to  vote  on  stock  as  a  stockholder,  he 
is  eligible  to  any  corporate  oiEce  to  which  any  stockholder  is  eli- 
gible, and  accordingly  may  be  elected  a  director,  even  though  an 
assignee  in  bankruptcy  has  been  appointed  of  his  estate.'  He  may 
obtain  stock  in  any  way  and  become  thereby  qualified.^  Although 
the  charter  requires  the  directors  to  be  stockholders,  it  has  been 
held  that  the  transferee  and  holder  of  a  certificate  of  stock  is  quali- 
fied, even  though  the  stock  itself  stands  on  the  books  of  the  com- 
pany in  the  name  of  his  transferrer.^  In  general,  any  one  who 
may  be  an  agent  may  be  elected  a  director  of  a  private  corporation; 
and  at  common  law  it  is  not  necessary  that  a  director  be  a  stock- 
holder.^    A  director  need  not  be  a  citizen  of  the  state  bv  which  the 


livered  to  them  after  they  had  notice 
of  the  first  agreement,  it  being  shown, 
however,  that  they  had  no  notice  of 
such  agreement  at  the  time  they  be- 
came sureties.  Dueber,  etc.  Co.  v. 
Daugherty.  62  Ohio  St.  589  (1900). 
'  State  V.  Ferris,  43  Conn.  560  (1S75). 

2  A  stockholder  may  have  purchased 
stock  with  a  view  of  becoming  a  di- 
rector, or  have  obtained  it  by  gift,  or 
he  may  hold  it  upon  a  trust,  and  be 
qualified  to  be  a  director.  He  is  quali- 
fied unless  the  "title  was  put  in  him 
colorably,  with  a  view  to  qualify  him 
to  be  a  director  for  some  dishonest  pur- 
pose, in  furtherance  of  some  fi'audulent 
scheme  touching  the  organization  or 
control  of  the  company,  or  to  carry 
into  effect  some  fraudulent  arrange- 
ment with  the  company."  Re  St.  Law- 
rence Steamboat  Co.,  44  N.  J.  L.  529 
(1882).  A  person  is  qualified  who  buys 
stock  in  liis  own  name  with  his  wife's 
money  and  transfers  the  certificate  to 
her,  but  afterwards,  and  before  regis- 
try, keeps  the  stock  for  himself.  Re 
St.  Lawrence  Steamboat  Co.,  44  N.  J. 
L.  529  (1882).  If  the  director  has  suffi- 
cient stock  registered  in  his  name,  it  is 
immaterial  that  he  does  not  own  it. 
Pulbrook  V.  Richmond,  etc.  Co.,  L.  R.  9 
Ch.  D.  610  (1878);  Bainbridge  v.  Smith, 
41  Ch.  D.  462  (1889). 

3  State  V.  Smith,  15  Oreg.  98  (1887). 
The  corporate  books  are  not  conclusive 
as  to  the  qualification  of  a  person  to  act 
as  a  director.    If  he  owns  stock  he  is 


qualified,  even  though  he  does  not  ap- 
pear as  a  stockholder  on  the  corporate 
books,  and  vice  versa.  The  inspector* 
cannot  reject  votes  on  the  ground  that 
the  candidate  is  not  qualified.  Re  St. 
Lawrence  Steamboat  Co.,  44  N.  J.  L. 
529  (1882).  Under  the  statutes  of  North 
Dakota  an  unregistered  holder  of  stock 
is  not  qualified  to  be  elected  a  director. 
Re  Argus  Printing  Co.,  1  N.  D,  434 
(1891). 

4  State  V.  McDaniel,  22  Ohio  St.  354, 
367  (1872);  McDowall  v.  Sheehan,  129 
N.  Y.  210  (1891);  Wight  v.  Springfield, 
etc.  R.  R.,  117  Mass.  226  (1875);  Re  St. 
Lawrence  Steamboat  Co.,  44  N.  J.  L. 
529  (1882);  Hoyt  v.  Bridgewater,  etc.  Co., 
6  N.  J.  Eq.  253,  274  (1847);  Bristol,  etc. 
Trust  Co.  v.  Jonesboro,  etc.  Trust  Co., 
101  Tenn.  545  (1898);  Ex  parte  Stock,  33 
L.  J.  (Ch.)  731  (1864);  Bartholomew  v. 
Bentley,  1  Ohio  St.  37  (1852);  People  v. 
Northern  R.  R.,  42  N.  Y.  217  (1870); 
Cammeyer  v.  United,  etc.  Churches,  2 
Sandf.  Ch.  186.  249  (1844);  Hurrell  & 
Hyde  on  Directors  and  Officers,  2;  State 
v.  Swearingen,  12  Ga.  23  (1852)  — a 
municipal  corporation  case.  The  charter 
or  by-laws  may,  however,  provide  other- 
wise. Despatch  Line  v.  Bellamy  Mfg. 
Co.,  12  N.  H.  205  (1841).  See  also  Cum- 
ming  V.  Prescott,  2  Younge  &  C. 
(Exch.)  488  (1837).  It  is  not  necessary 
that  the  directors  should  be  either  sub- 
scribers to  the  stock  or  corporators. 
Densmore  Oil  Co.  v.  Densmore,  54  Pa. 
St.  43  (1877);  Re  British  Provident,  etc. 


1373 


§  623.] 


ELECTIONS  —  CORPORATE    MEETINGS. 


[CH.  XXXVII. 


<;orporation  is  created.^  The  constitutionality  of  a  statute  which 
prohibits  the  citizens  of  other  states  from  being  directors  in  a  cor- 
poration may  well  be  doubted.^ 

An  alien  may  be  a  stockholder  and  director  in  a  corporation  if 
the  statutes  do  not  prohibit  it.'  A  married  woman  is  not  at  common 
law  qualified  to  act  as  an  incorporator  nor  as  treasurer,*  but  under 
the  usual  statutes  conferring  rights  upon  her  she  is  qualified  to  act 
as  a  director  or  officer.^  An  executor  ma}''  be  a  director.^  A  trus- 
tee is  qualified  to  act  as  a  director,  even  though  the  charter  required 
each  director  to  hold  stock  "  in  his  own  right,"  but  where  a  director's 
trustee  in  bankruptc}'  claims  the  stock  the  director  is  no  longer 
•qualified.^ 

Votes  cast  for  a  person  not  eligible  to  the  office  cannot  elect  him. 
He  is  not  even  a  de  facto  director,  and  he  may  be  ousted  by  legal 
proceedings.^     Such  votes,  however,  are  not  to  be  ignored  so  as  to 


Assoc,  L.  R  5  Ch.  D.  306  (1877).  It  has 
been  doubted  whether  the  by-laws  of  a 
company  may  require  directors  to  be 
stockholders.  People  v.  Albany,  etc. 
R  R,  55  Barb.  344,  373  (1869).  Cf.  Cross 
V.  West  Virginia,  etc.  Ry.,  37  W.  Va.  342 
(1892). 

iKerchner  v.  Gettys,  18  S.  C.  521 
(1882).  A  citizen  of  one  state  may  be  a 
stockholder  and  director  in  a  corpora- 
tion incorporated  in  another  stata 
Commonwealth  v.  Detwiller,  131  Pa.  St. 
614  ( 1890).  Directors  of  a  national  bank 
*•  are  not  required  to  reside  at  the  bank's 
place  of  business."  Robinson  v.  Hall, 
59  Fed.  Rep.  648  (1894).  The  directors 
of  a  corporation  need  not  be  residents 
of  the  state  unless  the  statutes  ex- 
pressly require  it.  North,  etc.  Rolling- 
stock  Co,  V.  People,  147  III  234  (1893). 

2  See  §  813,  infra,  to  the  eflfect  that 
such  a  statute  as  regards  trustees  in  a 
mortgage  deed  of  trust  is  unconstitu- 
tional and  void.  A  constitutional  pro- 
vision requiring  directors  to  be  stock- 
holders does  not  apply  to  a  consolidated 
railroad  company  existing  as  one  cor- 
poration in  two  states.  Ohio,  eta  Ry. 
V.  People,  123  111.  467  (1888). 

3  Commonwealth  v,  Hemmingway, 
131  Pa.  St.  614  (1890). 

4  9  Ry.  &  Corp.  L.  J.  197. 


*  People  V.  Webster,  10  Wend.  554 
(1833). 

6  Re  Santa  Eulalia  S.  Min.  Co.,  4  N.  Y. 
Supp.  174  (1889).  An  executor  may  be 
a  director  even  though  the  stock  does 
not  stand  in  his  name.  Schmidt  v, 
Mitchell,  101  Ky.  570  (1897);  Re  Santa 
Clara,  etc.  Co.,  N.  Y.  Daily  Reg.,  June 
19.  1888. 

7  Sutton  V.  English,  etc.  Co.,  87  L.  T. 
Rep.  438  (1902). 

8  The  election  of  a  person  not  qualified 
does  not  make  him  even  a  de  facto  di- 
rector. Re  Newcomb,  18  N.  Y.  Supp.  16 
(1891);  Hamley's  Case,  L.  R  5  Ch.  D.  705 
(1877);  Jenner's  Case,  L.  R  7  Ch.  D.  132 
(1877).  A  director  who  is  not  a  stock- 
holder cannot  complain  that  a  meeting 
of  the  directors  was  held  without  no- 
tice to  him.  Anderson,  etc.  Co.  v.  Pungs, 
127  Mich.  543  (1901).  In  a  stockholder's 
suit  in  behalf  of  the  corporation,  a  re- 
quest to  the  legal  board  of  directors  to 
bring  the  suit  is  necessary,  even  though 
it  is  alleged  that  a  majority  of  the  di 
rectors  are  involved  in  the  fraud  com 
plained  of,  where  it  appears  that  suet 
directors  were  not  qualified  to  act  a? 
directors  by  reason  of  not  being  stock 
holders,  and  never  had  acted  as  such 
Loomis  V.  Missouri,  etc.  Ry.,  165  Mo.  46S 
(1901).   Where  a  director  was  not  quali- 


1374 


CH.  XXXVII.] 


ELECTIONS COKPOKATE    MEETINGS. 


[§  623. 


elect  a  candidate  who  receives  a  minority  of  all  the  votes  cast.^ 
The  election  is  good  as  to  those  who  were  eligible.^  Although  the 
statutes  require  a  director  to  be  a  stockholder,  yet  a  person  not  a 
stockholder  may  be  elected,  and  may  then  acquire  one  or  more 
shares  of  stock  before  acting  as  director.     This  satisfies  the  law.^ 


fied  and  a  new  director  has  been  elected 
in  his  place,  he  cannot  have  mandamus 
to  allow  him  to  inspect  the  company's 
books  and  exercise  other  rights  of  a  di- 
rector, even  though  for  a  time  he  was 
permitted  to  act  as  director.  People  v. 
N.  Y.  etc.  Co.,  34  N.  Y.  Misc.  Rep.  326 
(1901).  Where  cumulative  voting  pre- 
vails, and  the  statutes  require  three  di- 
rectors to  be  residents,  and  all  votes 
cast  are  cumulated  on  non-residents 
excepting  thirty-two  which  are  cast  for 
three  residents,  the  three  residents  are 
elected,  and  the  remaining  directors 
are  those  of  the  non-residents  who  re- 
ceived the  highest  number  of  votes. 
Horton  v.  Wilder,  48  Kan*  223  (1892). 
Where  directors  must  be  stockholders 
qualified  to  vote,  a  stockholder  not 
qualified  to  vote  by  reason  of  not  own- 
ing his  stock  for  thirty  days  before  the 
election  is  not  qualified  to  be  a  director. 
His  election  does  not  make  him  even  a 
de  facto  director.  Re  Newcomb,  18  N.  Y. 
Supp.  16  (1891).  Where  an  election  is 
"  conceived  in  fraud  and  conducted  con- 
trary to  law,"  the  call  being  insufficient, 
the  notice  concealed,  the  instigators 
having  sold  and  transferred  their  cer- 
tificates of  stock,  the  purpose  of  the 
election  being  to  steal  the  control  from 
one  who  really  owned  all  the  stock,  and 
two  of  the  alleged  new  directors  not 
being  stockholders  as  required  by  law, 
there  are  no  directors  de  facto,  even 
though  they  take  possession  and  drive 
away  the  contractor  who  is  building 
the  road.  Johnston  v.  Jones,  23  N.  J.  Eq. 
216  (1872).  In  Barber's  Case.  L.  R  5 
Ch.  D.  963  (1877),  arising  under  similar 
facts,  the  court  said:  "Mr.  Barber  was 
not  qualified  to  be  elected  a  director,  and 
his  election  was  absolutely  null  and  void, 
.  .  .  If  he  had  acted  as  a  director, 
there  might  have  been  an  estoppel." 

13^ 


The  board  of  directors  cannot,  even 
under  a  by-law  authorizing  them  to  fill 
vacancies,  oust  a  director  on  the  ground 
that  he  was  ineligible  when  elected, 
and  then  proceed  to  fill  his  place. 
Commonwealth  v.  Detwiller,  131  Pa.  St. 
614  (1890).  A  director  who  is  not  a 
stockholder  cannot  sign  a  statutory  no- 
tice of  a  meeting  to  increase  the  capital 
stock.  Re  Wheeler,  2  Abb.  Pr.  (N.  S.) 
361  (1866).  It  formerly  was  held  in 
England  that  the  election  of  one  not  a 
shareholder  as  a  director  in  a  corpora- 
tion in  which  it  is  required  that  the  di- 
rectors be  owners  of  a  certain  amount 
of  stock  is  valid:  and  such  a  person, 
upon  acceptance  of  the  directorship,  is 
bound  to  take  and  pay  for  the  required 
number  of  shares.  But  the  later  de- 
cisions iave  established  the  rule  that 
by  accepting  the  directorship  he  does 
not  thereby  become  liable  as  a  sub- 
scriber for  stock  to  the  amount  of  quali- 
fication shares.  See  §  52,  supra.  The 
election  of  a  disqualified  person  as  di- 
rector is  voidable,  not  void.  People  v. 
Albany,  etc.  R.  R,  55  Barb.  344,  873 
(1869). 

1  See  §  620,  supra. 

2  Schmidt  v.  Mitchell,  101  Ky.  570 
(18971. 

3  Greenough  v.  Alabama,  etc.  R.  R., 
64  Fed.  Rep.  22  (1894).  Where  directors 
must  be  stockholders,  a  person  elected 
director  without  his  knowledge  and 
owning  no  stock,  and  who  never  acted 
as  a  director  for  ten  years,  is  not 
a  director,  even  though  a  share  of 
stock  was  given  to  him  shortly  after 
his  election  and  he  took  the  same. 
Hence  he  may  purchase  corporation 
property  at  a  judicial  sale.  Rozecrans 
Gold  Min.  Ca  v.  Morey,  111  CaL  114 
(1896). 


§  623.] 


ELECTIONS CORPORATE    MEETINGS.  [CH.  XXXVII. 


A  statute  requiring  directors  to  be  stockholders  does  not  apply  to 
directors  named  in  the  certificate  of  incorporation  for  the  first  year.^ 

Where  a  person  not  eligible  to  the  office  is  declared  elected,  and 
no  stockholder  objects  or  takes  legal  proceedings  to  test  the  right 
to  the  office,  and  such  person  is  allowed  to  perform  the  duties  of 
his  office,  he  becomes  an  officer  de facto.  As  such  his  acts  cannot 
be  objected  to  on  the  ground  that  he  was  not  a  legally-elected  di- 
rector. Neither  corporate  creditors,  nor  the  corporation,  nor  the 
stockholders,  nor  the  director  himself,  are  allowed  to  raise  this  ob- 
jection in  that  manner.  The  remedy  is  to  oust  him  by  quo  war- 
ranto or  to  enjoin  him  as  a  usurper.  But  after  he  is  allowed  to 
become  a  de  facto  director,  his  title  to  office  cannot  be  attacked 
collaterally,  nor  can  his  acts  be  repudiated  on  that  ground.^  A 
director,  as  a  de  facto  director,  may  bind  the  company  by  his  acts,  if 
allowed  to  continue  in  his  position.' 

Where  the  charter  -requires  the  directors  to  be  stockholders,  a 
director  must  continue  to  hold  stock  during  his  term  of  office.  If 
he  sells  all  his  stock  in  the  company,  he  thereby  becomes  disquali- 
fied and  ceases,  ipsofacto^  to  be  a  director.^     The  provision  in  the 

1  Hamilton  T.  Co.  v.  Clemes,  163  N.  Y.     facto  to  be  a  director,  and  is  no  longer 


423  (1900);  Camden,  etc.  Co.  v.  Burling- 
ton, etc.  Co.,  33  Atl.  Rep.  479  (N.  J. 
1895);  McDowall  v.  Sheehan,  129  N,  Y. 
200  (1891);  Portal  v.  Emmons,  L.  R.  1  C. 
P.  D.  664,  667  (1876).  The  New  York 
statute  that  only  one  incorporator  need 
be  a  resident  repeals  by  implication  the 
prior  statute  that  two  directors  for  the 
first  year  must  be  residents.  People  v. 
McDonough,  28  Misc.  Rep.  652  (1899). 

2  See  §  713,  infra. 

3  A  director  who  sells  his  stock  ceases 
to  be  a  de  jure  director.  If  he  con- 
tinues and  is  permitted  to  act  he  is  a 
director  de  facto.  Beardsley  v.  John- 
son, 121  N.  Y.  224  (1890). 

4  Where  the  statutes  require  the  di- 
rector to  be  a  stockholder,  it  follows 
"  that  as  soon  as  a  director  parts  with 
all  beneficial  interest  in,  and  control 
over,  the  stock  which  he  is  required  to 
hold,  and  causes  the  officers  of  the  cor- 
poration to  have  knowledge  of  such 
fact  by  a  request  that  a  proper  transfer 
be  made  on  the  books  of  the  company, 
he  no  longer  possesses  the  qualifica- 
tions which  the  statute  declares  to  be 
essential,"  and   hence  he  ceases   ipso 


liable  on  a  director's  statutory  liability. 
"The  statute  executing  itself  operated 
to  divest  him  of  title  to  the  ofiica" 
Chemical  Nat.  Bank  v.  Colwell,  133 
N.  Y.  250  (1892).  Notes  issued  by  di- 
rectors who  are  disqualified  by  having 
sold  their  stock  and  as  a  scheme  to 
create  a  liability  on  the  part  of  the 
stockholders  are  not  good,  especially 
where  the  meeting  of  the  directors  was 
not  properly  called.  Close  v.  Potter, 
155  N.  Y.  145  (1898).  Where  a  director 
must  be  a  stockholder,  and  there  is  a 
statutory  liability  attached  to  the  di- 
rectorship, the  director  may  transfer 
his  stock  in  order  to  cease  to  be  a  di-  < 
rector  and  in  order  to  avoid  such  lia- 
bility. Sinclair  v.  Fuller,  158  N.  Y.  607 
(1899).  Cf  Nathan  v.  Tompkins,  82  Ala. 
437  (1887),  holding  that  he  may  be  re- 
moved, but  does  not  cease  to  be  a  di- 
rector by  the  mere  act  of  selling  his 
stock.  To  same  effect,  Atlas  Nat.  Bank 
V.  F.  B.  Gardner  Co.,  8  Biss.  537  (1879); 
s.  c,  2  Fed.  Cas.  186.  Although  the 
statute  requires  three  directors,  who 
shall  be  stockholders,  and  one  assigns 
his  stock,  and  the  other  two  authorize 


1376 


CH.  XXXVII.]  ELECTIONS COKPOKATE   MEETINGS. 


[§  624. 


IS'ew  York  statutes  that  "  if  a  director  should  cease  to  be  a  stock- 
holder his  office  shall  become  vacant "  is  self-executing.'  Where 
the  charter  requires  directors  to  be  stockholders,  and  three  of  the 
seven  are  clerks,  to  each  of  whom  one  share  of  stock  is  transferred, 
and  the  certificate  therefor  is  at  once  retransferred  to  the  real  par- 
ties in  interest,  this  is  good  ground  for  a  forfeiture  of  the  charter.^ 
The  director  does  not  become  disqualified  by  reason  of  his  pledg- 
ing his  stock.'  The  secretary,  treasurer,  or  other  officer  of  a  corpo- 
ration need  not  be  a  stockholder  or  resident  or  citizen  unless  the 
statute  requires  it.*  "  It  is  not  uncommon  for  a  single  individual  to 
hold  several  offices  in  a  corporation."  ^ 

A  corporation  may  pass  a  by-law  prescribing  the  qualifications  of 
its  directors,  and  may  prescribe  that  a  person  who  is  an  attorney 
against  it  in  a  suit  shall  not  be  a  director.^ 

§  624.  Acceptance  and  resignation  of  office  and  failure  to  elect 
officers  —  Removal  of  directors. —  An  acceptance  of  the  office  by 


and  execute  a  corporate  mortgage  at  a    office  may  bind  the  corporation  by  his 


meeting  held  without  notice  to  the 
other,  yet  the  mortgagee,  having  no 
knowledge  of  these  facts,  is  protected. 
Kuser  v.  Wright,  53  N.  J.  Eq.  825  (1895), 
rev'g  Wright  v.  First  Nat.  Bank,  53  N. 
J.  Eq.  393.  Where  a  director  sells  and 
delivers  all  his  stock,  he  ceases  to  be 
an  officer  dejure,  the  statute  requiring 
him  to  be  a  stockholder;  and  where  the 
whole  board  of  directors  have  sold 
their  stock,  their  acts  as  a  board  of  di- 
rectors are  not  binding  on  the  corpora- 
tion. Orr,  etc.  Co.  v.  Reno  Water  Co., 
17  Nev.  166  (1883).  "Can  a  director 
part  with  his  qualification  shares  ? " 
See  on  this  subject,  8  Ry.  &  Corp.  L.  J. 
99.  A  person  may  purchase  stock  al- 
though such  stock  constitute  the  quali- 
fication shares  of  the  vendor  as  a  di- 
rector. Kern  v.  Day,  45  La.  Ann.  71 
(1893).  A  motion  declaring  the  office 
vacant  and  electing  another  person  be- 
fore the  director  has  really  sold  his 
stock  is  void.  Craw  v.  Easterly,  54  N.  Y. 
379  (1873). 

1  Sinclair  V.  Fuller,  158  N.  Y.  607  (1899). 
A  statute  that,  upon  an  officer  in  a  bank 
borrowing  money  of  the  bank  without 
security,  his  office  shall  become  vacant 
and  he  shall  cease  to  become  a  director, 
is  self-executing.     His  continuance  m 


acts,  but  does  not  prevent  a  creditor 
attacking  an  assignment  for  creditors 
made  by  him  in  behalf  of  the  bank. 
Cupit  V.  Park  City  Bank,  20  Utah,  393 
(1899). 

2Lorillard  v.  Clyde,  142  N.  Y.  456 
(1894). 

3  Cummings  v.  Prescott.  2  Y.  &  C. 
Exch.  488  (1837).  This  was  held  in  a 
case  where  the  qualification  shares 
were  to  be  held  by  the  directors  in 
their  own  right.  Pulbrook  v.  Richmond, 
etc.  Mining  Co.,  L,  R.  9  Ch.  D.  610 
(1878).  The  court,  in  Ex  parte  Little- 
dale,  24  L.  J.  (Bankr.)  N.  S.  9  (1855),  as- 
sumed that  a  director  became  disquali- 
fied where  he  had  pledged  his  stock, 
even  though  the  transfer  was  not  re- 
corded. 

4Kerchner  v.  Gettys,  18  S.  C.  521 
(1882);  McCall  v.  Byram  Mfg.  Co.,  6 
Conn.  428  (1827).  But  in  Matthews  v. 
Trustees,  3  Brewst.  (Pa.)  541  (1869),  the 
court  enjoined  the  company  from  com- 
pelling its  resident  treasurer  to  turn 
over  funds  to  a  newly  elected  non-resi- 
dent treasurer. 

5  Manhattan  Co.  v.  Kaldenberg,  165 
N.  Y.  1  (1900). 

<>  Cross  V.  West  Virginia,  etc  Ry.,  37 
W.  Va.  343  (1893). 


(87) 


1377 


§  624.] 


ELECTIONS CORPORATE   MEETINGS.  [OH.  XXXVIL 


one  who  is  elected  director  is  necessary  to  constitute  him  a  director. 
Some  direct  and  positive  act  of  acceptance  is  necessary.^ 

A  director  may  resign,  and  no  formal  acceptance  or  entry  thereof 
on  the  minute-book  of  the  corporation  is  necessary  to  complete  the 
resignation.^     Even  though  an  officer  resigns  for  the  purpose  of 


1  Osborne,  etc.  Co.  v.  Croome,  14  Hun, 
164  (1878);  aff'd,  77  N.  Y.  629;  Cameron 
V.  Seaman,  69  N.  Y.  396  (1877);  Roze- 
crans,  etc.  Co.  v.  Morey,  111  Cal.  114 
(1896).  An  "honorary  director,"  who 
sits  with  the  board,  makes  up  a  quorum 
and  accepts  pay,  is  subject  to  the  disa- 
bilities and  liabilities  of  a  director  as 
to  being  interested  in  contracts  with 
the  company.  There  is  no  such  thing 
in  law  as  an  "  honorary  director."  Ex 
parte  Stears,  Johns.  V.-C.  480  (1859).  It 
is  a  question  for  the  jury  whether  a 
person  accepted  a  directorship.  The 
mere  fact  that  as  an  adviser  he  met 
with  the  dii'ectors  and  made  motions  is 
Bot  conclusive  if  he  declined  to  accept. 
Blake  v.  Bayley,  83  Mass.  531  (1860). 
Acceptance  is  presumed.  Lockwood  v. 
Mechanics,'  etc.  Bank,  9  R.  I.  308  (1869). 
But  may  be  disproved,  even  though  the 
person  attended  directors'  meetings. 
Blake  v.  Bayley,  82  Mass.  531  (1860). 
The  fact  that  a  director  does  not  attend 
meetings  or  signify  his  acceptance  of 
the  office  does  not  justify  the  board  in 
declaring  his  office  vacant.  Acceptance 
is  presumed.  Halpin  v.  Mutual,  etc. 
Co.,  20  N.  Y.  App.  Div.  583  (1897).  No- 
tice of  a  directors'  meeting  need  not  be 
given  to  a  director  who  has  never  ac- 
cepted the  office.  United  Growers'  Co. 
V.  Eisner.  22  N.  Y.  App.  Div.  1  (1897). 
Directorship  is  not  proved  by  an  annual 
report  signed  and  sworn  to  by  the  presi- 
dent. Bank,  etc.  v.  Faber,  38  N.  Y.  App. 
Div.  159  (1899).  A  director  who  acts  as 
such  cannot  defend  against  his  statu- 
tory liability  on  the  ground  that  he 
was  irregularly  elected.  Union,  etc. 
Bank  v.  Scott,  53  N.  Y.  App.  Div.  65 
(1900). 

^Movius  V.  Lee,  30  Fed.  Rep.  298 
(1887);  Smith  v.  Danzig,  64  How.  Pr.  320 
(1883);  Chandler  v.    Hoag,  2  Hun,  613 

13 


(1874):  aff'd,  63  N.  Y.  624;  Blake  v. 
Wheeler,  18  Hun.  496  (1879);  aff'd,  80 
N.  Y.  128.  A  resignation  to  take  effect 
on  the  termination  of  the  term  for 
which  a  director  is  elected  is  effectual, 
and  he  does  not  hold  over  though  no 
successor  is  elected.  Van  Amburgh  v. 
Baker,  81  N.  Y.  46  (1880).  A  resignation' 
releases  a  director  if  laid  before  the 
board  of  directors,  and  it  is  effective, 
though  not  accepted,  where  it  has  been 
duly  presented.  Maitland's  Case,  4  De 
G.,  M.  &  G.  769  (1853).  Even  though 
an  officer  resigns  for  the  purpose  of 
preventing  service  upon  the  company, 
yet,  if  the  resignation  is  accepted, 
service  cannot  be  made  upon  him. 
Sturgis  V.  Crescent,  etc.  Co.,  10  N.  Y. 
Supp.  470  (1890).  A  director  may  resign 
after  the  company  and  officers  have 
been  enjoined  f-rom  interfering  with 
the  corporate  assets,  and  may  then  pur- 
sue his  remedies  as  a  corporate  creditor. 
Mexican,  etc.  Co.  v.  Mexican,  etc.  Co., 
47  Fed.  Rep.  351  (1891).  A  resignation 
takes  effect  upon  its  delivery,  even 
though  not  accepted.  International 
Bank  v.  Faber,  86  Fed.  Rep.  443  (1898). 
A  resignation  may  be  effective  without 
acceptance.  Noble  v.  Euler,  20  N.  Y. 
App.  Div.  548  (1897).  Where  a  treasurer 
and  general  manager  tenders  his  resig- 
nation to  take  effect  upon  acceptance, 
his  salary  ceases  upon  the  date  of  ac- 
ceptance. Savannah  C.  Mills  v.  Cun- 
ningham, 100  Ga.  468  (1897).  Even 
though  a  director  resigns  for  the  sole 
purpose  of  avoiding  a  statutory  liability 
and  causes  his  son  to  be  elected  director 
in  his  place  and  continues  t©  be  the 
agent  and  manager  of  the  business, 
nevertheless  he  is  not  liable  under  tlie 
statute.  Brown  v.  Clow,  62  N.  K  Rep. 
1006  (Ind.  1902).  Cf.  174  N.  Y.  247;  80 
N.  Y.  App.  Div.  578. 
78 


CH.   XXXVII.] 


ELECTIONS CORPORATE    MEETINGS. 


[§  624. 


preventing  service  being  made  upon  him,  j^et  such  resignation  is 
sufficient.^ 

A  director  may  resign  by  an  oral  statement  to  that  efiFect,  and 
his  resignation  may  be  accepted  in  the  same  manner  by  the  presi- 
dent.- But  a  mere  statement  of  a  director  that  he  will  have  noth- 
ing more  to  do  with  the  office  is  not  a  sufficient  resignation.^ 

A  resignation  may  be  effectual  even  though  it  is  not  accepted ; 
but  it  has  been  doubted  whether  all  the  directors  can  resign,  thereby 
leaving  the  corporation  helpless.* 

A  director  whose  resignation  has  been  accepted  cannot  after- 
wards vote  at  a  meeting  as  a  director.^  The  fact  of  the  resigna- 
tion need  not  be  published  or  made  known  to  corporate  creditors.*^ 

In  England  it  has  been  held  that  the  resignation  of  a  director 
must  be  presented  to  a  meeting  of  the  stockholders  in  order  to  be 
effective,  unless  the  by-laws  allow  the  directors  to  accept  it.  It  is 
not  sufficient  to  present  the  resignation  to  a  meeting  of  the  board 
of  directors.  Hence,  although  a  resignation  is  sent  in  in  the  mid- 
dle of  the  year,  and  is  not  accepted  until  the  stockholders'  meeting 


1  Continental,  etc.  Co.  v.  Lewis  Voight, 
etc.  Co.,  106  Fed.  Rep.  550  (1900).  Where 
by  the  by-laws  an  officer  shall  continue 
to  hold  office  until  his  successor  is 
elected  and  qualified,  an  officer  does  not 
cease  to  be  an  officer  by  a  mere  resigna- 
tion, and  hence  service  of  process  may 
still  be  made  upon  him  as  such  officer. 
Colorado,  etc.  Corp.  v.  Lombard,  etc. 
€o.,  71  Pac.  Rep.  584  (Kan.  1903).  But 
not  where  the  by-laws  are  silent  on  this 
question.  Yorkville  Bank  v.  Henry, 
etc.  Co.,  80  N.  Y.  A  pp.  Div.  578  (1903). 

2Briggs  V.  Spaulding,  141  U.  S.  132, 
150  (1891).  A  resignation  may  be  oral, 
and  the  election  of  an  officer  consti- 
tutes an  acceptance  of  such  resigna- 
tion. Johnson  v.  Griswold,  177  Mass. 
34  (1900).  A  director  of  a  corporation 
may  resign  at  any  time.  His  resigna- 
tion may  be  oral  or  in  writing.  The 
fact  that  a  statute  says  directors  shall 
•continue  until  their  successors  are  ap- 
pointed does  not  prevent  a  director  re- 
signing at  any  time.  Fearing  v.  Glenn, 
73  Fed.  Rep.  116  (1896).  Service  upon 
the  president  is  good  arlthough  he  testi- 
fies that  he  had  resigned,  there  being 
proof  to  the  contrary  and  that  he  after- 
wards acted  as  president.     Mott  Iron 

137 


Works  V.  West  Coast,  etc.  Co.,  113  Cal. 
341  (1896). 

■*  A  mere  statement  by  one  director 
to  another  that  he  would  have  no  more 
to  do  with  the  office  is  not  a  resigna- 
tion. Kindberg  v.  Mudgett,  24  N.  Y. 
Week.  Dig.  229  (1886).  A  statement  by 
a  director  to  the  secretary  and  treasurer 
at  the  time  of  transferring  all  his 
stock  that  he  severed  all  connection 
with  the  company  is  not  a  resignation, 
so  far  as  corporate  creditors'  rights  are 
concerned.  Chemical  Nat.  Bank  v.  Col- 
well,  9  N.  Y.  Supp.  285(1890);  Chemical 
Nat  Bank  v.  Colwell,  9  N.  Y.  Supp.  288 
(1890);  reversed  on  other  grounds,  132 
N.  Y.  250.  Application  to  sue  may 
be  made  to  the  president  though  he 
claims  to  have  resigned.  Averill  v. 
Barber,  6  N.  Y.  Supp.  255  (1889). 

*  Carnaghan  v.  Exporters',  etc.  Co.,  11 
N.  Y.  Supp.  172  (1890).  A  resignation 
is  complete  when  it  is  tendered,  and  its 
validity  does  not  depend  upon  accept- 
ance by  the  directors  or  the  election  of 
a  successor.  Manhattan  Co.  v.  Kalden- 
berg,  165  N.  Y.  1  (1900).  Cf.  174  N.  Y.  247. 

5  Wickersham  v.  Crittenden,  93  CaL 
17  (1892). 

6  Bruce  v.  Piatt,  80  N.  Y.  379  (1880X 
9 


§  624.] 


ELECTIONS COKI'ORATE    MEETINGS.  [CH.  XXXVn. 


later  in  the  year,  the  director  continues  to  be  such  until  such  ac- 
ceptance.^ The  by-laws  generally  give  the  board  of  directors  the 
power  to  accept  resignations  and  to  fill  vacancies  in  the  board.^  It 
is  legal  for  the  board  of  directors  to  resign  and  substitute  in  their 
places  the  purchasers  of  a  majority  of  the  stock,  provided  no  actual 
fraud  is  involved.' 

The  insolvency  of  a  director  does  not  vacate  his  office.*  A  di- 
rector does  not  lose  his  seat  by  absence.*  But  the  by-laws  may 
provide  otherwise.' 

A  director,  unless  he  has  resigned,  continues  to  be  such  until  his 
successor  is  elected,  even  though  he  never  attends  meetings  and  is 
never  consulted.'' 

A  reduction  in  the  number  of  trustees  may  be  valid,  although 
the  statutory  certificate  is  not  filed,  so  far  as  corporate  creditors 
are  concerned.^  The  failure  to  have  the  number  of  directors  re- 
quired by  statute  does  not  invalidate  their  acts.^ 

The  stockholders  have  no  power  to  remove  directors  before  the 
expiration  of  their  term  of  office  unless  the  charter  or  by-laws  ex- 
pressly give  that  power."  Nor  can  they  remove  the  president." 
The  president  is  elected  by  the  directors,'-  and  after  election  the  di- 


1  Municipal,  etc.  Land  Co.  u  Polling- 
ton,  63  L.  T.  Rep.  238  (1890).  Where  the 
by-laws  give  the  directors  power  to  fill 
vacancies  in  the  board,  they  may  fill 
vacancies  due  to  the  original  directors 
refusing  to  serve.  La  Compagnie  de 
Mayville  v.  Whitley,  [1896]  1  Ch.  788. 

2  See  g  603,  supra. 

3  See  §  622a,  supra. 

*  Atlas  Nat.  Bank  v.  F.  B.  Gardner  Co., 

8  Biss.  537  (1879);  s.  C,  2  Fed.  Cas.  186. 

sPhelps  V.  Lyle,  10  Ad.  &  E.  113  (1839). 

6  Wilson  V.  Wilson,  6  Scott,  540(1838), 
holding  that  an  absconding  director 
becomes  "  unable  to  act "  within  the 
meaning  of  the  by-laws.  Sturges  v. 
Vanderbilt,  73  N.  Y.  384  (1878);  s.  C 
below,  sub  nom.  Sturgis  v.  Drew,  11 
Hun,  136. 

7  First  Nat  Bank  v.  Lamon,  130  N.  Y. 
336  (1891). 

8  Wallace  v.  Walsh,  125  N.  Y.  26  (1890). 

9  See  §  713a,  infra. 

1"  See  §  711,  infra.  A  director  cannot 
be  excluded  from  his  duties  as  such, 
nor  can  his  election  be  declared  invalid, 
merely  because  of  what  he  may  con- 
template doing  as  a  director.  Ohio,  etc. 


1880 


Co.  V.  State,  49  Ohio  St.  668  (1892).  A 
charter  provision  giving  the  stock- 
holders power  to  remove  the  "  officers  " 
refers  to  directors  only.  Deposit  Bank, 
etc.  V.  Hearne,  104  Ky.  819  (1898). 

11  Ohio,  etc,  Co.  v.  State,  49  Ohio  St. 
668  (1892>  A  contract  between  a  com- 
pany and  a  person  that  he  shall  be  the 
managing  director  for  ten  years  does 
not  prevent  the  corporation  from  dis- 
missing him.  Bainbridge  v.  Smith,  L. 
R.  41  Ch.  D.  462  (1889).  A  voluntary  un- 
incorporated association,  without  ar- 
ticles, constitution,  or  rules,  may  remove 
its  president  or  other  officer  at  any 
time  and  without  notice,  except  that 
the  meeting  held  for  that  purpose  must 
be  duly  held,  and  cannot  expel  a  mem- 
ber without  notice.  Ostrom  v.  Greene, 
161  N.  Y.  353  (1900),  the  court  saying: 
"The  holding  of  an  office  unprotected 
by  rules  is  not  an  individual  right,  but 
is  subject  to  change  at  the  pleasure  of 
the  association." 

12  The  stockholders  have  no  power  to 
elect  the  president.  Their  action  is  a 
nullity.  Walsenburg  Water  Co.  v. 
Moore,  5  Colo.  App.  144  (1894). 


CH.  XXXVII.]  ELECTIONS CORPOKATE    MEETINGS. 


[§  624. 


rectors  cannot  remove  hira.^  Nevertheless,  the  stockholders  are 
not  always  helpless  in  such  circumstances  as  these.  The  stock- 
holders may,  at  a  meeting  called  for  that  purpose,  amend  the  by- 
laws so  as  to  increase  the  number  of  directors,  and  may  elect  such 
additional  directors  where  the  number  of  directors  is  not  fixed  by 
the  charter.^  The  stockholders  may  also,  at  a  special  meeting  duly 
called,  amend  the  by-laws  so  as  to  authorize  the  board  of  directors 
to  remove  the  president  and  treasurer,  and  the  board  of  directors 
may  subsequently  make  such  removal  under  the  amended  by- 
laws.^ 

A  failure  to  elect  oflBcers  at  the  stated  time  does  not  work  a  dis- 
solution of  the  corporation.  The  old  directors  continue  in  oflBce 
until  their  successors  are  duly  elected.*  But  in  England  it  is  held 
that  where  the  by-laws  provide  that  the  directors  shall  be  elected 
.annually,  and  shall  hold  office  for  one  year,  they  cannot  hold  over. 
They  cease  to  be  directors  at  the  end  of  the  year,  and  insurance 


1  Where  three  out  of  five  directors 
met  without  notice  to  the  other  two, 
and  deposed  the  president  and  author- 
ized a  mortgage,  their  acts  are  void, 
ilatch  V.  Johnson  L.  &  T.  Co.,  79  Fed. 
Rep.  828  (1895).  Where  the  statute  pre- 
scribes that  officers  and  agents  shall 
hold  their  places  during  the  pleasure 
■of  the  board,  the  board  may  oust  the 
secretary  and  treasurer  at  any  time. 
Darrah  v.  Wheeling,  etc.  Co.,  50  W.  Va. 
417  (1901). 

2  In  re  Griffing  Iron  Co.,  63  N.  J.  L. 
168  (1898);  aff'd,  63  N.  J.  L.  857  (1899). 

3  In  re  Griffing  Iron  Co.,  63  N.  J.  L. 
168  (1898);  aff'd,  63  N.  J.  L.  357  (1899). 
Where  a  directors'  by-law,  confirmed 
by  the  stockholders,  fixes  their  term  of 
office  at  one  year,  the  stockholders 
cannot,  by  amending  the  bj'-law,  turn 
the  directors  out  during  the  year.  Ste- 
phenson V.  Yokes,  27  Ont.  (Can.)  691 
(1896).  Where  the  by-laws  authorize 
the  board  of  directors  to  discharge  an 
officer  for  a  cause,  they  may  discharge 
the  vice-president  upon  his  selling  all 
his  stock.  Selley  v.  American,  etc.  Co., 
•93  N.  W.  Rep.  590  (Iowa,  1903). 

4  State  V.  Bonnell,  35  Ohio  St.  10,  17 
(1878),  in  which  an  election  of  directors 
being  held  invalid,  those  previously  in 
•office  were  restored  to  office  as  being 


entitled  to  hold  until  their  successors 
were  qualified.  Huguenot  Nat.  Bank 
V.  Stud  well,  6  Daly,  13  (1875);  reversed 
on  other  grounds,  74  N.  Y.  621  (1878); 
and  see  §  631,  infra.  Holding  over  may 
also  arise  from  acting  as  a  director. 
Sanborn  v.  Lefferts,  58  N.  Y.  179  (1874). 
Hold-over  directors  may  hold  meetings, 
fill  vacancies  in  the  board,^and  vote  to 
sell  property,  the  same  as  though  regu- 
lar elections  had  been  held.  Kent 
County  Agr.  Soc.  v.  Houseman,  81  Mich. 
609  (1890).  Directors  who  hold  over  are 
liable  on  the  statutory  liability  of  di- 
rectors. Jenet  v.  Nims,  7  Colo.  App. 
88  (1895).  A  hold-over  president  and 
manager  for  sixteen  years  may  insti- 
tute a  suit  in  behalf  of  the  corporation. 
Lucky  Queen  Miu.  Co.  v.  Abraham,  26 
Greg.  282  (1894).  For  purposes  of  mak- 
ing service  a  director  and  president  of 
a  railroad  company  is  presumed  to  con- 
tinue as  such,  even  though  elected  an- 
nually and  the  year  has  expired.  Buell 
V.  Baltimore,  etc.  R.  R.,  39  N.  Y.  App. 
Div.  236  (1899).  A  hold-over  director  is 
liable  on  a  statutory  liability,  and  the 
fact  that  he  was  a  director  may  be 
pi'oved  by  the  corporate  books.  St. 
George,  etc.  Co.  v.  Fritz,  48  N.  Y.  App. 
Div.  233  (1900),  54  AtL  Rep.  454;  71  Pac. 
Rep.  865. 


1381 


§  C25.] 


ELECTIONS  —  CORPORATE   MEETINGS.  [OIT.  XXXVIl. 


assessments  levied  by  them  after  the  year  are  invalid.^  Even  though 
the  failure  to  elect  has  extended  over  a  period  of  several  years,  and 
there  are  by  reason  thereof  no  directors  in  office,  the  old  directors 
having  wholly  abandoned  their  trust,  the  stockholders  may  at  any 
time,  in  a  lawful  manner,  proceed  to  the  election  of  a  new  board 
of  directors.^  But  if  the  majority  fail  or  refuse  to  hold  an  election, 
and  the  corporate  property  is  thereby  endangered,  a  court  of  equit}-- 
may  appoint  a  receiver  to  take  charge  of  it,'  and  will  in  a  proper 
case  authorize  a  winding  up.* 

A  director  is  an  "officer"  of  the  corporation  in  the  usual  mean- 
ing of  that  term.^  A  director  is  entitled  at  all  times  to  examine 
the  books  and  papers  of  the  company.^ 

Questions  relative  to  the  meetings  of  directors  are  considered 
elsewhere.''  Where  the  treasurer  of  a  corporation  uses  its  money 
for  his  own  purposes  he  may  be  sued  therefor,  even  though  he  con- 
tinues to  be  treasurer.^ 

§625.  Stoclcliolders  can  act  onhj  at  corporate  meetings. —  Stock- 
holders can  hold  elections  and  transact  the  other  business  which 
they  as  a  body  are  qualified  to  transact  only  at  a  corporate  meeting 
duly  called  and  convened.  Consequently,  all  votes  taken  elsewhere 
than  at  such  a  meeting,  and  all  separate  consents,  either  oral  or 
in  writing,  whereby  the  stockholders  assume  to  bind  the  company, 
are  invalid  and  void.^ 


1  Tyne,  etc.  Assoc,  v.  Brown,  74  L.  T. 
Rep.  283  (1896). 

2  People  V.  Twaddell,  18  Hun,  427 
(1879).  In  Reilly  v.  Oglebay,  25  W.  Va. 
36,  43  (1884),  it  is  held  that  where  there 
is  no  board  of  directors  the  stockhold- 
ers themselves  may,  pending  a  regular 
election,  lawfully  assume  and  perform 
the  duties  which  ordinarily  belong  to  a 
board  of  directors.   But  see  §  709,  infra. 

3  Lawrence  v.  Greenwich  F.  Ins.  Co., 
1  Paige,  587  (1829).  See  also  §  617,  suprcu 
Under  the  statutes  of  California  where 
a  bank  becomes  insolvent  the  court 
may  appoint  directors  to  fill  vacancies. 
Braslan  v.  Superior  Court,  etc.,  124  CaU 
123  (1899). 

4  Brown  v.  Union  Ins.  Co.,  3  La.  Ann. 
177,  182  (1848),  in  which  the  neglect  for 
nearly  ten  years  to  appoint  oflScers  being 
to  the  injury  of  the  creditors,  the  court 
appointed  a  manager  to  wind  up  the 
affairs  of  the  company. 

5  See  §  10,  supra. 


8  See  §  511,  supra, 
'  See  §  713a, infra. 

8  Marlborough  Assoc,  v.  Peters,   179 
]\Iass.  61  (1901).    See  also  §  648,  supra. 

9  Commonwealth  v.  CuUen,  13  Pa.  St. 
133  (1850);  Finley  Shoe,  etc.  Co.  v. 
Kurtz,  34  Mich.  89  (1876);  Peirce  v.  New 
Orleans  Building  Co.,  9  La.  397,  404 
(1836);  Livingston  v.  Lynch,  4  Johns. 
Ch.  573,  597  (1820);  Torrey  v.  Baker,  83 
Mass.  120  (1861);  Ex  parte  Johnson,  31 
Eng.  L.  &  Eq.  430  (1854);  Shortz  v. 
Unangst,  3  Watts  &  S.  (Pa.)  45  (1841). 
Cf.  Graham  v.  Boston,  etc.  R.  R,  118  U. 
S.  161  (1886);  Granger  v.  Grubb,  7  Phila. 
350  (1870).  For  the  rule  relative  to 
directors*  meetings,  see  §  713a,  infra. 
An  assignment  of  all  the  company's 
property  would  not  be  within  the  power 
of  the  stockholders,  even  though  all- 
signed  it,  without  formal  action  at  a 
meeting  held  for  that  purpose.  De  La 
Verge,  etc.  Co.  v.  German,  etc.  Inst.,  175' 
U.  S.  40  (1899).    A  lease  authorized  upon 


13S2 


CH.  XXXYII.]  ELECTIONS  —  CORPOKATE    MEETINGS.  [§§  626,  627. 

§§  626,  627.  StoclcJwlders  cannot  carry  on  the  Imsiness  of  or  enter 
into  contracts  for  the  corporation. — This  subject  is  fully  considered 
elsewhere.^ 


a  two-thirds  vote  of  the  stockholders 
cannot  be  effected  by  two-thirds  con- 
senting thereto  in  writing  without  a 
meeting.  Eeiff  v.  Western,  etc.  Tel.  Co., 
49  N.  Y.  Super.  Ct.  441  (1883).  The  sep- 
arate assent  of  stockholders  to  an  act  is 
not  valid.  Their  acts  must  be  in  meet- 
ing assembled.  Duke  v.  Markham,  105 
N.  C.  131  (1890).  The  agreement  of  a 
majority  of  the  stockholders  separately, 
that  the  corporation  should  pay  for  cer- 
tain work  and  that  they  would  vote 
for  a  resolution  to  that  effect  at  the 
next  meeting,  does  not  bind  the  corpo- 
ration. Nicholstone  City  Co.  v.  Smalley, 
21  Tex.  Civ.  App.  210  (1899).     An  actual 


meeting  of  the  stockholders  is  not 
necessary  if  all  consent,  even  though 
the  statute  require  a  meeting.  A  sub- 
sequent creditor  cannot  complain.  Coe 
V.  East,  etc.  E.  R.,  53  Fed.  Eep.  531  (1892). 
In  Re  George  Newman  &  Co.,  [1895]  1 
Ch.  674,  686,  the  court  said:  "Individ- 
ual assents  given  separately  may  pre- 
clude those  who  give  them  from  com- 
plaining of  what  they  have  sanctioned; 
but,  for  the  purpose  of  binding  a  com- 
pany in  its  corporate  capacity,  individ- 
ual assents  given  separately  are  not 
equivalent  to  the  assent  of  a  meeting." 
See  also  §  709,  infra. 
1  See  §  709,  etc.,  infra. 


1383 


CHAPTER  XXXYIIL 


DISSOLUTION,  FORFEITURE,  AND  IRREGULAR  INCORPORATION. 


628.  Methods  of  dissolution. 

629,630.  Dissolution  by  the  stock- 
holders —  A  court  of  equity- 
has  no  power  to  dissolve  a  cor- 
poration—  Receiver,  and  dis- 
tribution of  assfets  by  court  of 
equity  —  Statutory  dissolution. 

631.  Acts   which  do    not    constitute 

dissolution. 

632.  Only   the  attorney-general  can 

institute    a    suit  to   forfeit  a 
charter. 

633.  Forfeiture  for  misuser  —  Acts 

which  constitute  a  misuser  — 
Ultra  vires  acts  and  usurpa- 
tion of  franchises. 
634  Forfeiture    for   non-user  —  For- 


feiture for  failure  to  complete 
a  railroad  or  enterprise. 

635.  Injunction  at  the  instance  of  the 

state. 

636.  State  may  waive  forfeiture. 

637.  Who  may  set  up  forfeiture,  dis- 

solution, or  non-legal  incor- 
poration—  De  facto  corpora- 
tions. 

638.  Lapse  of  charter  by  failure   to 

comply  with  conditions. 
639,640.  Repeals  of  charters  —  Right 
of  stockholders  to  object. 

641.  The  assets    upon    dissolution  — 

Distribution. 

642.  The  liabilities  upon  dissolution, 

consolidation,  or  sale. 


§  628.  Metliods  of  dissolution. —  The  dissolution  of  a  corporation, 
may  be  brought  about  by  reason  of  (1)  the  forfeiture  of  its  fran- 
chises by  the  adjudication  of  a  court; '  (2)  the  loss  of  its  charter  by 
a  charter  provision  to  that  effect,  in  case  the  corporation  fails  to 
do  certain  things  within  a  certain  time;  ■^  (3)  the  repeal  of  its  charter 
under  the  reserved  power  of  the  state  ;^  (4)  the  voluntary  surrender 
of  the  franchises  by  the  stockholders;  or  (5)  the  expiration  of  the 
time  limited  for  its  existence  in  the  charter.*  Upon  dissolution  by 
any  one  of  these  methods  the  stockholders  have  certain  rights  in 
the  corporate  assets.    "Where  a  special  charter  is  granted,   and 


1  See  §§  632-637,  infra. 

2  See  §  638,  infra. 

3  This  subject  is  considered  in  §  639, 
infra. 

*  '•  The  dissolution  of  corporations  is 
or  may  be  effected  by  expirations  of 
their  charters,  by  failure  of  any  essen- 
tial part  of  the  corporate  organizations 
that  cannot  be  restored,  by  dissolution 
and  surrender  of  their  franchises  with 
the  consent  of  the  state,  by  legisla- 
tive enactment  within  constitutional 
authority,  by  forfeiture  of  their  fran- 
chises   and    judgment    of   dissolution 


declared  in  regular  judicial  proceed- 
ings, or  by  other  lawful  means."  Swan, 
etc.  Co.  V.  Frank,  148  U.  S.  603,  611  (1893). 
In  Michigan  all  charters  except  those 
of  railroad,  canals,  and  turnpikes  are 
limited  by  the  constitution  to  thirty 
years.  "The  evident  intent  of  this  sec- 
tion was  to  prevent  the  perpetuation  of 
corporate  power  and  corporate  wealth 
so  as  to  place  it  practically  beyond  the 
reach  of  the  people  or  the  legislature." 
It  does  not  apply  to  a  county-fair  cor- 
poration. Kent  County  Agr.  Soc  v. 
Houseman,  81  Mich.  609  (1890). 


1384 


CH.  XXXVIII.] 


DISSOLUTION,  FORFEITUEE,  ETC. 


[§  629. 


nothing  is  prescribed  as  to  the  duration  of  the  corporation,  the 
charter  is  perpetual.^ 

§  629.  Dissolution  hy  the  stockliolders  —  A  court  of  equity  has  no 
power  to  dissolve  a  corporation  —  Receiver^  and  distribution  of  as- 
sets hy  court  of  equity  —  Statutory  dissolution. —  It  is  an  unques- 
tioned rule  that  all  the  stockholders,  by  unanimous  consent,  may 
effect  a  dissolution  of  the  corporation  by  the  surrender  of  the  cor- 
porate franchises.^ 

Greater  difficulty  is  found  in  determining  whether  a  majority  of 
the  stockholders  may  dissolve  a  corporation.  It  has  been  held  that 
the  majority  in  interest  of  the  stockholders  of  a  corporation  may 
dissolve  it  by  a  voluntary  surrender  of  its  franchises,  even  though 
a  minority  of  the  stockholders  are  opposed  to  the  dissolution.' 

Such,  undoubtedly,  is  the  case  where  the  corporation  is  insolvent 
or  is  doing  a  failing  business,  and  is  manifestly  unable  to  accom- 
plish the  purposes  of  its  organization.^  But  where  such  is  not  the 
case,  and  where  the  term  during  which  the  corporation  was  to  exist 
has  not  expired;^  or  where  the  dissolution  is  desired  in  order  to  ob- 


1  State  V.  Ladies  of  Sacred  Heart,  99 
Mo.  533  (1889).  A  corporation  without 
limit  of  time  in  its  charter  as  to  duration 
is  perpetual.  Snell  v.  Chicago,  133  111. 
413  (1890).  See  also  §  913,  infra.  A 
grant  by  a  city,  under  authority  of  a 
statute,  to  a  water- works  company  to 
lay  pipes  in  the  streets  is  perpetual, 
where  no  limit  of  time  is  expressly 
stated,  and  is  irrevocable  when  acted 
upon.  National  Water-works  Co.  v. 
Kansas  City,  65  Fed.  Rep.  691  (1895). 

2  Mobile,  etc.  R.  R.  v.  State,  29  Ala. 
573,  586  (1857);  Savage  v.  Walshe,  26 
Ala.  619  (1855);  Attorney-General  v. 
Clergy  Society,  10  Rich.  Eq.  (S.  C.)  604 
(1859);  Chesapeake,  etc.  Canal  Co.  v. 
Baltimore,  etc.  R  R,  4  Gill  &  J.  (Md.) 
1,  121  (1832);  Mclntyre  Poor  School  v. 
Zanesville  Canal,  etc.  Co.,  9  Ohio,  203 
(1839);  La  Grange,  etc.  R.  R.  v.  Rainey, 
7  Coldw.  (Tenn.)  420  (1870);  Slee  v. 
Bloom,  19  Johns.  456  (1822);  Webster  v. 
Turner,  12  Hun,  264  (1877);  Houston  r. 
Jefferson  College,  63  Pa.  St.  428  (1869); 
Denike  v.  New  York,  etc.  Co.,  80  N.  Y. 
599,  606  (1880).  Although  a  stockholder 
has  sued  in  the  federal  court  to  wind 
up  a  Connecticut  corporation,  neverthe- 
less it  seems  that  such  (corporation  may 


dissolve  voluntarily.    Kessler  v.  Con- 
tinental, etc.  Co.,  42  Fed.  Rep.  258  (1890). 

3  Treadwell  v.  Salisbury  Mfg.  Co.,  73 
Mass.  393  (1856);  Hancock  v.  Hoi  brook, 
9  Fed.  Rep.  353  (1881)  (reversed  on  an- 
other point,  112  U.  S.  229);  Wilson  v. 
Central  Bridge,  9  R.  L  590  (1870).  Com- 
pare, however,  dictum  in  Denike  v. 
New  York,  etc.  Co.,  80  N.  Y.  599,  606 
(1880),  citing  cases,  and  in  Mobile,  etc. 
Co.  V.  State,  29  Ala.  573,  586  (1857).  citing 
New  Orleans,  etc.  Co.  v.  Harris,  27  Miss. 
517  (1854);  Ward  v.  Society,  etc.,  28  Eng. 
Ch.  (1  Collier),  370  (1844);  Angell  & 
Ames,  Corp.,  §  772.  See  also  Berry  v. 
Broach,  65  Miss.  450  (1888),  where  the 
business  was  a  losing  one. 

4  The  majority  have  a  right  to  have 
the  business  wound  up  and  sold  when 
such  business  cannot  be  advanta- 
geously carried  on.  Price  v.  Holcomb,  89 
Iowa,  123  (1893).     See  also  §  670,  infra. 

sKean  v.  Johnson,  9  N.  J.  Eq.  401 
(1853);  Zabriskie  v.  Hackensack,  etc.  R. 
R.,  18  N.  J.  Eq.  178  (1867);  Mowrey  v. 
Indianapolis,  etc.  R.  R,  4  Biss.  78(1866); 
S.  c,  17  Fed.  Cas.  930;  Lauman  v.  Leb- 
anon, etc.  R  R.,  30  Pa,  St.  42  (1858). 
See  also  Von  Schmidt  v.  Huntington,  1 
CaL  55  (1850).     Dissolution  of  a  solvent 


1385 


G29.] 


DISSOLUTION,  FOKFEITUKE,  ETC. 


[CH.   XXXVIII. 


tain  a  new  charter  for  a  different  object;  ^  or  where  the  dissolution 
is  merely  a  device  to  effect  a  consolidation  which  otherwise  would 
be  ultra  vires^ —  it'  has  been  held  that  the  majority  cannot  dissolve 
the  corporation  in  opposition  to  the  wishes  of  the  minority,'  Stock- 
holders owning  only  a  minority  of  the  stock  cannot,  at  common 
law,  compel  a  dissolution  before  the  expiration  of  the  time  limited 
in  the  charter  for  the  existence  of  the  corporation.*  The  directors- 
of  a  corporation  cannot  dissolve  it.* 


corporation  before  its  charter  time  has 
elapsed  cannot  be  had  except  by  unani- 
mous consent  of  the  stockholders.  Bar- 
ton V.  Enterprise,  eta  Assoc,  114  Ind. 
226  (1887).  In  Louisiana  a  majority  of 
the  stockholders  have  the  power  to 
wind  up  the  affairs  of  the  corporation 
even  though  it  is  solvent.  Pringle  v. 
Eltringham,  etc.  Co.,  49  La.  Ann,  301 
(1897).  In  Tennessee  it  is  held  that 
where  a  hotel  company  cannot  raise 
sufficient  capital  to  build,  and  it  has 
become  impracticable  and  undesirable 
to  proceed,  and  the  enterprise  is  clearly 
a  failure,  a  minority  stockholder  may 
force  a  wmding  up  and  distribution. 
O'Connor  v.  Knoxville  Hotel  Co.,  93 
Tenn.  708  (1894).  It  seems  that  a  com- 
pany cannot  dissolve  itself  by  a  vote  of 
a  majority  of  the  stockholders  without 
judicial  action  before  the  expiration  of 
the  charter.  Economy,  etc.  Assoc,  v. 
Paris,  etc.  Co.,  68  S.  W.  Rep.  21  (Ky. 
1902). 

1  Ward  V.  Society  of  Attorn  ies,  1  Coll. 
370  (1844). 

2  Black  V.  Delaware,  etc.  Canal  Co.,  22 
N.  J.  Eq.  403  (1871).  A  minority  stock- 
holder may  enjoin  a  public  sale  of  the 
propeity  of  a  prosperous  corporation, 
even  though  the  company  has  been  dis- 
solved, under  the  New  York  statute, 
where  he  shows  that  the  public  sale  is 
not  being  fairly  advertised  and  con- 
ducted, and  shows  also  that  the  disso- 
lution is  for  the  purpose  of  reorganizing 


under  the  laws  of  another  state  and 
freezing  out  the  minority,  and  that  in- 
formation could  not  be  obtained  as  to- 
the  actual  condition  of  the  company. 
Treadwell  v.  United,  etc.  Co.,  47  N.  Y. 
App.  Div.  613  (1900).  The  voluntary 
dissolution,  under  the  New  York  stat- 
ute, of  a  prosperous  corporation  will  be 
enjoined  at  the  instance  of  minority 
stockholders  where  it  is  alleged  that  it 
is  a  mere  scheme  to  freeze  out  the  lat- 
ter and  to  buy  in  the  property  for  a 
partnership.  Elbogen  v.  Gerbereu!x,  etc. 
Co..  30  N.  Y.  Misc.  Rep.  264  (1900).  In 
the  case  of  Arents  v.  Blackwell's,  etc 
Co.,  101  Fed.  Rep.  338  (1900),  where  the 
holders  of  159,769  shares  out  of  160,000 
shares  of  the  stock  of  a  tobacco  com- 
pany wished  to  accept  the  offer  of  an- 
other company  to  buy  it  out  for 
$2,800,000,  and  a  person  had  purchased' 
one  share  for  the  purpose  of  stopping 
the  sale  and  having  the  charter  re- 
pealed, the  court  appointed  a  receiver 
to  sell  the  property  as  preliminary  to  a 
dissolution  and  distribution  of  the  as- 
sets. See  also  g  670,  infra;  54  At).  Rep.  543.. 

*>  Polar  Star  Lodge  v.  Polar  Star 
Lodge,  16  La.  Ann.  53  (1861);  Curien  v. 
Santini,  16  La.  Ann.  27  (1861).  See  also 
dictum  in  Mobile,  etc  R  R.  v.  State,  29 
Ala.  573  (1857). 

4  Denike  v.  New  York,  etc  Co.,  80  N. 
Y.  599  (1880)  (citing  cases);  Folger  v. 
Columbian  Ins.  Co.,  99  Mass.  267  (1868); 
Pratt   V.   Jewett,   75    Mass.    34    (1857), 


*  Lake  Ontario,  etc.  Bank  u  Onon- 
daga Bank,  7  Hun,  549  (1876);  Jones  v. 
Bank  of  Leadville,  10  Colo.  464  (1888); 
Ward  V.  Sea  Ins.  Co..  7  Paige,  294(1838); 
Abbot  V.  American  Hard  Rubber  Co., 


33  Barb.  578  (1861).  C/.  Bank  of  Switz- 
erland V.  Bank  of  Turkey,  5  L.  T.  (N.  S.) 
549  (1862),  where  the  directors  repaid* 
sums  advanced  to  an  abortive  company* 


1386 


CH.  XXXVIII.] 


DISSOLUTION,  FOKFEITUEE,  ETO. 


[§  029. 


A  court  of  equity  has,  in  the  absence  of  statutory  power,  no 
jurisdiction  over  corporations  for  the  purpose  of  decreeing  their 
dissolution  and  the  distribution  of  their  assets  among  the  individ- 
ual corporators  at  the  suit  of  one  or  more  of  the  stockholders.* 


where  dissolution  was  denied,  although 
the  business  was  a  losing  one  and  the 
single  person  holding  a  majority  of  the 
stock  was  mismanaging  the  business; 
Croft  V.  Lumpkin,  etc.  Min.  Co.,  61  Ga. 
465  (1878),  where  the  corporation  was 
solvent,  but  made  no  effort  to  transact 
business  or  proceed;  Waterbury  v.  Mer- 
chants' Union  Exp.  Co.,  50  Barb.  177 
(1867),  holding  that  misconduct  of  the 
corporate  officers  is  no  cause  for  disso- 
lution at  the  suit  of  the  minority.  To 
same  effect,  Belmont  v.  Erie  Ry.,  53 
Barb.  637  (1869).  A  stockholder  has  no 
right  to  bring  an  action  for  the  disso- 
lution of  the  corporation.  Byrne  v. 
New  York  Brick,  etc.  Co.,  16  Week.  Dig. 
139  (1882).  A  stockholder  cannot  cause 
a  receiver  to  be  appointed  merely  on 
the  ground  that  the  liabilities  exceed 
the  assets  and  the  company  has  ceased 
to  do  business.  Murray  v.  Superior  Court, 
129  Cal.  628  (1900).  A  minority  stock- 
holder of  an  alien  corporation  cannot 
file  a  bill  in  equity  to  have  the  com- 
pany wound  up  and  its  assets  distrib- 
uted, even  though  he  complains  of  the 
management,  and  even  though  the 
main  purpose  of  the  corporation  is  to 
acquire  land  in  the  state,  it  being  shown 
that  the  corporation  is  solvent.  Sidway 
V.  IVdssouri,  etc.  Co.,  101  Fed.  Rep.  481 
(1900).  Where  the  stockholders  of  a 
bank  have  legally  ordered  the  winding 
up  of  its  business,  and  for  three  years 
thereafter  the  officers  still  continue  to 
do  business  at  a  great  loss,  apparently 
without  any  effort  to  wind  up  its  affairs, 
a  stockholder  may  file  a  bill  for  an  ac- 
counting and  the  appointment  of  a  re- 
ceiver, and  no  request  to  the  corpora- 
tion to  bring  the  suit  need  be  made. 
Mathews  v.  Bank  of  Allendale,  38  S.  E. 
Rep.  437  (S.  C.  1901).  Even  though  a 
corporation  has  lost  most  of  its  assets 
and  has  abandoned  its  business,  yet  a 


minority  stockholder  cannot  have  a  re- 
ceiver appointed,  except  for  misman- 
agement, especially  where  the  object 
of  the  receivership  is  to  bring  suits 
against  the  directors,  which  the  stock- 
holder himself  may  bring.  Clark  v.  Na- 
tional, etc.  Co..  105  Fed.  Rep.  787  (1900). 
1 U.  S.  Trust  Co.  V.  N.  Y.  etc.  R.  R., 
101  N.  Y.  478  (1896);  Taylor  v.  Decatur, 
etc.  Co.,  112  Fed.  Rep.  449  (1901);  Old- 
ham V.  Mt.  Sterling  Imp.  Co.,  45  S.  W. 
Rep.  779  (Ky.  1898);  Verplanck  v.  Mer- 
cantile, etc.  Co.,  1  Edw.  Ch.  84  (1831); 
Harden  v.  Newton,  14  Blatchf.  376 
(1878);  S.  C,  11  Fed.  Cas.  500;  Fountain 
Ferry,  etc.  Co.  r.  Jetvell,  8  B.Mon.  (Ky.) 
140  (1848);  Ferris  v.  Strong,  3  Edw.  Ch. 
127  (1837).  See  also  Strong  v.  McCagg, 
55  Wis.  624  (1882);  Latimer  v.  Eddy,  46 
Barb.  61  (1864).  But  see  dictum  in 
Benedict  v.  Columbus,  etc.  Ca,  49  N.  J. 
Eq.  23,  36  (1891);  Barton  v.  Interna- 
tional, etc.  Alliance,  85  Md,  14  (1897); 
Wallace  v.  Pierce- Wallace,  etc.  Co.,  101 
Iowa.  313  (1897);  People  v.  Weigley,  155 
111.  491  (1895);  State,  etc.  Ins.  Co.  v.  San 
Francisco  Super.  Ct,  101  Cal.  135  (1894). 
Mismanagement  is  not  a  good  cause 
for  the  appointment  of  a  receiver  with 
a  view  to  winding  up  the  business  and 
distributing  the  assets.  A  court  of 
equity  has  no  such  power.  Ulmer  v. 
Maine,  etc.  Co.,  93  Ma  324  (1899).  A 
court  of  equity  has  no  power  to  wind 
up  a  solvent  corporation  and  distribute 
its  assets  simply  on  the  ground  of 
dissensions  among  the  stockholders. 
Sternberg  v.  Wolff,  56  N.  J.  Eq.  555 
(1898).  See  s.  C,  56  N.  J.  Eq.  389  (1897). 
A  court  of  equity  has  no  jurisdiction 
to  appoint  a  receiver  of  and  dissolve  a 
solvent  beneficial  assessment  associa- 
tion on  the  ground  of  mismanagement, 
fraud,  and  the  abuse  of  corporate  pow- 
ers. Mason  v.  Equitable  League,  77 
Md.  483  (1893).     A  stockholder  cannot 


1387 


§  629.J 


DISSOLUTION,  FORFEITURE,  ETO. 


[CH.  XXXVIII. 


But  where  the  directors  of  a  corporation  have  misappropriated  the 
funds  of  the  company,  created  fraudulent  debts,  levied  assessments 
upon  the  stock,  caused  the  stock  to  be  forfeited  for  non-payment, 
and  judgment  to  be  entered  on  said  debts  and  the  property  to  be 
sold  out,  a  stockholder  may  file  a  bill  to  set  aside  all  the  transac- 
tions and  to  compel  the  directors  to  account  and  to  wind  up  the 
company.^    A  court  of  equity  has  no  power  to  sequestrate  the  prop- 


file  a  bill  for  the  dissolution  of  an  in- 
solvent corporation.  Heap  v.  Heap 
Mfg.  Co.,  97  Mich.  147  (1893).  But  the 
court  will  appoint  a  receiver  to  pre- 
serve the  corporate  assets  virhere  the 
majority  do  not  elect  officers.  Law- 
rence V.  Greenwich  Fire  Ins.  Co.,  1 
Paige,  587  (1829).  In  Tennessee,  where 
a  corporation  has  abandoned  business 
for  many  years,  and  has  no  known 
board  of  directors,  a  stockholder  may 
tile  a  bill  to  wind  up  its  affairs,  but  he 
should  not  join  the  corporation  as  a 
complainant  with  himself.  In  such  a 
case  no  request  to  the  directors  is  nec- 
essary. Tennessee,  etc.  Co.  v.  Ayers,  43 
S.  W.  Rep.  744  (Tenn.  1897). 

Where,  upon  voluntary  dissolution, 
the  stockholders  appoint  two  of  their 
number  to  administer  the  assets,  the 
court  will  not  displace  them  and  ap- 
point a  receiver.  Follett  v.  Field,  30 
La.  Ann.  161  (1878).  A  single  stock- 
holder in  an  insolvent  corporation  can- 
not have  it  dissolved  in  a  court  of 
equity.  Merry  man  v.  Carroll,  etc.  Co., 
4  Ry.  &  Corp.  L.  J.  12  (1888).  A  corpo- 
ration cannot  be  dissolved  except  by 
judicial  sentence  or  sovereign  power. 
A  court  of  equity  has  no  inherent 
power  to  decree  dissolution.  A  mem- 
ber cannot  sue  for  his  part  of  the  as- 
sets until  a  dissolution  is  had,  Magee 
V.  Geneseo  Academy,  17  N.  Y.  St.  Rep. 
221  (1888).  A  stockholder  cannot  have 
the  corporation  wound  up  in  equity. 
Hinckley  v.  Pfister,  83  Wis.  64  (1892). 
Where  for  seven  years  a  stockholder 
who  owned  a  majority  of  the  stock 
elected  himself  and  two  of  his  dum- 
mies as  directors  of  the  company,  and 
caused  the  board  to  vote  a  large  salary 

13 


to  himself  as  president  and  manager, 
and  had  leased  to  the  company  his 
property  at  a  large  rental,  the  salary 
and  rental  were  declared  illegal  and 
void.  Where  the  same  company  had 
failed  to  pay  its  dividends  by  reason  of 
such  acts,  a  court  of  equity,  upon  the 
suit  of  another  stockholder,  ordered  the 
president  to  account,  and  appointed  a 
receiver  of  the  company  and  directed 
that  its  affairs  be  wound  up.  Miner  v. 
Belle  Isle  Ice  Co.,  93  Mich.  97  (1892). 
The  appellate  court,  in  Florida  Const. 
Co.  V.  Young,  59  Fed.  Rep.  721  (1892), 
refused  to  reverse  an  order  in  an  ac- 
tion brought  by  stockiiolders  in  a  con- 
struction company  for  an  accounting 
between  the  company  and  a  railroad 
company,  and  a  distribution  of  the  as- 
sets of  the  former.  The  order  ap- 
pointed a  x'eceiver  of  the  former  and 
granted  an  injunction.  "The  power 
to  declare  a  forfeiture  of  corpoi'ate 
franchises  was  originally  in  England 
vested  in  the  courts  of  law,  and  was 
exercised  in  a  proceeding  brought  bj 
the  attorney-general  in  the  name  of 
the  sovereign.  The  court  of  chancery 
never  assumed  jurisdiction  in  such 
cases  until  it  was  conferred  by  act  of 
parliament.  It  declined,  until  the  power 
was  conferred  by  statute,  to  seques- 
trate corporate  property  through  the 
medium  of  a  receiver  or  to  dissolve 
corporate  bodies,  or  to  restrain  the 
usurpation  of  corporate  powers.'' 
Decker  v.  Gardner,  124  N.  Y.  834  (1890). 
In  the  absence  of  statutory  authority, 
a  court  of  equity  has  no  jurisdiction 
to  dissolve  a  corporation.  Wheeler  v. 
Pullman  Iron,  etc.  Co.,  143  111.  197  (1892). 
1  Jellenik  v.  Huron,  etc.  Co.,  177  U.  S. 
88 


CH.  XXXVIII.] 


DISSOLL'TION,  FORFEITURE,  ETC. 


[§  629. 


erty  of  a  corporation  by  means  of  a  receiver.^  Sequestration  is  the 
taking  of  property  from  the  owner  for  a  time  till  the  rents,  issues^ 
and  profits  satisfy  a  demand.  The  judgment  in  such  case  does  not 
dissolve  the  corporation.^  Sometimes  the  corporation,  after  pay- 
ing its  debts,  distributes  its  assets  among  its  stockholders  without 
any  dissolution.* 

In  many  of  the  states  and  in  England  there  are  statutes  regulat 
ing  the  dissolution  of  a  corporation.  These  statutes  generally 
specify  what  parties  may  bring  suit  for  dissolution,  on  what 
grounds  dissolution  will  be  decreed,  and  what  proceedings  must  be 
taken  to  obtain  the  decree.  Such  a  statutory  dissolution  is  hardly 
a  voluntary  dissolution,  and  yet  it  approaches  that  kind  of  dissolu- 
tion more  nearly  than  any  other.*    A  bill  filed  by  a  stockholder 


1  (1899).  Where  a  corporation  organ- 
ized to  build  a  town  and  sell  lots  finds 
that  its  plans  are  impossible,  and  it 
owes  no  debts  and  has  been  practi- 
cally abandoned  by  its  stockholders, 
and  the  officers  each  year  sell  a  little  of 
the  land  to  pay  taxes,  some  of  the 
stockholders,  even  though  they  are  a 
minority,  may  file  a  bill  to  have  the 
court  wind  up  the  affairs  of  the  com- 
pany and  distribute  the  proceeds,  it 
being  shown  that  there  are  a  great 
number  of  stockholders  scattered 
throughout  the  country,  and  that  it  is 
impossible  to  get  a  majority  of  them 
together.  Noble  v.  Gadsden,  etc.  Co., 
31  &  Rep.  856  (Ala.  1902). 

1  Re  Binghamton  Gen.  Elec.  Co.,  143 
N.  Y.  261  (1894).  A  receiver  will  not 
be  appointed  for  a  benevolent  society  in 
a  suit  by  a  member  charging  that  illegal 
expulsions  have  been  made  and  illegal 
elections  held,  even  though  the  illegal 
oflBcers  are  running  the  business;  nor 
will  a  receiver  be  appointed,  although 
the  purpose  of  the  company  is  imprac- 
ticable, the  member  bringing  the  suit 
having  been  a  party  thereto.  Equity 
will  not  interfere,  although  the  com- 
pany is  wholly  illegal  and  unauthor- 
ized. The  remedy  is  at  law.  Crombie 
V.  Order  of  Solon,  157  Pa.  St.  588  (1893). 

2  Proctor  V.  Sidney,  etc.  Co.,  8  N.  Y. 
App.  Div.  43  (1896).  A  collusive  suit 
by  officers  for  dissolution  and  the  ap- 

Ib 


pointment  of  a  receiver  does  not  pre- 
vent a  creditor  filing  an  independent 
bill.  Taber  v.  Royal,  etc.  Ca,  124  Ala, 
681  (1899).  Under  a  prayer  for  general 
relief  in  a  judgment  creditor's  suit  th© 
court  may  wind  up  the  afifairs  of  th© 
corporation.  Barber  v.  International 
Co.,  73  Conn.  587  (1901). 

3  See  §§  670-673,  infra,  and  §    548, 
supra. 

*  Thus,  in  New  York,  elaborate  pro- 
vision is  made.  Th©  majority  of  th© 
diiectors  may  apply  for  dissolution. 
See  Code  Civ.  Pro.,  §§  2419,  etc.  As  also 
may  a  creditor  or  stockholder.  Code 
Civ.  Pro.,  §g  1784,  etc.  Under  the  New 
York  statute  the  court  will  order  th© 
dissolution  of  a  corporation  where  a 
majority  of  the  directors  and  stock- 
holders wish  it,  where  the  interests  are 
discordant,  and  a  dissolution  will  be 
beneflciaL  Be  Importers',  etc.  Ex- 
change, 132  N.  Y.  212  (1892).  Where  a 
reduction  of  the  number  of  directors  is 
attempted,  but  not  made  in  compliance 
with  the  statute,  an  attempt  at  volun- 
tary dissolution  by  a  majority  of  th© 
directors  as  reduced  is  not  legal,  they 
not  being  a  majority  of  the  original 
number  of  directors.  Matter  of  Dolge- 
ville,  etc.  Co.,  160  N.  Y.  500  (1899). 
Under  the  old  statute,  part  of  th© 
stockholders  might  compel  a  dissolu- 
tion where  there  had  been  a  failure  to 
elect  officers.  Ward  v.  Sea  Ins.  Co.,  7 
89 


§  629.] 


DISSOLUTION,  FORFEITURE,  ETC. 


[CH.  XXXVIII. 


under  the  terms  of  a  statute  to  bring-  about  a  dissolution  and  wind- 
ing up  of  the  corporation  will  be  dismissed  where  it  is  shown  that 
the  suit  is  brought  in  the  interest  of  rival  corporations.     The  rea- 


Paige,  294  (1838).  Where  a  majority  of 
the  directors  and  stockholders  apply 
for  dissolution  the  court  will  presume 
that  it  should  be  granted.  Re  Niagara 
Ins.  Co.,  1  Paige,  258  (1828).  In  gen- 
eral, see  also  Re  Pyrolusite,  etc.  Co.,  29 
Hun,  439  (1883);  Re  Boynton,  etc.  Co., 
34  Hun,  369  (1884).  Corporate  creditors 
cannot,  before  judgment,  apply  for  a 
dissolution  of  the  corporation.  Cole  v. 
Knickerbocker,  etc.  Ins.  Co.,  23  Hun. 
255  (1880);  affd,  91  N.  Y.  641.  In  a 
stockholders'  suit  to  dissolve  and  wind 
up  a  corporation  the  books  of  the  com- 
pany are  not  admissible  as  against 
them,  being  mere  declarations  in  its 
favor.  Matter  of  Dittman,  65  N.  Y. 
App.  Div.  343  (1901\  It  is  legal  for 
a  person  to  contract  with  the  direct- 
ors of  an  insurance  company  to  pur- 
chase at  least  sixty-five  per  cent,  of 
the  stock  of  the  company,  the  same 
offer  being  made  to  all  the  stockhold- 
ers, even  though  it  is  proposed  to  there- 
upon wind  up  the  company.  Garrett  Co. 
V.  Morton,  65  N.  Y.  App.  Div.  366  (1901). 
In  this  case  the  lower  court  has  held  (35 
N.  Y.  Misc.  Rep.  10  —  1901)  that  under 
the  New  York  statute  it  is  illegal  for  an 
insurance  company  to  transfer  its  busi- 
ness and  liquidate  its  affairs  without 
dissolution  proceedings,  in  accordance 
with  the  statute,  and  hence  the  pur- 
chaser of  the  business  cannot  maintain 
a  suit  for  false  representations  as  to  the 
condition  of  the  company.  Under  a 
statute  authorizing  the  court  to  dis- 
solve any  corporation  on  good  cause 
shown,  a  minority  stockholder  may  file 
a  bill  to  have  the  corporation  dissolved 
for  purchasing  unnecessary  real  estate. 
Bixler  v,  Summerfield,  62  N.  E.  Rep.  849 
(111.  1902).  Where  the  minority  stock- 
holders file  a  bill  for  the  dissolution  of 
a  corporation  the  court  may  refuse  to 
proceed  unless  the  stockholders  at 
large    are    brought    iu.     McKleroy    ?'. 

1 


Gadsen,  etc.  Co.,  126  Ala.  184  (1900). 
Where  the  statute  provides  that  two- 
thirds  of  the  stockholders  may  cause 
the  cnrporation  to  be  wound  up,  their 
right  to  do  so  is  absolute  and  cannot  be 
controlled  by  the  court.  Watkins  v. 
Lawrence  Nat.  Bank,  51  Kan.  254 
(1893).  The  voluntary  dissolution  of  a 
company  under  the  statute,  but  with- 
out ten  days'  notice  required  by  the 
statute,  is  not  such  a  dissolution  as  to 
prevent  creditors  from  attaching  the 
property  of  the  company  as  though  no 
dissolution  had  been  had.  Cleveland, 
etc.  Co.  V.  Taylor,  etc.  Co.,  54  Fed.  Rep. 
82  (1893).  But  the  dissolution  cannot 
be  enjoined  by  creditors  in  the  absence 
of  fraud.  Cleveland,  etc.  Co.  v.  Taylor, 
etc.  Co.,  54  Fed.  Rep.  85  (1893).  Under 
statutes  in  some  of  the  states,  an  infor- 
mation in  the  nature  of  quo  warranto 
may  be  filed  at  the  relation  of  a  share- 
holder against  an  illegally-existing  cor- 
poration to  compel  a  dissolution.  Al- 
bert V.  State,  65  Ind.  413  (1879).  Under 
the  National  Banking  Act,  see  Ken- 
nedy V.  Gibson,  8  Wall.  498  (1869); 
Bank  of  Bethel  v.  Pahquioque  Bank,  14 
Wall.  383  (1871);  Bank  v.  Kennedy,  17 
Wall.  19  (1872);  Re  Piatt.  1  Ben.  534 
(1867);  s.  c,  19  Fed.  Cas.  815.  A  resolu- 
tion of  two-thirds  of  the  stockholders 
in  a  national  bank  to  go  into  liquida- 
tion does  not  dissolve  the  corporation. 
Merchants'  Nat.  Bank  v.  Gaslin,  41 
Minn.  552  (1889).  Where  a  statute  pro- 
vides that  on  a  certain  vote  a  corpora- 
tion may  be  dissolved  and  a  liquidator 
appointed  by  the  stockholders  and  such 
action  is  taken,  the  liquidator  may  file 
a  bill  in  a  court  of  equity  to  take  charge 
of  such  liquidation  and  enjoin  credit- 
ors' suits  and  supervise  the  acts  of  the 
liquidators.  In  re  Grant,  etc.  Co.,  51 
La.  Ann.  1254  (1899).  Under  the  stat- 
utes of  Louisiana  a  state  may  file  a  bill 
in  equity  to  enjoin  a  corporation  from 
390 


CH.  XXXVIII.J 


DISSOLUTION,  FORFEITUKE,  ETC. 


[§  029. 


son  for  dismissal  is  that  the  suit  is  a  fraud  upon  the  court.^  A 
stockholder  may  vote  for  the  dissolution  of  the  corporation  as  al- 
lowed by  the  statute,  even  though  hfs  object  is  to  terminate  a  con- 
tract which  he  has  with  the  corporation.^ 


Acting  as  a  corporation,  its  organization 
being  defective,  and  may  also  aslv  that 
the  charter  be  forfeited  for  violation 
of  law,  even  though  it  had  been  legally- 
organized.  The  incorporators  and  of- 
ficers need  not  be  made  parties  defend- 
ant. New  Orleans,  etc.,  Co.  v.  Louisi- 
ana, 180  U.  S.  320  (1901).  Proceedings 
for  the  dissolution  of  a  corporation  are 
not  an  act  of  bankruptcy.  In  re  Em- 
pire, etc.  Co..  95  Fed.  Eep.  957  (1899). 
Where  the  bill  does  not  specify  any  act 
which  is  illegal,  fraudulent,  or  ultra 
vires,  nor  show  any  effort  on  the  part 
of  the  minority  stockholder  to  change 
the  management,  the  court  will  not  ap- 
point a  receiver  and  will  not  decree 
dissolution  of  the  corporation.  Worth, 
etc.  Co.  V.  Bingham,  U6  Fed.  Rep.  785 
(1902).  In  West  Virginia  one-third  in 
interest  of  the  stockholders  may  apply 
to  the  court  for  a  dissolution.  See 
Hurst  u  Coe,  30  W.  Va.  158  (1887). 

Under  the  English  act  it  has  been 
held  that  the  majority  cannot  insist 
upon  dissolution,  though  the  business 
is  a  losing  one.  Re  Suburban  Hotel  Co., 
L.  R,  2  Ch.  737  (1867).  But  the  court 
may  grant  it  under  such  circumstances 
even  to  a  few  stockholders.  Re  Factage 
Parisien,  34  L.  J.  (Ch.)  140  (1865).  In  de- 
termining whether  to  order  a  winding 
up  the  court  will  not  consider  possible 


future  profits.  Re  European,  etc.  Soc, 
L.  R,  9  Eq.  122  (1869).  For  an  applica- 
tion to  have  a  winding  up  because  busi- 
ness had  not  been  commenced  within  a 
year,  see  Re  Tumacacori,  L.  R.  17  Eq. 
534  (1874).  If  the  corporation  has  sold 
its  property  and  ceased  business  the 
court  will  order  a  distribution  of  the 
assets.  Cramer  v.  Bird,  L.  R.  6  Eq.  143 
(1868).  The  mere  fact  that  the  com- 
pany is  losing  money  is  not  sufficient 
to  have  a  winding  up.  Re  Joint-stock 
Coal  Co.,  L.  R.  8  Eq.  146  (1869).  The 
court  has  a  judicial  discretion,  and  will 
not  ordinarily  order  a  winding  up  at 
the  instance  of  one  stockholder  in  oppo- 
sition to  all  the  others.  Re  London 
Suburban  Bank,  L.  R.  6  Ch.  641  (1871). 
But  if  the  company  is  insolvent  or  is 
doing  a  ruinous  business,  with  no  pros- 
pect of  a  change,  the  court  will  order  a 
winding  up  on  the  petition  of  a  mi- 
nority. Re  Great  Northern,  etc.  Min. 
Co.,  17  W.  R.  463  (1869).  Where  the 
main  purpose  of  a  corporation  is  the 
furnishing  of  lodgings  and  refreshments 
at  the  queen's  jubilee,  a  stockholder  has 
the  right  to  have  the  company  dissolved 
after  the  jubilee,  even  though,  under 
general  clauses,  the  objects  of  the  com- 
pany are  to  furnish  lodgings  and  re- 
freshments generally,  and  even  though 
the  directors  intend  to  continue  the 


1  Watson  V.  Le  Grand,  etc.  Co.,  177 
III  203  (1898). 

2Windmuller  v.  Standard,  etc.  Co., 
115  Fed.  Rep.  748  (1902).  In  the  case  of 
Robotham  v.  Prudential  Ins.  Co.,  53 
Atl.  Rep.  842  (N.  J.  1903),  the  court  ap- 
proved the  decision  in  WindmuUer  v. 
Standard,  etc.  Co.,  but  said  that  if  the 
complaint  had  been  framed  on  a  dif- 
ferent theory,  and  "  if  the  complainants 
had  attacked  the  action  of  the  directors 
in  mstituting  the  proceedings  for  dis- 
solution  as  the  product  of  bribery  or 


improper  influence  of  any  kind,  or  of 
favoritism  to  the  majority  stock- 
holder, who  had  appointed  the  direct- 
ors, a  very  different  case  would  have 
been  presented.  If  the  complainants 
had  also  charged  that  the  directors, 
their  trustees,  had  not  only  committed 
a  gross  and  flagrant  breach  of  duty,  but 
that  the  majority  stockholder  had  in- 
stigated them  to  do  it,  a  strong  case,  ap- 
parently, would  have  been  made  out, 
in  which  to  hold  the  majority  stock- 
holder liable  for  damages." 


1391 


§  629.] 


DISSOLUTION,  FORFEITUKE,  ETC. 


[CH.  XXXVIII. 


An  American  court  has  no  power  to  dissolve  an  English  corpo- 
ration and  wind  up  its  business.  A  resolution  to  that  effect  by  the 
stockholders  may  be  declared  invalid.  But  the  American  courts 
will  not  enjoin  a  dissolution  and  winding  up  of  the  company  in 
England  in  accordance  with  English  laws.^  The  courts  of  one 
state  cannot  dissolve  a  corporation  created  by  another  state,^  but 
may  appoint  a  receiver  of  the  corporate  assets  within  the  jurisdic- 
tion.^ 

Where  a  dissolution  is  being  obtained  or  has  been  obtained  by 
fraud  and  an  inequitable  overbearing  of  the  rights  of  an  innocent 
stockholder,^  a  court  of  equity  will,  at  the  instance  of  the  latter, 
enjoin  or  set  aside  the  dissolution.* 

business.  Re  Amalgamated  Syndicates,  fact  there  was  no  patent  such  as  was 
Ltd.,  [1897]  2  Ch.  600.  Where  a  com-  referred  to,  and  an  application  for  such 
pany  is  organized  to  work  gold  mines  a  patent  was  refused,  held,  that  the 
in  a  specified  place  as  well  as  else-  substratum  upon  which  the  company 
where,  and  the  company  actually  works  was  based  or  main  object  for  which  it 
mines  elsewhere,  but  not  in  the  speci-  was  formed  not  being  in  existence,  the 
fled  place,  the  main  purpose  of  the  company  must  be  dissolved  on  petition 
company  is  not  carried  out  and  a  disso-  of  a  shareholder,  notwithstanding  it 
lution  may  be  had.  Re  Cool  gar  die, 'etc.  was  profitably  engaged  in  the  manu- 
Mines,  Ltd.,  76  L,  T.  Rep.  269  (1897).  factiire  and  sale  of  the  commodity  with- 
Where  a  corporation  has  been  enjoined  out  any  patent,  and  notwithstanding  a 
from  using  its  name,  this  is  cause  for  a  very  large  majority  of  the  company 
dissolution.  Re  Thomas,  etc.  Sons,  Ltd.,  desired  to  have  the  company  continue 
[1897]  1  Ch.  406.  A  court  has  no  ju-  in  business.  To  same  effect,  under  some- 
risdiction  to  wind  up  a  corporation  what  similar  circumstances,  Re  Haven 
where  a  company  was  never  incorpo-  Gold  Min.  Co.,  L.  R.  20  Ch.  D.  151  (1882). 
rated,  one  of  the  requisite  incorporators  A  lender  of  money  to  a  benefit  building 
not  having  signed  the  articles  of  in-  society  cannot  petition  to  wind  it  up.  Ex 
corporation.  Re  National,  etc.  Corp.,  parte  Williamson,  L.  R  5  Ch.  309  (1869), 
[1891]  2  Ch.  505.  See  also,  in  general,  "Mortgage  bondholders  cannot  institute 
under  this  winding-up  act,  Re  Factage  winding-up  proceedings  under  the  Eng- 
Parisien,  34  L.  J.   (Ch.)  140  (1865);  Re    lish  act.     Re  Uruguay,  etc.  Ry.,  L.  R. 

11  Ch.  D.  372  (1879).     For  many  cases 
relative  to  the  question  of  when  a  court 
will  order  a  winding  up  and  when  not,  , 
under  the  English  statute,  see  Healey,  . 
Companies  Law  and  Practice,  pp.  446, 
etc. 
1  Republican,  etc.  Mines  v.  Brown,  58 


Exmouth  Docks  Co.  L.  R.  17  Eq.  181 
(1873);  Re  Sanderson's  Patents  Assoc, 
L.  R.  12  Eq.  188  (1871);  Re  Bradford 
Navigation  Co.,  L.  K.  10  Eq.  331  (1870); 
Princess  of  Reuss  v.  Bos,  L.  R.  5  H.  L. 
176  (1871);  Re  Commercial  Bank,  L.  R.  6 
Eq.  517  (1868);  Re  London  India  Rubber 

Co.,  L.  R.  1  Ch.  329  (1866);  Re  Pen-y-Van     Fed.  Rep.  644  (1893). 
Colliery  Co.,  L.  R.  6  Ch.  D.  477  (1877);        2Baker  v.  Backus,  32  III  79, 110(1863;. 
Re  United  Service  Co.,  L.  R.  7  Eq.  76        3  See  §  865,  infra. 
(1868);  Re  German  Date  Coffee  Co.,  L.  R.        *  People  r.  Hektograph  Co.,  10  Abb. 
20  Ch.  D.  169  (1882).  holding  that  where    N.  Cas.  358  (1882). 

a  company  was  organized  and  chartered  5  Re  Beaujolais  Wine  Co.,  L.  R.  3  Ch. 
to  engage  in  manufacture  and  sale  of  15  (1867);  Re  London,  etc.  Discount  Co., 
goods  under  a  certain  patent,  when  in     L.  R.  1  Eq.  277  (1865).     In  Stupart  v, 

1392 


CH.  XXXVIII.] 


DISSOLUTION,  FOKFEITUKE,  ETC. 


[§  630. 


§  630.  There  has  been  some  doubt  whether  a  voluntary  dissolu- 
tion by  all  or  a  majority  of  the  stockholders  is  completed  by  a 
mere  vote  of  the  stockholders,  or  whether  a  decree  of  a  court  is 
needed  and  is  sufficient;  or  whether  a  legislative  acceptance  and 
confirmation  of  the  dissolution  is  essential.  The  better  opinion  is 
that  tlae  resolution  of  the  stockholders  to  dissolve  will  effect  a  dis- 
solution only  after  the  legislature  has  accepted  it  and  ordained  it, 
or  a  court  duly  authorized  by  statute  to  accept  a  voluntary  dissolu- 
tion has  entered  a  decree  to  that  effect.^  Where  a  charter  expires 
no  adjudication  of  dissolution  is  necessary.^ 

Arrowsmith,  3  Sm.  &  G.  176  (1855),  a     Oregonian  Ry.,  38  Fed,  Rep.  187  (1889). 
bill  filed  by  a  shareholder  on  behalf  of     A  notice  of  the  resolution  sent  to  the 


himself  and  others  to  set  aside  a  dis- 
solution, after  three  years'  acquiescence, 
no  fraud  or  imposition  being  alleged, 
was  dismissed  with  costs.  Cf.  Kent  v. 
Jackson,  2  De  G.,  M.  &  G.  49  (1852); 
Bailey's  Appeal,  96  Pa.  St.  253  (1880), 
where  certain  stockholders  procured 
the  dissolution  of  a  corporation  by 
fraud.  They  were  held  to  be  trustees 
ex  maleficio  for  the  bona  fide  stock- 
holders, and  as  such  liable  to  account 
to  them  for  the  assets  of  the  company. 
^  Portland  Diy  Dock,  etc.  Co.  v.  Trus- 
tees of  Portland,  12  B.  Mon.  (Ky.)  77 
(1851);  La  Grange,  etc.  R.  R.  v.  Rainey, 
7  Coldw.  (Tenn.)  420'  (1870);  Harris  v. 
Muskingum  Mfg.  Co.,  4  Blackf.  (Ind.) 
267  (1886);  Town  v.  Bank  of  River 
Raisin,  2  Doug.  (Mich.)  530  (1847);  Cur- 
ien  V.  Santini,  16  La.  Ann.  27  (1861); 
Norris  v.  Smithville,  1  Swan  (Tenn.), 
164  (1851);  Bradt  v.  Benedict,  17  N.  Y. 
93,  99  (1858);  Boston  Glass  Mfy.  v.  Lang- 
ilon,  41  Mass.  49  (1841);  Wilson  v.  Cen- 
tral Bridge,  9  R.  L  590  (1870);  Penob- 
scot  Boom  Corp.  v.  Lamson,  16  Me.  224 
(1839);  Enfield  Toll  Bridge  Co.  v.  Con- 
necticut River  Co.,  7  Conn.  28,  45  (1828); 
Mumma  v.  Potomac,  etc.,  8  Pet.  281, 
287.  An  acceptance  by  the  state  of  a 
surrender  of  a  charter  is  necessary  in 
order  to  complete  a  dissolution  by  vol- 
untary surrender.  Mylrea  v.  Superior, 
etc.  Ry.,  67  N.  W.  Rep.  1138  (Wis.  1896). 
A  mere  resolution  of  the  stockholders 
is  ineS'ectual.  New  York,  etc.  Works 
V.  Smith,  4  Duer,  362  (1855);  Powell  v. 


governor  is  ineffectual.  Mechanics' 
Bank  v.  Heard,  37  Ga.  401  (1867);  Re- 
vere V.  Boston,  etc.  Co.,  32  Mass.  351 
(1834).  By  a  statute  the  acceptance 
may  be  made  by  a  proclamation.  Camp- 
bell V.  Mississippi  Union  Bank,  7  Miss. 
625,  681  (1842).  The  judgment  of  a. 
court  of  law  in  such  a  case  is  ineffect- 
ual. Chesapeake,  etc.  Co.  v.  Baltimore, 
etc.  R.  R.,  4  Gill  &  J.  (Md.)  1, 107  (1832). 
In  England  the  surrender  at  common 
law  was  to  the  king,  and  had  to  be  ac- 
cepted by  him  in  order  to  work  a  dis- 
solution. Rex  V.  Amery,  2  T.  R.  515, 
531  (1788);  Rex  v.  Gray,  8  Mod.  358 
(1825).  Cf.  Bruce  v.  Piatt,  80  N.  Y.  379 
(1880).  A  voluntary  dissolution  need 
not  be  accepted  by  the  state.  Mer- 
chants', etc.  Line  v.  Waganer,  71  Ala. 
581  (1882).  The  case  of  Webster  v. 
Turner,  12  Hun,  264  (1877),  can  be  up- 
held only  in  connection  with  §  631, 
infra.  See  also  cases  in  notes  supra,  to 
effect  that  a  court  cannot  decree  a  dis- 
solution at  the  instance  of  stockholders. 
Many  states  now  have  statutes  ex- 
pressly giving  to  courts  such  authority. 
The  statutes  may  of  course  make  a. 
voluntary  dissolution  effectual  without 
legal  proceedings. 

^People  V.  James,  5  N,  Y.  App.  Div. 
412  (1896),  holding  also  that  where  the 
statute  provides  for  the  directors  wind- 
ing up  the  company  the  attorney-gen- 
eral cannot  maintain  an  action  for 
that  purpose  in  behalf  of  the  state. 


(88) 


1393 


§  631.] 


DISSOLUTION,  FOKFEITUKE,  ETC. 


[CH.  XXXVIII. 


§  631.  Acts  tvhich  do  not  constitute  dissolution. —  There  are  certain 
acts  and  facts  which  do  not  in  themselves  constitute  a  dissolution. 
A  dissolution  is  not  effected  by  a  failure  to  elect  officers;'  nor  by 
a  sale  or  assignment  of  all  the  corporate  property;^  nor  by  the  fact 
that  one  person  owns  all  the  shares  of  stock ; '  nor  by  a  cessation 
of  all  corporate  business  and  acts;*  nor  by  the  death  of  its  stock- 


1  Rose  V.  Turnpike  Co.,  3  Watts  (Pa.), 
46  (1834);  Lehigh  Bridge  Co.  v.  Lehigh 
Coal,  etc.  Co.,  4  Rawle  (Pa.),  8,  23  (1832); 
Commonwealth  v.  CuUen,  13  Pa.  St.  133 
(1850);  Hoboken  Building,  etc. 'Assoc,  v. 
Martin,  13  N.  J,  Eq.  427  (1861);  Evarts 
V.  Killingworth  Mfg.  Co.,  20  Conn.  447 
(1850);  Nashville  Bank  v.  Petway,  3 
Humph.  (Tenn.)  523  (1842);  Boston  Glass 
Mfy.  V.  Langdon,  41  Mass.  49  (1841); 
Russell  V.  McLellan,  31  Mass.  63  (1833): 
Cahill  V.  Kalamazoo,  etc.  Ins.  Co.,  2 
Doug.  (Mich.)  124,  140  (1845);  Harris  v. 
Mississippi  Valley,  etc.  R.  R.,  51  Miss. 
602  (1875);  People  v.  Runkle.  9  Johns. 
147  (1812) ;  Phillips  v.  Wickham,  1  Paige, 
590  (1839);  Slee  v.  Bloom,  5  Johns.  Ch. 
366  (1821);  s.  C,  19  Johns.  456  (1822);  St. 
Louis,  etc.  Loan  Assoc,  v.  Augustin,  2 
Mo.  App.  123  (1876);  Knowlton  v.  Ack- 
ley,  62  Mass.  93  (1851);  Mendota  v. 
Thompson,  20  111,  197  (1858);  People  v. 
Wren,  5  111.  269  (1843).  Nor  will  a  res- 
ignation of  all  the  officers  dissolve  the 
corporation.  Muscatine  Turn  Verein  i\ 
Funck,  18  Iowa,  469  (1865);  Evarts  v. 
Killingworth  Mfg.  Co..  20  Conn.  447 
(1850),  The  corporate  rights  and  fran- 
chises are,  in  such  a  case,  merely  dor- 
mant until  other  officers  are  elected. 
Philips  V.  Wickham,  1  Paige,  590  (1829), 
Cf.  Lea  V.  American  Atlantic,  etc.  Canal 
Co.,  3  Abb.  Pr.  (N.  S.>  1  (1867). 

2  Quoted  and  approved  in  State  v. 
Mitchell,  104  Tenn.  336,  343  (1898);  Bar- 
clay V.  Talman,  4  Edw.  Ch.  123  (1842); 
De  Camp  v.  Alward,  52  Ind.  468  (1876); 
Reichwald  u  Commercial  Hotel  Co.,  106 
111.  439  (1883);  Rollins  v.  Clay,  33  Me. 
132  (1851);  Kansas  City  Hotel  Co.  v. 
Sauer,  65  Mo.  279  (1877);  Troy,  etc.  R.  R. 
V.  Kerr.  17  Barb,  581  (1854),  where  a  rail- 
road corporation  had  leased  the  entire 


property  to  another  corporation;  State 
V.  Merchant,  37  Ohio  St.  251  (1881); 
Smith  V.  Gower,  2  Duv.  (Ky.)  17  (1865), 
To  same  effect,  State  v.  Rives,  5  Ired.  L. 
(N.  C.)  297  (1844);  Bruffett  v.  Great  West- 
ern R.  R.,  25  III  353  (1861).  The  fact 
that  the  company  sells  its  property  and 
tliat  one  person  acquires  all  the  stock 
does  not  dissolve  the  corporation.  Par- 
ker V.  Bethel  Hotel  Co.,  96  Tenn.  252 
(1896). 

3  See  §  709,  infra, 

4  Attorney-General  v.  Bank  of  Niag- 
ara, Hopk.  Ch.  403  (1825);  Harrington  v. 
Connor,  51  Neb.  214  (1897);  Baptist  Meet- 
ing-house V.  Webb,  66  Me.  398  (1877); 
Rollins  V.  Clay,  33  Me,  132  (1851);  Harris 
V.  Nesbit,  24  Ala.  398  (1854);  Kansas  City 
Hotel  Co.  V.  Sauer,  65  Mo.  279, 288  (1877) ; 
Nimmons  v.  Tappan,  2  Sweeney  (N.  Y,), 
652  (1870);  Mickles  v.  Rochester  City 
Bank,  11  Paige,  118  (1844);  State  v.  Bar- 
ron, 58  N.  H.  370  (1878);  Be  Jackson  M. 
Ins.  Co..  4  Sandf.  Ch.  559  (1847);  West 
V.  Carolina,  etc.  Co.,  31  Ark.  476  (1876); 
Bache  v.  Horticultural  Soc,  10  Lea 
(Tenn.),  436  (1882);  Brandon  Iron  Co.  v. 
Gleason,  24  Vt.  228  (1852);  Atlanta  v. 
Gate,  eta  Co.,  71  Ga.  106  (1883);  haw  v. 
Rich,  47  W.  Va.  634  (1900).  Mere  non- 
user  does  not  dissolve  a  corporation.  A 
proceeding  in  behalf  of  the  state  is  first 
necessary.  Bloch  v.  O'Connor,  etc.  Co., 
129  Ala.  528  (1900).  Dissolution  may 
exist  by  cessation,  etc.,  so  far  as  the  re- 
version of  property  given  to  the  corpo- 
ration is  concerned.  Stone  v.  Framing- 
ham,  109  Mass.  303  (1872),  A  cessation  of 
business  with  the  understanding  that 
the  company  is  dissolved,  the  property 
having  been  transferred  to  tlie  stock- 
holders, does  not  work  a  dissolution. 
Suits  may  be   instituted  against  the 


1394 


•CH.  XXXVIII.j 


DISSOLUTION,  FORFEITURE,  ETC. 


[§  G32. 


holders;^  nor  by  insolvency;^  nor,  in  all  cases,  by  a  consolidation 
with  another  corporation  under  statutory  authorit}'.'  Xor  is  it 
dissolved  by  the  appointment  of  a  receiver,*  or  the  foreclosure  of  a 
mortgage,^  nor  by  failure  to  file  reports.^  The  fact  that  there  are 
less  stockholders  than  the  charter  requires  does  not  invalidate  the 
acts  of  the  corporation/  For  certain  purposes,  however,  such  as 
rendering  stockholders  liable  on  their  statutory  liability,^  or  reliev- 
ing directors  from  a  penal  liability,^  dissolution  is  held  to  arise  by 
some  of  these  acts. 

§  632.  Only  the  attorney-general  can  institute  a  suit  to  forfeit 
a  corporate  charter.- —  Such  unquestionably  is  the  law.  It  is  for 
the  state  alone  to  withdraw  the  charter  which  the  state  has  given. 


company.  Carnaghan  v.  Exporters', 
etc.  Co.,  11  N.  Y.  Supp.  172  (1S90).  A 
foreclosure  sale  of  all  the  property  and 
franchises  of  a  corporation  will  close 
out  and  foreclose  the  whole  interest  of 
the  stockholders  therein.  Vat;\ble  v. 
New  York,  etc.  R.  R,  96  N.  Y.  49  (1884); 
Thornton  v.  Wabash  Ry.,  81  N,  Y.  462, 
467  (1880).  See  also  Sullivan  n  Portland, 
etc.  R.  R.,  94  U.  S.  806  (1876).  As  to  re- 
organization, see  ch.  LII,  infra. 

1  Boston  Glass  Mfy.  v.  Langdon,  41 
Mass.  49,  52  (1841);  Russell  v.  McLellan, 
31  Mass.  63,  69(1833. 

^Stolze  V.  Manitowoc,  etc.  Co.,  100 
Wis.  208  (1898);  Geneva,  etc.  Co.  v.  Cour- 
sey,  45  N.  Y.  App.  Div.  268  (1899); 
Moseby  v.  Burrow,  52  Tex.  396  (1880); 
Valley  Bank,  etc.  Inst.  v.  Sewing  Soc, 
28  Kan.  423  (1882).  Such  is  the  case 
though  a  receiver  has  been  appointed. 
State  V.  Merchant,  37  Ohio  St.  251  (1881); 
National  Bank  v.  Insurance  Co.,  104 
TJ.  S.  54  (1881);  Kincaid  v.  Dwinelle,  59 
N.  Y.  548  (1875).  The  insolvency  of  a 
corporation  and  the  appointment  of  a 
receiver  do  not  constitute  dissolution. 
Chemical  Nat.  Bank  v.  Hartford  De- 
posit Co.,  161  U.  S.  1  (1896). 

3  See  ch.  LIII,  infra. 

*  The  appointment  of  a  receiver  does 
not  dissolve  a  corporation.  Nothing 
but  the  expiration  of  the  charter  or  the 
judgment  of  a  court  can  do  that.  Has- 
selman  v.  Japanese,  etc.  Co.,  2  Ind.  App. 
180  (1891). 

5  Smith   V.   Gower,   2   Duv.    (Ky.)  17 


(1865);  White,  etc.  R  R.  v.  White,  etc 
R.  R.,  50  N.  H.  50  (1870).  In  Pennsyl- 
vania it  seems  to  be  held  that  the  fore- 
closure sale  of  all  the  assets  of  the  com- 
pany extinguishes  the  company  itself. 
Reynolds  v.  Cridge,  1  Pa.  Dist.  693 
(1892);  N.evv  Castle  Northern  Ry.  r.  New 
Castle,  etc.  R.  R.,  1  Pa.  Dist.  768  (1892). 
Where  a  railroad  company's  property 
has  been  foreclosed,  and  for  twenty-six 
years  it  has  owned  no  property  and 
kept  up  no  existence,  it  will  be  pre- 
sumed to  have  been  dissolved,  and  serv- 
ice upon  it  will  be  set  aside.  Combes 
V.  Keyes,  89  Wis.  297  (1895).  A  corpora- 
tion is  not  dissolved  by  the  fact  that  it 
has  lost  all  its  property.  Weigand  v. 
Alliance  Supply  Co.,  44  W.  Va»  133 
(1897).  A  corporation  is  not  dissolved 
by  reason  of  its  property  being  sold  out 
under  a  mortgage.  Bump  v.  Butler 
County,  93  Fed.  Rep.  290  (1899). 

•^  Failure  to  file  a  report  does  not  work 
a  forfeiture  of  the  charter.  State  v. 
Brownstown,  etc.  Co..  120  Ind.  337  (1889). 

^  Welch  v.  Importers',  etc.  Bank,  122 
N.  Y.  177  (1890).  The  facts  that  the 
corporate  officers  are  dead,  and  the 
number  of  stockholders  is  less  than 
the  number  required  for  incorporation, 
do  not  dissolve  the  corporation.  Re 
Belton,  47  La.  Ann.  1614  (1895). 

8  See  Slee  v.  Bloom,  19  Johns.  456 
(1822),  and  §  219,  supra.  Cf.  Bradt  v. 
Benedict,  17  N.  Y.  93  (1858). 

»  Losee  v.  BuUard,  79  N.  Y.  404  (1880). 


1395 


§  632.] 


DISSOLUTION,  FORFEITURE,  ETC. 


[CH,  XXXVIII. 


A  stockholder  cannot  institute  the  suit;  ^  nor  a  corporate  creditor ;2 
nor  can  the  municipal  authorities  by  reason  of  a  change  of  route  by 
a  railroad;'  nor  can  a  person  who  is  overcharged  on  a  turnpike 
bring  suit  to  forfeit  the  company's  charter.*  The  secretary  of  state 
cannot  forfeit  a  charter,  even  though  the  statute  prescribes  forfeit- 
ure for  non-payment  of  taxes  ;^  but  it  is  constitutional  to  provide 
by  statute,  as  is  the  case  in  ISew  Jersey,  that  the  charter  and  all 
corporate  powers  shall  be  void  and  cease  upon  the  non-payment  of 
taxes.^  A  stockholder  in  a  corporation  cannot  sustain  a  bill  to  have 
the  charter  forfeited  and  the  corporation  wound  up  on  the  ground 
that  it  was  formed  to  purchase  and  combine  various  competing  lin- 
seed-oil mills  for  the  purpose  of  forming  a  monopoly.  The  state 
alone  can  ask  for  such  a  forfeiture.  Moreover,  the  stockholder,  by 
being  a  stockholder,  is  estopped  from  complaining,  and  is  presumed 
to  have  had  knowledge  of  the  facts  from  the  time  that  he  became 
a  stockholder.'^  Where  a  public  corporation,  vested  with  state 
property  for  public  use,  makes  a  lease  of  it  which  is  tdtra  vires,  a 
private  person  cannot  sustain  a  suit  to  contest  it;  this  can  be  done 
only  by  the  state  or  the  corporation.^ 


1  North  V.  State,  107  Ind.  356(1886); 
Baker  v.  Backus,  32  111.  79  (1863);  Com- 
monwealth V.  Union  Ins.  Co.,  5  Mass. 
230  (1809);  State  v.  Paterson.  etc.  Tump. 
Co.,  21 N.  J.  L.  9  (1847);  Murphy  u  Farm- 
ers' Bank,  20  Pa.  St.  415  (1853);  Rice  v.  ■ 
National  Bank,  126  Mass.  300  (1879);  Fol- 
ger  V.  Columbian,  etc.  Ins.  Co.,  99  Mass. 
267  (1868),  where  the  court  refused  to 
recognize  a  dissolution  decreed  by  a 
New  York  court  at  the  instance  of  a 
stockholder;  Raisbeck  v.  Oesterricher.  4 
Abb.  N.  Cas.  444  (1878),  where  the  plaint- 
iff claimed  that  the  incorporation  was 
irregular. 

2  Gaylord  v.  Fort  Wayne,  etc.  R.  R.,  6 
Biss.  286  (1875);  s.  G,  10  Fed.  Cas.  121.  A 
judgment  forfeiting  the  charter  of  a 
private  corporation,  where  the  state  is 
not  a  party  to  the  suit,  is  a  nullity. 
Pickett  V.  Abney,  84  Tex.  645  (1892). 

3  Moore  v.  Brooklyn  etc.  R.  R.,  108  N. 
Y.  98  (1888). 

*  Commonwealth  v.  Allegheny  Bridge 
Co.,  20  Pa.  St.  185  (1852);  State  v. 
White's,  etc.  Co.,  3  Tenn.  Ch.  164  (1876), 
where  the  bill  purported  to  be  in  the 


attorney-general's  name.  A  shipper  of 
freight  cannot  by  bill  in  equity  compel 
a  canal  company  to  repair  and  render 
its  canal  navigable.  Only  the  state  can 
complain.  Buck,  etc.  Co.  v.  Lehigh,  etc. 
Co.,  50  Pa.  St  91  (1865).  The  statutes 
of  a  state,  however,  sometimes  change 
these  rules  of  law. 

sPoxu  Robbins.  62  S.  W.  Rep.  815 
(Tex.  1901).  A  statute  of  West  Vir- 
ginia stating  that  charters  shall  be  for- 
feited if  corporate  taxes  are  not  paid 
does  not  authorize  the  secretary  of 
state  to  declare  corporate  charters 
forfeited.  Forfeiture  can  be  made  only 
in  a  suit  by  the  state  brought  for  that 
purpose.  Greenbrier  Lumber  Co.  v. 
Ward,  30  W.  Va.  43  (1887). 

6  See  General  Corporation  Act  of  New 
Jersey,  L.  1896,  p.  319.  As  to  such  a 
provision  being  self-executing,  see  §  638, 
infra. 

■^  Coquard  v.  National  L.  O.  Co.,  171 
III  480  (1898). 

8  Directors,  as  such,  of  such  corpora- 
tion, cannot  sustain  such  a  suit.  Smith 
V.  Cornelius,  41  W.  Va.  59  (1895). 


1396 


CH.  XXXVIII.] 


DISSOLUTION,  FORFEITURE,  ETC. 


[§  033. 


§  633.  Forfeiture  for  misuser  —  Acts  wMcli  constitute  a  mis- 
user —  Ultra  vires  acts  and  usurpation  of  francliises. —  The  law  is 
clear  that,  if  a  corporation  misuses  its  powers,  the  state  may  by  a 
suit  withdraw  the  charter  which  it  has  given.  Great  diificulty, 
however,  arises  in  determining  what  constitutes  a  misuser.  A  clear 
idea  can  be  obtained  only  by  a  study  of  the  cases  themselves.^ 


lA  corporation  organized  to  manu- 
facture railway  cars  has  no  power  to 
lay  out  a  town  around  its  works  and 
build    twenty-two   hundred  homes  to 
lease  to  its  employees,  to  build  and  run 
a  hotel  and  saloon,  and  also  a  theatre, 
a  gas  plant,  a  system  of  water-works 
and  a  brick  plant,  and  to  own  and  run 
a  farm  for  supplies  to  sell,  and  for  its 
employees,  and  to  own  stock  in  other 
corporations  manufacturing  and  sell- 
ing bar  iron  and  railroad  spikes;    but 
may  erect  an  office  building   contain- 
ing more  space  than  it  requires  at  the 
time,  and  may  purchase  more  real  es- 
tate than    it  actually  requires  at  the 
time,  and   may  supply  liquor,  etc.,  to 
passengers  on    its  cars,  and  may  sell 
surplus  steam  power.     The  state  may 
bring  quo  ivarranto  proceedings  to  for- 
feit the  charter.     It  is  no  defense  that 
the    usurpations    had     continued    for 
many  years  to   the  knowledge  of  the 
state,  or  that  a  legislative  committee 
had  reported  that  the  real  estate  was 
properly  taxed.      People  v.  Pullman's 
Palace  Car  Co.,  175  111.  125  (1898).    The 
state  will,  at  the  instance  of  the  attor- 
ney-general, forfeit  the  charter  of  the 
corporation    whose   stockholders   have 
entered  into  a  '*  trust '"  with  the  stock- 
holders of  competing  corporations,  for 
the  purpose  of  forming  a  monopoly  in 
and  raising  the  price  of  sugar.      The 
"  trust  "  is  not  a  joint-stock  association. 
It  is  of  the  character  of  a  trust  estate. 
People  V.  North  River  Sugar  Ref.  Co., 
121  N.  Y.  583  (1890).     Quo  warranto  lies 
against  a   corporation    formed  to  pur- 
chase substantially  all  the  distilleries 
in  the  country.     Distilling,  etc.  Co.  v. 
People,   156  III.  448  (1895).      The  state 
may  forfeit  a  charter  for  a  failure  of 

1397 


the  officers  to  file  the  annual  report  and 
of  the  stockholders  to  pay  in  the  cap- 
ital stock  as  required  by  statute.  It  is 
immaterial  that  the  state's  action  was 
induced  by  parties  who  were  them- 
selves responsible  for  the  failure  to 
comply  with  the  statute.  People  v.  Buf- 
falo, etc.  Co.,  131  N.  Y.  140  (1892).  It  is 
cause  for  forfeiture  that  some  of  the 
directors,  all  of  whom  were  required 
to  be  stockholders,  held  but  one  share 
each,  the  certificates  for  which  shares 
were  transferred  back  at  once  to  the 
real  parties  in  interest,  thus  leaving 
the  directors  disqualified;  also  that  re- 
quired certificates  had  not  been  filed; 
also  that  annual  elections  had  not  been 
held;  also  that  the  corporation  had 
done  business  xdtra  vires.  But  unless 
public  interest  so  requires,  the  attorney- 
general  should  not  bring  suit  at  his 
own  instance.  LoriUard  v,  Clyde,  142 
N.  Y.  456  (1894).  A  water-works  char- 
ter may  be  forfeited  where  it  wilfully 
and  persistently  charges  more  for  water 
than  its  charter  specifies.  State  v.  New 
Orleans,  etc.  Co.,  81  S.  Rep.  395  (La. 
1901).     See  S.  C,  185  U.  S.  336. 

In  the  case  of  State  v.  Hogan,  163  Mo. 
43  (1901),  it  was  held  that  an  option  to 
buy  a  mine  is  not  property  for  which 
stock  may  be  issued,  under  the  consti- 
tution and  statutes  of  the  state  of 
Missouri,  there  being  no  proof  that 
the  person  giving  the  option  owned  it. 
Hence  where  $90,000  of  stock  was  is- 
sued for  the  option  and  for  services  in 
inspecting  the  mine,  and  $30,000  of  the 
stock  was  turned  back  for  treasury 
stock,  the  court  held  that  the  state 
might  maintain  a  bill  to  forfeit  the 
charter. 

Under  the  statutes  of  Alabama  in  ref- 


§  633.: 


DISSOLUTION,  FORFEITURE,  ETC. 


[CH.  XXXVIII. 


In   Ohio  it  has  been  held  that  a  statute  giving  to  a  court  the 
power  to  forfeit  the  franchises  of  turnpike  companies  for  being- 


erence  to  watered  stock,  quo  warranto 
lies  where  $1,000,000  of  stock  is  issued 
for  the  possibility  of  patents  to  bethere- 
after  granted.    In  such  quo  warranto 
proceedings  stockholders   need  not  be 
made  parties.  State  v.  Webb,  97  Ala.  Ill 
(1893).     Where  a  railroad  leases  its  line 
in  violation  of  a  constitutional  provis- 
ion prohibiting  the  consolidation  of  par- 
allel lines,  it  is  subject  to  forfeiture.  So 
also  where  it  issues  "  watered  stock  "  in 
violation  of  the  constitution.     State  v. 
Atchison,  etc.  R  R,  24  Neb.  143  (1888). 
In  the  case  of  State  v.  New  Orleans,  etc. 
Co., 51  La.  Ann.  1827  (1899),  the  subscrib- 
ers to  the  stock  of  a  debenture  com- 
pany paid  ninety-five  per  cent,  of  their 
subscription  by  borrowing  that  amount 
from  the  company  on  their  notes,  and 
thereupon  full-paid  stock  was  issued  to 
them,  although  the  statute  prohibited 
the  issue  of  stock  until  paid  for.    The 
state  brought  suit  to  set  aside  the  char- 
ter and  liquidate  the  company.     The 
court  held  that  under  the  constitution 
of    Louisiana    the    incorporation   was 
illegal.    The  court  held  also  that  the 
charter  was  illegal,  in  that  the  debent- 
ures issued  were  forfeited  if  deferred 
payments  were  not  made,  and  that  they 
provided  for  cancellation  at  fifty  per 
cent,  on  the  amount  paid,  and  that  they 
were  redeemable  in  numerical  order  in 
six  years  and  that  it  would  be  impossible 
for  the  company    to  pay  them.     The 
same  conclusion  was  reached  in  State 
V.  Louisiana,  etc.  Co.,  51  La.  Ann.  1795 
(1899).    Where  a  corporation  is  author- 
ized to  commence  business  only  when 
$100,000  of  stock  has  been  subscribed, 
and  it  does  commence  business  prior  to 
such  subscription  being  made,  the  state 
may  file  a  bill  to  forfeit  its  charter. 
State  V.  Debenture,  etc.  Co.,  51  La.  Ann. 
1874  (1899).  In  the  case  of  State  v.  Port- 
age City,  etc.  Co.,  107  Wis.  441  (1900), 
the  court  stated  that    a  contract  be- 
tween a  city  and  a  water-works  com- 


pany, giving  to  the  latter  the  right  to 
use  the  streets  for  its  water  pipes,  was 
a  franchise,  and  that  quo  warranto 
would  lie  to  forfeit  such  franchise  for 
failure  to  supply  water  in  accordance 
with  its  terms. 

Where  an  unauthorized  lease  of  com- 
peting lines  has  been  made,  the  state 
may  forfeit  the  charter  of   the  lessor 
and  cause  a  receiver  of  the  charter  to 
be  appointed,  and  such  proceedings  will 
lie  even  six  years  after  the  lease  has 
been  made.     Eel  River  R  R  v.  State. 
155  Ind.   433  (1900).     In  quo  warranto 
against  a  turnpike  company  the  burden 
of  proof  is  on  the  company  to  prove  its 
title,  and  deeds  from  other  companies 
without  seals   and  not  acknowledged 
as    corporate    deeds    are   insufficient. 
Lyons,  etc.  Co.  v.  People,  68  Pac.  Rep. 
275  (Colo.  1903).  The  charter  of  a  plank- 
road  company  for  failure  to  keep  the 
road  in  repair  was  forfeited  in  the  case 
of  People  V.  Detroit,  etc.  Co.,  90  N.  W. 
Rep.  687  (Mich.  1902).     For  failure  to 
keep  a  part  of  its  road  in  repair,  or  to 
rebuild  a  burned  bridge,  or  for  aban- 
doning a  part  of  its  road,  a  plank-road 
company's    charter  may  be   forfeited. 
People  V.  Plainfield,  etc.  Co.,  105  Mich.  9- 
(1895).     The  charter  of  a   water-works 
company  may  be  forfeited  when,  in  vio- 
lation of  its  charter,  it  does  not  furnish 
pure  water  and  does  not  increase  its 
source  of  supply.    It  is  no  defense  that 
the  municipality  had   elected  to  take 
over  the  property   as  provided  in   the 
original  ordinance,  or  that  the  munici- 
pality had  the  right  to  annul  the  con- 
tract  between   the  municipality  and 
the  company.     Capital  City  Water  Co. 
V.  State,  105  Ala.  406  (1894).     To  a  quo 
ivarranto  to  forfeit  a  water-works  char- 
ter because  it  failed  to  supply  sufficient 
water,  it  is  no  answer  that  the  com- 
pany had  intended  to  enlarge,  but  had 
not  done  so  because  the  city  had  de- 
clared its  intention  to  exercise  its  op- 


1398 


CH.  XXXVIII.] 


DISSOLUTION,  FOEFEITUEE,  ETC. 


[§  633. 


out  of  repair  for  the  preceding  six  months,  without  having  a  jury 
pass  upon  the  question  and  without  appeal,  is  unconstitutional.^ 


tion  to  buy  the  works.   State  v.  Capital 
City  Water  Co.,  103  Ala.  231  (1894).     It 
has  been  held  to  be  misuser  to  file  a 
false  certificate  that  the  capital  stock 
has  been  paid  up,  Eastern,  etc.  Co.  v. 
Regina,  23  Eng.  L.  &  Eq.  328  (1853);  or 
to  establish  a  branch  bank  where  the 
charter    authorizes    only    a    principal 
banking    place,     People    v.     Oakland 
County    Bank,     1    Doug.    (Mich.)    283 
(1843);  or  for  an  insurance  company  to 
take  risks  which  it  cannot  pay   if  re- 
quired,  Ward  V.   Farwell,    97   111.  593 
(1881);  or  for  taking  "grave-yard"  in- 
surance,   State  V.  Central,  etc.   Assoc, 
29  Ohio  St.  399  (1876),  the  person  receiv- 
ing the  insurance  having  no  insurable 
interest  in  the  person  insured;  or  for 
not  keeping  tracks  in  a  condition  re- 
quired by  the  charter,  State  v.  Madison 
Street  Ry.,  73  Wis.  613  (1888);  or  for  a 
canal  company  to  allow  the  canal  to 
become  out  of  repair.  State  v.  Pennsyl- 
vania, etc.  Canal  Co.,  23  Ohio    St.  121 
(1873);    or  for  a  ferry  company  to  be 
guilty  of  the  same  neglect,   State  v. 
Council  Bluffs,   etc.   Co.,  11    Neb.   354 
(1881);  or  for  filing  false  and   fraudu- 
lent   articles  of  association;  State   v. 
Bailey,  16  Ind.  46  (1861^,  holding  also 
that  mere  insolvency  is  no  cause  for 
forfeiture;    or  for  accepting  subscrip- 
tions by  persons  who  are  notoriously 
insolvent,    Holman  v.  State.    105   Ind. 
569    (1885);    Jersey    City    Gas   Co.    v. 
D wight,  39  N.  J.  Eq.  342  (1878);  or  for  a 
failure  of  a    river-improvement   com- 
pany to  make  an  improvement  as  com- 
manded by  a  statute.   People  v.  Im- 
provement Co.,  103  111.  491  (1883);  or  for 
a  bank  to  loan  to  its  directors  in  viola- 
tion of  a  statute.  Bank  Com'rs  v.  Bank 
of  Buffalo,  6  Paige,  497  (1837);  or  for  a 
charitable  corporation  to  divide  with  a 


lobbyist  an  appropriation  obtained  from 
the  legislature,  People  v.  Dispensary, 
etc.  Soc,  7  Lans.  304  (1873);  or  for  an 
insurance  company  to  insure  in  a  man- 
ner contrary  to  statute  and   to  delay 
payments  of  losses.  State  v.  Standard, 
etc.  Assoc,  38  Ohio  St.  281  (1883);  for  a 
bank  to   contract    debts    beyond   the 
charter  limits,  and  to  make  dividends 
before  resuming  specie  payments,  State 
Bank  v.  State,  1  Blackf.  (Ind.)  267  (1823); 
or    for    persistently    taking    usurious 
interest.  Commonwealth  v.  Commercial 
Bank,  28   Pa.  St.  383   (1857);    State  v. 
Commercial  Bank,  33  Miss.  474  (1857); 
or  for  a  mutual  relief  association  to  be 
run  for  the  benefit  of  its  officers  only. 
State  V.  People's,  etc.  Assoc,  42  Ohio 
St.  579  (1885);  or  for  a  bank  to  suspend 
specie  payments,  State  v.  Bank  of  South 
Carolina,  1  Spears,  L.  (S.  C.)  433  (1841); 
Commercial  Bank  v.  State,  14  Miss.  599 
(1846  ;  but  see  State  v.  New  Orleans, 
etc  Co.,  2  Rob.  (La.)  529  (1842);  or  for  a 
turnpike  company  to  allow  its  road  to 
be  out  of  repair.     Washington,  etc.  T. 
Co.  v.  State,  19  Md.  239  (1862);  Coon  v. 
Plymouth,  etc  Co.,  32  Mich.  248  (1875); 
Darnell  v.  State,  48  Ark.  321  (1887);  State 
V.  Pawtucket,  etc.   Corp.,  8  R.   I.  183 
(1865),  where  the  company  neglected  a 
part  of  its  road  which  it  had  sold  to  a 
municipality.      Not  every    neglect   is 
fatal.     The  question    is  for  the  jury. 
People  V.  Royal  ton,  etc.  Turn  p.  Co.,  11 
Vt.  431  (1839).     And  it  is  no  defense  to 
forfeiture  for  neglect  that  the  road  has 
been  sold  on  an  execution  sale.     Com- 
monwealth V.  Tenth,  etc  Turnp.  Co.,  59 
Mass.  509  (1850).     Nor  is  it  a  defense 
that  the  state  has  authorized  a   com- 
peting line.    Turnpike  Co.   v.  State,  3 
Wall.  310  (1865). 

In  State  v.  Essex  Bank,  8   Vt.  489 


1  Salt  Creek  Val.  Turnp.  Co.  t\  Parks, 
50  Ohio  St.  568  (1893).  The  legislature 
may  authorize  county  commissioners 
to  institute  proceedings  to  forfeit  the 


charters  of  plank-road  companies  which 
do  not  keep  their  plank- roads  in  repair. 
Davis  r.  Vernon,  etc.  Co.,  108  Ga.  491 

(1898). 


1399 


§  633.] 


DISSOLUTION,  FORFEITURE,  ETC. 


[CH. 


XXXVIII. 


A  charter  will  not  be  forfeited  merely  because  the  corporation 
was  incorporated  in  one  state  and  all  its  officers  and  stockholders 


(1836),  the  court  refused  to  decree  a  for- 
feiture, since  the  public  were  not  in- 
jured, though  the  corporation  was 
clearly  guilty  of  misuser.  If  a  gas 
company  is  ordered  by  a  municipality 
under  a  statutory  power  to  reduce  the 
price  of  gas,  it  may  defend  against  for- 
feiture for  non-compliance  by  asserting 
that  the  municipality  was  fraudulently 
induced  to  act.  State  v.  Cincinnati,  etc. 
Co.,  18  Ohio  St.  263  (1868).  If  a  com- 
pany has  incorporated  under  a  general 
act,  but  for  a  purpose  not  authorized  by 
it,  a  suit  for  forfeiture  lies.  State  v. 
Beck,  81  Ind.  501  (1882).  where  a  turn- 
pike company  incorporated  to  purchase 
turnpikes,  a  purpose  not  authorized  by 
the  statute.  The  state  may  create 
causes  for  the  forfeiture  of  insurance 
companies'  charters.  Chicago,  etc.  Ins* 
Co.  V.  Needles,  113  U.  S.  574  (1885). 
Where  the  state  sues  to  forfeit  the 
charter  of  a  railroad  company  which 
has  leased  its  road,  the  latter  cannot 
institute  a  suit  to  test  the  validity  of  that 
lease.  Ogdensburgh,  etc.  R.  R.  v.  Ver- 
mont, etc.  R.  R.  4  Hun,  712  (1875):  s.  C, 
63  N.  Y.  176.  If  quo  warranto  is 
brought  for  not  making  reports,  the 
corporation  may  offer  to  make  the 
reports.  State  v.  Barron,  57  N.  H.  498 
(1876).  By  statute,  forfeiture  may  be 
decreed  where  the  court  decides  that  a 
continuance  of  business  by  an  insur- 
ance company  will  be  hazardous  to  the 
community.  Ward  v.  Farwell,  97  111. 
593  (1881).  The  legislature  cannot 
amend  a  charter  by  forfeiting  the  char- 
ter if  specie  payments  are  not  made 
within  a  specified  time.  State  v.  Tom- 
beckbee  Bank,  2  Stew.  (Ala.)  30  (1829). 
It  cannot  provide  that  charters  shall  be 
forfeited  for  non-payment  of  corpoi'ate 
obligations,  so  far  as  corporations  exist- 
ing before  the  statute  are  concerned. 
Aurora,  etc.  Co.  v.  Holthouse,  7  Ind.  59 
(1855).  But  it  may  prescribe  that  the 
charter    be  repealed  unless  within  a 


certain  time  the  company  do  certain 
things  —  here  make  good  its  capital. 
Lothrop  V.  Stedman,  42  Conn.  583  (1875). 
And  may  force  the  dissolution  of  insolv- 
ent insurance  corporations,  or  corpora- 
tions whose  continuance  of  business 
will  be  dangerous  to  the  public.  Ward 
V.  Farwell,  97  111.  593  (1881);  Chicago 
Life  Ins.  Co.  v.  Auditor,  101  111.  82 
(1881).  So  also  as  to  banks.  The 
remedy  "for  a  violation  of  duty  may 
be  altered  and  changed  by  legisla- 
tive provisions  if  the  power  of  ac- 
complishing the  same  objects  by  any 
means  is  within  the  legitimate  scope  of 
legislative  authority."  Commonwealth 
V.  Farmers',  etc.  Bank,  38  Mass.  542 
(1839).  Quo  warranto  does  not  lie 
against  a  corporation  for  ultra  vires 
acts,  such  as  issuing  watered  stock  or 
purchasing  its  own  stock.  "Acts  in  ex- 
cess of  power  may  undoubtedly  be 
carried  so  far  as  to  amount  to  a  misuser 
of  the  franchise  to  be  a  corporation  and 
a  ground  for  its  forfeiture."  The  courts 
refuse  to  define  what  ultra  vires  acts 
will  and  what  will  not  sustain  quo  war- 
ranto proceedings.  They  must  be  acts 
which  "  so  derange  or  destroy  the  busi- 
ness of  the  corporation  that  it  no  longer 
fulfills  the  end  for  which  it  was  cre- 
ated." State  V.  Minnesota,  etc.  Co.,  40 
Minn.  213  (1889).  A  suit  by  a  state  to  en- 
join the  defendant  railroad  company 
from  beingmanaged  by  directors  elected 
by  the  votes  of  stock  of  the  company 
owned  by  a  foreign  railroad  corporation 
ultra  vires,  and  also  to  declare  such  votes 
and  elections  void,  and  also  for  a  re- 
ceiver, or  in  lieu  of  all  this  for  a  forfeit- 
ure of  the  charter,  is  not  demurrable. 
State  V.  Port  Royal,  etc.  Ry.,  45  S.  C.  470 
(1895). 

The  following  acts  and  facts  do  not 
constitute  a  misuser:  Where,  eight 
years  after  the  organization  of  a  water- 
works company,  the  attorney-general 
applies  for  leave  to  bring  suit  to  forfeit 


1400 


■CH.  XXXVIII.] 


DISSOLUTION,  FORFEITURE,  ETC. 


[§  633. 


reside  in  another  state;  nor  because  it  keeps  its  books  out  of  the 
state,  in  violation  of  a  statute.^ 


the  charter  on  account  of  the  issue  of 
watered  stock  and  bonds,  and  of  viola- 
tions of  city  ordinances,  and  for  not 
keeping  accurate  books  of  account,  the 
city  having  the  right  to  buy  the  works 
at  the  end  of  seven  years,  the  court  will 
not  allow  the  suit  to  be  coninaenced. 
The  court  said:  "  Unless  there  is  a  clear, 
Avilful  misuse,  abuse,  or  non-use  of  the 
franchises  sought  to  be  forfeited,  or 
violation  of  law,  —  something  that 
strikes  at  the  very  groundwork  of  the 
contract  between  the  corporation  and 
the  sovereign  power;  something  that 
amounts  to  a  plain,  wilful  abuse  of 
power  or  violation  of  law,  within  the 
meaning  of  the  statute  on  the  subject, 
whereby  the  corporation  fails  to  fulfill 
the  very  design  and  purpose  of  its  or- 
ganization,—  leave  will  not  be  granted 
by  the  court  to  resort  to  the  extraordi- 
Jiary  remedy  for  a  forfeiture  of  its 
franchises."  State  v.  Janesville  Water 
Co.,  92  Wis.  496,  501  (1896).  A  water- 
works company's  charter  will  not  be 
forfeited  because  another  company  has 
purchased  a  majority  of  its  stock  and 
illegally  placed  a  mortgage  upon  its 
property.     Commonwealth   v.  Punxsu- 


tawney,  etc.  Co.,  47  Atl.  Eep.  843 
(Pa.  1901).  The  fact  that  a  corpora- 
tion has  levied  illegal  assessments  on 
its  stockholders  is  no  ground  for  a  dis- 
solution at  the  instance  of  the  state. 
People  V.  Rosen  stein,  etc.  Co.,  131  Cal. 
153  (1900).  Where  a  company  is  granted 
power  by  the  city  to  build  tracks  on  the 
streets  on  condition  that  the  tracks 
conform  to  the  street  grade,  and  on 
condition  that  the  company  pay  for  the 
paving  between  its  tracks,  its  failure  to 
comply  with  such  conditions  is  no 
ground  for  declaring  a  forfeiture  of  the 
company's  charter.  State  v.  Omaha, 
etc.  Co.,  91  Iowa,  517  (1894).  A  state 
may  forfeit  the  charter  of  a  corpora- 
tion which  is  engaged  in  the  lottery 
business.  State  v.  Nebraska,  etc.  Co., 
93  N.  W.  Rep.  763  (Neb.  1902).  An 
action  by  the  state  against  a  stock  ex- 
change in  San  Francisco,  to  annul  its 
charter  on  the  ground  that  it  was  a 
gambling  institution,  failed  in  People 
V.  San  Francisco  Public  Stock  Ex- 
change, 33  Pac.  Rep.  785  (Cal.  1893),  be- 
cause the  complaint  did  not  clearly 
allege  gambling  acts.  There  is  no 
misuser  of  franchises  by  a  corporation 


1  North,  etc.  Stock  Co.  v.  People,  147 
111.  234  (1893).  In  Kansas  the  charter 
of  a  corporation  may  be  forfeited  at 
the  instance  of  the  state  if  the  corpora- 
tion fails  to  keep  its  general  oflBce  and 
the  office  of  its  treasurer  within  the 
state  in  accordance  with  the  terms  of 
the  statutes.  State  v.  Topeka  Water 
Co.,  59  Kan.  151  (1898).  Where  a  corpo- 
ration removes  all  its  offices  from  the 
state,  a  stockholder  may  apply,  under  a 
statute,  for  a  dissolution  on  the  ground 
•of  an  abuse  of  powers.  Simmons  v. 
Norfolk,  etc.  Steamboat  Co.,  113  N.  C. 
147  (1893).  In  State  v.  Park,  etc.  Lum- 
ber Co.,  58  Minn.  330  (1894),  the  court 
forfeited  the  charter  of  a  company  that 
had  been  incorporated  in  Minnesota 
■for  tiie  purpose  evidently  of  doing  all 


its  business  in  Wisconsin.  The  char- 
ter was  forfeited  on  the  ground  that 
the  company  had  not  complied  with 
the  statute  in  having  its  place  of  busi- 
ness and  keeping  its  books  within  the 
state.  The  court  also  approved  of  a 
decision  in  Wisconsin  to  the  effect  that 
at  common  law  a  charter  may  be  for- 
feited where  the  corporation  keeps  its 
principal  office,  books,  and  records  out 
of  the  state  to  such  an  extent  that  it  is 
impossible  for  the  state  and  its  courts 
to  have  full  jurisdiction  and  visi- 
torial  power  over  the  corporation.  To 
same  effect  where  the  company  kept 
its  books  and  place  of  business  out  of 
the  state.  State  v.  Milwaukee,  etc.  Ry., 
45  Wis.  590  (1878). 


1401 


633.] 


DISSOLUTION,  FORFEITUEE,  ETC. 


[oh.  XXXVIII» 


A  charter  will  be  forfeited  where  it  authorizes  a  medical  school 
but  is  actually  used  to  sell  medical  diplomas.^ 


where  the  objectionable  act  was  by  a 
cashier  in  direct    violation    of  orders 
given  to  him  by  the  directors,  State  v. 
Commercial  Bank,  6  Sm.  &  M.  (Miss.) 
818  (1846);  or  where  a  railroad  or  turn- 
pike company  has  constructed  its  road 
over  land  without  obtaining  the  right 
of  way.  State  v.  Kill  Buck  Turnp.  Co., 
38  Ind.  71  (1871);  Peoples  Hillsdale,  etc. 
Turnp.  Co.,  2  Johns.  190(1807);  or  where 
the  company  deviates  slightly  from  its 
route,  fails  to  file  a  map  of  the  route, 
and   neglects  to  elect  new  directors, 
Harris  v.  Mississippi,  etc.  R.  R„  51  Miss. 
602  (1875) ;  or  fails  to  file  a  statement  of  its 
condition  as  required  by  statute,  the  ob- 
ject of  such  filing  having  ceased.  People 
V.  Improvement  Co.,  103  111.491  (1883);  or 
where  the  public  are  compelled  to  open 
a  drawbridge  for  themselves.  Common- 
wealth V.  Breed,  21  Mass.  460  (1827):  or 
where  a  bank  has  assigned  its  assets  to 
trustees  to  pay  its  debts.  State  v.  Com- 
mercial   Bank,  21  Miss.   569  (1850);  or 
for  the  insolvency  of  a  bank,  it  having 
since  then   become  solvent,   Peoplfe  v. 
Bank    of  Niagara,    6  Cow.  196  (1826): 
People    V.    "Washington,   etc.   Bank,   6 
Cow.  213  (1836)  (jjut  the  contrary  has 
been  held  as  regards  a  suspension  of 
specie  payments  and  a  subsequent  re- 
sumption. Commercial  Bank  v.  State, 
14  Miss.   599  (1846);  Planters'  Bank  v. 
State,  15  Miss.  1-63  —  1846);  or  where  a 
bridge  company  gives  reduced  rates  to 
constant  patrons,  and  gives  free   pas- 
sage in  payment  for  land  and  fails  to 
file      required     statements,    Common- 
wealth V.  Alleg;liany,  etc.  Co.,  20  Pa.  St. 
185  (1852);  or  on  the  ground  that  the 
corporation  has   incorporated  also   in 
another  state.  Commonwealth  v.  Pitts- 
burg, etc.  R.  R,  58  Pa.  St.  26  (1868);  or 
that  required  statements  are  not  filed, 

1  Illinois,  etc.  University  v.  People, 
166  111.  171  (1897).  The  charter  of  a 
medical  college  will  be  forfeited  at  the 
instance  of  a  state  where  it  is  shown 


State  V.  Barron,  58  N.  H.  370  (1878). 
Though  a  corporation  take  more  inter- 
est than  allowed  by  charter  it  may  re- 
cover. The  only  penalty  is  such  as  the 
usury  law  prescribes.  Grand  Gulf  Bank 
V.  Archer,  16  Miss.  151  (1847).  For  a 
vigorous  and  interesting  but  futile  ef- 
fort to  oust  a  going  railroad  company 
from  its  franchises  for  all  kinds  of  mis- 
feasances, malfeasances,  and  non-feas- 
ances, see  International,  etc.  Ry.  v. 
State,  75  Tex.  356  (1889);  and  for  a  suc- 
cessful case  in  the  same  line,  see  East 
Line,  etc.  Ry.  v.  State,  75  Tex.  434(1889). 
It  is  not  for  the  state  to  institute  an 
action  to  dissolve  and  wind  up  a  mut- 
ual benefit  and  building  corporation 
merely  because  some  of  the  mem  bers  are 
dissatisfied.  People  v.  Lowe,  117  N.  Y. 
175,  190  (1889).  No  quo  warranto  lies 
for  using  an  abbreviated  corporate 
name.  People  v.  Bogart,  45  Cal.  73 
(1872).  The  averments  of  misuser  must 
be  definite  and  certain.  Danville,  etc. 
Pr.  Co.  V.  State,  16  Ind.  456  (1861).  And 
the  misuser  must  be  wilful.  State  v. 
Columbia,  etc.  Co.,  2  Sneed  (Tenn.),  254 
(1854);  Baltimore  v.  Connellsville.  etc. 
Ry.,  6  PhiJa.  190  (1866).  In  charging 
misuser  the  word  "wilful "  is  not  nec- 
essary. State  V.  Equitable  L.  etc.  Co., 
142  Mo.  325  (1897).  Concerning  the 
pleadings  in  quo  warranto,  see  People 
V.  Stanford,  77  Cal.  360  (1888),  An  in- 
formation in  the  nature  of  quo  icar- 
ranto  to  forfeit  the  charter  of  a  tem- 
perance enterprise  is  not  definite 
enough  in  its  charges  when  it  charges 
a  perversion  of  funds.  People  t:  Dash- 
away  Assoc,  84  Cal.  114  (1890),  contain- 
ing also  a  discussion  on  the  pleadings 
and  practice.  Where  the  state  has 
brought  suit  to  forfeit  the  charter  of  a 
railroad  company  on  the  ground  that  a 

that  the  college  is  carried  on  chiefly  fco> 
sell   medical   diplomas.     Independent, 
etc.  College  v.  People,  182  111.  274  (1899). 


1403 


CH.  XXXVIII.] 


DISSOLUTION,  FOKFEITUKE,  ETC. 


[§  633. 


Frequently  a  corporation  does  acts  which  its  charter  does  not 
authorize  it  to  do,  or  which  its  charter  or  a  statute  expressly  pro- 
hibits it  from  doing.  The  question  then  arises,  What  is  the  remedy 
of  the  state?  The  right  of  a  stockholder,  or  the  corporation  itself, 
or  a  person  contracting  with  the  corporation,  to  object  to  such 
acts  is  discussed  elsewhere.^  But  may  the  state  object?  Undoubt- 
edly it  may.  It  seems  that  the  state  has  four  remedies.  Its  legis- 
lature may  repeal  the  charter  of  the  corporation  under  the  reserved 
right  of  the  state  to  repeal;-  or  the  state  may  institute  a  proceed- 
ing to  forfeit  the  charter  for  misuser  of  powers;  or  such  pro- 
ceeding may  be  only  to  oust  the  corporation  from  the  exercise  of 
the  usurped  powers;  or,  according  to  some  authorities,  a  suit  may 
be  commenced  in  equity  for  an  injunction  restraining  the  corpo- 
ration from  committing  the  ultra  vires  acts.'  Taking  up  first  the 
subject  of  quo  warranto,  it  seems  that  the  judgment  in  an  ordinary 
quo  warranto  proceeding  may  be  either  a  forfeiture  of  all  the  cor- 
porate franchises  and  of  the  charter,  or  may  be  a  forfeiture  only 
of  the  right  to  continue  to  do  the  illegal  acts,  and  that  it  is  within 
the  discretion  of  the  court  to  say  which  judgment  shall  be  rendered.* 


majority  of  its  stock  is  held,  contrary 
to  the  statutes  and  constitution  of  the 
state,  by  another  railroad  company,  the 
case  may  be  removed  to  the  federal 
court  if  the  latter  company  is  an  in- 
strument of  interstate  commerce  and 
purchased  the  stock  for  interstate  com- 
merce purposes.  It  is  also  removable 
where  the  latter  company  claims  that 
its  charter  existed  before  such  consti- 
tution and  statutes,  and  give  it  a  right 
to  own  such  stock.  South  Carolina  v. 
Port  Royal,  etc.  Ry.,  56  Fed.  Rep.  333 
(1893). 

1  See  Part  IV,  infra. 

2  See  §  639,  infra. 
2  See  §  635,  infra. 

*  State  V.  People's,  etc.  Assoc,  42 
Ohio  St.  579  (1885),  where  only  a  dis- 
continuance of  the  acts  complained  of 
was  ordei'ed;  People  v.  Improvement 
Co.,  103  111.  491  (1882),  where  a  com- 
plete forfeiture  of  charter,  etc.,  was 
decreed.  See  also  People  v.  Utica  Ins. 
Co.,  15  Johns.  357  (1818),  where  an  in- 
surance company  had  engaged  in  bank- 
ing contrary  to  statute.  A  partial 
ouster  does  not  seem  to  differ  much 
from  an  injunction  at  the  instance  of 


the  state.  See  §  635,  infra.  In  State  v. 
Buildmg  Assoc,  85  Ohio  St.  258  (1879),. 
the  court  said  that  where  the  corpora- 
tion is  guilty  of  an  offense  which  by 
statute  is  cause  for  forfeiture  of  its 
franchise  as  a  corporation,  the  court 
will  decree  that  forfeiture;  but  where 
the  cause  of  forfeiture  is  outside  of 
those  prescribed  in  the  statutes,  then 
the  court  may  decree  either  a  forfeit- 
ure of  the  franchise  to  be  a  corporation 
or  an  ouster  from  the  powers  and  acts 
illegally  assumed  or  done.  There  may 
be  a  judgment  of  ouster  of  a  particular 
franchise,  and  not  of  the  whole  char- 
ter. State  V.  Old  Town  Bridge  Corp., 
85  Me.  17  (1892).  Where  two  compet- 
ing gas  companies  agree  on  rates  to 
be  charged  the  public  and  agree  not  to 
interfere  with  each  others'  patrons,  the 
state  may  forfeit  their  charters,  or  the 
court  may  in  its  discretion  declare  a 
forfeiture  or  ouster  of  the  right  of  the 
defendants  to  carry  out  the  illegal  acts. 
State  V.  Portland,  etc.  Co.,  153  lud.  "483 
(1899).  Forfeiture  of  a  water-works 
grant  from  the  city  will  not  be  decreed 
except  in  a  clear  case,  and  where  no 
other  punishment  will  adequately  rem- 


1403 


§  033. j  DISSOLUTION,  FORFEITURE,  ETO.  [CH.  XXXVIII. 

Quo  warranto  lies  to  forfeit  tlie  exclusive  feature  of  a  franchise 
without  forfeiting  the  remainder  of  the  franchise.'  It  has  been 
held  in  a  recent  well  considered  case,  that  where  a  corporation  is 
exercising  a  power  which  it  has  no  charter  right  to  exercise,  a 
judgment  may  oust  it  from  exercising  that  particular  power,  but 
where  the  corporation  has  been  guilty  of  acts  which  by  statute  are 
made  the  cause  of  forfeiture,  the  whole  charter  may  be  forfeited.^ 
The  nature  of  scire  facias,  quo  warranto,  and  information  in  the 
nature  of  a  quo  warranto,  is  explained  in  the  notes  below.* 


edy  the  mischief.  City  of  Ashland  v. 
Ashland,  etc.  Co.,  110  Wis.  94  (1901). 
The  court  may  forfeit  the  charter  of  a 
railroad  corporation  for  illegally  leas- 
ing its  road,  and  need  not  merely  en- 
join the  continuation  of  the  lease. 
East  Line,  etc.  R  R  u.  State,  75  Tex. 
434  (1889).  "  Corporate  charters  are  not 
forfeited  in  fragments,  or  annulled  as 
damages  for  the  violation  of  private 
contracts."  In  condemnation  proceed- 
ings the  defendant  cannot  set  up  that 
the  charter  has  been  violated.  i2e  Long 
Island  R.  R.,  143  N.  Y.  67  (1894).  In 
Pennsylvania,  where  the  state  filed  an 
information  to  declare  ultra  vires  a 
contract  between  a  canal  company  and 
a  coal  company,  whereby  one-half  of 
the  canal  facilities  were  monopolized 
by  the  latter,  the  court  held  that  an 
information  was  a  proper  remedy,  and 
that  the  court,  in  its  judgment  in  favor 
of  the '  state,  might  order  the  corpora- 
tion to  discontinue  the  unauthorized 
act,  and  that  the  judgment  need  not 
oust  the  corporation  from  its  charter 
and  franchises.  Commonwealth  v.  Dela- 
ware, etc.  Canal  Co.,  43  Pa,  St.  295 
(1862).  Although  the  state  proves  the 
case,  yet  the  court  will  not  adjudge 
a  forfeiture  unless  justice  requires  it. 
State  V.  Essex  Bank,  8  Vt  489  (1836). 

1  Commonwealth  v.  Sturtevant,  182 
Pa.  St.  323  (1897). 

2  Marion  Bond  Co.  v.  Mexican,  etc. 
Co.,  65  N.  E.  Rep.  748  (Ind.  1902).  Where 
a  railroad  company  has  been  adjudi- 
cated to  have  no  power  to  own  ware- 
houses it  may  lease  them.     State    v. 


New  Orleans,  etc.  Co.,  33  S.  Rep.  81 
(La.  1902).     See  73  S.  W.  Rep.  645. 

3  Professor  Dwight  explained  these  a8 
follows: 

"■Scire  facias  is  resorted  to  where 
there  is  original  defect  in  the  charter, 
as  if,  e.  g.,  a  grant  obtained  by  fraud. 
It  may  be  used  also  in  the  case  where 
the  charter  was  valid  but  the  powers  of 
a  corporation  have  been  abused.  The 
distinction  taken  in  England  is  this: 
that  a  scire  facias  may  be  resorted  to 
where  a  legal  corporation  in  full  posses- 
sion of  its  powers  abuses  them,  while  a 
quo  warranto  is  applicable  where  a  cor- 
poration, from  a  defect  in  its  constitu- 
tion, such  as  a  loss  of  part  of  its  mem- 
bers which  are  integral  to  its  existence, 
becomes  an  imperfect  body,  but  never- 
theless continues  to  act  as  a  corpora- 
tion.    See  Grant  on  Corporations,  296. 

"Writ  of  quo  warranto.  This  is  an 
ancient  writ,  employed  by  the  king 
against  any  one  who  claims  or  usurps 
an  office  or  franchise,  or  who,  having 
had  a  right  to  the  franchise,  neglects  to 
exercise  it,  to  inquire  by  what  warrant 
he  still  claims  to  exercise  it.  The  theory 
of  the  writ  is,  there  is  an  unlawful  en- 
croachment upon  the  royal  prerogative, 
and,  being  a  dilatory  proceeding  and 
technical,  it  is  not  now  so  much  em- 
ployed as  the  succeeding  remedy. 

"  Information  in  the  §iature  of  a  quo 
warranto.  This  is  in  form  a  criminal 
proceeding.  There  were  two  proceed- 
ings in  the  criminal  law  for  the  convic- 
tion of  criminals.  One  is  termed  an 
information  and  the  other  an  indict- 


1404 


CH.  XXXVIII.] 


DISSOLrTION,  FORFEITURE,  ETC. 


[§  633. 


Quo  warranto  at  the  instance  of  the  state  does  not  lie  merely 
because  a  street  railway  company  has  been  given  street  rights  in 
perpetuity  by  a  municipality,  while  the  statute  limits  its  corporate 
existence  to  thirty  3'-ears.^  In  an  action  by  the  state  to  forfeit  a 
railroad  charter  the  state  must  prove  not  only  that  a  cause  of  for- 


ment.  They  differ  in  this  respect:  that 
while  ail  indictment  is  found  by  a  grand 
jury,  an  information  is  simply  the  alle- 
gation of  an  officer  who  files  it.  In  this 
case  the  attorney-general  proceeds  on 
twofold  ground,  both  to  punish  the 
usurper  and  to  prevent  the  unlawful 
exercise  of  its  franchises.  In  the  case 
of  a  corporation  the  main  object  is 
to  interfere  with  the  exercise  of  the 
franchise.  The  inquiry  is  the  same  as 
in  the  writ  of  quo  warranto;  that  is,  by 
what  warrant  the  franchise  is  exer- 
cised. The  reason  why  it  is  more  re- 
sorted to  is  that  it  is  easy  and  simple  of 
application. 

"  Under  the  New  York  code  the  pro- 
ceeding is  simply  an  action  brought  by 
the  attorney-general,  governed  by  the 
same  general  rules  as  an  action  at  com- 
mon law.  If  judgment  goes  against 
the  corporation  it  is  liable  to  be  dis- 
solved. This  proceeding  in  England 
was  instituted  in  the  great  criminal 
court,  the  king's  or  queen's  bench,  and 
in  New  York  in  the  supreme  court  only, 
which  represents  the  queen's  bench." 

A  quo  u'arranto  is  not  such  a  criminal 
proceeding  as  to  require  the  degree  of 
certainty  as  is  required  in  criminal  pro- 
ceedings. Independent,  etc.  College  v. 
People,  182  111.  274  (1899).  In  the  case 
of  State  V.  Merchants',  etc.  Trust  Co.,  8 
Humph.  (Tenn.)  235  (1847).  the  court 
said:  "By  the  common  law  the  for- 
feiture of  a  charter  can  be  enforced  in 
a  court  of  law  only;  and  the  proceeding 
to  repeal  it  is  by  a  scire  facias  or  an 
information  in  the  nature  of  a  writ  of 
quo  warranto.  A  scire  facias  is  the 
proper  remedy  where  there  is  a  legal 
existing  body  capable  of  acting,  but 
which  had  been  guilty  of  an  abuse  of 
the  power  intrusted  to  it;  a  qiio  war- 
ranto where  there  is  a  body  corporate 

140B 


de  facto,  which  takes  upon  itself  to  act 
as  a  body  corporate,  but  from  some  de- 
fect in  its  constitution  it  cannot  legally 
exercise  the  power  it  afifects  to  use." 
Citing  8  Wheat.  483,  484.  For  the 
ancient  learning  as  to  scire  facias  in 
forfeiting  charters,  see  State  v.  Moore, 
19  Ala.  514  (1851).  When  the  informa- 
tion has  for  its  object  to  oust  the  de- 
fendants from  acting  as  a  corporation, 
and  to  test  the  fact  of  their  incorpora- 
tion, it  must  be  filed  against  individuals. 
When  the  object  is  to  effect  a  dissolu- 
tion of  a  corporation  which  has  had  an 
actual  existence,  or  to  oust  such  corpo- 
ration of  some  franchise  which  it  has 
unlawfully  exercised,  the  information 
must  be  filed  against  the  corporation- 
People  V.  Rensselaer,  etc.  R.  R.,  15  Wend, 
lis  (1836).  Quo  warranto  against  a 
corporation  in  its  corporate  name  ad- 
mits that  it  was  legally  incorporated. 
North,  etc.  Stock  Co.  u  People,  147  111. 
234  (1893).  As  to  the  pleadings  in  quo 
warranto,  see  Distilling,  etc.  Co.  v.  Peo- 
ple, 156  111.  448  (1895);  People  v.  Stan- 
ford, 77  Cal.  360  (1888).  As  to  the  plead- 
ings in  quo  warranto  against  a  street 
railway  company  assuming  to  be  a  cor- 
poration, see  Smith  v.  State.  140  Ind- 
343  (1895).  For  pleadings  in  quo  war- 
ranto proceedings  by  the  state  to  oust 
a  corporation  from  usurped  franchises 
and  to  forfeit  a  railroad  charter,  see 
People  V.  Stanford,  77  Cal.  360  (1888), 
holding  also  that  the  statute  of  limita- 
tions is  no  bar.  The  state  cannot  file  a 
quo  warranto  proceeding  to  forfeit  a 
charter,  where  a  receiver  is  already  in 
charge,  unless  the  consent  of  the  court 
is  first  obtained.  Wayne  Pike  Co.  v. 
State,  134  Ind.  672  (1893). 

1  Attorney-General   v.    Detroit   Sub- 
urban Ry.,  96  Mich.  65  (1893). 


§  633.J 


DISSOLUTION,  FORFEITURE,  ETC. 


[cn.  XXXVIII. 


feiture  did  exist,  but  that  it  still  continues  to  exist.  Moreover 
some  public  interest  must  be  involved  in  obtaining  the  forfeiture.^ 
Quo  warranto  lies  against  r  railroad  corporation  to  recover  back  to 
the  state  canal  lands  which  the  railroad  is  using.-  Quo  warranto 
or  an  information  in  the  nature  thereof  is  the  proper  remedy  where 
the  corporation  has  not  been  legally  incorporated.^  The  attorney- 
general  may  file  an  information  in  quo  warranto  without  leave  of 
the  court.^  Quo  warranto  for  claiming  to  be  a  corporation  should 
be  against  the  officers  of  the  corporation  as  individuals.^  Under 
the  Massachusetts  statutes  any  person  who  is  injured  by  a  corpo- 


1  People  V.  Ulster,  etc.  R  R.,  128  N.  Y. 
240  (1891).     See  also  §  634,  infra. 

2  Ohio  V.  Railway  Co.,  53  Ohio  St.  189 
(1895). 

3  The  state  may  forfeit  a  charter 
where  the  statute  required  five  persons 
to  sign  and  acknowledge  the  articles, 
but  only  four  out  of  the  five  actually 
did  acknowledge  them.  People  v.  Mon- 
tecito  Water  Co.,  97  Cal.  276  (1893).  In 
quo  warranto  proceedings  on  the 
ground  that  the  company  was  not  prop- 
erly incorporated,  the  corporation  it- 
self is  a  necessary  party  defendant. 
People  V.  Montecito  Water  Co.,  97  Cal. 
276  (1893).  A  charter  of  the  company 
will  be  forfeited  at  the  instance  of  the 
state  where  some  of  the  parties  who  are 
alleged  to  join  in  the  corporation  did 
not  so  join,  but  their  names  were  in- 
serted without  their  sanction  or  author- 
ity. Such  parties  are  not  liable  as  stock- 
holders. La  Banque  d'Hochelaga  v. 
Murray,  L.  R  15  App.  Cas.  414  (1890). 
See  also  §S  286,  237,  supra.  In  a  quo 
warranto  proceeding  to  declare  void 
an  alleged  charter  the  corporation  is  a 
necessary  party  defendant.  People  v. 
Flint,  64  CaL  49  (1883).  After  the  at- 
torney-general institutes  quo  warranto 
proceedings  and  much  testimony  is 
taken,  and  then  the  proceeding  is  dis- 
continued, and  the  company  proceeds 
to  expend  money  and  make  contracts, 
the  attorney-general  will  not  be  allowed 
to  institute  new  proceedings.  Re  Equity 
Gas-Light  Co.,  10  N.  Y.  Supp.  801  (1890'. 
See  141  N.  Y.  232  (1894).  In  quo  war- 
ranto charging  defendants  with  usurp- 


ing a  public  franchise  to  operate  a  ferry, 
where  they  attempted  to  defend  on  the 
ground  that  they  had  a  legal  right  to 
use  the  ferry,  the  burden  was  on  them 
to  show  a  valid  title.  Gunterman  v. 
People,  138  111.  518  (1891).  Where  an  in- 
corporation is  for  several  objects,  one  of 
which  is  illegal,  the  charter  will  be  for- 
feited, the  objects  not  being  clearly 
separable.  People  v.  Chicago  Gas  T. 
Co.,  130  111.  268  (1889).  The  issuing  of 
transferable  certificates  of  stock  is  not 
assuming  the  functions  of  a  corporation 
Rice  V.  Rockefeller,  56  Hun,  516  (1890); 
reversed  on  other  points  in  134  N.  Y. 
174.  A  suit  instituted  by  the  state  to 
forfeit  a  charter  cannot  be  removed  to 
the  federal  court  on  the  ground  that  a 
contract  exists  between  the  corporation 
and  the  state,  and  that  such  contract 
will  be  violated.  Commonwealth  v. 
Louisville  Bridge  Co.,  42  Fed.  Rep.  241 
(1890).  A  corporation  incorporated  for 
an  illegal  purpose,  such  as  buying  a 
majority  or  all  of  the  stock  in  each  of 
four  competing  gas  corporations,  and 
thereby  creating  a  monopoly,  is  subject 
to  having  its  charter  forfeited  at  the 
instance  of  the  attorney-general.  People 
V.  Chicago  Gas  Trust  Co.,  130  111.  268 
(1889).  In  quo  warranto  proceedings 
against  a  turnpike  company,  the  latter 
has  the  burden  of  proof  to  show  by 
what  authority  it  is  exercising  its  priv- 
ileges. People  V.  Volcano,  etc.  Co.,  100 
CaL  87  (1893). 

*  State  V.  Equitable  Loan,  etc.  Co.,  14? 
Mo.  325  (1897). 

5  State  V.  Fleming,  147  Mo.  1  (1898). 


1406 


CH.  XXXVIII.]  DISSOLUTION,  FORFEITURE,  ETC.  [§  634. 

ration  may  file  an  information  in  the  nature  of  quo  warranto  against 
the  corporation.^  But  at  common  law  an  information  to  forfeit 
a  charter  does  not  lie  for  wrongs  to  creditors  and  stockholders.  It 
lies  only  for  ultra  vires  acts,  wilful  and  continued,  and  relating 
to  some  franchise  granted.^  Quo  warranto  lies  against  foreign  cor- 
porations doing  business  illegally  in  the  state.'  The  state  by  quo 
warranto  may  oust  a  railroad  from  discriminations  in  favor  of  oil 
shipped  in  tank  cars.*  An  exemption  from  taxation  is  not  a  fran- 
chise. Hence,  quo  warranto  does  not  lie  to  oust  the  corporation 
from  such  exemption.^  Although  quo  warranto  can  be  only  for 
acts  committed  within  five  years  in  Ohio,  yet  it  serves  to  oust  a 
<3ompany  from  exercising  a  power  which  it  has  not  exercised  con- 
tinuously for  twenty  years.**  The  court  has  no  power  to  appoint  a 
receiver  in  quo  warranto  proceedings.  A  receiver  can  be  appointed 
only  in  a  suit  in  equity  unless  a  statute  provides  otherwise.'' 

§  634.  Non-user  as  a  cause  for  forfeiture  —  Forfeiture  for  fail- 
ure to  complete  a  railroad  or  enterprise. —  Non-user  of  its  franchise 
is  a  cause  for  forfeiture  where  a  corporation  is  possessed  not  only 
of  its  franchise  to  be  a  corporation,  but  also  other  franchises,  such 
as  a  right  of  way,  which  the  public  are  interested  in  having  kept 
in  active  use.  Thus,  where  a  charter  required  a  street  railway 
company  to  lay  its  tracks  on  certain  streets,  and  the  company  did 
so  on  a  part  of  such  streets  and  then  removed  them,  and  for  many 
years  operated  no  cars  thereon  at  all,  the  court  held  that  the  char- 
ter miffht  be  forfeited  at  the  instance  of  the  state.*    Where  a  street 


'O" 


iHartnettr.  Plumbers' Supply  Assoc,  <  State   v.  Cincinnati,  etc  R.  R.,  47 

169  Mass.  229  (1897).  Ohio  St.  130  (1890). 

2  State  V.  Southern,  etc  Assoc,  31  S.  &  International,  etc  Ry.  v.  State,  75 
Rep.  375  (Ala.  1903).  Tex.  356  (1889). 

3  State  V.  Western,  etc  Ins.  Co.,  47  « State  v.  Standard  Oil  Co.,  49  Ohio 
Ohio  St.  167  (1890);   State  v.  Fidelity,  St.  137(1892). 

etc  Co.,  39  Minn.  538  (1888).     Quo  war-  "^  Commonwealth  v.  Order  of  Vesta, 

ranto  against  a  foreign  corporation  il-  156  Pa.  St.  531  (1893). 

legally  doing  business  in  the  state  must  ^  People  v.  Broadway  R.  R,  126  N.  Y. 

be  against  the  corporation  as  such  and  29    (1891).      A  suit  for   forfeiture   lies 

not    merely   agaiast    its    officers    and  where  a  railroad  company  takes  up  part 

agents.     State  v.  Somerby,  42  Minn.  55  of  its  track.    State  v.  West,  etc  Ry.,  34 

(1899).     Where  a   foreign  corporation  Wis.  197  (1874);  s.  C,  36  Wis.  466  (1874), 

has  not  complied  with  reasonable  reg-  Or    where   a    railroad  company  con- 

ulations  by  the  state  as  a  condition  of  structs  but  part  of  its  road,  has  no  sta- 

its  doing  business  in  the  state,  quo  war-  tion  or  freight-houses  and  no  passenger 

ranto  lies   to    oust  it  of  its  claim  of  coaches,  but  engages  only  in  getting 

right  to  do  business  in  the  state.   State  out  coal  from  beds  owned  by  those  in- 

V.  American,  etc.  Co.,  69  Pac  Rep.  563  terested  in  the  company.    State  v.  Rail- 

(Kan.  1902).    An  injunction  lies  at  the  way  Co.,  40  Ohio  St.  504  (1884).    But  the 

instance  of  the  state  against   foreign  suit  does  not  lie  on  the  ground  that  the 

•corporations.    See  g  635,  infra.  company  does  not  intend  to  complete 

1407 


§  634.] 


DISSOLUTION,  FORFEITURE,  ETC. 


[CH.  XXXVIII, 


railway  does  not  run  its  cars  as  required  by  the  ordinance,  th^' 
state,  at  the  instance  of  the  city,  may  hy  quo  warranto  proceedings 
oust  the  company  from  its  rights  in  said  ordinance.  The  remedy 
in  such  a  case  is  not  in  equity.^  A  street  railway  grant  from  the 
city  may  be  forfeited  at  the  instance  of  the  state  where  the  com- 
pany runs  but  one  car  a  day  in  order  t@  hold  the  franchise.  It 
may  also  be  forfeited  for  failure  to  construct  the  entire  line  within 
the  time  specified  by  statute.^ 

It  is  good  cause  for  forfeiture  of  a  charter  by  judicial  decree 
that  a  railroad  company  does  not  complete  its  road,  or  does  not 
complete  it  within  a  prescribed  time.^     And  such  a  forfeiture  at 


its  road.  State  v.  Kingan,  51  Ind.  143 
(1875);  State  v.  Beck,  81  Ind.  501  (1882). 
No  forfeiture  is  decreed  because  a  rail- 
road company  discontinues  passenger 
trains  over  a  branch  line  which  is  run 
at  a  loss  by  reason  of  horse-car  compe- 
tition. Commonwealth  v.  Fitchburg 
R.  R,  78  Mass.  180  (1858).  The  lessee  of 
a  railroad  is  a  proper  party  defendant 
to  a  suit  to  forfeit  franchises  for  non- 
user.  People  V.  Albany,  etc.  R  R,  77 
N.  Y.  233  (1879);  State  v.  Minnesota 
Cent.  Ry.,  36  Minn.  246  (1886).  An  as- 
signment of  all  corporate  assets  to 
others,  thereby  rendering  the  corpora- 
tion incapable  of  continuing  business, 
is  cause  for  forfeiture.  State  v.  Real 
Estate  Bank,  5  Ark.  595  (1843).  A  bank 
which  ceases  to  do  business  and  to  file 
statements,  and  which  makes  improper 
loans  to  its  directors,  is  liable  to  forfeit- 
ure of  charter.  State  v.  Seneca  County 
Bank,  5  Ohio  St.  171  (1856).  It  is  not  a 
non-user  for  a  county-fair  corporation 
to  rent  its  grounds.  Kent  County  Agr. 
Soc.  V.  Houseman,  81  Mich.  609  (1890). 
Where  the  statute  prescribes  that  non- 
user  for  a  year  shall  be  cause  for  for- 
feiture, a  non-user  for  a  few  days  is  in- 
sufficient. People  V.  Atlantic,  etc  R 
R,  125  N.  Y.  513  (i891).  A  railroad 
which  is  leased  to  another  company 
without  statutory  provisions  to  do  so  is 
subject  to  forfeiture  at  the  instance  of 
the  state.  State  v.  Atchison,  etc.  R  R., 
24  Neb.  143  (1888).  As  to  a  failure  of  a 
railroad  corporation  to  complete  its 
road,  see  §  638,  infra.     The  abandon- 


1408 


ment  of  the  right  of  way  by  the  rail- 
road is  no  ground  for  an  action  of  tres- 
pass by  the  former  owner  to  recover  it. 
Logan  V.  Vernon,  etc.  R.  R,  90  Ind.  553 
(1883).  See,  on  this  subject,  §  906,  in- 
fra. 

1  In  this  case  the  company  had  not 
run  its  cars  for  three  years.  State  v. 
East  Fifth  St.  Ry.,  140  Mo.  539  (1897). 

2  People  V.  Sutter  St.  Ry.,  117  Cal.  604 
(1897).  holding  also  that  the  court  may 
impose  a  fine  instead  of  forfeiting  the 
rights. 

3  The  failure  of  a  railroad  corporation 
to  complete  its  line  as  laid  down  in  the 
charter  is  ordinarily  good  cause  for 
forfeiture  of  its  charter,  but  the  state 
may  waive  it.  People  v.  Ulster,  etc.  R. 
R.  128  N.  Y.  240  (1891).  See  also  New 
York,  etc.  R  R  v.  New  York,  N.  H.  etc. 
R  R,  52  Conn.  274,  284  (1884).  A  rail- 
road may  construct  its  line  long  subse- 
quently to  the  date  of  its  charter,  there 
being  no  limit  in  its  charter  as  to  time 
of  construction.  Western,  etc.  R  R.'s 
Appeal,  104  Pa.  St.  399  (1883);  Union 
Canal  Co.  v.  Young,  1  Whart.  (Pa.)  410 
(1836).  If  the  time  limited  for  the  com- 
pletion of  the  road  has  expired,  this  is 
a  defense  to  eminent-domain  proceed- 
ings. Morris,  etc.  R  R  v.  Central,  etc. 
R  R,  31  N.  J.  L.  205  (1865).  Cf  §  637, 
infra.  The  state  may  forfeit  the  char- 
ter where  the  road  is  not  constructed 
within  the  time  fixed  by  the  charter 
and  amendments;  also  where  it  aban- 
dons a  part  of  its  lines.  State  v.  Non- 
connah  Turnp.  Co.,  17  S.  W.  Rep.   128 


CH.  XXXVIII.] 


DISSOLUTION,  FORFEITURE,  ETC. 


[§  634. 


the  instance  of  the  state,  by  reason  of  the  failure  of  the  corpora- 
tion to  complete  its  enterprise  as  required  by  charter,  has  often  been 
decreed.^ 


(Tenn.  1875).  Where  a  railroad  com- 
pany mortgages  such  part  of  its  road 
as  is  completed,  and  the  mortgage  is 
foreclosed,  the  purchasers  are  not 
bound  to  go  on  and  complete  the  road. 
Failure  on  their  part  to  complete  it  is 
no  defense  to  an  action  on  a  subscrip- 
tion. Chartiers  Ry.  v.  Hodgeus,  85  Pa. 
St.  501  (1877).  The  court  will  not  for- 
feit the  municipal  grant  to  a  water- 
works company,  even  though  the  latter 
does  not  extend  its  mains  as  required 
by  the  charter.  Mandamus  iS  the 
proper  remedy.  City  of  Topeka  v.  To- 
peka  Water  Co.,  58  Kan.  349  (1897).  Cf. 
%  931,  infra. 

1  People  V.  Kingston,  etc.  Turnp.  Co., 
23  Wend.  193  (1840),  where  the  road 
was  not  constructed  as  required; 
Thompson  v.  People,  23  Wend.  537 
(1840),  reversing  21  Wend.  235,  holding 
that  an  immaterial  omission  is  not 
fatal;  People  v.  National  Sav.  Bank,  11 
N.  E.  Rep.  170  (111.  1887);  aff'd,  129  IlL 
618  (1869),  forfeiting  for  failure  to  com- 
plete subscriptions  as  required  by  char- 
ter; Eastern,  etc.  Co.  v.  Regina,  22  Eug. 
L.  &  Eq.  328  (1853),  for  failure  to  pay  in 
capital  stock  as  required  by  charter; 
People  V.  City  Bank,  7  Colo.  226  (1883), 
to  same  effect.  See  People  v.  Jackson, 
etc.  P.  R  Co.,  9  Mich.  285  (1861),  for  a 
case  of  the  construction  of  a  road  in 
sections.  And  where  the  charter  pre- 
scribes that  a  certain  number  of  miles 
shall  be  completed  within  a  certain 
time,  but  does  not  prescribe  that  the 
effect  of  non-compliance  shall  be  a  for- 
feiture, then  the  only  way  of  forfeiting 
the  charter  is  by  a  suit  and  a  decree  of 
a  court.  Hughes  v.  Northern  Pac.  Ry., 
18  Fed.  Rep.  106  (1883);  Arthur  v.  Com- 
mercial Bank,  17  Miss.  394,  430  (1848). 
The  fact  that  a  corporation  commences 
business  in  another  state  within  a  year 
suffices  for  a  charter  provision  that  it 
must  commence  business  within  a  year. 


Re  Capital  F.  Ins.  Co.,  L.  R  21  Ch.  1/ 
209  (1882);  People  v.  Kankakee  Im 
provement  Co.,  103  IlL  491  (1882).  In 
this  case  the  charter  required  the  pro- 
posed improvements  to  be  comple'iied 
within  eight  years  as  far  east  a£;  che 
state  line.  The  company  completo-l  as 
far  east  as  Kankakee  City,  and  claimed 
the  right  to  exercise  the  option  of  mak- 
ing or  not  making  further  impiove- 
ments  between  that  point  and  the  state 
line.  The  court  said:  "  The  non-compli- 
ance with  the  requirements  was  per  ae 
a  misuser,  and  a  cause  of  forfeiture  of 
the  franchise  as  for  condition  broken; '' 
and  "  we  can  see  here  but  one  entire 
franchise  for  the  improvement  of  these 
streams,  and  that  this  obligation  to 
make  the  improvements  above  Kanka- 
kee City  was  a  condition  annexed  ta 
this  entire  franchise.  .  .  .  We  think 
the  non-compliance  with  the  require- 
ment in  question  was  a  cause  of  for- 
feiture of  the  entire  franchise."  The 
bondholders  of  the  company  take  the 
risk  of  this  forfeiture  of  the  charter  for 
non-compliance  with  conditions.  Silli- 
man  v.  Fredericksburg,  etc.  R  R,  27 
Gratt.  (Va.)  119  (1876),  where,  however, 
the  corporate  officers  were  endeavoring 
to  enforce  fraudulent  bonds.  Some  of 
the  English  railway  acts  are  plainly 
not  obligatory,  but  only  enabling;  and 
it  is  held  that  the  evident  intention  of 
parliament  was  to  permit  the  compa- 
nies to  complete  their  lines  as  far  as 
possible  or  desirable  before  the  limit  of 
time  set,  and  to  abandon  the  remain- 
ing portion.  York,  etc.  Ry.  v.  The 
Queen,  1  El.  &  Bl.  858  (1853),  reversing 
same  case,  1  EL  &  BL  178;  Great  West- 
ern Ry.  V.  The  Queen,  1  EL  &  BL  874 
(1853),  reversing  same  case,  1  EL  &  BL 
253;  Edinburgh,  etc.  Ry.  v.  Philip,  3 
Macq.  H.  L.  Cas.  514,  526  (1857);  Scot- 
tish N.  E.  Ry.  r.  Stewart,  3  Macq.  H.  L. 
Cas.  382,  414  (1859).     See  also  Rex  v. 


(89) 


1409 


§  634.] 


DISSOLUTION,  FORFEITURE,  ETC. 


[CH.  XXXVIII. 


A  water-works  charter  will  be  forfeited  where  the  company  has 
abandoned  business  and  attempted  to  sell  out,^  It  is  not  the  duty 
of  the  attorney-general,  however,  to  lie  in  wait  for  all  corporations, 
which  have  not  fully  or  technically  complied  with  all  the  requisites 
of  their  charters.- 

Turning-  now  to  purely  private  corporations  which  do  not  exer- 
cise any  great  public  franchises,  it  is  the  rule  here  too  that  for  non- 
user  quo  warranto  will  lie.'  Thus  where  a  river-improvement  com- 
pany that  has  received  a  land  grant  from  the  state  for  the  purpose 
of  improving  the  river  has  long  ceased  operations,  and  the  parties 
interested  in  it  departed,  an  injunction  and  dissolution  at  the  in- 
stance of  the  state  may  be  obtained.'' 

A  bill  filed  by  the  attorney -general  to  enjoin  the  construction  of 
an  electric  street  railroad  will  be  dismissed  where  it  was  filed  really 
at  the  instance  of  rival  companies.^     A  corporation  is  not  bound  to 


Birmingham  Canal,  2  W.  Bl.  708  (1780), 
by  Lord  Mansfield;  Blakemore  v,  Gla- 
morganshire Canal,  1  Myl.  &  K.  163 
(1832),  by  Lord  Eldon;  The  Queen  v. 
Eastern  Counties  Ry.,  10  Ad.  &  El.  531 
(1839);  The  Queen  v.  Lancashire,  etc. 
Ry.,  1  El.  &  Bl.  228  (1852). 

iCity  Water  Co.  v.  State,  33  S.  W. 
Rep.  259  (Tex.  1895). 

2  People  u  De  Grauw,  133  N.  Y.  254 
(1892);  People  v.  Equity  G.  L.  Co.,  141 
N.  Y.  233  (1894);  Lorillard  v.  Clyde,  142 
N.  Y.  456,  465,  466  (1894);  People  v. 
Ulster,  eta  R  R.,  128  N.  Y.  240  (1891); 
United  States  v.  San  Jacinto  Tin  Co., 
125  U.  S.  273  (1888). 

3 The  state  may  forfeit- a  charter  for 
wilful  non-user,  although  the  corpora- 
tion is  a  private  one.  People  v.  Milk 
Exchange,  133  N.  Y.  565  (1892);  Edgar 
Coll.  Inst.  V.  People,  142  111.  363  (1892). 
See  Attorney-General  v.  Simonton,  78 
N.  C.  57  (1878).  holding  that  the  suit  will 
not  lie,  although  only  five  shares  of  stock 
were  subscribed  for  and  no  other  act 
done  by  the  corporation;  State  v.  So- 
ciete  Republicaine,  etc.,  9  Mo.  App.  114 
(1880),  holding  the  same,  though  the 
company  was  dormant  But  the  case 
of  State  V.  Pipher,  28  Kan.  128  (1882), 
forfeited  the  charter  of  an  agricultural 
college  for  non-user  for  nineteen  years. 
And  see  dicta  in  Terrett  v.  Taylor,  9 


Cranch,  43,  51  (1815);  State  v.  Commer- 
cial Bank,  21  Miss.  569  (1850).  In  New 
York  by  statute  such  a  suit  will  lie. 
Code  Civ.  Pro.,  §  1798.  See  also  Re 
Jackson,  etc.  Ins.  Co..  4  Sandf.  Ch.  559 
(1847).  Where  a  corporation  has  aban- 
doned its  authorized  business  and  en- 
gaged in  another  it  will  be  wound  up. 
This  is  different  from  a  case  where  the 
directors  have  merely  and  incidentally 
committed  ultra  vires  acts.  Be  Crown, 
etc.  Bank,  L.  R.  44  Ch.  D.  634(1890).  An 
abandonment  by  a  corporation  of  part 
of  the  purposes  of  its  incorporation  is 
no  cause  for  dissolution.  Norwegian 
Titanic  Iron  Co.,  35  Beav.  223  (1865), 
where,  its  purpose  being  to  purchase 
English  and  Norway  mines,  it  sold  the 
English  mines.  By  the  terms  of  a  new 
constitution,  all  corporations  which 
have  failed  to  organize  before  its  adop- 
tion may  be  deemed  to  have  forfeited 
their  franchises  thereby.  Chinclecla- 
manch,  etc.  Co.  v.  Commonwealth,  100 
Pa,  St  438  (1882). 

*  State  V.  Cannon,  etc.  Assoc,  67  Minn. 
14  (1896). 

5  People  V.  General  Electric  Ry.,  173 
111.  129  (1898).  A  bill  filed  by  a  stock- 
holder under  the  terms  of  a  statute 
to  bring  about  a  dissolution  and  wind- 
ing up  of  the  corporation  will  be  dis- 
missed  where   it  is  shown  that  the 


1410 


•CH.  XXXVIII.] 


DISSOLUTION,  FOKFEITUKE,  ETC. 


[§  635. 


exercise  all  the  powers  contained  in  its  charter.^  Even  though  the 
property  of  a  private  corporation  is  sold  out  on  execution  and  it 
does  no  business  for  eight  years,  yet  it  may  resume  business.^ 

§  635.  Injunction  at  the  instance  of  tlie  state. —  Turning  now  to 
the  subject  of  injunction  as  a  remedy,  it  is  very  doubtful  whether 
the  state  may  file  a  bill  in  equity  to  enjoin  a  corporation  from  com- 
mitting an  ultra  vires  act.  The  remedy  of  the  state  is  quo  warranto} 
In  England,  however,  a  bill  has  been  sustained  to  restrain  a  railroad 
corporation  from  engaging  in  the  coal  business.*  And  an  injunction 
lies  to  enjoin  a  corporation,  the  same  as  an  individual,  from  creat- 
ing a  public  nuisance.^  The  state  may  enjoin  a  railroad  corpora- 
tion from  purchasing  a  competing  line  in  violation  of  the  constitu- 
tion.*^    In  Wisconsin  it  is  held  that  the  attorney-general  may  enjoin 


suit  is  brought  in  the  interest  of  rival 
corporations.  The  reason  for  dismissal 
is  that  the  suit  is  a  fraud  upon  the 
court.  Watson  v.  Le  Grand,  etc.  Co.,  177 
III.  203  (1898).  The  state  cannot  bring 
quo  warranto  to  prevent  a  street  rail- 
way company  from  carrying  freight 
where  the  proceedings  are  instituted 
at  the  instance  of  a  competitor  for  the 
purpose  of  preventing  competition. 
State  V.  Dayton,  eta  Co.,  60  N.  E.Rep.  291 
(Ohio,  1901). 

1  Illinois,  etc.  Bank  v.  Doud,  105  Fed. 
Rep.  123  (1900). 

2  Geneva,  etc.  Co.  v.  Coursey,  45  N.  Y. 
App.  Div.  268  (1899).  See  also  §  631, 
supra, 

3  In  quo  warranto  proceedings  it  is 
not  necessary  to  forfeit  the  whole  char- 
ter or  none.  There  may  be  judgment 
of  ouster  from  particular  powers.  See 
§  633,  supra. 

•*  Attorney-General  v.  Great  Northern 
Ry.,  1  Dr.  &  Sm.  154  (1860).  But  the 
attorney-general  cannot  enjoin  a  cor- 
porate act  merely  because  it  is  ultra 
vires.  Some  injury  to  the  public  must 
be  involved.  The  attorney-general's 
suit,  at  the  instance  of  a  manufacturer, 
to  enjoin  one  railroad  from  leasing  its 
rolling-stock  to  another  failed.  Attor- 
ney-General V.  Great  Eastern  Ry,,  L.  R 
11  Ch.  D.  449  (1879).  A  court  of  equity 
cannot  compel  a  corporation  to  cease 
collecting  tolls,  although  it  has  not  im- 
proved a  stream   as    required   by  its 


charter.  Pixley  v.  Roanoke,  etc.  Co.,  75 
Va.  320  (1881).  In  Attorney-General  v. 
Mid-Kent  Ry.,  L.  R  3  Ch.  App.  100  (1867), 
a  mandatory  injunction  requiring  the 
defendant  to  construct  a  bridge  was 
granted.  The  case  of  Attorney-General 
V.  North,  etc.  Tramways  Co.,  72  L.  T. 
Rep.  340  (1895),  was  an  action  brought 
by  the  attorney-general  at  the  relation 
of  several  car  manufacturers  to  restrain 
a  street-railway  company  from  manu- 
facturing and  selling  rolling-stock  to 
other  companies  on  the  ground  that 
such  acts  were  ultra  vires. 

5  Attorney-General  v.  Jamaica  Pond, 
etc.  Corp.,  133  Mass.  361  (1882).  A  cor- 
poration  may  be  enjoined  from  doing 
criminal  acts  —  in  this  case  prize-fight- 
ing—  and  a  receiver  may  be  put  in. 
Columbian  Athletic  Club  v.  State,  143 
Ind.  98  (1895). 

6  Louisville,  etc.  R  R  v.  Common- 
wealth, 97  Ky.  675  (1895);  aflf'd  in  161 
U.  S.  677  (1896).  sub  nam.  Louisville, 
etc.  Ry.  V.  Kentucky.  A  court  of  equity 
has  no  jurisdiction  to  forfeit  the  fran- 
chises of  a^  corporation,  but  it  may,  at 
the  instance  of  the  attorney  general, 
enjoin  the  abuse  or  misuse  of  corporate 
franchises.  State  v.  American,  etc. 
Assoc.,  64  Minn.  349  (1896).  In  the  case 
of  Trust  Co.  et<3.  v.  State,  109  Ga.  736 
(1900),  there  is  a  dictum  that  the  state 
may  enjoin  a  corporation  from  illegally 
purchasing  shares  of  stock  in  other  cor- 
porations where  it  is  shown  that  an 


1411 


§  ess."" 


DISSOLUTION,  FORFEITUKE,  ETC. 


[CH.  XXXV III. 


railroad  companies  from  taking  greater  rates  than  are  prescribed 
by  statute;^  and  in  some  of  the  states  such  a  bill  will  lie  by  statute.- 
The  attorney-general  may  file  a  bill  to  restrain  a  railroad  company 
from  laying  its  tracks  on  the  street,  and  it  is  not  necessar}'  for  him  to 
prove  any  injury  to  the  public'  A  state  may  maintain  a  suit  for  an 
injunction  against  an  elevator  company  using  all  its  capacity  for  the 
benefit  of  its  stockholdeis,  where  the  objection  is  not  raised  that 
there  is  an  adequate  remedy  at  law.'* 

The  weight  of  authority,  however,  is  that  the  remedy  of  the 
state  is  by  quo  warranto  and  not  by  a  bill  in  equity  for  an  injunc- 
tion.^    As,  for  instance,  the  attorney-general  cannot  enjoin  a  gas 


injury  to  the  public  is  involved.  The 
court  said  that  while  injunction  was 
not  the  proper  remedy  for  an  act  which 
was  naerely  ultra  vires,  yet  where  some 
public  interest  intervened,  such  an  in- 
junction would  lie. 

1  Attorney-Genei-al  v.  Railroad  Cos., 
35  Wis.  523,  553  (1874),  reviewing  many 
cases;  butc/.  Strong  i\  McCagg,  55  Wis. 
624  (1882).  A  lease  by  a  domestic  rail- 
road company  of  its  railroad  to  a 
foreign  railroad  corporation  is  illegal, 
especially  where  it  is  expressly  pro- 
hibited by  statute.  The  court  will  en- 
join the  lease  upon  the  application  of 
the  attorney-general  where  the  effect 
of  the  lease  would  be  to  create  a  com- 
bination in  the  transportation  of  coal 
and  to  destroy  competition  in  produc- 
tion and  sale.  Stockton  v.  Central  R.  R 
of  N.  J.,  50  N.  J.  Eq.  52  (1892).  That  a 
bill  in  equity  will  lie,  at  the  instance  of 
the  United  States  government,  to  de- 
clare invalid  a  violation  of  a  federal 
charter,  see  U.  S.  v.  Western  U.  Tel.  Co., 
50  Fed.  Rep.  28  (1892);  aff'd,  IGO  U.  S.  1 
(1895). 

2  State  V.  Merchants',  etc.  Co.,  8 
Humph.  (Tenn.)  254  (1874),  where  an 
insurance  company  was  restrained  from 
banking.  So  also  in  New  York  Bank 
Com'rs  V.  Bank  of  Buffalo,  6  Paige,  496 
(1837);  Brinckerhoff  v.  Bostwick,  88  N. 
Y.  52  (1882),  explaining  the  difference 
between  this  class  of  cases  and  cases 
where  other  parties  are  complainants. 
Concerning  the  power  of  the  state  to 
object  to  an  ultra  vires  act  of  a  private 


corporation  by  any  proceeding  other 
than  quo  warranto,  see  People  v.  Bal- 
lard, 134  N.  Y.  269  (1892),  a  carefully 
considered  case. 

3  Grey  v.  Greenville,  etc.  Co.,  60  N.  J. 
Eq.  153  (1900).  And  although  a  private 
owner  of  land  who  is  not  injured  in 
any  way  different  from  the  rest  of  the 
public  cannot  file  such  a  bill,  yet 'such 
private  owner  may  be  relator  in  an  in- 
formation filed  by  the  attorney -general. 
Morris,  etc.  Co.  v.  Greenville,  etc.  Ry., 
46  Atl.  Rep.  638  (N.  J.  1900). 

4  Central  Elevator  Co.  v.  People,  174 
111.  203  (1898). 

5  Attorney-General  v.  Utica  Ins.  Co., 
2  Johns.  Ch.  371  (1817);  Attorney-Gen- 
eral V.  Bank  of  Niagara,  Hopk.  Ch.  354 
(1825).  But  see  People  v.  Ballard,  134 
N.  Y.  269  (1892).  In  Attorney-General 
V.  Tudor  Ice  Co.,  104 .Mass.  239  (1870),  an 
injunction  restraining  an  ice  company 
from  importing  teas  was  denied.  A 
state  creating  a  corporation  has  no 
visitorial  power  over  it  —  i.  e.,  power  to 
correct  corporate  abuses  —  except  "(1) 
where  municipal,  charitable,  religious, 
or  eleemosynary  corporations,  public  in 
their  nature,  had  abused  their  fran- 
chises, perverted  the  purpose  of  their 
organization,  or  misappropriated  their 
funds;  and  as  they,  from  the  nature  of 
their  corporate  functions,  were  more  or 
less  under  government  supervision,  the 
attorney-general  proceeded  against 
them  to  obtain  correction  of  the  abuse; 
or  (2)  where  private  corporations,  char- 
tered for  private  and  limited  purposes, 


1412 


CH.  XXXVllI.J 


DISSOLUTION,  FORFEITURE,  ETC. 


[§  635. 


company  from  laying  its  pipes,  even  though  he  claims  that  the 
charter  was  void  by  reason  of  the  company  not  having  commenced 
work  within  the  prescribed  time.^  Quo  warranto  may  be  the  rem- 
edy of  the  state  where  "watered"  stock  has  been  illegally  issued.^ 
An  injunction  does  not  lie  at  the  instance  of  the  state  against  a 
corporation  doing  business,  on  the  ground  that  its  stock  was  not 
properly  issued  and  that  there  was  no  intent  to  do  any  business 
within  the  state  or  to  have  an  office  therein;  nor  does  an  injunc- 
tion lie  at  the  instance  of  the  state  to  restrain  a  corporation  from 
transacting  business,  even  though  it  was  formed  to  bring  about,  by 
conditions  imposed  upon  selling  agents,  a  monopoly  in  the  cigarette 
business,  and  had  largely  succeeded  in  doing  so.*  The  state  may 
enjoin  foreign  corporations  from  doing  business  illegally  in  the 
state.* 


had  exceeded  their  powers,  and  were  re- 
strained or  enjoined  in  the  same  man- 
ner from  the  further  violation  of  the 
limitation  to  which  their  powers  were 
subject."  Hence  the  United  States,  as 
the  creator  of  the  Union  Pacific  Rail- 
road, cannot  exercise  visitorial  power 
over  it  in  respect  to  frauds  in  its  man- 
agement. U.  S.  V.  Union  Pacific  R  R, 
98  U.  S.  569,  617  (1878).  Cf.  Attorney- 
General  V.  Wilson,  1  Cr.  &  Ph.  1  (1840), 
holding  that  the  court  had  jurisdiction 
over  charitable  corporations,  and  that 
when  the  trustees  of  them  abuse  their 
trust  the  court  would  take  notice  of 
such  abuse  by  reason  of  its  visitorial 
powers.  Also,  on  this  point,  Attorney- 
General  V.  Foundling  Hospital,  2  Ves. 
Jr.  42  (1793).  See  the  Pennsylvania 
cases  in  §  314,  supra,  where  the  state 
enjoined  an  illegal  purchase  of  stock 
by  a  corporation. 

1  People  V.  Equity  Gas  Light  Co.,  141 
N.  Y.  232  (1894).  The  attorney-general 
cannot  maintain  an  injunction  against 
a  combination  of  insurance  companies 
to  fix  rates  and  commissions,  inasmuch 
as  insurance  business  is  not  a  public  or 
quasi-public  business,  nor  does  it  con- 
cern a  staple  of  life.  Queen  Ins.  Co.  v. 
State,  86  Tex.  250  (1893). 

2  See  §  37,  supra.  Even  though  a, 
person  who  has  a  contract  with  a 
street  railway  company  that  the  latter 


will  lease  its  street  railway  on  certain 
terms,  turns  over  such  contract  to  a 
new  corporation  for  $900,000  of  stock 
of  the  latter,  and  the  latter  then  as- 
sumes the  lease,  and  even  though  such 
stock  is  illegal  under  the  constitution 
and  statutes  of  Pennsylvania,  yet  where 
the  state  delays  three  years  in  filing 
a  bill  to  declare  it  void,  and  meanwiiile 
the  stock  has  passed  into  bona  fide 
hands,  and  not  until  five  years  there- 
after are  the  real  owners  of  the  stock 
made  parties  defendant,  the  bill  will 
be  dismissed.  Commonwealth  v.  Read- 
ing, eta  Co.,  53  AtL  Rep.  755  (Pa.  1902). 

3  The  remedy,  if  any,  is  by  quo  war- 
ranto. The  court  reviewed  the  cases 
wherein  injunction  would  lia  Stock- 
ton V.  American,  etc.  Co.,  55  N.  J.  Eq. 
352  (1897). 

*  The  state  may  enjoin  a  foreign  rail- 
road company  from  carrying  on  the 
warehouse  business,  except  so  far  as  the 
same  is  incidental  to  the  railroad  busi- 
ness, the  charter  of  such  company  not 
including  warehouse  business  as  a  busi- 
ness in  itself.  State  v.  Southern,  etc. 
Co.,  52  La.  Ann.  1822  (1900).  The  Ten- 
nessee statute,  prohibiting  foreign  cor- 
porations from  doing  business  in  the 
state  vrhere  they  have  combined  to 
lessen  competition  and  influence  prices, 
is  legal,  and  the  state  may  file  a  bill 
to  restrain  foreign   corporations  from 


1413 


§  636.] 


DISSOLUTION,  FORFEITURE,  ETC. 


[CH.  XXXVIII. 


§  636.  The  state  may  ivaive  its  right  to  forfeit  a  charter. —  Ya- 
rious  acts  have  been  held  to  constitute  such  a  waiver.  "  "When  a 
legislature  has  full  power  to  create  corporations,  its  act  recognizing 
as  valid  a  de facto  corporation,  whether  private  or  municipal,  op- 
erates to  cure  all  defects  in  steps  leading  up  to  the  organization, 
and  makes  a  de  jure  out  of  what  before  was  only  a  de  facto  corpo- 
ration." There  must,  however,  be  a  de  facto  organization  upon 
which  this  recognition  may  act.^  Numerous  instances  of  acts  of 
the  legislature  which  constitute  a  waiver  are  set  forth  in  detail  in 
the  notes  below.^ 


doing  business  in  the  state  where  they    charter  the  route  and  its  termini  are 


have  violated  such  statute.  State  v. 
Schlitz,  etc.  Co.,  104  Tenn.  715  (1900). 
As  to  quo  warranto  against  foreign  cor- 
porations, see  §  633,  supra. 

1  Comanche  County  v.  Lewis,  133  U.  S. 
198  (1890). 

2  A  legislative  recognition  of  a  char- 
ter may  cure  any  unconstitutionality 
in  the  statute  creating  it.  Snell  v.  Chi- 
cago. 133  111.  413  (1890).  The  extension 
of  time  to  complete  railroads  applies  so 
as  to  prevent  forfeiture  for  non- com- 
pletion within  the  original  time.  State 
V.  Bergen  Neck  Ry.,  53  N.  J.  L.  108 
(1890).  Although  suit  is  brought  to 
forfeit  a  street-railway  franchise  for 
using  electric  power  without  author- 
ity, the  legislature  may  cure  the  defect 
of  power.  To  forfeit  for  not  commenc- 
ing work  within  a  year  the  pleading 
must  allege  when  the  work  was  com- 
menced. People  V.  Los  Angeles,  etc. 
Ry.,  91  Cal.  338  (1891).  An  amendment 
to  a  charter  is  a  waiver  of  any  forfeit- 
ure thereof  due  to  not  commencing 
business  within  the  prescribed  time. 
Farnsworth  v.  Lime  Rock,  etc.  R.  R.,  83 
Me.  440  (1891).  Although  the  act  re- 
quires the  certificate  of  incorporation 
to  specify  the  termini,  and  the  certifi- 
cate merely  says  the  termini  are  in  a 
certain  city,  yet  if  the  legislature  sub- 
sequently, by  special  act,  recognizes  the 
company,  the  legality  of  its  existence 
Cannot  be  questioned.  Koch  v.  North 
Ave.  Ry.,  75  Md.  223  (1893).  In  this 
case  the  organization  was  under  the 
general  railroad   law.    Under  such  a 


1414 


to  be  determined  by  the  mayor  and 
city  council  ■'  under  their  general  power 
of  control  and  regulation  of  the  streets." 
A  statute  authorizing  a  corporation  to 
reduce  its  capital  stock  waives  infor- 
malities in  its  incorporation,  and  such 
waiver  may  extend  to  an  illegal  issue 
of  watered  stock.  State  r.  Webb,  110 
Ala.  214  (1896).  A  waiver  may  be  ex- 
press or  by  statutes  recognizing  its  con- 
tinued existence.  Re  New  York  El.  R. 
R.,  70  N.  Y.  327,  338  (1877);  People  v. 
Manhattan  Co.,  9  Wend.  352,  380  (1833); 
or  requiring  it  to  make  alterations  on 
its  road,  Atty.  Gen.  v.  Petersburg,  etc. 
R.  R.,  6  Ired.  L.  (N.  C.)  470  (1846);  or  au- 
thorizing a  transfer  of  its  property  and 
franchises  to  another  corporation,  Ches- 
apeake, etc.  Canal  Co.  v.  Baltimore,  etc. 
R.  R.,4  G.  &  J.  (Md.)  1,  127  (1833);  or 
requiring  a  bank  to  resume  specific 
payments  by  a  certain  date,  Commer- 
cial Bank  v.  State,  6  Sm.  &  M.  (Miss.) 
599,  633  (1846).  But  waiver  as  to  ter- 
minus is  not  a  waiver  of  an  abandon- 
ment of  part  of  the  road,  nor  of  a  defect 
as  to  the  width  of  the  turnpike.  Peo- 
ple V.  Fishkill,  etc.  Co.,  27  Barb.  445 
(1857).  Waiver  may  arise  by  a  statute 
extending  the  corporate  powers.  Peo- 
ple V.  Ottawa,  etc.  Co.,  115  111.  281  (1885); 
Central,  etc.  R.  R.  v.  Twenty-third, 
etc.  R.  R.,  54  How.  Pr.  168,  186 
(1877);  or  by  authorizing  a  change  of 
route,  State  v.  Fourth,  etc.  Co.,  15  N.  H. 
162  (1844);  or  by  expressly  waiving  the 
cause  for  forfeiture,  Lumpkin  v.  Jones, 
1   Ga.   27  (1846).     The  legislature  may^ 


CII.  XXXVIII.] 


DISSOLCTION,  FOKFEITUKE,  ETC. 


[§  637. 


§  637.  Who  may  allege  that  forfeiture  or  non-incorporation  or 
dissolution  exists  —  De  facto  corporations. —  It  has  already  been 
shown  that  no  one  but  the  state  can  institute  a  suit  to  declare  a  for- 
feiture.^ Also,  that  no  one  can  institute  a  suit  in  equity  to  dissolve 
a  corporation.-  The  question  now  arises  Avhether  the  state  or  any 
person,  either  as  plaintiff  or  defendant,  may  allege  forfeiture  or  dis- 
solution or  non-incorporation  where  there  have  been  no  quo  war- 
ranto proceedings  instituted  and  prosecuted  by  the  state  to  judg- 
ment.    "With  a  few  exceptions  such  an  allegation  is  not  allowed. 

A  creditor  of  a  supposed  corporation  cannot  ordinarily  hold  the 
stockholders  liable  as  partners  although  they  did  not  legally  incor- 
porate.^ It  is  true  that  in  certain  cases,  where  a  stockholder  is 
made  liable  to  corporate  creditors  upon  the  dissolution  of  the  cor- 
poration, a  dissolution  is  held  to  exist  where  the  corporation  is 


expressly  waive  a  cause  for  forfeiture 
arising  from  suspension  of  specie  pay- 
ments. Atchafalaya  Bank  v.  Dawson, 
13  La.  497  (1839).  May  waive  by  ex- 
tending the  time  for  completion.  La 
Grange,  etc.  R.  R.  t;.  Rainey,  7  Coldw. 
(Tenn.)  420  (1870).  Amending  charter, 
etc.,  is  a  waiver.  White's,  etc.  Co.  v. 
Davidson  County,  3  Tenn.  Ch.  396(1877). 
An  act  reviving  a  corporation  is  a 
waiver,  even  though  the  act  was  fraud- 
ulently passed.  Re  Mechanics'  Soc,  31 
La.  Ann.  627  (1879).  The  waiver  pro- 
tects a  turnpike  corporation  from  an 
indictment  for  obstructing  the  road. 
State  V.  Godwinsville,  etc.  Co.,  44  N.  J. 
L.  496  (1882).  But  the  waiver  must 
have  been  clearly  intended.  People  v. 
Kingston,  etc.  Co.,  23  Wend.  193  (1840). 
The  appointment  of  a  corporate  officer 
by  the  governor  and  senate  is  not  a 
waiver.  People  v.  Phoenix  Bank,  34 
Wend.  431  (1840).  Long  delay  in  bring- 
ing the  quo  warranto  may  be  a  waiver. 
People  V.  Williamsburgh,  etc  Co.,  47 
N.  Y.  586  (1872);  People  v.  Oakland,  etc. 
Bank,  1  Doug.  (Mich.)  282  (1843).  Cf. 
%  633,  notes,  supra.  Dictum,  that  the  state 
may  waive  forfeiture.  Briggs  v.  Cape 
Cod,  etc.  Co..  137  Mass.  71  (1884),  citing 
cases.  A  special  act  amending  the  char- 
ter waives  defects  in  the  articles  of  asso- 
ciation as  filed.  Basshor  v.  Dressel.  34 
Md.  503   (1871).     An  amendment  to  a 


charter  waives  the  right  of  forfeiture 
for  fraud,  non-user,  and  misuser.  Peo- 
ple u  Ottawa,  etc.  Co.,  115  111.  281 
(1886).  An  amendment  of  the  charter 
is  a  waiver.  Attorney-General  v.  Peters- 
burg, eta  R.  R.,  6  Ired.  L.  (N.  C.)  456 
(1846);  Charles  River  Bridge  Co.  u 
Warren  Bridge,  24  Mass.  344  (1829).  The 
waiver  may  be  express.  State  v.  Bank 
of  Charleston,  2  McMulL  (S.  C.)  439 
(1843);  Enfield  Bridge  Co.  v.  Connecti- 
cut, etc  Co.,  7  Conn.  28  (1828);  Kana- 
wha Coal  Co.  V.  Kanawha,  etc  Co.,  7 
Blatchf.  391  (1870);  s.  C,  14  Fed.  Cas. 
108.  Where  the  incorporation  had  been 
irregular,  the  recognition  of  a  corpora- 
tion by  the  legislature  is  equivalent  to 
a  charter.  McAuley  v.  Columbus,  etc. 
Ry.,  83  IlL  348  (1876);  Cowell  v.  Colo- 
rado Springs  Co.,  3  Colo.  82  (1876);  Mead 
V.  New  York,  etc  R.  R.,  45  Conn.  199 
(1877);  Kanawha  Coal  Co.  v.  Kanawha, 
etc  Co.,  7  Blatchf.  391  (1870);  s.  C,  14 
Fed.  Cas.  108;  St.  Louis  R,  R.  v.  North- 
western, etc  Ry.,  2  Mo.  App.  69  (1876); 
Atlantic,  etc.  R.  R  u  St.  Louis,  6G  Mo. 
228  (1877);  State  v.  Morris,  73  Tex.  435 
(1889).  Contra,  where  charters  must  be 
granted  by  general  laws.  Oroville,  etc. 
R.  R.  V.  Supervisors,  37  Cal.  354  (1869). 
But  see  Brent  v.  State,  43  Ala.  297  (1869). 

1  g  632,  supra. 

-  g  629,  supra. 

3  See  ch.  XIII,  supra. 


1415 


§  637.] 


DISSOLUTION,  FORFEITURE,  ETC. 


[CH.  XXXVIII. 


hopelessly  insolvent.^  And  it  is  true  that  where  a  railroad  corpora- 
tion attempts  to  acquire  a  right  of  way,  the  persons  whose  prop- 
erty will  be  affected  thereby  may  oppose  the  acquisition  of  the 
right  of  way  by  showing  that  the  company  is  not  legally  incor- 
porated.^ But  aside  from  these  exceptions  no  one  is  allowed  to  as- 
sert that  the  corporation  is  dissolved,  or  its  franchise  forfeited,  or 
its  incorporation  illegal,  until  after  such  a  result  has  been  decreed 
by  a  court  in  a  proceeding  instituted  for  that  purpose  by  the  state. 
Thus,  a  stockholder  sued  on  his  subscription  cannot,  unless  his  sub- 
scription was  made  previous  to  the  incorporation,  set  up  that  the 
company  was  not  legally  incorporated.* 

The  corporation  is  called  a  de  facto  corporation,  and  only  the 
state  is  allowed  to  question  its  existence. 

If  there  is  a  law  authorizing  incorporation,  and  a  company  has 
attempted  to  organize  under  it  and  has  acted  as  a  corporation,  it 


1  See  §  631,  supra. 

2  Re  Brooklyn,  etc.  Ry.,  73  N.  Y.  245 
(1878);  Re  New  York  Cable  Co.  v. 
Mayor,  etc.,  104  N.  Y.  1  (1887).  In  con- 
demnation proceedings  the  incorpora- 
tion may  be  attacked  as  not  being  de 
facto.  Its  dejure  existence  cannot  be 
so  attacked*  Brown  v.  Calumet  River 
Ry.,  125  111.  600  (1888).  In  condemna- 
tion proceedings  the  defense  that  the 
corporation  has  ceased  to  exist  for  fail- 
ure to  complete  its  road  within  ten 
years  is  not  good,  inasmuch  as  the  cor- 
porate existence  can  be  attacked  only 
in  a  direct  proceeding  for  that  purpose. 
Morrison  v.  Forman,  177  III.  427  (1898). 
A  railroad  company  regularly  organ- 
ized is  entitled  to  condemn  a  right  of 
way,  even  though  it  was  organized  in 
the  interest  of  a  coal  company  which 
furnished  the  capital  for  such  railroad. 
The  claim  that  the  railroad  company  is 
merely  a  dummy  for  the  coal  company 
is  no  defense  to  the  condemnation  pro- 
ceedings. Kansas,  etc.  Ry.  v.  North- 
western, etc.  Co.,  161  Mo.  288  (1901).  An 
adjacent  owner  cannot  enjoin  a  street- 
railway  company  on  the  ground  that 
its  chai'ter  is  invalid,  unless  his  prop- 
erty rights  are  affected.  Nichols  v.  Ann 
Arbor,  etc.  Ry.,  87  Mich.  361  (1891).  A 
person  whose  land  a  corporation  seeks 


to  take  under  power  of  eminent  do- 
main cannot  set  up  that  the  articles  of 
incorporation  had  not  been  filed  with 
the  secretary  of  state,  as  required  by 
the  incorporating  statute.  Portland, 
eta  Co.  V.  Bobb,  88  Ky.  226  (1889).  A 
railroad  charter  is  not  good  so  far  as  the 
right  to  condemn  land  is  concerned, 
where  the  terminus  is  stated  to  be  on 
the  state  line  in  a  certain  county.  At- 
lantic, etc.  R.  R.  V.  Sullivant,  5  Ohio  St. 
276  (1855).  In  condemnation  proceed- 
ings the  defendant  cannot  set  up  that 
the  charter  has  been  violated.  Re  Long 
Island  R.  R,  143  N.  Y.  67  (1894).  The 
existence  of  a  railroad  corporation  can- 
not be  questioned  in  an  action  brought 
by  it  to  condemn  land.  Wellington, 
etc.  R.  R.  V.  Cashie,  etc.  Co.,  114  N.  C. 
690  (1894).  Where  a  gas  company  opens 
the  streets  under  a  statute  and  pays 
damages,  and  partly  lays  its  pipes,  it 
cannot  subsequently  be  enjoined  by  a 
property  owner  on  the  ground  that  the 
statute  has  subsequently  been  adjudged 
to  be  unconstitutional.  King  v.  Phila- 
delphia Co.,  154  Pa.  St.  160  (1893). 

3  g§  183-186,  supra.  Concerning  the 
question  of  who  can  complain  of  mis- 
takes, irregularities,  and  illegalities  in 
the  corporation,  see  also  ch.  I,  g  5, 
svpra. 


1416 


Cdl.  XXXVIII.J 


DISSOLUTION,  FORFEITURE,  ETC. 


[§  637. 


is  a  de  facto  corporation,  and  its  dejure  existence  can  be  questioned 
only  by  the  state.^ 

A  person  who  gives  a  bond  or  note  to  a  corporation  is  not  al- 
lowed to  defeat  the  bond  by  alleging  that  the  corporation  was  not 
duly  incorporated;-  nor  can  the  corporation  defeat  its  bonds  or 


1  Independent  Order  v.  United  Order, 
94  Wis.  234  (1896).  "The  test  of  a  de 
facto  corpoi'ation  is  this:  Was  there  a 
law  under  which  there  might  have  been 
a  dejure  corporation  of  the  kind,  char- 
acter, and  class  to  which  the  organiza- 
tion in  question  apparently  belongs  ?  " 
Toledo,  etc.  R.  R.  v.  Continental  Trust 
Co.,  95  Fed.  Rep.  497,  508  (1899).  In 
proving  a  de  facto  corporation  the  meet- 
ings and  the  issue  of  stock  and  the 
transaction  of  business  may  be  proved 
by  parol  without  producing  the  books. 
Johnson  v.  Okerstrom,  70  Minn.  303 
(1897).     A  de  facto  corporation  exists 


424  (1899).  A  railroad  suing  on  a  note 
cannot  be  defeated  by  the  defense  that 
it  has  forfeited  its  charter,  there  being 
no  adjudication  to  that  effect.  Toledo, 
etc.  R.  R.  V.  Johnson,  49  Mich.  148  (1882). 
A  suit  by  the  corporation  on  a  bond  is 
not  to  be  met  by  a  plea  of  forfeiture 
for  non-user.  AVest  v.  Carolina,  etc.  Ins. 
Co.,  31  Ark.  476  (1876).  Nor  its  suit  on 
a  note  by  the  plea  that  it  has  abandoned 
its  franchises.  John  v.  Farmers',  etc. 
Bank,  2  Blackf.  367  (1830);  East  Ten- 
nessee, etc.  Co.  V.  Gaskell,  2  Lea  (Tenn.), 
742  (1879);  Hartsville  University  v. 
Hamilton,  34  Ind.  506  (1870).      An  in- 


where  the  company  might  have  incorpo-'  dorser  sued  by  the  corporation  cannot 


rated  under  the  statutes  and  has  acted 
as  a  corporation.  Methodist,  etc.  Church 
V.  Pickett,  19  N.  Y.  482  (1859).  Estoppel 
as  to  corporate  existence  seems  to  mean 
that  the  corporation  js  obliged  to  prove 
only  a  de  facto  existence,  and  need  not 
prove  the  details  of  incorporation. 
Leonardsville  Bank  v.  Willard,  25  N.  Y. 
574  (1862). 

-  The  validity  of  the  incorporation  of 
an  insurance  company  cannot  be  ques- 
tioned by  a  person  who  has  given  to  it 
a  capital-stock  note.  Raegener  v.  Hub- 
bard, 167  N.  Y.  301  (1901).  A  member 
of  a  building  and  loan  association  who 
borrows  money  from  it  cannot  defend 
against  the  loan  on  the  ground  that  it 
was  illegally  organized.  Manship  v. 
New,  etc.  Assoc,  110  Fed.  Rep.  845 
(1901).  The  maker  of  a  note  in  payment 
for  goods  sold  by  a  corporation  cannot 
question  the  corporate  existence.  First 
etc.  Church  v.  Grand  Rapids,  etc.  Co., 
15  Colo.  App.  46  (1900).  Where  a  bond 
•has  been  given  to  a  corporation  for  the 
performance  by  the  treasurer  of  his 
duties,  and  the  corporation  sues  on  such 
bond,  due  incorporation  cannot  be  de- 
•nied.  Wood  v.  Friendship,  etc.,  106  Ky. 


claim  that  it  has  rendered  its  charter 
liable  to  forfeiture  by  suspension  of 
specie  payments.  Atchafalaya  Bank  v. 
Dawson,  13  La.  497  (1839).  See  also  Mc- 
Farlan  v.  Triton  Ins.  Co.,  4  Denio,  392 
(1847);  St.  Louis  v.  Shields,  62  Mo.  247 
(1876);  Loaners"Banku.  Jacoby,  10  Hun, 
143  (1877);  Commissioners,  etc.  f.  Bolles, 
94  U.  S.  104  (1876);  Henriques  v.  Dutch 
West  India  Co.,  2  Ld,  Raym.  1532  (1729), 
where  a  foreign  corporation  sued  and 
the  general  issue  was  not  pleaded. 
Proof  of  organization  in  fact  and  user 
meets  a  plea  of  nxd  tiel  corporation  by 
the  maker  of  a  note  to  the  corporation. 
Mitchell  V.  Deeds,  49  111.  416  (1867); 
Smelser  v.  Wayne,  etc.  T.  Co.,  82  Ind. 
417  (1882).  But  see  Williams  v.  Bank 
of  Michigan,  7  Wend.  540  (1831).  In  a 
suit  by  a  corporation  on  a  note,  the  ex- 
ecution of  the  note  to  the  corporation 
isprivia  facie  proof  of  its  incorporation. 
A  de  facto  corporation  may  enforce  a 
note  given  to  it.  Hudson  v.  Green  Hill 
Seminary,  113  111.  618  (1885);  Booske  v. 
Gulf  Ice  Co.,  24  Fla.  5.50  (1888);  Winget 
V.  Quincy  Bldg.  etc.  Assoc,  128  IlL  67 
(1889).  In  a  suit  by  a  bona  fide  indorsee 
of  a  note  from  a  corporation  as  indorser. 


1417 


037.] 


DISSOLUTION,  FORFEITURE,  ETC. 


[CH.  XXXVIII. 


debt  by  alleging  its  want  of  lawful  incorporation.^  A  tenant  can- 
not, in  an  ejectment  suit,  set  up  that  his  landlord  was  not  duly  in- 
corporated.^ But  where  a  proposed  national  bank  is  never  author- 
ized by  the  comptroller  of  the  currency  to  commence  business  and 


the  maker  cannot  set  up  that  the  com- 
pany was    not  properly  incorporated. 
Brickley  v.  Edwards,  131  Ind.  3  (1892). 
The  maker  of  a  noto  to  a  bank  cannot 
question  its  incorporation.    Exchange 
Nat.  Bank  v.  Capps.  82  Neb.  242  (1891); 
Columbia  Electric  Co.  v.  Dixon.  46  Minn. 
463  (1891):  Butchers',  etc.  Bank  v.  Mc- 
Donald, 130  Mass.  264  (1881);  Jones  v. 
Bank  of  Tennessee,  8  B.  Mon.  (Ky.)  122 
(1847);  Leonardsville  Bank  v.  Willard, 
25  N.  Y.  574  (1862);  Nutting  v.  Hill,  71 
Ga.  557  (1883);  Irvine  v.  Lumberman's 
Bank,  2  Watts  &  S.  (Pa.)  204  (1841); 
Congregational  Soc.  v.  Perry,  6  N.  BL 
164  (1833);    Pape  v.  Capital    Bank,  20 
Kan.   440  (1878);    Massey  v.    Building 
Assoc,  22    Kan.   624  (1879);    Vater  v. 
Lewis,  36  Ind.  288  (1871);  Smith  v.  Miss, 
etc.  R  R,  14  Miss.  179  (1846),  where  the 
maker  of  the  note  claimed  that  the  cor- 
poration was  fraudulently  and  illegally 
organized;  Studebaker,  etc.  Co.  v.  Mont- 
gomery, 74  Mo.  101  (1881);   Stoutimore 
V.  Clark,  70  Mo.  471  (1875);  Blake  v.  Hol- 
ley,  14  Ind.  383  (1860);  Jones  v.  Cincin- 
nati, etc.  Co.,  14  Ind.  89  (1860),  holding 
also    that   the    corporation    need   not 
prove  even  a  de  facto  existence.     To 
same    effect,    Montgomery    R.     R.   v. 
Hurst,  9  Ala.  513  (1846).      Cf.  White  v. 
Campbell,  5  Humph.  (Tenn.)  38  (1844). 
where    the    remarkable  decision   was 
made  that,  if  the  corporation  had  been 
dissolved  at  the  time  the  note  was  given, 
the  maker  was  not  liable  and  could 
have  a  mortgage  which  he  gave  as  se- 
curity set  aside.     A  de  facto  corpora- 
tion, as  indorsee  of  a  note,  may  enforce 
it.  Wilcox  V.  Toledo,  etc.  R  R,  43  Mich. 
584  (1880);  Haas  v.  Bank  of  Commerce, 
41  Neb.  754  (1894);    Bank  of  Shasta  v. 
Boyd,  99  Cal.  604(1893);  94  N.  W.  Rep.  329. 
1  Independent    Order,   etc.   v.  Paine, 
122  111.  625  (1887);  Blackburn  v.  Selma, 
etc.  R  R,  2  Flip.  525  (1879);  s.  C,  3  Fed. 


Cas.  526;  Racine,  etc.  R  R  u  Farmers', 
etc.  Co.,  49  111.  331,  346  (1868);  Liter  r. 
Ozokerite  Min.  Co.,  7  Utah,  487  (1891); 
AUer  V.  Cameron,  3  Dill.  198  (1874); 
S.  C,  1  Fed.  Cas.  522,  where  a  municipal- 
ity set  up  this  defense;  Empire,  etc.  Mfg. 
Co.  V.  Stuart,  46  Mich.  482  (1882),  a  prom- 
issory note  case.  A  corporation  cannot 
defend  against  a  debt  on  the  ground 
that  by  a  mistake  one  of  the  duplicate 
originals  of  its  certificate  of  incorpo- 
ration was  filed  in  the  state  recorder'* 
office  instead  of  the  county  recorder's 
offica  Huntington,  etc.  Co.  v.  Schofield, 
28  Ind.  App.  95  (1901).  Where  the  suit 
is  on  a  bond,  a  stockholder  cannot  sue 
to  have  the  corporation  declared  a  co- 
partnership by  reason  of  irregular  in- 
corporation. Baker  v.  Backus,  .82  111. 
79  (1863).  Even  though  the  statute  re- 
quires the  articles  of  incorporation  to 
be  filed  in  each  county  where  the  com- 
pany does  business,  yet  failure  to  file  in 
one  county  is  no  defense  to  a  note  given 
to  the  company.  Farmers',  etc.  Co.  v. 
Borders.  60  N.  E.  Rep.  174  (Ind.  1901). 
The  corporation  itself,  when  sued  upon 
notes  which  it  has  made,  cannot  set  up 
any  informality  in  its  incorporation. 
Kelley  v.  Newburyport,  etc.  R  R,  141 
Mass.  496  (1886);  Empire  Mfg.  Co.  v. 
Stuart,  46  Mich.  482  (1881),  where  the 
corporation  re-incorporated  in  order  to 
cure  the  irregularity. 

2  Ricketson  v.  Galligan,  89  Wis.  394 
(1895).  Or  where  the  corporation  sues 
for  rent  due  on  a  lease  made  by  it. 
Oregonian  Ry.  v.  Oregon,  etc.  Nav.  Co., 
22  Fed.  Rep.  245  (1884);  s.  C,  23  Fed.  Rep. 
232  (1885).  A  lessee  of  corporate  prop- 
erty cannot  refuse  to  vacate  on  the 
ground  that  the  company  was  not  prop- 
erly incorporated  and  officered,  and 
that  it  did  not  own  the  property.  Fay- 
etteville  Waterworks  Co,  v.  Tillinghast, 
119  N.  C.  343  (1896). 


1418 


CM.   XXXVIII.] 


DISSOLUTION,  rORFEITDKE,  ETC. 


[§  G37. 


never  does  commence  business,  a  lease  made  in  its  name  cannot  be 
enforced  against  it.^  A  person  who  mortgages  land  to  a  supposed 
corporation  cannot  defeat  a  foreclosure  of  the  mortgage  by  alleging 
that  the  mortgagee  is  not  a  corporation ;  ^  nor  can  the  corporation 
itself,  having  given  a  mortgage,  defeat  a  foreclosure  by  such  a 
plea.''     It  has  been  held  that  wliere  a  consolidation  of  two  railroad 


1  McCormick  v.  Market  Nat.  Bank,  162 
III.  100  (1896). 

2  People's  Sav.  Bank  v.  Collins,  27 
Conn.  142  (1858);  West,  etc.  Sav.  Bank 
V.  Ford,  27  Conn.  282  (1858);  and  Has- 
enritteru.  Kirchhoflfer,  79  Mo.  239  (1883), 
where  the  mortgagor's  grantee  was 
held  to  be  estopped;  Franklin  v.  Two- 
good,  18  Iowa,  515  (1865);  Hackensack 
Water  Co.  v.  De  Kay,  36  N.  J.  Eq.  548 
(1883);  Hubbard  u  Chappel,  14  Ind.  601 
(1860),  where  it  was  held  that  the  mort- 
gagee need  not  even  prove  itself  to  be 
a  de  facto  corporation;  Jones  v.  Ko- 
komo,  eta  Assoc.,  77  Ind.  340  (1881).  A 
mortgagor  cannot  attack  the  corporate 
existence  of  a  mortgagee.  Equitable, 
etc.  Assoc.  V.  Bidwell.  60  Neb.  169 
(1900).  The  regularity  of  the  incorpo- 
ration cannot  be  questioned  in  a  suit 
by  a  corporation  to  foreclose  a  mort- 
gaga  Washington,  etc.  Assoc,  v.  Stan- 
ley, 38  Oreg.  319  (1901).  But  the  mort- 
gagor may  deny  the  corporate  exist- 
ence of  the  assignee  of  the  mortgagee. 
Dundee,  etc.  Co.  v.  Cooper.  26  Fed.  Rep. 
665  (1886).  A  second  mortgagee  cannot 
question  the  incorporation  of  the  first 
mortgagee.  Williamson  v.  Kokomo, 
etc.  Assoc,  89  Ind.  389  (1883).  In  a 
mortgage  foreclosure  case  brought  by 
a  corporation,  the  mortgagee  cannot 
claim  that  the  corporation  took  the 
mortgage  before  stock  was  subscribed 
to  the  amount  required  by  its  charter. 
Johnston  V.  Elizabeth,  etc.  Assoc,  104 
Pa,  St  394  (1883).  Parties  contracting 
with  a  corporation  as  such  cannot  at- 
tack a  mortgage  given  by  the  corpora- 
tion on  the  ground  that  the  corpora- 
tion was  never  legally  organized.  An- 
drews V.  National,  etc.  Works,  77  Fed. 
Rep.  774  (1897).     A  mortgagor  to  a  for- 


eign insurance  company  cannot  demur 
to  a  bill  for  foreclosure  on  the  ground 
that  the  taking  of  the  mortgage  was 
ultra  vires  and  no  certificate  was  filed. 
Boulware  v.  Davis,  90  Ala.  207  (1890).  A 
stockholder  who  has  given  a  mortgage 
to  the  corporation  cannot  defeat  the 
same  on  the  ground  that  the  charter 
was  unconstitutional.  Building  &  Loan 
Assoc.  V.  Chamberlain,  4  S.  D.  271 
(1893).  As  against  its  mortgage  the  cor- 
poration cannot  set  up  the  defense  that 
it  was  not  legally  organized,  in  that  no 
stock  was  ever  subscribed  for.  Jones 
V.  Hale,  32  Oreg.  465  (1898). 

3  Quoted  and  approved  in  Phinizy  v. 
Augusta,  etc  R.  R.,  62  Fed.  Rep.  678 
(1894);  Wallace  v.  Loomis,  97  U.  S.  146 
(1877);  Racine,  etc.  R.  R.  v.  Farmeis', 
etc  Co.,  49  111.  831,  346  (1868).  Where 
the  mortgagor  was  a  consolidated  com- 
pany, the  grantee  of  the  corporation 
cannot  deny  the  validity  of  its  mort- 
gage to  another  person  by  alleging  its 
want  of  legal  incorporation.  Hassel- 
man  v.  U.  S.  etc  Co.,  97  Ind.  865  (1884). 
The  lessee  of  the  road  of  a  railroad  cor- 
poration cannot  defeat  the  foreclosure 
of  a  mortgage  given  by  the  latter  by 
alleging  that  the  latter  was  never  duly 
incorporated.  Beekman  v,  Hudson, 
etc  Ry.,  35  Fed.  Rep.  3  (1888).  A  mort- 
gagee of  a  de  facto  corporation  is  not 
defeated  by  an  attachment  against  the 
company.  Defects  in  incorporation  are 
immaterial  herein.  Duggan  v.  Colo- 
rado, etc  Co.,  11  Colo.  113  (1888).  In  a 
mortgage  foreclosure  the  defense  that 
the  mortgagor  was  not  legally  incorpo- 
rated or  organized  cannot  be  set  up. 
Hackensack  Water  Co.  v.  De  Kay,  36 
N.  J.  Eq.  548  (1883).  A  mortgagor  cor- 
poration   cannot    defend   against  the 


1419 


§  637.] 


DISSOLUTION,  FORFEITURE,  ETC. 


[CH.  XXXVIII. 


companies  without  statutory  authority  is  void,  and  the  consolidated 
company  is  not  even  a  de  facto  company,  a  mortgage  deed  of  trust 
and  the  bonds  given  by  such  a  consolidated  company  cannot  be 
enforced  and  do  not  bind  even  the  constituent  companies.'  But 
where  there  is  a  statute  authorizing  such  a  consolidation,  the  rule 
is  different.- 

A  grantor  of  land  to  a  de  facto  corporation  cannot  deny  the  le- 
gality of  his  grg-nt  on  the  ground  that  the  corporation  was  not  duly 
incorporated.*    Theoretically,  however,  a  deed  to  a  supposed  cor- 


mortgage  on  the  ground  that  the  spe- 
cial charter  of  the  mortgagor  was  un- 
constitutional and  void.  McTigh*  v. 
Macon  Const  Co.,  94  Ga.  306  (1894).  A 
junior  mortgagee  cannot  question  th«3 
incorporation  of  a  senior  mortgagee, 
the  latter  being  a  de  facto  corporation. 
"Williamson  v.  Koicomo,  etc.  Assoc,  89 
Ind.  389  (1883).  It  is  no  defense  to  a 
foreclosure  that  the  mortgagor  was  not 
legally  organized,  and  a  stockholder 
will  not  be  allowed  to  intervene  to  set 
up  that  defense.  Gunderson  v.  Illinois, 
etc.  Bank,  100  111.  App.  461  (1903).  It  is 
no  defense  to  a  mortgage  that  in  the 
incorporation  of  the  company  most  of 
its  subscriptions  were  made  by  irre- 
sponsible parties.  Gunnerson  v.  Illi- 
nois, etc.  Bank,  65  N.  E.  Rep.  326  (111. 
1902). 

1  American  L.  &  T.  Co.  v.  Minnesota, 
•  etc.  R.  R,  157  III.  641  (1895).     Cf.  Coe  v. 

New  Jersey,  etc.  Ry.,  31  N,  J.  Eq.  105 
(1879). 

2  Thus  no  one  but  the  state  can  at- 
tack the  legality  of  a  consolidation  of  a 
line  of  railroad  running  through  Ohio, 
Indiana,  and  Illinois,  where  the  statutes 
of  those  three  states  provided  for  such 
consolidation  under  certain  circum- 
stances, even  though  a  judgment  cred- 
itor who  endeavors  to  attack  such 
consolidation  offers  to  prove  that  this 
consolidated  company  did  not  come 
within  the  terms  of  the  statutes.  Such 
a  consolidated  company  is  a  de  facto 
corporation,  and  no  one  but  the  state 
can  attack  its  de  jure  existence,  there 
being  a  statute  under  which  such  cor- 
porations apparently  might  exist.    To- 


1420 


ledo,  etc.  R.  R.  v.  Continental  Trust  Co., 
95  Fed.  Rep.  497  (1899).  A  general  cred- 
itor of  a  consolidated  corporation  can- 
not attack  the  validity  of  the  bonds  of 
the  corporation  on  the  ground  that  the 
consolidation  was  not  legal.  Louisville 
T,  Co.  V.  Louisville,  etc.  Co.,  84  Fed. 
Rep.  539  (1898);  rev'd  on  other  grounds, 
174  U.  S.  674.     Cf  54  Atl.  Rep.  121. 

3 Smith  V.  Sheeley,  12  Wall.  358(1870); 
Frost  V.  Frostburg  Coal  Co.,  24  How.  278 
(lb60).  See  also  Cahall  v.  Citizens',  etc. 
Assoc,  61  Ala.  232  (1878),  where  the  cor- 
poration brought  ejectment;  Thompson 
V.  Candor,  60  111.  244  (1871),  where  the 
grantor  sued  to  recover  possession; 
Sword  V.  Wickersham,  29  Kan.  746(1883)> 
where  the  grantee  was  a  municipality; 
Cowell  V.  Colorado  Springs  Co.,  3  Colo. , 
82  (1876);  affirmed,  100  U.  S.  55  (1879), 
where  the  corporation  sued  for  breach 
of  covenant;  Alexander  v.  Tolleston 
Club,  110  111.  65  (1884),  where  the  grantor 
claimed  the  right  of  way;  Bakersfield, 
etc.  Assoc.  V.  Chester,  55  Cal.  98  (1880); 
Keene  v.  Van  Reuth,  48  Md.  184  (1877); 
Baker  v.  Neff,  73  Ind.  68  (1880);  Snyder 
V.  Studebaker,  19  Ind.  462  (1862),—  cases 
where  a  grantee  of  the  grantor  was 
held  estopped;  Fay  v.  Noble,  61  Ma^s. 
188  (1851),  where  a  third  person  was  not 
allowed  to  impeach  a  transfer  of  prop- 
erty by  a  corporation  to  another  person, 
setting  up  that  the  transfer  was  invalid 
owing  to  informalities  in  the  corpo- 
ration. 

The  grantee  of  the  corporation  can- 
not defeat  an  attachment  against  it 
and  levied  on  the  land  by  setting  up 
this   defense.      Dooley  v.  Walcott,    86 


CH.  XXXVIII.] 


DISSOLUTION,  FOKFEITCRE,  ETC. 


[§  637. 


poration,  which  is  not  even  a  de  facto  corporation,  has  been  held  to 
be  absolutely  void.^ 


Mass.  406  (1863).  But  Carey  v.  Cincin- 
nati, etc.  R  R.,  5  Iowa.  357  (1857),  allowed 
a  grantor  to  a  foreign  corporation  to 
allege  this  defense  to  its  suit  for  posses- 
sion. A  grantor  to  a  corporation  who 
aids  the  corporation  in  conveying  to 
others  is  certainly  not  allowed  this 
defensa  Close  v.  Glenwood  Cemetery, 
107  U.  S.  466  (1883).  A  corporation  may 
hold  and  sell  land,  though  in  its  incor- 
poration the  incorporators  did  not  at- 
tach a  seal  to  their  signatures  as  re- 
quired by  statute.  Stoker  v.  Schwab, 
1  N.  Y.  Supp.  435  (1888).  A  conveyance 
to  or  by  a  de  facto  corporation  cannot 
be  avoided  on  the  ground  of  any  defect 
in  its  organization.  Doyle  v.  San  Diego, 
etc.  Co.,  46  Fed.  Rep.  709  (1891).  The 
grantor  who  has  been  paid  cannot  re- 
scind on  the  ground  that  the  grantee 
corporation  could  not  take.  Long  v. 
Georgia  Pac.  Ry..  91  Ala.  519  (1891).  In 
ejectment  the  incorporation  of  a  prior 
grantor  need  not  be  shown.  Finch  v. 
Ullmann,  105  Mo.  255  (1891).  A  cred- 
itor of  a  supposed  corporation  cannot 
attack  a  mortgage  given  by  it  to  an- 
other creditor  on  the  ground  that  the 
company  was  irregularly  organized. 
Briar  Hill  Coal,  etc.  Co.  v.  Atlas  Works, 
146  Pa,  St.  290  (1892).  A  transfer  of 
land  by  a  de  facto  corporation  is  valid 
as  against  all  parties  except  the  stata 
Crenshaw  v'.  Uilman,  113  Mo.  633  (1893). 
In  ejectment  the  corporate  existence 
cannot  be  questioned,  its  deed  being  in 
the  chain  of  title.  Finch  v.  Ullmann, 
105  Mo,  255  (1891).  In  a  suit  by  a  cor- 
poration to  protect  real  estate  held  for 
it  by  trustees,  the  defendants  cannot 
attack  the  incorporation  of  the  com- 
pany. First  Baptist  Church  r.  Branham. 
90  CaL  22  (1891).  The  grantor  of  land 
cannot  claim  that  the  grantee  was  un- 
incorporated and  not  qualified  to  hold 
land,  the  inc;orporation  being  only  par- 
tially completed.  Reinhard  v.  Virginia, 
etc.  Co.,  107  Mo.  616  (1891).     Under  the 


Montana  statutes,  even  though  no  or- 
ganization meetings  of  the  stockholders 
and  directors  are  held,  yet  a  deed  of 
property  to  the  corporation  may  be 
valid.  Morrison  v.  Clark,  24  Mont.  515 
(1900).  Where  the  owner  of  real  estate 
deeds  it  to  a  supposed  corporation,  and 
many  years  afterwards  makes  anothei 
deed  to  another  corporation,  the  lattet 
cannot  claim  that  the  first  corporation 
was  illegally  organized.  It  is  for  the- 
state  alone  to  make  such  claim.  Lo» 
Angeles,  etc.  v.  Spires,  126  Cal.  541 
(1899).  A  statute  validating  deeds  made 
to  supposed  corporations,  which  after- 
wards become  incorporated,  applies  to 
deeds  made  after  such  statute.  Cum- 
berland, etc.  Co.  V.  Daniel,  52  S.  W.  Rep. 
446  (Tenn.  1899).  A  grantor  of  land  to 
a  corporation  cannot  reclaim  it  on  the 
ground  of  a  dissolution,  there  having 
been  no  decree  of  dissolution.  Bohan 
nan  v.  Binns,  31  Miss.  855  (1856).  The 
title  to  land  owned  by  a  corporation  is 
not  affected  by  the  fact  that  the  arti- 
cles of  incorporation  were  filed  with 
the  county  recorder  instead  of  the 
county  clerk,  as  required  by  statute. 
San  Diego,  etc.  Co.  v.  Frame,  70  Pac. 
Rep.  295  (Cal.  1902). 

1  A  deed  to  a  corporation  not  in  ex- 
istence is  void.  Provost  v.  Morgan's, 
etc.  Co.,  43  La.  Ann.  809  (1890).  A  pur- 
chaser of  land  from  a  corporation  may 
object  to  the  title  on  the  ground  that 
the  corporation  took  title  before  a  cer- 
tain amount  of  its  capital  stock  had 
been  obtained,  as  required  b}^  statute. 
Globe  Realty  Co.  v.  Whitney,  30  S.  Rep. 
745  (La.  1901).  Where  no  organization 
meetings  are  held  and  no  officers 
elected,  and  no  by-laws  adopted,  and 
no  certificates  of  stock  issued,  and  no 
seal  adopted,  and  no  records  kept,  the 
incorporation  does  not  exist,  even 
though  a  certificate  of  incorporation 
was  issued  by  the  state  officers.  Hence 
a  deed  delivered  to  such  corporation 


1421 


I  037.] 


DISSOLUTION,  FOKFEITCEE,  ETC. 


[CH.  XXXVIII. 


The  question  of  whether  a  deed  to  an  unincorporated  association 
is  valid  is  considered  elsewhere,'  as  is  also  the  effect  of  a  deed  to 
a  corporation  to  be  thereafter  organized. - 

In  general  it  may  be  said  that  the  uniform  current  of  authority 
is  to  the  effect  that  only  the  state  may  question  the  legality  of  the 
organization  of  a  de  facto  corporation.  Hence  persons  sued  by  a 
corporation  in  an  action  ex  contractu^  as  well  as  persons  sued  by 
the  corporation  in  an  action  ex  delicto^  are  equally  debarred  from 
setting  up  the  defense  that  the  corporation  was  not  legally  organ- 
ized.^ 


does  not  give  title.  Wall  v.  Mines.  130 
Cal.  27  (1900).  A  deed  to  certain  per- 
sons **as  incorporators  "  of  a  company 
not  yet  incorporated  does  not  vest  title 
in  the  company  when  incorporated. 
McCandless  v.  Inland,  etc.  Co.,  113  Ga. 
291  (1900).  Where  the  articles  must  be 
filed  with  the  secretary  of  state  and  a 
fee  paid  in  order  to  form  a  corporation, 
a  transfer  of  pi'operty  before  tins  is 
done  does  not  convey  title  to  the  corpo- 
ration. The  transferrer's  creditors  may 
attach  the  property.  Jones  v.  Aspen 
Hardware  Co.,  21  Colo.  263  (1895). 

1  See  !:;  504,  supra. 

2  See  §  694,  infra. 

3  Keokuk  Commercial  Bank  v.  Pfeif- 
fer,  108  N.  Y.  243  (1888).  A  city  con- 
tracting with  a  water-works  company 
for  water  cannot  defeat  the  rent  on 
the  ground  that  the  company  was  not 
legally  organized.  City  of  Greenville u. 
Greenville,  etc.  Co.,  135  Ala.  625  (1900). 
Even  though  an  electric  light  company 
is  incorporated  under  the  general 
manufacturing  act,  yet  if  a  city  grants 
the  company  the  right  to  use  the  streets 
and  the  company  exercises  the  right 
for  nine  years,  the  city  will  not  then  be 
allowed  to  repudiate  its  grant.  The 
state  alone  can  raise  the  question. 
Wyandotte,  etc.  Co.  v.  City  of  Wyan- 
dotte, 124  Mich.  43  (1900).  A  city,  after 
granting  a  franchise  to  a  gas  company, 
cannot  afterwards  question  the  reg- 
ularity of  its  incorporation.  City  of 
Kalamazoo  v.  Kalamazoo,  etc.  Co.,  83 
N.  W.  Rep.  811  (Mich.  1900).  Even 
though  a  charter  has  been  taken  out 


for  water-works  and  also  electric  light 
purposes,  although  the  statutes  do  not 
authorize  the  combining  of  those  two 
businesses  in  one  corporation,  yet  a 
contract  made  by  the  city  with  such 
corporation  to  pay  certain  hydrant  and 
electric  light  rentals  may  be  enforced, 
inasmuch  as  the  contract  is  valid,  even 
if  the  corporation  be  considered  but  a' 
parnership.  Cunningham  v.  City  of 
Cleveland,  98  Fed.  Rep.  657  (1899).  A 
purchaser  of  goods  from  a  corporation 
cannot  allege  that  the  company  com- 
menced business  before  a  certain  part 
of  the  capital  stock  had  been  paid  in 
as  required  by  its  charter.  Wells  Co. 
V.  Avon  Mills,  118  Fed.  Rep.  190  (1903). 
The  legality  of  the  existence  of  a  gas 
company  cannot  be  tested  by  a  bill  in 
equity  filed  by  a  municipality  to  pre- 
vent its  officers  and  agents  from  laying 
pipes  in  the  streets,  especially  where 
the  corporation  itself  is  not  made  a 
party  defendant.  Mayor,  etc.  v.  Ad- 
dicks,  7  Del.  Ch.  56  (1899).  A  member 
of  a  mutual  insurance  company  can- 
not, when  sued  for  an  assessment,  set 
up  that  the  articles  of  incorpora- 
tion did  not  comply  with  the  statute. 
Gilman  v.  Druse,  111  Wis.  400  (1901). 
It  is  no  objection  to  the  validity  of  the 
issue  of  stock  for  patents  that  the 
corporation  selling  the  patents  was  not 
legally  incorporated.  Way  v.  Ameri- 
can, etc.  Co.,  60  N.  J.  Eq.  263  (1900). 
Where  a  corporation  sues  to  prevent  a 
loss  of  its  property,  the  defendant  can- 
not set  up  the  defense  that  the  articles 
of  incorporation    were    not    acknowl- 


1422 


CH.  XXXVUI.]  DISSOLUTION,  FOEFEITDKE,  ETC.  [§  637. 

The  same  rule  applies  when  the  corporation  is  defendant  instead 


edged  as  required  by  statuta  Franke  v. 
Mann,  106  Wis,  118  (1900).  A  person 
who  has  contracted  to  purchase  land 
from  a  supposed  corporation  cannot 
avoid  the  contract  by  the  defense  that 
the  charter  of  the  company  had  ex- 
pired. West  Missouri,  etc.  Co.  v.  Kau- 
sas  City.  etc.  Ry.,  161  Mo.  595  (1901). 

The  validity  of  the  charter  of  a  school 
incorporated  as  a  joint-stock  incorpora- 
tion cannot  be  tested  in  quo  warranto 
proceedings  brought  to  determine  the 
rights  of  parties  claiming  to  be  trus- 
tees. Commonvrealth  v.  Yetter,  190  Pa. 
St.  488  (1899).  The  legality  of  the  ex- 
istence of  the  corpoi-ation  cannot  be 
questioned  in  a  creditor's  suit  to  wind 
up  and  administer  the  assets.  Hooven, 
etc.  Go.  V.  Evans,  etc.  Co.,  193  Pa.  St.  28 
(1899).  A  person  injured  by  a  railroad 
cannot  sue  the  lessor  of  such  railroad 
on  the  ground  tliat  the  lessee  was  not 
a  legal  corporation.  Pinkerton  v.  Penn- 
sylvania, etc.  Co.,  193  Pa.  St.  229  (1899). 
Even  though  a  corporation  was  incor- 
porated by  a  special  act  in  violation  of 
the  constitution,  yet  its  existence  can- 
not be  attacked  collaterally.  Common- 
wealth, etc.  V.  Philadelphia  County,  193 
Pa.  St.  236  (1899). 

An  officer  cannot  defend  against  an 
action  to  make  him  account,  by  setting 
up  that  the  company  was  fraudulently 
organized.  Haacke  v.  Knights,  eta 
Club,  76  Md.  429  (1892).  A  person  tak- 
ing water  from  an  irrigation  company 
under  contract  cannot  defend  against 
an  action  thereon  by  alleging  that  the 
company  was  not  incorporated.  Fresno, 
etc.  Co.  V.  Warner,  72  Cal.  379  (1887).  A 
debtor  sued  by  a  corporation  on  an  ac- 
count cannot  deny  the  corporate  exist- 
ence which  he  has  recognized.  Plum- 
rner  v.  Struby,  etc.  Co.,  23  Colo.  190 
(1896).  A  debtor  or  creditor  of  a  corpo- 
ration cannot  attack  the  incorporation 
on  the  ground  that  the  certificate  of 
the  payment  of  the  capital  stocS  has 
not  been  filed  as  required  by  the  New 


York  statutes.  Port  Jefferson  Bank  v. 
Darling,  91  Hun,  236  (1895).  That  the 
corporation  may  ratify  and  enforce  con- 
tracts entered  into  in  its  behalf  by  its 
promoters  before  incorporation,  see 
§  705,  etc.,  infra.  A  corporation  can- 
not defend  against  its  contracts  by  al- 
leging that  it  never  published  its  arti- 
cles of  association  as  required  by  statute. 
Wood  V.  Wiley,  etc.  Co.,  56  Conn.  87 
(1888).  A  corporation  is  liable  for  a  tax 
even  though  it  failed  to  file  its  articles 
of  association  with  the  secretary  of  state 
as  required  by  statute.  Walton  i\  Riley, 
85  Ky.  413  (1887).  The  defendant  can- 
not allege  that  the  corporation  was  for 
an  illegal  purpose  —  that  of  running 
blockades  —  the  charter  not  showing 
that  fact.  Importing,  etc.  Co.  v.  Lock, 
50  Ala,  332  (1873).  A  corporation  can- 
not be  defeated  in  an  action  on  a  con- 
tract by  the  fact  that  twenty-four  in- 
stead of  twenty-five  persons  signed  tlie 
articles  of  incorporation.  Buffalo,  etc. 
Ry.  V.  New  York,  etc.  R.  R.,  22  Alb.  L. 
J.  134  (N.  Y.  1886).  Where  a  corpora- 
tion sues  for  the  price  of  articles  sold, 
the  defendant  cannot  set  up  that  the 
plaintiff  sold  the  articles  before  its  cap- 
ital stock  was  fully  paid  up,  as  required 
by  statute.  Chase's,  etc.  Co.  v.  Boston, 
etc.  Co.,  152  Mass.  428  (1891);  McCord, 
etc.  Co.  v.  Glenn,  6  Utah,  139  (1889).  A 
stockholder  cannot  enjoin  the  sale  of 
his  stock  for  non-payment  of  an  assess- 
ment on  the  ground  that  an  amend- 
ment to  the  charter  increasing  the  num- 
ber from  seven  to  nine  had  not  been 
filed  with  the  secretary  of  state,  as  re- 
quired by  statute,  it  being  shown  that 
at  corporate  meetings  he  had  voted  for 
nine  directors  and  had  accepted  certifi- 
cates of  stock  signed  by  the  president 
and  secretary  elected  by  nine  directors. 
Jackson  v.  Crown  Point,  etc.  Co.,  21 
Utah,  1  (1899).  A  person  sued  for  tolls 
cannot  set  up  that  the  corporation 
has  not  rendered  required  statements, 
and  hence  its   charter  is  forfeitable. 


1423 


§  637.]  DISSOLUTION,  FORFEITURE,  ETC.  [CH.   XXXVIII, 

of  plaintiff.     The  corporation  itself  is  no  more  entitled  to  set  up 


Kellogg  V.  Union  Co.,  12  Conn.  7  (1837). 
Nor  that  the  charter  was  never  legally 
vested  or  has  been  violated.  In  a  suit 
by  a  toll  road  to  recover  a  penalty  for 
refusal  to  pay  toll,  the  validity  of  the 
company's  organization  and  the  condi- 
tion of  the  road  cannot  be  brought  into 
the  controversy  by  way  of  defensa 
Canal  St.  etc.  Co.  v.  Paas,  95  Mich.  372 
(1893).  But  a  turnpike  company  cannot 
recover  fares  for  the  part  of  its  road 
which  is  constructed  beyond  its  char- 
tered limits.  Pontiac,  etc.  Co.  v.  Hilton, 
69  Mich.  115  (1888);  Dyer  v.  Walker,  40 
Pa.  St.  157(1861).  Under  the  California 
Code,  §  358,  the  regular  incorporation 
of  a  de  facto  corporation  cannot  be 
questioned  in  an  action  by  it  for  dam- 
ages for  an  injury  to  property.  Golden 
Gate.  etc.  Co.  v.  Joshua,  etc.  Works,  83 
Cal.  184  (1890).  In  a  suit  by  a  water 
company  to  enjoin  another  company 
from  diverting  water,  the  legality  of 
the  incorporation  of  the  plaintiff  can- 
not be  questioned  where  it  is  a  de  facto 
corporation.  People's,  etc.  Co.  n  '76 
Land,  etc.  Co.,  44  Pac.  Rep.  176  (CaL 
1896).  In  a  trial  for  embezzlement  from 
a  corporation,  proof  of  a  de  facto  corpo- 
ration is  sufficient.  People  v.  Leonard, 
106  Cal.  303  (1895).  In  a  trial  for  re- 
ceiving stolen  goods  belonging  to  a  cor- 
poration, a  corporate  officer's  testimony 
of  its  existence  is  sufficient  if  not  con- 
tradicted. State  V.  Hahib,  18  R.  I.  558 
(1894).  In  Irvine  Co.  v.  Bond,  74  Fed. 
Rep.  849  (1896).  an  owner  of  land  in  Cali- 
fornia incorporated  a  company  under 
the  laws  of  West  Virginia,  and  trans- 
ferred to  it  in  payment  for  stock  cer- 
tain portions  of  his  land.  He  owned  all 
the  stock  and  caused  one  share  each  to 
be  issued  to  his  lawyer,  his  wife,  and 
three  employees.  The  court  held  that 
the  corporation  was  legal  so  far  as  the 
jurisdiction  of  the  United  States  court 
was  concerned.  A  director  is  not  per- 
sonally liable  in  damages  to  a  property 
owner  over  whose  premises  the  com- 


pany's road  runs  without  warrant.  Lam- 
ming V.  Galusha,  81  Hun,  247  (1894); 
aff'd,  151  N.  Y.  648,  where  it  was  also 
claimed  that  the  incorporation  had  been 
insufficient.  Where  two  railroad  com- 
panies claim  a  right  of  way,  one  cannot 
allege  that  the  other's  charter  is  for- 
feitable. Central,  etc.  R.  R.  v.  Twenty- 
third,  etc.  R  R.,  54  How.  Pr.  168,  185 
(1877).  A  religious  corporation  suing 
for  its  real  estate  cannot  be  met  by  a 
plea  of  dissolution,  there  having  been 
no  decree.  Baptist  House  v.  Webb,  66 
Me.  398  (1877).  A  corporation  suing  for 
personal  property  is  not  defeated  by  a 
plea  that  it  was  not  legally  organized 
or  is  dissolved  by  non-user.  Penobscot, 
etc.  Corp.  V.  Lamson,  16  Me.  224  (1839). 
A  grantee  of  a  corporation's  right  to 
overflow  land  is  not  deprived  of  his 
right  by  dormancy  and  non-user  of  its 
franchises  by  the  corporation.  Heard 
V.  Talbot,  73  Mass.  113  (1856).  Attach- 
ment lies  against  the  land  of  a  foreign 
corporation  though  a  receiver  of  it  ex- 
ists in  the  state  creating  it.  Moseby  v. 
Burrow,  52  Tex.  396  (1880).  One  corpo- 
ration cannot  enjoin  a  competing  cor- 
poration from  proceeding  on  the  ground 
that  the  latter  has  subjected  its  char- 
ter to  forfeiture  by  misuser  or  non-user. 
Elizabethtown  Gaslight  Co.  v.  Green.  46 
N.  J.  Eq.  118  (1889).  A  county  cannot 
seize  a  turnpike,  although  the  company 
is  guilty  of  misuser  or  non-user.  A 
judgment  of  forfeiture  is  first  neces- 
sary. Moore  v.  Schoppert.  22  W.  Va.  ^ 
283  (1883).  A  city  seeking  to  lay  out  a  .' 
road  on  a  right  of  way  cannot  claim 
that  the  railroad  company's  right  is  for- 
feited by  non-user.  New  Jersey  R.  R. 
V.  Long  Branch  Com'rs,  39  N.  J.  L.  28 
(1876).  Service  on  a  corporation  cannot 
be  made  by  service  on  a  stockholder  on 
the  ground  that  it  has  forfeited  its  char- 
ter by  non-user.  Bache  v.  Nashville, 
etc.  Soc.  10  Lea  (Tenn.),  436  (1882).  The 
forfeiture  can  exist  only  after  a  decree 
to  that  effect.     Chesapeake,  etc.  Co.  v. 


1424 


CH.  XXXVIII.] 


DISSOLUTION,  FOKFEITDRE,  ETC. 


[§  637. 


the  defense  of  irregular,  incomplete,  or  defective  incorporation  of 
itself  than  are  the  persons  who  are  suing  it.^ 


Baltimore,  etc.  R  R.,  4  G.  &  J.  (Md.)  1 
(1832).  An  agent  sued  for  conversion 
of  funds  cannot  allege  that  the  corpo- 
ration is  guilty  of  a  non-user  of  its  fran- 
chises. Elizabeth,  etc.  Acad.  v.  Lindsey, 
6  Ired.  L.  (N.  C.)  476  (1846).  A  squatter 
on  corporate  land  cannot  dispute  the 
corporate  title  by  alleging  that  it  was 
not  legally  incorporated  or  organized. 
Only  the  state  can  object.  East.  etc. 
Church  V.  Froislie,  37  Minn.  447  (1887). 
Statutory  provisions  as  to  notice  of  the 
first  meeting  are  directory.  They  need 
not  be  observed  if  the  stockholders  ac- 
quiesce. Braintree^  etc.  Co.  v.  Brain- 
tree,  146  Mass.  483  (1881).  See  §  590, 
supra.  Though  the  provision  in  the 
Kentucky  statutes  requiring  publica- 
tion of  the  charter  is  not  complied  with, 
yet  the  corporation  is  valid  and  com- 
plete, except  that  the  state  may  proceed 
to  annul  the  charter.  No  other  party 
can  raise  the  objection.  Stutz  v.  Hand- 
ley,  41  Fed.  Rep.  531  (1890);  rev'd  on 
other  grounds,  139  U.  S.  417;  Walton  v. 
Riley,  85  Ky.  413,  421  (1887),  overruling 
Heinig  v.  Adams,  etc.  Mfg.  Co.,  81  Ky. 
300(1883).  A.  de  facto  corporation  suf- 
fices where  it  seeks  to  enjoin  a  city 
from  disturbing  its  property.  Denver 
V.  Mullen,  7  Colo.  345  (1884).  Or  where 
an  assignment  by  the  corporation  was 
Illegal  and  the  assignee  is  sued  by  cred- 
itors. Rafferty  v.  Bank  of  Jersey  City, 
33  N.  J.  L.  868  (1869).  Or  where  the 
president  is  sued  by  the  company  to  re- 
cover its  assets  from  him.  Bank  of 
Circleville  v.  Renick,  15  Ohio,  822  (1846X 
Or  where  an  execution  purchaser  of  the 
corporate  property  sues  the  mortgagee 
of  the  corporation.  Morgan  v.  Donovan, 
58  Ala.  241  (1877).  Or  where  the  corpo- 
ration sues  the  sheriff  for  an  illegal 
levy  on  its  property.  Dannebroge  Min. 
Co.  V.  Aliment,  26  CaL  286  (1864).  Or 
where  the  suit  grows  out  of  contracts 
with  the  corporation.  Imboden  v.  Eto. 
wah,  etc.  Min.  Co.,  70  Ga.   86  (1883); 


Platte  Valley  Bank  v.  Harding,  1  Neb. 
461  (1870).  Or  where  a  bank  sues  it* 
correspondent  bank.  Bank  of  Toledft 
V.  International  Bank,  21 N.  Y.  542  (1860). 
Or  where  a  foreign  corporation  sues  iox 
a  stipulated  part  of  the  oil  taken  from 
its  land,  and  the  defendant  alleges  tha> 
it  is  doing  all  its  business  outside  of  tho 
state  incorporating  it.  Newburg,  etc. 
Co.  V.  Weare,  27  Ohio  St.  348  (1875).  Se& 
also  §§  237-239,  supra.  Or  where  a  for- 
eign corporation  sues  the  sheriff  tot 
trespass.  Persse,  etc.  Works  v.  Willett, 
1  Rob.  (N.  Y.)  181  (1863).  Or  where  th». 
company  sues  for  tolls.  Smelser  v. 
Wayne,  etc.  Turnp.  Co.,  82  Ind.  4tt 
(1882).  The  case  of  Welland  Canal  Co. 
V.  Hathaway,  8  Wend.  480 (1882), allowed 
a  contractor  to  deny  the  existence  ot  a 
corporation  which  sued  to  recover  tjack 
money  which  had  been  overpaid  -uo  nim. 
iDooley  v.  Cheshire  Glass  Co.,  81 
Mass.  494  (1860);  Callender  v.  Gaines- 
ville, etc.  R.  R.,  11  Ohio  St  ol6  (i860); 
Holbrook  v.  St.  Paul,  etc.  ins.  Co.,  25 
Minn.  229  (1878).  See  also  l5ommer  v. 
American,  etc.  Co.,  81  N.  Y.  468  (1880), 
where  the  corporation  sougfit  to  escape 
royalties  by  alleging  that  it  incor- 
porated after  the  contract  by  it  to  pay 
them  was  made.  A  corporation  sued 
for  work  done  cannot  set  up  that  it  was 
not  regularly  incorporated.  Merrick  v. 
Reynolds,  etc.  Co.,  101  Mass.  381  (1869). 
A  corporation  cannot  defeat  its  taxes 
by  alleging  failure  to  comply  with  con- 
ditions subsequent  in  its  charter.  Bal- 
timore, etc.  R.  R.  v.  Marshall  Co.,  3  W. 
Va.  319  (1869).  The  corporation  cannot 
avoid  a  tax  on  the  ground  that  it  has 
ceased  business.  Bank  of  U.  S.  v.  Com- 
monwealth, 17  Pa.  St.  400  (1851).  A  cor- 
poration receiving  the  stock  of  another 
corporation  in  consideration  of  certain 
agreements  as  to  renting  machines  be- 
longing to  said  latter  company  cannot, 
when  enjoined  from  violating  that 
agreement,  set  up  that  the  latter  com- 


(90) 


1425 


§  637.] 


DISSOLUTION,  FOEFEITUEE,  ETC. 


[oh.  XXXVIII. 


"Where,  however,  a  corporation  is  not  even  a  de  facto  corporation, 
then,  of  course,  it  falls  back  into  the  category  of  copartnerships' 
and  cannot  bring  suit  as  a  corporation.' 


pany  was  not  properly  organized.  Au- 
tomatic, etc.  Co.  V.  North  American, 
etc.  Co.,  45  Fed.  Rep.  1  (1891).  Although 
there  are  less  stockholders  and  less  di- 
rectors than  the  statute  or  charter  re- 
quire, yet  the  acts  of  these  are  sufficient 
to  sustain  obligations  incurred  by  the 
corporation  with  third  persons.  Welch 
V.  Importers',  etc.  Bank,  122  N.  Y.  177 
(1890).  It  is  no  defense  to  a  proceed- 
ing by  a  religious  corporation  to  collect 
a  legacy  to  allege  that  there  were  ir- 
regularities in  its  incorporation,  and 
that  there  has  been  a  non-user  of  its 
franchises.  Re  Cutchogue  Congrega- 
tional Church,  131  N.  Y.  1  (1892).  The 
California  code  provides  that  the  ex- 
istence of  Side  facto  corporation  shall 
not  be  called  in  question  in  private 
suits.  Lakeside,  etc.  Co.  v.  Crane,  80 
Cal.  181  (1889);  Golden,  etc.  Co.  v. 
Joshua,  etc.  Works,  82  Cal.  184  (1890). 
An  insurance  company  when  sued  on  a 
policy  cannot  deny  its  incorporation  on 
the  ground  that  its  charter  required 
that  it  be  published  in  a  certain  way 
within  a  specified  time  after  the  char- 
ter itself  was  granted  and  that  this  was 
not  do'ne.  Brady  v.  Delaware;  etc.  Co., 
2  Pennewill  (Del.),  237  (1899).  In  the 
case  of  Ferine  v.  Grand  Lodge,  48  Minn. 
82  (1892),  where  an  insurance  policy 
was  sued  upon,  the  court  held  that  it 
was  immaterial  that  the  defendant  was 
not  incorporated,  inasmuch  as  it  had 
held  itself  out  as  a  corporation.  Bon 
Aqua  Imp.  Co.  v.  Standard  F.  Ins.  Co., 
34  W.  Va.  764  (1891).  Even  though  .the 
certificate  of  incorporation  recites  sev- 
eral purposes,  where  the  statute  allows 
but  one  purpose,  yet  a  corporation  ex- 
ists and  may  be  held  liable  as  such. 
Marion  Bond  Co.  v.  Mexican,  etc.  Co., 
65  N.  E.  Rep.  748  (Ind.  1902). 

1  See  g§  233, 236, 508,  supra.  A  corpora- 
tion to  deal  in  bonds  cannot  be  organ- 
ized under  a  statute  authorizing  the 


formation  of  corporations  to  deal  in 
merchandise  and  conduct  mercantile 
operations.  Such  a  corporation  is  not 
even  a  de  facto  corporation,  inasmuch  as 
such  a  de  jMre  corporation  is  impossible 
under  such  a  statute.  Hence  such  a 
corporation  cannot  bring  suit  as  a  cor- 
poration. Indiana,  etc.  Co.  v.  Ogle,  22 
Ind.  App.  593  (1899).  Where  a  proposed 
national  bank  is  never  authorized  by 
the  comptroller  of  the  currency  to  com- 
mence business,  and  never  does  com- 
mence business,  a  lease  made  in  its 
name  cannot  be  enforced  against  it. 
McCormick  i'.  Market  Nat.  Bank,  162 
III  100  (1896).  Under  the  Georgia  rail- 
road act  a  company  is  not  a  corporation 
until  directors  have  been  elected,  even 
though  the  certificate  was  issued  by  the 
^^ecretary  of  state  some  time  prior 
thereto.  Watson  v.  Albany,  etc.  Ry., 
Ill  Ga.  10  (1900).  In  a  suit  brought  by 
a  street  railway  to  enjoin  another  street 
railway  from  interfering  with  an  al- 
leged exclusive  right  of  the  former,  the 
corporate  existence  of  the  former  may 
be  questioned.  Wilmington  City  Ry.  v. 
Wilmington,  etc.  Ry.,  46  Atl.  Rep.  12 
(Del.  1900).  Where  a  copartnership  in 
Connecticut  proceeds  to  incorporate. in 
that  state,  but  fails  to  file  the  certificate 
with  the  secretary  of  state,  as  required 
by  charter,  and  it  appears  that  the 
intent  to  incorporate  was  abandoned, 
one  partner,  upon  the  death  of  the  other, 
may  claim  possession  of  the  assets  as 
against  the  corporation.  Card  v.  Moore, 
68  N.  Y.  App.  Div.  327  (1902).  A  cor- 
poration whose  articles  are  not  filed  in 
the  right  county,  and  which  has  never 
had  an  organization  meeting,  is  not 
de  jure  nor  de  facto.  It  cannot  sue  a 
director  for  preventing  organization. 
Martin  v.  Deetz,  102  Cal.  55  (1894).  In 
order  to  constitute  a  de  facto  corpora- 
tion "there  must  at  least  be  an  organi- 
zation under  some  existing  charter  or 


1426 


CH.  XXXVIII.]  DISSOLUTION,  FORFEITURE,  ETC.  [§  637, 

Thus  a  corporation  which  files  its  certificate  of  incorporation  with 
the  secretary  of  state,  but  not  with  the  county  clerk,  as  required  by 
statute,  and  transacts  no  business  except  to  authorize  the  issue  of 
stock  for  property,  which  issue  is  never  made,  is  not  even  a  de  facto 
corporation,  and  hence  the  directors  are  not  liable  for  failing  to 
file  a  report  as  required  by  statute.^  And  where  the  statute  author- 
izes incorporation  for  producing  and  selling  electricity,  and  the  cer- 
tificate of  incorporation  includes  this  as  well  as  manufacturing  and 
selling  electrical  appliances,  apparatus,  and  supplies,  the  corporation 
is  not  a  de  jure  corporation,  and  hence  is  insufficient  to  support  an 
action  by  one  promoter  against  another,  on  a  contract  of  the  latter 
to  convey  land  to  a  corporation  to  be  formed  and  to  take  stock  in 
payment,  especially  where  the  full  capital  stock  of  such  corporation 
had  not  been  subscribed  for.^  The  mere  fact  that  a  person  con- 
tracts with  a  party  and  designates  the  latter  as  a  "company"  will 
not  estop  the  former  from  denying  the  incorporation  of  the  latter. 
This  is  the  law,  and  is  reasonable,  since  many  copartnerships  do 
business  and  make  contracts  under  the  name  of  "  company."  ^  But 
where  the  party  contracted  with  is  a  de  facto  corporation,  then  the 
rules  given  above  apply.  It  is  to  be  borne  in  mind,  also,  that  a 
company  which  is  supposed  to  be  incorporated,  but  is  not,  may 
after  incorporation  ratify  and  enforce  contracts  made  in  its  behalf.* 
The  execution  and  delivery  of  an  instrument  to  a  corporation  as  a 
corporation  raises  a  presumption  that  the  company  was  regularly 
incorporated.^ 

Irregularities  in  the  organization  of  a  corporation  created  by  a 
state  will  not  be  inquired  into  in  the  courts  of  another  state,  a 

law.     And  such  organization  must  be  stock  before  incorporation  may  defeat 

in  good  faith."    Hence,  where  an  at-  municipal  bonds  which  are  given  to  it. 

torney  sues  for  his  services,  the  sup-  Farnhamr.  Benedict,  107  N.Y.  159(1887). 

posed  corporation  may  set  up  that  it  is  ^  Emery  v.  De  Peyster,  77  N.  Y.  App. 

not  a  de  facto  nor  de  jure  corporation.  Div.  65  (1903).    An  older  New  York  case 

Welch  V.  Old  Dominion,   etc.  Ry.,   10  held   that    a    director    cannot   escape 

N.  Y.  Supp.  174  (1890).    A  person  who  his    statutory   liability  by   reason    of 

agreed  to  and  did  convey  property  to  a  the  failure  of  the  company  to  file  its 

company  to  be  incorporated  may  subse-  certificate  of  incorporation  with  the 

quently  repudiate  the  corporation  and  secretary  of  state.    Mexuden  Tool  Co.  v. 

his  conveyance  as  against  his  associates  Morgan,  1  Abb.  N.  Cas.  125,  n.  (N.  Y. 

who  shared  in  the  stock  received  there-  Super.  Ct  1875). 

for.   Doyle  v.  Mizner,  43  Mich.  332  (1879).  2  Burk  v.  Mead,  64  N.  E.  Rep.  880  (Ind. 

The  case  of  Boyce  v.  Trustees,  etc.,  46  1903)."  See  also  Carey  v.  Cincinnati,  etc. 

Md.  359  (1876),  allowed  a  corporation  to  R.  R.,  5  Iowa,  357  (1857),  and  §  638,  infra. 

deny  its  existence  as  against  a  director  ^  See  §  243,  siqjra. 

who  sued  it  for  moneys  advanced  to  it.  *  See  g  707,  infra. 

The  failure  of  a  railroad  to  cause  to  be  6  West  Side,  etc.  Co.  v.  Connecticut, 

paid  in  a  certain  amount  of  its  capital  etc.  Co.,  186  111.  156  (1900). 

1427 


§  638.] 


DISSOLUTION,  FORFEITUKE,  ETC. 


[CH. 


XXXV  nr. 


charter  having  been  issued  to  the  company  in  the  state  where  it 
was  organized.^ 

§  638.  Lapse  of  charter  hy  failKre  to  comply  ivitli  conditions. — 
Frequently  a  charter  of  a  railroad  corporation  requires  it  to  com- 
plete its  road  or  a  certain  number  of  miles  of  road  within  a  certain 
time,  and  the  charter  expressly  declares  that  for  failure  to  comply 
with  this  requisite  the  corporate  powers  and  existence  shall  cease. 
There  is  a  strong  line  of  decisions  to  the  effect  that  such  a  provis- 
ion as  this  forfeits  the  charter  absolutely  upon  non-compliance,  and 
that  no  decree  of  a  court  is  necessary  to  effectuate  that  forfeiture.^ 


1  Lancaster  v.  Amsterdam  Imp.  Co., 
140  N.  Y.  576  (1894). 

2  See  Brooklyn,  etc.  Co.  u  City,  78  N. 
Y.  524  (1879);  Re  Brooklyn,  etc.  R.  R, 
73  N.  Y.  .245  (1878);  Re  Brooklyn,  etc. 
R.  R.  75  N.  Y.  335  (1878);  Common- 
wealth V.  Lykens,  etc.  Co.,  110  Pa.  St. 
391  (1885);  Farnham  v.  Benedict,  107  N. 
Y.  159  (1887).  Cf.  Re  Kings  County  El. 
Ry.,  105  N.  Y.  97  (1887),  rev'g  41  Hun, 
425;  People  v.  National  Sav.  Bank,  11 
N.  E.  Rep.  170  (111.  1887);  aflE'd,  129  111. 
618  (1889).  A  new  state  constitution 
may  forfeit  all  charters  previously  ex- 
isting, but  which  have  not  been  used 
by  the  incorporators.  Chinclecla- 
manche  Lumber,  etc.  Co.  v.  Common- 
wealth, 100  Pa.  St.  438  (1883),  holding 
also  that  a  constitutional  provision 
that  charters  under  which  no  organ- 
ization has  been  made  and  business  has 
been  commenced  shall  lapse  forthwith 
is  constitutional  and  self-enforcing.  In 
a  condemnation  proceeding  by  a  street 
railway  to  obtain  a  right  over  a  turn- 
pike, the  turnpike  company  may  set 
up  that  the  street  railway  charter  has 
lapsed  by  reason  of  the  company  not 
having  organized  and  commenced  busi- 
ness within  a  certain  time  and  that 
thereby  the  charter  became  void  by 
reason  of  a  constitutional  provision. 
In  re  Philadelphia  &  M.  Ry„  187  Pa.  St. 
123  (1898).  A  provision  in  a  charter  that 
it  should  become  void  unless  a  certain 
amount  of  railroad  is  constructed  by  a 
certain  date  is  self-executory,  and  the 
company  ceases  to  exist  if  construction 
is  not  so  made  within  that  time,  and 


hence  the  company  cannot  maintain 
a  suit  after  that  time.  Maine,  etc.  R. 
R.  V.  Maine,  etc.  R.  R,  92  Me.  476  (1899). 
The  defense  may  be  set  up  that  the 
company's  time  to  complete  its  road 
had  expired.  Atlantic,  etc.  R.  R.  v.  St. 
Louis,  66  Mo.  238  (1877).  The  provision 
in  a  street  railway  charter  that  the 
right  should  become  void  unless  the 
line  was  completed  within  two  years 
and  the  franchises  were  thereupon  to 
wholly  cease  is  self-executing.  Will- 
iamson V.  Gordon,  etc.  Ry.,  40  Atl.  Rep. 
933  (Del.  1898).  Where  a  charter,  by  its 
terms,  is  to  be  void  unless  the  capital 
stock  is  subscribed  within  two  years 
and  business  commenced,  a  failure  to 
secure  the  whole  subscription  within 
that  time  renders  the  charter  void, 
though  business  was'commenced.  Quo 
warranto  lies.  People  v.  National  Sav. 
Bank,  11  N.  E.  Rep.  170  (111.  1887).  The 
provision  in  the  Railroad  Act  of  New 
York  of  1850  relative  to  forfeiture  of 
the  charter  for  failure  to  proceed  with 
the  enterprise  was  self-executing. 
Underground  R.  R.  v.  City  of  New 
York,  116  Fed.  Rep.  9.53  (1902).  In  Put- 
nam V.  Ruch,  54  Fed.  Rep.  316  (1893), 
the  court,  in  a  dictum,  said  that  the  re- 
peal of  a  charter  by  a  constitutional 
enactment  may  be  self-executing,  but 
that  in  the  case  before  the  court  the 
judgment  of  the  court  was  necessary. 
Where  by  its  chai'ter  a  street  railroad 
is  to  be  commenced  within  three  years 
and  completed  within  ten.  but  it  does 
not  even  open  books  for  subscriptions 
until  nearly  twenty  years  have  elapsed, 


1428 


CH.  XXXVIII.] 


DISSOLUTION,  FOEFEITCEE,  ETC. 


[§  638. 


But  this  drastic  and  dangerous  construction  of  charters  does  not 
commend  itself  to  law  and  justice.  It  adds  one  more  to  the  perils 
which  are  attached  to  all  great  corporate  enterprises.  Even  in 
Xew  Tork,  where  the  above  doctrine  seems  to  have  had  its  origin, 
the  courts  are  inclined  to  limit  its  application.  The  New  York 
courts  have  held  that  a  provision  in  a  charter,  that  unless  certain 
things  are  done  within  a  certain  time  the  company  should  "  forfeit 
the  rights  acquired,"  does  not  work  a  forfeiture  i^so  facto^  and 
that  a  provision  in  a  charter,  that  unless  work  shall  be  commenced 
within  two  years  "all  rights  and  privileges  granted  hereby  shall 
be  null  and  void,"  is  not  self-executing,  and  a  judgment  of  the 
court  is  necessary  before  forfeiture  takes  place,^  and  the  weight  of 


the  corporation  never  came  into  exist- 
ence, and  an  abutting  property  owner 
may  enjoin  the  laying  of  tracks. 
Bonaparte  v.  Baltimore,  etc.  R.  R.,  75 
Md.  340  (1893j.  Contra,  New  York,  etc. 
R  R.  V.  New  York,  N.  H.  etc.  R.  R.,  52 
Conn.  274,  284  (1884).  Cf.  State  v.  Bull, 
16  Conn.  179  (1844).  In  Texas  the  stat- 
ute is  self-executing,  the  words  used 
being  the  same  as  in  the  New  York 
statute.  But  the  property  rights  sur- 
vive for  the  benefit  of  creditors  and 
stockholders.  Sulphur  Springs,  etc.  Ry. 
V.  St.  Louis,  etc.  Ry.,  2  Tex.  Civ.  App. 
650  (1893).  A  provision  that,  unless  cer- 
tain roads  should  be  completed  within 
a  certain  time,  "  its  corporate  existence 
and  its  powers  shall  cease,  so  far  as  it 
relates  to  that  portion  of  said  road  then 
unfinished,"  is  self-executing.  Houston 
V.  Houston,  etc.  Ry.,  84  Tex.  581  (1892). 
A  subscriber,  sued  on  his  subscription 
for  stock,  may  defeat  the  suit  by  show- 
ing that  by  statute  tiie  cliarter  was  to 
be  void  if  no  work  was  commenced 
within  two  years,  and  that  such  two 
years  have  elapsed  and  no  work  has 
been  done.  Bywaters  v.  Paris,  etc.  Ry., 
73  Tex.  624  (1889).  Under  the  Virginia 
law  requiring  organization  within  two 
years  or  else  the  charter  is  void,  the 
charter  becomes  void  "  without  legal 
proceedings  of  any  kind,  from  mere 
operation  of  law."  Welch  v.  Old  Do- 
minion, etc.  Co.,  10  N.  Y.  Supp.  174 
(1890):  Silliman  v,  Fredericksburg,  etc. 
R  R,  27  Gratt.  (Va.)  119  (1876).     A  pro- 

14 


vision  in  the  general  statutes  to  the 
effect  that  the  powers  of  a  corporation 
shall  cease  if  it  does  not  organize  within 
one  year  does  not  apply  to  a  special 
charter  the  terms  of  which  indicate 
that  organization  might  be  after  one 
yeai*.  People  v.  Bowen.  30  Barb.  24 
(1859);  affirmed  on  other  grounds,  21 
N.  Y.  517.  In  Bybee  v.  Oregon,  etc. 
R.  R,  139  U.  S.  683  (1891),  the  court  re- 
viewed the  conflicting  decisions  on  the 
question  whether  a  corporate  charter 
could  be  made  by  the  legislature  to 
lapse  and  cease  ipso  facto  and  without 
judicial  action.  As  to  the  effect  on  cor- 
porate mortgages,  see  §  792,  infra. 

1  Consequently  this  is  no  defense  to 
condemnation  proceedings.  Re  Brook- 
lyn, etc.  R  R,  125  N.  Y.  434  (1891). 

'^  Re  New  York,  etc.  Bridge  Co.,  148 
N.  Y.  540  (1896).  The  attorney-general 
cannot  enjoin  a  gas  company  from  lay- 
ing its  pipes  on  the  ground  that  the 
charter  was  void  by  reason  of  the  com- 
pany not  having  commenced  work 
within  the  prescribed  time.  The  local 
authorities  are  fully  competent  to  raise 
the  question  if  they  wish.  People  v. 
Equity  Gas  Light  Co.,  141  N.  Y.  233 
(1894).  Failure  to  commence  work 
within  a  time  specified  in  the  charter, 
and  a  penalty  that  therefor  the  com- 
pany should  be  dissolved,  does  not  ef- 
fect dissolution.  A  judgment  is  neces- 
sary. Day  V.  Ogdeusburg,  etc.  R  R., 
107  N.  Y.  129  (1887). 


29 


§  638.] 


DISSOLUTION,  FORFEITURE,  ETC. 


[CH. 


XXXVIII. 


authority,  as  well  as  logic  and  public  policy,  favor  such  a  rule.^    A 
statute  that  after  a  year's  suspension  of  business  the  franchises 


'In  condemnation  proceedings  the 
defense  tliat  the  corporation  has  ceased 
to  exist  for  failure  to  complete  its  road 
within  ten  years  is  not  good,  inasmuch 
as  the  corporate  existence  can  be  at- 
tacked only  in  a  direct  proceeding  for 
that  purpose.  Morrison  v.  Forman,  177 
IlL  427  (1898).  The  question  of  whether 
or  not  a  charter  has  been  forfeited  by 
a  provision  that  its  rights  should  revert 
to  the  state,  in  case  certain  work  was 
not  done  within  two  years,  cannot  be 
raised  by  a  party  litigating  with  such 
company,  but  can  be  raised  only  by  a 
proceeding  instituted  by  the  state.  Oly- 
phant,  etc.  Co.  v.  Borough  of  Olyphant, 
196  Pa.  St.  553  (1900).  A  statutory  pro- 
vision that  a  corporation,  for  purposes 
of  enforcing  the  stockholder's  statutory 
liability,  shall  be  deemed  dissolved  one 
year  after  it  ceases  to  do  business  does 
not  cause  such  dissolution  as  to  pre- 
vent the  corporation  being  sued  there- 
after. Whitman  V.  Citizens'  Bank,  110 
Fed.  Rep.  503  (1901).  A  provision  that 
a  railroad  charter  shall  be  null  and 
void  unless  certain  things  are  done 
within  two  years  is  not  self-executing. 
Brown  v.  Wyandotte,  etc.  Ry.,  68  Ark. 
134  (1900).  Even  though  a  city  has  re- 
served the  po^er  to  forfeit  the  right  of 
a  street  railway  company  to  construct 
its  road  on  certain  streets,  if  such  con- 
struction is  not  completed  within  five 
years,  this  in  itself  does  not  work  a  for- 
feiture, but  a  forfeiture  must  first  be 
declared.  Louisville,  etc,  R.  R  v.  Bowl- 
ing Green  Ry.,  63  S.  W.  Rep.  4  (Ky. 
1900).  Although  a  municipal  grant  to 
construct  a  street  railway  provides 
that  it  shall  be  forfeited  and  the  rights 
shall  cease  without  any  action  at  law  or 
otherwise  unless  the  road  is  completed 
within  a  specified  time,  yet  the  court 
will  not  enforce  the  provision  if  there 
was  a  legal  excuse  for  the  delay  or  a 
waiver  of  the  provision.  Dusen berry 
V.  New  York,  etc,  Co.,  46  N.  Y.  App. 


Div.  267  (1899).  A  provision  in  a  street 
railway  charter  that,  if  certain  things 
are  not  done  within  a  certain  time,  the 
"  act  of  incorporation  shall  be  void  " 
as  to  streets  not  then  covered,  is  not 
self -executing,  and  delay  in  insisting 
thereon  will  constitute  a  waiver.  Dern 
V.  Salt  Lake,  etc.  R.  R.,  19  Utah,  46 
(1899).  The  act  of  congress  granting 
lands  to  railroad  companies,  and  pro- 
viding that  if  any  section  of  the  road  is 
not  completed  within  five  years  after 
its  location  the  land  grant  shall  be  for- 
feited, is  not  self-executing,  and  no  for- 
feiture takes  jDlace  except  bj'  judicial 
proceedings  or  an  act  of  congress  as- 
suming title.  Utah,  etc.  R  R.  v.  Utah, 
etc.  Ry.,  110  Fed.  Rep.  879  (1901).  Al- 
though the  charter  states  that  it  shall 
be  forfeited  unless  the  corporation  is 
organized  within  two  years,  yet  a  stock- 
holder cannot  set  up  such  a  forfeiture 
in  a  suit  involving  a  lien  of  the  corpo- 
ration on  his  stock.  Boyd  r.  Redd,  120 
N.  C.  335  (1897).  Where  land  has  been 
condemned  by  a  railroad  corporation, 
the  grantee  of  the  party  whose  land 
has  been  so  condemned,  the  grant  hav- 
ing been  made  prior  to  the  condemna- 
tion, but  the  grantee  being  represented 
in  the  proceedings,  cannot  maintain 
ejectment  therefor  on  the  ground  that 
the  railroad  charter  provided  "that  the 
rights,  privileges,  and  powers  of  said 
corporation  shall  be  null  and  void,"  un- 
less certain  work  was  done  within  a 
certain  time,  even  if  the  work  had  not 
been  done  within  the  prescribed  time. 
Only  the  state  can  question  the  corpo- 
rate existence  on  this  ground.  New 
York  &  N.  E.  R.  R.  r.  New  York,  N.  H. 
etc.  R.  R.,  52  Conn.  274,  284  (1884).  See 
also  Briggs  v.  Cape  Cod  Land  Co.,  137 
Mass.  71  (1884).  In  this  case  the  charter 
of  a  corporation  required  it  to  deposit 
with  the  state  treasurer  within  four 
months  from  its  date  the  sum  of 
§200,000  as  security  for  certain  purposes. 


1430 


CH.  XXXVIII.] 


DISSOLUTION,  FORFEITURE,  ETC. 


LP  639,  640. 


shall  be  deemed  surrendered  and  the  corporation  be  adjudged  dis- 
solved is  not  self-executory,  but  requires  the  judgment  of  the  court.^ 

Where  by  a  charter  a  bridge  is  to  revert  to  the  state  after  forty 
years,  the  state,  upon  the  expiration  of  the  forty  years,  may,  by  an 
information,  enforce  the  reversion  of  the  bridge  to  the  public."^ 
Proof  of  a  charter  and  user  is  sufficient  without  proving  organiza- 
tion wit  nin  the  time  allowed  by  law.'  Where  a  bank  charter  pro- 
vided that  it  should  be  void  unless  the  company  should  organize 
and  proceed  to  business  within  two  years,  and  the  company  organ- 
ized, but  failed  to  transact  any  business  for  fifteen  years,  a  judg- 
ment of  ouster  against  it  will  not  be  disturbed.^  The  failure  of  a 
street  railway  company  to  perform  a  condition  of  its  charter  may 
enable  a  city  to  make  a  new  grant  to  another  company.^ 

§§  639,  640.  Bepeals  of  cliarters  —  Riglit  of  stockholders  to  olrject 
The  repeal  by  the  state  of  a  charter  before  the  expiration  of  the 
time  it  was  to  exist,  or  the  repeal  at  any  time  where  the  charter 
is  perpetual,  is  an  unconstitutional  breach  of  the  contract  between 
the  state  and  the  corporation  and  the  stockholders.®    Where,  how- 


among  others  for  the  payment  of  dam- 
ages for  taking  land,  and  the  corpora- 
tion did  not  deposit  the  $200,000  in  cash, 
but  in  bonds  of  the  United  States  of  the 
par  value  of  $200,000,  and  of  the  mar- 
ket value  of  $230,000.  Held,  a  sufficient 
compliance,  as  the  object  of  the  pro- 
vision was  to  provide  security  to  vari- 
ous interests.  Also  held  that  the  ques- 
tion whether  a  corporation  has  ceased 
to  exist  for  non-compliance  with  char- 
ter provisions  could  only  be  judicially 
determined  in  a  suit  to  which  the  com- 
monwealth was  a  party.  The  corpora- 
tion itself,  when  sued  for  taxes,  cannot 
set  up  this  defense.  Baltimore,  etc.  R. 
R.  V.  Marshall  Co.,  3  W.  Va,  319  (1869). 
An  owner  of  land  which  a  railroad  has 
taken  cannot  reclaim  possession  by 
reason  of  the  failure  of  the  company 
to  complete  its  road  within  the  time 
limited  by  charter.  Cincinnati,  etc.  R. 
R.  V.  Clifford,  113  Ind.  460  (1888);  Bra- 
vard  V.  Cincinnati,  etc.  R.  R.,  115  Ind.  1 
(1888).  A  provision  that  if  the  road  is 
not  completed  within  a  certain  time 
"the  charter  shall  be  forfeited'"  is  not 
self-executing.  Galveston,  etc.  Ry.  v. 
State,  81  Tex.  573  (1891).  Such  also  is 
the    rule  where    the    statute    merely 


limits  the  term  of  existence  of  the  cor- 
poration. Elizabethtown  Gaslight  Co. 
V.  Green,  46  N.  J.  Eq.  118  (1889).  A  pro- 
vision in  the  charter  that  the  corpo- 
rate powers  should  cease  and  become 
void  unless  certain  things  were  done 
within  a  certain  time  does  not  work  a 
forfeiture  ipso  facto.  A  judicial  pro- 
ceeding is  necessary.  State  v.  Spartan- 
burg, C.  etc.  R.  R.,  51  S.  C.  129  (1897). 
See  also  Hardy  Lumber  Co.  v.  Pickerel 
Co.,  29  Can.  S.  C.  Rep.  211  (1898). 

1  Mylrea  v.  Superior,  etc.  Ry.,  67  N.  W. 
Rep.  1138  (Wis.  1896). 

2  A  subsequent  act  of  the  legislature 
waiving  the  reversion  upon  condition 
does  not  prevent  the  reversion  if  the 
condition  is  not  performed.  State  v.  Old 
Town  Bridge  Corp.,  85  Me.  17  (1892). 

3  St.  Louis,  etc.  R.  R.  v.  Belleville  City 
Ry.,  158  111.  390  (1895). 

■*  Henderson,  etc.  Assoc,  v.  People,  163 
111.  196  (1896X 

5  Santa  Rosa,  etc.  R.  R.  v.  Central  St. 
Ry.,  112  Cal.  436  (1896).  See  also  §  634, 
sujira,  and  §§  913,  931,  infra. 

« Greenwood  V.  Freight  Co.,  105  U.  S. 
13  (1881).  "  A  grant  of  corporate  privi- 
leges for  a  specified  period  cannot  be 
resumed  by  the  state  within  such  pe- 


1431 


§  640.] 


DISSOLUTION,  FORFEITURE,  ETC. 


[CH,  XXXVIII, 


ever,  the  right  of  repeal  is  reserved  bj'^  the  legislature,  then  such 
reservation  becomes  a  part  of  the  contract,  and  the  repeal  of  the 
charter  rests  in  the  discretion  of  the  legislature.^  Upon  a  repeal 
the  corporate  property  becomes  a  fund  to  be  applied,  first  to  the 
payment  of  the  debts  of  the  corporation,  and  the  balance  to  be  dis- 
tributed among  the  stockholders.^     The  question  as  to  the  right  of 


riod.  If  the  charter  be  without  limita- 
tion as  to  time  it  is  forever  irrepealable." 
Erie,  etc.  R  R.  v.  Casey,  26  Pa.  St.  287 
(1856).  The  legislature  cannot  forfeit  a 
charter.  Forfeiture  can  be  decreed  only 
by  the  courts.  It  is  not  a  legislative 
function  unless  reserved.  Allen  v.  Bu- 
chanan, 9  Phila.  (Pa.)  283  (1873).  Con- 
gress  may  repeal  a  charter  granted  by 
a  territory.  Mormon  Church  v.  United 
States,  136  U.  S.  1  (1890).  A  forfeiture 
of  land  by  the  government  for  non- 
compliance with  the  terms  of  the  grant 
may  be  by  legislative  enactment.  Farns- 
worth  V.  Minnesota,  etc  R.  R.,  92  U.  S. 
49  (1875).  The  legislature  cannot  repeal 
a  charter  granted  by  the  constitution 
of  the  state.  New  Orleans  v.  Houston, 
119  U.  S.  265  (1886).  The  legislature 
may  repeal  the  charter  of  a  fire-engine 
company,  such  company  being  in  the 
nature  of  a  municipal  corporation. 
State  V.  Washington,  etc.  Co.,  76  Miss. 
449  (1899).     See  §  913,  infra. 

1  Under  a  reserved  power  to  repeal  at 
the  pleasure  of  the  legislature  the  courts 
cannot  question  the  necessity  or  the 
legislative  motives  leading  to  a  repeal. 
Greenwood  v.  Freight  Co.,  105  U.  S.  13 
vl881);  Lothrop  v.  Stedman,  42  Conn. 
583  (1875);  Lothrop  v.  Stedman,  13 
Blatchf.  134  (1875).  See  Sinking  Fund 
Cases,  99  U.  S.  700,  720  (1878);  Northern 
R.  R.  V.  Miller,  10  Barb.  260  (1851);  Erie, 
etc.  R.  R  V.  Casey,  26  Pa.  St.  287,  302 
(1856);  Miners'  Bank  v.  U.  S.,  1  Greene 
(Iowa),  553  (1848);  McLaren  v.  Penning- 
ton, 1  Paige,  102  (1828);  Crease  v.  Bab- 
cock.  40  Mass.  334,  344  (1839).  If  the 
power  of  repeal  arises  only  upon  an 
abuse  of  franchise  the  court  may  review 
the    question   whether    there   was  an 


abuse.  Erie,  etc.  R  R.  v:  Casey,  26  Pa. 
St.  287  (1856);  Baltimore  v.  Pittsburgh, 
etc.  R  R,  1  Abb.  (U.  S.)  9  (1865).  Hence 
the  legislature  cannot  forfeit  a  charter 
merely  because  the  corporation  has  been 
incorporated  elsewhere  and  has  brought 
suits  in  the  federal  courts.  Common- 
wealth V.  Pittsburgh,  etc.  R  R,  58  Pa. 
St.  26  (1868).  See,  in  general,  Flint,  etc. 
Plank-road  Co.  v.  Woodhull,  25  Mich.  99 
(1872);  Montgomery  v.  Merrill,  18  Mich. 
338  (1869);  State  v.  Noyes,  47  Me.  189 
(1859);  Canal  Co.  v.  Railroad  Co.,  4  G.  & 
J.  (Md.)  122  (1832);  University  of  Mary- 
land V.  Williams,  9  G.  &  J.  (Md.)  365 
(1838);  Cooley's  Const.  Lim.  106;  Mayor, 
etc.  V.  Twenty-third  Street,  113  N.  Y. 
311  (1889).  Under  this  reserved  power 
the  state  may  authorize  one  corporation 
to  build  its  road  on  a  route  which  a 
prior  corporation  has  designated  but 
not  acquired.  Re  Cable  Ry.,  40  Hun,  1 
(1886).  A  general  statute  or  constitu- 
tional provision  reserving  the  right  to 
repeal,  alter,  or  amend  charters  enters 
into  all  charters  granted  subsequent 
thereto  as  much  as  if  actually  inserted 
in  such  chartera  Re  Lee's  Bank  of 
Buffalo,  21  N.  Y.  9  (1860);  Commission- 
ers, etc.  V.  Holyoke  Water-power  Co., 
104  Mass.  446  (1870);  Delaware  R  R  v. 
Tharp,  5  Harr.  (Del.)  454  (1854).  See 
also  §  2,  supra.  The  repeal  of  a  general 
incorporating  act  and  the  enactment 
of  a  new  one  does  not  repeal  charters 
which  have  already  been  taken  out 
under  the  old  act.  Freehold,  etc.  Assoc. 
V.  Brown,  29  N.  J.  Eq.  121  (1878);  United, 
etc.  Assoc.  V.  Benshimol.  130  Mass.  325 
(1881).  Contra,  Wilson  v.  Tesson,  12  Ind. 
285  (1859). 
2  See  §  641,  infra. 


1432 


CH.  XXXVIII.] 


DISSOLUTION,  FORFEITUKE,  ETC. 


[§  641. 


a  legislature  to  repeal  a  part  of  a  charter,  such  as  an  exemption 
from  taxation,  is  considered  elsewhere.^ 

§641.  The  assets  upon  dissolution  —  Distrihution. —  Upon  the 
dissolution  of  a  corporation,  all  its  properly,  both  personal  and 
real,  is  to  be  used  to  pay  the  debts  of  the  corporation,  and  after  the 
debts  are  paid  the  remainder  is  to  be  distributed  among  the  stock- 
holders.^ 

It  was  formerly  believed  to  be  the  common  law  that  upon  the 
dissolution  of  a  corporation  all  its  assets  belonged  to  the  state, 
and  all  its  debts  were  canceled,  and  that  the  creditors  were 
not  entitled  to  anything  from  the  assets.  This  remarkable  theor}' 
has  been  stated  and  restated  in  text-books  and  decisions  of  the 
courts  for  over  one  hundred  years.'  It  is  found  in  Blackstone's 
Commentaries  and  in  the  old  works  of  Kyd  on  Corporations  and 
Grant  on  Corporations.  The  courts,  however,  while  upholding 
the  rule  theoreticall}^,  have  quite  uniformly  refused  to  ajjpli/  such 
a  doctrine,  and  have  invented  various  theories,  fictions,  and  argu- 
ments for  avoiding  this  supposed  doctrine  of  the  common  law. 
Finally,  in  1899,  an  English  court  denied  that  the  common  law  ever 


1  See  §§  501,  572b,  supra. 
.  2  Krebs  v.  Carlisle  Bank,  2  Wall.  (C.  C.) 
38  (1850);  S.  C,  14  Fed.  Cas.  856;  Heath 
V.  Barmore,  50  N.  Y.  303  (1873);  Burrall 
V.  Bushwick  R.  R,  75  N.  Y.  311  (1878); 
James  v.  Woodruff,  10  Paige,  541  (1844); 
Frothingham  v.  Barney,  6  Hun,  366 
(1876);  Wood  v.  Dummer,  3  Mason,  308, 
323  (1824);  &  c,  30  Fed.  Cas.  435.  Cf. 
Be  Hodges  Distillery  Co.,  L.  R.  6  Ch.  51 
(1870);  Nathan  v.  Whitlock,  9  Paige, 
153  (1841);  Curran  v.  State,  15  How.  304, 
307  (1853):  Hastings  v.  Drew,  76  N.  Y.  9 
(1879),  affirming  s.  C,  50  How.  Pr.  254 
{1887).  The  same  rule  prevails  where 
the  charter  is  repealed  by  the  legisla- 
ture. Lothrop  V.  Stedman,  13  Blatchf. 
134  (1875);  McLaren  v.  Pennington,  1 
Paige,  103  (1828),  by  statute:  Detroit  v. 
Detroit,  etc.  P.  R.  Co.,  43  Mich.  140 
(1880);  San  Mateo  County  v.  Southern 
Pacific  R.  R,  8  Sawyer,  338  (1883),  per 
Field,  J„  holding  that  "  the  property  of 
the  corporation  acquired  in  the  exer- 
cise of  its  faculties  is  held  independ- 
ently of  such  reserved  power,  and  the 
state  can  only  exercise  over  it  the  con- 
trol which  it  exercises  over  the  prop- 
erty of  individuals  engaged  in  similar 


business "  (p.  379).  People  v.  O'Brien, 
111  N.  Y.  1  (1888).  Where  the  capital 
stock  is  reduced  and  the  corporate 
propertj'  over  and  above  the  reduced 
capital  stock  is  distributed  among  the 
stockholders,  this  is  not  a  dividend 
within  the  meaning  of  the  New  York 
tax  statute.  People,  etc.  v.  Roberts,  41 
N.  Y.  App.  Div.  31  (1899). 

3Hightower  v.  Thornton,  8  Ga.  486 
(1850);  Life  Association  v.  Fassett,  103 
111,  315  (1883);  Commercial  Bank  v. 
Lockwood,  3  Har.  (Del.)  8  il835);  State 
V.  Rives,  5  Ired.  L.  (N.  C.)  297  (1844); 
White  I'.  Campbell,  5  Humph.  (Tenn.)  38 
(184-^);  Malloy  v.  Mallett,  6  Jones,  Eq. 
(N.  C.)  345  (1863),  holding  also  that  the 
stockholder's  liability  was  extinguished; 
Port  Gibson  r.  Moore,  31  Miss.  157  (1849); 
Bingham  v.  Weiderwax,  1  N.  Y.  509 
(1848);  Owen  v.  Smith.  31  Barb.  641 
(1860);  State  Bank  v.  State,  1  Blackf. 
(Ind.)  267,  283(1823):  Acklin  v.  Paschal, 
48  Tex.  147  (1877);  St.  Philip's  Church 
V.  Zion,  etc.  Church,  23  S.  C.  297  (1885); 
Coulter  V.  Robertson,  24  Miss.  378  (1852); 
Bank  of  Mississippi  t".  Duncan,  56  Miss. 
166  (1878);  Hamilton  v.  Accessory 
Transit  Co.,  26  Barb.  46  (1857). 


1433 


641.] 


DISSOLUTION,  FORFEITURE,  ETC. 


[CH.  XXXVIII. 


countenanced  such  confiscation,  and  showed  that  in  the  seventeenth' 
and  eighteenth  centuries  many  corporations  were  dissolved,  and 
that  in  not  a  single  case  was  any  such  doctrine  applied.^  It  again 
may  be  said  that,  although  the  common  law  has  its  reproaches,  this 
is  not  one  of  them.  The  Ameriqan  courts  have  always  refused  to 
follow  the  supposed  common-law  rule  on  this  subject.^  Where  the 
statutes  in  existence  at  the  time  of  incorporation  provide  for  the 
extension  of  corporate  charters,  a  stockholder  cannot  prevent  the 
corporation  from  extending  its  existence  in  accordance  with  such  stat- 
utes.^ A  deed  made  by  a  corporation  after  its  charter  has  expired  is 
a  nullity.*  The  dissolution  of  a  corporation  after  an  execution  has- 
been  levied  upon  its  property  does  not  prevent  a  sale.^ 

"When  the  corporation  owns  a  right  of  way  or  other  franchise 
obtained  from  a  municipality  or  by  the  exercise  of  the  state's  power 


1  Re  Higginson  and  Dean,  [1899]  1  Q. 
B.  325. 

2  Bacon  v.  Robertson,  18  How.  (U.  S. ) 
480  (1855);  Heath  v.  Barmore,  50  N.  Y. 
302  (1872);  Lum  v.  Robertson,  6  Wall. 
277  (1867);  Robinson  v.  Lane,  19  Ga.  337 
(1856);  Lothrop  v.  Stedman,  13  Blatchf. 
134  (1875);  s.  a,  15  Fed.  Gas.  922;  Blake 
V.  Portsmouth,  etc.  R.  R.,  39  N.  H.  435 
(1859);  Re  Woven  Tape  Skirt  Co.,  8 
Hun,  508  (1876);  Mumma  v.  Potomac 
Co.,  8  Pet.  281  (1834);  Fox  v.  Horah,  1 
Ired.  Eq.  (N.  G.)  358  (1841);  Bingham  v. 
Weiderwax,  1  N.  Y.  509  (1848);  Curry  u. 
Woodward,  53  Ala.  371  (1875);  2  Kent, 
Com.  307,  n. ;  Powell  v.  North  Missouri 
R.  ;R.,  42  Mo.  63  (1867);  Wood  v.  Dum- 
mer,  3  Mason,  308  (1824);  s.  C,  30  Fed. 
Gas.  435.  Land  conveyed  to  a  corpora- 
tion in  fee  does  not  revert  to  the  grantor 
or  his  heirs  on  the  extinction  of  the 
corporation.  Wilson  v.  Leai-y,  120  N.  CL 
90  (1897),  overruling  Fox  v.  Horah,  36 
N.  G.  358.  Statutes  are  frequently 
enacted  to  this  effect.  Nevitt  v.  Bank 
of  Port  Gibson,  14  Miss.  513  (1846);  Mc- 
Coy V.  Farmer,  65  Mo.  244  (1877);  Owen 
V.  Smith,  31  Barb.  641  (1860).  A  deed 
of  property  to  a  railroad  for  fifty  years 
or  solongas  its  charter  continues,  which 
by  charter  is  fifty  years,  passes  the  land 
to  a  corporation  which  by  legislative 
enactment  succeeds  to  the  rights  of  the 
first   corporation.     Davis  v.   Memphis, 


etc.  R.  R.,  87  Ala.  633  (1889).  So  far  as- 
land  grants  are  concerned  the  consoli- 
dated company  is  the  same  as  the  old 
company.  U.  S.  v.  Southern  Pac.  R.  R., 
45  Fed.  Rep.  596  (1891).  A  consolidated 
company  succeeds  to  land  owned  by 
one  of  the  consolidating  companies. 
Gashman  v.  Brownlee,  128  Ind.  266 
(1891).  An  agreement  that  upon  disso- 
lution of  a  telegraph  company  the  tele- 
graph line  should  go  to  the  railroad  is 
binding.  Latrobe  v.  Western  Tel.  Co., 
74  Md.  232  (1891).  A  deed  duly  author- 
ized is  good,  though  executed  after  the 
corporation  is  consolidated  with  an- 
other. Edison,  etc.  Co.  v.  New  Haven, 
etc.  Co.,  35  Fed.  Rep.  233  (1888). 

3  Smith  v'.  Eastwood,  etc.  Co.,  58  N.  J. 
Eq.  331  (1899). 

4  Bradley  v.  Reppell,  133  Mo.  545 
(1896);  Marysville  In  v.  Co.  v.  Munson, 
44  Kan.  491  (1890).  Where  by  statute, 
after  dissolution,  the  corporation  con- 
tinues for  three  years  for  the  purpose 
of  winding  up,  it  may,  during  those 
three  years,  convey  its  real  estate  to  a 
trustee  in  trust  to  wind  up  its  business. 
Hanan  v.  Sage,  58  Fed.  Rep.  651  (1893). 
A  corporation  cannot  deed  land  after 
its  charter  has  expired.  Marysville  In- 
vest. Co.  V.  Munson,  44  Kan.  491  (1890). 

5  Boyd  V.  Hankinson,  83  Fed.  Rep.  876- 
(1897). 


1434 


CH.  XXXVIII.] 


DISSOLUTION,  FORFEITURE,  ETC. 


[§  fi-H. 


of  eminent  domain,  this  right-of-way  franchise  is  a  corporate  asset 
upon  the  dissolution  of  the  corporation  and  may  survive  the  death 
of  the  corporation.  It  does  not  revert  to  the  state  or  municipality.^ 
This  is  the  natural  and  logical  result  of  the  principle  of  law  that  a 
railroad  company  may  make  a  contract  to  run  longer  than  its  char- 
tered existence; 2  that  a  grant  may  be  made  by  a  city  to  a  street 
railway  for  a  period  longer  than  the  duration  of  the  charter  of 


1  Where  a  legislature,  under  its  re- 
served right  of  repeal,  repeals  a  street ' 
railroad  charter,  the  right  to  use  the 
streets  and  operate  the  road  does  not 
revert  to  the  state,  but  passes  as  prop- 
erty to  the  receiver  for  the  benefit  of 
the  creditors  and  stockholders  of  the 
corporation.  People  v.  O'Brien,  111  N. 
Y.  1  (1888).  See  also  §  792,  infra.  In 
Pennsylvania  tlie  franchise  of  the  right 
of  way  of  a  railroad  vests,  upon  its  dis- 
solution, in  the  state,  and  the  state 
may  grant  it  to  another  railroad.  Erie, 
etc.  R.  R.  V.  Casey,  26  Pa.  St.  287  (1856). 
See  also  Plitt  v.  Cox,  43  Pa.  St.  486 
(1862).  In  Ohio  it  seems  that  the  right 
of  way  reverts  to  the  owner  of  the  fee. 
New  York,  etc  R.  R.  v.  Parmalee,  1 
Ohio  C.  G  Rep.  239  (1885).  See  also,  as 
to  the  rule  in  New  York,  Heard  v. 
Brooklyn,  60  N.  Y.  242  (1875);  People  v. 
White,  11  Barb.  26  (1851);  Hooker  v. 
Utica,  etc.  Turnp.  Co.,  12  Wend.  371 
(1834).  There  is  no  reversion  of  the 
right  of  way  on  the  dissolution  of  the 
company  after  fifty  years.  Davis  v. 
Memphis,  etc.  R  R.,  87  Ala.  633  (1889). 
A  lottery  grant  cannot  be  repealed, 
when  mortgaged  by  the  corporation, 
until  the  mortgage  is  paid.  Gregory  v. 
Shelby  College,  2  Mete.  (Ky.)  589  (1859). 
Compare,  in  general,  Turnpike  Co.  v. 
Illinois,  96  U.  S.  63  (1877).  Where  the 
stockholders  of  an  old  plank-road  com- 
pany are  still  operating  the  road,  but 
under  another  charter,  they  cannot  be 
ousted  from  the  latter  by  an  injunction 
suit  against  their  operating  under  the 
former.  The  court  stated  that  it  did 
not  favor  such  a  confiscating  suit.  Peo- 
ple V.  De  Grauw,  133  N.  Y.  254  (1892). 
An  unused  right  of  way  does  not  revert 


to  the  original  owner.  McConihay  v. 
Wright,  121  U.  S.  201  (1887).  See  also 
§  906,  infra.  The  state  may  grant  an 
unused  street-railway  franchise  to  an- 
other company.  Henderson  v.  Central, 
etc  Ry.,  21  Fed.  Rep.  358  il884).  No  re- 
verter where  the  railroad  takes  a  fee. 
Yates  V.  Van  De  Bogert,  56  N.  Y.  526 
(1874).  See  also,  in  general,  Norton  v. 
Walkill,  etc  R.  R.,  42  How.  Pr.  228 
(1871);  State  v.  Rives,  5  Ired.  (N.  C.)  l! 
297  (1844);  Hopkins  v.  Whitesides,  1 
Head  (Tenn.),  31  (1858).  Where  a  turn, 
pike  company  is  authorized  to  collect 
tolls  only  for  fifteen  years,  the  road  is 
free  after  that  date.  People  v.  Ander 
son,  etc  Co.,  76  Cal.  190  (1888).  The  dis- 
solution of  a  water-works  company 
does  not  put  an  end  to  the  contract  be- 
tween it  and  the  city.  Weatherly  v. 
Capital,  etc  Co.,  115  Ala.  156  (1897).  In 
Haff^cke  v.  Clark,  50  Fed.  Rep.  531  (1892), 
tne  court  said  in  a  dictum  that  inas- 
ravich  as  a  license  is  not  assignable,  the 
dissolution  of  a  corporation,  which  is 
the  licensee,  puts  an  end  to  the  license. 
See  note  3,  p.  1436. 

'^  A  contract  between  two  railroad 
companies  by  which  one  is  given  the 
right  to  run  its  trains  over  the  tracks 
of  the  other  may  be  for  a  period  be- 
yond the  duration  of  the  charter  of 
one  of  the  companies,  the  court  saying 
that  the  contingency  that  the  company 
"  will  cease  to  exist  and  leave  neither 
assigns  nor  successors  is  far  too  remote 
to  have  any  influence  upon  the  validity 
of  this  contract."  Union,  etc.  Ry.  v. 
Chicago,  etc  Ry.,  163  U.  S.  564,  593 
(1896).  A  corporation  may  lease  its 
property  for  a  hundred  years,  even 
though  the  statutes  forbid  any  disposi- 


1435 


§  641.J 


DISSOLUTION,  FORFEITURE,  ETO. 


[CH.  XXXVIII. 


the  corporation;'  that  a  corporation  may  take  a  deed  of  land  in 
fee,  although  the  company's  duration  is  limited;^  and  may  acquire 
a  perpetual  right  of  way  under  the  same  circumstances.^  The 
liability  of  a  corporation  on  a  contract  extending  beyond  the 
corporate  existence  is  discussed  elsewhere.*  On  the  dissolution  of 
a  corporation  having  no  stockholders,  the  common-law  rules  of 
reverter  and  appropriation  apply.^     Upon  dissolution  the   stock- 


tioa  of  property  which  suspends  the 
absolute  power  of  controlling  the  same 
for  more  than  two  lives  and  twenty- 
one  years,  and  may  mortgage  its  in- 
terest as  lessor.  Sioux,  etc.  Co.  v.  Trust 
Co.,  82  Fed.  Rep.  124  (1897);  aff' d,  173  U. 
S.  99  (1899).  A  bank  may  take  a  lease 
of  land  for  ninety-nine  years  even 
though  its  charter  will  expire  before 
that  time.  Brown  v.  Schleier,  118  Fed. 
Rep.  981  (1903). 

1  Detroit  v.  Detroit,  etc.  Ry.,  184  U.  S. 
368  (1902).  A  street  railway  com- 
pany may  legally  receive  from  a  city  a 
grant  of  street  rights  for  a  period  ex- 
tending beyond  the  chartered  life  of 
the  corporation.  Detroit  Citizens'  St. 
Ry.  V.  Detroit,  64  Fed.  Rep.  628  (1894), 
rev'g  Detroit  v.  Detroit  City  Ry.,  56 
Fed.  Rep.  867,  and  60  Fed.  Rep.  161,  a 
case  where  a  thirty-year  street  ease- 
ment was  given  to  a  corporation  hav- 
ing only  fourteen  years  of  corporate 
life.  To  same  effect.  People  v.  O'Brien, 
111  N.  Y.  1  (1888).    See  also  §  913,  infra. 

2Nicoll  V.  New  York,  etc.  R.  R.,  12 
N.  Y.  121  a854).  See  also  §  694,  note, 
infra. 

3  Miner  v.  New  York,  etc.  R.  R.,  123 
N.  Y.  242(1890);  Davis  v.  Memphis,  etc. 
R.  R.,  87  Ala.  633  (1889):  Bailey  v. 
Platte,  etc.  Co.,  12  Colo.  230  (1889).  See 
note  1,  p.  1435.  Dissolution  does  not  ter- 
minate a  lease  to  a  corporation.  People 
V.  National  Trust  Co.,  82  N.  Y.  284(1880). 
A  contract  between  a  city  and  an  indi- 
vidual as  to  wharves  which  is  assign- 
able and  is  assigned  by  the  individual 
to  a  corporation  does  not  cease  merely 
because  the  corporate  existence  ceases. 
Fleitas  v.  City  of  New  Orleans,  51  La. 
Ann.  1(1898);  also  §  642,  in/?'a.     A  gas 

14 


company  may  receive  a  municipal 
grant  for  a  term  of  years  extending  be- 
yond the  life  of  the  gas  company  as 
fixed  by  its  charter.  Keith  v.  Johnson, 
59  S.  W.  Rep.  487  (Ky.  1900). 

*  See  §  642,  infra. 

5  Upon  the  dissolution  of  a  public  or 
charitable  corporation  its  property  goes 
to  the  state  and  former  owners,  sub- 
ject to  the  trust  that  the  property  shall 
still  be  used  for  similar  purposes  if 
those  purposes  be  legal.  Mormon 
Church  V.  U.  S.,  186  U.  S.  1(1890).  Upon 
the  dissolution  to  an  eleemosynary 
corporation  having  no  stockholders  or 
creditors,  the  title  of  its  land  reverts  to 
the  donor.  Danville  Seminary  r.Mott, 
136  111.  289  (1891).  A  private  corpora- 
tion —  a  normal  college  —  cannot  by  act 
of  the  legislature  be  converted  into  a 
public  corporation  and  the  property 
vested  in  the  state.  Bakewell  v.  Board 
of  Education,  33  N.  E.  Rep.  186  (111. 
1893).  In  California,  on  the  dissolution 
of  a  corporation  for  literar}^  purposes, 
its  land  goes  to  the  state.  People  v. 
College  of  California,  38  CaL  166  (1869). 
Upon  dissolution  of  a  mutual  insurance 
company  having  no  stockholders,  its 
assets,  after  the  payment  of  its  liabili- 
ties, belong  to  the  state.  Titcomb  v. 
Kennebec,  etc.  Co.,  79  Me.  315  (1887). 
But  where  an  insurance  company  is 
organized  both  on  the  stock  and  mut- 
ual plan,  upon  a  dissolution  of  the 
stock  part  of  the  organization  the 
guaranty  accumulations  belong  to  the 
stockholders.  Traders',  etc.  Ins.  Co.  v. 
Brown,  142  Mass.  403  (1886).  Land  re- 
verts to  the  former  owner.  Mott  v. 
Danville  Seminary.  129  111.  403  (1889). 
Distribution  of  funds  of  incorporated 
36 


CH.  XXXVIII.] 


DISSOLUTION,  FORFEIT UKE,  ETC. 


L§  641. 


holders  are  entitled  to  an  immediate  settlement  of  the  corporate 
debts  and  a  distribution  of  the  residue.^  Usually  they  are  not 
obliged  to  accept  the  stock  of  another  corporation  as  payment 
upon  a  final  distribution,  but  may  demand  that  the  distribution  be 
in  cash.2  They  may  also  demand  that  the  property  be  sold,  unless 
the  statutes  provide  otherwise.*  The  stockholders  upon  dissolution 
may  make  a  contract  as  to  the  mode  of  distribution."*  The  company 
by  unanimous  consent  may  distribute  the  assets  without  a  dissolu- 
tion, provided  all  creditors  are  paid.^ 


association.  Ashton  v.  Dashaway 
Assoc,  84  CaL  61  (1890).  As  to  unin- 
corporated associations,  see  ch.  XXIX, 
supra.  The  members  of  a  military 
corporation,  which  is  dissolved  under  a 
statute,  cannot  by  a  suit  in  equity  ob- 
tain control  of  its  property  which  has 
been  acquired  by  donation.  Cummings 
V.  Hollis,  108  Ga.  403  (1899).  Where  a 
police  association  receives  gifts  from 
the  city  and  then  dissolves,  the  money 
will  be  returned  to  the  city.  In  re 
Minneapolis,  etc.  Assoc,  88  N.  W.  Rep. 
977  (Minn.  1902). 

1  Frothingham  v.  Barney,  6  Hun,  366 
(1876).  A  committee  appointed  by  the 
stockholders  to  sell  the  property  for 
stock  in  a  new  corporation  and  dissolve 
the  old  corporation  and  distribute  the 
assets  may  be  liable  to  the  stockhold- 
ers if,  after  making  such  sale,  they  de- 
lay in  dissolving  the  old  corporation 
and  distributing  the  assets  until  the 
new  stock  becomes  worthless.  Their 
liability  is  a  question  of  negligence  for 
the  jury.  In  re  Lincoln,  etc.  Co.,  190 
Pa,  St.  124  (1899> 

2See§671,  infra, 

3  See  §  670,  infra.  A  minority  stock- 
holder may  enjoin  a  public  sale  of  the 
property  of  a  prosperous  corporation, 
even  though  the  company  has  been  dis- 
solved, under  the  New  York  statute, 
where  he  shows  that  the  public  sale  is 
not  being  fairly  advertised  and  con- 
ducted, and  shows  also  that  the  disso- 
lution is  for  the  purpose  of  reorganiz- 
ing under  the  laws  of  another  state  and 
freezing  out  the  minority,  and  that  in- 
formation could  not  be  obtained  as  to 


the  actual  condition  of  the  company. 
Treadwell  v.  United,  etc  Co.,  47  N.  Y. 
App.  Div.  613  (1900).  Where  in  a  dissolu- 
tion proceeding  an  injunction  has  been, 
issued  against  a  corporation  doing  any 
further  business  or  disposing  of  its 
property,  a  sale  or  mortgage  of  its 
property  to  one  of  its  stockholders  is 
illegal  and  will  be  set  aside  by  the 
court,  especially  where  it  is  made  to  a 
director  for  an  inadequate  considera- 
tion. Grant  v.  Lowe,  89  Fed.  Rep.  881 
(1898).  Upon  dissolution  a  company 
may  sell  its  good  will  and  trade  name. 
Townsend  v.  Jarman,  [1900]  3  Ch.  698. 
In  distributing  the  assets  the  court  has 
no  power  to  give  certain  parts  of  the 
property  to  some  stockholders  and 
other  parts  to  others,  without  the  value 
thereof  being  ascertained,  even  though 
such  stockholders  originally  contrib- 
uted that  which  the  court  decreed 
should  be  returned  to  them.  Clow  v. 
Redman,  57  Pac.  Rep.  437  (Idaho, 
1899). 

*  White  V.  Boreing,  45  S.  W.  Rep.  343 
(Ky.  1898). 

*  A  statutory  liability  for  dividends 
paid  out  of  the  capital  stock  abrogates 
all  common-law  liability,  and  if  such 
statute  does  not  prohibit  such  divi- 
dends they  may  be  declared  and  paid 
subject  to  such  liability.  People  v. 
Barker,  141  N.  Y.  251  (1894).  See  also 
§  546,  supra;  Rorke  v.  Thomas,  56  N. 
Y.  559  (1874).  Although  the  state  is 
prosecuting  a  suit  to  forfeit  the  charter 
for  entering  into  a  combination,  yet  a 
sale  of  part  of  the  corporate  property 
to  a  stockholder    pending  the  suit  is 


143i 


'§  641] 


DISSOLUTION,  FORFEITURE,  ETC. 


[CH.  xxxviir 


Upon  dissolution  a  stockholder  may  file  a  bill  for  distribution 
of  the  assets.^  When  corporate  assets  are  placed  in  the  hands  of  a 
corporate  officer  or  other  person  for  distribution,  a  stockholder 
may  file  a  bill  i^  equity  for  his  part,  but  in  such  a  suit  the  corpora- 
tion is  a  necessary  party. ^    The  remedy  in  such  a  case  is  not  at 


legal,  and  the  receiver  cannot  follow 
tlie  property.  A  writ  of  prohibition 
will  issue  against  him.  Havemeyer  v. 
Superior  Court,  84  Cal.  327  (1890). 
Where  a  corporation  distributes  all 
its  assets  among  its  stockholders  with- 
out paying  the  debts,  a  coi'porate  cred- 
itor may  hold  them  liable;  but  he  must 
first  obtain  a  judgment  against  the 
corporation  and  execution  must  be  re- 
turned unsatisfied.  Lamar  v.  Allison, 
101  Ga.  270  (1897).  See  also  §  548,  supra, 
and  §  671,  infra. 

1  Brown  v.  Mesnard  K  Co.,  105  Mich. 
658  (1895).  Where  a  corporation  has 
been  dissolved  at  the  instance  of  the 
state,  a  stockholder  may  file  a  bill  for 
the  appointment  of  a  receiver  to  ad- 
minister the  assets.  Olmstead  v.  Dis- 
tilling, etc.  Co.,  73  Fed.  Rep.  44  (1895), 
the  court  holding  also  that  the  appoint- 
ment could  not  be  questioned  collater- 
ally. Where  a  charter  has  expired,  a 
court  of  equity  has  power  to  take 
charge  of  its  property  and  wind  up  its 
affairs  at  the  instance  of  a  stockholder 
upon  a  proper  showing.  Stewart  v. 
Pierce,  89  N.  W.  Rep.  334  (Iowa,  1902). 
Where  the  stockholders  have  dissolved 
a  corporation  by  resolution,  under 
the'  West  Virginia  statute,  the  court 
will  not  interfere  and  appoint  a  re- 
ceiver, unless  it  is  shown  that  provision 
has  not  been  made  for  payment  of  the 
debts.  Mere  cessation  of  business  is 
not  dissolution.  Law  v.  Rich,  47  W. 
Va.  634  (1900).  A  corporation  cannot 
appeal  from  a  decree  appointing  a  re- 
ceiver of  it,  where  the  same  decree  dis- 
solves the  corporation,  and  no  appeal  is 
taken  from  that  portion  of  the  decree. 
State  V.  Fidelity,  etc.  Co ,  113  Iowa,  439 
(1901).  Upon  dissolution,  if  no  receiver 
is  appointed,  the  title  to  land  vests  in 
'the  stockholders  as  tenants  in  common, 


in  Texas.  Baldwin  v.  Johnson,  65  S.  W. 
Rep.  171  (Tex.  1901).  Where  a  corpo- 
ration is  dissolved  by  lapse  of  its  char- 
ter, but  the  directors  by  statute  con- 
tinue for  the  purpose  of  winding  up 
the  business,  a  receiver  will  not  be  ap- 
pointed. Anderson  v.  Buckley,  126  Ala. 
623  (1900).  After  the  state  has  caused 
a  charter  to  be  declared  illegal,  the  duty 
of  the  state  is  finished,  and  a  receiver 
will  not  be  appointed,  all  the  debts  hav- 
ing been  paid  and  all  the  parties  in  in- 
terest being  satisfied,  the  stockholders 
having  been  declared  personally  liable 
the  same  as  in  a  copartnership.  State 
V.  New  Orleans,  etc.  Co.,  32  S.  Rep.  102 
(La.  1902).  Even  though  the  time  to 
wind  up  the  affairs  of  a  corporation 
after  dissolution  has  expired,  the  stock- 
holders may  sue  for  the  assets.  Con- 
necticut, etc.  Co.  V.  Dunscomb,  69  S. 
W.  Rep.  345  (Tenn.  1902). 

2  Young  V.  Moses,  53  Ga.  638  (1875). 
For  the  remedy  and  procedure  when 
the  directors  on  dissolution  have  divided 
the  assets  fraudulently,  see  Horner  v. 
Carter,  11  Fed.  Rep.  362  (1883).  The 
minority  may  bring  the  officers  to  an 
accounting  for  an  unfair  distribution 
of  the  bonds,  etc.,  owned  by  a  construc- 
tion company.  Meyers  v.  Scott,  3  N.  Y. 
Supp.  753  (1888).  The  corporation  may 
file  a  bill  to  distribute  a  specific  fund 
only,  and  need  not  in  that  bill  have  a 
general  distribution  of  all  its  fund.s. 
Pacific  R.  R.  V.  Cutting,  37  Fed.  Rep. 
638  (1886).  If  the  directors,  who  by 
statute  are  made  trustees  to  wind  up 
the  corporation  upon  dissolution,  delay 
in  so  doing,  the  court  will  appoint  a  re- 
ceiver. Be  Pontius,  26  Hun,  232  (1882). 
Although  the  charter  is  forfeited  at  the 
instance  of  the  state,  yet  the  directors 
are  trustees  to  wind  up  the  company 
under  the  statute  unless  a  receiver  is 


1438 


OH.  XXXVIII.] 


DISSOLUTION,  FORFEITURE,  ETC. 


[§  641. 


law.^  The  stockholders  may  insist  on  the  application  of  the  statute 
of  limitations  as  far  as  it  is  a  bar  to  the  claim  of  corporate  creditors 
upon  the  assets.^  The  statute  of  limitations  does  not  run  as  against 
the  estate  of  a  dissolved  corporation.^  Where  the  corporation  has 
been  dissolved,  and  its  assets  distributed,  and  its  trustees  discharged 
by  a  decree  of  court,  a  creditor  who  was  a  party  to  the  suit 
cannot  afterward  maintain  a  bill  against  the  trustees  to  reach  un- 
paid subscriptions.*  But  often  by  statute,  if  the  directors  upon  the 
dissolution  of  a  corporation  distribute  the  assets  among  the  stock- 
holders without  paying  the  debts,  they  are  personally  liable  for 
such  debts.^  The  mode  of  distribution  among  corporate  creditors, 
where  some  have  other  security  and  others  not,  is  considered  else- 
where.^    The  rights  of  the  stockholders  in  the  assets  upon  a  dissolu- 


appointed  at  the  instance  of  a  creditor 
or  stockholder.  Havemeyer  v.  Supe- 
rior Court,  84  Cal.  327  (1890).  Although 
the  fund  upon  dissolution  is  small  and 
the  number  of  stockholders  large,  yet 
the  directors  cannot  avoid  their  duty  as 
to  the  distribution  of  the  fund  by  turn- 
ing it  over  to  a  court  to  administer. 
Re  Centennial  Board,  48  Fed.  Rep.  350 
(1891). 

1  Brown  v.  Adams,  5  Biss.  181  H870); 
s.  c,  4  Fed.  Cas.  350.  Cf.  Pacific  R.  R. 
V.  Cutting,  27  Fed.  Rep.  638  (1886); 
Hodsdon  v.  Copeland,  16  Me.  314  (1839). 
It  has  been  held  that  surplus  assets 
ought  to  be  distributed  in  proportion 
as  the  subscriptions  to  the  stock  have 
been  paid.  Krebs  v.  Carlisle  Bank,  2 
Wall.  (C.  C.)  33  (1850);  s.  C,  14  Fed.  Cas. 
856;  Sheppard  v.  Scinde,  etc.  Ry.,  56  L. 
T.  Rep.  180  (1887);  aff'd,  57  L.  T.  Rep. 
585  (1887);  aff'd,  H.  of  L.,  60  L.  T.  Rep. 
641  (1889);  Re  Hodges,  etc,  Co.,  L.  R.  6 
Ch.  App.  51  (1870).  On  winding  up, 
stockholders  who  have  advanced  on 
the  subscription  price  more  than  the 
calls  required,  under  an  agreement  of 
repayment  with  interest,  are  entitled 
to  repayment  before  a  general  dividend 
is  made.  So  held  where  full-paid  stock 
was  issued  for  property,  but  other 
stock  for  cash  was  not  fully  paid  up. 
Exchange,  etc.  Co.,  L.  R  38  Ch.  D.  171 
(1888). 

^Johnston  v  Talley,  60  Ga.  540  (1878). 
On  a  bill  to  wind  up  an  insolvent  cor- 


poration the  stockholder  may  prove 
that  some  claims  against  the  company 
were  not  legally  contracted.  Crutch- 
field  V.  Mutual,  etc.  Co.,  2  S.  W.  Rep. 
658  (Tenn.  1886). 

3  Ludington  v.  Thompson,  153  N.  Y. 
499  (1897).  The  running  of  the  statute 
of  limitations  is  not  suspended  by  the 
dissolution  of  the  corporation.  Bradley, 
etc.  Co.  V.  Norfolk,  etc  Co.,  101  Fed.  Rep. 
681  (1900). 

*  Chavent  v.  Schefer,  59  Fed.  Rep.  231 
(1894).  If  a  corporation  has  been  dis- 
solved, garnishee  process  does  not  lie 
against  a  stockholder  at  the  instance  of 
a  corporate  creditor  to  reach  an  unpaid 
subscription.  Paschall  v.  Whitsell,  11 
Ala.  473  (1847). 

s  Keen  v.  Maple,  etc.  Co.,  50  Atl.  Rep. 
467  (N  J.  1901).  rev'g  61  N.  J.  Eq.  497. 
A  solvent  corporation  does  not  hold  its 
property  in  trust  for  its  creditors,  even 
though  it  is  in  process  of  liquidation, 
and  hence  a  partial  distribution  of  the 
assets  of  a  bank  to  the  stockholders 
during  liquidation,  when  the  bank  was 
solvent  and  retained  what  seemed  to 
be  sufficient  assets  to  pay  its  liabilities, 
cannot  be  recovered  back  subsequently 
by  the  receiver  in  an  action  at  law,  al- 
though it  turned  out  that  the  remain- 
ing assets  were  not  sufficient  to  pay  all 
liabilities,  no  bad  faith  being  involved. 
Lawrence  v.  Greenup,  97  Fed.  Rep.  906 
(1899).     See  also  §  546,  supra, 

«  See  §  763,  infra. 


1430 


§  641.] 


DISSOLUTION,  FORFEITURE,  ETC. 


[CH. 


XXXVIII. 


tion  depend  upon  the  law  of  the  country  creating  the  corporation.' 
And  these  rights  cannot  be  taken  from  the  stockholders  by  an  act 
repealing  the  charter.^  In  winding-up  proceedings  an  assessment 
may  be  levied  upon  stock  which  is  not  fully  paid,  in  order  to  ad- 
just the  rights  of  the  stockholders  as  between  themselves.'  Where 
increased  capital  stock  is  only  partly  paid  up,  and  a  dissolution  is 
had,  the  court  will  order  repayment  of  all  that  was  paid  on  the 
original  capital  stock  and  on  the  increased  capital  stock,  and  then 
a  distribution  of  the  surplus  on  the  whole  capital  stock.''     In  the 


1  Hamilton  v.  Accessory  Transit  Co., 
26  Barb.  46  (1857). 

2  Lothrop  V.  Stedman,  13  Blatchf.  134 
(1875);  s.  a,  15  Fed.  Cas.  932. 

3  Welton  V.  SafTery,  [1897]  A.  C.  299. 
Upon  dissolution  the  court  may  and 
will  call  in  unpaid  subscriptions  where 
this  is  necessary  in  order  to  make  a 
proper  distribution.  Re  Sheppard's.  etc. 
Co.,  70  L.  T.  Rep.  3  (1893).  In  Re  Anglo, 
etc.  of  W.  A.,  [1898]  1  Ch.  327,  the  court 
ordered  a  call  as  a  matter  of  form  on 
subscriptions,  so  as  to  equalize  the 
amount  already  paid  on  such  subscrip- 
tions with  a  view  to  distribution  on  dis- 
solution. The  assets,  after  paying  the 
debts,  are  distributed  in  proportion  as 
the  stockholders  have  paid  in  their  sub- 
scriptions. Connecticut,  etc.  Co.  v. 
Dunscomb,  69  S.  W.  Rep.  345  (Tenn. 
1902). 

4  Re  Driffield  Gas  L.  Co.,  [1898]  1  Ch. 
451.  Where  the  original  stock  is  paid 
for  in  cash  at  par,  and  then  increased 
stock  is  paid  for  at  the  rate  of  $3  on 
$10,  and  upon  the  winding  up  of  the 
company  a  large  surplus  exists  for  dis- 
tribution, the  court  ordered  that  the 
original  stock  should  first  receive  $7  on 
each  $10,  and  then  that  the  remaining 
assets  should  be  distributed  pro  rata 
on  all  the  stock.  Re  Weymouth,  etc. 
Co.,  [1891]  1  Ch.  66.  Where  there  is  a 
surplus  remaining  after  paying  back 
all  that  the  stockholders  have  paid  in, 
the  common-law  rule  is  that  such  sur- 
plus is  divided  pro  rata  among  the 
stockholders,  even  though  some  of  the 
stock  had  been  paid  up  and  other  stock 
only  partially  paia  up.     This  ruie  may 


be  varied  by  the  charter  so  as  to  divide 
the  surplus  in  proportion  to  the  paid-up 
capital,  and  not  in  proportion  to  the 
number  of  shares,  irrespective  of  the 
amount  paid  thereon.  Re  Mutoscope, 
etc.  Syndicate,  Ltd.,  [1899]  1  Ch.  896. 
On  a  dissolution  and  winding  up,  where 
part  of  the  stock  is  paid  up  and  part 
not,  each  class  of  stockholders  is  repaid 
the  amount  paid  upon  that  class  of 
stock,  and  then  the  surplus  is  divided 
proportionately.  Re  Wakefield,  etc. 
Co.,  [1892]  3  Ch.  165.  On  a  winding  up, 
if  it  turns  out  that  the  profits  had  been 
systematically  overestimated  for  many 
years,  thereby  depriving  common  stock- 
holders of  the  dividends,  an  account 
should  be  taken  and  such  dividends  be 
then  paid.  Re  Bridgewater,  etc.  Co., 
[1891]  2  Ch.  317.  Founders'  shares  are 
a  species  of  preferred  or  deferred  stock ; 
and  where,  on  dissolution,  the  found- 
ers' shares  are  to  have  one- fifth  of  the 
surplus  assets,  the  words  "surplus  as- 
sets "  were  construed  to  be  the  assets 
remaining  after  paying  the  debts,  and 
also  paying  back  whatever  the  stock- 
holders had  originally  paid  in.  Re  New 
Transvaal  Co.,  [1896]  2  Ch.  750.  Even 
though  there  are  different  classes  of 
stock,  a  reduction  of  the  capital  may 
be  made  on  a  difTerent  basis  from  the 
basis  specified  as  applicable  upon  a  dis- 
solution and  winding  up.  Re  Credit 
Assurance,  etc.  Corp.,  87  L.  T.  Rep.  216 
(1902).  Where  stockholders  in  a  na- 
tional bank  have  been  assessed  irregu- 
larly, and  a  surplus  remains  after  pay- 
ingr  creditors,  the  stockholders  who 
nave  paia    xhq  irre^rular    assessments 


1440 


CH.  XXXVIII.]  DISSOLUTION,  FORFEITURE,  ETC.  [§  Gil. 

distribution  of  the  assots  of  a  corporation  upon  its  winding  up,  the 
accumulated  profits  will  be  considered  separate  from  the  capital,  if 
some  of  the  stock  is  held  in  trust  for  life  tenants  and  remainder- 
men.' In  Maine  it  has  been  held  that  while  a  corporation  may- 
pay  an  ordinary  dividend  to  a  stockholder  of  record,  yet  that  a 
dividend  paid  in  the  liquidation  and  winding  up  of  the  corporation 
must  be  paid  to  the  holder  of  the  certificate,  even  though  such 
holder  be  a  transferee  who  has  not  been  recorded  as  such  on  the 
books  of  the  company,  and  that  the  company  is  liable  to  him  for 
dividends  in  liquidation,  even  though  it  has  paid  them  to  the  regis- 
tered stockholder,  and  that  this  rule  applies  to  a  pledgee  of  a  cer- 
tificate of  stock  as  well  as  a  purchaser  of  a  certificate  of  stock.^  A 
contest  between  the  preferred  and  common  stockholders  as  to  who 
shall  be  entitled  to  the  surplus  will  not  be  decided  in  a  foreclosure 
suit,  but  the  surplus  will  be  paid  to  the  corporation  for  distribu- 
tion.' In  the  distribution  of  the  assets  of  an  insolvent  corporation 
citizens  of  other  states  cannot  be  discriminated  against.* 

Debts  due  from  the  stockholder  to  the  corporation  are  to  be  de- 
ducted from  his  interest  in  the  assets.^  And  an  assignment  or  trans- 
fer of  stock  by  a  stockholder  after  the  dissolution  of  the  corpora- 
tion is  merely  an  equitable  assignment  of  his  interest  in  the  assets 
of  the  concern  as  it  may  appear  upon  the  settlement.'^  Where  prof- 
its have  been  earned  and  properly  entered  as  profits  on  the  corpo- 
ration books  they  belong  to  the  stockholder,  even  though  there 
after  the  corporation  becomes  insolvent  and   is  wound  up  before 

will  first  be  repaid  out  of  the  surplus  (1844);  Nathan  v.  Whitlock,  9  Paige,  152 

assets.     In  re  Hulitt,  96  Fed.  Rep.  785  (1841);  Purton  v.  New  Orleans,  etc.  R. 

(1899).  R.,  3   La.    Ann.    1933  (1848).     Where  a 

^  Re  Rogers,  22  N.  Y.  App.  Div.  428,  stockholder   in  an    insolvent  national 

435  (1897);  aff'd,  161  N.  Y.  108.  bank  does  not  pay  the  assessment  lev- 

2  Bath  Sav.  Inst.  v.  Sagadahoc  Nat.  ied  by  the  comptroller,  he  cannot  par- 
Bank,  89  Me.  500  (1897).  ticipate  in  a  dividend  to  the  stockhold- 

3  Continental  Trust  Co.  v.  Toledo,  etc.  ers  after  the  debts  are  paid,  such  divi- 
R.  R.,  86  Fed.  Rep.  929  (1898).  On  a  dend  being  less  than  his  assessment. 
foreclosure  sale  the  court  may  order  a  Neither  can  his  transferee,  nor  the  pur- 
distribution  of  any  surplus  remaining  chaser  of  his  stock  at  an  execution  sale, 
after  the  payment  of  the  mortgage  Richardson  v.  Wallace,  39  S.  C.  216 
debt,  and  the  court  need  not  turn  over  (1893). 

such  surplus  to  the  insolvent  corpora-  <>  James    v.  Woodruff,    10  Paige,  541 

tion,  but  may  decree  that  the  surplus  (1844);  aff'd,  2  Denio,  574  (1845);  Sewall 

be    divided    among    the    stockholders  v.    Chamberlain,    82  Mass.    581  (1860). 

after  paying  all  general  creditors  who  Money  in  the  hands  of  the  court  on  the 

present    their   claims   within  a    fixed  liquidation  of  a  company,  even  though 

time.     Toledo,  etc.  R.  R.  v.  Continental  it  belongs  to  a  stockholder,  cannot  be 

Trust  Co.,  95  Fed.  Rep.  497  (1899).  garnisheed   for    his    debts    under  the 

^BlakeuMcClung,  176 U.S.  59(1900).  English   statute.     Spence  v.  Coleman, 

6  James  v.  Woodruff,  10    Paige,  541  [1901]  2KB.  199. 
(91)                                                 1441 


C42.] 


DISSOLUTION,  FORFEITURE,  ETC. 


[CII.  XXXVIII. 


such  profits  are  declared  to  be  dividends.  The  creditors  of  the  cor- 
poration are  entitled  to  the  corpus  of  the  estate,  but  not  to  any  prof- 
its.    If  there  is  preferred  stock  such  profits  go  to  that  stock.^ 

A  person  who  conveys  property  to  the  corporation  in  payment 
for  stock  maj'^  contract  that  upon  dissolution  he  shall  receive  back 
that  property.^  A  suit  cannot  be  instituted  in  the  name  of  a  dis- 
solved corporation,  inasmuch  as  it  is  dead,  but  by  statute  it  is  often 
provided  that  such  suits  ma}'^  be  brought  for  purposes  of  liquida- 
tion.' "Where  the  corporation  is  dissolved,  but  by  statute  suits  may 
be  brought  during  the  three  succeeding  years,  a  stockholder  must 
request  the  directors  to  sue  before  he  sues  to  compel  a  creditor  to 
restore  propert}''  illegally  taken.*  A  forfeiture  of  a  charter  by  a 
state  court  does  not  affect  the  status  of  a  receiver  appointed  by  the 
United  States  court.  Such  receiver  may  proceed  to  administer  the 
property.^ 

§  642.  The  UaMUties  upon  dissolution,  consolidation,  or  sale. — As 
already  seen,  the  old  rule  that  upon  dissolution  all  debts  by  or  to 
the  corporation  are  rendered  unenforceable  is  no  longer  the  law.** 
It  has  been  held  that  the  liability  of  a  corporation  to  deliver  goods, 


1  Bishop  u  Smyrna,  etc  Co.,  [1895J  2 
Ch.  265. 

2  Fish  V.  Nebraska,  etc.  Co.,  25  Fed. 
Rep.  795  (1885).  Where  one  of  "the  or- 
ganizers of  the  corporation,  who  is  also 
its  president,  sells  goods  to  it  for  stock, 
the  corporation  is  protected  in  its  title, 
even  though  it  turns  out  that  he  held 
part  of  the  goods  to  sell  on  commission, 
but  if  he  retains  the  stock  and  the  com- 
pany is  dissolved,  it  is  bound  to  respect 
the  rights  of  the  owner  of  the  goods  in 
distributing  its  assets.  Wyeth  v.  Renz- 
Bowles  Co.,  66  S.  W.  Rep.  825  (Ky.  1902). 

3  Under  the  Nebraska  statute  a  dis- 
solved corporation  may  bring  suit. 
Schmidt,  etc.  Co.  v.  Mahoney,  60  Neb. 
20  (1900).  Even  though  a  Canadian  cor- 
poration has  been  dissolved,  yet  if, 
under  the  statutes  of  Canada,  it  re- 
mains in  force  to  wind  up  its  business, 
it  may  bring  suit  in  Rhode  Island  to 
recover  a  debt.  Ham  v.  Banque  Ville 
Marie,  22  R  L  248  (1900).  In  the  case 
of  Singer,'  etc.  Co.  v.  Hutchinson,  176 
111.  48  (1898),  the  court  held  that  the. 
expiration  of  the  two  years  prescribed 
by  statute  for  a  dissolved  corporation 
bringing  suits,  etc.,  does  not  bar  a  writ 


of  error  sued  out  after  the  two  years. 
Where  by  statute  upon  dissolution  the 
directors  are  made  trustees  to  wind  up 
the  affairs  of  the  company,  they  may 
maintain  a  suit  in  another  state,  inas- 
much as  they  are  not  receivers,  but  are 
successors  of  the  corporation.  Root  v. 
Sweeney,  12  S,  Dak.  43  (1899). 

•*  General  Electric  Co.  v.  West  Ashe- 
ville  Imp.  Co.,  73  Fed.  Rep.  336  (1896). 
Even  after  dissolution  a  stockholder 
may  file  a  bill  to  recover  assets  that 
have  been  wrongfully  diverted.  Boyd 
V.  Hankinson,  92  Fed.  Rep.  49  (1899). 

5  City,  etc.  Co.  v.  btate,  88  Tex.  600 
(1895).  But  where,  after  an  injunction 
has  been  obtained  in  the  federal  court, 
the  corporation  is  dissolved  in  the  state 
court,  the  suit  in  the  federal  court  falls. 
Lang  V.  Louisiana  Tanning  Co.,  56  Fed. 
Rep.  675  (1893). 

*>  See  preceding  section.  But  a  judg- 
ment declaring  a  corporation  illegal, 
void,  and  the  association  dissolved  puts 
an  end  to  a,  contract  by  it  to  pay  cer- 
tain parties  its  bonds  and  stock  if  they 
would  build  its  road.  Vinal  v.  Conti- 
nental, etc.  Co.,  32  Fed.  Rep.  345  (1887). 


1443 


CH.  SXXVIII.] 


DISSOLUTION,  rOEFEITUEE,  ETC. 


[§  6i2. 


according  to  an  executory  contract,  ceases  upon  such  corporation 
passing  into  the  hands  of  a  receiver,  where  the  receivership  was 
accompanied  by  the  usual  injunction  against  the  further  transac- 
tion of  business  by  the  insolvent  corporation.  This  conclusion  is 
arrived  at  on  the  theory  that  the  failure  to  perform  was  due  to  the 
operation  of  law,  and  hence  that  no  damages  could  be  recovered 
for  breach  of  the  contract.!  The  better  rule,  however,  is  that  even 
at  common  law  the  obligations  of  a  corporation  do  not  cease  by 
reason  of  its  dissolution.^  The  dissolution  of  a  company  does  not 
put  an  end  to  its  executory  contract  to  employ  a  person,^  nor  obli- 


1  Malcomson  v.  Wappoo  Mills,  88  Fed. 
Rep.  680  (1898),  the  court  following  the 
case  of  People  v.  Globe,  etc.  Ins.  Co.,  91 
N.  Y.  174  (1883),  and  refusing  to  follow 
Spader  v.  Mural,  etc.  Mfg.  Co.,  47  N.  J. 
Eq.  18  (1890).  "Where  an  insolvent 
corporation  is  forced  into  liquidation 
and  dissolution,  all  its  executory  con- 
tracts perish  with  it,  for  this  is  an  im- 
plied condition  of  their  execution." 
The  rule  is  otherwise  as  to  a  solvent 
corporation.  "  A  receiver  is  not  bound 
to  carry  out  executory  contracts  of  the 
corporation,  but  he  may  disregard 
them."  No  damages  can  be  recovered 
for  failure  of  the  insolvent  corporation 
or  receiver  to  carry  out  the  contract. 
Griffith  V.  Blackwater,  etc.  Co.,  46  W. 
Va.  56  (1899).  In  the  case  of  Liverpool, 
etc.  Co.  V.  McNeill,  89  Fed.  Rep.  131 
(1898),  the  court  held  that  the  appoint- 
ment of  the  receiver  of  two  insolvent 
corporations  had  the  effect  of  dissolv- 
ing all  contracts  between  such  two  cor- 
porations. 

2  Shayne  v.  Evening  Post,  etc  Co.,  168 
N.  Y.  70  (1901).  Under  the  New  Hamp- 
shire statutes,  when  a  corporation  is 
wound  up  under  insolvency  proceed- 
ings, all  claims  are  allowed  as  of  the 
same  date,  interest  being  added  for 
those  past  due,  and  a  rebate  of  interest 
made  on  those  not  yet  due.  An  as- 
signee in  insolvency  cannot  agree  that 
a  trustee  to  whom  the  cori^oration 
pledged  mortgages  as  security  for  de- 
bentures shall  purchase  such  securities 
at  a  price  named.  Bank  Com'rs  r.  New 
Hampshire,  etc.  Co.,  69  N.  H.  621  (1899). 

1443 


3  Tiffin  Glass  Co.  v.  Stoehr,  54  Ohio, 
157  (1896).  A  contract  made  by  a  cor- 
poration to  pay  when  it  is  in  funds  is 
not  enforceable  if  the  company  aban- 
dons business.  Zimmer  v.  Brooklyn 
Sub.  Ry.,  6  N.  Y.  Supp.  316  (1889).  A 
contract  of  officers  for  salary  ceases 
upon  the  corporation  passing  into  a  re- 
ceiver's hands,  since  performance  is 
rendered  impossible  by  judicial  action 
and  not  by  the  fault  of  the  corporation. 
Lenoir  v.  Linville,  etc.  Ca,  126  N.  C.  922 
(1900 ;.  A  contract  of  employment  with 
a  corporation  is  terminated  by  dissolu- 
tion, the  same  as  if  the  employer  was 
an  individual  and  had  died.  Louch- 
heim  v.  Clawson,  etc.  Co.,  12  Pa.  Sup. 
Ct.  55  (1899).  A  contract  whereby  a 
stockholder  sells  his  stock  to  an  indi- 
vidual who  guarantees  that  the  former 
will  be  employed  at  a  stated  salary  by 
the  corporation  for  two  years  is  enfor- 
cible  against  the  person  so  purchasing 
the  stock,  even  though  the  corporation 
passes  into  the  hands  of  a  receiver  be- 
fore the  expiration  of  the  two  years 
and  the  employment  is  thereby  stopped. 
Kinsman  v.  Fisk,  37  N.  Y.  App.  Div.  443 
(1899).  A  merger  of  two  insurance  com- 
panies under  the  New  York  statute 
forms  a  new  corporation,  and  a  person 
under  contract  of  employment  in  one 
of  the  companies  is  not  bound  to  work 
for  the  new  company  and  may  recover 
damages  for  breach  of  the  contract. 
Globe,  etc,  Co.  v.  Jones,  89  N.  W.  Rep. 
580  (Mich.  1902). 


§  642.]  DISSOLUTION,  FORFEITURE,  ETC.  [CH.  XXXVIII. 

gations  which  were  created  for  a  period  longer  than  the  duration 
of  the  corporate  charter.^ 

Where  a  corporation  is  dissolved  before  a  lease  taken  by  it  runs 
out,  the  lessor  may  hold  its  assets  liable  for  the  breach  of  contract.^ 
"Where  a  receiver  is  appointed  he  generally  finds  a  number  of  ex- 
ecutory contracts  in  force  —  contracts  of  employment,  or  for  rental 
of  premises,  or  for  purchases  of  material,  etc.  lie  then  must  de- 
cide whether  he  wishes  to  adopt  any  of  these  contracts  as  his  own. 
If  he  does  not  adopt  a  particular  contract,  then  that  contractor 
has  no  preferred  claim  against  the  receiver,  as  a  part  of  the  receiv- 
er's expenses  or  disbursements,  but  has  merely  a  claim  against  the 
corporation  and  its  general  assets,  and  this  claim  may  be  for  past 
sums  due  or  for  breach  of  contract,  or  both.  On  the  other  hand,  if 
the  receiver  does  adopt  the  contract,  then  as  to  sums  becoming 
due  before  such  adoption  the  contractor  is  a  general  creditor  only, 
but  as  to  sums  becoming  due  after  such  adoption,  they  are  a  part 
of  the  receiver's  expenses  or  disbursements  and  must  be  paid  as 
such.  The  law  is  clear  that  a  receiver  may  refuse  to  carry  out  an 
executory  contract  of  the  corporation.  A  receiver  has  no  power, 
however,  to  cancel  a  lease  except  as  to  his  own  liability.  The  lia- 
bility of  the  insolvent  corporation  itself  on  rent  accruing  after  the 
receiver  is  appointed  is  not  affected  by  the  insolvency  and  receiv- 
ership.'' A  lessor,  as  a  general  creditor,  may  file  a  claim  for  rent 
to  become  due  in  the  future  under  the  lease.*  After  a  receiver  is 
appointed  interest  ceases  as  between  the  creditors,  but  continues 
as  against  the  corporation  and  its  stockholders.^  In  distribution, 
debts  not  yet  due  participate  with  a  rebate  of  interest  for  the  un- 
expired time.®  The  liability  of  the  corporation  on  indorsements  is 
not  considered  in  the  distribution  of  assets  by  the  receiver,  except 

1  See  §§  641,  supra,  913,  infra.  151  N.  Y.  593  (1897).      Where  the  re- 

2Kalkhoff    V.   Nelson,  60   Minn.    284  ceiver  continues  in  possession  under  an 

(1895);  People  v.  National  Trust  Co.,  82  existing  lease,  he  is  liable  for  the  rent 

N.  Y.  284  (1880).     Damages  for  breach  for  the  time  he  occupies  the  premises, 

of    a    contract  should    be    allowed  in  and  the  lessor  may  put  in  a  claim  as  a 

liquidation,  even  though  the  time  for  general  creditor  for  the  remainder  of 

the  performance  of  sucli  contract    is  the  rent.     Shackell  v.  Chorlton,  [1895] 

not  3'et  complete.  Rosenbaum  v.  United  1  Ch.  378.     In  the  bankruptcy  court  the 

States,  etc.  Co.,  61  N.  J.   L.   543  (1898),  landlord  cannot  prove  a  claim  for  rent 

rev'g  60  N.  J.  L.  294.  not  yet  due,  but  vs^hich  would  accrue 

3  New  York,  Pa,  etc.  R.  R.  v.  New  thereafter  under  the  lease.    In  re  Arn- 

York,  Lake  Erie,  etc.  R.  R.,  58  Fed.  Rep.  stein,  101  Fed.  Rep.  706  (1899). 

268  (1893);  Chemical  Nat.  Bank  v.  Hart-  »  People  v.  American,  etc.  Co.,  172  N. 

ford  Deposit  Co.,  161  U.  S.  1  (1896).  Y.  371  (1902). 

*Re  New  Oriental  Bank,  [1895J  1  Ch.  « Jones  v.  Arena  Pub.   Co..  171  Mass. 

753.     As  to  a  claim  for  rent  to  become  22  (1898). 
due,  see  People  v.  St.  Nicholas  Bank, 

1444 


CH.  XXXVIII.]  DISSOLUTION,  FORFEITUKE,  ETC.  [§  642. 

SO  far  as  such  indorsements  have  matured  and  have  not  been  paid.^ 
Dissolution  ma}'  put  an  end  to  a  guaranty  of  dividends  on  the  stock 
of  the  compan3^'-  Where  suit  for  dissolution  is  instituted  against 
an  insurance  company,  the  claims  against  it  are  figured  at  their 
value  at  the  commencement  of  the  suit,  even  though  an  insured 
person  dies  thereafter  and  before  distribution.'  A  railroad  com- 
pany, having  statutory  power  to  extend  the  period  of  its  existence, 
may  make  a  lease  of  its  railroad  for  a  period  of  time  extending 
beyond  the  duration  of  its  charter,  and  such  lease  is  valid  and 
binding  upon  the  compan}^  for  at  least  the  period  of  its  existence.^ 
A  corporation  that  owns  stock  in  another  corporation  may  vote 
such  stock  in  favor  of  dissolution  of  the  latter,  even  though  it  was 
influenced  so  to  vote  by  the  fact  that  it  has  guaranteed  dividends 
on  the  stock  of  the  latter  so  long  as  the  latter  exists.^  An  impor- 
tant question  arises  in  this  connection  where  one  corporation  sells 
out  all  its  property  to  another  corporation  leaving  some  of  the 
debts  of  the  former  corporation  unpaid.  The  rights  and  remedies 
of  the  creditors  in  such  a  case  are  fully  considered  elsewhere.^  So 
also  it  frequently  becomes  important  to  know  whether  a  consoli- 
dated company  is  liable  for  the  debts  of  the  constituent  compa- 
nies,'' and  whether  a  purchaser  at  a  foreclosure  sale  is  liable  for  the 
debts  of  the  foreclosed  corporation.^ 

Dividends  paid  to  the  stockholders  out  of  the  capital  stock  are 


"> 


1  Oyster  v.  Short,  177  Pa,  St.  601  (1896).  parties,  and  is  strictly  in  the  nature  of 

2  Lorillard    v.  Clyde,  143  N.  Y.  456  a  rescission  by  them,  and  the  proof  by 
(1894).     Cf.  §  775,  infra.  them  in  such  cases  is  in  the  way  of  dam- 

3  People  V.  Commercial  A.  L.  Ins.  Co.,  ages,  and  is  measurable  by  the  present 
154  N.  Y.  95  (1897).     In  winding  up  an  value  of  their  contracts." 

insolvent  insurance  company  the  court  *  Gere  v.  New  York  Central,  etc.  R.  R., 

will  ascertain  the  present  value  of  ex-  19  Abb.  N.  C.  193  (1885).    In  this  case 

ecutory  obligations  of    the    company,  the  validity  of  a  mortgage  by  the  West 

Taber  v.  Royal,  etc,  Co.,  124  Ala.  681  Shore  Railroad  Company  to  become  due 

(1899),  the  court  saying  that  "When  it  four    hundred  and    seventy-five  years 

falls  out  that  the  company  is  unable  from  its  date,  although  the  corporate 

longer  to  keep  its  promises,  and  its  as-  existence  of  the  company  was  only  one 

sets    are    taken    possession  of   by   the  hundred  years,  was  not  questioned,  the 

court,   for  pro  rata  application  to  its  court  holding  that  a  lease  made  at  the 

debts,  the  court  has  a  right  to  fix  a  day  same  time  forjthe  same  length  of  time  by 

up  to   which  engagements  under  con-  the  company  was  legal.    See  also  §  641, 

tract  may  be  regarded  as  continuing,  supra. 

but  after  which  the  creditors  may  re-  *  WindmuUer  v.  Standard,  etc.   Ca, 

gard  them  as  terminated  on  account  of  114  Fed.  Rep.  491  (1902),  also  115  id.  748. 

the  altered  condition  of  the  company.  See  a  criticism  on  this  case  on  page  13Si, 

disabling  it  further  to  meet  its  recipro-  supra. 

cal  promises.      That  is    an  option  af-  ^  See  ch.  XL,  infra. 

forded    to  creditors  by  the    court,  in  "^  See  ch.  LIII,  infra, 

view  of  the  contract  relations  of  the  ^  gee  ch.  LII,  infra. 

1445 


§  642.J 


DISSOLUTION,  FORFEITURE,  ETC. 


[CH.  XXXVIII. 


illegal  as  against  corporate  creditors  whether  paid  before  or  at  the 
time  of  dissolution.^ 

The  question  of  liability  where  the  corporation  is  a  mere 
"  dummy  "  is  considered  elsewhere.'^ 

Another  question  is  whether  a  person  or  corporation  which  owns 
all  the  stock  of  another  corporation  is  ever  liable  for  the  debts  of  the 
latter  on  the  ground  that  the  latter  is  a  mere  "dummy  "  for  the 
former.     This  subject  also  is  considered  elsewhere.' 

At  common  law,  upon  dissolution  of  a  corporation,  all  suits  by 
or  against  it  abate.* 

Where  a  corporation  is  dissolved  while  an  infringement  suit  is 
pending  against  it  the  suit  may  be  revived  against  the  receiver.^ 


1  See  §  546,  supra. 

2  See  §§  6,  supra,  and  663.  664,  709, 
infra. 

3  See  §  6,  supra,  and  663,  664,  709, 
infra. 

*  McCulloch  V.  Norwood,  58  N.  Y.  563 
(1874);  Re  Norwood,  32  Hun,  196  (1884); 
Greeley  v.  Smith,  3  Story,  C.  C.  657 
(1845);  Saltmarshu  Planters',  etc.  Bank, 
17  Ala.  761  (1850);  Merrill  v.  Suffolk 
Bank,  31  Me.  57  (1849):  Ingraham  v. 
Terry,  11  Humph.  (Tenn.)  572  (1851); 
Life  Assoc,  n  Fassett,  102  111.315(1882); 
Piatt  u.  Ashman,  32  Hun,  230  (1884).  A 
judgment  against  a  corporation  after 
its  charter  has  been  forfeited  by  decree 
of  the  court  is  void.  Insurance  Com'r 
V.  United,  etc.  Co.,  22  R.  I.  377  (1901). 
Dissolution  dissolves  a  pending  attach- 
ment. Morgan  v.  New  York,  etc.  Assoc, 
73  Conn.  151  (1900).  A  judgment  in  Illi- 
nois rendered  against  a  New  York  cor- 
poration after  it  has  been  dissolved  is 
not  evidence  against  the  New  York  re- 
ceiver, even  though  the  suit  was  com- 
menced before  the  dissolution,  it  ap- 
pearing that  the  attorneys  for  the  com- 
pany had  withdrawn  their  appearance 
before  the  judgment  and  the  receiver 
had  not  appeared.  People  v.  Mercan- 
tile, etc.  Co.,  65  N.  Y.  App.  Div.  306 
(1901).  Where  the  attorney  fails  to  call 
the  attention  of  the  court  to  the  fact 
that  his  client,  one  of  the  parties  in  the 
case,  has  been  dissolved,  he  may  be  liable 
for  costs  thereafter.  Sal  ton  v.  New  Bees- 
ton,  etc.  Co.,  [1900]  1  Ch.  43.     An  action 


for  tort  abates  upon  the  expiration  of. 
the  corporate  charter.  Grafton  v.  Union 
Ferry  Co.,  13  N.  Y.  Supp.  878  (1891). 
Corporate  suits  end  when  the  charter 
expires.  Logan  v.  Western,  etc.  R.  R., 
87  Ga.  533  (1891).  Where  by  consolida- 
tion a  corporation  ceases  to  exist,  suits 
against  it  abate.  Council,  etc.  Ry.  i\ 
Lawrence,  3  Kan.  App.  274  (1896).  A 
dissolution  of  a  corporation  puts  an  end 
to  a  suit  at  law  for  damages  for  per- 
sonal injuries.  Grafton  v.  Union  Ferry 
Co.,  19  N.  Y.  Supp.  966  (1892).  Upon 
dissolution  of  a  corporation  all  suits 
abate.  Marion  Phosphate  Co.  v.  Perry, 
74  Fed.  Rep.  425  (1896).  The  dissolution 
of  a  foreign  corporation  ends  a  suit 
against  it.  Wamsley  v.  Horton,  12  N. 
Y.  App.  Div.  312  (1896);  aff'd,  153  N.  Y. 
687.  A  judgment  in  Illinois  against  a 
New  York  corporation  that  has  already 
been  dissoh'ed  in  New  York  is  not  good 
in  New  York,  Rodgers  v.  Adriatic  F. 
Ins.  Co.,  87  Hun,  384  (1895).  An  action 
in  tort  for  personal  injuries  abates  upon 
the  dissolution  of  the  company.  Re 
Yuengling  Brewing  Co.,  24  N,  Y.  App. 
Div.  223  (1897). 

5  Griswold  v.  Hilton,  87  Fed.  Rep.  256 
(1898).  Even  though  a  suit  against  a 
corporation  for  libel  abates  by  reason 
of  the  dissolution  of  the  corporation, 
yet  it  may  be  revived  and  continued 
against  the  former  directors  in  order  to 
reach  assets  in  their  hands  as  trustees, 
under  the  New  York  statute.  Shayne 
V.  Evening  Post,  etc.  Co.,  168  N.  Y.  70 


1446 


CH,  XXXVIII.] 


DISSOLUTION,  FOKFEITUEE,  ETC. 


L§  642. 


Suit  does  not  lie  against  a  corporation  which  has  been  dissolved.^ 
But  the  statutes  often  contain  a  provision  that  the  corporate  exist- 
ence shall  be  continued  for  a  fixed  time,  pending  the  proceedings 
for  dissolution,  so  that  suits  may  be  brought  by  and  against  the 
corporation  for  the  purpose  of  closing  the  business  and  disposing 
of  the  assets.^ 


(1901).  An  action  against  a  corporation 
may  be  continued  against  those  who 
administer  its  assets  where  the  corpo- 
ration is  dissolved  pending  the  suit. 
Hepworth  v.  Union  Ferry  Co.,  63  Hun, 
258  (1891). 

iDobson  V.  Simonton,  86  N.  C.  493 
(1883);  Gold  v.  Clyne,  58  Hun.  419  (1890); 
atf'd,  134  N.  Y.  263.  The  legislature 
may  provide  for  suits  against  corpora- 
tions after  dissolution,  thus  changing 
the  common-law  rule.  Stetson  v.  City 
Bank,  etc.,  3  Ohio  St.  167  (1853);  Foster 
V.  Essex  Bank,  16  Mass.  345  (1819).  Uneier 


183  (1900).  A  statute  authorizing  a  dis- 
solved corporation  to  bring  suit  enables 
such  corporation  to  sue  in  the  federal 
courts.  Dundee,  etc.  Co.  v.  Hughes,  89 
Fed.  Rep.  183  (1898).  In  the  case  of  Ham- 
mond V.  National,  etc,  Assoc,  58  N.  Y. 
App.  Div.  458  (1901),  the  court  intimated 
that  the  dissolution  of  a  foreign  corpo- 
ration did  not  prevent  suit  and  attach- 
ment against  such  corporation  in  New 
York.  Even  after  dissolution  a  stock- 
holder may  file  a  bill  to  recover  assets 
that  have  been  wrongfully  diverted. 
Boyd  V.   Hankinson,   93  Fed.   Rep.   49 


the  New  York  statute  dissolution  does*  (1899).     A  corporation  may  be  sued  as 


not  bar  an  action  for  damages.  Mar- 
staller  v.  Mills,  143  N.  Y.  398  (1894). 
Even  though  a  Connecticut  corporation 
which  owns  a  railroad  in  Kentucky  is 
being  wound  up,  in  accordance  with 
the  statutes  of  Connecticut,  and  even 
though  the  company  has  assigned  to 
the  statutory  receiver  in  Connecticut 
all  its  property,  yet  such  an  assignment 
is  not  an  assignment  for  the  benefit  of 
creditors,  and  hence  a  creditor  of  the 
railroad  may  attach  in  Kentucky  assets 
in  that  state.  Huntington  v.  Chesa- 
peake, etc.  Ry.,  98  Fed.  Rep.  459  (1899). 
A  suit  to  collect  a  debt  against  a  cor- 
poration, the  charter  of  which  has 
expired,  can  be  in  a  court  of  equity 
only.  Stiles  v.  Laurel,  etc.  Co.,  47  W. 
Va.  838  (1900).  Suit  does  not  lie  against 
a  dissolved  corporation,  and  a  statute 
authorizing  suit  against  a  domestic 
dissolved  corporation  does  not  apply  to 
a  foreign  corporation.  Fitts  v.  National, 
etc.  Assoc,  130  Ala,  413  (1901).  An  ir- 
regular dissolution  of  a  Connecticut 
corporation  is  no  bar  to  a  subsequent 
attachment  against  such  corporation  in 
New  York  state.  Hammond  v.  Na- 
tional, etc  Assoc,  31  N.  Y.  Misc.  Rep. 


such  for  a  tort  committed  by  it  after 
its  charter  has  expired.  Miller  v.  New- 
burg,  etc  Co.,  31  W.  Va.  836  (1888). 
Where' an  attorney  brings  suit  in  the 
name  of  a  corporation  that  has  been 
dissolved  before  the  action,  he  is  liable 
for  costs  if  beaten.  Attleboro  Nat.  Bank 
V.  Wendell,  64  Hun,  208  (1892).  After 
dissolution  has  been  decreed  it  is  too 
late  for  a  corporate  creditor  to  bring 
an  action  to  hold  the  directors  liable 
for  declaring  dividends  out  of  the 
capital  stock,  no  fraud  in  obtaining 
the  dissolution  being  alleged.  Coxon 
V.  Gorst,  [1891]  3  Ch.  73.  Upon  dissolu- 
tion,  the  directors  becoming  trustees 
by  statute,  the  statute  of  limitations 
begins  to  run  against  claims  against 
the  secretary.  Landis  v.  Saxton,  105 
Mo.  486  (1891).  A  corporation  may  give 
a  bond  on  appeal,  even  though  the 
charter  has  been  forfeited,  an  appeal 
having  been  taken  from  the  judgment 
of  forfeiture.  Texas,  etc.  R.  R.  v.  Jack- 
son, 85  Tex.  605  (1893). 

2  Stetson  V.  City  Bank  of  New  Orleans, 
12  Ohio  St.  577  (1861);  McGoon  v.  Scales, 
9  Wall.  33  (1869);  Mariners'  Bank  v. 
Sewall,  50  Me.   220  (1861);  Muscatine 


1447 


642.] 


DISSOLUTION,  FORFEITURE,  ETC. 


[CH.  XXXVIII. 


A  contract  made  bj  the  officers  after  the  charter  has  been  for- 
feited does  not  bind  the  stockholders.* 

A  director  who  is  a  creditor  of  the  corporation  may  share  pro- 
portionately with  other  creditors  in  the  assets.^ 

Where  a  company  owing  debts  allows  a  foreclosure  of  a  mort- 
gage and  buys  in  the  property  and  holds  it  secretly  in  the  name  of 
a  trustee,  an  execution  may  be  levied  on  it  by  a  judgment  creditor 
of  the  company.'  The  directors  are  not  personally  liable  for  attor- 
ney fees  for  services  rendered  in  a  voluntary  dissolution  of  the 
company.* 


Turn  Verein  v.   Funck,   18  Iowa,   469    v.  Gardner,  81  Mass.  362  (1860).    Some- 


(1865);  Thornton  v.  Marginal  Freight 
Ry.,  123  Mass.  32  (1877);  Folger  v.  Chase, 

35  Mass,  63(1836);  Crease  u.  Babcock,  51 
Mass.  525,  567  (1846);  Re  Independent 
Ins.  Co.,  Holmes,  103  (1872);  s.  C,  13 
Fed.  Cas,  13;  Franklin  Bank  v.  Cooper. 

36  Me.  179  (1853;;  Nevitt  v.  Bank  of  Port 
Gibson,  14  Miss.  513  (1846).  The  life  of 
the  corporation  is  frequently  extended 
by  these  statutes  for  tliree  years.  Her- 
ron  V.  Vance,  17  Ind.  595  (1861);  Foster 
V.  Essex  Bank,  16  Mass.  245  (1819); 
Blake  v.  Portsmouth,  etc  R.  R*^  39  N. 
H.  435  (1859);  Von  Glahn  v.  De  Rosset, 
81  N.  C.  467  (1879);  Michigan  State  Bank 


1448 


times  five  years.  Tuskaloosa,  etc.  Assoc. 
V.  Green,  48  Ala.  346  (1872).  Cf.  Lmcoln, 
etc.  Bank  v.  Richardson,  1  Me.  79  (1820  . 
A  suit  abates  upon  the  expiration  of 
the  time  limited,  where  by  statute  the 
corporation  continues  for  five  years 
after  dissolution  for  the  purpose  of 
prosecuting  and  defending  suits.  Dun- 
dee, etc  Co.  V.  Hughes,  77  Fed.  Rep.  855 
(1896). 

1  Wilson  V.  Tesson,  12  Ind.  285  (1859). 

2  Thompson  v.  Huron  Lumber  Cc,  4 
Wash.  St.  600  (1892). 

estate  V.  McBride,  105  Mo.  265  (1891). 
*  Drew  V.  Longwell,  81  Hun,  144  (1894). 


PAET  IT. 

FRAUDS  — ULTRA  VIRES  ACTS  —  INTRA  VIRES  ACTS — 
NEGLIGENCE  AND  IRREGULAR  CONTRACTS  OF  DI- 
RECTORS, STOCKHOLDERS,  PROMOTERS,  AND  AGENTS. 


CHAPTER  XXXIX. 

FRAUDULENT  ACTS  OF  DIRECTORS,  MAJORITY  OF  STOCKHOLDERS, 

AND  THIRD  PERSONS. 


A.  THE  OCCASION,   SCOPE.    AND  PURPOSE 

OF  THE  SUBJECT   HEREIN. 

§  643.  The  cause  and  occasion  of  this 
subject. 
644  The  three  classes  of  stockholders' 
wrongs  herein — -The  corpora- 
tion is  ordinarily  the  party  to 
remedy  these  wrongs. 

645.  But  the  corporation  failing  to  do 

so,  a  stockholder  may   bring 
the  action. 

646,  647.  Tiie    facts    and     conditions 

which    allow    and  sustain    a 
stockholder's  suit  herein. 

B.  FRAUDS  OF  CORPORATE  DIRECTORS,  OF 

A  MAJORITY  OF  THE  STOCKHOLD- 
ERS. OR  OF  THIRD  PERSONS,  TO  REM- 
EDY WHICH  A  STOCKHOLDER  MAY 
BRING  SUIT. 


648. 
649. 


650. 


651. 
652. 
653. 


654 
655. 


656. 


Directors  as  trustees. 

Director  or  other  corporate  offi- 
cer interested  in  construction 
company — Contracts  between 
a  director  and  his  company. 

Secret  gifts  to  directors  from  per- 
sons contracting  with  the  cor- 
poration. 

Promoters'  frauds  on  the  corpo- 
ration. 

Sales  of  property  by  corporate 
officers  to  the  corporation. 

Sales  of  property  by  the  corpora- 
tion to  corporate  officers,  and 
purchases  by  corporate  officers 
at  foreclosure  and  execution 
sales. 

Reorganizations  of  corporations. 

Issue  of  '•  watered  "  stock  and  of 
bonds  at  a  discount  —  Divis- 
ion of  assets,  leaving  creditors 
unpaid. 

Stockholders'  actions  against  per 
sons,  other  than  directors,  for 
frauds,  etc.,  against  the  corpo- 
ration. 

1449 


§  657.  Salaries  or  compensation  to  cor- 
porate officers. 

658.  Contracts  between  corporations 

having  one  or  more  directors 
in  common. 

659.  Foreclosure  of  mortgage  on  cor- 

porate property,  and  collusion 
with  directors,  whereby  no  de- 
fense is  made  to  the  foreclos- 
ure. 

660.  Directors'  purchases  of  property 

needed  by  the  corporation  — 
Buying  up  the  debts  of  the 
corporation. 

661.  Loans   by  the   directors  to  the 

corporation,  mortgages  by  the 
corporation  to  directors,  and 
the  right  of  a  corporation  — 
solvent  or  insolvent  —  to  give 
a  mortgage  or  assignment  of 
its  property  to  a  director  in 
order  to  prefer  the  payment 
of  his  debt. 

662.  Frauds  by  a  majority  of  the 
stockholderson  the  minority — 
Directors  owning  stock  in  an- 
other corporation  with  which 
a  contract  is  made  —  Stock- 
holders' ratification  of  the 
voidable  acts  of  directors  — 
One  corporation  voting  stock 
in  another  competing  corpo- 
ration. 

663.  664.  "  Dummy  "  corporations  — 
The  courts  will  ignore  the  cor- 
porate existence  where  it  is 
fraudulently  ilsed  to  do  what 
the  stockholders  cannot  le- 
gally do.  An  individual  or 
corporation  owning  all  the 
stock  of  another  corporation  is 
not  ordinarily  liable  for  the 
debts  of  the  latter. 

665.  Participation,  ratification,  and 
laches  as  a  bar  to  stockhold- 
ers' complaints. 

666.  Parties,  pleadings,  etc. 


§§  643,  644.]       FRAUDS   of   DIKECTOKS,  promoters,  etc.  [cH.  XXXIX. 

A.    THE   OCCASION,    SCOPE,    AND   PURPOSE   OF   THE    SUBJECT    HEREIN. 

§  643.  Tlie  cause  and  occasion  of  this  sulject. —  Perhaps  the  most 
striking  feature  of  the  modern  era  of  industrial  development  is  the 
growth,  wealth,  and  power  of  corporations.  They  have  built  the 
railways,  dug  the  canals,  established  the  factories,  carried  the  ocean 
commerce,  and  assumed  control  of  the  industries  of  Europe  as  well 
as  of  America.  They  have  absorbed  a  large  part  of  the  surplus 
wealth  of  the  world,  and  have  been  the  means  of  making  great 
profits.  But  these  gains  and  profits  have  not  always  been  honestly 
preserved  and  administered  for  the  benefit  of  those  who  are  en- 
titled thereto —  the  stockholders  of  the  company.  Corporations, 
with  their  vast  capital  stock  and  their  great  income,  have  proved 
to  be  a  temptation  to  corporate  officers.  These  companies  have 
been  found  to  be  efficient  instruments  of  fraud  and  illegal  gain. 
Corporations  have  become  insolvent,  and  stockholders  have  lost 
their  investments,  while  individuals  have  become  millionaires. 

The  expense,  difficulty,  and  delays  of  litigation ;  the  power  and 
wealth  of  the  guilty  parties;  the  secrecy  and  skill  of  their  meth- 
ods; and  the  fact  that  the  results  of  even  a  successful  suit  belong 
to  the  corporation,  and  not  to  the  stockholders  who  sue,  all  tend  to 
discourage  the  stockholders,  and  to  encourage  and  protect  the 
guilty  parties. 

In  England,  ever  since  the  year  1720,  when  the  "  South  Sea 
Bubble  "  exploded  and  unsettled  the  finances  of  the  kingdom,  there 
have  been  many  instances  of  "bubble  companies"  and  dishonest 
promoters. 

In  America  the  cases  involving  a  breach  of  trust  by  the  directors 
arise  generally  out  of  the  management  of  corporations,  and  not  in 
their  formation. 

It  is  the  purpose  of  this  part  of  this  work  to  explain,  so  far  as  is 
possible,  the  methods  of  those  frauds,  and  to  point  out  the  remedy 
for  the  wrong. 

§  644.  The  three  classes  of  stockholders'  wrongs  herein  —  The  cor- 
poration is  ordinarily  the  party  to  remedy  these  wrongs. —  Stock- 
holders' wrongs,  arising  from  a  breach  of  trust  by  directors  or  a 
majority  of  the  stockholders  or  third  persons,  are  clearly  divisible 
into  three  classes.  They  are:  first,  fraudulent  acts;^  second,  ultima 
vires  acts;^  third,  negligence  of  corporate  directors.' 

There  is  another  class  of  grievances  —  that  of  internal  dissen- 
sions in  the  corporation  and  dissatisfaction  with  its  policy  and  acts. 
These,  however,  are  intra  vires  of  the  directors  or  majority  of  the^ 

1  This  is  the  subject  of  this  chapter.  *  See  ch,  XLII,  infra. 

2  See  eh.  XL,  infra. 

1450 


CH.  XXXIX.]  FRAUDS   OF    DIRECTORS,  PROMOTERS,  ETC.  [§  645v 

stockholders.  The  law  gives  no  remedy  for  such  dissensions,  since 
the  stockholder  has  the  corporate  elections  as  a  remedy.  The  ma- 
jority are  to  rule  so  long  as  they  do  so  without  fraud  and  within- 
the  powers  of  the  corporation.^  So  also  the  decision  of  the  board 
of  directors  is  binding  as  regards  the  usual  suits  which  a  corpora- 
tion might  bring  against  third  persons.'^ 

It  is  to  be  borne  in  mind  that  frauds,  ultra  vires  acts,  and  acts  of 
negligence  are  injuries  to  the  corporation;  and  the  corporation  is 
naturally  the  party  to  bring  suit  to  rectify  them.  These  frauds,  ultima 
vires  acts,  and  negligence  of  directors  do  not  affect  the  stockholder 
directly ;  but  they  affect  the  stockholders  indirectly  by  decreasing 
the  corporate  assets,  and  thereby  affecting  the  value  of  the  stock.  Ac- 
cordingly it  is  the  duty  of  the  corporation  to  bring  suit  to  remedy 
these  wrongs,  just  as  it  is  the  duty  and  right  of  the  corporation  to 
bring  suit  to  remedy  an  ordinary  trespass,  conversion,  or  fraud, 
whereby  third  parties  injure  the  corporate  property  and  interests. 
That  a  corporation  may  bring  suit  to  remedy  the  frauds,  ultra  vires 
acts,  or  neffliffence  of  its  trustees  or  directors  was  the  decision  of 
Lord  Chancellor  Hardwicke,  in  1T42,  in  the  case  of  The  Charitable 
Corporation  against  Sutton.' 

§  645.  But^  the  corporation  failing  to  do  so,  a  stocMolder  may 
hring  the  action. —  Notwithstanding  this  fact,  however,  that  it  was 
the  duty  and  right  of  the  corporation  to  bring  suit  to  remedy  these 
wrongs,  it  gradually  became  apparent  that  frequently  the  corpora- 
tion was  helpless  and  unable  to  institute  the  suit.  It  was  found, 
where  the  guilty  parties  themselves  controlled  the  directors  and 
also  a  majority  of  the  stock,  that  the  corporation  was  in  their 
power,  was  unable  to  institute  suit,  and  that  the  minority  of  the 
stockholders  were  being  defrauded  of  their  rights  and  were  without 
remedy;  and  it  became  apparent  that  there  was  a  wrong  which 
had  no  remedy.  The  time  came  when  the  minority  of  the  stock- 
holders of  a  defrauded  corporation — the  corporation  itself  being 
controlled  by  the  guilty  parties — were  given  a  standing  in  court 
for  the  purpose  of  taking  up  the  cause  of  the  corporation,  and,  in 
its  name  and  stead,  of  bringing  the  guilty  parties  to  an  account. 
Accordingly,  in  1843,  in  the  leading  case  of  Foss  v.  Harbottle,*  a 
stockholder  brought  suit  in  the  name  of  himself  and  other  defrauded 
stockholders,  and  for  the  benefit  of  the  corporation,  against  the 
directors,  for  a  breach  of  their  duty  to  the  corporation.  This  case 
was  decided  against  the  complaining  stockholders  on  the  ground 

^  See  ch.  XLI,  infra,  every  breach  of  trust,  let  the  person  be 

2  See  §  750,  infra.            .  guilty  of  it  either  in  a  private  or  public 

3  2Atk.  400.  In  this  case  the  court  capacity."  Asto  the  power  of  the  state 
said:  '•  Nor  will  I  ever  determine  that  to  remedy  such  abuses,  see  §  635,  supra. 
a  court  of  equity  cannot  lay   hold  of  ^2  Hare,  461. 

1451 


§  645.]  FRAUDS    OF    DIRECTORS,  PROMOTERS,  ETC.  [cn.  XXXIX. 

that  the  complainant  had  not  proved  that  the  corporation  itself  was 
under  the  control  of  the  guilt}'  parties,  and  had  not  proved  that  it 
was  unable  to  institute  the  suit.  The  court,  however,  broadly  inti- 
mated that  a  case  might  arise  when  a  suit  instituted  by  the 
defrauded  stockholders  would  be  entertained  by  the  court  and 
redress  given.  Acting  upon  this  suggestion,  and  impelled  by 
the  utter  inadequacy  of  suits  instituted  by  the  corporation,  de- 
frauded stockholders  continue  to  institute  these  suits  and  to  urge 
the  courts  of  equity  to  grant  relief.*  These  efforts  were  unsuccess- 
ful in  clearly  establishing  the  rights  of  stockholders  herein  until 
the  cases  of  Atwool  against  Merryweather,  in  England,  in  1807,'^ 
and  of  Dodge  v.  Woolsey,  in  this  country,  in  1855.'  These  two 
great  and  leading  cases  have  firmly  established  the  law  for  both 
England  and  America,  that  where  corporate  directors  have  com- 
mitted a  breach  of  trust  either  by  their  frauds,  ultra  vires  acts,  or 
negligence,  and  the  corporation  is  unable  or  unwilling  to  institute 
suit  to  remedy  the  wrong,  a  single  stockholder  may  institute  that 
suit,  suing  on  behalf  of  himself  and  other  stockholders  and  for 
the  benefit  of  the  corporation,  to  bring  about  a  redress  of  the 
wrong  done  directly  to  the  corporation  and  indirectly  to  all  the 
stockholders.'* 

The  rule  as  formulated  therein  has  been  repeated,  applied,  ex- 
plained, and  extended  by  subsequent  cases  and  by  text  books  until 
a  system  of  jurisprudence  may  be  said  to  be  based  upon  it.  In 
bringing  that  class  of  suits  stockholders  are  not  liable  for  libel  and 
slander  by  reason  of  allegations  in  their  suit  against  directors  for 
fraud.     Not  even  a  director  who  was  not  a  party  can  sue  them  for 

iMozley  v.  Alston.  1  Thil.  Ch.  790  Northern  T.  Co.,  176  U.  S.  181,  188 
(1847),  where  the  court  said  there  was  (1900),  where  the  above  section  is  cited, 
no  reason  assigned  "  why  the  corpora-  *  It  is  to  be  noticed  that  long  prior  to 
tion  does  not  put  itself  in  motion  to  these  cases  it  had  been  held  by  the 
seek  a  remedy;  "  Lord  i*.  Copper  Min-  courts  in  various  cases  that  a  stockhold- 
ers, 2  Phil.  Ch.  740  (1848).  where  the  er's  action  herein  would  lie,  but  the 
court  refused  relief  because  the  acts  principle  was  not  clearly  established 
were  capable  of  confirmation  and  had  until  the  foregoing  decisions  were 
been  confirmed  by  the  majority;  Gray  made.  Thus,  in  New  York,  as  early  as 
V.  Lewis,  L.  R  8  Ch.  App.  1085,  1050  1833,  in  the  case  of  Robinson  v.  Smith, 
(1873),  See  also  MacDougall  v.  Gard-  3  Paige,  222  (1833),  the  remedy  was  de- 
iner,  L.  E,  1  Ch.  D.  13  (1875),  in  regard  clared  to  exist.  In  the  early  case  of 
to  the  principle  of  law  decided  by  these  Preston  v.  Grand  Collier  Dock  Co.,  11 
cases.  Sim.  327  (1840),  a  bill  by  a  stockholder 
2L.  R  5  Eq.  464,  n.  in  behalf  of  himself  and  others  to  ren- 
^  18  How.  331.  The  case  of  Hawes  v.  der  certain  persons  liable  as  stockhold- 
Oakland,  104  U.  S.  450  (1881),  is  perhaps  ers,  they  having  subscribed  in  order  to 
of  even  greater  importance  than  Dodge  get  a  charter,  and  then  declared  that 
V.  Woolsey,  and  may  take  the  place  of  they  subscribed  as  trustees  for  the  cor- 
the  latter.       See    also  Dickerman   v.  poiation,  was  sustained. 

1452 


CH.  XXXIX.]  FKAUDS   OF   DIEECTOES,  PEOMOTEES,  ETC.        [§§  640-648. 

libel.'  Xor  does  a  suit  by  a  stockholder  against  the  corporation 
for  an  injunction  and  a  receiver  on  the  ground  that  the  corporation 
is  insolvent  render  the  stockholder  liable  to  a  suit  for  malicious 
prosecution,  even  if  his  suit  failed,  there  having  been  no  arrest  of 
the  person  or  seizure  of  property.^ 

§§  646,  647.  The  facts  and  conditions  which  allow  and  sustain  a 
stocliholder's  suit  herein. —  Before  a  stockholder  can  sustain  a  suit 
to  remedy  the  frauds,  ^lUra  vires  acts,  or  negligence  of  directors,  he 
should  be  certain  that  three  distincts  facts  or  conditions  exist  in 
his  favor.  These  are:  first,  that  the  acts  complained  of  are  such 
as  amount  to  a  breach  of  trust,  and  such  as  neither  a  majorit}'"  of 
the  directors  nor  of  the  stockholders  can  ratify  or  condone;'  sec- 
ond, that  the  complaining  stockholder  himself  is  free  from  laches,^ 
acquiescence,  or  ratification  of  the  acts  to  remedy  which  the  suit 
is  brought;*  third,  that  the  corporation  has  been  requested  and  has 
neglected  or  refused  to  institute  the  suit;  that  the  suit  is  instituted 
by  honajide  stockholders  as  complainants,  and  that  the  corporation 
and  the  guilty  parties  and  other  proper  i)arties  have  been  made 
defendants.^ 

B.    FEAUDS   OF    COEPOEATE    DIEECTOES,   OF    A     MAJOEITY    OF    THE    STOCE!- 
,  HOLDEES,    OE    OF   THIED    PEESONS,    TO    EEMEDY     WHICH    A    STOCK- 

HOLDEE   MAY    BEING    SUIT. 

§  648.  Directors  as  trustees. —  It  is  frequently  said,  both  in  the 
cases  and  in  the  text-books,  that  the  directors  of  a  corporation  are 
practically  trustees,  with  the  whole  body  of  the  stockholders  as 
cestuis  que  trust.^    The  Xew  York  court  of  appeals,  however,  has 

iRunge     V.    Franklin,    72    Tex.    5S5  Pierce,  Railroads,  36-44;  Wickersham 

(1889).  V.    Crittenden,   93    Cal.    17    (1893).     In 

-  Cincinnati,    etc.  Co.    v.    Bruck,   61  Wasatch  Min.  Co.  v.  Jennings,  5  Utah, 

Ohio  St  489  (1900).  243  (1887),  the  court  well  said  in  refer- 

3  This  subject  is  treated  in  the  remain-  ence  to  cor[jorate  directors:  "  Courts  of 

der  of  this  chapter  and  in  chapter  XL,  equity  have  carefully  refrained  from 

infra.     See  also  as  to  such  ratification,  defining    the    particular  instances   of 

§  740,  infra.  fiduciary  relations  in  such  a  manner 

^  See  ch.  XLIV,  infra.  that  other  and  perhapsnew  cases  might 

5  See  ch,  XLV,  in/ro.  be  excluded."    The  corporation,  how- 

6  That  directors  occupy  the  position  ever,  stands  in  no  fiduciary  relation 
of  trustees  towards  the  stockholders,  towards  its  stockholders.  Karnes  v. 
^ee  European,  etc.  Ry.  v.  Poor,  59  Me.  Rochester,  etc.  R.  R.,  4  Abb.  Pr.  (N.  S.) 
277  (1871);  Koehler  v.  Black  River,  etc.  107(1867).  As  stated  in  Hoyle  v.  Platts- 
Co..  2  Black.  715  (1862).  See  also  Green's  burgh,  etc.  R  R.,  54  N.  Y.  314  (1873), 
Br  ice.  Ultra  Vires  (2d  ed.),  p.  478,  citing  whether  a  director  of  a  corporation  is 
many  cases.  Cf.  Smith  v.  Anderson,  to  be  called  a  trustee  or  not,  in  a  strict 
L.  R  15  Ch.  D.  247  (1880);  Imperial  sense,  there  can  be  no  doubt  that  his^ 
Hotel  Co.  V.  Hampson,  L.  R  23  Ch.  D.  character  is  fiduciary. 

12  (18S2);  Angell  &  A.  Corp..  !^  812,  etc.: 

14 -.3 


V 


§  64U.J 


FRAUDS    OF    DIKKCTOUS,  TROMOTERS,   KTC.  [CH.   XXXIX. 


recently  said  that  directors  are  trustees  in  their  relations  towards 
the  corporation,  but  not  in  their  relations  towards  the  stock- 
holders.^ And  again,  that  "  while  courts  of  law  generally  treat  the 
directors  as  agents,  courts  of  equity  treat  them  as  trustees  and  hold 
them  to  a  strict  account  for  any  breach  of  the  trust  relation.  For 
all  practical  purposes  they  are  trustees  when  called  upon  in  equity 
to  account  for  their  official  conduct."  ^  The  obligation  of  this  trus- 
teeship, whetiier  to  the  corporation  or  to  the  stockholders,  has  been 
the  basis  of  ascertaining  what  acts  of  directors  constitute  a  fraud, 
and  W'hat  remedies  may  be  applied.  A  corporation  may  file  a  bill 
to  compel  its  secretary  and  treasurer  to  account  for  funds  coming 
into  his  hands,  and  need  not  resort  to  a  suit  at  law.  Such  a  suit 
is  practically  one  to  compel  a  trustee  to  account.' 

§  649.  Director  or  other  corporate  officer  interested  in  construc- 
tion comjHuiy —  Contracts  between  a  director  and  Ms  company. — 
It  has  been  held  that  a  director  cannot,  as  against  the  dissent  of  a 
single  stockholder,  become  a  contractor  with  the  corporation,  nor 
can  he  have  any  personal  and  pecuniary  interest  in  a  contract  be- 
tween a  third  person  and  the  company  of  which  he  is  a  director.* 


1  Bloom  ?7.  National  United,  etc.  Co., 
152  N.  Y.  114  (1897). 

-'Bosworth  V.  Allen,  168  N.  Y.  157 
(1901),  120  Fed.  Rep.  440;  81  N.  Y.  App. 
Div.  10;  94  N.  W.  Rep.  171. 

'Consolidated,  etc  Works  v.  Brew, 
112  Wis.  610  (1902).  A  treasurer  sued 
by  the  corporation  for  money  held  by 
him  as  treasurer  cannot  offset  a  debt 
due  from  the  corporation  to  him  indi- 
vidually. Orep;on,  etc.  Co.  u  Schmidt, 
60  S.  W.  Rep.  530  (Ky.  1901).  A  new  treas- 
urer may  bring  suit  against  a  former 
treasurer  to  recover  corporate  funds, 
and  such  suit  may  be  in  equity.  Hunter 
V.  Robbins,  117  Fed.  Rep.  920  (1902). 

4  Port  V.  Russell.  36  Ind.  60  (1871), 
where  an  injunction  was  granted 
against  the  payment  by  a  plank-road 
company  of  money  to  a  construction 
company  of  which  a  director  of  the 
former  was  a  member.  The  court  said 
that  the  three  leading  American  cases 
on  the  subject  of  frauds  by  directors 
are  Michoud  v.  Girod,  4  How.  503  (1846); 
Cumberland,  etc.  Co.  v.  Sherman,  80 
Barb.  553  (1859);  and  s.  C,  20  Md.  117 
(1863);  and  Hoffman  Steam  Coal  Co.  v. 
€umberland,  etc.  Co.,  16  Md.  456  (1860) ; 


and  in  England  the  case  of  Aberdeen 
Ry.  V.  Blakie,  1  Macq.  461  (1854).  Where 
two  contractors  cause  a  railroad  cor- 
poration to  be  formed,  in  which  one 
contractor  becomes  a  director,  and  the 
other  directors  are  clerks  of  the  second 
contractor,  and  the  construction  con- 
tract is  made  with  these  two,  by  means 
of  "dummy"  intermediaries,  at  an  im- 
provident price,  one  of  the  contractors 
cannot  compel  the  other  to  divide  the 
profits.  Jackson  v.  McLean,  36  Fed. 
Rep.  213  (1888).  A  president  is  person- 
ally liable  on  loans  by  his  bank  to  an 
insolvent  person  with  whom  he  has 
other  interests.  First  Nat  Bank  v. 
Reed,  36  Mich.  263  (1877).  A  waiver  of 
the  statute  of  limitations  by  the  board 
of  directors  is  illegal  where  the  party 
benefited  was  a  director  and  was  pres- 
ent when  the  resolution  was  passed. 
Lowndes  v.  Garnett.  etc.  Co.,  33  L.  J. 
(Ch.)  418  (1864).  Although  the  officers 
of  a  railroad  company  take  in  their 
names  lands  which  are  donated  to  the 
railroad,  yet  the  railroad  cannot  com- 
pel them  to  give  up  the  lands,  if  the 
railroad  company  had  no  power  to  ac 
quire  such  lands.     Case  v.  Kelly,  133  U. 


1454 


CH.  XXXIX.]  FRAUDS    OF    DIEP:CTORS,  I'ROMOTERS,  ETC. 


[§  649. 


^'  Constituted  as  humanity  is,  in  the  majority  of  cases  duty  would 
be  overborne  in  the  struggle."  Where  a  construction  company  con- 
tracts with  a  corporation,  the  director  cannot  be  interested  in  the 
construction  company  at  the  time  the  contract  is  made,  nor  sub- 
sequently; and  it  is  immaterial  that  the  contract  was  fair,  or  even 
to  the  advantage  of  the  corporation.  The  corporation,  upon  dis- 
covering the  fact  that  the  director  is  interested  in  the  construction 
company,  may  compel  him  to  pay  over  to  the  corporation  all  profits 
that  he  has  derived  from  the  construction  contract.^     Again,  if  a 


S.  21  (1890).     "Where  a  corporation  gives 
a   building  contract  to  one  of  its   di- 
rectors on  his  representation  that  the 
price  is  the  actual  cost  of  the  work, 
when  in  fact  he  had  already  arranged 
to  subcontract  it  at  a  less  figure,  it  is 
a  question  for  the  jury  as  to  whether 
fraud    was    involved.     Keystone,    etc. 
Co.  V.  Bate,  187  Pa.  St.  460  (1898).     A 
contract  between  a  director  and  a  cor- 
poration  whereby  the  former  gets  a 
commission  for  selling  the  product  of 
the  latter  may  be  disregarded  by  a  re- 
ceiver of  the  corporation.     Griffith  v. 
Blackwater,  etc.  Co.,  46  W.  Va.  56  (1899). 
iSee  §  662.  infra.     Quoted  and  ap- 
proved in  Rutland,  etc.  Co.  v.  Bates,  68 
Vt.  579  (1896).    It  is  illegal  for  directors 
to  be  stockholders  in  a  construction 
company  to  which  a  construction  con- 
tract is  let.     Oilman,  etc.  R.  R.  v.  Kelly, 
77    111.    426    (1875).     See   also    Bayliss 
V.  Lafayette,  etc.  Ry.,  8  Biss.  193  (1878); 
&  c,  2  Fed.  Cas.  1079;  Paine  v.  Lake 
Erie,  etc.  R  R.,  31  Ind.  283(1869);  Flint, 
etc.  Ry.  V.  Dewey,  14  Mich.  477  (1866), 
where  a  director  had  become  interested 
in  the  construction  work  after  the  con- 
tract had  been  given.    To  same  effect, 
see  Thomas  v.  Brownville.  etc.   R.  R., 
109  U.  S,  522  (1883),  rev'g  2  Fed.  Rep. 
877,   where,   however,   it  is  held  that 
bonds  issu«d  to  a  construction  com- 
pany in  which  a  director  is  interested 
cannot  be  altogether  repudiated,   but 
are  valid   to  the  extent  of  the  actual 
value  of  work  done.    See  also  Ryan  v. 
Leavenworth,  etc.  Ry.,21  Kan.  365  (1879), 
holding  also  that  a   stockholder  in   a 
corporation  which  is  a  stockholder  in 


the  defrauded  corporation  may  sue  to 
remedy  the  wrong  to  the  latter;  Euro- 
pean, etc.  Ry.  V.  Poor,  59  Ma  277  (1871). 
See  also  Risley  v.  Indianapolis,  etc  R. 
R,  62  N.  Y.  240,  248  (1875);  Whitman  v. 
Bowden,  27  S.   C.   53  (1887),  where  a 
building  committee  of  a    joint-stock 
company     secretly     contracted     with 
themselves.     Where  the  president,   in 
order  to  get  control  of  the  corporation, 
causes  a  meeting  of  the  board  of  direct- 
ors to  vote  stock  in  payment  for  serv- 
ices and  property  whose  value  is  much 
less  than  the  par  value  of  the  stock,  the 
stock  being  voted  to  outside  parties, 
but  thereafter  secretly  transferred  to 
the  president,  a  stockholder  may  com- 
pel him  to  return  the  stock  to  the  cor- 
poration   for    cancellation.      Perry   v, 
Tuskaloosa,  etc.  Co.,  93  Ala.  364  (1891;. 
In   Lewis  v.   Meier,  14  Fed.   Rep.  311 
a8S2;,  the  remarkable  decision  is  made 
that  the  corporation  cannot  have  such 
a  contract  set  aside,  since  the  corpora- 
tion is  responsible  for  the  frauds  of  its 
directors,  and  hence  both  parties  are 
in  x>ari   delicto.     Where    one  of  the 
common  council  and  of  the  committee 
granting  a  street-railway  franchise  to 
individuals  who  convey  the  same  to  a 
corporation  becomes  a  stockholder  in 
that  corporation  as  soon  as  it  is  formed, 
the  franchise  is  void  as  having  been 
fraudulently  obtained.     Finch  v.  River- 
side, etc.  Ry.,  87  Cal.  597  (1891).   Where 
three    out  of   a  board  of  five  public 
officers  give  a  contract  for  the  supply 
of  water  to  the  town,  and  one  of  the 
three  is  interested  in  the  contract,  the 
contract  is  illegal.     Santa  Ana  Water 


1455 


g  649.] 


FRAUDS    OF    DIRECTOKS,  PROMOTERS,  ETC.  [CII.  XXXIX. 


company  contracting  with  the  corporation  secretly  gives  to  the 
contracting  agent  of  the  latter  a  subcontract  for  the  construction 
work,  the  corporation  may  attack  the  whole  contract  and  recover 
back  the  profits  realized  therefrom.^     A  contract  is  not  valid  and 


Co.  V.  San  Buenaventura,  65  Fed.  Rep. 
324  (1895).  Under  the  Kentucky  stat- 
utes a  contract  between  a  city  and  a 
printing  company,  in  which  company 
a  member  of  the  common  council  is  a 
stockholder,  is  illegal.  Nuiiemacher  v. 
Louisville,  98  Ky.  334  (1895).  Wiiere 
two  competing  street-railway  compa- 
nies apply  for  the  right  to  lay  tracks, 
and  the  board  of  public  works  grants 
the  right  to  a  company  in  which  one 
of  the  members  of  the  board  is  a  stock- 
holder, the  other  company  may  have 
the  grant  set  aside.  Traction  Co.  v. 
Board  of  Public  Works,  56  N.  J.  L.  431 
(1894).  Where  one  corporation  buys  a 
street  railroad  from  another,  a  stock- 
holder in  the  former  cannot  question 
the  validity  of  bonds  issued  by  tiie 
latter  and  expressly  assumed  by  the 
former,  nor  can  he  raise  the  question 
of  fraud  in  constructing  the  road. 
Smith  V.  Ferries,  etc.  Ry.,  51  Pac.  Rep. 
710  (Cal.  1897).  The  president  of  a  gas 
company  cannot  let  to  a  partnership 
of  which  he  is  a  member  a  contract  to 
erect  a  gas  plant  for  the  corporation. 
If  the  contract  is  abandoned  and  a  suit 
brought  on  a  quantum  meruit,  the 
value  of  the  labor  and  materials  used 
must  be  clearly  proved.  Sims  v.  Peta- 
luma,  etc.  Co.,  131  Cal.  656  (1901).  Wliere 
an  agent  to  sell  is  able  to  sell  for  more 
than  he  accounts  for  to  his  principal, 
the  latter  cannot  recover  the  difference 
unless  the  sale  was  actually  made. 
Edison  v.  Gilliland,  42  Fed.  Rep.  205 
(1890).  Where  the  rolling-stock  is  pur- 
chased by  the  directors  in  the  name  of 
a  trustee  of  a  car  trust,  he  being  merely 
a  figure-head,  payments  being  made 
from  the  funds  provided  for  the  build- 
ing of  the  road  under  the  construction 
contract,  the  court  held  that  there  was 
such  a  mingling  of  the  funds  and  of 
the   interests  of  the   directors  as  di- 


rectors with  tlieir  interests  as  pur- 
chasers of  the  rolling-stock  that  the 
title  to  the  rolling-stock  passed  to  the 
company,  and  the  car  trust  was  in- 
valid. The  court  said:  "  Any  arrange 
ment  by  which  the  road  is  equippeo 
with  rolling-stock  belonging  to  an- 
other corporation  should  be  distinct, 
unequivocal,  and  above  suspicion."  Mc- 
Gourkey  v.  Toledo,  etc.  Ry.,  146  U.  S. 
530,  567  (18D2).  Even  though  directors 
are  interested  in  the  construction  com- 
pany which  takes  the  bonds,  and  the 
property  is  foreclosed  and  is  bought  in 
by  the  directors,  yet  the  railroad  com- 
pany cannot  set  aside  the  tran.saction 
unless  it  offers  to  pay  to  the  directors 
wiiat  they  have  expended  or  offers  to 
take  the  property  subject  to  such 
mortgage  bonds.  San  Antonio,  etc.  Ry. 
V.  San  Antonio,  etc.  R  R.,  60  S.  W.  Rep. 
338  (Texas,  1900).  A  director  who  owns 
the  assets  of  a  business  which  is  cog- 
nate to  the  business  of  his  corporation 
may  sell  the  same  to  his  corporation  at 
an  advanced  price,  and  he  need  not 
disclose  what  he  paid  for  it,  and  a  stock- 
holder cannot  compel  the  director  to 
pay  to  the  corporation  the  profit  he  has 
made.  The  sale  may  be  rescinded,  but 
the  court  has  no  power  to  force  the 
director  to  sell  at  a  lower  price.  Bur- 
land,  etc.  V.  Earle,  etc..  [1902]  A.  C.  83. 
1  "  According  to  my  view  of  the  law 
of  this  court,  I  take  it  to  be  clear  that 
any  surreptitious  dealing  between  one 
principal  and  the  agent  of  the  other 
principal  is  a  fraud  on  such  other  prin- 
cipal cognizable  in  this  court."  Pan- 
ama, etc.  Tel.  Co.  v.  India  Rubbei%  etc. 
Tel.  Works  Co.,  L.  R,  10  Ch.  App.  515 
(1875).  In  this  case  the  secret  subcon- 
tractor was  the  agent  and  engineer  of 
the  corporation.  He  received  a  com- 
mission for  his  work,  and  the  work  was 
to  be  accepted  subject  to  his  approval. 


1456 


CH.  XXXIX.]  FRAUDS    OF   DIEECTOKS,  PEOMOTERS,  ETC. 


[§  6i0. 


enforceable  against  the  corporation  where  the  parties  contracting 
with  the  corporation  have  given  to  the  directors  of  the  corporation 
a  secret  interest  in  the  profits  of  the  contract.^  In  England  it  has 
been  decided  that  even  though  it  is  legal  under  the  statutes  to  pro- 
vide that  no  calls  shall  be  made  on  certain  shares,  except  upon  a 
winding  up,  yet  where  the  directors  are  the  subscribers  for  such 
shares  and  do  not  fully  inform  other  subscribers  of  the  situation, 
they  may  be  compelled  at  the  instance  of  a  stockholder  to  pay  at 
the  same  time  that  the  others  pay,  even  though  there  was  no  actual 
fraud,  the  parties  having  acted  in  good  faith.^ 


Where  a  national  bank  and  two  of  the 
directors  of  a  corporation  are  secretly 
interested  in  the  profit  made  by  selling 
property  to  such  corporation  for  stock, 
the  corporation  may  hold  them  liable 
for  such  profit.  The  defense  of  ultra 
vires  on  the  part  of  the  bank  is  not 
good.  Zinc,  etc.  Co.  v.  First,  etc.  Bank, 
103  Wis.  125  (1899).  The  case  of  Currier 
V.  New  York,  etc.  R  R,  35  Hun,  355 
(1885),  goes  still  further,  and  holds  that 
a  stockholder  may  compel  the  contract- 
ors to  disgorge  when  they  obtain  the 
contract  with  the  corporation  through 
their  associates  or  hirelings  being  made 
directors.  An  agreement  of  an  attor- 
ney to  share  his  fees  with  a  director 
who  votes  Mud  aids  him  in  getting  the 
company's  business  is  void.  The  courts 
will  not  compel  the  attorney  to  carry 
out  the  agreement.  All  parties  are 
left  as  they  are  found.  Attaway  v. 
Third  Nat.  Bank.  98  Mo.  485  (1887).  See 
also  Lindley.  Company  Law,  pp.  328, 
368.  Where  the  managing  director  of 
the  Union  Pacific  Railroad  caused  a 
contract  for  its  construction  to  be 
given  to  a  person  who  acted  as  his 
agent,  <and  the  director  then  formed 
the  Credit  Mobilier  company,  a  Penn- 
sylvania corporation,  and  had  the  con- 
struction contract  assigned  to  it,  and 
all  the  stockholders  of  the  railroad  were 
invited  to  become  stockholders  in  the 
latter  company,  and  all  the  facts  herein 
were  more  or  less  known  to  all  parties, 
a  court  of  equity  refused  to  enjoin  the 
Credit  Mobilier  from  collecting  the 
contract    price    of    the    construction 


work.  Union  Pac.  R  R  v.  Credit 
Mobilier,  135  Mass.  367  (1883).  Although 
an  assistant  engineer  of  the  company  is 
secretly  interested  with  the  contractor 
in  the  profits  of  the  construction,  yet 
where  the  former  had  nothing  to  do 
with  the  letting  the  contracts  or  accept- 
ing the  work,  and  merely  testified  in 
an  arbitration  in  the  settlement,  but 
did  not  testify  falsely,  the  parties  need 
not  give  up  their  profits.  Union  R  R 
V.  Dull,  124  U.  S.  173  (1888).  In  Fox  v. 
Hale,  etc  Co.,  108  Cal.  369  (1895),  the 
president  was  held  liable  for  fraud  in 
reducing  ores  belonging  to  the  com- 
pany. 

1  Quoted  and  approved  in  Rutland, 
etc.  Co.  V.  Bates.  68  Vt.  579  (1896);  War- 
dell  V.  Railroad  Co.,  103  U.  S.  651  (1880). 
A  person  who  brings  about  a  contract 
whereby  the  president  obtains  a  secret 
profit  in  a  corporate  contract  cannot 
recover  for  his  services.  Van  Valken- 
burgh  V.  Thomasville,  etc.  R.  R.,  4  N.  Y. 
Supp.  783  (1889).  Where  the  directors 
appropriate  the  money  of  the  corpora- 
tion to  themselves,  a  minority  stock- 
holder may  bring  them  to  account. 
Sage  V.  Culver,  71  Hun.  42  (1893);  aflfd, 
147  N.  Y.  241.  Where  the  directors  are 
secretly  interested  in  the  construction 
contract  and  are  to  have  a  portion  of 
the  profits,  bonds  issued  under  the  con- 
tract are  void  except  in  hona  fide  hands. 
Vanderveer  v.  Asbury  Park,  etc.  Ry.,  83 
Fed.  Rep.  355  (1897).  See  also  §  650, 
infra. 

-  Alexander  v.  Automatic,  etc.  Co., 
[1899]  2  Ch.  302. 


[1900],  2  Ch.  56,  rev  g 


(93) 


1457 


§  6A9.] 


FKACD8   OF   DIKECTORS,  PROMOTERS,  ETC.  [OH.  XXXIX. 


In  Massachusetts,  however,  the  supreme  court,  with  character- 
istic independence  and  recognition  of  actual  conditions,  has  said  in 
regard  to  a  contract  between  a  corporation  and  one  of  its  directors: 
"It  was  not  illegal  or  void  because  made  with  a  director, —  the  only 
person  likely  to  be  willing  to  make  it.  In  this  country  it  very 
generally  has  been  deemed  impracticable  to  adopt  a  rule  which 
absolutely  prohibits  such  contracts.'" 

In  Wew  Jersey  the  highest  court  has  just  decided  that  a  director 
may  contract  with  the  corporation,  if  the  contract  is  a  fair  wi^,  and 
if  it  is  made  without  concealment,  and  if  it  is  approved  by  a  ma- 
jority of  the  stockholders  in  meeting  assembled,^  Such  also  seems 
to  be  the  rule  in  New  York.'     On  the  other  hand  it  has  very  prop- 


^  The  court  held  that  a  director  may 
be  employed  by  a  corporation  to  settle 
claims  against  it,  he  to  receive  five  per 
cent,  of  the  face  value  of  the  comi)any's 
bonds  used  in  settlement,  and  also  to 
receive  whatever  discount  he  could  get 
from  the  claims,  where  he  did  not  vote 
on  the  question  of  his  employment,  and 
a  jury  has  found  that  the  contract  was 
made  in  good  faith  and  was  not  im- 
provident, it  being  shown  tiiat  the  com- 
pany was  pressed  and  had  no  other 
way  of  raising  money,  and  that  the  di- 
rector advanced  his  own  money.  A  re- 
ceiver cannot  recover  back  the  amount 
so  paid  the  director.  Ft.  Payne,  etc. 
Mill  v.  Hill,  174  Mass.  224  (1899).  Not- 
withstanding a  resolution  for  the  issue 
of  stock  in  payment  for  a  patent  does 
not  recite  that  the  patentee  is  to  have 
a  salary,  yet  that  fact  may  be  shown 
by  parol  evidence,  and  the  fact  that 
the  corporation  re-assigned  the  patent 
as  security  for  such  salary  is  not  neces- 
sarily proof  of  fraud,  even  though  the 
patentee  is  president  of  the  corpora- 
tion.   Gay  V.  Fair,  175  Mass.  521  (1900). 

-Even  though  the  directors  are  to 
receive  a  commission  on  bonds  which 
they  sell  for  the  corporation,  yet  if  the 
stockholders  are  notified  of  the  same 
and  ratify  the  transaction  in  meeting 
assembled,  the  minority  stockholders 
cannot  complain,  the  transaction  itself 
being  a  fair  one.  The  directors  may 
vote  their  own  stock  at  such  meeting 
and  the  ratification  is  legal,  even  though 


their  stock  was  necessary  in  order  to 
carry  the  resolutions.  The  court  said: 
''Like  other  stockholders,  they  had  a 
right  to  be  influenced  by  what  they 
conceived  to  be  for  their  own  interest, 
and  they  cannot  lawfully  be  denied  the 
right,  nor  can  it  be  limited  or  circum- 
scribed by  the  fact  that  they  occupied 
the  position  of  directors  in  the  com- 
pany." The  court  further  said:  "In 
Leavenworth  v.  Chicago  Railway  Co., 
134  U.  S.  688.  it  was  held  that  the  ac- 
tion of  the  stockholders  validated  the 
contract  where  nine  out  of  thirteen 
directors  were  personally  interested. 
In  the  case  of  Nye  v.  Storer.  168  Mass. 
53,  and  Bjorngaard  v.  Goodhue  County 
Bank.  49  Minn.  483,  a  like  infirmity  in 
contracts  was  held  to  be  eliminated  by 
the  vote  of  a  majority  of  stockholders." 
Hodge  V.  United  States  Steel  Corp.,  54 
Atl.  Rep.  1  (N.  J.  1903). 

3  Inasmuch  as  in  New  York  an  agree- 
ment of  a  contractor  to  divide  with  the 
ofiicers  of  the  company  profits  made  in 
the  construction  of  the  railroad  is  legal, 
unless  avoided  by  the  corporation,  and 
is  not  subject  to  collateral  attack,  such 
a  contract  will  be  sustained  in  Penn- 
sylvania if  the  contract  was  made  in 
New  York  and  pertained  to  a  New  York 
corporation,  even  though  such  corpora- 
tion was  thereafter  consolidated  with  a 
Pennsylvania  corporation.  Rumsey  r. 
New  York,  etc.  R  R,  53  Atl.  Rep.  49o 
(Pa.  1902). 


1458 


CH.  XXXIX.]  FRAUDS    OF    DIEECTOES,  PEOMOTEES,  ETC. 


[§  649. 


■erly  been  decided  in  California  that  if  the  contract  is  an  unfair  one 
no  amount  of  publicity  or  ratification  by  a  majority  of  the  stock- 
holders can  learalize  it.^  This  seems  to  leave  it  with  the  court  to 
decide  whether  the  contract  is  a  fair  one  or  not,  with  power  to  set 
the  contract  aside,  if  it  is  manifestly  unfair.^ 

Moreover,  this  principle  of  law  is  a  shield  and  not  a  sword.  The 
guilty  party  cannot  avail  himself  of  it.^  Hence,  even  though  all 
the  directors  of  a  corporation  organize  another  company  to  buy 
out  the  first-named  company,  and  they  are  directors  in  the  second 
company  also,  yet,  if  all  the  facts  are  fully  stated,  the  sale  is  legal 
and  the  new  compan}''  cannot  repudiate  the  sale  on  that  ground.* 
Where  the  president  by  secret  agreement  is  to  participate  in  a  con- 
struction contract,  he  cannot  enforce  such  contract,  and  hence  bonds 
issued  to  the  contractor  are  not  affected  by  the  Ohio  statute  pro- 
hibiting the  sale,  directly  or  indirectly,  of  bonds  to  an  officer  at  less 
than  par.^    Even  though  the  president  has  authority  to  make  con- 


1  Where  a  majority  of  the  directors 
of  an  irrigation  company  are  members 
of  an  association  which  desires  to  ob- 
tain water  from  such  corporation,  a 
contract  to  that  effect  which  is  solely 
for  the  benefit  of  the  association  is  ille- 
gal and  may  be  repudiated  by  the  cor- 
poration, even  though  such  contract 
was  openly,  made,  and  even  though  the 
directors  were  guilty  of  laches  in  not 
causing  the  contract  to  be  set  aside, 
and  in  the  meantime  the  association 
has  spent  its  money  in  installing  its 
plant.  Goodell  v.  Verdugo,  etc.  Co.,  71 
Pac  Rep.  354  (Cal.  1903).  the  court  say- 
ing, "  the  publicity  alone  of  an  illegal 
and  unauthorized  act  of  the  directors 
of  the  corporation  does  not  make  it 
legal  or  valid." 

2  The  court  seems  to  have  the  same 
power  that  it  has  as  to  contracts  be- 
tween two  corporations  having  direct- 
ors in  common.     See  §  658,  infra. 

3  Where  a  railroad  construction  con- 
tract is  assigned  to  trustees,  to  be 
carried  out  and  the  profits  to  be  paid 
to  the  stockholders  of  a  designated 
corporation,  the  stockholders  may 
compel  the  trustees  to  pay  over  such 
profits.  The  trustees  cannot  set  up 
that  they  were  also  directors  of  the 
railroad.     Hazard  v.  Dillon,  34  Fed.  Rep. 


485  (1888).  A  person  sued  on  a  contract 
by  a  corporation  cannot  claim  that  the 
contract  is  unenforceable  because  an- 
other of  the  parties  thereto  was  a  di- 
rector of  the  corporation.  Stewart  v. 
Lehigh  Valley  R  R.,  38  N.  J.  L.  505 
(1875),  Where  a  corporation  has  as- 
sumed a  personal  contract  between  the 
president  and  one  of  the  directors,  if 
the  president  has  accepted  the  corpo- 
ration as  liable  on  the  contract,  he  can- 
not thereafter  hold  the  director  liable 
on  such  contract  Munsou  v.  Magee, 
161  N.  Y.  182(1900). 

*  Even  if  the  promoters  stated  that  a 
certain  part  of  the  plant  was  in  full 
operation,  yet  if  there  was  no  fraud, 
and  that  part  of  the  plant  was  put  in 
operation  soon  afterwards,  the  court, 
instead  of  setting  aside  the  sale,  may 
give  damages  for  the  delay.  Misrepre- 
sentations, although  not  fraudulent, 
are  suflBcient  ground  for  relief.  The 
fact  that  the  directors  are  not  inde- 
pendent, but  represent  the  vendor,  is 
immaterial,  if  that  fact  is  made  known 
to  the  parties.  Lagunas,  etc.  Co.  Ltd. 
V.  Lagunas  Syndicate  Ltd.,  [1899J  2  Ch. 
392. 

5  Continental  Trust  Co.  v.  Toledo,  etc. 
R.  R.,  86  i:ed.  Rep.  929  (1898).  Although 
the  president  is  secretly  to  participate 


1459 


§  649.]  FKAUDS    OF   DIRECTORS,  PROMOTERS,  ETC.  [CH.  XXXIX. 

tracts,  yet  he  cannot  cancel  a  contract  which  he  is  personally  inter- 
ested in  having  canceled.^  Where  a  director  of  a  construction 
company  compels  an  iron  concern  to  agree  to  give  a  bonus  to'  the 
construction  company  under  threat  that  otherwise  the  railroad 
would  be  run  on  another  route,  the  contract  cannot  be  enforced.- 
Where  one  corporation  owns  stock  in  another  corporation,  and  a 
committee  of  the  board  of  directors  of  the  former,  in  sellino-  such 
stock,  provide  for  the  purchaser  purchasing  also  similar  stock  owned 
by  the  directors  and  their  friends,  but  not  providing  for  simi- 
lar stock  owned  by  other  stockholders,  the  contract  is  illegal.* 
However,  there  are  many  cases  in  which  the  above  rules  do  not 
apply.  Thus,  where  the  director  was  a  surety  for  the  contractor, 
and  the  latter  failed,  the  former,  who  finished  the  construction 
■work  under  compulsion  by  the  company,  may  set  up  its  acquies- 
cence as  a  bar  to  its  suit  to  recover  from  him  the  profits  of  the 
transaction.^  Again,  where  a  director  purchased  an  interest  in 
the  construction  contract  after  it  had  been  entered  into,  but  sold 
that  interest  before  any  work  was  done  thereunder,  the  illegality 
of  his  connection  with  the  construction  company  cannot  affect  the 
legality  of  his  sale  of  that  interest.*  Even  though  a  director  pre- 
vents a  removal  of  the  company's  business  to  another  location  on 
advantageous  terms,  his  reason  being  that  he  did  not  get  a  secret 
bonus,  yet  he  is  not  personally  liable  for  damages  for  so  doing,  it 
appearing  that  the  information  which  he  gave  to  the  parties  who 
were  about  to  deal  with  the  corporation  was  correct.®  Where  the 
business  of  a  lumber  railroad  has  been  exhausted,  it  is  les:al  for  the 
majority  of  the  directors  to  vote  to  extend  the  road,  even  though 
the  extension  is  to  enable  them  to  market  their  own  timber.^  Upon 
the  consolidation  of  two  companies,  it  is  legal  for  one  of  the  com- 
panies to  pay  the  president  and  vice-president  of  the  other  company 
a  sum  of  money  in  consideration  of  their  agreeing  not  to  engage 
individually  in  the  same  business  during  the  period  of  ten  3'ears 
within  a  defined  territory.     A  stockholder  in  the  company  in  which 

in  the  construction  contract,  yet  if  the  which   he  is   interested  on   the  other 

company  does  not  rescind  the  contract  side.     Leonhardt  v.   Citizens'  Bank  of 

on  this  ground,  and  the  corrupt  rela-  Ulysses,  56  Neb.  38  (1898). 

tion  is  terminated  before  the  comple-  2  Woodstock   Iron  Co.  v.  Richmond, 

tion  of  the  contract,  bonds  issued  under  etc.  Co.,  129  U.  S.  643  (1889). 

the   contract    are  valid.     Continental  ^Kelsey  n  New  England,  etc.  Ry.,  62 

Trust  Co.  V.  Toledo,  etc.  R  R.,  86  Fed.  N.  J.  Eq.  742  (1901). 

Rep.  929  (1898);  aff'd  in  Toledo,  etc.  R.  ^Kelley  v.  Newburyport,  etc.  R.  R, 

R  V.  Continental  T.  Co.,  95  Fed.  Rep.  141  Mass.  496  (1886). 

497  (1899).  5  Barnes  r.  Brown,  80  N.  Y.  527  (1880). 

1  Wallace    v.    Oceanic,    etc.    Co.,    25  « Hale  r.  Mason,  160  N.  Y.  501  (1S99). 

Wash.  143  (1901).     An  officer  of  a  bank  7  Bucksport,  etc.  R  R  v.  Edinburgh, 

cannot  legally  compromise  a  claim  in  etc.  Co.,  68  Fed.  Rep.  973  (1895). 

1460 


CH.  XXXIX.]  FRAUDS    OF    DIRECTORS,  PROMOTERS,  ETC. 


[§  649. 


such  persons  were  officers  cannot  compel  the  officers  to  account  for 
the  money  if  the  consolidation  itself  was  acquiesced  in  and  the 
transaction  was  honest  in  fact.'  But  a  settlement  between  a  cor- 
poration and  its  creditors,  made  by  a  board  of  directors  of  whom  a 
majorit}'^  are  interested  in  the  matter  adversely  to  the  corporation, 
is  voidable  as  against  the  corporation  and  non-assenting  stockhold- 
ers, even  though  the  settlement  may  have  been  for  the  best  inter- 
ests of  the  corporation  at  the  time.^  In  England  it  is  customary  to 
insert  in  the  by-laws  a  provision  that  if  a  director  is  interested  in 
a  corporate  contract  without  declaring  his  interest,  his  office  is 
thereby  vacated.^  A  person  dealing  with  a  director,  and  taking 
from  him  notes  or  securities  which  the  corporation  has  issued,  must 
investigate  as  to  the  legality  of  the  issue  of  such  securities.* 

A  contract  between  a  director  and  the  corporation  is  voidable, 
ftnd  not  void.  Accordingly,  if  none  of  the  stockholders  object  to 
6uch  a  contract  it  is  legal.^    Where  the  directors  own  all  the  stock 


1  Bristol  V.  Scranton,  57  Fed.  Rep.  70    est  in  the  profits  of  a  contract  for  the 


^893);  aff'd,  63  Fed.  Rep.  218  (1894). 

-Higgins  V.  Lansingh,  154  111.  301 
(1895).  A  deed  of  all  the  corporate 
property  authorized  at  a  meeting  of  the 
board  of  directors  of  which  no  notice 
was  given  and  only. four  out  of  seven 
were  present,  and  three  of  the  four  were 
interested  in  the  company  which  pur- 
chased the  property,  is  invalid,  and  may 
besetasidebya  judgment  creditor  of  the 
selling  corporation.  Summers  v.  Glen- 
u-ood,  etc.  Co.,  86  N.  W.  Rep.  749  (So. 
Dak.  1901). 

^  See  Turnbull  v.  West  Riding,  etc. 
Co..  70L.  T.  Rep.  93  1 1894). 

<  See  ^  293,  supra,  and  §  727,  infra, 

^  If  all  parties  assent  to  a  guaranty 
by  the  company  of  bonds  and  stock  in 
another  company  owned  by  directors 
of  the  first  company,  such  guaranty, 
being  in  consideration  of  a  lease,  will 
not  be  set  aside.  Barr  v.  New  York,  etc. 
R.  R.,  125  N.  Y.  263  (1891).  Creditors  can- 
not object  to  a  contract  between  the 
corporation  and  a  director  where  the 
stockholders  have  assented  thereto  and 
the  contract  is  a  fair  one.  Welch 
V.  Importers',  etc.  Bank,  123  N.  Y. 
177  (1890).  Where  neither  the  corpora- 
tion nor  any  stockholder  objects,  it  is 
legal  for  the  directors  to  have  an  inter- 


construction  of  the  road,  and  they  may 
compel  the  contractor  to  pay  over  to 
them  their  part  of  the  profits.  The  con- 
tract was  voidable,  not  void.  Robison 
V.  McCracken,  53  Fed.  Rep.  726  (1892); 
aff'd,  57  Fed.  Rep.  375,  sub  nom.  Mc- 
Cracken V.  Robi.son.  Bonds  issued  at 
their  full  par  value  to  the  president  in 
payment  for  work  done  by  him  under 
a  contract  between  himself  and  his 
company  are  valid  and  enfoi'ceable 
where  all  the  stockholders  assented  to 
such  contract.  Arkansas,  etc.  Co.  v. 
Farmers',  etc.  Co.,  13  Colo.  587  (1889). 
Where  all  the  stockholders  unite  in  the 
issue  of  watered  stock  to  the  president 
for  his  own  use,  and  assent  to  a  con- 
tract between  him  and  the  company, 
the  corporation  itself  cannot  subse- 
quently complain.  Arkansas,  etc.  Co. 
V.  Farmers',  etc.  Co.,  13  Colo.  587  (1889). 
The  letting  of  a  construction  contract 
to  one  who  owns  ninetj^-nine  one-hun- 
dredths  of  the  stock,  in  payment  for 
such  stock,  is  legal,  although  he  as 
president  issues  it  to  himself,  where  a 
bona  fide  board  of  directors  ordered  it 
in  the  usual  discharge  of  their  duties. 
The  fact  that  the  contractor  received 
stock  and  bonds  four  times  in  par  value 
the    value  of    the  work  is   not  fatal 


1461 


649.] 


FRAUDS   OF   DIRECTORS,  PROMOTERS,  ETC.  [cil.  XXXIX. 


of  a  corporation,  the  usual  rules  preventing  a  director  from  con- 
tracting with  the  corporation  do  not  apply.'  A  stockholder  may 
be  interested  in  the  construction  company,  and  bonds  may  be  issued 
to  him,  even  though  he  owns  a  majority  of  the  stock  and  thereby 
has  control.^  •  A  stockholder  who  is  also  secretary  of  the  board,  but 
not  a  member  of  the  board,  may  contract  with  the  company.^ 
Where  the  manager,  in  order  to  continue  a  profitable  contract 
which  he  has  with  the  corporation,  keeps  up  a  dead-lock  in  the 
board  of  directors,  due  to  there  being  a  vacancy,  he  is  bound  to 
prefer  the  interests  of  the  company,  or  else  to  terminate  his  em- 
ployment and  rely  on  his  contract."* 


where  no  fraud  is  alleged  and  the  act- 
ual cost  of  the  work  is  not  alleged. 
But  where  the  contractor  tlien  entered 
into  a  contract  whereby  the  mortgage 
was  to  be  foreclosed,  and  he  was  to  par- 
ticipate at  the  sale,  all  for  the  purpose 
of  cutting  oflf  other  creditors,  he  is  lia- 
ble to  them.  Cleveland,  etc.  Co.  v. 
Crawford,  9  Ry.  &  Corp.  L.  J.  171  (Chi- 
cago, 1891).  In  McGourkey  v.  Toledo, 
etc.  Ry.,  146  U.  S.  536  (1893),  the  court, 
speaking  of  a  contract  in  which  the  di- 
rectors were  interested,  said:  "  Did  tlie 
vice  of  these  contracts  lie  in  an  at- 
tempted concealment  of  the  actual 
facts,  as  is  frequently  the  case  where 
preferences  are  secretly  reserved  in  as- 
signments, there  would  be  mucli  force 
in  this  suggestion;  but  if  it  inheres  in 
the  very  nature  of  the  contract, —  if 
there  be  a  thread  of  covin  running 
through  the  web  and  woof  of  the  entire 
transaction, —  in  other  words,  if  the  pur- 
pose be  unlawful,  it  is  not  perceived 
that  an  open  avowal  of  such  purpose 
make  it  the  less  unlawful.  We  do  not 
wish  to  be  understood  as  saying  that 
the  transaction  in  question  necessarily 
involved  actual  fraud  on  the  part  of 
those  participating  in  it."  A  contract 
between  the  president  and  a  third 
party  from  whom  the  company  buys 
lumber,  that  such  third  party  shall  pay 
him  a  commission,  is  not  illegal  perse. 
The  president  may  collect  such  com- 
missions unless  it  is  shown  that  the 
agreement  was  concealed  from  the  cor- 


poration, or  that  the  president  was  ex- 
ercising some  discretion  or  trust.  Jame- 
son V.  Coldwell,  23  Oreg.  144  (1893). 
Bondholders  cannot  sustain  a  bill  in 
equity  to  remove  a  trustee  who  Jiolds 
the  stock  of  various  gas  companies  as 
collateral  security  for  the  payment  of 
their  bonds,  even  tliough  such  trus- 
tee has  voted  such  stock  in  favor 
of  directors  who  liave  made  im- 
provident contracts  in  which  such  di- 
rectors were  personally  interested,  it 
appearing  that  by  the  terms  of  the 
trust  agreement  the  trustee  was  to  vo'te 
such  stock  as  the  pledgors  directed, 
until  default  on  the  bonds,  and  it  not 
being  shown  that  the  trustee  knew 
that  such  default  had  been  made.  More- 
over, such  removal  will  be  denied  when 
the  trust  agreement  itself  provides  for 
the  removal  of  the  trustee  by  vote  in 
writing  of  one-third  in  interest  of  the 
bondholders  at  a  meeting  called  for 
that  purpose,  and  no  reason  is  shown 
for  disregarding  this  mode  of  changing 
the  trustee.  Dillavvay  v.  Boston,  etc. 
Co.,  174  Mass.  80  (1899).  See  also  eh. 
XLIV,  infra. 

1  McCracken  v.  Robison,  57  Fed.  Rep. 
375  (1893). 

2  Porter  v.  Pittsburg,  etc.  Co.,  120  U.  S. 
649,  670  (1887).     Cf.  %  662,  infra, 

3Hitt  V.  Sterling,  etc.  Co.,  Ill  Iowa, 
458  (1900). 

*  Kane  v.  Schuylkill,  etc.  Ca,  199  Pa. 
St.  198  (1901). 


1463 


CH.  XXXIX.]  FRAUDS    OF    DIRECTORS,  PROMOTERS,  ETC. 


[§  650. 


§  650.  Secret  gifts  to  directors  from  jycrsons  contracting  icitli  tlie  cor- 
poration.—  It  is  a  well-established  principle  of  law  that  a  director 
commits  a  breach  of  trust  in  accepting  a  secret  gift  or  secret  pay 
from  a  person  who  is  contracting  or  has  contracted  with  the  corpo- 
ration, and  that  the  corporation  may  compel  the  director  to  turn 
over  to  it  all  the  money  or  property  so  received  by  him.'  Thus,  an 
agreement  of  a  third  person  to  pay  a  certain  sum  to  a  director  if  a 
certain  location  of  a  railroad  is  adopted,  or  an  agreement  to  allow 
him  to  participate  in  the  profits  derived  from  such  location,  is  not 
an  enforceable  contract.^  So  also  where  a  director  receives  a  com- 
mission from  one  who  obtains  a  loan  from  the  corporation  through 
the  director's  influence,  the  latter  may  be  compelled  to  pay  over 
the  commission  to  the  corporation.*  A  treasurer  who  receives  a 
secret  commission  from  a  party  selling  to  a  corporation  must  turn 
the  same  over  to  the  corporation.* 

A  similar  rule  was  applied  where  a  director  of  an  insolvent  in- 
surance company  accepted  a  secret  gift  for  re-insuring  the  com- 
pany's risks  in  another  insurance  company,^  And,  in  general, 
whenever  an  officer  or  agent  of  the  corporation  accepts  a  secret 


1  Quoted  and  approved  in  McClure  v. 
Trask,  161  N.  Y.  83  (1899). 

2  Warden  v.  Railroad  Co.,  103  U.  S. 
651  (1880);  Bestor  v.  Wathen,  60  111.  138 
(1871);  Linder  v.  Carpenter,  62  111.  309 
(1873);  Fuller  v.  Dame,  35  Mass.  473 
(1836),  holding  that  a  promissory  note 
given  therefor  is  void.  See  also  Union 
Pac.  R.  R.  u  Durant,  3  Dill.  343  (1874); 
&  G,  24  Fed.  Cas.  628,  holding  that  where 
the  president  uses  his  power  oppres- 
sively and  by  threats  to  compel  citi- 
zens to  convey  lands  to  him  for  the 
company,  the  court  will  decree  a  re- 
conveyance to  the  grantors;  Holladay 
V.  Patterson,  5  Oreg.  177  (1874),  where 
the  agreement  to  pay  money  to  a  di- 
rector and  president  of  a  railway  if  a 
depot  was  located  in  a  certain  place 
was  held  unenforceable.  A  subscrip- 
tion, however,  conditioned  upon  the 
location  of  a  depot  is  valid.  See  >;  83, 
supra,  Cf.  §  681,  infra.  In  Cook  v. 
Sherman,  20  Fed.  Rep.  167  (1882),  the 
court  refused  to  enforce  specifically  a 
contract  whereby  corporate  officers 
agreed  to  purchase  lands,  the  purpose 
of  all  the  parties  being  to  influence 
thereby  the  location  of  the  railroad. 


A  note  for  §5,000  given  to  a  general 
manager  to  use  his  influence  to  have 
the  company  remove  its  mill  is  illegal. 
Lum  V.  McEwen,  56  Minn.  278  (1894). 
An  agreement  to  convey  land  to  a  per- 
son in  consideration  of  his  endeavoring 
to  ha-ve  a  depot  located  on  the  land  is 
illegal  and  not  enforcible,  where  such 
person  already  had  an  agreement  with 
the  oflScers  of  the  railroad  by  which 
they  were  to  receive  a  part  of  such 
land.  Reed  v.  Johnson,  27  Wash.  43 
(1901). 

s  Farmers',  etc.  Bank  v.  Downey,  53 
Cal.  466  (1879);  Imperial,  etc.  Assoc,  v. 
Coleman,  L.  R.  6  H.  L.  189  (1873). 

<  In  this  case  the  commission  was  re- 
ceived by  an  outside  party  in  the  way 
of  stock  issued  at  par  which  he  imme- 
diately and  secretly  turned  over  to  the 
treasurer.  Rutland,  etc.  Co.  v.  Bates, 
68  Vt.  579  (1896). 

5  Bent  V.  Priest,  86  Mo.  475  (1885);  Gas- 
kell  V.  Chambers,  26  Beav.  360  (1858), 
where  the  director  received  a  secret 
gift  for  bringing  about  a  consolidation. 
Contra,  if  all  assented.  Southall  v. 
British,  etc  Assoc,  L.  R  6  Ch.  App. 
614  (1871). 


1463 


§  650.] 


FEAUDS    OF    DIKECTOKS,  PKOMOTERS,  ETO.  [cil.  XXXIX. 


gift  or  participates  in  the  profits  of  a  contract  with  the  corporation, 
without  the  assent  of  the  stoclcliolders,  the  corporation  is  entitled 
to  the  gifts  or  profits,  and  a  stockholder  may  bring  the  suit  to  com- 
pel the  officer  or  agent  to  pay  over.' 


i"All  persons  who  stand  in  a  fidu- 
ciary relation  to  others  must  account 
for  all  the  profits  made  upon  moneys 
in  their  hands  by  reason  of  such  rela- 
tion.    .    .    .     Agents,    guardians,    di- 
rectors of  corporations,  officers  of  mu- 
nicipal corporations,  and  all  other  per- 
sons clotlied  with  a  fiduciary  charac- 
ter, are  subject  to  this  rule."    Perry  on 
Trusts  (3d  Ed.),  §  430.    In  Chandler  v. 
Bacon,  30  Fed.  Rep.  538  (1887),  the  pres- 
ident and  secretary  were  held   liable 
for  stock  received  by  them    secretly 
from  a  patentee  to  whom  all  the  cap- 
ital stock  had  been  issued  for  his  pat- 
ent.    Directors  receiving  stock  as    a 
gift  from  one  who  sells  property  to  the 
company  for  stock  will  be  compelled 
to  give  it  up  to  the  company.     So  also 
will  an  outside  party  who  aided  in  the 
bribe    and    took   sSme  stock   himself. 
Paducah,  etc.  Co,  v.  MulhoUand,  24  S. 
W.   Rep.   624  (Kj^.   1894).     Where  the 
party  selling  property  to  the  company 
for  stock  gives  part  of  the  stock  to  di- 
rectors, a   person  who  afterwards  be- 
comes president  and  takes  a  part  of 
this  stock  as  a  gift  is  liable  for  it  or  its 
value  to  the  company,  even  though  he 
did  not  know  of  the  fraud  until  after 
he  took  the  stock.     Paducah,  etc.  Co.  v. 
Hays,  24  S.  W.  Rep.  237  (Ky.  1893).     In 
Yale  Gas  Stove  Co.  v.  Wilcox,  64  Conn. 
101  (1894),  a  promoter  and  director  was 
■compelled  to  restore  to  the  corporation 
the  cash  or  stock  which  he  had  received 
secretly  as  a  gift  from  a  party  who  had 
sold  patents  to  the  company.    The  same 
case  holds  that  such  a  contract  cannot 
be  enforced  by  the  promoter  against 
the  patentee.     Where  the  incorporat- 
ing act   required  all  the  proceeds   of 
sales  of  lots  by  a  cemetery  company  to 
be  used  for  embellishments,  and  the  di- 
rectors proceed  to  buy  land  for  a  con- 
sideration of  $500,000  in  bond,s,  of  which 


bonds  $480,000  were  turned  back  by  the 
vendor  to  the  directors,  who  divided 
them  among  themselves,  the  bonds  are 
void  in  the  hands  of  directors.     The  di- 
rectors in  this  case  had  erected  over  the 
entrance  to  the  cemetery  a  statue  of 
Immortality,  and  had  done  so  "with 
great  pomj)  and  solemnity."    Campbell 
V.  Cypress  Hills  Cemetery,  41  N.  Y,  34 
(1869).     In  Tyrrell  v.  Bank  of  London, 
10  H.  L.  Caa  26  (18G2),  a  solicitor  was 
compelled  to  repay  with  interest  a  se- 
cret gift;  General  Exch.  Bank  v.  Hor- 
ner, L.  R.  9  Eq.  480  (1870;,  wliere  the 
manager  was  paid  a  large  sum  in  order 
to  obtain   his  aid  to  a  consolidation 
scheme.     Where  the  company  pays  to 
its  solicitor  a  commission    for    stock 
which  he  induces  the  president  to  take, 
he  must  repay  the  commission  on  the 
windmg    up.     Re  Stapleford   Colliery 
Co.,  49  L.  J.  (Ch.)  253  (1880).     A  man- 
ager who  takes  seci'et  gifts  from  par- 
ties  with  whom  he  contracts  for  his 
company  must  disgorge  the  same.     He 
also  may  be  dismissed  and  his  contract 
salary  stopped.     Boston,  etc.  Co.  v.  An- 
sell.  L.  R,  39  Ch.  D.  339  (1888).     Where 
corporate  agents  organize  local  branch 
companies  on  a  basis  prescribed  by  the 
parent   company,  and  the  agents   de- 
mand and  obtain  from  the  local  com- 
pany more  than  the  parent  company 
prescribed,  the  excess  belongs  to  the 
parent  company.    Sheridan  v.  Sheridan, 
etc.  Co.,  38  Hun,  396  (1886).     Directors 
borrowing  money  from  the  corporation 
and  giving  notes  therefor  cannot  de- 
fend against  the  notes  on  the  ground 
that  a  discount  thereon  was  to  be  al- 
lowed  to  them.     Alford  v.  Miller,  32 
Conn.  543  (1865).     See  Western  U.  TeL 
Co.  V.  Union  Pac.  Ry.,  3  Fed.  Rep.  721 
(1880);  and  quaere,  as  to  the  effect  of  the 
contract  between  the  complainant  and 
defendant  where  one  of  the  minor  pro- 


1464 


<3H.  XXXIX.]  FKAUDS    OF   DIKECTOKS,  PROMOTERS,  ETC. 


[§  650. 


The  contract  being  illegal  it  cannot  be  enforced  by  the  guilty 
officer  or  agent  as  against  the  party  with  whom  it  is  made.^ 

The  party  paying  the  bribe  may  also  be  held  liable  in  damages 
to  the  defrauded  party.^     An  agreement  to  turn  over  the  control 


vor  of  the    officer  against  the  party 
with  whom  he  has  contracted."    Gillig 
V.  Barrett,  N.  Y.  L.  J.,  Jan.  6,  1891.     A 
general  manager  of  a  road  cannot  en- 
force a  contract  by  which  he  was  to  re- 
ceive stock  in  another  road  for  aidmg 
the  latter  in  procm-ing  municipal  bonds, 
his  aid  being  due  to  his  influence  as 
general  manager.     Sargent  v.   Kansas 
Mid.  R.  R.,  48  Kan.  673  (1892).     A  con- 
tract wliereby  a  party  who  is  about  to 
sell  his  business  to  a  corporation  to  be 
organized  agrees  secretly  to  give  $5,000 
of  stock  to  a  party  who  agrees  to  sub- 
scribe openly  for  $5,000  of  the  stock  is 
not   enforcible,  it  appearing   that  the 
party  who  was  thus  to  get  the  extra 
ing  the  corporation  to  purchase  stock     stock  objected  to  the  amount  of  stock 
upon    which  they    received    a  secret     to  be  issued  to  the  vendor,  and  with- 
profit  is  fatal  to   the  suit.     Cullen  v.     drew    his    objection    only    upon    this 
Coal  Creek,  etc.  Co.,  42  S.  W.  Rep.  693     agreement,  and  it  appearing  also  that 
(Tenn.  1897).  J^e  afterwards  became  a  director  and 

I A  person  suing  for  services  rendered     voted  to  purchase  the  property  at  the 
in  procuring  a  construction   contract     price  demanded  by  the  vendor.   Koster 


visions  was  that  the  railway  officers 
were  to  have  free  telegraph  service  for 
themselves  and  families.  Although  the 
purchasing  agent  of  a  railroad  com- 
pany buys  coal  from  a  coal  company  in 
which  such  agent  owns  one  quarter  of 
the  stock,  the  dividends  received  by 
such  agent  on  such  stock  may  be  re- 
tained by  him,  although  the-  railroad 
■company  was  ignorant  of  the  fact  that 
he  was  such  stockholder,  there  being 
no  proof  of  fraud  and  the  coal  bemg 
sold  cheaper  than  the  going  rate.  Clark 
V.  American  Coal  Co.,  86  Iowa,  436 
(1892).  Nine  years'  delay  on  the  part 
of  a  minority  stockholder  in  complain- 
ing of  the  act  of  the  directors  in  caus- 


cannot  collect  if  he  was  not  mstru- 
mental  in  obtaining  the  contract,  or  if 
he  gave  a  secret  commission  to  the 
agent  of  the  party  who  was  to  pay  the 
whole  commission,  unless  the  firincipal 
ratified  the  contract  with  knowledge  of 
«uch  commission  to  the  agent.  Smith 
V.  Seattle,  etc.  Ry.,  72  Hun,  202  (1893). 
The  officers  cannot  recover  secret  com- 
missions on  sales  to  the  corporation 
where  the  corporation  repudiated  the 


V.  Pain,  41  N.  Y.  App.  Div.  443  (1899). 
Even  though  the  agent  of  a  corporation 
represents  to  it  that  a  party  owns  cer- 
tain property  and  will  sell  it  to  the  cor- 
poration for  $7,500  in  bonds  and  $30,000 
in  stock,  and  the  purchase  is  made  on 
those  terms,  and  the  vendor  keeps  the 
bonds  and  gives  the  stock  to  such 
agent,  and  the  agent  sells  a  portion  of 
the  stock  to  a  bona  fide  purchaser,  yet 
the  latter  cannot  rescind  tne  sale  on 


purchase  by  reason  of  such  commissions     the  ground  of  fraud.  Foushee  v.  Snyder, 


and  then  bought  from  the  same  parties 
at  a  lower  figure.  Jameson  v.  Coldwell, 
25  Oreg.  199  (1894).  A  secret  commis- 
sion paid  to  the  agent  of  the  other 
party  to  the  contract  invalidates  the 
contract.  Findlay  v.  Pertz,  66  Fed.  Rep. 
427  (1895).  "  It  seems  to  be  illogical  to 
contend  that  a  contract  can  be  avoided 
.as  between  the  officer  and  the  corpora- 
tion, and  yet  be  held  to  be  valid  in  fa- 


54  S.  W.  Rep.  730  (Ky.  1900).  The  agree- 
ment of  a  person  who  sells  property  to 
a  corporation  that  he  will  divide  the 
profits  with  the  manager  does  not  inval- 
idate the  sale  where  such  agreement  was 
made  after  the  sale  itself  had  been  made, 
and  was  made  under  threat  of  the  man- 
ager to  repudiate  the  contract.  Yellow, 
etc.  Co.  V.  Daniel,  109  Fed.  Rep.  39  (1901). 
2  The  president  and  managmg  agent 


1465 


§  650.] 


FRAUDS   OF   DIRECTOKS,  PROMOTERS,  ETC. 


[on. 


XXXIX. 


of  a  co-operative  insurance  company  is  illegal,  and  money  received 
therefor  may  be  recovered  back  by  a  receiver  of  the  company.^ 

There  is  another  large  class  of  cases,  particularly  in  England, 
wherein  persons  who  desire  to  form  a  company  for  the  purpose  of 
purchasing  and  working  certain  property,  such  as  patents  and 
mines,  cause  their  friends  to  accept  the  position  of  directors  or 
agents,  and  then  give  them  money  or  stock  in  compensation  there- 
for. This  is  still  a  common  practice  in  business,  but  tlie  courts 
have  uniformly  held  that  a  stockholder  or  the  corporation  or  a  re- 
ceiver on  the  winding  up  may  compel  such  directors  or  agents  to 
pay  over  to  the  corporation  the  money  received,  or,  if  stock  was 
received,  then  to  pay  to  it  the  value  of  such  stock.^ 


renders  his  corporation  liable  for  a 
bonus  of  stock  in  another  corporation 
which  he  gives  secretly  and  corruptly 
to  the  agent  of  the  latter  corporation  in 
order  to  get  a  contract  for  the  former 
corporation.  Grand  Rapids,  etc,  Co.  v. 
Cincinnati,  etc  Co.,  45  Fed.  Rep.  671 
(1891),  holding  the  former  corporation 
liable  for  the  par  value  of  the  stock,  in- 
asmuch as  it  was  the  original  issue  of 
that  stock.  Even  though  a  person  does 
not  know  that  a  promoter  to  whom  he 
has  given  an  option  on  his  property  is 
a  director  in  the  company  which  pro- 
poses to  buy  it,  yet  if  he  discovers  this 
fact  before  he  closes  the  transaction  he 
must  pay  to  the  company  the  commis- 
sion which  he  agreed  to  pay  to  the  pro- 
moter; and  even  though  the  company 
has  recovered  from  the  promoter  such 
part  of  the  commission  as  the  promoter 
actually  received,  yet  the  company 
may  recover  the  balance  from  the  ven- 
dor of  the  property,  although  such  bal- 
ance had  been  waived  by  the  promoter 
in  consideration  of  what  was  actually 
paid  to  him.  It  is  unnecessary  to  re- 
scind the  contract.  Grant  v.  Gold,  eta 
Syndicate,  [1900]  1  Q.  B.  233.  Where  the 
directors  of  a  corporat'on  sell  out  its 
assets  in  consideration  of  a  person  pay- 
ing the  debts,  and  the  latter  organizes 
a  new  corporation  and  gives  to  the  old 
directors  stock  in  the  new  corpoi-ation 
equal  to  their  stock  in  the  old,  but  does 
not  give  anything  to  the  other  stock- 
holders of  the  old  corporation,  the  di- 


1466 


rectors  and  the  person  so  purchasing  the 
assets  are  liable  to  the  old  corporation 
for  the  value  of  the  stock  so  given  to 
the  directors.  A  pledgee  of  the  stock  of 
the  old  corporation  may  bring  suit  for 
that  purpose.  Smith  v.  Smith,  etc.  Co., 
125  Mich.  234  (1900).  Even  though  a 
director  prevents  a  removal  of  the  com- 
pany's business  to  another  location  on 
advantageous  terms,  his  reason  being 
that  he  did  not  get  a  secret  bonus,  yet 
ne  is  not  personally  liable  for  damages 
for  so  doing,  it  appearing  that  the  in- 
formation which  he  gave  to  the  par- 
ties who  were  about  to  deal  with  the 
corporation  was  correct.  Hale  v.  Mason, 
160  N.  Y.  561  (1899). 

1  McClure  v.  Law,  161  N.  Y.  78  (1899). 
Money  received  by  a  director  of  a  co- 
operative insurance  company  for  sub- 
stituting other  directors  and  trans- 
ferring its  business  to  another  com- 
pany can  be  recovered  back  on  the 
ground  of  fraud,  and  such  director 
is  chargeable  with  notice  of  the 
facts  which  he  knew  or  might  have 
learned  by  the  exercise  of  reasonable 
care.  McClure  v.  Wilson,  70  N.  Y.  App 
Div.  149  (1902).  Directors  who  have 
been  held  liable  for  moneys  paid  to  di- 
rectors of  another  company  to  induce 
the  latter  to  resign  and  turn  over  the 
assets  of  such  company  cannot  recover 
back  such  money  from  the  parties  who 
received  it  Gilbert  i?.  Finch,  173  N.  Y. 
455  (1903). 

2i2e  Westmoreland,  etc.  Ca,  [1893]  2 


CH.  XXXIX.]  FRAUDS    OF    DIKECTOKS,  PKOMOTERS,  ETC. 


[§  650. 


A  vendor  of  property  to  a  corporation  may,  however,  pay  the 
officers  of  the  corporation  for  services  in  promoting  and  organizing 


Ch.  612.  A  gift  by  a  promoter  to  a 
director  of  a  company  whilst  there  are 
any  questions  open  between  the  com- 
pany and  the  promoter  must  be  ac- 
counted for  by  the  director  to  the  com- 
pany; and  the  company  is  entitled  to 
the  highest  value  of  the  gift  at  any 
time  between  the  wrongful  act  and  the 
time  when  it  came  to  their  knowledge. 
Eden  v.  Ridsdales,  etc.  Co.,  L.  R.  23  Q. 
B.  D.  369  (1889);  Pearson's  Case,  L.  R.  5 
Ch.  D.  336.  aflf'g  L.  R.  4  Ch.  D.  222  (1876), 
the  court  saying:  "Whether  the  pur- 
chase was  or  was  not  an  advantageous 
one  for  the  company  ...  is  a  question 
wholly  immaterial  for  us  to  consider; 
he  cannot,  in  the  fiduciary  position  he 
occupied,  retain  for  himself  any  benefit 
or  advantage  that  he  obtained  under 
such  circumstances;"  Leeke's  Case,  L. 
R.  6  Ch.  App.  469  (1871);  De  Ruvigne's 
Case,  L.  R.  5Ch.  D.  306(1877);  Ormerod's 
Case,  25  W.  R.  765  (1877),  where  the 
director  was  elected  and  the  gift  re- 
ceived even  after  the  contract  was 
made.  The  court  said:  "If  it  is  lawful 
that  a  man  may  be  bought  as  a  di- 
rector, it  must  be  decided  by  some  one 
else.  I  never  will  decide  it;"  Weston's 
Case,  L.  R,  10  Ch.  D.  579  (1879),  where 
the  director  was  held  liable  for  the  full 
price  of  the  stock  less  what  he  paid 
therefor;  Re  Eskern  Slate,  etc.  Co.,  37 
L.  T.  222  (1877).  where  the  articles  of 
association  allowed  the  gift,  but  were 
held  to  be  fraudulent;  McKay's  Case, 
L.  R.  2  Ch.  D.  1  (1875),  where  the  secre- 
tary of  the  corporation  was  compelled 
to  pay  over:  Hay's  Case.  L.  R.  10  Ch. 
App.  593  (1875),  where  the  court  said: 
"No  agent  can  in  the  course  of  his 
agency  derive  any  benefit  whatever 
without  the  sanction  or  knowledge  of 
iiis  principal;"  Re  Englefield  Colliery 
Co.,  L.  R.  8  Ch.  D.  388  (1878);  Emma 
Silver  Min.  Co.  v.  Lewis,  L.  R.  4  C.  P.  D, 
396  (1879),  where  the  mining  experts  of 
the  corporation  were  compelled  to  dis- 


gorge; Re  Carriage,  etc.  Assoc,  L.  R. 
27  Ch.  D.  322  (1884);  iJeDrum,  c^tc.  Co., 
53  L.  T.  250  (1885).  where  the  party  gave 
money  to  the  directors.  See  also  Madrid 
Bank  v.  Pelly,  L.  R.  7  Eq.  442  (1869), 
where  the  directors  were  held  liable  for 
the  money  received  by  them,  but  for 
no  more;  Nant-y-Glo,  etc.  Co.  r.  Grave, 
L.  R.  12  Ch.  D.  738  (1878).  holding  that 
the  corporation  may  sue  herein  the 
same  as  a  liquidator;  Mitcalfe's  Case. 
L.  R.  13  Ch.  D.  169  (1879),  where  a  di- 
rector was  held  liable  for  the  market 
value  of  stock  given  to  him  by  the  per- 
son to  whom  the  stock  was  issued  as 
full  paid  in  consideration  of  property. 
There  was  no  evidence  that  the  di- 
rector acted  unfairly  or  acted  as  a 
promoter.  He  was  held  liable,  although 
he  had  sold  part  of  the  stock.  The  sec- 
retary need  not  give  up  a  profit  which 
he  made  as  one  of  the  promoters.  Sale, 
etc.  Gardens,  Ltd.,  78  L.  T.  Rep.  368 
(1898),  rev'g  77  L.  T.  Rep.  681.  Where 
the  directors  vote  money  to  a  promoter, 
and  he  invests  it  in  the  company's  de- 
bentures and  divides  them  among  the 
directors,  the  latter  must  refund  the 
money  so  voted,  and  cannot  offset  a 
debt  due  to  them  from  the  company. 
Re  Anglo-French  Co-op.  Soc,  L.  R.  21 
Ch.  D.  492  (1882).  Money  paid  to  di- 
rectors by  the  person  selling  to  the  com- 
pany, in  order  to  induce  them  to  be- 
come directors,  cannot  be  retained.  Re 
Brighton  Brewery  Co.,  37  L.  J.  (Ch.)  278 
(1868).  Where  the  company's  agent,  in 
negotiatingacontract,  procures  a  larger 
sum  for  the  company  than  it  demands, 
on  a  secret  agreement  that  it  should 
pay  him  the  increase,  he  cannot  collect 
it.  Re  Owens,  Ir.  Rep.  7  Eq.  235.  424 
(1873).  Where  the  owners  of  property, 
the  promoters,  the  directors,  and  the 
solicitor  sold  to  the  company  property 
the  title  to  which  was  bad,  and  divided 
the  proceeds,  each  was  made  to  repay 
the  amount  received   by  him.     Phos- 


1467 


§  650.] 


FRAUDS    OF    DIRKCTORS,  PROMOTERS,  ETC,  [CH.  XXXII. 


the  company  and  procuring  the  purchase  of  his  lands,  there  being 
no  fraud  or  concealment  in  the  matter.' 

Even  though  a  party  purchases  property  and  makes  a  partial  pay- 
ment thereon,  yet,  where  he  then  proceeds  to  form  a  corporation 
and  controls  the  corporation,  and  acts  as  a  director  in  taking  over 
the  property  at  a  largely  increased  price,  the  corporation  may  com- 
pel him  to  turn  over  to  it  all  the  profit  he  has  made  by  the  trans- 
action.^   In  any  case,  unless  all  persons  interested  are  fully  informed 


phate  Sewage  Co.  v.  Hartniont.  L.  R  5 
Ch.  D.  394  (1877).  And  see  many  Eng- 
lish cases  in  Healey,  Company  Law  and 
Pr.,  pp.  543, 544.  Directors  will  be  com- 
pelled, upon  the  dissolution  of  the  com- 
pany,  to  pay  to  it  the  |)ar  value  of  stock 
which  has  been  presented  to  them  by 
the  promoters  in  order  to  induce  them 
to  act  as  directors,  even  though  the  ar- 
rangement was  known  to  all  stock- 
holders, it  appearing  that  stock  had 
been  offered  to  the  public  without  men- 
tion of  these  facts,  although  the  public 
did  not  subscribe  for  any  of  the  stock. 
So  far,  however  as  the  contract  be- 
tween the  promoter  and  the  company 
disclosed  the  facts,  the  directors  were 
protected.  Re  Postage  Stamp,  etc.  Co., 
[1892J  3  Ch.  566.  Where  a  director  is 
required  to  hold  a  certain  amount  of 
stock,  and  he  takes  that  stock  with  a 
secret  agreement  by  which  the  j^ro- 
moter  is  to  purchase  the  stock  from 
the  director  at  a  certain  price  when- 
ever the  director  so  desires,  and  after 
the  company  becomes  insolvent  the  di- 
rector sells  the  stock  to  the  promoter 
at  such  price  and  receives  the  money, 
the  director  may  be  compelled  to  turn  in 
the  money  to  the  corporation.  Re  North 
Australian,  etc.  Co.,  [1892J 1  Ch.  322.  Di- 
rectors who  have  been  obliged  to  repay 
money  which  they  and  others  received 
for  turning  over  the  assets  of  the  com- 
pany to  another  compaiiy,  they  having 
no  interest  which  could  legally  be  the 
subject  of  such  sale,  cannot  recover  back 
from  such  other  persons  the  amount  paid 
by  the  latter.  There  can  be  no  contribu- 
tion demanded  by  a  joint  tortfeasor. 
Gilbert  v.  Finch,  173  N.  Y.  455  (1903). 

1468 


1  Dexter  v.  McClellan,  116  Ala.  37 
(1897).  Where  one  company  buys  out 
another,  the  former  may  agree  to  pay 
a  certain  sum  to  the  directors  and  sec- 
retary of  the  latter  "as  compensation 
for  loss  of  office."  This  agreement  is 
legal  r€  the  stockholders  of  the  selling 
company  ratify  the  same.  The  notice 
of  a  meeting  of  the  stockholders,  how- 
ever, to  ratify  such  an  agreement,  must 
specify  such  payment,  in  addition  to 
stating  that  the  object  of  the  meeting 
is  to  ratify  the  agreement  generally.  A 
circular  subsequently  senttotiie  stock- 
holders referring  to  the  payment  to  the 
directors  and  secretary  is  not  sufficient, 
even  though  it  was  sent  before  the 
meeting  was  Iield.  Kaye  r.  Croydon, 
etc.  Co..  [1898]  1  Ch.  358.  Even  though 
the  purchaser  of  land  from  a  corpora- 
tion has  agreed  to  pay  a  director  one- 
half  of  the  net  profit  such  purchaser 
might  make  in  case  the  director  resold 
the  land,  yet  if  the  director  did  not  vote 
for  the  sale  and  a  full  disclosure  was 
made  to  the  board,  and  the  price  re- 
ceived is  the  full  value  thereof,  and  the 
company  was  in  liquidation,  a  profit 
thereafter  received  by  the  director  does 
not  belong  to  the  corporation.  Teni- 
son  V.  Patton,  67  S.  W.  Rep.  92  (Tex. 
1902).  A  commission  paid  to  a  director 
on  the  purchase  of  land  by  the  company 
does  not  invalidate  a  purchase-money 
mortgage  where  there  was  no  fraud 
and  the  fact  was  known  to  the  direct- 
ors. Blood  V.  La  Serena,  etc.  Co.,  134 
Cal.  361  (1901). 

'^  The  only  way  he  could  have  avoided 
this  result  would  have  been  by  making 
a  full  disclosure  of  all  the  facts,  and  by 


CH.  XXXIX.]  FRAUDS    OF    DIRECTORS,  PROMOTERS,  ETC. 


[§  650. 


of  the  facts  and  assent  thereto,  the  promoter,  director,  or  vendor 
may  be  brought  to  account.'  Thus,  a  person  who  agrees  with  the 
owner  of  patent-rights  to  form  a  corporation  to  bu}'^  them  is  a  pro- 


furnishing  the  company  with  a  board 
of  directors  capable  of  forming  a  com- 
petent and  impartial  judgment  as  to 
the  wisdom  of  the  purchase  and  the 
price  to  be  paid.  The  company  may 
enjoin  him  from  voting  or  selling  stock. 
Plaquemines,  etc  Co.  v.  Buck,  53  N.  J. 
Eq.  219  (1893). 

1  Where  the  promoters  paid  to  a  per- 
son who  was  to  act  as  chairman  of  the 
directors,  and  his  firm  who  underwrote 
10,000  shares,  a  commission  of  12,000 
shares,  the  court  held  that  10,000  of  the 
12,000  was  for  the  use  of  his  name,  and 
only  2,000  shares  for  the  commission, 
and  hence  he  was  liable,  at  the  instance 
of  an  investor  in  the  stock,  to  pay  to 
the  corporation  the  difference  between 
the  amount  paid  for  the  stock  and  its 
actual  value  the  day  after  an  allotment, 
the  transaction  not  being  fully  disclosed 
in  the  prospectus.   A  clause  in  the  pros- 
pectus that  there  "  may  "  be  various 
trade  contracts  and  business  arrange- 
ments and  underwriters'  agreements, 
followed  by  the  usual  waiver  as  to  them, 
does  not  apply  to  such  a  contract,  inas- 
much as  the  word  •'  may ''  was  mislead- 
ing.   Cackett  v.  Keswick.  85  L.  T.  Rep. 
14  (1901).     As  regards  the  duties  and 
liabilities  of  a  promoter,  pure  and  sim- 
ple, see  the  next  section.     That  a  di- 
rector is  disqualified  to  buy  for  the  cor- 
poration from  himself,  see  §  652,  infra. 
The  cases  now  under  consideration  in- 
volve a  combination  of  frauds.     Thus, 
where  the  owner  of  property  agrees 
with  two  persons  that  if  they  form  a 
company  to  purchase  the  property  he 
will  secretly  pay  them  a  certain  amount, 
and  they  form  a  company  and  act  as  a 
minority  of  the  directors,  and  it  pur- 
cliases  the  property  even  at  a  fair  valua- 
tion, the  court,  upon  corporate  insolv- 
ency, will  refuse  to  allow  the  two  per- 
sons their  salaries  and  will  declare  their 
agreement  to  be  a  fraud.    Re  Hereford. 


etc.  Co.,  L.  R  2  Ch.  D.  621  (1876).   Where 
the  directors,  who  were  also  promoters, 
had  purchased  property  before  the  com- 
pany was  formed,  and  then  sold  to  the 
com  pan}'  at  an  advance,  and  induced 
the  public  to  subscribe  by  representa- 
tions that  the  price  paid  v^-as  the  orig- 
inal price  paid  by  them  to  the  original 
vendors,  they  must  pay  the  secret  profit 
to  the  company.   Simons  u  Vulcan,  etc. 
Co.,  61  Pa.  St.  202  (1869).     Where  the 
directors  had  purchased  property  before 
the  company  was  formed,  and  then  a& 
directors  bought  it  for  the  company  at 
an  advance,   the    title  passing   direct 
from  the  first  vendor  to  the  company, 
and  the  directors'  interest  being  con- 
cealed, the  court  held  the  directors  lia- 
ble to  the  company  for  their  profit,  the 
suit    being    brought  by   stockholders. 
Hichens  v.  Congreve,  1  Russ.  &  M.  150 
(1829).    Under  similar  facts  and  to  same 
effect.  Benson  u  Heathorn,  1  Y.  &  C. 
326  (1842).     A   stockholder  cannot   re- 
scind a  subscription  for  fraud  where  a 
person  purchased  a  patent  outright  on 
condition   that  he  could  resell  it,  and 
then  proceeded  to  promote  and  organ- 
ize a  company  and  to  sell  to  it  the  pat- 
ent at  an  advanced  price,  even  though 
he  was  a  director,  it  being  clearly  known 
to  all  that  he  owned  and  sold  the  pat- 
ent as  his  own.     Cover's  Case,  L.  R.  1 
Ch.  D.  182  (1875).    Where  parties  pur- 
chase property  and  agree  absolutely  to 
pay  therefor  themselves,  and  not  by  the 
issue  of  the  stock  of  a  corporation  to  be 
formed,  or  by  the  money  of  that  corpo- 
ration, the  fact  that  they  intend  to- and 
do  then  form  a  company  to  buy  the 
property  from  themselves  at  an  advance 
does  not  render  them  liable  to  the  com- 
pany for  the  profit.  If  they  had  formed 
the  company  partially  or  completely  be- 
fore they  purchased,  the  case  might  be 
different.     The   court  referred  to  the- 
word  "promoters,"  but  only  to  refuse 


1469 


§  651.] 


FEAUDS    OF    DIRECTORS,  PROMOTERS,  ETC.  [OH.  XXXII. 


moter,  and  is  liable  to  give  up  a  secret  gift  given  to  him  by  the 
patentee,  especially  where  such  promoter  was  a  director  wlK-n  the 
purchase  was  made  by  the  company.'  A  secretary  is  not  liable  as 
a  promoter  even  though  he  accepts  a  gift  from  the  promoter.- 

§651.  Promoters' frauds  on  the  corporation. —  A  promoter  is  a 
person  who  brings  about  the  incorporation  and  organization  of  a 
corporation.  He  brings  together  the  persons  who  become  inter- 
ested in  the  enterprise,  aids  in  procuring  subscriptions,  and  sets  in 
motion  the  machinery  which  leads  to  the  formation  of  the  corpo- 
ration itself.^    The  supreme  court  of  the  United  States  says:  "  The 


to  use  it  on  account  of  its  indefinite- 
ness.  One  of  the  parties  pui'chasing  the 
mine  and  afterwards  selling  to  the  com- 
pany was  a  director  in  the  hitter  at  the 
time  of  purchase.  The  right  to  rescind 
was  barred  by  the  fact  that  the  com- 
pany had  lost  the  property,  a  Jeaseliold, 
by  non-payment  of  rent.  Lady  well  Min. 
Co.  V.  Brookes.  L.  R.  35  Ch.  D.  400  (ls87). 
It  is  to  be  borne  in  mind  in  all  transac- 
tions of  this  kind  that  the  objections 
mentioned  above  may  be  obviated  by 
the  unanimous'  consent  of  the  stock- 
holders or  hy  their  acquiescence  or  par- 
ticipation with  knowledge,  all  of  which 
is  considered  in  §  662  and  ch.  XLIV, 
infra. 

J  Yale  Gas  Stove  Ca  v.  Wilcox,  64 
Conn.  101  (1894). 

■^  Re  Sale,  eta  Co.,  78  L.  T.  Rep.  368  ' 
(1898). 

^  Quoted  and  approved  in  Burbank  v. 
Dennis,  101  Cal.  90  (1894).  An  interest- 
ing description  of  the  "promoter'*  is 
given  by  Judge  Lurton,  in  McMullen  v. 
Ritchie,  64  Fed.  Rep.  253,  200  (1894),  as 
follows:  "  He  was  a  man  of  great  abil- 
ity, enormous  energy,  and  a  towering 
ambition  for  great  enterprises.  As  a 
promoter  or  'boomer'  he  seems  to  be 
unrivaled;  a  man  of  large  general  in- 
formation and  robust  constitution,  ex- 
traordinarily sanguine,  desperately  pug- 
nacious, generous  as  a  prince,  and  pos- 
sessing no  degree  of  caution  whatever. 
His  ambition  was  to  make  millions." 
Great  difficulty  is  experienced  in  deter- 
mining who  is  and  who  is  not  a  promoter. 
An  old  English  statute  defined  a  pro- 

14 


moter  as  "every  person  acting,  by  what- 
ever name,  in  the  forming  and  establish- 
ing of  a  com|iany  at  any  period  prior  to 
tlie  company  "  being  fully  incorporated 
(7  &  8  Vict,  0.  110,  §3).  Other  definition.s 
are,  "one  who  undertakes  to  form  a 
company  with  reference  to  a  given 
project  and  to  set  it  going,  and  wlio 
takes  the  necessary  steps  to  accomplisii 
that  purpose."  Twycross  r.  Grant,  L. 
R.  2  C.  P.  D.  460,  541  (1877);  Bagnall  v. 
Carlton,  L.  R.  6  Ch.  D.  371,  381,  382,  407 
(1877).  See  also  New  Sombrero  Co.  v. 
Erlanger,  L.  R  5  Ch.  D.  73,  118  (1877); 
Erlanger  r.  New  Sombrero  Co.,  L.  R.  3 
App.  Cas.  1218,  1208  (1878);  Whaley 
Bridge,  etc.  Ca  v.  Green.  L.  R.  5  Q.  B. 
D.  Ill  (1879);  Emma  Silver  Min.  Co.  r. 
Lewis.  L,  R.  4  C.  P.  D.  396,  407  (1879), 
where  Lindley,  J.,  said:  "The  term 
'l^romoter'  involves  the  idea  of  exer- 
tion for  the  fiurpose  of  getting  up  and 
starting  a  company  (of  what  is  called 
'floating  '  it),  and  also  the  idea  of  some 
duty  towards  the  company  imposed  by 
or  arising  from  the  position  which  the 
so-called  promoter  assumes  towards  it." 
See  also  Re  Great  Wheal  Polgooth,  32 
W.  R.  107  (1883),  holding  that  the  solic- 
itor was  not  a  promoter;  Re  Great 
Western,  etc.  Co.,  L.  R  31  Ch,  D.  496 
(1886),  practically  overruling  Ex  parte 
Valpy,  L.  R  7  Ch.  App.  289  (1872).  But 
see  Tyrrell  v.  Bank  of  London,  10  H.  L. 
Cas.  26  (1862).  An  agent  of  a  person 
selling  property  to  the  corporation  may 
also  be  a  promoter  of  the  latter  and  lia- 
ble as  such.  Lydney,  etc.  Co.  v.  Bird. 
L.  R  33  Ch.  D.  85  (1886),  reversing  L.  R 
70 


OB.  XXXIX.]  FRAUDS    OF    DIRECTORS,  PROMOTERS,  ETC. 


[§  <"51. 


promoter  is  the  agent  of  the  corporation  and  subject  to  the  disabil- 
ities of  an  ordinary  agent.  His  acts  are  scrutinized  carefully,  and 
he  is  precluded  from  taking  a  secret  advantage  of  the  other  stock- 
holders."^ A  person  who  procures  subscriptions  and  aids  in  organ- 
izing the  company  and  frames  the  papers  and  manages  the  procuring 
of  options  and  the  vesting  of  title  is  a  promoter,  even  though  he  is  also 
a  subscriber.^  A  trust  company  may  be  liable  in  connection  with  the 
issue  of  stock,  where  it  issues  receipts  for  the  same  and  it  turns  out 
that  by  reason  of  liens  on  the  stock  the  stock  itself  is  Avorthless.^ 

It  is  legal  for  persons  to  contract  to  form  a  corporation  and  to 
provide  for  its  future  management  and  control.*  But  it  is  not  legal 
for  promoters  to  cause  the  board  of  directors  to  vote  stock  to  such 
promoters  for  services  already  performed.'  A  promoter  is  con- 
sidered in  law  as  occupying  a  fiduciary  relation  towards  the  cor- 
poration. He  is  an  agent  of  the  corporation,  and  is  subject  to  the 
disabilities  of  such.  There  are  two  classes  of  cases  in  which  he 
may  be  guilty  of  a  breach  of  his  duties  to  the  company. 

First,  where  he  sells  property  to  the  corporation.  It  he  purchased 
the  property  before  he  began  promoting  the  company,  he  may  sell 
to  the  company  at  an  advance  without  disclosing  his  profit.^     But 


31  Ch.  D.  328.  For  other  definitions, 
see  Ladywell  Min.  Co.  v.  Brookes,  L.  E. 
35  Ch.  D.  400  (1887);  Healey,  Company 
Law  and  Pr.  (3d  ed.\  p.  35.  In  Emma 
Silver  Min.  Co.  v.  Grant,  L.  R  11  Cli. 
D.  918  (1879),  a  promoter  is  defined  as 
"  a  trustee,  agent,  or  person  in  a  fiduci- 
ary position  as  regards  the  company; 
one  who  has  undertaken  a  duty  towards 
the  company  of  such  a  character  as  in- 
capacitates liim  from  making  a  secret 
profit  at  the  expense  of  the  company." 
No  doubt  a  very  little  will  make  people 
promoters  of  a  company,  if  it  can  be 
seen  that  they  were  really  doing  some- 
thing in  the  way  of  speculation  for 
their  own  interest  and  not  acting  merely 
as  agents  for  others.  Glasier  v.  Rolls, 
L.  R.  42  Cli.  D.  436  (1889).  A  banker  is 
not  a  promoter.  Re  Imperial  Land  Co., 
L.  R  10  Eq.  Cas.  298  (1870).  Where  a 
mining  company  is  practically  reor- 
ganized by  selling  out  to  a  new  and 
larger  company  having  the  same  direct- 
ors, and  the  stock  is  sold  to  the  public, 
if  the  prospectus  discloses  all  the  facts 
e.\ceptihg  the  amount  of  profit  which 
one  of  the  directors  made  as  a  stock- 


holder in  the  former  company,  he  is  not 
liable  to  the  new  company  for  such 
profit  as  a  promoter  thereof,  although 
it  might  have  been  ground  for  rescind- 
ing the  contract  of  purchase.  Re  Lady 
Forrest,  etc..  [19011  1  Ch.  582. 

1  Dicker  man  v.  Northern  T.  Co.,  176 
U.  S.  181.  204  (1900',  citing  §  651,  supra. 

2  Woodbury,  etc.  Co.  v.  Loudenslager, 
55  N.  J.  Eq.  78  (1896). 

SMcClure  v.  Central  Trust  Co.,  165 
N.  Y.  108  (1900). 

*  King  V.  Barnes,  109  N.  Y.  267  (1888). 

6  Where  a  company  issues  fully  paid- 
up  stock  to  parties  in  payment  for 
services  rendered  to  the  company  in  its 
formation,  and  in  establishing  its  busi- 
ness, such  persons  are  liable  on  such 
stock  as  unpaid  stock,  if  the  company 
becomes  insolvent.  Re  Eddystone,  etc. 
Ins.  Co.,  [1895]  1  Ch.  771.  See  also  §  46, 
.'iupra, 

•>  A  person  who  buys  property  at  a 
foreclosure  sale  and  then  organizes  a 
company  to  take  it  over,  and  who  dis- 
closes the  price  which  he  paid  at  sucb 
sale,  should  disclose  the  fact  that  he 
had  previously  bought  a  part  of  the 


1471 


§  651.] 


FRAUDS    OF   DIRECTORS,  PROMOTERS,  ETC.  [CH.  XXXIX. 


where  the  promoter  obtains  merely  an  option  on  property  and  then 
causes  a  company  to  be  formed  to  which  he  sells  it  at  a  profit,  with- 
out disclosing  the  amount  of  that  profit,  he  is  liable  in  damages  to 
subscribers  for  the  stock.^   He  is  liable  also  to  the  corporation  itself. 


mortgage  bonds  of  the  bankrupt  com- 
pany and  had  made  a  profit  thereby. 
Re  Olympia,  Limited,  [1898]  2  Ch.  153. 
A  person  who  purchases  land  and  partly 
pays  therefor  may  afterwards  cause  a 
corporation  to  be  organized  to  purchase 
the  land  at  a  higher  figure,  and  is  not 
liable  to  the  corporation  for  the  profit 
if  there  was  no  concealment  of  the  fact. 
He  may  also  legally  pay  a  commission 
to  parties  to  induce  them  to  subscribe 
for  stock.  The  fact  that  he  was  a  di- 
rector in  the  corporation  does  not  neces- 
sarily change  the  rule.  Milwaukee,  etc. 
Co.  V.  Dexter,  99  Wis.  214  (1898).  Per- 
sons owning  land  may  form  a  corpora- 
tion and  may  sell  such  land  to  the 
corporation  for  more  than  they  paid  for 
it.  Spauiding  i\  North  Milwaukee,  etc. 
Co.,  106  Wis.  481  (1900);  54  Atl.  Rep.  254. 
1  In  Brewster  v.  Hatch,  123  N.  Y.  349 
(1890),  the  plan  adopted  was  as  follows: 
The  promoters  took  an  option  for  which 
they  gave  $"),000,  and  by  whi9h  they 
had  the  privilege  of  purchasing  certain 
mines  at  any  time  within  four  months 
for  .$135,000.  This  agreement  is  set  forth 
in  the  case.  They  then  issued  a  pros- 
pectus to  the  public,  soliciting  subscrip- 
tions to  a  coi"poration  thereafter  to  be 
formed  to  purchase  the  mines  for  all 
its  capital  stock,  which  was  to  be 
$1,500,000.  The  stock  was  offered  to 
the  public  at  forty  cents  on  the  dollar. 
Subscriptions  for  $610,000  par  value 
w^ere  received,  netting  $244,000.  The 
corporation  was  then  formed,  the  pro- 
moters making  themselves  directors, 
and  the  above  plan  carried  out.  A 
subscriber  then  sued  the  promoters  for 
damages.  The  court  held  that  the 
plaintiff  could  recover.  The  defend- 
ants were  not  mere  vendors  of  the 
fctock.  The  fatal  defect  seems  to  have 
been  in  the  fact  that  the  promoters  did 
not  buy  the  property  before  offering 

14' 


the  stock.  On  the  contrary  they  merely 
obtained  options,  and  would  have  aban- 
doned them  if  the  stock  had  not  been 
taken.  Moreover  they  placed  the  stock 
before  the  corporation  was  organized. 
All  this  made  them  fiduciary  agents  of 
the  subscribers.  If  they  had  been  in- 
trinsically vendors  of  the  stock,  it  was 
admitted  that  they  would  not  have 
been  liable.  In  the  case  of  Franey  v. 
Warner,  96  Wis.  222  (1897),  where  pro- 
moters purchased  land  for  $32,727  and 
sold  it  to  the  corporation  for  $45,000 
without  divulging  the  profit,  the  court 
held  that  a  stockholder  could  not  re- 
scind his  subscription,  inasmuch  as  the 
corporation  was  innocent,  but  that  he 
might  have  a  judgment  against  the 
promoters  for  his  pro  rata  sliare  of  the 
profit.  See  also  Franey  v.  Wauwatosa 
Park  Co.,  99  Wis.  40  (1898>.  A  person 
holding  an  option  right  to  purchase 
land  for  $6,000  may  cause  a  corpora, 
tion  to  be  organized  to  purchase  such 
land  for  $8,500,  thereby  giving  a  profit 
to  the  promoter,  for  which  the  com- 
pany may  issue  to  him  its  stock,  it  being 
known  in  advance  that  such  promoter 
was  the  owner  of  such  option  and  would 
sell  the  same  at  that  price.  Richard- 
son r.  Graham,  45  W.  Va.  134  (1898).  In 
South  Joplin  Land  Co.  v.  Case,  104  Mo. 
572  (1891),  it  was  held  that  a  person 
who  secures  an  option  on  a  property 
with  a  view  to  organizing  a  corpora- 
tion and  selling  the  property  to  it,  and 
who,  together  with  another  person  em- 
ployed by  him,  forms  the  company  and 
places  the  stock  on  representations  that 
the  property  cost  $2,000  more  than  it 
actually  did,  and  also  that  certain 
notes  would  be  included  in  the  sale, 
but  after  the  company  is  organized  in- 
forms the  stockholders  that  the  notes 
were  not  included,  though  they  were 
received  by  himself,  is  accountable  to 


CH.  XXXIX.]  FRAUDS    OF   DIKECTOKS,  PKOMOTEKS,  ETC. 


[§  651. 


and  this  liability  may  be  even  greater  than  any  actual  profit  re- 
ceived by  him,  especially  where  stock  was  issued  to  him  and  the 
corporation  has  become  insolvent.  He  may  then  be  liable  for  the 
actual  original  value  of  the  stock.^     So  also  if  he  purchased  after 


the  corporation  for  the  profits  thus  re- 
alized  by  himself,  as  he  occupied   a 
position  of  trust  towards  the  subscrib- 
ers, and  could  not  make  secret  profits 
out  of  the  transaction.     The  court  said 
that  persons  who  "  project  and  form  a 
corporation,  by  soliciting   and  procur- 
ing others  to  subscribe  for  and  take 
shares  of  stock,  for  the  purpose  of  sell- 
ing or  turning  over  to  the  company  prop- 
erty whicli  they  own,  or  have  a  right 
to  acquire  by  executory  contract,  do 
occupy  a  double  position.     On  the  one 
hand  they  represent  their  own  interest 
in  respect  of  the  disposition  of  the  prop- 
erty; on  the  other,  they  represent  the 
proposed  corporation."    The  court  also 
said  that  a  vendor  is  a  promoter,  and  is 
bound  to  protect  the  interests  of  those 
who  ultimately   constitute   the   com- 
pany "  if  he  assumes  to  act  for  them,  or 
if  he  induces  them  to  trust  him,  or  to 
trust  persons  who  are  under  his  con- 
trol and  who  are  practically  himself  in 
disguise.     He  also  assumes  such  duty  if 
he  calls  the  company  into  existence  in 
order  that  it  may  buy  what  he  has  to 
sell;  but  he  does  not  assume  such  duty 
by  negotiating  with  persons  who  have 
themselves  assumed  that  duty,  and  who 
are  in  no  way  under  his  influence." 
Where  the  person  holding  an  option  for 
the  purchase  of  a  mine  represents  that 
he   is  to  pay  a  certain  price  for   the 
mine,  and  induces  parties  to  form  a 
corporation  and  to  have  the  corpora- 
tion purchase  the  mine  at  that  price, 
the  corporation  may  rescind  the  con- 
tract if  the  actual  price  paid  by  such 
person  was  much  less.     But  the  corpo- 
ration cannot  recover  back  its  expenses. 
Cortes  Co.  v.  Thannhauser,  45  Fed.  Rep. 
730  (1891).    An  owner  of  land  who  gives 
an  option  thereon  to  an  irresponsible 
party  and  then  aids  the  latter  in  form- 
ing a  corporation  to  take  over  the  land 


for  stock  and  acts  as  one  of  the  direct- 
ors, is  a  promoter  of  the  corporation 
and  is  liable  to  parties  who  purchase 
the  stock  on  misrepresentations  as  to  the 
transaction,  but  is  to  be  credited  with 
the  actual  value  of  the  property.  Hay- 
den  V.  Green,  71  Pac.  Rep.  236  (Kan. 
1903).  Where  promoters  having  an  op- 
tion on  land  obtain  subscribers  to  the 
stock  of  a  proposed  corporation  on  a 
prospectus  stating  that  the  land  was 
worth  $230,000,  and  that  it  would  only 
cost  $175,000,  and  it  turns  out  that  the 
promoters  realized  a  secret  profit  of 
$30,000  from  the  $175,000,  a  subscriber 
to  the  stock  is  not  bound  to  pay  unless 
he  has  ratified  the  transaction  with 
full  knowledge  of  the  facts,  even  though 
the  facts  do  not  come  to  his  knowl- 
edge for  a  long  time.  West  End,  etc. 
Co.  V.  Nash,  41  S.  E.  Rep.  182  (W.  Va. 
1902) ;  88  L.  T.  Rep.  123. 

1  Where  promoters  pay  out  less  than 
$30,000  to  secure  options  on  land  and 
then  sell  the  options  to  a  corporation 
for  $700,000  of  stock  of  the  latter,  the 
corporation  assuming  the  purchase  price 
of  the  land,  and  then  issue  a  prospectus 
which  is  misleading  and  does  not  state 
the  facts  about  the  issue  of  stock,  and 
the  corporation  becomes  insolvent,  they 
are  liable  to  the  corporation  for  the  fair 
market  value  of  the  stock  at  the  time 
the  stock  was  issued,  or  as  soon  there- 
after as  it  had  a  market  value.    The 
liability  is  not  for  unpaid  stock,  but  for 
fraud  as  promoters  in  making  a  secret 
profit  in  services  and  not  making  a  full 
disclosure    to    the    stockholders.     The 
promoters  owe  a  duty  to  future  stock- 
holders.  The  land  need  not  be  tendered 
back.   The  promoters  are  to  be  credited 
with  their  actual  disbursements  and  to 
be  charged  with  the  fair  market  value 
of  the  stock,  with  interest,  and  also 
with   dividends.     The   suit  should   be 


(93) 


1473 


§  651.] 


FRAUDS    OF    DIKEOTOKS,  PKOMOTEltS,  ETO. 


[cn. 


XXXIX 


he  began  promoting-  and  then  sold  to  the  company,  the  sale  is  valid 
only  when  he  informs  the  directors  that  the  property  belongs  to 
him,  and  when,  also,  the  directors  are  competent  and  impartial 
judges  as  to  whether  the  purchase  ought  or  ought  not  to  be  inade.^ 


brought  by  the  corporation  itself  and 
not  by  its  receiver,  according  to  the 
Massachusetts  decisions.  Hayward  v. 
Leeson,  17G  Mass.  810  (I'JOO).  A  pro- 
moter who  obtains  an  option  on  land, 
and  then  forms  a  corporation  to  pur- 
chase the  land  at  an  advanced  price 
without  disclosing;  his  profit,  is  liable  to 
the  corporation  for  such  profit,  and  if 
the  corporation  refuse  to  sue  for  it  a 
stockholder  may  bring suit.even  though 
other  stockholders  are  ncjt  in  a  ])osition 
to  complain.  Exter  v.  Sawyer,  146  Mo. 
302  (1898).  A  corporation  may  hold 
liable  in  damages  a  person  who  has  sold 
property  to  it  in  payment  for  stock 
where  the  corporation  was  induced  to 
make  the  purchase  by  false  representa- 
tions, even  though  such  false  representa- 
tions were  made  not  to  the  corporation 
but  to  its  promoters  before  the  incor- 
poration took  place.  Schoefield,  etc.  Co. 
V.  Schoefield,  71  Conn.  1  (1898).  Where 
a  person  obtains  an  option  on  land  at 
$2,500  an  acre  and  then  with  other 
persons  forms  a  corporation  and  sells  it 
to  the  corporation  at  $2,700  an  acre, 
payable  partly  in  cash  and  partly  by 
mortgage,  the  profit  being  concealed 
from  the  other  subscribers  to  the  stock, 
and  the  promoter  being  a  director  at 
the  time  of  the  purchase,  he  and  those 
who  co-operated  with  him  are  liable  to 
return  to  the  corporation  such  profit, 
but  such  liability  cannot  be  enforced  in 
a  suit  against  the  sureties  on  his  bond 
as  treasurer.  First,  etc  Co.  v.  Hilde- 
brand,  103  Wis.  530  (1899).  In  a  suit 
against  promoters  for  selling  to  a  cor- 
poration land  on  which  they  had  an  op- 
tion and  receiving  stock  in  payment,  in 
such  a  manner  that  they  pay  nothing 
for  the  stock,  a  defendant  who  is  not 
clearly  alleged  to  have  received  some 
of  the  stock  is  not  liable.  Pietsch  v. 
Krause,  112  Wis.  418  (1901).     Promoters 


who  obtain  an  option  and  then  sell  the 
property  to  a  corporation  at  a  secret 
profit  in  payment  for  stock  may  be 
held  liable  by  the  receiver  upon  the  in- 
solvency of  the  corporation  for  the  dif- 
ference between  what  they  paid  and 
what  they  received,  without  regard  to 
the  actual  value.  Central  T.  Co.  i\  East 
Tennessee,  etc.  Co.,  116  Fed.  Rep.  743 
(1902);  66  N.  &  Rep.  427. 

I  Erlanger  v.  New  Sombrero  Co.,  L. 
R.  3  App.  Cas.  1218  (1S78);  New  Som- 
brero Co.  V.  Erlanger,  L.  R.  5  Ch.  D.  73 
(1877);  Re  Coal,  etc.  Co.,  L.  R  20  Eq. 
114  (1875);  s.  a,  L.  R  1  Ch.  D.  182;  Lind- 
say  Petroleum  Co.  v.  Hurd,  L.  R  5  P.  C. 
221  (1874).  Promoters  of  a  corporation 
are  bound  to  the  exercise  of  j^ood  faith 
toward  all  the  stockholders,  to  disclose 
all  the  facts  relating  to  the  property, 
and  to  select  competent  persons  as  di- 
rectors, who  will  act  honestly  in  the 
interest  of  the  stockholders,  and  are 
precluded  from  taking  a  secret  advan- 
tage of  other  stockholders.  Dickerman 
V.  Northern  T.  Co.,  176  U.  S.  181  (1900). 
Even  though  all  the  directors  of  a  cor- 
poration organize  another  company  to 
buy  out  the  first-named  company,  and 
they  are  directors  in  the  second  com- 
pany also,  yet.  if  all  the  facts  are  fully 
stated,  the  sale  is  legal  and  the  new 
company  cannot  repudiate  the  sale  on 
that  ground.  Even  if  the  promoters 
stated  that  a  certain  part  of  the  plant 
was  in  full  operation,  yet,  if  there  was 
no  fraud  and  that  part  of  the  plant  was 
put  in  operation  soon  afterwards,  the 
court,  instead  of  setting  aside  the  sale, 
may  give  damages  for  the  delay.  Mis- 
representations, although  not  fraudu- 
lent, are  sufficient  ground  for  relief. 
The  fact  that  the  directors  are  not  in- 
dependent, but  represent  the  vendor,  is 
immatprial  if  that  fact  is  made  known 
to  the  parties     Lagunas,  etc.  Co.  Ltd. 


1474 


CH.  XXXIX.]  FRAUDS    OF    DIRECTORS,  PROMOTERS,  ETC. 


[§  651. 


Where  the  promoters  misrepresent  the  price  paid  by  them  for  prop- 
erty sold  by  them  to  the  company,  they  are  liable  to  the  company 


V.  Lagunas  Syndicate,  Ltd.,  [1899]  2  Ch. 
;{92.  But  where  a  person  purchases 
property  for  the  sole  purpose  of  creat- 
ing a  crorporation  to  take  it  over  from 
him  and  to  pay  him  therefor  an  ex- 
cessive price  in  cash  and  stock,  netting 
a  large  profit  to  him,  the  stock  being 
offered  to  the  public,  and  he  causes  the 
incorporation  to  be  made  and  directors 
to  be  named  who  are  his  dummies,  he 
is  a  promoter  and  can  be  held  liable  by 
such  corporation  for  tlie  profit  he  has 
made,  unless  he  fully  disclosed  in  a 
prospectus  the  fact  that  he  had  formed 
the  corporation  and  that  he  had  made 
such  profit.  Especially  is  this  the  rule 
where  the  prospectus  gave  a  false  im- 
pression. He  occupies  a  fiduciary  rela- 
tion towards  the  purchasers  of  the 
stock.  It  IS  immaterial  that  the  direct- 
ors approved  of  the  transaction  with 
full  knowledge.  Non-disclosure  in  such 
a  case  is  a  misfeasance  in  the  nature  of 
a  breach  of  trust.  Re  Leeds,  etc.,  87  L. 
T.  Rep.  488  (1903).  In  Emma  Silver 
Min,  Co.  V.  Grant,  L.  R.  11  Ch.  D.  918 
(1879),  the  promoter  was  compelled  to 
disgorge  a  gift  given  to  him  by  the 
vendors  of  a  mine  to  the  corporation, 
but  he  was  allowed  to  retain  therefrom 
his  disbursements.  It  is  immaterial 
that  the  sale  was  a  fair  one.  The  court 
said:  "He  must  let  his  company  know 
what  profit  he  has  taken,  and  deal  with 
them,  so  to  say,  at  arms'  length;" 
South  Durham  Iron  Co.  v.  Shaw,  14  W. 
N.  159  (1879);  Beck  n  Kantorowicz,  3 
K.  &  J.  230  (1857);  Whaley  Bridge,  etc. 
Co.  V.  Green,  L.  R.  5  Q.  B.  D.  109  (1879). 
holding  also  that  if  the  vendor  has  not 
yet  paid  the  money  to  the  promoter 
the  corporation  may  recover  it  from 
the  former;  Twy cross  v.  Grant,  L.  R.  2 
C.  P.  D.  469  (1877),  disapproving  Craig 
V.  Phillips,  L.  R.  3  Ch.  D.  723  (1876); 
Kent  V.  Freehold,  etc.  Co..  L.  R.  4  Eq. 
588  (1867).  Where  a  person  who  is  the 
owner  of  land  buys  options  on  adjoin- 

14 


ing  lands  and  takes  deeds  for  the  whole 
for  $66,000  (the  deeds  reciting  the  con- 
sideration as  $80,000),  and  then  sells  the 
same  to  a  corporation,  which  he  forms, 
for  $80,000  cash  and  $40,000  stock,  and 
then  divides  the  stock  among  the  stock- 
holders, keeping  the  cash  himself,  he  is 
liable  to  refund  to  the  corporation  his 
profit,  the  court  holding  open  the  ques- 
tion as  to  whether  he  was  liable  for 
the  profit  of  the  others.  Woodbury, 
etc.  Co.  V.  Loudenslager,  55  N.  J.  Eq.  78 
(1896).  In  Re  Hess  Mfg.  Co.,  23  S.  C.  of 
Can.  644.  658  (1894),  the  court  said  of  a 
promoter:  "It  was  incumbent  upon 
him  to  sell  the  land  for  no  excessive 
price;  he  was  bound  to  misrepresent 
nothing  which  could  influence  the 
company  in  determining  whether  to 
buy  or  not;  to  conceal  nothing  that  it 
was  material  should  be  known  in  order 
to  enable  them  to  form  a  sound  judg- 
ment on  that  question,  and  to  put  them 
in  possession  of  all  material  informa- 
tion. Further,  it  was,  above  all,  the 
duty  of  Dr.  Sloan,  as  a  vendor  sell- 
ing property  to  a  company  towards 
which  he  stood  in  a  fiduciary  relation, 
to  see  that  the  executive  management 
of  the  company  was  in  the  hands  of  a 
thoroughly  independent  board  of  di- 
rectors, a  board  over  which  he  could 
exercise  no  influence,  and  which  would, 
as  the  expression  is,  keep  him  at  '  arms' 
length 'in  making  the  bargain."  But 
the  court  held  that  the  promoter  is  not 
liable  unless  the  company  rescinds  and 
restores  whatever  it  has  received.  In 
this  case  the  court  stated  that  although 
the  promoter  stands  in  a  fiduciary  re- 
lation to  the  company,  yet  that  he  is 
not  necessarily  a  trustee  of  property 
which  he  acquires  to  sell  to  the  com- 
pany: and  that  even  if  he  were,  the 
remedy  is  rescission  and  the  turning 
back  of  the  property  to  him.  In  Dens- 
more  Oil  Co.  V.  Densmore,  64  Pa.  St.  48 
(1870),  the  court  refused  to  hold  the  de- 
75 


§  651.] 


FKAUDS    OF   DIRECTORS,  PROMOTKRS,  ETC.  [CII.  XXXIX. 


for  their  profits,  even  though  the  property  is  worth  all  that  the 
company  paid  for  it.^ 

If  the  promoter  conceals  the  fact  that  he  is  selling  his  own  prop- 
erty to  the  company,  the  latter  may  rescind  the  sale;''  or,  if  the 


fendants  liable  who  owned  property 
and  formed  a  company,  and  sold  the 
property  to  the  company  at  a  profit, 
without  disclosing  the  original  price, 
but  witliout  misrepresenting  that  price. 
The  court  said,  however,  "  that  where 
persons  form  such  an  association,  or 
begin  or  start  the  project  of  one,  from 
that  time  tliey  do  stand  in  a  confiden- 
tial relation  to  each  other,  and  to  all 
others  who  may  subsequently  become 
members  or  subscribers;  and  it  is  not 
competent  for  any  of  them  to  purchase 
proi)erty  for  the  purpose  of  such  a  com- 
pany, and  then  sell  it  at  an  advance 
without  a  full  disclosure  of  the  facts. 
They  must  account  to  the  company  for 
the  profit,  because  it  legitimately  is 
theirs."  Wiiere  a  promoter,  after  the 
company  is  formed,  buys  land  for  $G,000 
and  sells  it  to  the  company  at  $12,000, 
and  represents  to  a  subscriber  for  stock 
that  the  land  cost  .$12,000  originally, 
the  stockholder  may  recover  from  the 
promoter  the  amount  paid  for  his  stock. 
Short  V.  Stevenson,  63  Pa.  St.  95  (1809). 
In  Rice's  Appeal,  79  Pa.  St.  168  (1875), 
where  a  promoter  elected  the  directors 
and  sold  property  to  the  corporation  at 
an  exorbitant  price,  taking  payment  in 
money,  stock,  and  bonds,  the  court  re- 
fused to  allow  the  bonds  upon  the 
winding  up.  In  McElhenny's  Appeal, 
61  Pa.  St.  188  (1869),  where  a  person 
bought  land  for  $2,000,  and  then  in- 
duced others  to  join  him  in  organizing 
a  company  to  purchase  it  for  $40,000 
after  he  had  sold  it  to  them  for  $12,000, 
is  liable  to  account  to  the  company  for 
his  part  of  the  $28,000  profit,  but  not 
for  his  $10,000  profit.  A  person  may 
purchase  property  and  then  proceed  to 
form  a  corporation  and  sell  the  prop- 
erty to  it  at  an  advanced  price.  He  is 
not  bound  to  disclose  his  profit,  nor  is 
he  liable  therefor  unless  he  makes  mis- 


representations.    Lungren   r.  Penneli, 
10  W.  N.  Caa.  297  (Pa.  1881). 

1  Burbank  v.  Dennis,  101  Cal.  90  (1894). 
Where  promoters  obtain  an  oi)tion  on 
property  for  $75,000,  and  organize  a 
company  for  $100,000  capital  stock,  and, 
as  directors  of  the  company,  with  other 
friendly  directors,  purchase  the  option 
for  $100,000.  and  sell  $75,000  of  the 
stock  at  par  and  thereby  liave  the  re- 
maining §2.5,000  of  stock  as  profit,  and 
the  purchasers  of  the  $75,000  of  stock 
supposed  that  the  actual  price  paid 
was  $100,000,  the  corporation  may  com- 
pel such  promoter  to  return  and  can- 
cel the  $25,000  of  stock,  and  it  is  imma- 
terial that  the  property  was  wortii 
$100,000,  the  actual  facts  not  having 
been  disclosed  to  the  corporation  or  its 
stockholders.  The  court  said:  "The 
promoter  of  a  company  stands  in  the 
relation  of  a  trustee  to  it  and  those 
who  become  subscribers  to  its  stock  so 
long  as  he  maintains  the  power  of  con- 
trol over  it."  Yeiser  v.  United  States, 
etc.  Co..  107  Fed.  Rep.  340  (1901). 

-  Lindsay  Petroleum  Co.  v.  Ilurd,  L. 
R.  5  P.  C.  221  (1874);  Erlanger  v.  New 
Sombrero  Co.,  L.  R  3  App.  Cas.  1218, 
aff'g  New  Sombrero  Phosphate  Co.  v. 
Erlanger,  L.  R  5  Ch.  D.  73  (1877);  Re 
Ambrose  Lake,  etc.  Co.,  L.  R  14  Ch.  D. 
390  (1880);  Re  Cape  Breton  Co.,  L.  R  29 
Ch.  D.  795  (1885).  But  not  if  the  com- 
pany is  unable  to  restore  the  property, 
where  the  disability  to  restore  it  is  due 
to  the  company  and  not  the  promoter. 
Western  Bank  v.  Addie,  L.  R  1  H.  L. 
Sc.  145  (1867);  Phosphate  Sewage  Co.  v. 
Hartmont,  L.  R.  5  Ch.  D.  394  (1877); 
Head  v.  Tattersall,  L.  R  7  Exch.  7 
(1871);  iJeCape  Breton  Co..  L.  R  29  Ch. 
D.  795  (1885).  The  company  may  re- 
scind as  to  part  if  the  transaction  is 
severable.  ^laturin  v.  Tredinnick,  2 
N.  R  514  (1863);  s.  C,  4  N.  R  15.  Where 


1476 


CH.  XXXIX.]  FRAUDS    OF   DIRECTORS,  PROMOTERS,  ETC. 


L§  651. 


promoter  was  a  promoter  at  the  time  he  purchased  the  property, 
the  company  may  recover  from  the  promoter  the  profit  made  by 
him.^  If  the  promoter  owns  the  property  at  the  time  of  forming 
the  company,  and  sells  it  to  the  company  at  an  advance  over  its 
cost  to  him,  and  then  induces  persons  to  subscribe  by  stating  that 
he  made  no  profit  thereby,  he  is  liable  in  equity  to  account  to  them 
for  the  injury  they  have  sustained.'^ 


a    mine  was  sold   to  a  company  for    ordered  canceled.    In  this  case  it  ap- 


$30,000,  the  promoters  representing 
that  they  did  not  have  any  interest 
therein,  and  it  afterwards  was  dis- 
covered that  they  received  $20,000  of 
the  price,  the  corporation  succeeded  in 
having  the  whole  purchase  set  aside 
and  the  $30,000  and  interest  and  ex- 
penditures refunded.  St.  Louis,  etc. 
Co.  V.  Jackson,  5  Cent.  L.  J.  317  (1877, 
St.  Louis  Ct.). 

1  Re  Cape  Breton  Co..  L.  R.  26  Ch.  D. 
221  (1884);  Lydney,  etc.  Co.  v.  Bird,  L. 
R  33  Ch.  D.  85  (1886),  reversing  L.  R,  31 
Cli.  D.  328;  Tyrrell  v.  Bank  of  London, 
10  H.  L.  Cas.  26  (1862);  Benson  v.  Hea- 
thorn,  1  Y.  &  C.  Ch.  326  (1842);  Emma 
Silver  Min.  Co.  v.  Grant,  L.  R  11  Ch.  D. 
918  (1S79):  Re  Ambrose  Lake,  etc.  Co., 
L.  R.  14  Ch.  D.  390  (1880). 

2  Getty  V.  Devlin,  54  N.  Y.  403  (1873); 
S.  C,  70  N.  Y.  504  (1877);  Getty  v.  Don- 
elly.  9    Hun,   603  (1877):    Brewster   v. 
Hatch,  10  Abb.  N.  Cas.  400  (1881);  aff'd, 
12  i  N.  Y.  349.  See  also  chs.  IX  and  XX, 
supra.     In  the  important  case  of  Ex- 
Mission,  etc.  Co.  V.  Flash,  97  Cal.    610 
(1893),  where  persons  purchased  land  at 
$5  an  acre  and  subsequently  proceeded 
to  organize  a  corporation  to  purchase 
it  at  $25  an  acre,  representing  to  the 
stockholders  that  $25  an  acre  was  the 
lowest  price  at  which  the  land  could 
be  purchased,  it  being  concealed  from 
the  stockholders  that  one  of  their  num- 
ber, a  large  subscriber,  was  interested 
in  the  contract,  and  that  the  organizers 
ot  the  corporation  were  his  agents,  the 
corporatioti  caused    to  be  set  aside  a 
mortgage  and  foreclosure  thereof  wiiich 
was  given  to  tlie  promoters  in  part  pay- 
ment for  such  land,  and  the  notes  were 


pears  that  the  representation  was  made 
that  $25  per  acre  was  the  lowest  price 
for  which  the  land  could  be  purchased, 
and  that  the  subscribers  came  "  in  on  the 
ground  floor  at  bedrock  figures."  Where 
a  prospectus  contained  a  material  mis- 
representation which  induced  a  person 
to  subscribe  he  may  maintain  a  suit  to 
rescind  the  subscription,  even  though 
the  prospectus  stated  that  there  were 
certain  contracts  not  mentioned  in  the 
prospectus  and    that  the    subscribers 
would  be  held  to  have  had  notice  of  tlie 
same,  and  even  though  the  subscrip- 
tion contract  contains  a  provision  that 
the  subscriber  has  notice  of  that  which 
in  fact  is  concealed   from  him.    The 
misrepresentation  in  this  instance  was 
a  misleading  and  ambiguous  statement 
and  also  the  non-disclosure  of  an  agree- 
ment to  which  the  promoter   was  a 
party,  such  agreement  not  relating  to 
the  formation  of  the  company  or  his 
subscription   to  its  stock.      The  court 
rescinded  the  subscription  and  held  the 
directors  personally  liable  for  loss  sus- 
tained by  the  subscriber.     Greenwooc^ 
V.  Leather,  etc.  Co.  Ltd.,  [1900]  1   Ch. 
421.    The  Solicitors'  Journal  (vol.  31, 
p.  740)  has  summarized  the  law  on  this 
subject:     "Where  the    promoter  had 
originally  bought,  not  for  himself,  but 
for  a  company  to  be  afterwards  formed, 
in  such  a  case  it  was  an  ordinary  in- 
stance of   purchase   by  an  agent,  and 
the  company  would  be  entitled  both  to 
keep  the  property  and  to  call  upon  the 
promoter  to  repay  the  profit  he  had 
made.     But   it   is  for  the  company  to 
prove  this  relationship  of  principal  and 
agent,  and  also  that  it  existed  at  the 


1477 


651.] 


FRAUDS    OF    DIRECTORS,  PROM«TERS,  KTC.  [CH.  XXXIX. 


Second,  a  promoter  may  commit  a  breach  of  trust  by  accepting 
a  commission  or  bonus  from  a  person  who  sells  property  to  the  cor- 


time  of  the  original  purchase.  Hence, 
where  this  is  not  shown,  the  above  rule 
does  not  apply,  not  even  although  the 
promoter  subsequently  becomes  a  di- 
rector of  the  company.  In  this  case  it 
is  his  duty  to  inform  the  company  of 
the  profit  he  is  making;  and  in  default 
they  are  entitled,  if  they  soclioose,  to  a 
rescission  of  the  contract.  But  they 
cannot  affirm  the  contract  and  also 
claim  the  profits;  and  if  rescission  of 
the  contract  has  become  impossible, 
they  seem  to  have  no  remedy  at  all." 
Where  a  promoter  to  whom  nearly  the 
entire  stock  has  been  issued  sells  a  part 
of  it  on  the  fraudulent  representation 
that  the  stock  belongs  to  the  company, 
and  then  causes  the  company  to  be 
wound  up  and  himself  to  be  released 
from  certain  subscriptions,  and  the 
property  to  be  sold  by  a  trustee  named 
by  him,  the  court  will  appoint  a  receiver 
at  the  instance  of  the  party  so  de- 
frauded, for  the  purpose  of  recovering 
back  the  property  of  the  company.  Du 
Puy  V.  Transportation,  etc.  Co.,  82  Md. 
438  (1896).  Where  the  promoters  repre- 
sented that  property  cost  them  $23,000, 
at  which  price  they  turned  it  in  to  the 
corporation,  and  as  a  fact  it  cost  them 
$1:3.000,  they  are  each  liable  for  the 
$10,000  profit,  even  though  they  did 
not  personally  make  the  representa- 
tions, a  conspiracy  being  shown.  Foun- 
tain, etc.  Co.  V.  Roberts,  92  Wis.  345 
(1896).  Where  promoters  have  a  right 
to  purchase  land  for  $31,000,  and  induce 
persons  to  join  with  them  to  form  a 
corporation  to  purchase  the  land  at 
$55,000,  and  represent  to  such  persons 
that  $55,000  is  what  tho  land  actually 
costs,  the  persons  so  induced  to  sub- 
scribe may  have  the  purchase  of  the 
land  rescinded.  Hebgen  v.  Koeffler,  97 
Wis.  313  (1897),  Where  a  promoter  mis- 
represents to  subscribers  the  cost  of 
property  which  is  to  be  and  is  sold  to 
the  corporation  for  cash,  the  corpora- 

14 


tion  may  rescind.  Limited  In  v.  Assoc. 
V.  Glendale  Inv.  As.soc.,  99  Wi&  54 
(1898).  In  Franey  V.  Wauwatosa  Park 
Co.,  99  Wis.  40  (1898).  the  subscription 
was  held  to  be  binding,  although  the 
promoters  were  individually  liable  to 
the  subscribers  for  the  profit  made  by 
the  promoters.  Where  i)romoters  repre- 
sent that  the  territorial  rights  which 
they  sell  to  a  corporation  cost  a  certain 
sum,  when  in  fact  one-half  of  that  sum 
went  to  them,  the  corporation  .may 
compel  them  to  pay  to  it  such  one-half. 
Cook  V.  Southern,  eta  Co.,  75  Miss.  121 
(1897).  Statements  that  a  large  part  of 
the  capital  stock  had  been  taken  by  the 
parties  themselves,  and  that  the  parties 
themselves  would  continue  the  man- 
agement of  the  concern;  concealment 
of  the  fact  that  a  large  quantity  of  the 
stock  was  to  be  issued  for  the  good-will 
of  the  business;  and  statements  lead- 
ing to  the  conclusion  that  all  sub- 
scribers for  stock  stood  on  an  equal 
footing, —  constitute  material  misrepre- 
sentations, and  will  sustain  a  rescission 
of  the  subscription  if  untrue.  Such 
statements  and  concealments  made  to 
agents  or  brokers  who  are  selling  stock 
are  the  same  as  though  made  to  the 
subscribers  for  the  stock.  Hence, 
where  partners  organize  a  corporation 
to  take  over  their  business,  each  of  the 
partners  is  liable  for  misrepresentations 
and  concealments  of  the  others  com- 
mitted while  engaged  in  promoting  and 
bringing  out  the  enterprise.  They  are 
liable  as  promoters.  Walker  v.  Anglo- 
Am.  etc.  Trust  Co.,  72  Hun,  334,  341 
(1893).  Where  the  chief  promoter  of  a 
proposed  manufacturing  corporation 
obtains  donations  from  property  owners 
to  the  proposed  corporation  on  his 
agreement  that  $75,000  of  stock  should 
be  subscribed  for  within  a  certain 
time  and  then  proceeds  to  organize  the 
company,  he,  himself,  subscribing  for 
$25,000  of  the  stock,  and  the  corpora- 
78 


CH.  XXXIX.]  FRAUDS    OF    DIKECTOKS,  PEOMOTERS,  ETC. 


[§  651. 


poration.  The  company  may  compel  a  promoter  to  turn  his  profit 
into  the  corporate  treasury,^  or  the  company  may  rescind  its  pur- 
chase of  the  property.- 

If  the  commission  or  bribe  paid  to  the  promoter  consisted  of 
sliares  of  stock,  then  the  compan}''  may  recover  from  him  the 
amount  received  by  him  upon  a  sale  of  the  shares  and  all  dividends 
previously  received,  together  with  interest;''  or,  if  he  still  holds  the 
shares,  the  company  may  recover  the  value  of  the  stock  together 
with  interest."*     The  party  who  sells  the  property  to  the  corpora- 


tion then  purchases  certain  worthless 
patents  and  agency  contracts  and 
issues  therefor  $63,250  of  full-paid 
stock,  including  the  $25,000  subscribed 
for  by  him,  and  'afterwards  the  cor- 
poration collects  $i,000  of  such  dona- 
tions and  borrows  money  from  such 
promoter  and  gives  him  a  mortgage 
therefor,  his  mortgage  is  not  good  as 
against  the  parties  who  donated  the 
$4,000.  Moore  v.  Universal,  etc  Co.,  122 
Mich.  48  (1899);  189  U.  S.  260. 

1  Where  the  promoters  receive  pay 
from  the  contractor,  such  pay  being  in 
excess  of  their  disbursements,  the  com- 
pany may  compel  them  to  turn  in  the 
amount  to  the  company,  although  all 
the  original  stockholders  and  directors 
knew  of  the  transaction.  Mann  v.  Edin- 
burgh, etc  Co.,  [1893j'a.  C.69;  Hichens 
V.  Congreve,  4  Russ.  562  (1828);  Beck  v. 
Kantorowicz,  3  K  &  J.  230  (1857);  Phos- 
phate Sewage  Co.  v,  Hartmont,  L.  R  5 
Ch.  D.  394  (1877);  Bagnall  v.  Carlton,  L. 
R.  6  Ch.  D.  371  (1877);  Emma  Silver 
Min.  Co.  V.  Grant,  L.  R.  11  Ch.  D.  918 
(1879);  Whaley  Bridge,  etc  Co.  v.  Green, 
L.  R  5  Q.  B.  D.  109  (1879),  holding  also 
that,  if  the  bonus  has  not  yet  been  paid 
to  the  promoter,  the  company  may 
claim  it  from  the  person  contracting 
with  it.  Cf.  Arkwright  v.  Newbold,  L. 
R.  17  Ch.  D.  301,  319  (1881);  Lydney, 
etc  Co.  V.  Bird,  L.  R  33  Ch.  D.  85  (1886), 
reversing  L.  R  31  Ch.  D.  328;  Albion, 
etc  Co.  V.  Martin,  L.  R  1  Ch.  D.  580 
(1875).  The  promoter  is  allowed  a  rea- 
sonable sum  for  disbursements.  Lyd- 
ney. etc  Co.  V.  Bird,  L.  R  33  Ch.  D.  85 
(1886).     Cf.    Emma   Silver  Min.  Co.   v. 


Grant,  L.  R  11  Ch.  D.  918  (1879);  Bag- 
nall V.  Carlton,  L.  R  6  Ch.  D.  371  (1877); 
South  Durham  Iron  Co.  v.  Shaw,  14  W. 
N.  159  (1879).  The  promoter  must  dis- 
gorge, though  by  his  efforts  tiie  com- 
pany paid  for  the  property  less  than  it 
was  worth.  Emma  Silver  Min.  Co.  v. 
Grant,  L.  R  11  Ch.  D.  918  (1879).  The 
statute  of  limitations  bars  the  suit. 
Metropolitan  Bank  v.  Heiron,  L.  R  5 
Exch.  D.  319,  325  (1880).  But  only  from 
the  time  when  the  facts  are  known  to 
the  directors,  or,  if  the  directors  are  also 
implicated,  to  the  stockholders.  Re 
Fitzroy,  etc  Ca,  50  L.  T.  144  (1884). 
Where  promoters,  in  collusion  with  the 
owner  of  a  mine,  pay  him  $20,000  there- 
for, and  cause  him  to  transfer  it  to  a 
corporation  for  $100,000  of  the  capital 
stock,  and  then  induce  third  persons  to 
buy  such  stock  at  par  on  representa- 
tions that  the  mine  cost  the  promoters 
$90,000,  and  then  receive  from  the 
owner  of  the  mine  the  proceeds  from 
the  sale  of  the  stock,  less  the  $20,000, 
the  corporation  may  compel  them  to 
pay  over  the  profits  to  it.  Pittsburg 
Min.  Co.  V.  Spooner,  74  Wis.  307  (1889). 

2  Munson  v.  Syracuse,  etc  R.  R.,  lOS 
N.  Y.  58  (1886);  Erlanger  v.  New  Som- 
brero Ca,  L.  R  3  App.  Cas.  1218  (1878); 
Lindsay  Petroleum  Co.  v.  Hurd,  L.  R  5 
P.  C.  221  (1874);  Bagnall  v.  Carlton,  L. 
R  6  Ch.  D.  371  (1877).  Cf.  Smith  v. 
Sorby,  L.  R  3  Q.  B.  D.  552,  n.  (1875). 

3  Emma  Silver  Min.  Co.  v.  Lewis,  L.  R 

4  C.  P.  D.  396  (1879);  88  L.  T.  Rep.  123. 

*  McKay's  Case,  L.  R  2  Ch.  D.  1  (1875); 
Pearson's  Case,  L.  R  4  Ch.  D.  222,  L.  R 

5  Ch.  D.  336  (1877);  Re  Fitzroy,  etc  Ca, 


1479 


§  651.] 


FRAUDS    OF   DIKECTORS,  PROMOTERS,  ETC.  [CH.  XXXIX. 


tion  through  the  promoter  may  also  be  liable  to  the  corporation  for 
the  promoter's  profits.'  If.  however,  the  vendor  had  nothing  to  do 
with  the  formation  of  the  corporation  he  is  not  liable.^  The  vendor 
of  land  to  a  corporation  is  not  responsible  for  the  misrepresenta- 
tions of  his  agent  to  a  party  who  purchases  stock  of  the  corporation, 
such  vendor  not  having  taken  part  in' organizing  the  corporation 
or  selling  its  stock.'  A  promoter  may  be  liable  to  parties  whom 
he  induces  to  sell  property  to  the  corporation,  a  secret  profit  having 
been  taken  by  him.* 


50  L.  T.  144  (1884);  Nant-y-glo,  etc.  Co. 
V.  Grave,  L.  R.  12  Ch.  D.  738  (1878);  and 
see  §  650,  supra;  Chandler  v.  Bacon,  30 
Fed.  Rep.  588  (1887),  where  promoters 
were  compelled,  at  the  option  of  the 
corporation,  to  transfer  stock  back  to  it 
or  pay  over  the  amount  received  by 
them  for  stock  sold,  or  to  pay  to  it  the 
market  value  of  stock  which  they  as 
promoters  had  received  from  liim  to 
whom  all  the  capital  stock  had  been 
issued  in  payment  for  a  patent.  Tlie 
agent  of  the  person  who  deals  with  the 
corporation  may  recover  his  compensa- 
tion from  that  person,  but  he  cannot 
recover  compensation  for  improperly 
influencing  the  agents  of  the  corpora- 
tion to  make  the  contract.  Lydney, 
etc.  Co.  V.  Bird,  L.  R  31  Ch.  D.  328 
(1885);  Arkwright  v.  Newbold,  L  R  17 
Ch,  D.  301  (1881);  Davison  u  Seymour, 
1  Bosw.  (N.  Y.)  88  (1857),  where  the  court 
said:  "There  was  secrecy,  applications 
to  individuals,  a  concealed  promise  of 
compensation,  and  utter  ignorance  and 
recklessness  as  to  the  competency  of 
the  party  whose  cause  he  was  promoting 
and  wlVose  reward  he  was  to  receive." 
1  Even  though  a  person  does  not  know 
that  a  promoter  to  whom  he  has  given 
an  option  on  his  property  is  a  director 
in  the  company  which  proposes  to  buy 
it,  yet  if  he  discovers  this  fact  before 
he  closes  the  transaction  he  must  pay 
to  the  company  the  commission  which 
he  agreed  to  pay  to  the  promoter,  and 
even  though  the  company  has  recovered 
from  the  promoter  such  part  of  the 


the  balance  from  the  vendor  of  the 
property,  altliough  such  balance  had 
been  waived  by  the  promoter  in  consid- 
eration of  what  was  actually  paid  to 
him.  It  is  unnecessary  to  rescind  the 
contract.  Grant  v.  Gold,  etc  Syndicate, 
[1900]  1  Q.  B.  233. 

■-'Even  though  the  agent  of  a  land- 
owner forms  a  corporation,  which  pur- 
chases the  land  at  a  proflt  to  the  owner, 
and  even  though  such  agent  receives  a 
part  of  the  profit,  yet  if  the  vendor  did 
not  contemplate  and  had  notliing  to  do 
with  the  formation  of  the  corporation 
he  cannot  be  held  liable  for  the  profit. 
Forest,  etc.  Co.  v.  Bjorkquist,  110  Wis. 
547  (1901).  Although  a  person  owning 
land  employs  an  agent  to  sell  it,  and  the 
agent,  without  the  principal's  knowl- 
edge, organizes  a  company  and  turns 
in  the  land  at  an  advanced  price,  yet 
neither  the  corporation  nor  its  stock- 
holders can  have  the  sale  rescinded  on 
the  ground  that  the  owner  of  the  land 
was  guilty  of  a  promoter's  fraud.  God- 
frey V.  Schneck,  105  Wis.  568  (1900). 

'  Hoyer  17.  Ludington,  100' Wis.  441 
(1898). 

*  Promoters  who  cause  some  thirty- 
nine  owners  of  paper  mills  to  turn 
their  property  into  a  single  corpora- 
tion in  exchange  for  bonds  and  stock 
of  the  latter  are  bound  to  disclose  to 
such  property  owners  the  profit  made 
by  themselves  as  promoters.  Promoters 
are  entitled  to  a  reasonable  sum  for 
their  services  and  expenses,  but  are  not 
entitled  to  a  large  profit  which  they 


commission  as  the  promoter  actually    realize  without  the  knowledge  of  the 
received,  yet  the  company  may  recover    parties  "  who  represented  the  substan- 

1480 


CH.  XXXIX.]  FRAUDS    OF    DIRECTORS,  PROMOTERS,  ETC. 


[§  651. 


The  subscriber  for  stock  may  sue  the  directors  for  fraudulent  rep- 
resentations if  they  knew  that  the  pronioter  was  secretly  receiving 
laro-e  illegal  profits.^  Bondholders  cannot  complain  of  promoters 
in  the  same  way  that  the  corporation  may.^ 

Under  the  English  statute  prohibiting  commissions  for  under- 
writing, a  plan  by  which  a  company  sells  its  property  to  an  indi- 
vidual and  he  agrees  to  organize  a  new  company  to  take  over  the 
property  and  pay  him  a  profit  is  illegal.^  A  sale  of  the  assets  at 
foreclosure  sale,  and  purchase  thereof  by  a  reorganized  company, 
does  not  carry  a  cause  of  action  against  promoters  for  fraud.* 

A  plaintiff  may,  upon  the  trial,  be  compelled  to  elect  whether  he 
sues  to  hold  the  promoters  liable  for  fraud,  or  whether  he  sues  in 
behalf  of  all  stockholders  and  for  the  benefit  of  the  corporation.'* 

Brehm  v.  Sperry,  93  Md.  378  (1901).  The 
vendors  of  a  mine  to  a  corporation,  the 
title  not  to  pass  until  full  payment,  are 
not  estopped  from  reclaiming  posses- 
sion, even  though  they  knew  that  the 
vendee  had  assigned  his  interest  to  a 
corporation  and  stock  of  the  corpora- 
tion sold  to  the  public.  Wiser  v.  Lavvler, 
62  Pac.  Rep.  695  (Ariz.  1900). 

1  Persons  induced  to  subscribe  by  a 
prospectus  stating  that  a  certain  price 
was  paid  for  a  business,  when  in  fact  a 
large  part  of  that  price  went  as  a  bonus 
to  promoters,  may  sue  the  directors  for 
fraudulent  misrepresentations.  Capel 
V.  Sim's,  etc.  Co.,  58  L.  T.  Rep.  807  (1888). 
Where  a  promoter  induces  a  person  to 
subscribe  and  pay  for  stock  by  repre- 
senting that  property  conveyed  by  the 
promoter  to  the  company  cost  the  pro- 
moter $20,000,  when  in  fact  it  cost  him 
$14,000,  the  subscriber  may  sue  the  pro- 
moter for  damages  for  false  representa- 
tions. Teachout  v.  Van  Hoesen,  76 
Iowa.  113  (1888).  See  also  ch.  XX,  siq)ra. 
Cf.  Glasier  v.  Rolls,  L.  R,  42  Ch.  D.  436 
(1889),  where  merely  deceit  was  in- 
volved. 

2  Banque,  etc.  v.  Brown,  34  Fed.  Rep. 
162.  196  (1888).  Cf.  §§  42,  43,  supra,  and 
g  735,  infra.;  121  Fed.  Rep.  587. 

3  Booth  V.  New  Afrikander,  etc.  Co., 
87  L.  T.  Rep.  509  (1902). 

4  Central  T.  Co.  v.  East  Tennessee,  eta 
Co.,  116  Fed.  Rep.  743  (1902). 

5  Brewster  v.   Hatch,  123  N.  Y.  349 
481 


tial  interests  in  the  new  corporation," 
being  tlie  parties  whom  the  promoters 
induced  to  sell  their  properties  to  the 
corporation  in  exchange  for  bonds  and 
stock.   But  even  though  a  large  number 
of  owners  of  paper  mills  are  induced  to 
turn  their  property  into  a  single  corpo- 
ration in  exchange  for  bonds  and  stock 
of  the  latter,  and  the  promoters  secretly 
receive  a  large  quantity  of  additional 
profit,  and  even  though  the  total  amount 
of  bonds  and  stock  issued  is  about  twice 
the  price  actually  paid  to  the  owners  for 
the  properties,  yet  this  does  not  invali- 
date the  mortgage  securing  the  bonds, 
and  the  remedy  of  the  parties  who  so 
turned  in  their  properties  is  against  the 
promoters  and  not  in  defense  of  a  suit 
to  foreclose  the  mortgage.     Dickerman 
V.  Northern  T.  Co..  176  U.  S.  181  (1900), 
A  contract  between  the  owner  of  prop- 
erty and  a    pronioter,  by   which  the 
former  agrees  to  sell  his  property  to  a 
corporation  to  be  formed  by  the  latter, 
with  a  specified  capital  stock,  cannot,  a 
year    after  the  transaction    has  been 
carried  out,  be  made  the  basis  of  a  suit 
in  equity  to  compel  the  promoter  to 
cancel  excessive  stock  which  was  issued 
to  the  promoter,  there  being  no  allega- 
tion that   the  promoter   still  had   the 
stock.     The  remedy  of  the  vendor  is  at 
law.     Even  though  several  vendors  to 
the  corporation   had  a  similar  claim, 
yet  one  of  them  cannot  file  such  a  bill 
in  equity  in  behalf  of  himself  and  others. 


§  652.] 


FBADDS    OF    DIRECTOKS,  PKOMOTEKS,  ETC.  [CH.  XXXIX. 


A  compromise  and  settlement  of  suits  between  promoters  and 
the  corporation  will  be  upheld  by  the  court.^ 

A  provision  in  a  contract  of  subscription  to  the  stock  of  the  com- 
pany whereby  the  subscriber  waives  notice  of  all  contracts  between 
the  promoters  and  the  company  is  not  binding  on  the  stockholders, 
if  such  waiver  is  tricky  and  fraudulent.-  A  secretary  is  not  liable 
as  a  promoter  even  though  he  accepts  a  gift  from  the  promoter.' 

§  652.  Sales  of  property  hy  corporate  officers  to  the  corporation. — 
V  It  is  well  said  in  the  case  of  Michoud  v.  Girod^  that  a  person  can- 
not legally  purchase  on  his  own  account  that  which  his  duty  or 
trust  requires  him  to  sell  on  account  of  another,  nor  purchase  on 
account  of  another  that  which  he  sells  on  his  own  account.  He  is 
not  allowed  to  unite  the  two  opposite  characters  of  buyer  and  seller. 
Especially  is  this  the  rule  with  corporate  directors.*  If  they  make 
sales  to  the  corporation  they  may  be  compelled  to  pay  over  to  the 
corporation  the  profit  realized  by  such  sales,^  or  the  corporation  may 
refuse  altogether  to  complete  the  contract.'  Generally  the  director 


(1890).  A  suit  by  a  stockholder  against 
a  promoter  in  behalf  of  the  corporation, 
to  require  him  to  pay  for  his  stock,  and 
also  to  recover  damages  for  false  rep- 
resentations inducing  the  plaintiff  to 
purchase  stock,  and  also  to  enjoin  a 
proposed  sale  of  plaintiff's  stock,  in 
order  to  pay  an  assessment,  is  multi- 
farious. Pietsch  V.  Krause,  93  N.  W. 
Rep.  9  (Wis.  1903). 

1  Coburn  v.  Cedar  Valley,  etc.  Co.,  138 
U.  S.  196  (1891). 

2  Greenwood  v.  Leather,  etc.  Co.  Ltd., 
[19001  1  Ch.  421. 

3  Re  Sale,  etc.  Co.,  78  L.  T.  Rep.  368 
(1898> 

<4How.  503  (1846). 

*  Quoted  and  approved  in  Stanley  v. 
Luse,  36  Oreg.  25,  32  (1899). 

<»  Where  the  directors  buy  property 
for  $2,500  and  sell  it  to  the  company  for 
$S,000,  they  can  collect  only  $2,500  from 
the  corporation,  although  the  corpora- 
tion has  sold  the  land  for  $17,000.  Hig- 
gins  V.  Lansingh,  154  III  301  (1895). 
Directors  who  purchase  land  in  the 
name  of  one  of  them  and  then  cause 
the  corporation  to  purchase  it  at  an  ad- 
vance, the  real  price  being  concealed, 
may  be  compelled  to  pay  over  their 
profit  to  the  corporation.    Spaulding  v. 


North  Milwaukee,  etc.  Ca,  106  Wis.  481 
(1900):  Albion  Steel,  etc.  Co.  v.  Martin, 
L.  R  1  Ch.  D.  580  (1875),  holding  the  di- 
rectors liable  to  refund  profits  on  con- 
tract made  subsequent  to  incorpora- 
tion, but  not  on  those  made  previous  to 
incorporation;  Dunne  v.  English,  L.  R 
18  Eq.  524  (1874),  where  two  brokers, 
having  agreed  to  divide  the  profits  on  a 
mine  to  be  bought  by  one  and  sold  by 
the  other,  the  former  compelled  the 
latter  to  divide  a  secret  profit  which 
the  latter  had  obtained;  Benson  v. 
Heathorn,  1  Y.  &  C.  (Ch.)  326  (1842), 
§  650,  supra,  and  other  cases  therein. 
Concerning  the  right  of  the  corporation 
to  confirm  the  sale  and  sue  the  director 
at  law  or  in  equity  for  the  profit  made 
by  him,  see  "The  remedial  rights  of 
corporations  against  their  directors," 
by  Judge  Fenn,  3  Yale  L.  J.  111.  See 
also  §  660,  infra. 

^  Coleman  v.  Second  Ave,  R  R.,  38  N. 
Y.  201  (1868).  A  contract  by  a  corpo- 
ration to  buy  land  of  a  director  is  not 
enforceable  by  the  latter  where  it  wa& 
authorized  by  only  three  out  of  five  di- 
rectors, and  two  of  those  three  were 
interested  in  the  contract.  Hill  v.  Rich 
Hill,  etc.  Co.,  119  Mo.  9  (1893).  Cf.  Re 
Cape  Breton  Co.,  19  W.  N.  54  (1884). 


1482 


CH.  XXXIX.]  FBAUDS    OF   DIEECTOKS,  PEOMOTEKS,  ETC. 


[§  652. 


has  purchased  the  property  for  the  express  purpose  of  selling  it  to 
the  corporation.  When  such  is  the  case  the  company  may  ratify 
and  confirm  the  transaction,  or  it  may  keep  the  property  and  re- 
cover from  the  director  the  profit  realized  by  him,  or  the  company 
may  repudiate  the  whole  transaction,  return  the  property,  and  re- 
cover back  the  purchase-money.^     But  where  the  director  alreadv 


where  the  court  declined  to  hold  a  di- 
rector responsible  for  profits  made  by  a 
sale  of  property  from  himself  to  the 
company,  and  declined  to  rescind  the 
sale,  since  the  corporation  could  not  re- 
store the  property.  Where  the  corpora- 
tion is  insolvent,  a  director  cannot  turn 
in  his  property  in  payment  of  his  debt 
due  to  the  corporation.  White,  etc.  Co. 
V.  Pettes,  etc.  Co.,  30  Fed.  Rep.  864 
(1887).  A  purchaser  of  corporate  assets 
at  a  receiver's  sale  cannot  claim  a  lease- 
hold which  the  president  holds  to 
premises  which  were  used  by  the  cor- 
poration. Crooked  Lake  Nav.  Co.  v. 
Keuka  Nav.  Co.,  37  Hun,  9  (1885).  Di- 
rectors cannot  purchase  machinery  and 
then  sell  it  to  the  company  at  an  ad- 
vance. Redmond  v.  Dickerson,  9  N.  J. 
Eq.  507  (1853).  In  Great  Luxembourg 
Ry.  V.  Magnay,  25  Beav.  586  (1858). 
where  the  director  purchased  for  the 
corporation  property  secretly  owned  by 
himself,  the  court  refused  to  interfere 
after  the  corporation  had  resold  the 
property  without  loss.  Under  the  above 
principle  of  law  the  court  refused  to 
enforce  a  contract  by  a  director  to  fur- 
nish railway  chairs  to  his  corporation. 
Aberdeen  Ry.  v.  Blakie.  1  Macq.  461 
(1854).  And  in  Flanagan  v.  Great  West- 
ern Ry.,  L.  R.  7  Eq.  116  (1868),  the  court 
refused  to  enforce  a  corporate  agree- 
ment to  lease  property  to  a  director.  A 
stockholder's  bill  does  not  lie  to  enjoin 
an  execution  sale  of  the  corporate  fran- 
chise and  property  on  a  judgment  ob- 
tained against  the  corporation  by  a  di- 
rector for  property  sold  to  it  by  him, 
there  being  no  actual  fraud,  nor  proof 
of  directorship  at  the  time  of  the  sale. 
Ward  V.  Salem  St.  Ry.,  108  Mass.  332 
(1871).  School  directors  may  be  en- 
joined from  selling  their  propertj'  to 


the  district.     Witmer's  Appeal,  15  Atl. 
Rep.  428  (Pa.  1888). 

1  Parker  v.  Nickerson,  112  Mass.  195 
(1873),  where  the  directors  were  held 
liable  for  the  profit  on  a  price  paid  by 
the  corporation  for  a  boat  purchased 
from  another  corporation,  in  which  the 
directors  were  also  the  directors  and 
sole  stockholders.  They  were  held 
liable  to  refund  all  profit  above  the 
cost  of  the  boat  to  the  vendor  corpora- 
tion. If  the  corporation  has  made  im- 
provements on  land  purchased  from  the 
director,  it  cannot  compel  him  to  take 
the  land  and  pay  it  the  price  paid  him 
and  also  the  cost  of  the  improvements. 
Paine  v.  Irwin,  16  Hun,  390  (1878). 
Where  the  corporation  secretly  agrees 
to  give  a  subscriber  extra  stock  if  he 
will  subscribe  for  a  certain  amount, 
and  he  subscribes  and  intends  that  his 
subscription  shall  be  used  to  induce 
others  to  subscribe  without  knowledge 
of  the  secret  gift,  and  they  do  subscribe, 
he  cannot  receive  from  the  corporation 
such  extra  stock.  The  contract  is  void 
as  against  public  policy.  Nickerson  v. 
English,  142  Mass.  267  (1888).  A  sale  of 
mortgaged  property,  under  a  power  to 
sell,  by  the  mortgagee,  to  a  newly- 
formed  corporation  in  which  he  holds 
stock,  does  not  invalidate  the  sale, 
though  he  could  not  sell  to  himself. 
Farrar  v.  Farrars,  L.  R.  40  Ch.  D.  395 
(1888).  The  president  of  a  stockyard 
company,  who  takes  a  lease  of  property 
in  his  own  name,  and  then  assigns  the 
lease  to  the  company  on  a  guaranty  of 
a  large  stockholder  in  the  corporation 
that  said  president  shall  have  one-fifth 
of  the  profits  from  the  use  of  the  prop- 
erty, cannot  enforce  that  guaranty- 
Robinson  V.  Jewett,  14  N.  Y.  St.  Rep. 
223;  aff'd,  116  N.  Y.  40  (1889).  A  director 
1483 


§  ^>52.] 


FRAUDS   OF   DIRECTORS,  PROMOTERS,  ETC. 


[CH.  XXXIX. 


owns  the  property  in  good  faith,  the  court,  while  it  may  set  the 
sale  aside,  cannot  compel  the  director  to  take  a  less  price  than  that 
already  agreed  upon.^  A  person  who  sells  property  to  a  director 
to  be  paid  for  partly  in  the  stock  of  a  corporation  cannot  after- 
wards object  that  the  director  was  disqualified  from  selling  the 
property  to  the  corporation.^  Where  the  president  of  a  railroad 
corporation  secretly  owns  land  in  the  name  of  another  person,  and 
causes  the  corporation  to  purchase  it  and  issue  stock  and  bonds  in 
payment,  without  disclosing  his  interest  in  the  land,  he  is  liable  to 
the  corporation  for  the  difference  between  the  actual  market  value 
of  the  stock  and  bonds  and  the  actual  value  of  the  land.^ 

Where,  however,  the  directors  sell  to  the  corporation  at  a  profit 
to  themselves,  but  with  a  full  and  fair  disclosure  thereof  to  the 
stockholders,  and  without  participating  in  the  acceptance  of  the 
property  by  the  corporation,  and  no  objection  is  made,  the  trans- 
action cannot  be  impeached  afterwards.^  In  most  cases  a  disclosure 


cannot  be  a  partner  with  the  corpora- 
tion in  sharing  profits.  Rudd  v.  Robin- 
son, 54  Hun,  ao9  (1889),  rev'd  on  another 
point  in  126  N.  Y.  113.  It  is  illegal  for 
directors  to  buy  from  themselves  lots 
for  the  corporation.  Landis  v.  Sea  Is!e, 
etc.  Ca,  53  N.  J.  Eq.  654  (1895).  Where 
a  person  obtains  an  option  on  land  at 
$2,500  an  acre,  and  then  with  other  per- 
sons forms  a  corporation  and  sells  it  to 
the  corporation  at  $3,700  an  acre,  pay- 
able partly  in  cash  and  partly  by  mort- 
gage, the  profit  being  concealed  from 
the  other  subscribers  to  the  stock  and 
the  promoter  being  a  director  at  the 
time  of  the  purchase,  he  and  those  who 
co-operated  with  him  are  liable  to  re- 
turn to  the  corporation  such  jirofit,  but 
such  liability  cannot  be  enforced  in  a 
suit  against  the  sureties  on  his  bond  as 
ti'easurer.  First,  etc.  Co.  v.  H.ildebrand, 
103  Wis.  580  (1899). 

1 A  director  who  owns  the  assets  of  a 
business,  which  is  cognate  to  the  busi- 
ness of  his  corporation,  may  sell  the 
same  to  his  corporation  at  an  advanced 
price,  and  he  need  not  disclose  what  he 
paid  for  it,  and  a  stockholder  cannot 
compel  the  director  to  pay  to  the  cor- 
poration the  profit  he  has  made.  The 
sale  may  be  rescinded,  but  the  court 
has  no  power  to  force  the  director  to  sell 


at  a  lower  price.  Burland,  etc.  v.  Earle, 
etc.,  [1902]  A.  C.  83.   Cf.  54  Atl  Rep.  460. 

2Mackey  17.  Burns.  64  Pac.  Rep.  485 
(Cal.  1901).  It  is  not  for  the  purchaser 
of  land  from  a  company  to  raise  the  ob- 
jection that  the  company  purchased  it 
from  one  of  its  directors.  Farnham  Brew- 
ery Co.  V.  Hunt,  68  L.  T.  Rep.  440  (1893V 

3  Danville,  etc.  R  R.  v.  Kase,  39  Atl. 
Rep.  301  (Pa.  1898). 

*  Where  a  director  sells  a  plant  to  the 
corporation,  and  the  sale  is  ratified 
unanimously  at  the  stockholders'  meetr 
ing,  a  stockholder  cannot  subsequently 
cause  it  to  be  set  aside,  especially  where 
a  great  majority  of  the  stockholders 
still  object  to  its  being  set  aside.  The 
terms  of  the  sale  were  held  by  the  court 
to  be  reasonable.  Barr  v.  Pittsburgh 
Plate-Glass  Co.,  57  Fed.  Rep.  86  (1893). 
Even  though  a  director  sells  property 
to  the  company  and  overvalues  it,  yet 
if  the  company  caused  an  independent 
valuation  to  be  made,  and  for  three 
years  acquiesced  in  the  purchase,  it 
cannot  then  complain.  Stetson  i\  North- 
ern Inv.  Co.,  104  Iowa,  593  (1898);  Ches- 
terfield,  etc.  Co.  v.  Black,  37  L.  T.  Rep. 
740  (1877),  where  the  court  refused  to 
hold  liable  for  profits  a  director  and  a 
promoter  where  they  had  purchased  a 
mine  before  incorporation  and  had  sold 


1484 


CH.  XXXIX.]  FRAUDS    OF    DIRECTOES,  PROMOTERS,  ETC. 


[§  652. 


to  the  board  of  directors  alone  is  insufficient.    Acquiescence  or  rati- 
fication by  the  stockholders  is  necessary.^ 
However,  it  is  within  the  power  of  the  majority  of  the  stock- 


it  to  the  company  at  a  profit,  it  being 
clearly  stated  to  the  company  that  a 
profit  was  being  made,  but  the  amount 
of  that  profit  not  being  divulged;  Bat- 
telle  V.  Northwestern,  etc.  Co.,  37  Minn. 
89  (1887).  Even  though  directors  sell 
property  to  the  corporation  in  ex- 
change for  treasury  stock  which  is  is- 
sued to  them  at  twelve  and  a  half  cents 
on  a  dollar,  yet,  if  they  oflfer  to  allow 
all  the  stockholders  to  purchase  their 
proportion  of  the  stock  at  that  price, 
and  they  all  take  the  stock  excepting 
one  director,  the  latter  cannot  object 
to  the  transaction  where  he  had  him- 
self moved  that  the  stock  be  so  issued. 
Mackey  v.  Burns,  64  Pac.  Rep.  485  (Cal. 
1901).  Even  though  all  the  directors  of 
a  corporation  organize  another  com- 
pany to  buy  out  the  first-named  com- 
pany, and  they  are  directors  in  the  sec- 
ond company  also,  yet,  if  all  the  facts 
are  fully  stated,  the  sale  is  legal,  and 
the  new  company  cannot  repudiate  the 
sale  on  that  ground.  Even  if  the  pro- 
moters stated  that  a  certain  part  of  the 
plant  was  in  full  operation,  yet,  if 
there  was  no  fraud  and  that  part  of  the 
plant  was  put  in  operation  soon  after- 
wards, the  court,  instead  of  setting 
aside  the  sale,  may  give  damages  for 
the  delay.  Misrepresentations,  although 
not  fraudulent,  are  sufficient  ground 
for  relief.  The  fact  that  the  directors 
are  not  independent,  but  represent  the 
vendor,  is  immaterial  if  that  fact  is 
made  known  to  the  parties.  Lagunas, 
etc.  Co.  Ltd,  V.  Lagunas  Syndicate,  Ltd., 
[1899]  2  Ch.  392.  It  is  no  defense  to  a 
subscription  that  the  insolvency  of  the 
company  is  due  to  debts  incurred  in 
buying  land  from  the  directors,  such 
contract  being  voidable  instead  of  void 
and  being  subject  to  the  ratification  of 
the  majority  of  the  stockholders.  Ur- 
ner  v.  Sollenberger,  89  Md.  316  (1899). 
In  St.  Louis,  etc.  R  R.  v,  Tiernan,  37 


Kan.  606  (1887).  it  is  held  that  a  sale,  by 
the  directors,  of  a  road-bed  to  the  cor- 
poration is  legal  where  all  the  facts  are 
known  to  all  except  a  few  nominal 
holders  of  stock.  But  a  partial  disclos- 
ure is  insufficient.  Imperial,  etc.  Assoc. 
V.  Coleman.  L.  R.  6  H.  'L.  189  (1873). 
rev'g  L.  R  6  Ch.  App.  558.  Where  the 
president,  by  fraudulent  representa- 
tions, induces  the  corporation  to  buy 
property  from  himself,  a  minority 
stockholder  may  cause  the  purchase  to 
be  set  aside,  even  though  all  had  con- 
sented to  the  purchase.  Gerry  v.  Bis- 
marck Bank,  19  Mont.  191  (1897).  See 
also  ch.  XLIV,  infra, 

1  A  director  who  assigns  a  contract 
to  the  company  at  a  profit  of  $40,000  to 
himself  must  refund  his  profit  to  the 
company,  but  will  be  allowed  such 
sums  as  he  paid  out  for  commissions. 
It  is  immaterial  that  all  of  the  original 
directors  knew  all  of  the  facts  and  as- 
sented to  the  transaction.  Re  George 
Newman  Co.,  [1895]  1  Ch.  674.  The  vice- 
president  and  manager  may  lease  prop- 
erty to  the  corporation,  and  may  exe- 
cute the  lease  for  the  corporation,  where 
the  lease  is  fair  and  the  other  officers 
approve.  Louisville,  etc.  Ry.  v.  Carson, 
151  III.  444  (1894).  The  fact  that  the 
president  of  an  iron  manufacturing 
company  purchases  iron  for  the  com- 
pany through  his  firm,  which  takes  a 
commission,  does  not  render  the  con- 
tract invalid  unless  it  was  actually  un- 
fair and  fraudulent,  there  being  no  con- 
cealment of  the  facts,  and  especially 
where  there  was  evidence  that  the  con- 
tract was  reported  to  and  discussed  by 
the  board  of  directors.  Salem,  etc.  Co. 
V.  Lake  Superior,  etc.  Mines,  112  Fed. 
Rep.  239  (1901).  A  purchaser  of  prop- 
erty in  which  a  director  is  interested 
is  not  necessarily  illegal,  although  such 
director  voted  for  the  same,  it  being 
shown  that  all  the  other  directors  alsa 


1485 


§  G53.]  FKAL'DS    OP-    niKIXToUS,   I'lK  »M.  (TKR.S,   r.T(\  [cil.    XXMX. 

holders  to  ratify  and  confirm  such  a  transaction  where  there  is  no 
actual  fraud  involved.  The  fraud  is  not  an  actual  ono  if  the  director 
sold  at  a  fair  price  and  did  not  use  his  position  to  induce  the  corpf> 
ration  to  purchase.  Such  a  sale,  however,  is  always  :v  constructive 
fraud,  and  unless  legally  ratified  is  voidable  at  the  option  of  any 
director  or  stockholder.' 

There  is  some  dilliculty  in  determining  what  will  constitute  a 
confirmation  of  such  a  transaction.  If  a  majority  of  the  directors 
and  of  tlie  stockholders,  without  counting  the  votes  controUed  b^' 
the  director  who  is  interested,  favor  a  confirmation  of  the  trans- 
.action,  a  dissenting  stockholder  cannot  bring  suit  to  set  it  aside 
unless  he  can  show  the  existence  of  some  fraud  other  than  the  mere 
fact  that  the  vendor  was  a  din^ctor  when  he  made  the  sale.  If, 
however,  a  nfajority  of  the  stt)ckhohlers,  excluding  the  votes  owned 
directl^'or  indirectly  by  the  guilty  parties,  are  in  favor  of  bringing 
the  directors  to  an  accounting,  greater  difiiculty  arises.  The 
weight  of  authority  holds  that  the  votes  of  the  director  as  a  stock- 
holder are  to  be  counted.  If,  however,  rtc^j/a^  fraud  is  involvtHJ, 
this  question  is  immaterial,  since  no  majority,  liowever  large,  can 
ratify  actual  fraud .'- 

§  G53.  Sales  of  property  hy  the  corporation  to  corporate  ojjiars, 
and  purchases  by  corporate  officers  at  foreclosure  and  cxecutiou 
sales. —  One  of  the  most  frequent  frauds  perpetrated  upon  a  corjK)- 
ration  and  its  stockholders  is  where  one  or  more  of  the  directors 
purchase  property  from  the  corporation  directly  or  indirectly,  or 
participate  in  the  profits  of  such  a  purchase.  The  law  is  well  set- 
tled that  a  director's  purchase  of  property  from  the  corporation  is 
voidable  at  the  option  of  the  corporation,  even  though  the  direct- 
ors paid  fully  as  much  as  the  property  is  worth.'  This  principle  of 
law  was  fully  established  by  the  cases  of  Cumberland  Coal  Com- 
pany against  Sherman  *  and  Hoffman  Steam  Coal  Company  against 
Cumberland  Coal  and  Iron  Company.'     There  are  exceptions,  how 

voted  for  such  purchase.   Porter  v.  Las-  Cumberland  Coal  Co.  v.  Sherman,  20  Md. 

sen  County,  etc.  Co.,  127  Cal.  261  (1899).  117  (1863). 

Cf.  g§  649,  662,  and  ch.  XLIV.  5  16  Md.  456  (1860),  where  a  minority 

1  Quoted  and  approved  in  Stanley  v,  of  tlie  directors  purchased  part  of  the 
Luse,  36  Or.  25,  33  (1899).  corporate  property  at  an  undervalua- 

2  See  §  662,  m/ra,  tion  and  then  sold  it  to  the  Hoffman 

3  Quoted  and  approved  in  Morgan  v.  Company,   in   which   they   were  large 
King,  27  Colo.  539,  555  (1900).  stockholders.    The  court  held  that  the 

*  30  Barb.  553  (1859).     The  court  also  latter  was  chargeable   with  notice  of 

held  that  the  purchase  by  the  directors  the  voidable  act.     This  case  and  the 

could   be   ratified  only  by  the  unani-  preceding  one  grew  out  of  the  same 

mous  vote  of  all  the  stockholders,  and  transaction.  See  also  Buell  v.  Bucking- 

that  a  ratification  by  proxy  would  not  ham,  16  Iowa,  284  (1864),  holding  that 

bind  the  stockholder  himself.    See  also  the  purchase  is  voidable,  but  not  void. 

1486 


Ca.  XXXIX.]  FRAUDS    OF    DIRECTORS,  PROMOTERS,  ETC.  [§  653. 

ever,  to  this  rule,  especially  where  the  corporatioa  is  insolvent,  or 


It  may  be  avoided,  however,  without 
proving  any  actual  fraud  on  the  part 
of  the  director  or  injury  to  the  corpora- 
tion.    It  is  fraudulent  per  se.     A  sale 
of  the  corporate  property  to  one  of  the 
directors  is  a  constructive  fraud,  even 
if  not  an  actual  fraud,  and  may  be  set 
aside   at  the  instance    of    a  minority 
stockholder.      Stanley  v.  Luse,  36  Or. 
25  (1899).     A  sale  of  valuable  mining 
stock  by  a  bank  to  some  of  the  direct- 
ors is  illegal,  especially  where  the  stock 
paid  for  itself  within  six  years.     Mor- 
gan V.  King.  27  Colo.  539  (1900 1.   Where 
the   manager  of  a  co-operative   grain 
elevator    company  sells  the    grain    to 
himself  he  must  account  for  the  prof- 
its, even  though  the  fixed  price  of  tlie 
company  for  handling  the  grain  has 
been  duly  paid.     Goodhue,  etc.  Co.  v. 
Davis,    81    Minn.     L'lO    (1900).     Where 
trustees  hold  stock  as  security  for  vari- 
ous debts  of  various  parties,  the  stock 
to  be  sold  if  the  debts  are  not  paid,  it 
ia  illegal  for  one  of  the  trustees  to  re- 
sign and  for  the  remaining  trustees  to 
sell  the  stock  in  a  way  calculated  not 
to  bring  its  full  value,  and  for  the  re- 
signing trustee  to  purchase  the   same 
at  a  very   low  price  for  the  benefit  of 
himself  and  the  other  trustees.     The 
sale  will  be  set  aside.     Jenkins  v.  Ham- 
merschlag.  38  N.  Y.  App  Div.  209  (18991 
Where  a  director  has  been  director  for 
three  years  and  then  resigns  and  pur- 
chases property  from  the  corporation 
and  then  is  re-elected,  the  purchase  is 
the  same  as  though  he  had  been  director 
during  the  whole  period,  and  he  may 
be   held  liable  for  the    difference  be- 
tween the  price  paid  by  him  and  the 
■  actual  value  of  the  property.     Millsaps 
V.  Chapman,  76  Miss.  942  (1899).  Wliere 
the  directors  of  a  corporation  sell  out 
its  assets  in  consideration  of  a  person 
paying  the  debts,  and  the  latter  organ- 
izes a  new  corporation  and  gives  to  the 
old  directors  stock  in  the  new  corpora- 
tion equal  to  their  stock  in  the  old,  but 


does  not  give  anything  to  the  other 
stockholders  of  the  old  corporation,  the 
directors  and  the  persons  so  purchasing 
the  assets  are  liable  to  the  old  corpora- 
tion for  the  value  of  the  stock  so  given 
to  the  directors.  A  pledgee  of  the  stock 
of  the  old  corporation  may  bring  suit 
for  that  purpose.  Smith  v.  Smith,  etc. 
Co.,  125  Mich.  284  (1900).  A  stockholder 
may  file  a  bill  to  set  aside  a  transfer  of 
real  estate  of  the  corporation  to  a  di- 
rector without  consideration.  Mobile, 
etc.  Co.  V.  Gass.  129  Ala.  214  (1901). 

A  director  may  be  the  trustee  in  a 
trust  deed  executed  by  his  corpora- 
tion. Bassett  v.  Monte  Christo,  etc. 
Co.,  15  Nev.  298  (1880).  Although  a  com- 
pany  is  insolvent,  a  lease  of  its  prop- 
erty to  a  director  on  fair  terms  is  legal, 
especially  wliere  for  many  years  there 
is  no  complaint.  Pneumatic  Gas  Co. 
r.  Berry,  113  U.  S.  323  (1885).  A  sale 
of  the  property  of  an  insolvent  foreign 
corporation,  for  an  insufficient  consid- 
eration, by  the  executive  committee  to 
two  of  the  trustees,  is  voidable.  Third 
Nat.  Bank  v.  Elliott.  42  Hun,  121  (1886); 
aff'd,  114  N.  Y.  622.  See  also  Reilly  v. 
Oglebay,  25  \V.  Va.  86  (1884).  Wliere  a 
sale  of  laud  is  made  by  the  corporation 
to  a  director,  in  order  to  raise  funds  to 
pay  debts  due  to  mismanagement,  the 
corporation  itself  may  sub.sequently 
cause  the  sale  to  be  set  aside.  Crescent 
City,  etc.  Co.  v.  Flanner,  44  La.  Ann.  22 
(1892).  Where  a  director  buys  land  of 
the  corporation  at  one-tenth  of  its 
value,  a  stockholder  may  cause  the 
transaction  to  be  set  aside.  Woodroof 
V.  Howes,  88  Cal.  184  (1891).  Where  a 
contract  is  made  by  a  corporation  to 
sell  coal  to  one  of  its  directors,  and  the 
corporation  does  not  fulfill,  the  director 
cannot  recover  damages  where  the 
money  for  the  coal  was  to  pay  a  per- 
sonal debt  of  the  president,  and  the  di- 
rector has  relieved  the  corporation  from 
liability.  Main  Jellico,  etc.  Co.  v.  Lot- 
speich,  20  S.  W.  Rep.  377  (Ky.  1892).    A 


1487 


§  GOl>.] 


FRAUDS    OF   DIRECTORS,  PROMOTERS,   ETC.  [CU.   XXXIX, 


the  sale  is  a  public  sale.'  Corporate  creditors  cannot  cause  to  be  set 
aside  an  old  sale  of  land  by  the  corporation  to  the  directors  through 
"dummies,"  even  though  the  sale  was  at  an  inadequate  price.' 


receiver  may  replevy  corporate  per- 
sonalty fraudulently  sold  to  a  director. 
Mish  V.  Main,  «1  Md.  36  (1895).  Where 
a  board  of  directors,  consisting  of  six, 
sell  corporate  pro|ierty  to  two  of  them, 
the  sale  being  autiiorized  at  a  meeting 
at  which  five  were  present,  including 
the  two,  the  remaining  three  do  not 
constitute  a  quorum  and  the  sale  is 
illegal.  Leary  v.  Interstate,  etc.  Bank, 
63  S.  W.  Rep.  149  (Tex.  1901).  Even 
though  the  cashier  of  a  bank,  with  the 
consent  of  the  directors,  takes  a  part  of 
the  profit  realized  by  the  purchaser  of 
land  from  the  bank,  yet  a  stockholder 
may  compel  him  to  repay  that  amount 
to  the  bank,  although  the  purchaser 
has  not  yet  paid  the  amount  to  the 
cashier.  Tenison  v.  Patton,  04  S.  W. 
Rep.  810  (Tex.  190 1 ).  A  deed  of  the  cor- 
porate assets  to  the  directors  personally 
will  be  set  aside  at  the  instance  of  a 
stockholder,  even  though  the  considera- 
tion was  adequate  and  full  and  no  actual 
injury  was  done  to  the  corporation. 
Barnes  v.  Lynch,  9  Okl.  156  (1899). 

1  A  corporation  having  a  leasehold 
with  the  privilege  of  purchasing  the 
fee  may  sell  the  latter  to  a  director 
where  the  company  has  neither  the 
money  nor  credit  to  exercise  such  privi- 
lege. Hannerty  v.  Standard  Theater 
Co.,  109  Mo.  297  (1892).  And  a  sale  of 
an  insolvent  corporation's  property  to 
a  director  for  its  full  value  is  upheld 
when  bona  fide  and  advantageous  to 
all.  Ashhurst's  Appeal,  60  Pa.  St.  290 
(1869).  A  sale  of  corporate  bonds  to  a 
syndicate  of  which  three  of  the  direct- 
ors are  members  is  valid,  the  price  being 
fair.  Du  Pont  v.  Northern  Pac.  R,  R., 
18  Fed.  Rep.  467  (1883).  Where  an  in- 
solvent corporation  sells  its  assets  for 
bonds  and  stock  in  another  corporation, 


it  may  sell  such  bonds  and  stock  to  one 
of  its  directors  at  a  fair  price,  no  actual 
fraud  being  involved.  Graham  v.  Carr, 
41  S.  E.  Rep.  379  (N.  C.  1902).  A  solvent 
corporation  may  sell  a  note  to  its  presi- 
dent. Hlake  r.  Ray,  62  .S.  W.  Kep.  531 
(Ky.  1901).  Where  the  stockholders  of 
an  insolvent  corporation  have  author- 
ized the  directors  to  sell  the  property 
and  puhlic  sale  is  thereupon  made,  tlie 
court  will  not  set  the  sale  aside,  al- 
though directors  who  were  creditors  of 
the  corporation  purchased  at  such  sale 
at  a  low  figure.  Patterson  t".  Portland, 
etc.  Works,  35  Or.  96  (18'J9v  Even 
though  a  railroad  which  owns  stock  in 
another  niilroail  sells  such  stock  to  a 
copartnership  in  wliicli  one  of  the  di- 
rectors is  a  partner,  yet  the  court  will 
not  enjoin  the  sale  if  it  is  a  fair  one. 
Ryan  v.  Williams,  100  Fed.  Rep.  172 (1900). 
A  title  is  not  bad  merely  because  in  the 
chain  of  title  was  a  deed  from  a  corpo- 
ration to  its  president.  Jones  v.  Hanna, 
24  Tex.  Civ.  A  pp.  550  (1900).  A  sale  of 
property  to  a  syndicate,  of  which  a  di- 
rector is  a  member,  will  not  be  set 
aside  when  the  full  value  was  received 
by  the  corporation,  and  the  sale  was 
made  in  order  to  protect  the  parties 
who  were  sureties  for  the  price  to  be 
paid  by  the  corporation  for  the  prop- 
erty. Hill  V.  Nisbet,  100  Ind.  341  (1884). 
Where  all  the  assets  of  a  corporation 
are  transferred  for  stock  of  another 
corporation  and  such  stock  is  sold  by 
trustees  of  the  former  to  pay  its  debts, 
the  fact  that  one  of  the  trustees  subse- 
quently buys  a  portion  of  the  stock 
does  not  render  him  liable  for  such 
debts.  Wing  v.  Charleroi,  etc.  Co.,  112 
Fed.  Rep.  817  (1902). 

Perry  on  Trusts  (8d  ed.),  §  428,  states 
the  rule  as  follows:     "A  trustee,  exec- 


-  Graham  v.  Railroad  Co.,  102  U.  S.  It  is  voidable  by  the  corporation  or  its 
148  (1880).  A  deed  from  the  corpora-  stockholders  onlj-.  Fudickar  v.  East, 
tion  to  the  president's  firm  is  not  void.    etc.  Dist,  109  CaL  29  (1895). 

1488 


CH.  XXXIX.]  FRAUDS    OF    DIKECTORS,  PROMOTERS,  ETC. 


[§  653. 


Where  all  the  stockholders  and  directors  assent  to  a  lease  of  cor- 
porate property  to  a  director,  a  receiver  appointed  at  the  instance 
of  a  foreclosing  mortgagee  cannot  have  the  lease  declared  void,  it 
not  being  shown  that  he  represents  other  creditors  or  is  vested 
with  equities  to  maintain  the  suit.  Leases  to  a  director  "  will  be 
sustained  if  they  are  fair,  and  have  been  entered  into  in  good  faith, 
and  no  advantage  has  been  taken  of  the  fiduciary  relation."  ^  i\[ore 
difficult  questions  arise  in  regard  to  a  director's  purchases  of  cor- 


utor,  or  assignee  cannot  buy  up  a  debt  or 
incumbrance  to  which  the  trust  estate 
is  liable,  for  less  than  is  actually  due 
thereon,  and  make  a  profit  to  himself; 
but  such  purchase  inures  for  the  bene- 
fit of  the  trust  estate,  and  the  creditors, 
legatees,    and   cestuis  que  trust  shall 
have  all  the  advantage  of  such  pur- 
chase.    But  if  a  trustee  buys  up  an  out- 
standing   debt  for  the  benefit  of  the 
cestuis  que  trust,  and  they  refuse  to 
take  it  or  to  pay  the  purchase-money, 
they  cannot  afterwards,  when  the  pur- 
chase turns  out  to  be  beneficial,  claim 
the  benefit  for  themselves.  Nor  can  the 
trustee  make  any  contract   with   the 
cestui  que  tnist  for  any  benefit,  or  for 
the  trust  property,  nor  can  he  accept  a 
gift  from    the  cestui  que    trust.    The 
better    opinion,    however,    is,    that    a 
trustee  may  purchase  of  the  cestui  que 
trust,  or  accept  a  benefit  from  him,  but 
the  transaction  must  be  beyond  suspi- 
cion ;  and  the  burden  is  on  the  trustee 
to  vindicate  the  bargain  or  gift  from 
any  shadow  of  suspicion,  and  to  show 
that  it  was  perfectly  fair  and  reason- 
able in  every  respect,  and  courts  will 
scrutinize  the  transaction  with  great 
severity.    So,  if  a  trustee  buys  the  trust 
property  at  private  sale  or  public  auc- 
tion, he  takes  it  subject  to  the  right  of 
the  cestui  que  trust  to  have  the  sale  set 
aside,  or  to  claim  all  the  benefits  and 
profits  for  the  sale  himself." 

1  Tyler  v.  Hamilton,  6'2  Fed.  Rep.  187 
(1894).  Where  the  directors  of  an  in- 
solvent  corporation  lease  the  property 
to  themselves,  they  must  account  to 
corporate  creditors  for  the  profits,  but 
the    creditors  cannot  claim    material 


which  the  directors  have  purchased  and 
manufactured  by  means  of  the  prop- 
erty.    Hutchinson  v.  Bidwell,  24  Oreg. 
219  (1893).     A  corporation  cannot  hold 
the  director?  liable  on  stock  which  the 
corporation  issued  to  them  for  services, 
being  taken   by  the  directors  at  five 
cents  on  the  dollar  in  lieu  of  salary, 
where    all   the  stockholders    assented 
thereto,  such  stock  so  issued  to  them 
being    treasury  stock,   that   is,    stock 
which  was  issued  for  property  as  full 
paid  and  then  donated  to  the  corporate 
treasury.    The  evidence  showed  that 
the  stock   represented  a    patent-right 
and  was  purely  speculative  and  had  no 
market    value.     Divine    v.    Universal, 
etc.  Co.,  38  S.  W.  Rep.  93  (Tenn.  189G). 
A  lease  to  a  director  is  not  necessarily 
illegal,  even  though  a  stockholder  ob- 
jects thereto,  where  a  majority  of  th& 
stockholders    have  ratified  the    leasa 
The  court  refused,  at  the  instance  of  a 
dissenting  stockholder,  to  set  aside  such 
a  lease,  in  the  case  of  Nye  v.  Storer,  168 
Mass.  53  (1897).     Even  though  the  board 
of  directors  have  leased  all  the  cor- 
porate property  to  a  minority  of  the 
directors,  yet  the  minority  stockholders 
cannot  have  a  receiver  appointed  un- 
less it  is  shown  that  the  lease  was  un- 
fair, especially  where  one  of  the  com- 
plaining stockholders  has  ratified  the 
transaction.     Farwell   v.  Babcock,    65 
S.  W.  Rep.  599  (Tex.  1901),  a  case  in- 
volving a  corporation  owning  3,000,000 
acres  of  land  and  120,000  head  of  cattle 
valued  at  $10,000,000.     See  also  §§  649, 


662,  as  to  the  effect  of  the  transac- 
tion being  fully  stated  to  the  stock- 
holders and  approved  by  a  majority. 


m) 


1489 


§  653.] 


FBAUDS    OF    DIEECT0E8,  PROMOTERS,  ETC.  [CH,  XXXIX. 


porate  property  at  foreclosure  sale  thereof.  The  old  rule  was  that 
he  could  not  be  a  purchaser,  either  directly  or  indirectly,  at  the 
foreclosure  sale.  This  was  the  rule  whether  the  foreclosure  was 
instituted  by  those  interested  in  the  corporation  or  by  tliird  par- 
ties. If  the  director  niirchased  at  such  a  fon-closuro  sale  he  held 
the  property  as  trustee  for  the  benefit  of  the  corporation  ;ind  the 
stockholders.  Upon  beint,^  repaid  tiie  price  he  gave  therefor,  lie 
was  bound  to  make  over  the  property  to  the  corporation.'  The 
supreme  court  of  the  United  States,  however,  has  held  in  regard 
to  the  president  that  if  the  foreclosure  is  not  brought  about  by  the 
president  "  in  violation  of  his  duties  as  an  olTicer  of  the  company, 
his  official  relations  to  the  company  prior  to  the  foreclosure  did  not 
prevent  him  from  bidding  for  the  property  or  from  being  inter- 
ested in  its  purchase  "  by  another.' 


1  Harts  V.  Brown,  77  111.  226  (1875). 
To  same  effect,  Hope  v.  Vallej  City 
Salt  Co.,  25  W.  Va.  789  (1885),  where 
the  directors  resold  the  property  at 
three  times  its  cost  to  himself.  .See 
also  Jackson  u.  Ludeling,  21  Wall.  616, 
625  (1874),  where  the  directors  were 
part  of  those  who  purchased  at  a  fore- 
closure sale  of  the  corporate  property; 
also,  Munson  v.  Syracuse,  etc.  Ry.,  2'J 
Hun,  76(1883),  where  the  directors  pur- 
chased for  the  purpose  of  reorganizing 
the  corporation;  &  c,  103  N.  Y.  58  (1886), 
where  Munson  was  a  director  in  an 
insolvent  railroad  corporation,  and  also 
a  director  in  a  corporation  that  wished 
to  purchase  said  railroad,  and  in  behalf 
of  the  latter  company  contracted  to 
purchase  the  said  railroad  from  the 
bondholders  after  the  latter  should 
purchase  the  same  at  a  foreclosure  sale. 
The  court  refused  to  enforce  the  con- 
tract; Raleigh  v.  Fitzpatrick,  43  N.  J. 
Eq.  501  (1887),  where  the  directors  of  a 
corporation  owning  the  land  subject  to 
a  mortgage  allowed  a  foreclosure  to  be 
made,  and  then  purchased  at  the  sale. 
See  Foster  r.  Oxford,  etc  Ry.,  13  C.  B. 
200  (1853).  See  also  Allen  n  Jackson, 
123  111.  567(1887),  holding  a  director 
who  had  purchased  corjwrate  property 
at  a  foreclosure  sale  liable  to  former 
purchasers  of  that  property  from  the 
corporation,  subject  to  the  mortgaga 


Where  a  director  purchases  jiroperty 
from  an  insolvent  corj)oration,  "it  de- 
volves on  the  directors  to  show  that 
the  transaction  wa.s  made  in  good  faith, 
and  that  the  sale  produced  the  full 
value  of  the  proi>erty.  If  they  fail  to 
show  these  facts,  creditors  are  entitled 
to  compel  them  to  account  for  the  full 
value  of  the  pro[>erty."  Wilkinson  r. 
Bauerle,  41  N.  J.  Eq.  635  (1886);  Jones, 
etc.  Ca  V.  Arkansas,  etc.  Co.,  38  Ark. 
17  (1881),  involving  a  scheme  where  a 
director  purchased  at  a  foreclosure  sale 
ami  reorganized-  A  stockholder  who 
did  not  come  in  caused  the  purchase  to 
be  set  aside.  See  also  Dennis  v.  Ken- 
nedy, 19  Barb.  517  (1854).  Where  the 
directors  had  purchased  corporate  projv 
erty  after  its  sale  on  a  lien,  and  the 
purchase  by  them  was  held  to  be 
fraudulent,  the  passive  connivance  of 
a  director  renders  him, liable  the  same 
as  though  he  participated.  Weetjen 
V.  Vibbard,  5  Hun,  265  (1875).  A  director 
who  purchases  the  property  at  fore- 
closure sale  is  bound  to  turn  the  prop- 
erty over  to  the  corporation  on  being 
repaid  the  price  he  paid  therefor.  Kroe- 
gher  V.  Calivada,  eta  Co.,  119  Fed.  Rep. 
641  (1902). 

2  McKittrick  v.  Arkansas  Central  Ry., 
152  U.  a  473,  497  (1894).  In  Twin  Lick 
Oil  Co.  V.  Marbury,  91  U.  S.  587  (1875), 
a  director  loaned   monev  to  the  cor- 


1490 


<3H.  XXXIX.]  FRAUDS   OF   DIRECTORS,  PROMOTERS,  ETC. 


[§  653. 


Ao-ain,  it  has  been  held  that  where  the  directors  find  it  neces- 
sary  to  extend  the  plant  in  order  to  meet  competition,  and  the  cost 
is  greater  than  expected,  and  bonds  are  offered  to  the  stockholders 
and  not  taken,  and  the  directors  loan  money  to  the  company  on  the 
bonds  at  par,  and  then  on  foreclosure  buy  in  the  property,  their 
purchase  will  be  upheld,  there  being  no  actual  fraud  in  the  trans- 


poration,  took  bonds  therefor,  and  had 
the  bonds  secured  by  a  mortgage  run- 
Bing  to  a  third  person  as  a  trustee,  and 
upon  a  sale  by  the  trustee  the  director 
purchased  for  himself.  Laches  barred 
any  remedy.  Directors  may  purchase 
at  a  foreclosure  sale,  under  some  cir- 
cumstances. Saltmarsh  v.  Spaulding, 
147  Mass.  224  (1888).  A  director  may 
own  bonds  and  may  purchase  at  the 
foreclosure  sale.  The  sale  is  valid  even 
though  allowed  by  the  directors  from 
corrupt  motives,  and  this  was  known  to 
the  purchasing  trustee.  At  least  the 
stockholders  must  offer  to  redeem  be- 
fore they  can  do  anything.  Harpend- 
ing  V.  ]\Iunson,  91  N.  Y.  650  (1883).  The 
president  of  the  company  may  purchase 
at  the  foreclosure  sale.  He  does  not 
thereby  become  a  trustee  for  the  bond- 
holders. Credit  Co.  etc,  v.  Arkansas 
Cent.  K.  R.,  15  Fed.  Rep.  46  (1882). 
Where  au  the  capital  stock  is  deposited 
with  a  bank  as  security  for  certam 
debts  of  the  corporation  and  is  sold 
under  a  decree  of  the  court  for  the 
amount  of  such  debts,  the  sale  is  valid, 
although  the  president  of  the  bank  pur- 
chased the  stock  at  such  sale,  and  al- 
though he  had  already  purchased  the 
debts  so  secured,  it  being  shown  that  he 
had  been  one  of  the  creditors  from  the 
beginning.  Harrison  v.  Mulvane,  62 
Kan.  454  (1901).  A  director  in  au  in- 
solvent corporation  may  purchase  the 
property  at  the  receiver's  sale  at  public 
auction,  but  the  court  will  carefully 
scrutinize  the  purchase.  Janney  v. 
Minneapolis,  etc.,  79  Minn.  488  (1900).  A 
liquidating  trustee  of  a  national  bank 
may  purchase  at  the  sale  of  the  assets, 
notice  of  such  sale  having  been  given 
to  all  parties  interested.    Shappard  v. 


Cage,  19  Tex.  Civ.  App.  206  (1898).  A 
director  who  owns  bonds  may  purchase 
the  property  at  foreclosure  sala  Raw- 
lings  V.  New  Memphis,  etc.  Co.,  60  S.  W. 
Rep.  206(Tenn.  1900).  Seven'years' delay 
in  complaining  that  the  directors  issued 
bonds  to  themselves  for  no  consider- 
ation, and  then  foreclosed  and  bought 
the  road  in.  is  fatal.  Burgess  v.  St. 
Louis  County  R.  R.,  99  Mo.  496  (1889). 
At  a  reorganization  sale  a  director  may 
purchase  in  behalf  of  a  part  of  the  stock- 
holders, and  the  transaction  will  be  up- 
held if  the  price  is  a  fair  one.  Hayden  v. 
Official,  etc.  Co.,  42  Fed.  Rep  875  a890). 
A  director's  purchase  for  the  creditors 
and  certain  mortgage  bondholders  of 
the  mortgaged  property  at  a  foreclos- 
ure sale  cannot  be  set  aside  by  a  stock- 
holder five  years  after  the  sale,  where 
the  road  was  sold  for  all  it  was  worth, 
and  was  badly  in  debt,  and  required 
large  expenditures,  and  there  was  no 
possible  means  of  raising  more  money, 
and  the  stockholders  knew  of  the  con- 
dition of  things,  but  made  no  effort  to 
prevent  a  sale,  and  the  director  offered 
to  allow  the  stockholders  to  come  into 
a  reorganization,  and  offered  to  resell 
the  property  for  less  than  what  he  paid 
for  it.  This  is  the  rule  even  though  the 
property  subsequently  becomes  very 
valuable.  Osborne  v.  Monks,  21  S.  W. 
Rep.  101  (Ky.  1893).  An  insurance  com- 
pany cannot  refuse  payment  of  a  loss 
on  the  ground  that  the  insurer  was  a 
director  and  had  bought  the  corporate 
property  at  a  foreclosure  sale.  Caraher 
V.  Royal  Ins.  Co.,  63  Hun,  82  (1892); 
aff'd,  136  N.  Y.  645.  As  to  the  purchase 
of  the  property  by  the  president  and 
others  on  a  foreclosure,  with  a  view  to 
reorganization,  see  also  ch.  LH,  infra. 


1491 


§  653.] 


FHAUnS   OF    DIJJfClOKS,  PR0M0TP:RS,  etc.  [cII.  XXXIX. 


action.*  In  Michigan  it  is  held  that  as  against  a  stockholdor  a  di- 
rector may  purchase  the  property  at  foreclosure  sale.-  Judginc'nt 
creditors  cannot  complain  where,  upon  the  foreclosure  sale  of  the 
corporate  property,  the  president  purchases  the  property  at  its  full 
value.^  Where  the  directors  are  sureties  on  corporate  notes  se- 
cured by  mortgage  they  may  buy  in  the  property  at  the  fore- 
closure sale  for  their  own  protection.*  There  is  a  limit,  however. 
Thus,  where  a  director  who  practically  controlled  the  board  of  direct- 
ors caused  all  the  earnings  of  the  railroad  to  be  used  in  improving  the 
property,  therel^y  j)reventing  a  payment  of  interest  on  the  corpo- 
rate indebtedness  and  bringing  about  a  foreclosure  of  the  mortgage, 
the  director  himself  having  purchased  the  bonds  secured  by  the 
mortgage  and  having  purchased  the  railroad  at  the  foreclosure  sale, 
the  court  held  that  the  purchase  at  the  foreclosure  sale  by  the  di- 
rector was  voidable.  Upon  repayment  to  him  of  the  purchase  price 
he  was  compelled  to  retransfer  the  property  to  the  corporation, 
even  though  another  foreclosure  would  be  the  result.  Third  per- 
sons who  had  purchased  the  road  from  him  with  notice  stood  in 
no  other  position  than  the  director  himself.' 

The  same  general  rules  apply  to  execution  sales.     A  director  is 

1  Foster  v.  Belcher's,  etc.  Co.,  118  Mo.     cannot  complain  that  the  corporation 
238  (1893).  sold  some  of  its  property  to  two  direct- 

2  Lucas  V.  Friant,  111  Mich.  420  (1897).     ors  in  consideration  of  their  paying cer- 
"Inglehart  r.  ThousJind  Island  Hotel     tain  of  the  debts;  neither  can  he  claim 


Co.,  109  N.  Y.  454  (1888).  A  corporate 
creditor  cannot  hold  a  director  liable  for 
a  profit  which  he  has  made  in  purchas- 
ing a  property  at  a  foreclosure  sale  even 
though  the  corporation  was  the  equi- 
table mortgagor  of  such  property. 
Ready  v.  Smith,  70  S.  W.  Rep.  484  (Mo. 
1902).  A  sale  of  property  by  an  insolv- 
ent corporation  to  one  of  its  directors 
is  valid  as  against  its  creditors  where 
a  full  consideration  was  paid  therefor. 


that  the  transaction  was  not  duly  au- 
thorized by  the  board  of  directors  or 
signed  by  the  projjer  officers,  where  he 
has  participated  in  the  results  of  tlieir 
action.  Swentzel  v.  Franklin,  etc.  Co., 
108  Ma  272  (1902).  Cf.  72  S.  W.  Re|i.  075. 

*  College,  etc.  Line  v.  Ide,  15  Tex.  Civ. 
A  pp.  273  (1897). 

5  Covington,  etc  R  R.  v.  Bowler,  9 
Bush  (Ky.),  408  (1872).  In  Kitchen  r.  St. 
Louis,  etc.  Ry.,  09  Ma  224  (1878),  the 


Webb  V.  Rockefeller,  71  Pac.  Rep.  283    court  said:  "  Wliatever  is  suflBcient  to 


(Kan.  1903).  A  creditor  of  an  insolvent 
corporation  who  causes  its  property  to 
be  sold  under  execution  cannot  com- 
plain that  a  director  purchased  at  the 
sale  at  a  low  price.  Potvin  v.  Denney 
Hotel  Ca,  20  Wash.  309  (1901).  Where 
a  director  purchases  the  corporate  as- 
sets at  a  mortgage  sale  for  much  less 
than  their  value,  a  creditor  of  the  cor- 


put  a  person  on  inquiry  is  notice;  that 
is,  when  a  man  has  sufficient  informa- 
tion to  lead  him  to  a  fact,  he  shall  be 
deemed  cognizant  of  it."  So  also  where 
a  director  agrees  to  redeem  from  an  ex- 
ecution sale  certain  corporate  property, 
on  an  understanding  that  he  does  it 
for  the  corporation,  and  his  payment  is 
to  be  a  preferred  corporate  debt,  the 


poration  may  hold  him  liable  for  profits  corporation  may  redeem  long  subse- 
made  by  him.  Fishel  v.  Goddard,  09  quently,  even  though  the  director  had, 
Pac.  Rep.  007  (Colo.  1902).    A  creditor     after  a  time,  treated  the  property  as 

1492 


CH.  XXXIX.]  FRAUDS    OF   DIRECTORS,  PROMOTERS,  ETC. 


[§  C53. 


disqualified  from  purchasing  corporate  property  sold  under  execu- 
tion.^ Where  a  director  causes  the  property  to  be  sold  on  an  exe- 
cution issued  on  his  own  debt,  and  buys  in  the  property,  he  must 
allow  other  creditors  to  participate  in  the  price  paid  at  the  execu- 
tion sale.-  He  cannot  be  interested  in  the  purchase  of  corporate 
property  sold  for  the  non-payment  of  taxes.^  The  corporation  may 
reclaim  the  property  upon  payment  to  the  director  of  the  amount 
he  paid  therefor.  A  similar  rule  applies  where  a  director  allows  or 
brings  about  a  forfeiture  of  a  lease  which  the  company  holds  as 
lessee,  and  then  takes  a  new  lease  of  the  same  property  in  his  own 
name.*    But  a  corporate  officer  may  purchase  property  at  an  exe- 


his  own.  Wasatch  Min.  Co.  v.  Jennings, 
5  Utah,  243,  385  (1887).  Where  a  corpo- 
ration is  liable  to  an  officer  on  a  debt, 
the  officer  may  purchase  at  a  foreclosure 
sale  property  upon  which  the  corpora- 
tion has  a  subsequent  lien ;  may  pay  the 
prior  lien  out  of  the  corporate  funds; 
and  may  hold  the  title  to  secure  the 
debt  due  him.  Smith  r.  Lansing,  22 
N.  Y.  520  (1860). 

1  Hoyle  V.  Plattsburgh,  etc.  R  R,  54 
N.  Y.  314  (1873).  Where  the  president 
and  a  director  purchase  the  corporate 
property  at  an  execution  sale,  and  agree 
to  convey  it  to  the  corporation  upon  re- 
payment of  the  amount  paid,  the  corpo- 
ration may  redeem  it  long  subsequently 
upon  payment  and  reimbursement  for 
improvements  made.  Wasatch  Min.  Co. 
V.  Jennings,  5  Utah,  243,  385  (18881 
Where  in  a  joint-stock  company  one 
member  buys  all  the  company's  prop- 
erty at  an  execution  sale,  though  he 
owes  the  company  more  than  the  price 
paid,  the  company  is  entitled  to  the 
property  and  an  accounting  lies.  Brad- 
bury V.  Barnes,  19  Cal.  120(1861).  Where 
the  director  of  an  insolvent  corporation 
buys  its  property  at  an  execution  sale 
to  which  he  is  not  a  party,  he  is  liable 
to  the  corporation  for  the  value  of  the 
property  less  the  amount  he  paid  for  it. 
Tobin  Canning  Co.  v.  Fraser,  81  Tex. 
407  (1891).  The  purchase  of  a  boat  at 
judicial  sale  by  the  manager  of  the  cor- 
poration owning  such  boat,  for  himself 
and  other  stockholders,  may  not  cut  off 
the   maritime  lien   of  another  person. 


•  Crosby  v.  The  Lillie.  42  Fed.  Rep.  237 
(1890).  Where  a  director  and  treasurer 
buys  corporate  land  at  an  execution 
sale  brought  about  by  himself,  he  can- 
not maintain  an  action  of  forcible 
entry  and  detainer  against  the  com- 
pany. Hoffman  v.  Reichert,  147  111.  274 
(1893),  afT'g  31  111.  App.  558.  Where  a 
director  purchases  for  §8,400  property 
of  the  company  sold  on  an  execution  on 
a  judgment  obtained  by  him  against 
the  company,  and  within  a  year  sells 
the  property  for  §23,000,  he  must  pay 
over  the  profit  to  the  company.  Be 
Iron,  etc.  Mfg.  Co.,  19  Ont.  Rep.  (Can.) 
113  (1889).  Where  the  president  turns 
over  claims  against  the  corporation  to 
his  wife,  even  for  value,  and  the  corpo- 
rate property  is  sold  out  to  her  on  judg- 
ments on  the  notes,  although  the  corpo- 
ration was  doing  a  good  business  and 
in  no  danger,  the  court  will  set  the 
transaction  aside.  Butler,  etc.  Co.  v. 
Robbins,  151  111.  588  (1894). 

2  Kittel  V.  Augusta,  etc.  R  R,  78  Fed. 
Rep.  855  (1897). 

» Smith  V.  Fagan,  17  Cal.  178  (1860). 
Where  the  president  of  the  mortgagor 
corporation  allows  the  property  to  be 
sold  for  non-payment  of  taxes  and  buys 
in  the  property  himself,  the  mortgagee 
may  recover  such  property  from  him- 
Appleton,  etc.  Ca  v.  Central  Trust  Co. 
etc..  93  Fed.  Rep.  286  (1899). 

*  Bengley  v.  Wheeler,  45  Mich.  493 
(1881);  Smith  v.  Bank  of  Victoria,  41 
L.  J.  (R  C.)  34  (1872).     In  the  latter  case 


the  director  reorganized  and   allowed 


1493 


§  G53.] 


FRAUDS    OF   DIRECTORS,  PROMOTERS,  ETC.  [CH,  XXXIX^ 


cution  sale  where  he  does  so  in  ^ood  faith  and  pa^-s  the  full  valuo 
of  the  property.^  The  disability  of  directors  to  purchase  property 
from  the  corporation  may  restrict  their  right  to  subscribe  for  unis- 
sued stock  of  the  corporation.'^  There  is  some  difficulty  in  deter- 
mining whether  this  disqualification  of  a  corporate  officer  to  pur- 
chase property  from  the  corporation  extends  to  officers  other  than 
the  president  and  directors.  It  has  been  held  to  affect  the  treasurer 
of  the  corporation^  and  also  the  cashier  of  a  bank.*  It  has  also 
been  intimated  that  a  superintendent  of  the  corporation  is  under 


part  of  the  old  stockholders  to  come  in. 
A  dissenting  stockholder  caused  the 
whole  transaction  to  be  set  asida 

1  Horbach  v.  Marsh,  37  Neb.  22  (1893). 
Where  directors  are  joint  indorsers  of 
corporate  notes  and  one  of  them  buys 
the  property  at  public  sale  in  good 
faith  and  pays  the  notes,  he  may  sue 
the  others  for  contribution  and  need 
not  account  for  profits  he  made  in  such 
purchase.  Weeks  u  Parsons,  176  Mass. 
570  (1900).  In  a  stockholders'  suit  to 
set  aside  an  execution  sale  of  all  the 
property  for  a  debt  due  to  the  directors 
and  a  purchase  at  the  sale  by  the  di- 
rectors, it  is  not  necessary  for  the  court 
to  order  an  accounting,  but  the  court 
may  hear  the  entire  case  and  decide  it. 
Davis  V.  Hofer,  38  Or.  150  (lOOOj. 

2  Where  a  director  takes  for  himself 
the  right  of  the  corporation  to  subscribe 
for  new  stock  he  is  liable  in  damages. 
Greenfield  Sav.  Bank  v.  Simons,  133 
Mass.  415  (18S2).  Where  the  directors 
cause  treasury  stock  to  be  sold  to  them- 
selves at  less  than  its  real  value,  and 
for  the  purpose  of  carrying  an  election, 
the  court  will  set  the  transaction  aside 
as  fraudulent.  Hilles  v.  Parrish,  14 
N.  J.  Eq.  380  (1862).  Where,  long  after 
the  company  has  commenced  business, 
it  has  disposed  of  its  property  and  is 
ready  to  declare  a  five  per  cent,  divi- 
dend, the  directors'  issuance  to  them- 
selves at  par  of  that  part  of  the  original 
capital  stock  which  never  had  been 
issued  is  a  fraud  on  the  remaining 
stockholders.  Arkansas,  etc.  Soc.  v. 
Eichholtz,  45  Kan.  164  (1891).  Where  a 
director  issues  to  himself  at  par  stock 


belonging  to  the  coiporation,  and 
which  is  worth  more  than  par,  tlie 
transaction  is  voidable;  but  if  all  the- 
stockholders  acquiesce  therein  for  a 
long  time,  the  acijuiescence  of  the  exec- 
utors of  a  deceased  stockholder  binds 
the  estata  St  Croix  Lumber  Co.  v. 
Mittlestadt,  43  Minn.  91  (1890).  But  see 
Sims  V.  Street  R  R.,  37  Ohio  St.  556 
(1882).  See  also  ^§  65.  70,  286,  614,  supra. 
Cf.  Charleston  Ins.  &  T.  Co.  r.  Sebring, 
5  Rich.  Eq.  (S.  C.)  342  (1853),  where  the 
directors  purchased  from  the  corpora- 
tion stock  which  the  corporation  had 
previously  issued  and  had  purchased 
for  itself.  See  also  Parker  f.  McKenna, 
L.  R.  10  Ch.  A  pp.  90  (1874).  and  York, 
etc.  Ry.  V.  Hudson,  16  Beav.  485  (1853), 
holding  that  upon  an  increase  of  the 
capital  stock  the  directors  have  no 
right  to  make  a  secret  profit  in  its  dis- 
posal. 

SMcAUen  v.  Woodcock,  60  Mo,  174 
(1875),  holding  that  the  treasurer's  pur- 
chase of  the  corporate  property  at  an 
execution  sale  thereof  is  a  purchase  for 
the  benefit  of  the  corporation.  See 
also  Parker  v.  Nickerson,  112  Mass.  195 
(1873).  Where  the  general  manager 
sells  goods  to  himself  under  another 
name,  the  corporation  may  compel  him 
to  pay  over  to  it  the  profit  made  by  him, 
the  board  of  directors  having  no  knowl- 
edge of  the  character  of  such  sales. 
Steward  Mfg.  Co.  v.  Steward,  70  S.  W. 
Rep:  808  (Tenn.  1902). 

*  First  Nat.  Bank  v.  Drake,  29  Kan.- 
311  (1883);  Torrey  v.  Bank  of  Orleans,  9 
Paige,  649  (1842):  aff"d,  Bank  of  Orleans 
V.  Torrey,  7  Hill,  260. 


1494 


CH.  XXXIX.] 


FKAUDS    OF   DIRECTORS,  PROMOTERS,  ETC. 


[§  653. 


the  same  disability.^  A  stockholder,  however,  even  though  he  owns 
a  majority  of  the  stock  of  the  corporation,  may  at  a  puhlio  sale  of 
its  property  buy  such  property.  "  He  has  his  own  interests  to  pro- 
tect, and  is  not  charged  with  the  care  of  the  interests  of  the  other 
stockholders.  They  act  for  themselves."  -  Where  a  reorganization 
committee  purchase  bonds  at  a  price  less  than  the  amount  finally 
realized  on  the  bonds,  and  keep  the  profit,  they  are  liable  jointly 
and  severally  for  the  profit  to  the  parties  who  have  participated  in 
the  reorganization,  and  the  fact  that  in  organizing  the  new  com- 
pany they  stated  that  profits  made  by  them  "  from  interim  invest- 
ments "  were  excluded  is  not  a  suiBcient  disclosure  of  their  secret 
profit.'  Even  though  a  contractor  taking  stock  and  bonds  in  pay- 
ment for  work  subcontracts  the  work  for  the  stock,  and  then  fore- 
closes the  mortgage  and  buys  the  property  in,  the  subcontractor 
cannot  hold  him  liable  for  the  stock.*  A  commissioner,  appointed 
by  the  court  to  sell  the  assets  of  a  company,  cannot  sell  to  a  bank 
in  which  he  is  a  stockholder  and  director,  even  though  the  sale 
and  price  were  fair.* 

An  insurance  company's  secretary  has  no  right  to  insure  in  the 
company  his  own  property,  unless  other  officers  properly  approve 
of  it'    A  judgment  that  a  corporation  has  a  right  to  have  set  aside 


» Cook  V.  Berlin  Woolen  Mill  Co.,  43 
Wis.  433  (1877).  In  this  case  the  super- 
intendent's purchase  was  illegal,  inas- 
much as  one  of  the  directors  was  a 
secret  partner  in  the  purchase  A  cor- 
poration may  set  aside  an  execution 
sale  fraudulently  concealed  by  its  agent, 
who  was  interested  in  the  judgment, 
which  fact  the  purchaser  knew.  Lang 
Syne,  etc.  Co.  v.  Ross.  20  Nev.  127  (1888). 
The  superintendent  and  surveyor  of  a 
rural  cemetery  association  may  pur- 
chase from  it  a  large  number  of  lots  in 
the  cemetery,  although  he  intends  to 
resell  them.  Palmer  v.  Cypress  Hill 
Cemetery,  122  N.  Y.  429  (1890). 

2  Price  r.  Holcomb,  89  Iowa,  123(1893); 
Mickles  v.  Rochester  City  Bank,  11 
Paige,  118  (1844).  Even  though  an  offi- 
cer of  a  mortgagor  owns  a  majority  of 
the  stock,  and  is  also  a  creditor,  and 
promotes  a  suit  for  a  receivership  and 
sale  of  the  corporate  property,  yet  he 
may  purchase  at  the  foreclosure  sale, 
even  at  a  nominal  figure,  and  a  corpo- 
ration to  which  he  transfers  it  in  ex- 


change for  the  latter's  capital  stock 
may  be  a  bona  fide  purchaser  for  value, 
even  though  it  is  chargeable  with  notice 
of  all  the  facts,  and  may  insure  the 
property  for  its  own  benefit  and  not  for 
the  benefit  of  an  underlying  mortgage. 
Farmers',  etc.  Co.  v.  Penn.  etc.  Co.,  103 
Fed.  Rep.  132,  157  (1900).  Even  though 
the  purchasers  of  an  equity  in  land  sell 
it  to  a  corporation  which  they  form  at 
a  price  which  pays  them  back  their 
money,  and  more,  and  the  corporation 
becomes  insolvent  and  they  purchase 
the  land  at  execution  sale,  yet  a  stock- 
holder cannot  have  the  sale  set  aside 
unless  he  repays  to  them  the  amounts 
actually  disbursed  by  them.  Flecken- 
stein  V.  Waters,  160  Mo.  649  (1901).  See 
also  §  886,  infra. 

SQluckstein  v.  Barnes,  [1900]  A.  C. 
240,  afl'g  [1898]  2  Ch.  153. 

4  McLane  v.  King.  144  U.  S.  260  (1893). 

sMcCuHough,  etc.  Co.  v.  Nat.  Bank, 
etc.,  Ill  Ga.  132  (1900). 

6  Pratt  V.  Dwelling,  etc.  Ins.  Co.,  130 
N.  Y.  206  (1891).    Where  the  secretary. 


1495 


§§  654,  655.]        FRAUDS    of   directors,  promoters,  etc.  [cH.  XXXIX. 

a  sale  of  certain  of  its  property  to  its  president  is  personal,  and 
cannot  be  assigned.' 

§  Q^4i.  Reorganization  of  corimrations. —  This  subject  is  consid- 
ered elsewhere.* 

§  655.  Issue  of  ^^ watered ^^  stock  and  of  londs  at  discount  — 
Division  of  assets  leaving  creditors  unpaid. —  The  general  subject 
of  the  legality  of  issues  of  stock'  and  bonds*  at  less  than  their  par 
value  is  considered  elsewhere.  The  fact  that  such  issues  are  made 
to  directors  instead  of  to  the  public  is  immaterial,  unless  actual 
fraud  is  involved.  As  will  be  shown  hereafter,  bonds  may  legally 
be  issued  to  directors,'  and  such  issues  may  be  at  less  than  par.® 
A  corporate  creditor  cannot  complain  that  a  company  sold  its  bonds 
to  some  of  the  directors  at  a  discount  of  twenty-five  per  cenf 
Xevertheless,  although  none  of  the  stockholders  and  creditors  of  a 
company,  which  is  in  difliculties,  object  to  a  new  issue  of  bonds 
and  stock  for 'con  tract  work,  a  part  of  the  bonds  and  stock  being 
given  to  the  stockholders  and  bondholders  as  a  bonus,  yet  where 
the  intention  is  to  have  outside  people  invest  in  the  bonds  and 
stock  of  the  company,  the  scheme  is  illegal  and  the  directors  are 
liable.^  As  between  the  directors  and  the  stockholders  the  rule 
invalidating  contracts  between  the  corporation  and  its  directors' 
would  apply  to  the  sale  of  bonds  at  a  price  which  is  unfair.  The 
stockholders  may  sue  the  directors  for  gross  mismanagement,  and 
for  damages,  where  fraudulent  mortgages  have  been  placed  by 
them  on  the  corporate  property.^"  A  division  of  the  assets  of  a 
corporation  leaving  its  creditors  unpaid  is  considered  elsewhere." 
A  stockholder  cannot  secure  a  transfer  from  the  corporation  to 
himself  of  the  property  of  the  corporation  so  as  to  deprive  a  cor- 

who  is  also  general  manager,  buys  in  8  London  Trust  Co.  v.  Mackenzie,  68 

the  corporate  property  at  an  execution  L.  T.   Rep.   380  (1893).    See  also  §  766, 

and  tax  sale,  he  must  yield  it  up  to  the  infra.      Directors  may  be   personally 

company  upon  payment  of  the  amount  liable   for   illegally  issuing  stock  and 

for  which  it  was  sold,  and  liis  grantee,  afterwards  paying  to  the  stockholders 

who  is  also  in  a  fiduciary  relation,  must  a  portion  of  the  price  received  by  the 

do  the  same.     San  Francisco  Water  Co.  corporation  for  bonds  and  stock,  the 

V.  Pattee,  86  Cal.  623  (1890).  stock  being  contributed  by  the  stock- 

1  Smith  V.  Pacific  Bank,  70  Pac.  Rep.  holders,  but  they  are  not  liable  jointly 
184  (CaL  1902).  for    money  so  paid   to  each  of  them 

2  See  ch.  Lll,  infrcu                  •  separately  aa  stockholders.  Great  West- 

3  See  ch.  Ill,  supra,  ern,  etc.  Co.  v.  Harris'  Estate,  111  Fed. 
<  See  ch.  XLVI,  infra.  Rep.  38  (1901). 

5  See  §§  660,  661,  692,  infra.  9  See  §§  649,  652,  mpra. 

6  Du  Pont  V.  Northern  Pac.  R  R,  18       lOLandis  v.  Sea  Isle,  eta  Co.,  53  N.  J. 
Fed.  Rep.  467  (1883).  See  also  §  766,  infra.    Eq.  654  (1895). 

^Bank  of  Toronto  v.  Cobourg,  etc.       ^  See  ch.  XL,  ni/ra. 
Ry.,  10  Ont.  Rep.  (Can.)  376  (1885). 

1496 


•CH.  XXXIX.]  FRAUDS    OF   DIKECTOKS,  PROMOTERS,  ETC.  [§  656. 

porate  creditor  of  the  payment  of  his  debt.  Where  he  does  so 
through  legal  proceedings  fraudulently  and  by  conspiracy,  the  prop- 
erty may  be  reached.^  The  receiver  of  an  insolvent  corporation 
which  has  been  rendered  insolvent  bv  reason  of  its  assets  having 
been  absorbed  by  another  corporation  may  hold  its  directors  liable 
for  the  loss,  and  his  suit  may  be  at  law  or  in  equity.^  Although 
one  company  owns  a  majority  of  the  stock  of  another  company, 
and  the  property  of  the  latter  company  is  leased  to  the  former  at  a 
fixed  rental,  the  rent  to  be  paid  to  bondholders  of  the  latter,  a  judg- 
ment creditor  of  the  latter  cannot  have  the  lease  set  aside  unless 
he  can  show  that  the  income  of  the  latter  company  is  more  than 
sufficient  to  pay  the  rental,  there  being  no  proof  that  the  rental 
was  unfair,  and  there  being  proof  that  the  rental  is  more  than 
the  company  earned.  The  principle  that  the  owner  of  a  majority 
of  the  stock  will  not  be  permitted  to  defraud  stockholders  or  credit- 
ors does  not  apply.'  As  against  corporate  creditors  the  company 
cannot  trade  off  all  its  assets  for  other  property,  where  the  latter 
property  is  not  of  a  character  to  be  used  to  pay  debts,  even  though 
ultimately  it  will  probably  be  very  valuable,  such  trade  being  with 
the  general  manager  of  the  company.* 

§  056.  /Stockholders''  actions  against  jtar sons  other  than  directors 
for  frauds,  etc.,  against  the  corporation. —  Ordinarily,  where  third 
persons  have  defrauded  a  corporation,  and  have  defrauded  it  by 
collusion  with  the  corporate  officers,  the  stockholder's  action  is 
against  both  the  officers  and  the  third  persons,  all  being  joined  as 
parties  defendant.  When  such  is  the  case  the  third  parties  may  be 
held  liable,  even  though  the  corporation  itself  is  in  no  position  to 
complain.*     Where  the  directors  have  turned  over  the  property  to 

1  Angle  V.  Chicago,  etc.  Ry.,  151  U.  S.  Albans,  etc.  Works,  50  Vt.  477  (1878), 
1  (1894).  very  properly  says  "that  whenever  the 

2  Mason  v.  Henry,  152  N.  Y.  529  (1897).  trustee  has  been  guilty  of  a  breach  of 

3  Sidell  V.  Missouri  Pac.  Ry.,  78  Fed.  trust,  and  has   transferred    the    trust 
Rep.  724  (1897).  property  by  sal^   or  otherwise  to  any 

^  Levins  v.  Peoples,  etc.  Co.,  38  S.  W.  third  party,  the  cestui  que  trust  has  a 
Rep.  733  (Tenn.  1896).  full  right  to  follow  such  property  into 
*  See  the  cases  in  the  notes  to  §§  649-  the  hands  of  such  third  party,  unless 
'655.     Thus,  where  a  railroad  has  been  he  stands  in  the  situation  of  a  6o7?a^de 
leased   to  another    railroad   company  purchaser  for   value  without  notice." 
under  a  certain  agreement  of  the  latter  See  also  Imperial,  etc.  Assoc,  v.  Cole- 
guaranteeing  a  fixed  sum  to  the  former,  man,  L.  R.  6  H.  L.  189  (1873).     A  person 
.and  the  lessee  railroad  company  refuses  receiving  corporate  money  in  compro- 
to  fulfill  its  contract  and  has  control  of  mise  of  his  suit  against  guilty  directors 
the  lessor  railroad,  a  stockholder  of  the  may  be  compelled  to  pay  it  back  to  the 
latter  may  bring  suit  to  remedy  the  corporation.     Erie  Ry.  v.  Vanderbilt,  5 
•wrong.    March  V.  Eastern  R.  R,  40  N.  H.  Hun,  123  (1875).  The  fact  that  an  officer 
■  548  (1860).     And  the  case  of  Lewis  v.  St.  of  the  company  took  part  in  a  swindling 

1497 


§  Go 6.]  FEAUDS    OF    DIRECTORS,  PROMOTERS,  ETC.  [CH.  XXXIX. 

an  assignee  to  pay  illegal  debts,  the  stockholders  may  file  a  bill  to 
set  the  transaction  aside.'  A  director  of  an  assessment  life  insur- 
ance company  who  receives  money  for  causing  a  person  and  his 
friends  to  be  elected  directors,  thereby  giving  them  the  control  of 
the  company,  together  with  its  property,  may  be  held  liable  by  the 
receiver  of  the  company  for  the  money  so  received.^  Where  the 
officers  and  directors,  in  a  conspiracy,  resign  their  offices  and  sub- 
stitute other  officers  who  are  irresponsible  and  untrustworthy,  in 
consideration  of  unlawful  payments  made  to  the  former  directors, 
and  the  assets  of  the  corporation  are  thereby  lost,  the  first-named 
directors  are  personally  responsible  for  their  action,  and  a  receiver 
of  the  corporation  may  hold  them  liable.'  An  attorney  who  re- 
ceives money  from  a  company  for  a  specific  purpose  cannot  retain 
it  and  set  it  off  against  his  fees.*  A  stockholder  in  a  trust  com- 
pany may  file  a  bill  in  equity  to  enjoin  the  company  from  paying 
an  illegal  income  tax  to  the  federal  government.* 

Another  class  of  cases  arises  when  third  persons  commit  frauds 
against  the  corporation  without  the  collusion  of  the  corporate  offi- 
cers, but  the  latter  neglect  or  refuse  to  institute  a  suit  to  rectify 
the  wrong.  The  right  of  the  stockholder  is  then  not  so  clear.  It 
is  ordinarily  within  the  discretion  of  the  corporate  officers  to  en- 
force, compromise,  or  abandon  claims  which  the  corporation  may 
have  against  third  persons.  Generally  this  exercise  of  discretion 
cannot  be  questioned  or  remedied  by  the  stockholders,  except  by 
electing  at  a  subsequent  election  directors  more  in  accord  with  the 
stockholders'  views.  It  is  possible,  however,  that  cases  may  occur 
where  the  judgment  of  the  directors  is  so  palpably  and  injuriously 
wrong  that  the  courts  will  sustain  a  stockholder's  action  herein. 
This  subject  is  treated  elsewhere.^ 

scheme  does  not  deprive  the  company  plaint  is   multifarious  where   it  joins- 

of  its  right  to  recover  back  moneys  of  parties  not  having  a  common  interest 

vehich  it  vras  wrongfully  deprived  by  and  unites  distinct  and  disconnected 

such  schema     Farrow  y.  Holland  Trust  causes  of  action.     Fry  v.  Rush,  65  Pac. 

Co.,  74  Hun,  585   (1893).     Where  trust  Rep.  701  (Kan.  1901). 

deeds  to  a  trust  company  run  to  the  2McClure  v.  Law,  161  N.  Y.  78  (1899). 

president  as  trustee,  the  court  will  com-  sBosworth  u   Allen,   168  N.  Y.    157 

pel  him  to  administer  the  trusts  for  the  (1901). 

benefit  of  the  company.    Tulleys  v.  Kel-  ■*  Re  Mid-Kent  Fruit  Factory,  [1896]  1 

ler,  45  Neb.  220  (1895).  Ch.  567.     Where  bonds  are  issued  by  a 

i  People's  Sav.  Bank  v.  Colorado,  etc  corporation  to  a  director  or  officer  for 

Co.,  8  Colo.  App.  354  (1896).    Where  an  a  certain  purpose,   he    cannot    retain 

investment    company  in   a    receiver's  them  on  the  ground  that  the  company 

hands  has  paid  all  its   debts,  but  by  owes  him  money.     Greenville  Gas  Co. 

fraud  its  remaining  assets  have  been  v.  Reis,  54  Ohio  St.  549  (1896). 

transferred  to   various   parties,  a  suit  5  Pollock  v.  Farmers'  L.  &  T.  Co.,  157" 

lies  at  the  instance  of  a  stockholder  to  U.  S.  429  (1895). 

set  aside  the  transfer;   but  the  com-  t*  See  §  750,  i»/ra. 

1498 


CH.  XXXIX.]  FRAUDS    OF    DIREOTOKS,  PKOMOTEKS,  ETC. 


[§  65T.. 


§  657.  Salaries  or  compensation  to  corporate  officers.—  A  frequent 
fraud  upon  corporations  and  stockholders  is  perpetrated  by  the  cor- 
porate funds  being  used  to  pay  illegal  salaries  and  compensation. 
to  corporate  officers  and  assistants.  It  is  a  general  rule  that,  a 
director  is  not  entitled  to  any  pay  for  his  services  to  the  corporation 
as  a  director  where  there  has  been  no  agreement  in  advance  that  he 
shall   have   a   salary.^     Hence  a  salary  or  back  pay   voted  to   a 


1  American  Cent.  Ry.  v.  Miles,  53  III. 
174(1869);  Illinois  Linen  Co.  v.  Hough, 
91  111.  63  {1878);  Citizens'  Nat.  Bank  v. 
Elliott,   55  Iowa,   104  (1880):  Smith  v. 
Putnam,  61  N.  H.  632  (1883).    The  presi- 
dent cannot  claim  a  salary  for  services 
after  dissolution.     Mason    v.   Pewabic 
Min.  Co.,    66  Fed.  Rep.   391  (1894).     A 
president  who  is  a  large  stockholder, 
and  who  of  his  own  accord  renders  serv- 
ices  to  advance   its   interests,  cannot 
afterwards  recover  a  salary  or  even  his 
personal  expenses,  the  claim    of    the 
president  in  this  case  being  $1,000,000. 
McMullen  v.  Ritchie,  64  Fed.  Rep.  253 
(1894).    The  vice-president  of  a  bank  is 
not  entitled  to  a  salary  where  none  had 
been  agreed  upon.     Blue  v.  Capital  Nat. 
Bank,  145  Ind.  518  (1896).    In  a  suit  by 
a  director  for  reasonable  compensation 
the  company  may  show  its  practice  in 
regard  to  salaries;  also  the  holdings  of 
the  director  as  a  stockholder,  and  also 
any  agreement   between   the  original 
incorporators  that  no  salaries  be  paid. 
McCarthy  v.  Mt.  Tecarte,  etc,  Co.,  Ill 
Cal.  328  (1896),    Where  one  company 
sells  out  to  another,  and  the  president 
of  the  former  goes  into  the  employ  of 
the  latter,  the  presumption  is  that  his 
salary  as  president  ceases.    Simonson 
V.  New  York  City  Ins.  Co.,  141  N.  Y.  13 
(1894).    Where,  by  agreement  between 
the  corporation  and  its  creditors,  the 
corporate  affairs   are   managed    by  a 
committee  of  the  creditors,  the  commit- 
tee may  collect  for  their  services.    The 
committee  may  sue  jointly.    Dallas  v. 
Columbia,  etc.  Co.,  158  Pa.  St.  444(1893). 
In  Danville,  etc.  R.  R.  v.  Kase,  39  Atl. 
Rep.  301   (Pa.  1898),  where  the  court 
compelled  the  president  of  the  company 


to  refund  a  back  salary  which  had  been 
voted  and  paid  to  him,  the  court  never- 
theless said:  "Kase  for  years,  from  the 
inception  of  the  enterprise  to  its  close, 
performed  most   arduous    duties    and 
rendered  the  most  drudging  service  to 
the  company.    He  was,  in  one  sense, 
the  company,  and  without  him  there 
would  have  been  no  railroad.    Some  of 
his  acts  were  reckless,  and  perhaps  im- 
provident.    He  was  strong,  energetic, 
and  domineering.     The  only  one  who 
seemed  to  exercise  any  restraint  upon 
him  was  Mr.  Wolverton,  the  treasurer, 
and  he  often  failed  in  holding  him  to 
anything  like  business  methods.     But 
immense   work,  whether  good  or  ill, 
Kase  performed;  and  if  this  work  had 
been  preceded  by  a  contract  for  reason- 
able compensation,  he  would  be  entitled 
to  a  credit  for  the  contract  price."    A 
director  who  receives  a  salary  for  cer- 
tain services  cannot  recover  a  further 
sum  for  other  services,  where  he  was 
not  expressly  employed  to  render  the 
latter  services  and  there  was  no  promise 
to  pay.     Acceptance  of  the  service  is 
immaterial.    Gill  v.  New  York  Cab  Co., 
48  Hun,  524  (1888),  holding  also  that  a 
vice-president  cannot  recover  for  extra 
services  where  there  was  no  agreement 
to  pay  him.    An  allegation  that  the 
plaintiff  had  demanded  that  the  presi- 
dent repay  an  illegal  salary,  and  that 
he  refused  to  do  so,  and  that  he  con- 
trolled the  board  of  directors  and  that 
they  refused  to  take  action,  is  sufficient 
even  in  Massachusetts.    Blair  v.  Tele- 
gram News.  Co.,  172  Mass.  201  (1898). 
The  secretary  of  a  director  is  not  en- 
titled to  pay.    West,  eta  Co.  v.  Rose^ 
76  Miss.  61  (1898). 


1499 


§  657.] 


FRAUDS    OF    DIRECTORS,  PROMOTERS,  ETC. 


[CH. 


XXXIX. 


director  after  the  services  have  been  rendered  cannot  be  enforced 
SO  far  as  such  pay  is  for  his  services  as  director  only,  and  not  for 
special  services  performed  by  him.  It  is  invalid  and  voidable.  It 
is  the  same  as  giving  away  the  assets  of  the  corporation.^ 

Where  an  illegal  salary  has  been  paid,  with  the  consent  of  a  raa- 


1  Bennett  v.  St.  Louis,  etc.  Co..  19  Mo. 
App.  349  (1885);  Ogden  v.  Murray,  39 
N.  Y.  202  (1868);  Blatchford  v.  Ross,  5 
Abb.  Pr.  (N.  S.)  434  (1869);  Jones  u  Mor- 
rison, 31  Minn.  140  (1883);  Maux  Ferry, 
etc.  Co.  V.  Branegan,  40  Ind.  361  (1872); 
Loan  Assoc,  v.  Stonemetz,  29  Pa.  St.  534 
(1858);  Holder  v.  Lafayette,  etc.  Ry.,  71 
111.  106  (1873),  where  the  director  even 
acted  as  treasurer;  Gridley  r.  Lafay- 
ette, etc.  Ry.,  71  111.  200  (1873).  where 
the  director  was  a  member  of  the 
executive  committee.  Directors  are 
not  liable  to  account  for  extra  pay 
voted  to  a  director  for  his  services  as 
an  agent  Godbold  v.  Mobile  Branch 
Bank,  11  Ala.  (N.  S.)  191  (1847).  The 
majority  of  the  stockholders  cannot,  on 
the  winding  up,  vote  back  pay  to 
directors.  Hutton  v.  West  Cork  Ry., 
L.  R.  23  Ch.  D.  654  (1883);  Northeastern 
Ry.  V.  Jackson,  19  W.  R  198  (1870), 
holding  a  director  liable  for  back  salary 
paid  him  by  vote  of  the  directors  when 
the  statute  required  such  vote  to  be  by 
the  stockholders.  In  Hall  v.  Vermont, 
etc.  R  R,  28  Vt.  401  (1856),  compensa- 
tion for  taking  subscriptions  had  been 
voted  by  the  stockholders.  After  the 
rescinding  of  that  vote  no  compensa- 
tion was  allowed,  and  none  was  allowed 
for  lobbying  the  charter  through  the 
legislature.  A  vote  by  the  stockholders 
of  free  passes  over  the  road  to  a  director 
m  consideration  of  his  efforts  as  a  pro- 
moter before  incorporation  may  be  re- 
pudiated at  any  time  by  the  corpora- 
tion. New  York,  etc.  R  R  v.  Ketchum, 
27  Conn.  170  (1858).  But  see  St.  Louis, 
etc.  R  R  u  Tiernan,  37  Kan.  606  (1887), 
where  back  pay  to  directors  for  serv- 
ices in  promoting  and  launching  the 
enterprise  was  voted  and  upheld.  A 
director  cannot  collect  pay  from  the 
company  for  his  services  on  the  execu- 


tive committee  and  for  his  expenses  in 
travel  wliere  there  has  been  no  resolu- 
tion passed  previous  to  the  services,  en- 
titling him  to  the  pay.  Lafayette,  etc. 
Ry.  V.  Cheeney,  87  111.  446  (1877).  Di- 
rectors cannot  vote  compensation  to 
themselves  after  the  services  have  been 
performed.  Pfeiffer  v.  Lansberg  Brake 
Co.,  44  ^lo.  App.  59  (1891),  reviewing  at 
length  the  cases;  Burns  v.  Commence- 
ment Bay,  etc.  Co.,  4  Wash.  St.  558 
(1892),  A  director  cannot  recover  pay 
for  past  services,  even  though  he  de- 
voted considerable  time  to  the  aflfairs 
of  the  company  and  traveled  on  several 
occasions  in  its  behalf,  his  expenses  on 
such  occasions  having  been  paid  by  the 
conipanj'.  The  court  held  that  the 
rule  that  the  director  was  entitled  to 
pay  for  services  rendered  clearly  out- 
side of  his  duties  as  director  is  subject 
to  the  condition  "that  they  were  per- 
formed under  circumstances  suflBcient 
to  show  that  it  was  well  understood  by 
the  proper  corporate  officers  as  well  as 
himself  that  the  services  were  to  be 
paid  for  by  the  corporation."  Brown 
r.  Republican,  etc.  Mines,  17  Colo.  421 
(1892).  Where  no  salary  is  attached  to 
the  office  none  can  be  recovered.  Field 
V.  Union  Box  Co.,  2  W.  N.  Cas.  426  (1876). 
Nor,  when  the  salary  is  fixed,  will  ex- 
tra compensation  be  allowed  for  extra 
services.  Carr  v.  Chartiers  Coal  Co., 
25  Pa.  St.  337  (1855).  And  a  resolution 
remunerating  officers  who  have  been 
elected  to  serve  without  compensation 
is  merely  voluntary  and  revocable. 
Loan  Assoc,  v.  Stonemetz,  29  Pa.  St. 
534  (1858).  An  officer  cannot  claim  a 
past-due  salary  when  it  was  never 
voted  to  him  and  he  had  on  several 
occasions  acted  as  though  nothing  was 
due  him.  Pyper  v.  Salt  Lake,  etc. 
Assoc,  20  Utah,  9  (1899). 


loOO 


CH.  XXXIX.]  FRAUDS    OF   DIKECTOKS,  PKOMOTERS,  ETC. 


[§  657.. 


jority  of  the  stockholders,  but  a  minority  stockholder  files  a  bill 
to  compel  repayment,  the  court  may  order  the  repayment  to  dis- 
senting stockholders  of  such  part  of  the  salary  as  they  would  get 
if  the  whole  salary  was  repaid  to  the  corporation  and  a  dividend 
made.i  The  president  cannot  claim  a  salary  for  his  services  as 
president  where  none  was  voted  to  him  before  the  services  were 
rendered.^ 


1  Brown  v.  De  Young,  167  111.  549 
(1897).  In  Eaton  v.  Robinson,  19  R.  I. 
146  (1895),  where  illegal  salaries  had 
been  paid,  the  court  ordered  the  guilty 
parties  to  pay  to  each  gtockholder 
his  proportionate  part  of  the  money. 
Where  a  trustee  holding  stock  votes 
himself  into  ofiBce  and  illegally  votes 
to  himself  a  large  salary,  the  cestuis  que 
trust  may  in  a  suit  for  his  removal  ask 
also  that  he  account  to  such  cestuis  que 
trust  for  such  salary.  Elias  v.  Schweyer, 
27  N.  Y.  App.  Div.  69  (1898).  A  re- 
ceiver will  not  be  appointed  at  the  in- 
stance of  a  stockholder  to  recover  back 
illegal  salaries,  inasmuch  as  such  a  suit 
may  be  carried  on  by  the  stockholder 
himself.  Marcuse  v.  Gullett,  etc.  Co.,  52 
La.  Ann.  1383  (1900).  Cf.  67  N.  E.  Rep.  17. 

2  The  president  is  not  entitled  to  a 
salary  unless  the  same  is  fixed  by  reso- 
lution or  by-law  of  the  board  of  direct- 
ors.   St.  Louis,  etc.  R.  R.  v.  O'Hara,  177 
IlL   525  (1898).    The   president  cannot 
recover  for  his   services  as  president, 
even  though  an  officer  and  stockholder 
of  the  corporation   promised  that  he 
would  be  paid,  it  not  being  shown  that 
the  other  directors  knew  of  the  prom- 
ise and  the  by-laws  not  providing  for 
his  salary  and  no  salary  having  been 
voted  by  the  directors.     Henry,  etc.  Co. 
V.  Schaefer,  173  Mass.  443  (1899).    The 
president  and  directors  who  vote  back 
pay  to  him  and  cause  corporate  notes 
to  be  issued  therefor  are  liable  to  the 
company  therefor,   but  directors   not. 
taking  part  in  the  issue  of  the  notes 
are  not  liable.     Metropolitan  Elev.  Ry. 
n  Kneeland,  120  N.  Y.  134  (1890);  Mer- 
rick V.  Peru  Coal  Co.,  61  111.  472  (1871); 
Holland  u  Lewiston  Falls  Bank,  52  Me. 


564  (1864);  Barrii  v.  Calendar,  etc.  Co., 
50  Hun,  257  (1888);  Commonwealth  Ins. 
Co.  V.  Crane,  47  Mass.  64  (1843),  where- 
it   was  even   proved  that  the  former 
president  had  a  salary.     Kilpatrick  v. 
Penrose,  etc.  Co.,  49  Pa.  St.  118  (1865), 
where  both  the  president  and  treasurer 
sued.   The  salary  of  the  presiden  t  ceases 
upon  the  discontinuance  of  the  corpo- 
rate business  by  a  sale  of  all  its  prop- 
erty.    Long  Island  Ferry  Co.  v.  Terbell, 
48  N.  Y.  427  (1872).     The  president  is 
not  entitled  to  a  preference  in  payment 
under  a  statute  giving  to  '-laborers" 
of  an  insolvent  corporation  such  a  pref- 
erence.    England  v.  Beatty,  etc.  Co.,  41 
N.  J.  Eq.  470  (1886).     A  note  is  not  col- 
lectible by  a   principal   whose    agent 
made  the  note  as  president  of  a  corpo- 
ration, where  the  consideration  there- 
for was  unpaid  salary  of  the  pi-esident, 
and  the  note  was  ratified  by  the  corpo- 
ration only  by  the  casting  vote  of  the 
president.     Chamberlain  v.  Pacific,  etc. 
Co.,  54  Cal.  103  (1880).   Under  a  peculiar 
charter  provision  it  was  held  in  Grundy 
V.  Pine  Hill  Coal  Co.,  9  S.  W.  Rep.  414 
(Ky.  1888),  that  there  was.  an  implied 
obligation  of  the  corporation  to  pay  its 
president  a  salary.    A  salary  as  fixed  for 
a  preceding  year  gives  no  right  to  a  sal- 
ary for  prior  years.   Smith  V.  Woodville, 
etc.  Co.,  66  Cal.  398  (1885).     Stock  may 
be  issued  to  the  president  in  payment 
of  past  salary  and  debts.     Reed  v.  Hayt, 
51  N.  Y.  Super.  Ct.  121  (1884);  aff'd,  109 
N.  Y.  659,  holding  also  that  though  the 
president  himself  was  one  of  the  three 
directors  voting  for  the  same,  yet  that 
long  acquiescence  cures  any  right  to 
object.     A    meeting    of    four   legally- 
elected  and  three  illegally-elected  di- 


1501 


§  657.] 


FKAUD8    OF    DIEECTOKS,  PKOMOTEKS,  ETO.  [CH.  XXXIX. 


^  I 


There  is  authority  to  the  effect  that  directors  cannot  vote  a  sal 
ary  to  themselves  even  in  advance  of  their  services  as  directors 
In  an  English  case  Judge  Lindley  said:  "Directors  have  no  right 
to  be  paid  for  their  services,  and  cannot  pay  themselves  or  each 
other,  or  make  presents  to  themselves,  out  of  the  company's  assets, 
unless  authorized  so  to  do  by  the  instrument  which  regulates  the 
company,  or  by  the  shareholders  at  a  properly  convened  meeting. 


"  2 


rectors  of  a  corporation  is  not  such  a    is  a  promise  to  give  a  gratuity,  and  is 


meeting  as  sustains  an  action  for  sal- 
ary by  the  president  who  was  elected 
by  them.  Waterman  v.  Chicago,  etc. 
R  R.,  139  111.  658  (1892).  In  Bowen  v. 
Carolina,  etc.  Ky.,  34  S.  C.  217  (1891), 
the  president  of  a  railroad  company  was 
allowed  to  recover  from  the  company 
what  the  jury  believed  bis  services  to 
have  been  worth.  A  president  is  not-en- 
titled to  pay  for  his  services  unless  an 
agreement  in  advance  to  that  effect  is 
mada  Martindale  r. Wilson-Cass  Co.,  134 
Pa.  St.  348  (1890):  Barril  v.  Calendar,  etc. 
Co.,  50  Hun,  257  (1888 1.  The  president 
may  be  entitled  to  compensation  for 
extra  services  performed  with  the 
knowledge  of  the  directors,  although  a 
former  resolution,  of  which  he  had  no 
knowledge,  prohibited  pay,  unless  voted 
in  advance.  Bartlett  v.  Mystic  River 
Corp.,  151  Mass.  433  (1890).  A  mutual 
life  insurance  company  having  no  cap- 
ital stock  cannot  make  a  contract  to 
pay  its  retiring  president  a  future  sal- 
ary for  life.  Beers  v.  New  York  L.  Ins. 
Co.,  66  Hun,  75  (1892).  The  president 
cannot  enforce  the  payment  of  a  salary 
out  of  the  assets  of  the  insolvent  corpo- 
ration, even  though  the  by-laws  pro- 
vided therefor  and  the  salary  had  been 
voted  to  him,  such  vote  having  been 
after  the  services  were  rendered.  Wood 
V.  Lost  Lake,  etc.  Co.,  23  Greg.  20(1890). 
A  salary  voted  to  the  president  after 
the  services  were  performed  and  the 
company  has  become  insolvent  is  not 
collectible.  McAvity  v.  Lincoln  Pulp, 
etc.  Co.,  82  Me.  504  (1890). 

1  A  resolution  tliat  directors  shall  re- 
ceive pay  for  attendance  in  the  future 
ioes  not  sustain  an  action  therefor.    It 


not  enforceable  compulsorily.  Dunston 
V.  Imperial  Gas  Light  Ca,  3  B.  &  Ad. 
125  (1832).  Directors  voting  stock  to 
themselves  in  compensation  for  selling 
corporate  stock  are  liable  for  the  value 
of  the  stock  upon  corporate  insolvency. 
Freeman  v.  Stine,  15  Phila.  37  (1881). 
Stock  issued  to  directors,  on  a  vote  of 
themselves,  in  payment  for  extra  serv- 
ices will  be  ordered  canceled  by  the 
court.  Jones  v.  Johnson,  86  Ky.  530 
(1888);  Collins  v.  Godefroy,  1  B.  &  Ad. 
956  (1831),  where  a  director  was  not  al- 
lowed to  receive  a  reward  offered  for 
the  recovery  of  stolen  property;  Kelsey 
V.  Sargent,  40  Hun,  150  (1886),  denying 
the  right  of  the  directors  to  vote  sala- 
ries to  themselves.  See  also  cases  in  the 
following  nota 

'Re  George  Newman  Co.,  [1895]  1  Ch. 
674,  686.  The  court  said:  "The  share- 
holders, at  a  meeting  duly  convened 
for  the  purpose,  can,  if  they  think 
proper,  remunerate  directors  for  their 
trouble  or  make  presents  to  them  for 
their  services  out  of  assets  properly  di- 
visible amongst  the  shareholders  them- 
selves. Further,  if  the  company  is  a 
going  concern,  the  majority  can  bind 
the  minority  in  such  a  matter  as  thi& 
But  to  make  presents  out  of  profits 
is  one  thing,  and  to  make  them  out 
of  capital  or  out  of  money  borrowed 
by  the  company  is  a  very  different 
matter."  The  court  held  that  even 
the  fact  that  all  the  stockholders  knew 
of  the  transaction  and  acquiesced 
therein  was  not  sufficient.  Cf.  lie 
Woods,  etc.  Co.,  02  L.  T.  Rep.  760  (1890). 
Where  directors  are  allowed  a  salary 
by  the  charter,  it  may  be  paid  out  of 


1502 


•CH.  XXXIX.]  FRAUDS   OF    DIKECTORS,  PROMOTERS,  ETC. 


[§  657. 


And  there  is  strong  authority  in  America  to  the  effect  that  com- 
pensation to  directors  for  serving  as  directors  merely  must  be  voted 
by  the  stockholders  or  provided  for  in  the  by-laws.^     Where  the 


the  capital  if  no  profits  are  made.  Re 
Lundy  Granite  Co.,  26  L.  T.  Rep.  673 
(1872).  A  resolution  relative  to  direct- 
ors' pay  passed  at  a  special  stockholders' 
meeting  may  differ  from  the  resolution 
specified  in  the  notice  of  the  meeting, 
but  if  the  meeting  adjourns  and  such 
resolution  is  confirmed  at  the  adjourned 
meeting,  it  must  not  differ  from  the 
resolution  as  first  passed.  Torbock  v. 
Lord  Westbury,  87  L.  T.  Rep.  165  (1902). 
A  director  and  stockholder  who,  by 
contract  with  the  company,  is  entitled 
to  a  certain  salary,  may,  upon  tlie  in- 
solvency of  the  company,  prove  bis 
claim  the  same  as  other  creditors.  Re 
Dale,  L.  R.  43  Ch.  D.  255  (1889). 

1  A  stockholder  may  file  a  bill  to  com- 
pel the  president  to  repay  a  salary  which 
the  president  had  paid  to  himself  from 
the  corporate  funds,  without  being  au- 
thorized so  to  do,  even  though  the  board 
of  directors,  which  was  controlled  by 
the  president,  afterwards  ratified  such 
payment.  Blair  v.  Telegram  News  Co., 
172  Mass.  201  (1898).  Where  a  person 
who,  with  his  friends,  controlling  a  ma- 
jority of  the  stock,  takes  control  of  the 
^aoard  of  directors,  and  causes  the  board 
to  vote  him  a  salary  as  president  and  to 
vote  one  of  his  employees  a  salary  as  di- 
rector, which  salary  he  himself  takes, 
dissenting  stockholders,  may  compel 
him  to  repay  such  salaries.  Strouse  v. 
Sylvester,  66  Pac.  Rep.  660  (Cal.  1901). 
Where  by  the  by-laws  each  director  is 
to  be  paid  so  much  a  year,  he  can  col- 
lect nothing  for  services  for  less  than  a 
year.  Inman  v.  Ackroyd,  etc.,  [1901]  1 
k,  B.  618,  aff'g  82  L.  T.  Rep.  621  (1900). 
A  by-law  authorizing  the  directors  to 
fix  the  salaries  of  the  ofiBcers  does  not 
authorize  them  to  vote  a  salary  to  them- 
selves, and  they  may  be  compelled  to 
pay  it  back.  Schoening  v.  Schwenk, 
112  Iowa,  733  (1901).  Where  by  the  by- 
'^aws  salaries  are  to  be  fixed  by  the  board 


of  directors,  and  the  salary  of  the  presi- 
dent is  not  fixed  until  a  year  has  ex- 
pired, and  is  then  reduced  from  $25,000 
for  the  prior  year  to  $10,500  on  account 
of  personal  hostility  to  him,  the  execu- 
tion of  the  by-law  was  unreasonable 
and  the  court  fixed  the  amount  at 
$17,500.  Banigan  v.  United  States,  etc. 
Co.,  22  R.  I.  452  (1901).  A  resolution 
that  the  president  shall  receive  $5,000 
a  year,  which  has  been  acted  on  for 
fifteen  years,  may  be  relied  upon  by  a 
new  president,  even  though  he  does  not 
collect  it  for  two  and  a  half  years. 
Farmers'  L.  &  T.  Ca  i'.  Housatonic  R, 
R.  152  N.  Y.  251  (1897),  aff'g  Starbuck 
V.  Housatonic  R  R,  83  Hun,  534  (1895). 
Where  the  salary  of  the  president  has 
been  fixed  for  a  year  by  resolution  of 
the  board  of  directors,  the  board  can- 
not rescind  the  resolution.  It  is  a  con- 
tract Kimball  v.  New  England,  etc. 
Co.,  46  N.  E.  Rep.  432  (Mass.  1897).  In 
Re  New  British  Iron  Co..  [1898]  1  Ch. 
324,  the  by-laws  provided  that  £1,000 
annually  should  be  paid  to  the  board  of 
directors  for  fees,  to  be  divided  as  the 
board  might  direct.  The  contract  to 
pay  the  president  may  be  oral  and  in- 
formal, and  may  consist  of  conversa- 
tions. Bagley  v.  Carthage,  etc.  R  R, 
25  N.  Y.  App.  Div.  475  (1898).  Where 
the  board  consists  of  the  president,  his 
son,  and  his  clerk,  and  they  vote  five 
years"  back  pay  to  the  president,  the 
act  is  illegal,  and  notes  issued  therefor 
are  illegal.  Doe  v.  Northwestern,  etc. 
Co.,  78  Fed.  Rep.  62  (1896),  the  court 
saying:  "  The  directors  of  a  corporation 
have  not  the  power  to  fix  their  own  sal- 
aries, nor  to  bind  the  corporation  by  a 
resolution  to  pay  for  services  which 
have  been  rendered  in  their  ofiBcial 
capacity  under  by-laws  which  contain 
no  express  provision  for  such  compen- 
sation." The  principle  of  law  that  back 
pay  cannot  be  voted  to  officers  of  a  cor- 


1503 


§  057.] 


FEADDS    '^'•'    DIRECTORS,  PROMOTORS,  ETC.  [CH.  XXXIX.. 


board  of  directors  pay  salaries  to  the  president  and  vice-presidont- 
without  any  work  being  done  by  them,  they  being  insolvent  and 
the  salaries  being  applied  on  debts  which  they  owe  to  another  cor- 
poration, the  board  of  directors  may  be  held  personally  liable  for 
such  salaries.'  It  is  legal  for  a  corporation  to  distribute  its  profits 
by  the  payment  of  salaries,  provided  all  the  stockholders  assent 
thereto.^  Nevertheless,  even  without  any  vote,  a  director  is  en- 
titled to  pay  for  extra  services  which  he  performed  as  general 
manao^er  or  otherwise  with  the  consent  of  the  board.'     And  where 


poration  who  are  also  directors  does  not 
apply  to  a  case  where  the  stockholders 
had  assented  to  the  officers  receiving 
reasonable  compensation  for  their  work 
and  by  the  by-laws  the  board  of  direct- 
ors were  authorized  to  fix  such  compen- 
sation. A  note  given  to  the  president 
under  such  circumstances  for  past  work 
is  legal.  National,  etc.  Co.  v.  Rockland 
Co.,  94  Fed.  Rep.  335  (1899).  A  salary 
duly  voted  to  the  president  is  payable 
although  he  by  reason  of  disability  is 
absent  part  of  the  time.  Such  salary 
is  not  payable  to  the  vice-president,  al- 
though he  acts  as  president  in  the  mean- 
time. Brown  v.  Galveston,  etc.  Co.,  92 
Tex.  520  (18991.  A  contract  to  pay  a 
salary  to  the  president  will  be  closely 
scrutinized,  but  where  every  stock- 
holder assents  to  it  directly  or  by  agents 
the  court  will  not  set  the  contract  aside 
if  reasonable.  Church  v.  Church,  etc. 
Co.,  75  Minn.  85  (1898).  Unpaid  salaries 
voted  to  its  officers  by  an  insolvent  cor- 
poration which  has  never  made  any 
profits  cannot  be  offset  as  against  the 
stockholders'  liability  to  creditor* 
Burns  v.  Beck,  etc.  Co.,  83  Ga.  471  (1889). 
"  The  rule  that  trustees  can  make  no 
profit  out  of  the  estate  is  carried  so  far 
in  England  that  they  can  receive  no 
compensation  for  their  services.  In  the 
United  States,  trustees  are  entitled  to 
a  reasonable  compensation."  Perry  on 
Trusts  (3d  ed.),  g 432.  Even  though  a  trus- 
tee of  stock  who  has  been  an  officer  and 
stockholder  in  the  corporation  is  voted  a 
salary,  this  is  no  ground  for  removing 
him  as  trustee,  there  being  no  proof 
that  he  voted  in  favor  of  the  salary. 


Neither  is  the  fact  that  the  company 
did  not  pay  as  large  dividends  as  it 
formerly  did,  any  ground  for  the  re- 
moval of  the  trustea  Daileyr.  Wight, 
51  Atl.  Rep.  38  (Md.  1902).  Where  di- 
rectors vote  salaries  to  themselves  for 
services  to  be  performed,  the  court 
will  pass  upon  the  reasonableness 
thereof,  and  in  this  case  reduced  sala- 
ries of  $5,000  each  of  the  president, 
vice-president,  and  secretary  to  $2,000 
each.  Davis  r.  Thomas  A.  Davis  Co..  52 
Atl.  Rep.  717  (N.  J.  1902).  The  Virginia 
statute  requiring  stockholders  to  au- 
thorize salaries  to  the  directors  before 
such  salaries  are  paid  is  satisfied  i'r  the 
salaries  are  ratified  by  the  stockholders. 
Shickell  v.  Berryville,  etc.  Co.,  99  Va. 
88  (1901).  Under  the  West  Virginia 
statutes  the  directors  cannot  vote  rrom- 
pensation  to  the  president  or  directors. 
Such  vote  must  be  of  the  stockholders. 
Ravenswood,  etc.  Ry.  v.  Woodyard,  46 
W.  Va.  558  (1899). 

'  Harrison  v.  Thomas,  112  Fed.  Rep. 
23  (1901). 

2  Fitchett  V.  Murphy,  46  N.  Y.  App. 
Div.  181  (1899).  Where  all  the  stock- 
holders are  officers,  and,  instead  of  div- 
idends, the  corporation  distributes  its 
profits  by  large  salaries,  there  is  danger 
that  upon  the  death  of  one  of  them 
others  may  continue  the  payment  of 
such  salaries  to  themselves,  even  though 
they  are  executors  of  the  deceased  offi- 
cer's estate.  Matter  of  Schaefer,  65  N. 
Y.  App.  Div.  378  (1901). 

3  A  director  who  is  also  treasurer  and 
manager  may  recover  compensation  for 
his  services   although  none  has  beeit 


1504 


CH.  XXXIX.]  FKACDS    OF   DIKECTORS,  PEOMOTERS,  ETC. 


[§  657. 


a  reasonable  salary  was  drawn  by  a  managing  director  without  the 
authority  of  any  resolution,  and  without  any  specific  notice  to  the 
stockholders,  but  the  item  appeared  in  the  accounts,  and  every 
stockholder  either  knew  or  had  the  means  of  knowing  the  fact,  it 
was  held  that  the  director  was  not  liable  to  account  to  the  com- 
pany for  the  money.^  It  has  been  held  also  that  a  director  may 
recover  reasonable  compensation  for  his  services  as  superintendent,^ 


agreed  upon.  It  is  for  the  jury  to  de- 
cide what  is  reasonable.  Fitzgerald, 
etc.  Co.  V.  Fitzgerald,  137  U.  S.  98,  111 
(1890),  quoting  with  approval  Pew  v. 
First  Nat.  Bank,  130  Mass.  391  (1881); 
Eales  V.  Cumberland,  etc.  Co.,  6  H.  & 
N.  481  (1861).  A  director  may  be  given 
back  pay  for  his  services  as  manager. 
Even  though  his  presence  at  the  meet- 
ing of  the  directors  so  voting  is  neces- 
sary to  form  a  quorum,  yet,  if  he  did 
not  himself  vote,  the  action  of  the  di- 
rectors is  legal.  He  may  also  be  present 
and  vote  at  the  stockholders'  meeting 
ratfying  such  payment,  his  vote  not 
being  necessary  to  carry  the  resolution. 
Bassett  v.  Fairchild,  132  Cal.  637  (1901). 
A  salary  voted  to  a  director  by  the  di- 
rectors for  services  as  manager  is  not 
legal  where  the  charter  requires  a  vote 
of  the  stockholders  on  contracts  in 
which  a  director  is  interested.  Re 
State  F.  Ins.  Co.,  36  L.  J.  (Ch.)  634  (1867). 
In  Benson  v.  Heathorn,  1  Y.  &  C.  (Ch.) 
826  (1842),  the  court  compelled  a  di- 
rector to  pay  back  a  salary  which  he 
had  received  for  acting  as  "  ship's  hus- 
band "  for  the  company,  whose  business 
was  the  working  of  vessels.  The  presi- 
dent cannot  bind  the  corporation  by 
an  agreement  to  pay  a  director  extra 
compensation.  Bailey  v.  Buffalo,  etc. 
Ry.,  14  Hun,  488  (1878);  Hodges  v.  Rut- 
land, etc.  R.  R.,  29  Vt.  220  (1857).  A  sal- 
ary voted  by  a  board  of  three  directors 
to  one  of  their  number  as  general  man- 
ager is  valid,  at  least  so  far  as  concerns 
a  person  who  purchases  the  stock  after 
the  salary  has  been  paid.  Clark  v. 
American  Coal  Ca,  86  Iowa,  436  (1892). 
A  director  who  performs  services  as 
general  manager  may  recover  therefor. 


Kryger  v.  Railway,  etc.  Mfg.  Co.,  46 
Minn.  500  (1891).  A  director  may  re- 
cover on  a  quantum  meruit  for  services 
rendered  outside  of  his  duties  as  di- 
rector. Ruby,  etc.  Co.  ti.  Prentice,  25 
Colo.  4  (1898).  It  is  legal  for  a  corpoi-a- 
tion  to  issue  stock  as  full  paid  to  a  per- 
son in  consideration  of  his  leaving  an 
employment  in  which  he  is  engaged, 
and  of  assuming  the  presidency  of  the 
corporation.  Shannon  v.  Stevenson,  173 
Pa.  St.  419  (1896).  A  resolution  of  the 
stockholders  that  a  managing  director 
should  receive  a  certain  salary  up  to  a 
certain  date  does  not  entitle  him  to  a 
salary  beyond  that  date,  and  he  may  be 
compelled  to  repay  it.  Re  Bolt  and 
Iron  Co..  14  Ont.  Rep.  (Can.)  211  (1887); 
aff'd,  16  App.  Rep  397.  While  an  offi- 
cer cannot  recover  for  services  per- 
formed as  an  officer  unless  there  is  a 
resolution  or  by-law  to  that  effect,  yet 
for  services  performed  outside  of  his 
official  duties  he  may  recover  compen- 
sation. Baines  v.  Coos  Bay,  etc.  Co.,  68 
Pac.  Rep.  397  (Oreg.  1902).  An  officer  is 
not  entitled  to  pay  for  performing  the 
ordinary  duties  of  his  office,  but  is  en- 
titled to  pay  for  duties  outside  of  those 
imposed  upon  him  by  virtue  of  his  of- 
fice. Boggiano  v.  Chicago,  etc.  Co.,  67 
N.  E.  Rep  17  (IlL  1903). 

1  Felix,  etc.  Ltd.  v.  Hadley,  77  L.  T. 
Rep.  131  (1897). 

2  A  director  who,  at  the  request  of  the 
president,  superintends  the  construc- 
tion of  the  road,  may  recover  pay  there- 
for. Henry  v.  Rutland,  etc.  R.  R.,  37 
Vt.  435  (1855);  Chandler  v.  Monmouth 
Bank,  13  N.  J.  L.  255  (1832),  where  there 
was  even  a  charter  prohibition.  A  di- 
rector may  recover  for  services  ren- 


(95) 


1505 


§  657.] 


FRAUDS    OF    DIRECTOES,  PROMOTERS,  ETC.  [CH.  XXXIX. 


or  attorrxcy  in  a  suit  '  or  secretary  and  agent; ^  or  cashier;'  bat 
not  for  sc'-vices  as  a  promoter;*  nor  for  acting  as  president  and 
master-builder;*  bi^  may  recover  for  acting  as  agent  of  the  com- 
pany.'- 

dered  as  superinten^'x/nt.     Severson  v.  the  agreement  by  a  suit  in  equity  where 

Bimetallic,  etc.  O..  18  Mont,  lo  (1896).  net   earnings  exist  and   the   directors 

The  president  o^  -'.  club  may  recover  ignore  the  contract.    Dupignac  r.  Bern- 

for  his  service  'V  acting  as  janitor  and  strom,  76  N.  Y.  App.  Div.  105  (1902). 


collecting  rer.'K     Flynn   r.   Columbus 
Club,  21  R.  J.  534  (1900). 

1  Where  the  president  of  a  railroad 
renders  services  in  litigations  and  ob- 
taining loans  on  the  agreement  of  the 
board  of  directors  to  pay  him  therefor, 
he  may  recover  payment  for  the  same, 
even  though  there  was  no  formal  res- 
olution of  the  directors,  and  even 
though  the  by-laws  were  silent  as  to 
the  duties  of  the  president  and  as  to  his 
salary.  Bagley  v.  Carthage,  etc.  R  R, 
165  N.  Y.  179  (1900).  Even  though  an 
attorney  is  one  of  the  directors,  yet  if 
he  performs  services  at  the  request  of 
the  directors  and  managing  officers  he 
may  recover  therefor.  Taussig  v.  St, 
Louis,  etc  Ry.,  166  Mo.  28  (1901),  A 
lawyer  may  recover  for  his  services  to 
a  corporation,  even  though  he  is  presi- 
dent and  a  director  thereof.  Kenner  v. 
Whitelock,  152  Ind.  635  (1899).  On  this 
point  see  also  §  707,  infra,  and  Jackson 
V.  New  York  Cent,  R  R,  2  Thomp.  & 
C.  (N.  Y.)  653  (1874);  Santa  Clara  Min. 
Assoc.  V.  Meredith,  49  Md,  889  (1878); 
Ten  Eyck  v.  Pontiac,  etc.  R  R,  74  Mich. 


Rogers    r,    Hastings,    etc.    Ry., 


oo 


Minn.  25  (1875).  As  to  secretary,  Tal- 
cott  V.  Olcott  Mfg.  Co.,  11  N.  Y.  Week. 
Dig,  141  (1880).  Contra,  Fraylor  u  So- 
nora  Min.  Co,,  17Cal.  594  (1861).  Neither 
the  president,  treasurer,  nor  secretary 
can  recover  the  value  of  their  services, 
where  they  are  also  directors,  unless 
there  was  an  express  contract  to  pay 
them  or  the  by-laws  .so  provide.  The 
decisions  in  Pennsylvania  to  this  effect 
control  services  there  rendered,  though 
suit  is  brought  elsewhere.  Crumlish  v. 
Central  Imp.  Co.,  38  W.  Va.  390  (1893). 
A  secretary  may  recover  for  real  serv- 
ices, even  though  he  is  also  a  director. 
Chamberlain  v.  Detroit  Stove  Works, 
103  Mich.  124  (1894). 

3  First  Nat  Bank  v.  Drake,  29  Kan. 
311  (1883). 

4  Rock  ford,  etc.  R  R  v.  Sage,  65  III. 
328  (1872).  See  Eakins  v.  American, 
etc.  Co.,  75  Mich.  568  (1889). 

*  Levisee  v.  Shreveport  City  R  R,  27 
La.  Ann.  641  (1875). 

6  In  the  case  of  Taussig  v.  St.  Louis,  etc. 
Ry„  166  Mo.  28  (1901).  the  court  said: 
226  (1889),  An  attorney  may  recover  "The  rule  applicable  to  such  a  case,  to  be 
for  services,  even  though  he  is  a  di-  deduced  from  the  modern  and  best  con- 
rector,  it  being  agreed  that  he  should  sidered  cases,  is,  we  think,  that  a  party, 
be  paid  as  soon  as  the  company  was    although  a  director  or  other  officer  of  a 


able,  and  an  agreement  prior  to  incor- 
poration having  been  ratified.  Arapa- 
hoe Inv,  Co.  V.  Piatt,  5  Colo,  App,  515 
(1895).  A  director  who  acts  as  attor- 
ney for  the  company  cannot  collect 
fees  therefor  unless  there  was  an  ex- 
press contract  to  that  effect.  Re  Mim- 
ico,  etc,  Co.,  26  Ont.  Rep.  289  (1895).  A 
lawyer  having  a  contract  with  thecor- 


corporation,  may  recover  the  reason- 
able value  of  necessary  services  ren- 
dered to  a  corporation  entirely  outside 
of  the  line  and  scope  of  his  duties  as 
such  director  or  officer,  performed  at 
the  instance  of  its  officers,  whose  pow- 
ers are  of  a  general  character,  upon  an 
implied  promise  to  pay  for  such  serv- 
ices, when  they  were  rendered  under 


poration  that  he  should  receive  five  per    such  circumstances  as  to  raise  a  fair 
cent,  of  its  net  earnings  may  enforce     presumption  that  the  parties  intended 

1508 


OB.  XXXIX.]  FKAUDS   OF   DIRECTOES,  PROMOTERS,  ETC. 


[§  657. 


A  salary  which  takes  all  the  profits  and  part  of  the  capital  stock 
is  unreasonable.^  The  voting  of  a  salary  or  compensation  must  be 
entirely  free  from  fraud,  actual  or  constructive.  The  vote  is  ille- 
gal if  it  is  carried  only  by  including  the  vote  of  the  director  who  re- 
ceives the  salary  or  pay.^     A  salary  paid  to  a  director  for  nominal 

Allenberg,  99  Cal.  57  (1893).     The  presi- 
dent may  collect  a  salary  legally  voted 
to  him,  even  though  he  failed  to  fulfill 
his   promise   to   make  the   business  a 
success.     Paducah,  etc.  Co.  v.  Hays,  24 
S.  W.  Rep.  237  (Ky.  1893).    The  presi- 
dent may  collect  pay  for  his  services  if 
they  vfere  outside  of  his  official  duties, 
and  he  was  actually  employed  by  the 
corporation,  and  the  services  were  ren- 
dered with  the  knowledge  and  consent 
of  the  corporation.     Outterson  v.  Fonda 
Lake  Paper  Co.,  20  N.   Y.   Supp.   980 
(1892).     A   director    may    recover   for 
services  rendered.    McDowall  v.  Shee- 
han,  13  N.  Y.  Supp.  386  (1891)  (rev'd  on 
another  point,  129  N.  Y.  200).     A  salary 
payable  when  bonds  are  sold  is  collect- 
ible in  cash  if  they  are  not  sold  within 
a  reasonable  time.     Indianapolis,  etc. 
R.  R.  V.  Hyde,  122  Ind.  188  (1890).    In 
general,  see  also  Cheeney  v.  Lafayette, 
etc.  Ry.,  68  111.570(1873);  Shackelford 
V.  New  Orleans,  etc.  R,  R.,  37  Miss.  202 
(1859);  Santa  Clara  Min.  Assoc,  v.  Mer- 
edith, 49  Md.  389  (1878),  where  a  di- 
rector obtained  patents  and  negotiated 
their  sale. 

A  director  may  be  paid  eight  per 
cent,  interest  for  his  services  and  ad- 
vances in  purchasing  claims  against 
the  corporation,  such  rate  not  being 
usurious.  Kroegher  v.  Calivada,  etc. 
Co.,  119  Fed.  Rep.  641  (1902). 

1  Decatur,  etc.  Co.  u  Palm,  118  Ala. 
531  (1896). 

2  Butts  V.  Wood,  37  N.  Y.  317  (1867), 
where  the  vote  was  set  aside,  although 
the  salary  was  for  services  by  the  di- 
rector as  secretary  and  treasurer;  Ward 
V.  Davidson,  89  Mo.  445  (1886),  where 
increased  pay  was  voted  to  the  presi- 
dent of  the  corporation:  Gardner  v. 
Butler,  30  N.  J.  Eq.  702  (1879) ;  Jones  r. 
Morrison,  31   Minn.  140  (1883);  Kelsey 


and  understood  they  were  to  be  paid 
for,  or  ought  to  have  so  intended  and 
understood."    Where  the  vice-president 
performs  services  which  are  not  incum- 
bent on  him  by  reason  of  his  office,  he 
may  recover   pay   for  the  same  on  a 
■quantum  meruit,    even  though  there 
was  no  contract  to  pay  him.    Brown  v. 
•Creston   Ice   Co.,  113  Iowa,  615   (1901). 
Services  rendered  by  a  director  after 
he  had  subscribed  for  stock  are  a  good 
consideration  in  payment  therefor,  in 
accordance  with  an  agreement  to  that 
efifect.     Doak  v.   Stahlman,   58  S.   W. 
Rep.  741  (Tenn.  1899).     Even  though  the 
president  of  a  corporation  brings  about 
a  sale  of  all  its  stock,  under  a  contract 
by  which  the  corporation  is  to  pay  him 
a  certain  sum,  nevertheless  he  cannot 
collect  that  sum  from  the  corporation 
itself.     Wood  v.  Manchester,  etc.  Co., 
54  N.  Y.  App.  Div.  522  (1900).     Where 
a  company  is  in  financial  trouble  and 
a  committee  of  the  directors  is  author- 
ized to  sell  the  property,  their  expenses 
to  be  paid  by  the  company,  and  the 
committee  abandon  the  effort,  and  cer- 
tain directors  then  take  up  the  work 
and  complete  the  sale,  and  a  majority 
of  the  stockholders  vote  that  their  ex- 
penses shall  be  paid,  a  dissenting  stock- 
holder cannot  prevent  such  payment. 
Huffaker  v.  Krieger's  Assignee,  107  Ky. 
200  (1899).     A  director  may  collect  a  rea- 
sonable compensation  for  services  and 
.materials  given  to  his  company.  Greens- 
boro, etc.  Co.  V.  Stratton.  120  Ind.  294 
(1889).     A  bona  fide  holder  of  a  street 
railway  company's  note  is  protected, 
even  though  it  was  given  to  a  director 
in  payment  for  services  in  procuring 
the  franchise.     Kneeland  v.  Braintree 
Street  Ry.,  167  Mass.  161  (1896).     A  di- 
rector who  performs  extra  services  is 
entitled  to  pay  therefor.     Zellerbach  r. 


1507 


§  657.] 


FKAUDS    OF    DIRECTORS,  PROMOTERS,  ETC.  [CH.  XXXIX. 


services  when  the  corporation  was  insolvent  may  be  recovered 
back.^ 


V.  Sargent,  40    Hun,   150  (1886).    The 
president,  secretary,  and  treasurer  can- 
not  vote    salaries  to  themselves,   the 
company  being  in  bad  financial  condi- 
tion.    Hardee  v.  Sunset  Oil  Co.,  56  Fed. 
Rep.   51   (1893).     Where  the   directors 
vote  a  salary  to  themselves,  partly  for 
services,  but  largely  in  fraud,  the  court 
will  compel  them  to  refund  the  whole 
salary.     Eaton  v.  Robinson,  19  R.  1.  146 
(1895).     In  McNulta  v.  Corn  Belt  Bank. 
164  III.  427  (1897),  the  president  sued  to 
recover  a  two  and  a  half  per  cent,  com- 
mission which  had  been  voted  by  the 
directors  to  him  on  unissued  stock  for 
services.    The    suit  failed   on   several 
grounds  of  illegality,  particularly  that 
his   vote   was   necessary   to   carry  the 
same.     A  ratification  by  the  same  di- 
rectors as  stockholders  does  not  cure 
the  defect     A  salary  voted  to  the  pres- 
ident by  a  quorum  of  three  directors, 
the  two  other  directors  being  absent, 
and   the   president   being  one   of   the 
three,  is  not  enforceable.     Copeland  v. 
Johnson  Mfg.   Co..  47  Hun,  235  (1888). 
MacNaughton  v.  Osgood.  41  Hun,  109 
(1886),  holds  that  a  stockholder  cannot 
cause  the  vote  of  salary  to  be  set  aside 
and  repayment  made  merely  by  prov- 
ing that  the  officers  voted  it  to  them- 
selves.    He  must  prove  actual  fraud. 
This  decision,   however,  may  well   be 
doubted.     It  was  reversed  on  another 
point  in  114  N.  Y.  574.     Where  the  pres- 
,  ident  presides  over  a   meeting  which 
votes  a  future  salary  to  himself  for  life, 
the  salary  is  illegal,  although  he  did 
not  vote.    Beers  v.  New  York  L.  Ins. 
Co.,  66  Hun,  75  (1892).    Stock  voted  to 
the  president  as  a  salary  at  a  meeting 
where  his  presence  is  necessary  to  form 
a  quorum  may  be  recovered  back,  but 
acquiescence  for   five  years  is    fatal. 
U.  S.  Ice,  etc.  Co.  v.  Reed,  2  How.  Pr. 
(N.  S.)  253  (1885).     A  stockholder  may 
compel  the  president  to  refund  a  sal- 


ary voted  to  himself  at  an  illegal  meet- 
ing of  a  part  of  the  directors.     Back 
pay   is   illegal.     Where  the    president 
takes  part  in  theproceeding,  or  his  vote 
is  essential,  the  vote  of  salary  to  him  is 
illegal.     Wickersham  r.  Crittenden,  93 
Cal.  17  (1892).     A  salary  to  the  presi- 
dent, his  own  vote  being  necessary,  is 
illegal.     Wickersham  v.  Crittenden,  106 
Cal.  327  (1895).     A  salary  voted  by  the 
aid  of  the  vote  of  an  officer  receiving 
the  same  may  be  validated  by  subse- 
quent vote  of  the  board.     Wickersham' 
V.   Crittenden,  110  Cal.  332   (1895).     A 
salary  voted  to  the  president  at  a  meet- 
ing at  which  he  presides,  the  minutes 
showing  no  dissenting  vote,  is  illegal 
where  he  had  performed  no  substan- 
tial service,  even  though   he    swears 
that  he  did  not  vote.     Ashley  v.  Kin- 
nan,  3  N.  Y.  Supp.  574  (1888).     A  di- 
rector cannot  collect  a  salar}'  voted  to 
him  as  general  manager,  even  in  ad- 
vance of  the  services,  where  there  were 
only  three  directors,  and  the  other  two 
were  voted  salaries,  one  as  vice-presi- 
dent and  the  other  as  assistant  treas- 
urer.    Delay  in  objecting  thereto  for 
some  months  is  no  bar  to  this  defense. 
Mallory    v.    Mallory-Wheeler    Co.,    61 
Conn.  131  (1891).     Where  a  company  is 
l)rosperous,  the  directors  may  vote  in- 
creased salaries  to  themselves,  each  one 
refraining  from  voting  when  the  reso- 
lution affecting  himself  is  voted  upon. 
McNab  V.  McNab,  etc.  Co.,  62  Hun,  18 
(1891);  aff'd,  133  N.  Y.  687.     In  Bagaley 
V.  Pittsburgh,  etc.  Iron  Co.,  146  Pa.  St. 
478  (1892),  a  salary  to  the  president, 
fixed  by  the  president  and  another  di- 
rector, was  upheld  where  the  company 
was  a  close  corporation.     Where  two 
directors,  forming  a  majority  of  the 
board,  vote  themselves  very  large  sal- 
aries, and   refuse   information    to  an- 
other director  who   is  the  only  other 
stockholder,  and  refuse  to  declare  divi- 


1  Putnam  v.  Gunning,  163  Mass.  552  (1895). 
1508 


CH.  XXXIX.]  FRACDS    OF    DIRECTOKS,  PROMOTERS,  ETC. 


[§  657. 


Where  the  board  of  directors  vote  large  pay  to  themselves,  evi- 
dently in  bad  faith,  and  with  a  view  to  depriving  the  corporation 
of  more  than  a  reasonable  proportion  of  its  net  earnings,  a  dissent- 
ing stockholder  may  file  a  bill  in  equity  to  have  the  amount  recov- 
ered back.^  And  where  the  chief  stockholder,  who  is  president, 
induces  the  directors,  his  "  dummies,"  to  vote  a  large  salary  to  him, 
the  corporation  may  defeat  the  officer's  action  at  law  to  recover  it.- 

president  is  the  chief  stockholder,  and 
causes  the  directors  to  vote  him  a  large 
salary,  it  is  illegal,  especially  where  he 
votes  for  it  and  his  vote  is  necessary. 


dends,  and  proceed  to  convey  the  prop- 
erty of  the  company  to  another  com- 
pany controlled  by  themselves,  a  court 
of  equity  will  set  aside  the  illegal  con- 
veyance and  the  resolutions  authoriz- 
ing  the   salaries,   and   will   order    the 
books  to  be  opened   to  the  other  di- 
rector, and  will  order  dividends  to  be 
declared.     The  court,  however,  will  not 
appoint  a  receiver  and  enjoin  the  con- 
tinuance of  the  business,  and  will  not 
order  a  distribution  of  the  assets  of  the 
company.     Laurel  Springs  Land  Co.  n 
Fougeray,  50  N.  J.  Eq.  756  (1893),  rev'g 
Fougeray   v.   Cord,   50  N.  J.   Eq.    185. 
Where  three  out  of  five  directors  are 
present  at  a  board  meeting  and  vote 
one  of  themselves  a  salary  as  secretary, 
it  is   illegal    The  action  of  the  full 
board  subsequently  in   increasing  the 
salary  does  not  validate  the  first  vote. 
Martin  v.  Santa  Cruz.  etc.  Co.,  36  Pac. 
Rep.  36  (Ariz.  1894).     Where  three  per- 
sons, being  the  owners  of  a  majority  of 
the  stock,  agree  that  they  will  vote 
their  stock  to  elect  as  directors  three 
persons  to  be  named  by  one  of  them 


Adams  v.  Burke,  103  IlL  App.  148(1902). 
1  Quoted  and  approved  in   Bixler  v. 
Summerfield,  62  N.  E.  Rep.  849  (IlL  1902X 
In  this  case    a  minority  stockholder 
maintained  a  bill  in  equity  for  an  ac- 
counting against    the  president,  who 
owned  a  majority  of  the  stock  and  who 
had  voted  himself  and  wife  exorbitant 
salaries.     Where  during  eiglit  years  all 
the    profits    of    a    turnpike  company, 
amounting  to  §20,000,  are  used  to  pay 
exorbitant  salaries  to  the  trea.surer  and 
secretary,  the  court  will  order  a  repay- 
ment of  the  same  with  interest.  Wayne 
Pike  Co.  V.  Hammons,  129  Ind.  368(1891); 
Blatchford  v.  Ross,  54  Barb.  42  (1869); 
Ziegler  V.  Hoagland,  52  Hun,  385  (1889), 
where  $86,000  in  salaries  was  voted  to 
three  persons.     In  Hedges  v.  Paquett, 
3  Oreg.  77  (1869),  the  court  refused  to 
interfere,  though  fraud  was  charged,  in 
that  the  directors  credited  large  bills 
to    themselves,  and    paid    themselves 


and  two  persons  to  be  named  by  the     large  sums  for  services,  had  destroyed 


others,  and  that  one  of  them  who  had 
received  a  salary  of  $2,500  should  re- 
ceive a  salary  of  $5,000,  and  that  two  of 
such  directors  should  receive  a  salary 
of  $500  each,  the  agreement  is  illegal. 
Snow  V.  Church,  13  N.  Y.  App.  Div.  108 
(1897).  A  trustee  holding  stock  and 
electing  himself  the  president  of  a  com- 
pany and  receiving  a  salary  must  not 
allow  his  personal  interest  in  the  salary 
to  conflict  with  his  duty  as  a  stock- 
holder to  favor  the  sale  of  the  corpo- 
rate, property  at  a  high  price.  Elias  v. 
Schweyer,  13  N.  Y.  App.  Div.  336  (1897); 
S.  C,  27  N.  Y.  App.  Div.  69.     Where  the 


the  business  and  had  wasted  the  funds 
and  property.  This  case,  however,  has 
met  with  universal  disapproval,  and 
must  be  considered  as  contrary  to  law. 
2  Davis  V.  Memphis  City  Ry.,  22  Fed. 
Rep.  883  (1885).  In  Hubbard  v.  New 
York,  etc.  Co.,  14  Fed.  Rep.  675  (1882), 
wherein  a  person  contracted  In  advance 
to  become  a  director  and  superintend- 
ent at  a  remuneration  of  one-third  of 
the  profits  of  the  business,  the  court  re- 
fused to  uphold  the  agreement,  and  said 
the  contract  is  to  be  "construed  in  the 
same  manner  as  if  he  was  actually  a 
director  at  the  time  of  its  inception,  and 


1509 


057.] 


FKAUD8    OF    DIRECTORS,  PROMOTERS,  ETC. 


[cn. 


XXXIX. 


It  has  been  held  also,  where  the  majority  of  the  stock  of  a  corpo- 
ration was  held  by  one  family,  who  voted  away  the  corporate  profits 
for  salaries,  that  the  minority  might  call  upon  a  court  of  equity  to 
remedy  the  fraud.'  Where  an  insurance  compan}'^  has  re-insured 
all  its  risks  and  is  doing  no  business,  but  the  officers  are  drawing 
large  salaries,  a  stockholder  may  have  a  receiver  appointed.'^ 

In  another  case,  where  for  seven  years  a  stockholder  who  owned  a 
majority  of  the  stock  elected  himself  and  two  of  his  dummies  as 
directors  of  the  companj'-  and  caused  the  board  to  vote  a  large  salary 
to  himself  as  president  and  manager,  and  leased  to  the  company 
his  property  at  a  large  rental,  the  salary  and  rental  were  held  to 
be  illegal  and  voidable.' 

Again,  where  persons  buying  a  majority  of  the  stock  thereupon 
take  control  and  vote  to  the  retiring  president  a  large  salary  for 
past  services,  he  being  one  of  the  persons  selling  the  stock  to  them, 
and  such  salary  so  paid  is  credited  to  the  vendees  on  the  purchase 
price  of  th.e  stock,  the  vendees  are  liable  to  restore  the  money  sO' 
paid.* 

A  person  who  is  appointed  and  acts  as  secretary,  and  is  neither 
a  director  nor  a  stockholder,  is  entitled  to  pay  although  the  cor- 
poration never  agreed  to  pay  him.* 


as  if  it  was  made  with  him  while  he  was 
a  director,"  The  court  will  scrutinize 
carefully  a  salary  voted  by  the  board  of 
directors  to  one  of  their  number  as  su- 
perintendent, where    such    vote  is  by 


Ry.,  4  Dak.  549(1887);  Greenleaf  v.  Nor- 
folk Southern  R  R,  91  N.  C.  33  (1884); 
Missouri  River  R  R  r.  Richards,  8  Kan. 
101  (1871).  The  secretary  and  president 
cannot,  by  their  own  votes,  cause  the 


those  representing  him  in  the  board,    board  to  vote  them  a  salary  for  past 


but  if  the  salary  is  reasonable  the  court 
will  sustain  it.  Harris  r.  Lemming,  etc. 
Works,  43  S.  W.  Rep.  869  (Tenn.  1896). 

1  Sellers  v.  Phoenix  Iron  Co.,  13  Fed. 
Rep.  20  (1881).    See  66  N.  E.  Rep.  235. 

2  Treat  v.  Pennsylvania,  etc.  Co.,  52 
Atl.  Rep.  60  (Pa.  1902). 


services.  Graves  v.  Mon©  Lake,  etc. 
Co.,  81  Cal.  303  (1889).  An  understand- 
ing between  the  president  and  secre- 
tary', who  is  also  a  director,  by  which 
the  latter  was  to  have  a  commission  on 
the  sale  of  land,  the  business  of  the  cor- 
poration being  that  of  buying  land  and 


3  Where  the  company  had  failed  to  selling  it  in  lots,  is  not  binding  on  the 

pay  its  dividends  by  reason  of  such  acts,  corporation,  but  the  secretary  is  enti- 

a  court  of  equity,  upon  the  suit  of  an-  tied  to  reasonable  pay  for  what  work 

other  stockholder,  ordered  the  presi-  he  did.     Louisville,  etc.  Assoc,  v.  Hegan, 

dent  to  account,  and  appointed  a  re-  49  S.  W.  Rep.  796  (Ky.  1899).     A  secre- 

ceiver  of  the  company  and  directed  that  tary,  after  he  ceases  to  be  such,  cannot 

its  affairs  be  wound  up.     Miner  v.  Belle  claim  pay  where  he  has  been  receiving 

Isle  Ice  Co.,  93  Mich.  97  (1892).  pay  during  all  the  time  as  general  man- 

i  Ellis  V.  Ward,  137  111.  509  (1890);  s.  c,  ager.     Fowler  v.  Great,  etc.  Co.,  104  La. 


20  N.  E.  Rep.  671,  holding  the  president 

not  liable  where  he  knew  nothing  of  it. 

5  Smith  v.  Long  Island  R  R,  102  N. 

Y.   190  (1886);  Edwards  v.  Fargo,  eta 


1510 


751  (1901).  Where  by  oral  agreement 
between  the  president  and  secretary 
the  secretary  was  to  receive  a  certain 
monthly  salary,  and  at  the  end  of  th& 


CH.  XXXIX.]  FRAUDS    OF    DIEECTOKS,  PKOMOTEES^    STC. 


[§  657. 


Even  though  a  large  stockholder  of  a  corporation  renders  valu- 
able services  to  it  for  several  years,  yet  he  is  not  entitled  to  pay 
therefor  from  the  corporation  unless  there  is  a  contract  to  that  ef- 
fect, especially  where  the  circumstances  showed  that  he  expected 
his  pay  from  the  increased  value  of  his  investment.^ 

Although  a  treasurer  is  presumed  to  be  entitled  to  compensation, 
yet  if  he  is  a  stockholder  and  his  firm  have  the  banking  business  of 
the  company,  and  nothing  has  ever  been  said  about  compensation, 
he  cannot  afterwards  claim  or  obtain  it.^ 

A  contract  of  a  director,  officer,  or  president  that  he  will  not  ask 
any  compensation  for  his  services  cannot  be  insisted  upon  by  the 
company  if  it  was  not  a  party  to  the  contract.'' 


year  the  directors  approved  the  ac- 
counts, including  the  payment  of  such 
salary,  and  the  secretary  holds  over,  he 
may  recover  the  same  salary  for  the  en- 
tire time.  Mobile,  etc.  R.  B.  v.  Owen, 
121  Ala.  505  (1899).  A  secretary  is  not 
entitled  to  pay  for  his  services  as  secre- 
tary unless  there  is  an  express  contract 
to  that  effect;  but  where  he  gives  up 
his  whole  time  to  the  company's  busi- 
ness, one-half  as  secretary  and  one-half 
in  doing  engineering  work,  he  is  enti- 
tled to  pay.  Talcott  v.  Olcott,  etc.  Co., 
11  N.  Y.  Week.  Dig.  141  (1880).  In  Eng- 
land the  law  "is  settled  by  a  series  of 
decisions  that  it  is  impossible  for  a  com- 
pany to  ratify  anything  that  is  done  or 
any  contract  that  is  made  before  it 
comes  into  existence."  Hence  a  con- 
tract, before  incorporation,  as  to  the 
secretary's  salary,  is  unenforceable.  He 
can  recover  only  on  a  quantum  meruit. 
Re  Dale,  61  L.  T.  Rep.  206  (1889).  The 
salary  of  a  secretary,  where  it  consists 
of  a  fixed  sum  and  also  dividends  on 
certain  stock  not  owned  by  him,  con- 
tinues as  to  both  until  stopped  on  no- 
tice. Crane,  etc.  Co.  v.  Adams,  142  111. 
125  (1892).  A  sale  of  all  the  corporate 
property  stops  the  salary  of  the  secre- 
tary where  he  was  subject  to  removal 
at  any  time  by  the  directors.  Union 
Compress  Co.  v.  Douglass,  60  Ark.  591 
(18951. 

1  Ritchie  v.  McMuUen,  79  Fed.  Rep. 
522  (1897).  The  cashier  of  a  bank  can- 
not collect  money  for  his  services  while 

151 


collecting  the  dividends  and  coupons  of 
a  depositor  and  stockholder  in  a  bank, 
where  there  was  no  agreement  to  pay. 
Wright  V.  Sheldon,  53  Atl.  Rep.  59  (R. 
L  1902). 

2  Mather  v.  Eureka,  etc.  Co.,  118  N.  Y. 
629  (1890),  44  Hun,  333  (1887).  The  ques- 
tion may  be  one  for  the  jury.  Pendle- 
ton V.  Empire,  etc.  Co.,  19  N.  Y.  13 
(1859).  A  treasurer  may  recover  for 
services  actually  rendered  by  him,  even 
though  he  was  a  director  and  there  was 
no  agreement  as  to  his  pay  for  services 
as  treasurer.  Reeve  v.  Harris,  50  S.  W. 
Rep.  658  (Tenn.  1897).  The  secretary 
and  treasurer  and  curator  of  a  scien- 
tific institute  is  not  entitled  to  back 
salary  where  the  facts  show  that  no 
such  salary  was  contemplated.  Whitte- 
more  v.  Kent  Scientific  Institute,  87  N. 
W.  Rep.  623  (Mich.  1901).  "  No  duties, 
no  pay."  A  treasurer's  salary  ceases 
upon  the  sale  of  all  of  its  assets  even 
though  there  is  no  dissolution;  but  if 
substantial  duties  continue,  the  salary 
continues.  Rodney  v.  Southern  R.  R. 
Assoc,  3  N.  Y.  St.  Rep.  564  (1886),  dis- 
tinguishing Long  Island  Ferry  Co.  v. 
Terbell.  48  N.  Y.  427  (1872).  A  salary 
to  a  treasurer  does  not  continue  while 
he  is  sick,  it  appearing  that  during  that 
time  he  sold  his  stock  and  never  per- 
formed any  further  services.  Raley  v. 
Victor  Co.,  90  N.  W.  Rep.  973  (Minn. 
1902). 

3  An  agreement  among  the  officers  to 
reduce  their  salaries  cannot  be  insisted 
1 


§  658.] 


FRAUDS    OF   DIRECTORS,  PROMOTERS,  ETC.  [OH.   XXXIX. 


Various  decisions  in  regard  to  other  officers  of  the  company  are 
given  in  the  notes  below.* 

§  658.  Contracts  letiveen  corporations  having  one  or  more  direct- 
ors in  common. —  It  has  been  ditricult  to  determine  whether  a  stock- 
holder in  one  corporation  could  cause  to  be  set  aside  a  contract  or 
ao-reement  between  two  corporations  having  one  or  more  directors 
in  common.  As  a  rule,  even  though  the  boards  of  directors  of  two 
corporations  are  the  same,  and  one  buys  out  the  property  of  the 
other,  yet  the  transaction  is  not  void,  and  will  not  be  set  aside  at  the 
instance  of  a  stockholder  unless  he  shows  damage.'^  A  contract  be- 
tween two  corporations  will  not  be  declared  invalid  because  the 
corporations  have  common  directors,  where  its  fairness  is  manifest.' 
But  a  contract  between  corporations  having  directors  in  common 
must  be  "  open  and  free  from  any  suspicion  of  secret  dealing  in  favor 


upon  by  the  corporation.  It  was  not  a 
party  to  the  agreement.  Thompson  Co. 
V.  Brook.  14  N.  Y.  Supp.  370  (1891).  An 
agreement  of  the  president  with  certain 
creditors  tliat  lie  would  not  take  a  salary 
until  other  claims  were  paid  cannot  be 
enforced  by  the  receiver.  The  president 
may  come  in  as  a  creditor.  Snow  v. 
Russel  Coe  etc.  Co.,  58  Hun.  134  (1890). 
Lambert  r.  Northern  Ry.,  18  W.  R.  ISO 
(1869),  holds  that  a  promise  by  directors 
to  perform  their  duties  gratuitously  is 
nudum  pactum,  and  does  not  prevent 
them  from  recovering  upon  a  previous 
binding  agreement  for  salaries.  Where 
the  vendor  of  property  agrees  by  con- 
tract with  the  vendee  and  accepted  by 
the  company  that  he,  the  vendor,  will 
for  five  years  give  his  personal  super- 
vision to  the  business  of  the  company, 
he,  the  vendor,  cannot  recover  compen- 
sation from  the  company  for  such  serv- 
ices. Wetmore  v.  Wetmore  Co.,  113  Cal. 
331  (1896).  The  conduct  of  an  officer 
may  be  such  as  to  preclude  the  idea  that 
he  was  to  have  a  salary.  Simonson  v. 
New  York  City  Ins.  Co.,  25  N.  Y.  Week. 
Dig.  90  (1886). 

1  The  president  may  employ  the  vice- 
president,  his  brother,  to  do  work  for 
which  the  company  will  pay  him.  Mc- 
Dowell V.  New  York,  etc.  R.  R.  12  N.  Y. 
St  Rep.  877  (1887).  When  it  is  under- 
stood by  the  directors  that  the  officers 

15 


are  to  be  paid  for  their  services,  and  at 
tiie  end  of  the  year  a  note  is  given  for 
services  to  the  superintendent,  who  is 
also  a  director,  he  may  collect  it.  Stew- 
art u  St.  Louis,  etc.  R.  R.,  41  Fed.  Rep. 
736  (18S7).  Where  the  vice-president 
sues  for  services  as  general  manager,  he 
must  prove  services  clearly  outside  of 
his  duties  as  an  officer,  and  that  there 
was  no  contrary  agreement  (citing  many 
cases).  Topouce  t>.  Corinne,  etc.  Co.,  6 
Utah,  439  (1890).  A  i,'>ntract  with  di- 
rectors for  their  services  ceases  upon 
the  windingupof  the  company.  Frames 
V.  Bulfontein  Min.  Co.,  [1891]  1  Ch.  140. 
Cf.  Rodney  r.  Southern  R.  R  Assoc,  3 
N.  Y.  St.  Rep.  564  (1886).  For  the  services 
of  ordinary  clerks,  etc.,  the  corporation 
is  of  course  liable.  Legrand  v,  Manhat- 
tan, etc.  Assoc,  80  N.  Y.  638  (1880);  Pol- 
lok  V.  Shultze,  1  Hun,  320  (1874):  Bard 
V.  Bauigan,  39  Fed.  Rep.  13  (1889);  Gowen 
Marble  Co.  v.  Tarrant,  73  IlL  608  (1874). 
Wiiere  an  excessive  salary  is  paid  to  an 
employee  in  order  to  induce  him  to  sub- 
scribe for  stock,  he  may  bd  liable  for 
the  excess  upon  the  corporation  becom- 
ing insolvent  Deppeni".  German- Amer- 
ican, etc  Co.,  70  S.  W.  Rep.  868  (Ky. 
1902). 

2  Smith  V.  Ferries,  etc..  Ry.,  51  Pac  Rep. 
710  (Cal.  1897). 

3  Evansville,  etc  Co.  v.  Bank  of  Com- 
merce, 144  Ind.  34  (1896). 

12 


■CH.  XXXIX.]  FKAUDS    OF    DIRECTORS,  PROMOTERS,  ETC. 


[§  658. 


of  one  principal  while  acting  as  the  representative  of  the  other."* 
A  mortgage  by  an  insolvent  corporation  to  a  creditor  corporation, 
the  two  corporations  having  a  majority  of  their  directors  in  com- 
mon, has  been  declared  to  be  illegal.-  A  guaranty  where  there  are 
directors  in  common  is  voidable.*  Such  contracts  as  these,  however, 
are  not  void,  and  they  may  be  validated  by  a  unanimous  vote  of  the 
stockholders.*  Moreover,  if  the  minority  stockholders  object  to  the 
contract,  the  court  will  consider  it,  and  will  sustain  it  if  fair,  and 
set  it  aside  if  unfair.* 


1  Mercantile,  etc.  Co.   u  Pittsburgh, 
etc.  Assoc,  173  Pa.  St.  30  (1896). 

2  Sutton  Mfg.  Co.  V.  Hutchinson,  63 
Fed.  Rep.  496  (1894). 

3  Barr  v.  New  York,  etc.  R.  R.,  125  N. 
Y.  263  (1891);  Metropolitan  Elev.  Ry.  v. 
Manhattan  Ry.,  15  Am.  &  Eng.  R  R. 
Cas.  1  (1884).  A  contrary  conclusion  was 
reached  by  the  federal  court  on  the 
same  facts.  Flagg  i\  Manhattan  Ry.,  10 
Fed.  Rep.  413  (1881).  For  other  cases 
connected  with  this  litigation,  see  Met- 
ropolitan Elev.  R}-.  V.  Manhattan  Ry.,  14 
Abb.  N.  Cas.  152,  n.  (1884):  Manhattan 
Ry.  V.  New  York  Elev.  Ry.,  29  Hun,  309 
(1883),  rev'g  N.  Y.  D.  Reg.,  Dec.  2,  1882; 
People  V.  Metropolitan  Elev.  Ry.,  26 
Hun,  82  (1881);  Harkness  v.  Manhattan 
Ry.,  54  N.  Y.  Super.  Ct.  174  (1886).  See 
also  St.  James'  Church  v.  Church  of 
Redeemer,  45  Barb.  356  (1865),  where 
one  religious  corporation  gratuitously 
conveyed  property  to  another,  the  di- 
rectors being  common.  A  consolidation 
of  two  religious  corporations  having  a 
director  in  common  is  illegal  and  may 
be  set  asida  Stokes  v.  Phelps  Mission, 
47  Hun,  570  (1888).  "  It  is  undoubtedly 
a  well  settled  rule  of  law  that  executory 
contracts  entered  into  by  corporations 
having  common  directors  are  voidable 
at  the  instance  of  either  corporation, 
and  the  court  will  not  inquire  into  the 
question  whether  or  not  it  is  beneficial 
to  the  corporation  seeking  to  avoid  it." 
But  th>s  right  is  vested  in  the  corpora- 
tion and  not  in  any  stockholder,  and  a 
stockholder  cannot  obtain  an  injunc- 
tion against  such  contract  being  car- 
ried out,  unless  actual  fraud  is  shown. 

1 


Burden  v.  Burden,  159  N.  Y.  287,  307 
(1899) ;  72  S.  W.  Rep.  823. 

*  If  the  stockholders  unanimously 
ratify  a  contract  between  two  corpo- 
rations having  directors  in  common, 
the  contract  is  legal.  Coe  v.  East,  etc. 
R.  R,  52  Fed.  Rep.  531  (1892).  A  sale  of 
property  by  one  corporation  to  another, 
all  of  the  directors  except  one  being  in 
common,  is  legal  where  such  sale  is 
subsequently  ratified  by  a  meeting  of 
the  stockholders.  Grant  v.  United,  etc. 
Ry.,  L.  R.  40  Ch.  D.  135  (1888).  A  sale 
of  property  by  one  corporation  to  an- 
other is  not  fraudulent  merely  because 
there  was  ono  director  common  to  both, 
where  the  directors  and  stockholders 
assented  thereto.  Leathers  v.  Janney, 
41  La.  Ann.  1120  (1889).  A  lease  of  one 
railroad  to  another,  ratified  by  the 
stockholders  as  required  by  the  statute, 
is  legal,  even  though  the  same  persons 
were  directors  in  both  companies.  Jones 
V.  Concord,  etc.  R  R,  67  N.  H.  119  (1891); 
S.  c,  67  N.  H.  234.  Where  a  land  company 
agreed  to  pay  a  railroad  company  a 
certain  sum  in  instalments,  if  the  rail- 
road company  would  extend  its  road 
to  the  land  company's  land,  it  is  im- 
material that  four  of  the  five  directors 
of  the  land  company  were  also  direct- 
ors of  the  railroad  company,  it  being 
shown  that  all  acts  of  the  directors 
were  expressly  ratified  at  a  stock- 
holders' meeting,  and  it  being  also 
shown  that  the  railroad  had  been  con- 
structed and  a  part  of  the  instalments 
paid.  San  Diego,  eta  R.  R  v.  Pacific 
Beach  Co..  112  Cal.  53  (1896). 
5  A  stockholder  cannot  cause  to  be 
513 


§  659.] 


FRAUDS    OF    DIRECTORS,  PROMOTERS,  ETC. 


(11.    X.XXIX. 


§  659,  Foreclosure  of  mortgage  on  corporate  property^  and  collu- 
sion ivith  directors,  whereby  no  defense  is  made  to  the  foreclosure. — 
This  subject  is  considered  elsewhere.'     Where  the  directors  of  a 


set  aside  a  contract  between  two  cor- 
porations having  a  majority  of  direct- 
ors in  common,  unless  he  shows  dam- 
age. Lyman  v.  Kansas  City,  etc.  R  K., 
101  Fed.  Rep.  636  (1900).  A  debt  from 
one  corporation  to  another  is  not  in- 
valid, although  they  have  directors  in 
common.  Salina,  etc.  Bank  v.  Prescott, 
60  Kan.  490  (1899'.  The  fact  that  two  of 
the  directors  in  a  vendor  corporation  are 
also  directors  in  a  vendee  does  not 
render  the  sale  fraudulent  per  se.  Hag- 
erstown,  etc.  Co.  v.  Keedj',  91  Md.  430 
(1900).  A  pledge  of  bonds  by  one  cor- 
poration to  another  is  not  invalid,  even 
though  there  is  one  director  in  com- 
mon. Rawlings  v.  New  Memphis,  etc. 
Co.,  60  S.  W.  Rep.  206  (Tenn.  1900). 
Even  though  all  the  directors  of  a  cor- 
poration organize  another  company  to 
buy  out  the  first  named  company,  and 
they  are  directors  in  the  second  com- 
pany also,  yet,  if  all  the  facts  are  fully 
stated,  the  sale  is  legal  and  the  new 
company  cannot  repudiate  the  sale  on 
that  ground.  The  fact  that  the  direct- 
ors are  not  independent,  but  represent 
the  vendor,  is  immaterial  if  that  fact 
is  made  known  to  the  parties.  Lagunas, 
etc.  Co.  Ltd.  V.  Lagunas  Syndicate,  Ltd., 
[1899]  2  Ch.  392.  In  the  case  of  Robo- 
tham  V.  Prudential  Ins.  Co.,  53  Atl.  Rep. 
843  (N.  J.  1903),  the  court  said:  "I  in- 
cline strongly  to  believe  that  the  safe 
rule  in  most  cases,  in  the  end,  will  be 
found  to  be  that  the  presence  of  a  di- 
rector or  directors  on  both  sides  of  the 
transaction  under  investigation  does 
not  give  the  dissenting  stockholder  an 
arbitrary  right  to  an  injunction,  but 
may  give  him  a  most  ample  right  to 
subject  the  transaction  to  the  scrutiny 
of  the  court,  and  may  cast  upon  the 
corporations  or  directors  concerned  the 
burden  of  disclosing  and  justifying  the 
transaction.     To  give    the    dissenting 


stockholder  the  arbitrary  right  to  an 
injunction  in  this  class  of  cases  often 
will  put  a  deadly  weapon  in  the  hands 
of  the  blackmailer  and  the  corporation 
•striker.'  Such  a  rule  tends  to  drive 
tlie  actual  wrong-doers  to  cover,—  to 
induce  them  to  seek  concealment  while 
the  corporate  action  is  accomplished 
through  apparently  impartial  directors, 
wlio  are  m  fact  only  agents  or  *  dum- 
mie.s.*"  The  court  in  this  case  held 
that  where  all  the  directors  are  person- 
ally interested  in  the  matter,  aside 
from  their  interest  as  stockholders,  the 
court  at  the  instance  of  a  minority 
stockholder  may  compel  the  directors 
to  prove  that  the  proposed  action  is  ad- 
vantageous to  the  corporation,  inas- 
much as  it  has  not  received  the  ap- 
proval of  an  impartial  board  of  direct- 
ors. Where  a  rolling-stock  company  by 
its  board  of  five  directors  makes  aeon- 
tract  with  a  railroad  companj'  having 
thirteen  directors,  five  of  whom  are  the 
same  as  the  directors  of  the  rolling-, 
stock  company,  and  the  railroad  com- 
pany makes  the  contract  at  a  meeting 
of  eight  directors,  two  of  whom  are  of 
the  five,  and  for  two  years  the  railroad 
company  lives  up  to  the  contract,  it 
cannot  then  repudiate.  The  majority 
of  its  directors  were  not  in  common, 
and  it  should  have  objected  befora 
U.  S.  Rolling-Stock  Co.  v.  Atlantic,  etc. 
R.  R.,  34  Ohio  St.  450  (1878).  Cf.  Bill  v. 
Western  Union  Tel.  Co.,  16  Fed.  Rep. 
14  (1883),  where  the  illegality  was  clear, 
since  the  directors  common  to  both  cor- 
porations constituted  a  majority  of  the 
directors  of  one  of  them.  In  Fitzgerald 
V.  Fitzgerald,  etc.  Co.,  41  Neb.  374  (1894), 
where  the  same  persons  formed  a  major- 
ity of  the  boards  of  directors  of  a  con- 
struction company  and  also  of  a  rail  road 
company,  to  which  latter  company  the 
construction  company  had  agreed   ta- 


1  See  §  848,  ch. 
15 


XLIX,  infra. 
14 


CH.  XXXIX.] 


FRAUDS    OF   DIRECTOKS,  PROMOTERS,  ETa 


[§  C59. 


corporation  have  misappropriated  the  funds  of  the  company,  created 
fraudulent  debts,  levied  assessments  upon  the  stock,  caused  the 
stock  to  be  forfeited  for  non-payment,  and  judgment  to  be  entered 


turn  over  the  stock  of  another  railroad 
company;  and  where,  by  the  contract 
between  the  two  companies  having  a 
majority  of  the  board  of  directors  in 
common,  the  railroad  company  was  to 
transport  freight  at  a  certain  price,  and 
to  deliver  to  the  construction  company 
its  bonds  to  a  certain  amount;  and 
where  subsequently  this  contract  was 
changed  so  as  to  reduce  the  amount 
going  to  the  construction  company  by 
upwards  of  $700,000, —  it  was  held  that 
the  minority  stockholders  and  directors 
of  the  construction  company  might  file 
a  bill  on  behalf  of  the  construction 
company  and  compel  the  railroad  com- 
pany to  pay  to  the  construction  com- 
pany the  amount  mentioned  abova  It 
was  also  held  that  where  these  directors 
controlled  both  boards,  and  sold  a  part 
of  the  bonds  going  to  the  construction 
company  to  themselves  at  ninety  cents 
on  the  dollar,  when  the  bonds  were 
worth  par,  the  construction  company 
could  hold  the  railroad  company  liable 
for  the  loss.  The  decision  was  modified 
in  44  Neb.  463  (1895),  reducing  the  de- 
cree to  $300,906.33.  An  appeal  to  the 
supreme  court  of  the  United  States  was 
dismissed  in  Missouri  Pac.  Ry.  v.  Fitz- 
gerald, 160  U.  S.  556  (1896 j.  The  fact  that 
a  minority  of  the  directors  are  directors 
in  another  contracting  company  does 
not  render  a  contract  voidable  at  the  in- 
stance of  one  of  the  companies  or  of  a 
dissenting  stockholder.  Ziegler  v.  Lake 
Street  El.  R.  R,  69  Fed.  Rep.  176,  182 
(1895).  A  receiver  of  an  insolvent  bank 
may  file  a  bill  in  equity  to  compel  its 
president  and  another  bank  to  pay  back 
the  price  of  stock  in  the  insolvent  bank 
which  the  latter,  through  the  instru- 
mentality of  its  president,  who  was 
also  cashier  of  the  other  bank,  had  pur- 
chased of  the  other  bank  on  the  eve  of 
the  insolvency  of  the  former.  Bridg- 
ens  V.  Dollar  Sav.  Bank,  66  Fed.  Rep.  9 


(1895).  The  fact  that  a  railroad  com- 
pany and  a  construction  company  have 
mainly,  though  not  entirely,  the  same 
ofi5cers  and  stockholders,  does  not 
render  them  legally  identical,  but 
merely  requires  a  more  careful  scru- 
tiny of  their  dealings  with  each  other 
where  the  interests  of  outside  parties 
are  affected.  Hence  a  contract  by 
which  the  construction  company  takes 
stock  and  bonds  and  agrees  to  do  cer- 
tain work  will  be  upheld  if  it  is  a  rea- 
sonable and  fair  contract,  and  the  con- 
struction company  may  enforce  claims 
against  the  railroad  company.  David- 
son V.  Mexican  Nat,  R.  R.,  58  Fed.  Rep. 
653  (1893).  A  mortgage  by  one  corpo- 
ration to  another  is  not  void  because 
they  have  the  same  president  Roy  v. 
Scott,  etc.  Co.,  11  Wash.  399  (1895).  An 
insurance  policy  issued  by  an  agent  to 
a  corporation  in  which  he  is  an  ofiBcer 
is  not  enforceable.  Greenwood,  etc.  Co. 
V.  Georgia,  etc.  Ins.  Co.,  72  Miss.  46 
(1895).  A  sale  of 'iron  by  one  corpora^ 
tion  to  another  which  is  fair  is  not  il- 
legal simply  because  the  company  has 
directors  in  common.  Burden  v.  Bur- 
den, 8  N.  Y.  App.  Div.  160  (1896):  aff'd, 
159  N.  Y.  287  (1899).  In  Hart  v.  Ogdens- 
burg,  etc.  R.  R.,  89  Hun,  316  (1895),  where 
two  railroads  having  directors  in  com- 
mon were  consolidated,  the  court  held 
that  the  minority  stockholders  could  not 
object,  inasmuch  as  the  act  was  not  so 
clearly  against  the  interest  of  the  mi- 
nority as  to  be  a  wanton  and  fraudulent 
destruction  of  their  rights,  nor  a  clear, 
substantial,  flagrant  violation  thereof. 
Jiloreover  the  court  held  that  six  years' 
delay  in  suing  was  fataL  A  city  is 
liable  on  a  gas  contract  although  the 
same  man  is  mayor  and  is  also  president 
of  the  gas  company'.  Capital,  etc.  Co. 
V.  Young,  109  Cal.  140  ^1895).  In  Santa 
Fe  Electric  Co.  v.  Hitchcock,  9  N.  Mex. 
156  (1897),  the  court  held  a  lease  to  be 


1515 


§  659.] 


FRAUDS    OF    DIRECTORS,  PROMOTERS,  ETC.  [CH.  XXXIX. 


on  said  debts  and  the  property  to  be  sold  out,  a  stockholder  may 
file  a  bill  to  set  aside  all  the  transactions  and  to  compel  the  direct- 
ors to  account  and  to  wind  up  the  company.^ 


void  between  two  companies  having 
the  same  directors,  there  being  actual 
fraud.  A  note  by  one  corporation  to 
another  is  valid  although  the  same  per- 
son is  president  of  both.  St.  Joe,  etc. 
Co.  V.  First  Nat.  Bank,  10  Colo.  App.  339 
(1897).  Where  a  town  board  of  three 
are  authorized  to  make  a  grant  to  a 
railroad,  and  two  of  them,  one  being  a 
director  of  the  railroad,  made  the  grant, 
the  court  will  set  it  aside.  San  Diego 
V.  San  Diego,  etc.  R.  R.,  44  Cal.  106 
(1872).  The  fact  that  two  directors  out 
of  eight  of  one  packet  company  are  also 
directors  out  of  six  directors  of  a  com- 
peting packet  company  does  not  render 
them  liable  for  fraud,  although  the 
former  company  loans  the  latter  com- 
pany much  money  and  takes  a  chattel 
mortgage  and  closes  out  its  property. 
Bcroth  V.  Robinson.  55  Md.  419  (1880-. 
En  England  contracts  between  com- 
panies having  directors  in  common  are 
void  by  statute,  unless  they  are  ratified 
by  vote  of  the  stockholders,  and  may 
be  so  ratified,  although  the  by-laws  pro- 
hibit the  directors  from  making  con- 
tracts In  which  they  are  interested. 
Grant  v.  United,  etc.  Ry.,  L.  R  40  Ch. 
D.  135  (1888);  Ernest  v.  NichoUs,  6  H. 
L.  Cas.  401  (1857).  Cf.  Grifiin  v.  Inman, 
57  Ga.  370  (1876),  where  the  town  offi- 
cers merely  executed  bonds  to  a  rail- 
road company  of  which  they  were  di- 
rectors. The  bonds  were  held  to  be 
valid.  In  Wallace  v.  Long  Island  R.  R., 
12  Hun,  460  (1877),  held,  that  a  dissent- 
ing stockholder  could  not  sue  to  set 
aside  a  lease  made  between  two  rail- 
roads having  directors  in  common,  but 
that  a  majority  of  the  stockholders 
might  have  objected.  A  conveyance  of 
all  the  property  of  an  insolvent  corpo- 
ration to  one  of  its  creditors,  a  corpora- 
tion having  two  directors  in  common 
with  the  insolvent  corporation,  such 
conveyance  being  to  secure  the  latter 


corporation's  debt,  is pnma/anV fraud- 
ulent and  voidable.  If  free  from  actual 
fraud,  and  if  reasonable,  it  is  sustained. 
Sweeny  v.  Sugar  Ref.  Co.,  30  W.  Va. 
443  (1887).  The  fact  of  having  stock- 
holders in  common  is  immaterial. 
Warfield  v.  Marshall,  etc.  Co.,  72  Iowa, 
666  (1887).  The  fact  that  a  construction 
contract  is  assigned  by  the  contractor 
to  a  corjioration  having  directors  in 
common  with  the  railroad  does  not 
render  the  contract  fraudulent  per  se. 
Union  Pac.  R.  R.  v.  Credit  Mobilier,  135 
Mass.  367  (1883).  A  contract  between 
two  corporations  having  directors  in 
common  is  voidable,  but  equity  will 
cause  such  payments  to  be  made  for 
work  done  as  are  just,  irrespective  of 
the  written  contract  Thomas  v.  Pe- 
oria, etc.  Ry.,  36  Fed.  Rep.  808  (1888). 
Where  one  director  is  a  director  also  in 
another  company  with  which  a  con- 
tract is  being  made,  he  cannot  be 
counted  in  making  up  a  quorum.  Met- 
ropolitan, etc.  Co.  V.  Domestic,  etc.  Co., 
44  N.  J.  Eq.  568  (1888).  A  contract  be- 
tween corporations  having  common 
directors  is  voidable,  not  void.  If  it  is 
fair  It  will  not  be  disturbed.  Manu- 
facturers' Sav.  Bank  v.  Big  Muddy  Iron 
Co.,  97  Mo.  38  (1889);  Alexander  v.  Will- 
iams, 14  Mo.  App.  13  (1888).  A  lease  of 
one  railroad  to  another  by  directors 
who  are  directors  in  both  companies  is 
invalid.  Thouron  v.  East,  etc.  Ry.,  5 
Ry.  &  Corp.  L.  J.  77  (Tenn.  1888).  In 
Pearson  v.  Concord  R.  R,  62  N.  H.  537 
(1883).  the  court,  in  setting  aside 
a  contract  made  by  corporations  hav- 
ing common  directors,  said:  "Stock- 
holders and  creditors  are  entitled  not 
only  to  the  vote  of  a  director  in  the 
board,  but  to  his  influence  and  argu- 
ment in  discussion." 

i  Jellenik  v.  Huron,  etc  Co.,  177  U.  S. 
1  (1899). 


1516 


CH.  XXXIX.] 


FRAUDS    OF   DIKECTOKS,  PROMOTERS,  ETC. 


[§  6G0. 


§  660.  Directors'  'purcliases  of  property  neededhy  thecorporationy 
and  purchases  of  outstanding  dehts  or  claims  against  the  corpora- 
tion.—  It  is  an  abuse  of  trust  for  a  corporate  director  to  purchase 
property  which  he  knows  the  corporation  will  need,  and  then  to 
sell  the  same  to  the  corporation  at  an  advanced  price.  This  gen- 
erally occurs  where  the  director  purchases  in  his  own  name  land 
which  the  corporation  must  purchase  for  its  enterprise,  or  over 
which  it  will  need  a  right  of  way.^  Where,  however,  the  director 
offers  the  land  to  the  corporation  at  the  price  which  he  paid  for  it,. 


1  Blake   .  Buffalo  Creek  R.  R.,  56  N.  Y. 
485  (1874).     See   Buffalo,  etc.   R.    R,  v. 
Lampson,  47  Barb.  533  (1867);  Blair,  etc. 
Co.  V.  Walker,  50  Iowa.  376  (1879);  Taylor 
V.  Salmon,  4  Myl.  &  C.  134  (1838),  where 
the  corporate  agent  took  in  his  own 
name  a  lease  which  the  company  de- 
sired and  had  instructed  him  to  obtain 
for  itself.     See  also  Mitchell  v.  Reed,  61 
N.  Y.  123  (1874).   The  corporate  treasurer 
cannot  purchase  stock  at  a  discount 
and  sell  to  the  corporation  at  par,  where 
such  stock  is  needed  by  the  corporation 
to  fulfill  its  contracts.     East  New  York, 
etc.  R.  R.  u  Elmore,  5  Hun,  214  (1875). 
Where  the  business  of  a  corporation  re- 
quires the  construction   of  a  raih'oad 
and  steamship  line,  and  the  company 
has  no  power  to  construct  them,  and 
consequently  the  oflBcers  with  others 
take  out  a  separate  charter  and  own 
the  stock  of  the  new  company  and  con- 
struct the  line,  and  then  propose  to  con- 
solidate the  companies  on  a  plan  which 
will  give  to  the  new  stock  an  interest 
in    the    consolidated   company   which 
will  represent  a  large  profit,  a  stock- 
holder of  the  old  company  may  enjoin 
the  consolidation  upon  proving  that  the 
new  franchises  were  necessaiy  to  the 
old  company  and  were  intended  for  the 
benefit  of  the  old   company,  the  same 
oflScers   being  in   control  of  the  two 
companies.     Miller  v  Consolidated,  etc. 
Co.,  110  Fed.  Rep.  480  (1901).     Where  a 
corporation  has  a  lease  of  and  option  to 
purchase  land,  and  the  officers  purchase 
the  land  for  themselves  in  violation 
thereof,  the  corporation  is  entitled  to 
the  property  at  the  price  paid  by  the 


officers,  but  as  to  land  which  the  com- 
pany merely  wished  to  purchase,  but 
had  made  no  contract  in  respect  thereto, 
the  company  is  not  entitled  to  the 
benefit  of  purchase  of  such  land  by  an 
officer.  Lagarde  v.  Anniston,  etc.  Co., 
126  Ala.  496  (1900).  Wherethepresident 
is  directed  to  buy  the  boats  of  a  rival 
company,  and  does  so  by  buying  them 
for  another  corporation  which  he  con- 
trols, and  credits  himself  with  an  ad- 
vance, he  may  be  made  to  refund. 
Ward  V.  Davidson,  89  Mo.  445  (1886). 
A  director  cannot  take  a  contract  ia 
his  own  name  for  himself  where  such 
contract  really  should  belong  to  the 
corporation.  The  president  of  a  packet 
compan}'  may  take  a  contract  for  carry- 
ing mails,  and  may  have  the  service 
performed  by  the  packet  company,  he 
paying  it  therefor.  He  is  not  liable  to 
it  for  his  profits,  he  having  endeavored 
first  to  get  the  contract  for  the  com- 
pany. Keokuk,  etc.  Co.  v.  Davidson.  95 
Mo.  467  (1888).  A  treasurer  is  not  liable 
for  profits  in  coal  sold  b}'  himself  to  the 
corporation,  where  he  purchased  the 
coal  with  no  intent  of  selling  to  the 
company.  Parker  v.  Nickerson,  137 
Mass.  487  (1884).  A  director  who  takes 
to  himself  an  assignment  of  a  patent 
that  ought  to  have  been  assigned  to  his 
corporation  must  account  for  all  profits 
that  he  has  received.  Averill  v.  Barber, 
6  N.  Y.  Supp.  255  (1889).  A  corporate 
cred  itor  cannot  complain  that  a  director 
has  purchased  property  needed  by  the 
corporation.  Cornell  v.  Clark,  104  N.  Y. 
451  (1887).  See  also  §  652,  supra,  on 
sales  by  directors  to  the  corporation. 


1517 


§  660.]  FRAUDS    OF    DIRECTORS,  PROMOTERS,  ETC.  [CU.  XXXIX, 

and  the  corporation  refuses  it,  he  cannot  long  subsequently  be  com- 
pelled to  accept  that  price.'  A  director  may  construct  works  to 
compete  with  the  works  of  the  corporation  in  which  he  is  a  di- 
rector. He  is  not  disqualified  from  so  doing.-  Directors,  who  are 
also  officers,  of  a  manufacturing  corporation,  if  acting  in  positive 
good  faith  towards  the  corporation  and  their  co-stockholders,  are 
not  precluded  from  engaging  in  the  building  and  operation  of  other 
distinct  works  in  the  same  general  business;  and  they  do  not  stand, 
in  respect  to  said  works,  in  any  trust  relation  to  the  -corporation.' 
IJut  whore  the  |)resident  takes  a  renewal  of  a  corporate  lease  in  his 
own  name,  and  admits  that  he  takes  it  for  his  company,  he  cannot 
claim  any  of  the  profits  arising  from  it,  even  though,  in  order  to 
get  the  lease  from  him,  a  contract  is  made  that  he  have  a  part  ot 
the  profits.^  A  director  ciinnot  take  a  contract  in  his  own  name 
for  himself,  where  such  contract  really  should  belong  to  the  corpo- 
ration.* 

It  is  a  fraud  on  the  corporation  and  on  corporate  creditors  for 
the  directors  to  buy  up  at  a  discount  the  outstandino:  L'^eneral  debts 
of  the  corporation,  and  coiii|)el  it  to  pay  them  the  full  face  value 
thereof.  In  such  a  case  the  directors  may  be  compelled  to  turn 
over  to  the  corporation  the  evidences  of  indebtedness  upon  being 
paid  the  money  which  they  gave  for  the  same.^ 

1  Sandy  River  R  R  r.  Stubbs.  77  Ma  lease  is  given  to  tlie  director,  the  cor- 
594  (1885).  A  president  and  treasurer  poration  cannot  compel  the  director  to 
who  purchase  land  as  agents  for  a  rail-  turn  over  the  lease  where  tiie  lease 
road  company,  and  allow  it  to  pay  part  containsa  provision  against  sub-letting. 
of  the  purchase  price,  and  obey  its  di-  Crittenden,  etc.  Co.  v.  Cowles.  66  N.  Y. 
rection  to  sell  part,  whereby  the  pur-  App.  Div.  95  (1901);  54  Atl.  Rep.  254. 
chase  price  is  repaid,  are  liable  to  con-  »  Richardson  v.  Green.  133  U.  S.  30 
vey  to  the  company  the  remainder,  the  (1890).  Where  a  corporation  has  for- 
title  to  which  is  in  their  names.  Church  feited  its  right  to  buy  a  mining  claim, 
V,  Sterling,  16  Conn.  388  (1844).  a  director  may  subsequently  buy  it  in 

2  Barr  v.  Pittsburgh,  etc.  Co.,  51  Fed.  good  faith  from  a  person  who  has  relo- 
Rep.  33  (1892).  See  also  Ward  v.  David-  cated  it.  McDerraott,  etc.  Co.  r.  Me- 
son, 89  Mo.  445  (1886).     Cf.  Keokuk,  etc.  Dermott,  69  Pac.  Rep.  715  (Mont  1902). 

,  Co.  v.  Davidson,  95  Ma  467  (1888).    The        ^  Quoted  and  approved  in  Bonney  v. 

president  of  a  water  irrigation  com-  Tilley,    109  CaL   346  (1895).     A   stock- 

pany  cannot  acquire  an  interest  in  the  holder  who  is  also  a  director  cannot  buy 

property  hostile  to  the  interest  of  the  up  claims  against  the  insolvent  com- 

stockholders.     Center,  etc.  Co.  v.  Lind-  pany    and  oflFset  them  at  their    face 

say,  21  Utah,  193  (1900).  value.     Bulkley  v.  Whitcomb,  121  N.  Y. 

3  Barr  v.  Pittsburgh,  etc.  Ca,  57  Fed.  107  (1890);  Duncomb  v.  New  York,  etc. 
Rep.  86  (1893),  aflf'g  51  Fed.  Rep.  33.  R  R.,  84  N.  Y.  190.  202  (1881);  Ee  Im- 

4  Robinson  v.  Jewett,  116  N.  Y.  40  perial  Land  Co.,  L.  R  4  Ch.  D.  566 
(4889).  Even  though  a  corporation  has  (1877).  See  also  Davis  v.  Rock  Creek, 
applied  for  the  renewal  of  a  lease,  and  etc.  Co.,  55  CaL  359  (1880),  where  a 
afterwards  a  director  applies  and  the  mortgage  given  to  a  director  to  secure 

1518 


■CH.  XXXIX.  J  FRAUDS    OF    DIRECTORS,  PROMOTERS,  ETC. 


[§  660. 


Bat  directors  may  buy  corporate  bonds  from  third  parties  at  a  dis- 
<30unt  and  enforce  them  at  par,  where  there  are  no  special  equities 
a  purchase,  and  no  present  duty  in  regard  to  them 


against  such 


debts  purchased  by  him  at  a  discount 
was  defeated  in   foreclosure.      If  the 
corporate  managers  buy  up  corporate 
debts  with  corporate  funds,  a  corporate 
creditor  may  compel  them  to  give  up 
the  claims  so   purchased.     Thomas  v. 
Sweet,  37  Kan.   183  (1887).     Directors 
who  authorize  acts  by  the  corporation 
infringing   on  a   patent  cannot  after- 
wards buy  the  patent  and  enforce  the 
right  to  damages.     New  York,  etc,  Co., 
V.   Buffalo,  etc.   Co.,  24  Fed.    Rep.  604 
(1885).      A   corporate    creditor    cannot 
complain  that  a  director  has  purcliased 
property    needed   by  the  corporation. 
Cornell  v.  Clark.  104  N.  Y.  451   (1887). 
"Where  an  insurance  company  absorbs 
another  company  ultra  vires  and  gives 
notes     therefor,    and     the     president 
acquires  and  collects  the  notes,  he  may 
be  compelled  to  refund.     McClure  v. 
Levy,    147   N.  Y.  215  (1895).     Where  a 
company -has  assigned,  and  its  directors 
have  bought  claims  at  a  discount,  a 
suit  to  compel   them   to  turn   in  the 
claims  at  cost  should  be  instituted  by 
the  assignee.     Moulton  v.  Connell.  etc. 
Co.,  93  Tenn.  377   (1894).     Payment  of 
corporate  notes  by  a  director  may  en- 
title him  to  preference  in  the  distribu- 
tion of  the  assets.     Atkinson's  Appeal, 
11   Atl.  Rep.   239  (Pa,    1887).     English 
debentures  may  be  issued  to  directors 
at  a  discount.    Campbell's  Case,  L.  R.  4 
Ch.  D.  470  (187Gj.     Where  a  corporation 
is  without  funds,  its  president  may  pur- 
chase for  himself  its  overdue  bond,  and 
may  agree  with  the  corporation  that  the 
rate  of  interest  of  the  bond  shall  be  in- 
creased.    There  was  no  proof  that  he 
purchased  at  a  discount      Bradly    v. 
Marine,  eta   Co..  3  Hughes.  26   (1879); 
S.  c,  3  Fed.  Cas.  1172.    As  to  the  rule  that 
where  a  director  or  officer  of  an  insolv- 
ent corporation   obtains  a  preference 


quasi-fiduciary  relation  to  the  corpora- 
tion, and  cannot  profit  by  purchasing 
claims  against  it  Hill  v.  Frazier,  22 
Pa.  St  320  (1853).  Also  Lingle  v. 
National  Ins.  Co.,  45  Mo.  109  (1869): 
Holland  v.  Heyman.  60  Ga.  174  (1878), 
holding  that  the  purchased  claims  are 
good  only  for  the  amount  paid. 

Where  a  corporation  is  a  going  con- 
cern, although  embarrassed  for  ready 
money,  it  is  legal  for  the  president  to 
purcliase  its  outstanding  notes  at  a  dis- 
count, and  the  corporation  cannot  main- 
tain a  bill  in  equity  to  pay  such  notes 
at  such  discount  Glenwood,  etc.  Co. 
V.  Syme,  109  Wis.  355(1901). 

Perry  on  Trusts  (3d  ed.),  §  428,  lays 
down  the  rule  as  follows:  "A  trustee, 
executor,  or  assignee  cannot  buy  up  a 
debt  or  incumbrance  to  which  the 
trust  estate  is  liable,  for  less  than  is 
actually  due  thereon,  and  make  a  profit 
to  himself;  but  such  purchase  inures 
for  the  benefit  of  the  trust  estate,  and 
the  creditors,  legatees,  and  cestuisque 
trust  shall  have  all  the  advantage  of 
such  purchase.  But  if  a  trustee  buys 
up  an  outstanding  debt  for  the  benefit 
of  the  cestuis  que  trust,  and  they  refuse 
to  take  it  or  to  pay  the  purchase-money, 
they  cannot  afterwards,  when  the  pur- 
chase turns  out  to  be  beneficial,  claim 
the  benefit  for  themselves.  Nor  car 
the  trustee  make  any  contract  with  the 
cestui  que  trust  for  any  benefit,  or  for 
the  trust  property,  nor  can  he  accept  a 
gift  from  the  cestui  que  trust.  The  bet- 
ter opinion,  however,  is,  that  a  trustee 
may  purchase  of  the  cestui  que  trust,  or 
accept  a  benefit  from  him,  but  the  trans- 
action must  be  beyond  suspicion ;  and 
the  burden  is  on  the  trustee  to  vindi- 
cate the  bargain  or  gift  from  any 
shadow  of  suspicion,  and  to  show  that 
it  was  perfectly  fair  and  reasonable  in 


■in  the  payment  of  his  debt  it  is  illegal,    every  respect  and  courts  will  scrutinize 
692,  infra.      Officers    occupy    a     the    transaction   witli    great   severity. 

1519 


«ee 


§  coo.] 


FRAUDS    OF    DIKECrOKS,  PROMOTEItS,  KTC.  [cU.  XXXIX. 


from  him  as  a  director.     Morever,  the  corporation  must  chiim  the 
benefit  at  once,  if  at  all.^ 

An  attachment  and  execution  sale  of  railroad  bonds  on  a  judg- 
ment obtained  by  a  director  was  disregarded  and  declared  void, 
where  the  director  himself  purchased  at  the  sale,  and  the  whole 
transaction  was  tainted  with  a  fraudulent  control  exercised  by  the 
director  over  the  company.^ 


So,  if  a  trustee  buys  the  trust  property 
at  private  sale  or  public  auction,  he 
takes  it  subject  to  the  right  of  the 
cestui  qiie  trust  to  have  the  sale  set 
aside,  or  to  claim  all  the  benefits  and 
profits  for  the  sale  himself." 

Where  a  director  is  one  of  a  com- 
mittee appointed  by  the  board  of  direct- 
ors to  settle  claims  against  tlie  corpo- 
ration, and  he  buys  some  of  the  claims, 
he  must  turn  them  in  at  the  price  he 
paid,  and  even  tliough  the  stockholders 
and  directors  intended  to  allow  him  the 
profit,  yet  this  does  not  estop  the  corpo- 
ration from  objecting.  Kroegheru.  Cali- 
vada.  etc.  Co.,  119  Fed.  Rep.  641  (1902). 

1  Seymour  v.  Spring  Forest  Cem. 
Assoa,  144  N.  Y.  333  (1895);  s.  G,  157 
N.  Y.  697.  See  also  §  655,  sttpra.  In 
Higgins  V.  Lansingh,  154  111.  301  (1895), 
the  court  said  that  if  a  director  acts 
fairly  and  for  the  interest  of  the  corpo- 
ration, he  may  buy  up  at  a  discount  a 
debt  of  the  corporation  and  enforce 
such  debt  at  its  full  face  value,  provided 
the  corporation  was  given  an  opportu- 
nity itself  to  become  the  purchaser  and 
could  not  or  would  not  purchase.  The 
court  held,  however,  in  the  case  before 
it  that  the  purchase  on  the  part  of  the 
director  was  fraudulent,  and  that  the 
director  could  collect  only  the  amount 
he  paid.  The  fact  that  a  director  buys 
up  the  securities  of  an  insolvent  corpo- 
ration for  the  purpose  of  using  them  in 
reorganization  is  not  fraudulent  or  a 
breach  of  his  duty,  he  having  paid  all 
that  the  securities  were  wqrth.  Powell 
V.  Willamette  Valley  R  R,  15  Oreg. 
393  (1887).  In  Inglehart  v.  Thousand 
Island  Hotel  Co.,  109  N.  Y.  454  (1888). 
33  Hun,  377,  the  assignee  of  a  judgment 


from  a  director  who  purchased  it  at  a 
discount  was  allowed  to  enforce  it  for 
the  full  amount.  After  the  corpora- 
tion lias  assigned  for  the  benefit  of 
creditors,  and  all  its  property  has  been 
sold,  a  director  may  buy  up  claim* 
against  it,  and  participate  in  the  dis- 
tribution of  assets.  Hammond's  Ap- 
peal, 123  Pa.  St.  503  (1889);  Craigs  Ap- 
peal, 92  Pa.  St.  396  (1880).  The  ca.se  of 
St.  Louis,  etc.  R  R  i-.  Chenault,  30  Kan. 
51(1886),  holds  that  a  corporate  treas- 
urer may  buy  up  outstanding  notes 
against  the  corporation,  and  may  then 
pay  such  notes  out  of  the  corporate 
funds  in  his  possession.  Wliere  the 
directors  issued  bonds  as  collateral  to 
the  company's  note,  and.  upon  the  sale 
of  the  bonds  by  the  pledgee  for  non- 
payment of  the  note,  purchased  the 
bonds  at  five  cents  on  the  dollar,  a  fore- 
closure based  chiefly  on  such  bond* 
will  be  set  aside.  James  v.  Railroad 
Ca,  6  W^alL  752  (1867).  The  compli- 
cated  principles  of  law  growing  out  of 
directors  owning  corporate  debts  are 
considered  in  §§  692.  693,  iyifra.  As  to 
the  issue  by  the  corporation  of  its  bonds 
to  directors  at  less  than  par,  see  §  766, 
infra, 

2  Richardson  t\  Green,  133  U.'  S.  30 
(1890).  Where  the  president  of  a  coal 
company  contracts  in  his  own  name  to 
supply  coal  to  parties,  and  the  board  of 
directors,  a  majority  of  whom  are  his 
relatives,  contract  to  furnish  the  com- 
pany's coal  to  him  on  a  royalty,  a  stock- 
holder may  compel  him  to  turn  into 
the  corporation  the  profits  of  his  con- 
tract. An  assignee  of  his  interest  who 
took  with  notice  is  not  protected.. 
Davis  V.  Gemmell,  70  Md.  356  (1889). 


1520 


CH.  XXXIX.]  FKADDS    OF    DIRECTORS,  PROMOTERS,  ETC.         [§§  661,  662. 

§  661.  Loans  lij  directors  to  the  corporation;  mortgages  hg  the 
corporation  to  the  directors,  and  the  right  of  an  insolvent  corpora- 
tion to  give  a  mortgage  or  assignment  of  its  property  to  a  director 
in  order  to  prefer  the  payment  of  his  debt.—  These  questions  are  con- 
sidered elsewhere.^ 

§  662.  Frauds  hg  a  majority  of  the  stocMolders  on  the  minority  — 
Directors  owning  stock  in  another  corporation  ivith  which  a  con- 
tract is  made  —  Stockholders'  ratification  of  the  voidable  acts  of  di- 
rectors—One corporation  voting  stock  in  another  competing  cor- 
poration.—It  often  happens  that  a  consolidation,  lease,  sale,  or  con- 
tract between  two  corporations  is  made  where,  first,  the  directors 
of  one  of  the  corporations  are  largely  interested  in  the  stock  of  the 
other,  or,  second,  one  corporation  owns  a  majority  of  the  stock  of 
the  other,  or,  third,  the  same  person  or  persons  own  a  majority  of 
the  stock  of  both  corporations.  There  then  is  likely  to  arise  a  con- 
flict between  interest  and  duty.  Such  contracts  as  these  are  inves- 
tigated very  closely  by  the  courts.  They  are  not  necessarily  void, 
and  are  not  constructively  fraudulent.  But  if  there  is  actual  fraud, 
or  if  there  has  been  an  undue  advantage  taken  or  an  unconscionable 
bargain  made,  the  court  will  set  it  aside.  If  the  transaction  is  fair 
the  court  will  sustain  it;  if  it  is  unfair  the  court  will  undo  it.^ 

First,  where  the  directors  oC  one  corporation  are  stockholders  in 
another  corporation,  and  a  lease,  sale,  consolidation,  or  contract  is 
made  between  the  two.  Such  transactions  are  ©f  constant  occur- 
rence. They  are  not  fraudulent  in  law  unless  they  are  unfair.  The 
court  has  power  to  set  them  aside,  however,  at  the  instance  of  a 
dissenting  stockholder,  if  in  the  conflict  between  interest  and  duty 
interest  has  prevailed.' 

1  See  >;§  692,  693,  infra.  meantime  the  association  has  spent  its 

2  Quoted  and  approved  in  Hill  v.  money  in  installing  its  plant.  Goodell 
Gould,  129  Mo.  106  (1895i,  where  a  sale  v.  Verdugo,  etc.  Co.,  71  Pac.  Rep.  354 
of  coal  was  upheld,  although  at  about  (Cal.  1903),  the  court  saying:  "Thepub- 
costj^  and  a  majority  of  the  directors  licity  alone  of  an  illegal  and  unau- 
were  elected  by  and  represented  the  thorized  act  of  the  directors  of  the 
railroad  company  that  bought  the  coal,  corporation  does,  not  ndake  it  legal  or 

3  Where  a  majority  of  the  directors  of  valid." 

an  irrigation  company  are  members  of  Where  the  officers  and  owners  of  a 
an  association  which  desires  to  obtain  majority  of  the  stock  of  a  company 
water  from  such  corporation,  a  contract  vote  as  stockholders  and  oflBcers  to 
to  that  effect  which  is  solely  for  the  lease  its  property  to  another  corpora- 
benefit  of  the  association  is  illegal  and  tion,  all  of  whose  stock  they  own,  the 
may  be  repudiated  by  the  corporation,  minority  stockholders  in  the  first  cor- 
even  though  such  contract  was  openly  poration  may  cause  it  to  be  set  asid& 
made,  and  even  though  the  directors  Meeker  v.  Winthrop  Iron  Co..  17  Fed. 
were  guilty  of  laches  in  not  causing  the  Rep.  48  (1883).  See  also  Brewer  v.  Bos- 
contract  to  be  set  aside,  and  in  the  ton  Theater,  104  Mass.  378  (1870);  Fitz- 
(9G)                                                 1521 


§  6G2.] 


FRAUDS    OF    DIREOTOES,  PROMOTERS,  ETC.  [cil.   XXXIX. 


Nevertheless  a  court  of  equity  will  not,  at  the  instance  of  minor- 
ity stockholders  in  a  corporation,  enjoin  that  corporation  from  tak- 
ino-  a  lease  of  another  railroad,  even  though  the  same  persons  are- 


gerald  v.  Fitzgerald,  eta  Co.,  41  Neb. 
374  (1894). 

A  lease  made  by  a  majority  of  the 
board  of  directors,  of  which  majority 
one  is  interested  in  anotlier  corporation 
taking  the  lease,  and   his  vote  being 
necessary  to  authorize    the    lease,    is 
voidable  at  the  instance  of  a  stock- 
holder of  the  lessor.  Parsons  v.  Tacoma, 
etc.  Co.,  25  Wash,  492  (1901).     A  minor- 
ity stockholder  cannot  enjoin  the  com- 
pany from  issuing  its  stock  in  payment 
for  the  stock  of  other  similar  companies 
on  the  ground  that  the  price  to  be  paid 
is  excessive  and  that  three  of  the  di- 
rectors are  interested  as  stockholders 
in  the  other  companies,  where  he  does 
not  prove  that  the  price  is  excessive, 
and  it  appears  that  the  stockholders 
will  have  to  approve  the  transaction 
before  the  directors  can  issue  the  stock, 
and  it  appears  also  that  the  plaintiff 
owns  but  a  very  small  amount  of  the 
stock.    Ceer  v.  Amalgamated,  etc.  Co., 
61   N.  J.  Eq.   364  (1901).     Where    the 
business  of  a  corporation  requires  the 
construction  of  a  railroad  and  steam- 
ship line  and  the  company  has  no  power 
to  construct   them,  and   consequently 
the  oflBcers  with  others  take  out  a  sep- 
arate charter  and  own  the  stock  of  the 
new  company  and  construct  the  line, 
and  then  propose  to  consolidate  the 
companies  on  a  plan  which  will  give  to 
the  new  stock  an  interest  in  the  con- 
solidated company  which  will    repre- 
sent a  large  profit,  a  stockholder  of  the 
old  company  may  enjoin  the  consolida- 
tion upon  proving  that  the  new  fran- 
chises were  necessary  to  the  old  com- 
pany and  were  intended  for  the  benefit 
of  the  old  company,  the  same  officers 
being  in  control  of  the  two  companies. 
Miller  v.  Consolidated,  etc.  Co.,  110  Fed. 
Rep.  480  (1901).    Even  though  an  officer 
of  a  mortgagor  owns  a  majority  of  the 
stock,  and  is  also  a  creditor,  and  pro- 


motes a  suit  for  a  receivership  and  sale 
of  the  corporate  property,  yet  he  may 
purcliase  at  the  foreclosure  sale,  even 
at  a  nominal  figure,  and  a  corporation 
to  which  he  transfers  it  m  exchange  for 
the  latter's  capital  stock  may  be  a  bo7ia 
fide  purchaser  for  value,  even  though  it 
is  chargeable   with   notice  of  all   the 
facts,  and  may  insure  the  property  for 
its  own  benefit  and  not  for  the  benefit 
of  an  underlying  mortgage.     Farmers', 
etc.  Co.  V.  Penn,  etc  Co.,  103  Fed.  Rep. 
132.    157   (1900).     A    lease  will   not   be 
set  aside  even    though   a   majority  of 
the  directors  of  the   lessor  are   inter- 
ested   in  the  lessee,  and  even  though 
after  the  lease  was  made  they  became 
stockholders  and  directors  of  the  lessee, 
it   being  shown  that  the  lessor  had  a 
fioating  and  bonded  debt  and  no  funds, 
and  had  never  paid  a  dividend,  and  that 
as  a  result  of  the  lease  the  stock  ad- 
vanced fifty  per  cent  in  value,  and  the 
complaint    is  not  made  until  eighteen 
months  after  the  lease  was  made.    Dick- 
inson V.  Consolidated,  etc  Co.,  114  Fed. 
Rep.  232  (1902);  aff'd,  119  id.  871.  The  fact 
that  directors  loaned  money  to  the  cor- 
poration  on   its  purchase  of  property 
from  another  corporation  in  which  they 
are  interested  does  not  postpone  their 
claims  to  the  claims  of  other  creditors. 
In  re  Estate,  etc,  202  Pa.  St.  589  (1902). 
Even  though  the  general  manager  is  a 
stockholder  in  another  company  which 
is  selling  articles  to  his  company,  yet 
where  the  board  of  directors  of  his  com- 
pany knew  the  facts  and  monthly  state- 
ments were  made,  and  no  actual  fraud 
is  shown,  the  sales  cannot  be  set  aside 
after  they  have  been  completed.  Aldine 
Mfg.  Co.  V.  Phillips,  88  N.  W.  Rep.  632 
(Mich.   1902).    Where  the  by-laws  ex- 
pressly provide  that  a  director  shall  not 
be  liable  for  the  profits  received  by  him 
as  a  stockholder  in  another  corporation 
by  reason  of  a   contract  between  the 


r^oo 


152 


€H.  XXXIX.]  PKAUDS    OF   DIKECTOKS,  PROMOTERS,  ETC. 


[§  662. 


the  oflBcers  and  majority  stockholders  in  both  companies,  unless  act- 
ual unfairness  and  injustice  are  proven.  Moreover,  the  court  can- 
not prescribe  the  terms  of  a  lease.    It  can  merely  enjoin  a  fraudulent 


two  corporations,  he  cannot  be  held 
liable.     Costa    Rica    Ry.    v.    Forwood, 
[1900]  1  Ch.  756;  aff' d,  [1901]  1  Ch.  746. 
"Wliere  the  directors  let  a  contract, 
and    then   the  contractor  assigns    his 
rights  to  a  corporation  the  majority  of 
■whose  stock  is  owned  by  the  directors, 
the  court  will  not  aid  the  contractor  as 
a  stockholder  in  the  second  corporation. 
Warden  v.  Union  Pac.  R  R..  103  U.  S. 
551  (1880).  See  §  649.  supra.  Where  the 
directors  of  a  railway  company  enter 
tnto    a   contract   with    third    persons, 
whereby  a  new  company  is  organized, 
franchises  secured,  and  a  road  built  and 
leased  to  the  old   company,   and  the 
profits  realized  from  the  transaction  are 
equally  divided  between  the  directors 
and  the  third  persons,  the  latter  are  not 
liable  for  their  profits,  even  though  ex- 
orbitant, on  a  suit  by  the  stockholders 
of  the  old  company,  unless  the  contract 
of  lease  is  rescinded  and  the  road  re- 
stored to  the  new  company.  Hitchcock 
V.    Barrett,   50    Fed.    Rep.    653    (1892). 
Although  a  lessee  railroad  company  has 
directors,   a    minority    of    whom    are 
largely  interested    iu    the   stock   and 
bonds  of  the  lessor  railroad,  and  such 
bonds  and  stock  are  largely  "  water," 
yet  this  does  not  necessarily  vitiate  the 
lease.    The  court  will  not  set  the  lease 
aside  if  no  undue  advantage  was  taken 
and  no  actual  fraud  involved.   Jesup  v. 
Illinois  Cent   R.  R,  43  Fed.   Rep.   483 
(1890).     Where  a  gas  company  is  under 
contract  to  furnish  gas  to  several  con- 
cerns, and  its  business  is  so  managed  as 
to  favor  a  concern  in  which  the  officers 
are  interested,  there  being  an  insuffi- 
cient supply  of  gas,  a  minority  stock- 
holder may  complain.     Clark  v.  Pitts- 
burgh, etc.  Co.,  184  Pa.  St.  188  (1898). 
Although  certain  persons,  being  direct- 
ors and  owners  and  in  control  of  a  rail- 
road company,  cause  it  to  make  a  con- 
«truction    contract    with    a    company 


which  they  also  control,  yet,  if  all 
stockholders  assent,  subsequent  consol- 
idated bondholders  cannot  object  that 
a  part  of  the  old  issue  of  bonds  was 
issued  below  par  and  was  fraudulently 
and  illegally  issued.  Coe  v.  East,  etc. 
R.  R,  52  Fed.  Rep.  531  (1892).  An  agree- 
ment of  persons  holding  a  majority  of 
the  stock,  they  being  directors  also, 
that  a  person  purchasing  stock  from 
them  shall  be  general  manager,  and 
may  at  the  end  of  two  years  sell  the 
stock  back  to  them  at  a  stated  price,  is 
contrary  to  public  policy  and  void. 
The  vendors  need  not  repurchase.  The 
arrangement  is  unfair  to  the  corpora- 
tion. Wilbur  V.  Stoepel,  82  Mich.  344 
(1890).  It  is  illegal  for  directors  to  be 
stockholders  in  a  construction  company 
to  which  a  construction  contract  is  let. 
Oilman,  etc.  R  R  u.  Kelly,  77  111.  426 
(1875). 

In  England  it  seems  that  under  the 
statutory  power  of  one  company  to  sell 
out  to  another,  the  sale  may  be  for  cash, 
and  the  minority  are  bound,  even 
though  the  majority  own  the  purchas- 
ing company.  But  all  the  cash  must  be 
paid,  and  not  merely  the  part  that  goes 
to  the  minority.  Hoist  v.  Sydney,  etc 
Ry.,  69  L.  T.  Rep.  132  (1893).  A  contract 
of  a  corporation  that  a  patentee  shall 
have  forty-eight  per  cent,  of  an  increase 
of  stock  does  not  apply  to  the  capital 
stock  of  a  consolidated  company,  al- 
though the  former  corporation  is  one  of 
those  entering  into  the  consolidation. 
Einstein  v.  Rochester,  etc.  Co.,  146  N.  Y. 
46  (1895). 

Sometimes  an  underwriting  syndi- 
cate is  brought  into  the  deal  The  fol- 
lowing decision  may  then  be  applicable  j 
Where  unissued  shares  of  the  par  value 
of  £1  each  are  worth  about  £4  each  and 
a  portion  thereof  are  offered  to  the 
stockholders  at  £2  10s.  each,  and  an  op- 
tion on  the  balance  is  given  to  under- 


1523 


§  662.]  FRAUDS   OF    DlKECroRS,  PROMOTERS,  ETC.  [CH.   XXXIX. 

or  ultra  vires  one.'  Again,  where  one  corporation  buys  out  another, 
a  stockholder  of  the  former  cannot  comphiin,  even  thoug'h  a  hirge 
amount  of  watered  stock  was  issued  in  payment,  and  even  though 
the  directors  of  the  purchasing  company  were  personally  interested 
in  the  selling  company  and  had  made  large  profits  in  the  construc- 
tion of  the  work,  it  appearing  that  the  purchasing  company  had  no 
property  at  all  kt  the  time  of  the  purchase.  In  such  a  case  no  dam- 
age is  done  to  the  stockholder,  and  hence  suit  by  him  does  not  lie.'- 
But  where  a  lease  is  made,  and  the  directors  of  the  lessee  railroad 
company  are  also  directors  of  the  lessor  company,  and  own  a  ma- 
jority of  the  stock  of  both  companies,  a  stockholder  of  the  lessee 
company  alleging  that  the  lease  is  at  an  exorbitant  rent  and  unlaw- 
fully depletes  the  funds  and  earnings  of  the  lessee  company,  and  in- 
jures him  as  a  stockholder,  and  alleging  also  that  the  directors  have 
unlawfully  paid  large  sums  to  themselves  on  account  of  alleged 
loans,  may  by  a  bill  in  equity  compel  them  to  account.' 

Where  the  officers  of  a  lessee  corporation,  which  has  leased  the 
property  of  the  lessor  corporation,  control  a  majority  of  the  stock 
of  the  latter,  and  conspire  to  compel  the  minority  to  sell  their  stock 
by  refusing  to  pay  the  rent  due  on  the  lease,  a  court  of  equity,  on 
the  application  of  the  minority,  will  compel  a  payment  of  the  rent.* 
The  question  as  to  the  liability  of  a  director  who  is  interested  as  a 
stockholder  in  a  contracting  construction  company  is  considered 
elsewhere.^ 

A  lease  to  a  director  is  not  necessarily  illegal,  even  though  a 
stockholder  objects  thereto,  where  a  majority  of  the  stockholders 
have  ratified  the  lease." 

Where  a  director  has  sold  his  property  to  the  corporation,  or  has 
committed  some  other  act  which  is  voidable  and  not  void,  and 

writers  at  the  same  price  in  considera-  Georgia,    eta    Ry.,  112  Fed.   Rep.  838 

tion  of  the  underwriters  agreeing  to  (1900;. 

take  such  of  the  stock  as  is  offered  to  i  Sliaw  v.  Davis,  78  Md.  308  (1894).  The 

the  stockholders  and  is  not  taken  by  court  held  that  no  actual  fraud  was 

the  latter,  a  minority  stockholder  may  proven  in  this  case. 

enjoin  the  carrying  out  of  such  option  2Smith  v.  Ferries,   etc.  Ry.,  51  Pac. 

to  the  underwriters,  it  being  in  viola-  Rep.  710  (Cal.  1897). 

tion  of  the  English  statute  prohibiting  3  Sage  v.  Culver,  147  N.  Y.  241  (1895). 

the  payment  of  a  commission  for  under-  <  Barr  r.  New  York,  etc.  R,  R.,  96  N. 

writing  subscriptions.  Burrows  v.  Mat-  Y.  444  (1884). 

abele,  etc.  Co.,  [19011  2  Ch.  23.   The  fact  ssee  §  649,  stipra. 

that  one  of  the  trustees  of  a  voting  ^The  court  refused,  at  the  instance 

trust  is  an  officer  in  a  certain  railroad  of  a  dissenting  stockholder,  to  set  aside 

does  not  render  illegal  the  voting  of  the  such  a  lease,  in  the    case    of    Nye  r. 

stock  in  favor  of  consolidating  with  Storer,  168   Mass.  53  (1897).     See   also 

that  railroad,  there  being  no  proof  of  §  649,  supra. 

wrong-doing  or  unfair  terms.     Dady  v. 

1524 


CH.  XXXIX.]  FRAUDS    OF    DIRECTORS,  PROMOTERS,  ETC. 


[§  062. 


where  a  majority  of  the  stock  can  ratify  and  validate  that  act,  it 
being  not  actually  fraudulent,  but  merely  voidable  at  the  option  of 
the  stockholders,  the  important  question  arises  whether,  in  taking 
the  vote  of  the  stockholders  on  such  a  question,  the  stock  held  by 
the  director  himself  is  to  be  counted.  The  well-settled  rule  is  that 
his  stock  is  to  be  counted,  even  though  the  vote  would  have  failed 
if  his  stock  had  not  been  voted.^ 


1  A  director  may  sell  property  to  the 
corporation    where    the    purchase     is 
adopted  at  a  meeting  of  the  stockhold- 
ers.    Such  director  may  vote  in  favor 
of  such  purchase  all  tlie  stock  that  he 
owns;  but  if  the  result  is  "so  detri- 
mental to  the  interests  of  the  corpora- 
tion  itself  as  to  lead  to  the  necessary 
inference  that  the  interests  of  the  ma- 
jority of  the  shareholders   lie  wholly 
outside  of  and  in  opposition  to  the  in- 
terests of  the  corporation  and  of  the  mi- 
nority of  the    shareholders,  and  that 
their  action  is  a  wanton  or  fraudulent 
destruction  of  the  rights  of  such  mi- 
nority," tlien  a  court  of  equity  will  set 
the  act  aside.     Gamble  v.  Queen's,  etc 
Co..  123  N.  Y.  91  (1890).    The  court  said; 
"  In  such  cases  it  may  be  stated  that 
the  action  of  the  majority  of  the  share- 
liolders  may  be  subjected  to  the  scru- 
tiny of  a  court  of  equity  at  the  suit 
of  the   minority  shareholders."    Even 
though  the  directors  are  to  receive  a 
commission  on  bonds  which  they  sell 
for  the  corporation,  yet  if  the  stock- 
holders are  notified  of  the  same  and 
ratify  the  transaction  in  meeting  as- 
sembled, the  minority  stockholders  can- 
not complain,    the    transaction    itself 
being  a  fair  one.     The  directors  may 
vote  their  own  stock  at  such  meeting 
and    the     ratification    is    legal,    even 
though  their  stock   was   necessary  in 
order  to  carry  the  resolutions.     Hodge 
V.  United  States  Steel  Corp.,  54  Atl.  Rep. 
1  (N.  J.  1903).     The  court  said:  '-Like 
other  stockholders,  they  had  a  right  to 
be  influenced  by  what  they  conceived 
to  be  for  their  own  interest,  and  they 
cannot  lawfully   be  denied  the   right, 
nor  can  it  be  limited  or  circumscribed 


by  the  fact  that  they  occupied  the  posi- 
tion of  directors  in  the  company."    The 
court  further  said:    "In  Leavenworth 
V.  Chicago  Railway  Co.,  134  U.  S.  6S8, 
it  was   held  that  the   action    of   the 
stockholders    validated    the    contract 
where  nine  out  of  thirteen   directors 
were  personally  interested.    In  the  case 
of  Nye   V.  Storer,   168    Mass.  53,   and 
Bjorngaard  v.  Goodhue  County  Bank, 
49  Minn.  483,  a  like  infirmity  in  con- 
tracts was   held  to  be  eliminated  by 
the  vote  of  a  majority  of  stockholders."' 
A  purchase  of  a  steamboat  from  one 
who  is  a  director  and  owns  a  majority 
of  the  stock  is  valid  where  ratified  by 
a  majority  vote  at  a  stockholders'  meet- 
ing.    The  director  may  vote  his  stock. 
Northwest  Transp.  Co.  v.  Beatty,  L.  R. 
12  App.  Cas.  589  (1887).     It  was  said,  in 
effect,  that  in  such  case  the  ratification 
must  not  be  brought  about  by  unfair  or 
improper  means,  nor  be  illegal  or  fraud- 
lent  or  oppressive  toward  those  share- 
holders who  oppose  it.     A  rule  exclud- 
ing stockholders  from  the  right  to  vote, 
merely  because  they  might  be  person- 
ally interested  to  vote  in  a  particular 
way,  contrary  to  the  interests  of  the 
other  stockholders,  would  be  likely  to 
lead    to    great    confusion.    Beatty    v. 
Northwest  Transp.  Co.,  5  Can.  L.  T.  277 
(1885)  (rev'g  S.  C,  4  Can.  L.  T.  85),  hold- 
ing that  a  purchase  by  the  directors  of 
a  vessel  from  one  of  the  directors  could 
not  be  set  aside  by  a  dissenting  stock- 
holder where  a  majority  of  the  stock 
had  ratified  the  purchase,  even  though 
the    director   himself  held  and  voted 
that  majority. 

A  stockholder  may  vote  to  ratify  a 
purchase  of  property  from  a  corpora- 


1525 


§  002.] 


FRAUDS   OF    DIRECTORS,  PROMOTERS,  ETC.  [CH.  XXXIX. 


Second,  a  similar  situation  arises  where  one  corporation  owns  a 
majority  of  the  stock  of  another,  and  hence  controls  it,  and  brings 
about  a  lease,  consolidation,  sale,  or  contract  between  the  two." 
This  is  very  much  the  same  as  where  a  corporation  sells  property 
to  one  of  its  directors,-  or  buys  property  from  him.'     The  courts 


tion  by  the  directors,  although  such 
stockholder  is  a  director  himself.  Tlie 
court  said:  "The  fact  that  he  may 
have  a  personal  interest  separate  from 
the  others  or  from  that  of  the  corpora- 
tion in  the  matter  to  be  voted  upon 
does  not  afifect  his  riglit  to  vote.  It  is 
not  to  be  understood  that  the  majority 
stockholders  may  use  their  power  of 
voting  for  the  purpose  of  defrauding 
the  minority."  Bjorngaard  v.  Goodliue 
County  Bank,  49  Minn.  483  (1892);  Foss 
V.  Harbottle,  2  Hare,  461  (1843;,  wliere 
the  directors  sold  their  property  to  the 
corporation.  Inasmuch  as  the  major- 
ity of  stockholders  could  ratify  the  pur- 
chase, the  court  refused  to  entertain  a 
stockholders'  suit  until  they  had  voted. 
Where  a  person  fraudulently  misrepre- 
sented a  mine  in  its  sale  to  the  com- 
pany for  shares  of  stock,  a  suit  by  the 
company  against  him  does  not  lie  where 
a  majority  of  the  stock  votes  against 
the  suit,  although  the  shares  obtained 
by  the  vendee  were  voted  by  him  and 
were  necessary  to  make  the  majority, 
and  although  he  was  a  director  of  the 
company  at  the  time.  East,  etc.  Co.  v. 
Merryweather,  2  Hem.  &  M.  254  (1854). 
This  case  goes  much  farther  than  the 
modern  rule  would  uphold.  See  Mason 
V.  Harris,  L.  R.  11  Ch.  D.  97  (1879),  hold- 
ing explicitly  that  where  a  director  is 
guilty  of  fraud  as  a  promoter,  a  dissent- 
ing stockholder  may  bring  him  to  an 
accounting,  although  the  director  con- 
trols the  directorate  and  a  majority  of 
the  shares  of  stock.  Also  Atwool  v. 
Merryweather,  L.  R  5  Eq.  464,  note 
(1867),  where  a  dissenting  stockholder 
sued  to  set  aside  a  sale  of  property  to 
the  company  by  the  defendant,  who  di- 
vided the  profits  with  one  of  the  direct- 
ors. Although  a  majority  of  the  stock- 
holders_  had   voted    not  to  bring  the 


action,  yet  this  majority  was  made  up 
by  counting  the  stock  of  the  guilty 
parties,  and  hence  was  not  "binding.  In 
a  stockliolders'  vote  ratifying  the  acts 
of  directors,  a  stockholder  has  no  right 
to  vote  stock  which  he  has  transferred 
to  others,  even  though  it  still  stands  in 
his  name  on  the  books.  Graves  v.  Mono 
Lake,  etc.  Co.,  81  Cal.  303  (1889i  A 
creditor  who  is  also  a  stockliolder  may 
vote  his  stock  in  favor  of  a  mortgage 
to  himself.  Rittenhouse  v.  "Winch,  11 
N.  Y.  Supp.  122  (1890).  Works  built  by 
a  director  in  opposition  to  the  corpora- 
tion may  be  purchased  by  the  latter 
and  new  stock  issued  therefor.  Such  a 
transaction  is  certainly  legal  where  a 
majority  of  the  minoritj'  stockholders, 
not  including  the  parties  interested, 
vote  in  favor  of  it.  Barr  v.  Pittsburgh, 
etc.  Co..  51  Fed.  Rep.  33  (1892).  In  Cum- 
berland Coal  Co.  V.  Sherman,  30  Barb. 
553  (1859),  the  court  held  that  a  unani- 
mous vote  of  the  stockholders  was 
necessary  to  confirm.  A  ratification 
by  the  stockholders  of  directors'  acts 
cannot  be  made  by  a  general  resolution 
ratifying  "  all  of  the  acts  of  the  officers." 
Farmers'  L.  &  T.  Co.  v.  San  Diego,  etc. 
Co.,  45  Fed.  Rep.  518  (1891),  holding  also 
that  the  directors  holding  a  majority 
of  the  stock  cannot  by  its  vote  ratify  a 
preference  to  them  by  the  corporation, 
which  is  insolvent.  A  stockholder  may 
vote  on  the  propriety  of  a  sale  to  the 
corporation  in  which  he  is  interested  as 
vendor.  Worth,  etc.  Co.  v.  Bingham, 
116  Fed.  Rep.  785  (1902). 

1  This  is  practically  a  private  sale  of 
the  corporate  property  to  one  of  the 
stockholders  and  may  be  objected  to. 
See  ^lason  v.  Pewabic  Min,  Co.,  133 
U.  S.  50  (1890).     See  also  §  671,  infra. 

-  See  §  653,  supra. 

3  See  §  652,  supra. 


1526 


CH.  XXXIX.]  FKACDS    OF    DIKECTOES,  PEOMOTEKS,  ETC. 


[§  662. 


will  scrutinize  the  transaction  very  closely  and  will  set  it  aside,  at 
the  instance  of  a  stockholder,  if  it  is  unreasonable,  unfair,  and  prac- 
tically fraudulent.!     The  Kew  York  court  of  appeals  has  well  said 


1  Where  one  railroad  owns  a  majority 
of  the  stock  and  controls  the  board  of 
directors  of  another  railroad,  and  causes 
the  latter  to  lease  its  road  to  the  former, 
a  stockholder  of  the  former  may  file  a 
bill  in  equity  to  set  aside  such  lease  on 
the  ground  that  its  terms  were  so  in- 
equitable as  to  constitute  fraud.    In 
such  case  no  demand  need  be  made  to 
the  board  of  directors  to  bring  the  suit, 
if  the  facts  alleged  in  the  bill  show  that 
the  board  of  directors  is  controlled  by 
the  guilty  party.     Rogers  v.  Nashville, 
etc.  Ry.,  91  Fed.  Rep.  399  (1898).     Where 
one  mining  company  owns  the  majority 
of  the  stock  of  another  mining  company 
and  elects  the  directors  of  the  latter, 
and  causes  its  property  to  be  sold  out 
to  the  former  on  its  own  terms,  the 
minority  stockholders  of  the  latter  may 


cause  the  sale  to  be  set  aside,  even    preliminary    mjunction    will    not 


purchases  the  property  of  the  latter  at 
a  foreclosure  sale  thereof,  yet,  if  there 
was  no  actual  fraud,  the  minority  stock- 
holders of  the  insolvent  company  can- 
not complain,   especially  where   they 
waited  seventeen  months  and  allowed 
large  expenditures  to  be  made  in  re- 
liance on  the  sale.  Rothchildu  Memphis, 
etc.   R   R.,   113  Fed.   Rep.   476    (1902). 
Where  an   insolvent  savings  bank  is 
really  controlled  by  a  national  bank, 
although  they  have  not  the  same  direct- 
ors, yet  the'  former  cannot  prefer  the 
latter.     It  is  an  illegal  preference  in 
behalf  of  the  directors.     Slack  v.  North- 
western, etc.  Bank,  103  Wis.  57  (1899). 
In  a  stockholders'  suit  to  set  aside  a 
consolidation  on  the  ground  that  it  was 
ultra  vires  and  also  fraudulent  in  that 
one  company  controlled  the  other,  a 

be 


though    no    actual    fraud    is    shown. 
Glengary,  etc.  Co.  v.  Boehmer.  62  Pac. 
Rep.  839  (Col.  1900).     This  would  seem 
to  be  the  logical  rule  under  the  decision 
of  the  supreme  court  of  the  United 
States  in  Mason  v.  Pewabic  Min.  Co., 
133  U.  S.  50  (1889),  which  held  that  a 
majority  of  the  stockholders  could  not 
sell  out  all  the  property  of  the  company 
to  themselves    at  a  fixed   price  at  a 
private  sale,  even  though  the  minority 
stockholders  were  given  an  opportunity 
to  participate  in  such  sale  the  same  as 
the  majority  stockholders.     See  on  this 
subject  ^  671,  infra. 

Where  one  corporation  has  taken  a 
lease  of  the  property  of  another  and 
guarantees  dividends  on  the  stock  of 
the  latter,  and  then  acquires  a  majority 
of  the  stock  of  the  latter  and  proposes 
to  rescind  such  an  agreement,  a  minor- 
ity stockholder  may  enjoin  such  action. 
McLeary  v.  Erie,  etc.  Co.,  38  N.  Y.  Misc. 
Rep.  3  (1903).  Even  though  one  rail- 
road company  owns  the  majority  of  the 
stock  of  another  railroad  company  and 


granted  if  the  consolidation  has  already 
been  completed.  Stevens  v.  Missouri, 
etc.  Ry.,  106  Fed.  Rep.  771  (1901).  As  to 
one  corporation  voting  stock  in  another 
corporation,  see  §  615,  supra. 

Where  one  street  railway  owns  all 
the  stock  of  another  street  railway  (ex- 
cepting  five  shares,  the  owner  of  which 
does  not  object),  and  the  former  makes 
a  contract  authorizing  a  third  street 
railway  to  run  its  cars  over  the  tracks 
of  the  company  whose  stock  is  so  owned, 
such  contract  is  legal  and  will  be  en- 
forced. South,  etc.  Ry.  v.  Second  Ave. 
etc.  Ry.,  191  Pa.  St.  493  (1899).  The  pro- 
vision in  a  lease  that  any  differences 
arising  shall  be  decided  by  arbitration 
cannot  be  avoided  by  a  minority  stock- 
holder, even  though  the  lessee  owns  a 
majority  of  the  stock  of  the  lessor  and 
controls  its  board.  Wolf  v.  Pennsyl- 
vania R.  R.,  195  Pa.  St.  91  (1900). 

Where  a  majority  of  the  stock  of  a 
railroad  company  is  held  by  another 
company,  and  the  latter  company  uses 
its  control  to  acquire  all  the  property 


1527 


§  662.] 


FRAUDS    OF    DIRECTORS,  PROMOTERS,  ETC.  [CH.  XXXIX. 


that  where  "a  majority  of  the  stock  is  owned  by  a  corporation  or 
a  combination  of  individuals,  and  it  assumes  the  control  of  another 
company's  business  and  affairs  through  its  control  of  the  officers 
and  directors  of  the  corporation,  it  would  seem  that  for  all  prac- 
tical purposes  it  becomes  the  corporation  of  which  it  holds  a  ma- 
jority of  stock,  and  assumes  the  same  trust  relation  towards  the 
minority  stockholders  that  a  corporation  itself  usually  bears  to  its 
stockholders."' 

Third,  the  same  principles  of  law  apply,  where  an  individual  or 
several  individuals,  instead  of  a  corporation,  own  the  majority  of 
the  stock  of  another  corporation  and  bring  about  a  sale,  lease,  con- 
solidation, contract,  or  foreclosure,  to  their  own  personal  gain,  at 
the  expense  of  minority  stockholders.  The  law  requires  of  the 
majority  of  the  stockholders  the  utmost  good  faith  in  their  control 
and  management  of  the  corporation  as  regards  the  minority,  and 
in  this  respect  the  majority  stand  in  much  the  same  attitude  to- 
wards the  minority  that  the  directors  sustain  towards  all  the  stock- 
holders. Hence,  where  the  majority  are  interested  in  another  cor- 
poration, and  the  two  corporations  have  contracts  between  them, 
it  is  fraudulent  for  that  majority  to  manage  the  affairs  of  the  first 
corporation  for  the  benefit  of  the  second.  A  court  of  equity  will 
intervene  and  protect  the  minority  upon  an  application  by  the 
latter.^     The  principle  of  law  has  been  laid  down  that  "when  a 


of  the  former  company  fraudulently,  a 
minority  stockholder  may  bring  tiie 
latter  company  to  account  therefor. 
Pondir  v.  New  York,  etc.  E.  R.,  72  Hun, 
384  (1893).     Cf.  72  S.  W.  Rep.  822. 

» Farmers'  L.  &  T.  Co.  v.  New  York, 
etc.  Ry.,  loO  N.  Y.  410,  430  (1896),  the 
court  saying  also  (p.  434):  "There  are 
circumstances  under  which  the  ma- 
jority stockholders  occupy  substantially 
the  same  relation  of  trust  towards  the 
minority  as  the  board  of  directors 
would  occupy  towards  the  stockholders 
it  represents."  This  decision  was  fol- 
lowed in  a  stockholders'  suit  in  the  fed- 
eral court  to  remedy  the  same  wrong 
)n  De  Neufville  v.  New  York,  etc.  Ry., 
81  Fed.  Rep.  10  (1897).  A  stockholder 
in  one  railroad  corporation  cannot 
maintain  a  suit  at  law  against  another 
railroad  corporation  for  damages  to  his 
shares  of  stock  on  account  of  the  latter 
railroad  corporation  owning  a  majority 
of  the  stock  of  the  former,  and  so  man- 


aging the  former  as  to  cause  a  mortgage 
to  be  foreclosed  resulting  in  a  purchase 
of  the  property  by  the  latter  railroad 
corporation.  Niles  v.  N.  Y.  etc.  R.  R., 
05  N.  Y.  Misc.  Rep.  69  (1901).  involving 
the  same  transaction  as  the  preceding 
two  cases.     Cf.  54  Atl.  Rep.  121. 

'''Quoted  and  approved  in  the  case  of 
Farmers'  L.  &  T.  Co.  v.  New  York,  etc 
Ry.,  150  N.  Y.  410,  430  (1896). 

In  the  case  of  Flynn  v.  Brooklyn,  etc. 
E.  R.,  158  N.  Y.  493  (1899),  the  court  said 
that  a  lease  of  one  railroad  to  another 
is  illegal,  even  though  made  by  vote 
of  the  stockholders  in  accordance  with 
the  statutes,  where  it  is  shown  that  the 
same  parties  controlled  both  corpora- 
tions, and  the  lease  itself  was  unfair  in 
that  the  lessee  was  a  dummy  corpora- 
tion without  responsibility,  and  the 
rental  consisted  of  a  guarantee  of  divi- 
dends to  a  certain  amount  and  the 
right  to  purchase  a  certain  amount  of 
stock  of  the  lessee  for  $15  per  share;  but 


1528 


•CH.  XXXIX.] 


FRAUDS    OF    DIRECTOKSj  PROMOTERS,  ETC. 


[§  662. 


number  of  stockholders  combine  to  constitute  themselves  a  majority 
in  order  to  control  the  corporation  as  they  see  fit,  they  become  for 


the  court  further  held  that  a  proper  re- 
quest to  the  board  of  directors  to  bring 
•■suit  had  not  been  made. 

Where  a  corporation  sells  or  leases  all 
its  property  to  another  corporation, 
which  the  majority  of  the  stockholders 
•of  the  former  corporation  own  or  con- 
trol, the  contract  is  not  illegal  in  itself, 
but  it  will  be  scrutinized  carefully  by 
the  court,  and  if  unfair  will  be  set  aside. 
Mumford  v.  Ecuador,  etc.  Co.,  Ill  Fed. 
Rep.  639  (1901).  See  also  J^  671,  infra, 
fis  to  the  majority  buying  the  property 
at  private  sale  on  dissolution.  A  lease 
of  all  the  corporate  property  made  by  a 
majority  vote  of  the  stockholders  and 
directors  may  be  set  aside  at  the  in- 
stance of  a  dissenting  stockholder, 
where  the  lessee  owned  a  majority  of 
the  stock  and  controlled  the  board  of 
directors  of  the  lessor.  Parsons  v. 
Tacoraa.  etc.  Co.,  25  Wash.  493  (1901). 
A  minority  stockholder  may  enjoin  a 
public  sale  of  the  property  of  a  prosper- 
ous corporation,  even  though  the  com- 
pany has  been  dissolved,  under  the  New 
York  statute,  where  he  shows  that  the 
public  sale  is  not  being  fairly  advertised 
and  conducted,  and  shows  also  that  the 
dissolution  is  for  the  purpose  of  reor- 
ganizing under  the  laws  of  another 
state  and  freezing  out  the  minority,  and 
that  information  could  not  be  obtained 
as  to  the  actual  condition  of  the  com- 
pany. Treadwell  ?'.  United,  etc.  Co.,  47 
N.  Y.  App.  Div.  613  (1900).  See  also 
§  629,  supra.  The  voluntary  dissolu- 
tion, under  the  New  York  statute,  of  a 
prosperous  corporation  will  be  enjoined 
at  the  instance  of  minority  stockholders 
vs'here  it  is  alleged  that  it  is  a  mere 
scheme  to  freeze  out  the  latter  and  to 
buy  in  the  property  for  a  partnership. 
Elbogen  f.  Gerbereaux,  etc,  Co..  30  N.  Y. 
Misc.  Rep.  264  (1900).  Where  the  same 
person  controls  two  corporations  in  the 
same  line  of  business,  and  is  conducting 
-one  at  the   expense    of    the  other,   a 


minority  stockholder  of  the  latter  may 
have  relief.  Jacobus  v.  American,  etc. 
Co.,  88  N.  Y.  Misc.  Rep.  371  (1902).  In 
the  case  of  Drake  v.  New  York.  etc.  Co., 
36  N.  Y.  App.  Div.  275  (1899).  where  the 
owner  of  ten  out  of  two  thousand  shares 
of  stock  attacked  a  foreclosure  decree 
on  the  ground  of  fraud,  the  court  re- 
fused to  grant  relief,  the  purchaser  at 
the  foreclosure  sale  being  willing  to 
pay  to  such  stockholder  his  proportion 
of  the  actual  value  of  the  property 
irrespective  of  the  price  realized  at  the 
foreclosure  sale.  The  court  said  that 
the  expense  of  further  litigation  would 
be  many  times  the  actual  value  of  the 
plaintiff's  interest,  and  that  while  the 
plaintiff  in  a  court  of  law  would  be  en- 
titled to  the  full  measure  of  his  legal 
rights,  yet  in  a  court  of  equity  a  differ- 
ent rule  prevails  and  he  may  be  com- 
pelled to  take  his  actual  interest.   ■ 

The  holder  of  seventy-five  shares  can- 
not enjoin  the  holders  of  three  thousand 
six  hundred  and  seventy-five  shares 
from  making  a  pi'ivate  sale  of  the  cor- 
porate assets  at  a  fair  price,  where  the 
corporate  business  is  unprofitable  and 
each  stockholder  has  an  opportunity  of 
participating  in  the  purchase.  Phillips 
V.  Providence,  etc.  Co.,  21  R.  I.  302  (1899). 
It  has  been  held  that  where  a  majority 
stockholder  buys  the  property  at  fore- 
closure sale  and  sells  it  to  a  new  com- 
pany for  stock  and  bonds,  a  minority 
stockholder  has  a  right  to  his  propor- 
tion of  the  new  stock  subject  to  a  lien 
of  the  majority  stockholder  for  claims 
owned  by  him  against  the  old  company 
which  have  not  been  paid  by  bonds  of 
the  new  company,  no  actual  fraud  be- 
ing involved.  Cutting  v.  Baltimore, 
etc.  R  R.,  35  N.  Y.  Misc.  Rep.  616  (1901). 
This  decision,  however,  may  well  be 
questioned.     See  54  Atl.  Rep.  578. 

Where  a  person  controls  a  majority 
of  the  stock  of  a  ferry  and  also  a  rail- 
road company,  and  puts  his  "  dummies  " 


1529 


§  t^62.J 


FRAUDS    OF    DIRECTOKS,  PROMOTERS,  ETO.  [CH.  XXXIX. 


all  practical  purposes  the  corporation  itself,  and  assume  the  trust 
relation  occupied  by  the  corporation  towards  its  stockholders."^ 


in  as  directors,  and  leases  all  the  prop- 
erty of  the  former  to  the  latter  at  an 
unfair  price,  the  court  will  set  the  lease 
aside  at  the  instance  of  a  minority 
stockholder.  Me3''er  v.  Staten  Island 
Ry.,  7  N.  Y.  St.  Rep.  245  (1887).  Where 
a  lessor  and  a  lessee  company  are  con- 
trolled by  the  same  person,  and  the 
lessor  company  is  insolvent,  and  the 
lessee  company  is  advancing  large  sums 
of  money  to  pay  interest  on  the  bonds 
of  the  lessor  company,  with  no  hope  of 
repayment,  the  minority  stockholders 
of  the  lessee  company  may  enjoin  such 
payments.  Jeans  v.  Pittsburgli,  etc 
Ry.  (Com.  PI.  Ohio,  1885),  stated  in 
Moran  v.  Pittsburgh,  etc.  Ry.,  32  Fed. 
Rep.  882  (1885).  See  Menier  v.  Hoop- 
ers Tel.  Works,  L.  R,  9  Ch.  350  (1874); 
also  Peabody  v.  Flint,  88  Mass.  53 
(1863),  where,  however,  laches  barred 
the  remedy:  Gorham  v.  Gilsou,  28  Cal. 
479  (1865),  where,  however,  the  ac- 
tion failed  because  the  stockholders 
sued  to  compel  a  conveyance  to  each  of 
his  proportionate  part.  Where  the  ma- 
jority of  the  stockholders  vote  to  make 
a  lease  of  the  whole  corporate  pioperty 
to  tliemselves,  a  dissenting  stockholder 
may  have  the  lease  set  aside.  Meeker 
V.  Winthrop  Iron  Co.,  17  Fed.  Rep.  48 
(1883);  Rices  Appeal,  79  Pa.  St.  1G8,  204 


(1875).  Where,  however,  corporate  prop- 
erty has  been  sold  and  the  proceeds  re- 
tained by  one  stockholder,  another 
stockholder  cannot  sue  him  for  money 
had  and  received.  The  action  must  be 
in  equity  and  for  the  benefit  of  the  cor- 
poration. Hodsdon  v.  Copeland,  16  Me.. 
314  (1839).  Equity  will  set  aside  a  lease 
which  the  directors  make  of  a  mine  ta 
the  minority  stockholders  in  order  to 
take  it  from  the  control  of  incoming 
directors  who  were  elected  by  the  ma- 
jority. Mahoney  Min.  Co.  v.  Bennett,  5 
Sawyer.  141  (1878):  s.  c,  16  Fed.  Cas.  497. 
The  mere  fact  that  a  person  owns  a 
majority  of  the  stock  does  not  raise  a 
legal  inference  that  he  dominates  the 
board  ©f  directors.  Porter  v.  Pittsburg, 
etc,  Co.,  120  U.  S.  649,  670  (1887).  The 
sale  of  all  corporate  assets  to  the  ma- 
jority, where  others  offer  a  higher  price, 
is  fraudulent.  Wilson  v.  Central  Bridge, 
9  R.  I.  590  (1870);  Gregory  v.  Patchett, 
33  Beav.  595  (1864),  where  a  sale  of  all 
the  corporate  assets  to  two  of  the  stock- 
holders on  the  purchase  of  their  stock 
by  the  company  was  set  aside  as  a  fraud 
on  the  remaining  stockholders.  Where 
the  stockholders  enter  into  a  contract 
by  which  they  give  a  certain  amount 
of  their  stock  to  a  person  who  agrees 
to  do  certain  work  for  the  corporation 


1  Ervin  v.  Oregon  R.  &  Nav.  Co.,  37 
Fed.  Rep.  625  (1886);  s.  c,  20  Fed.  Rep. 
577.  In  Lowe  v.  Pioneer  Threshing  Co., 
70  Fed.  Rep,  646  (1895),  the  court  en- 
joined  the  company  from  transferring 
nearly  all  of  its  property  to  a  few  stock- 
holders in  purchase  of  their  stock,  but 
the  court  refused  to  appoint  a  receiver. 
Where  a  person  in  control  of  a  company 
obtains  control  of  a  rival  company  and 
allows  judgments  against  the  latter, 
and  the  sale  of  its  bonds  on  execution 
at  nine  cents  on  the  dollar,  and  exe- 
cutes a  mortgage  and  controls  the  busi- 
ness, all  for  the  benefit  of  the  former 

1 


corporation,  he  3,nd  the  dummy  direct- 
ors and  third  persons  may  be  joined  in 
a  bill  filed  by  a  minority  stockholder 
to  enjoin  their  acts  and  obtain  a  per- 
sonal judgment.  Gray  v.  Fuller,  17 
N.  Y.  App.  Div.  29  (1897).  An  able  New 
Jersey  court,  in  the  case  of  Robotham 
V.  Prudential  Ins.  Co.,  53  AtL  Rep.  843 
(N.  J.  1903),  called  attention  to  the  fact 
that  the  persons  holding  a  majority  of 
the  stock  occupied  no  fiduciary  rela- 
tions towards  the  minority,  but  if  the 
majority  caused  the  directors  to  commit 
a  breach  of  duty  then  the  minority  may 
complain  of  the  acts  of  the  majority. 
530 


CH.  SXXIX.]  FKAUDS    OF    DIRECTORS,  PROMOTERS,  ETC. 


[§  66^. 


Thus,  the  majority  of  stockholders  cannot  cause-  the  corporate 
property  to  be  sold  to  themselves  at  private  sale  at  a  price  agreed 
upon  by  them  and  the  directors  whom  they  placed  in  office.  The 
minority  are  entitled  to  a  public  sale.^ 

"Where  two  stockholders  own  two-thirds  of  the  capital  stock,  and 
cause  the  directors  to  sell  all  the  corporate  property  to  a  person  V 
who  buys  for  them,  the  owner  of  the  other  one-third  may  cause 
the  sale  to  be  set  aside,  even  though  a  stockholders'  meeting  has 
authorized  it.^ 

Where  a  stockholder  is  under  contract  to  carry  along  the  corpo- 
rate debt,  and  instead  of  doing  so  obtains  control  of  the  board  of 
directors,  and  causes  a  mortgage  to  be  given  to  a  confederate,  and 
thereby  causes  the  corporate  property  to  be  foreclosed  and  sold, 


in  consideration  of  the  stock,  the  remedy 
for  a  breach  of  contract  on  his  part  is 
an  action  for  damages,  unless  by  the 
contract  the  stock  was  to  be  returned 
in  case  of  non-payment.  Gillett  v. 
Bowen,  28  Fed.  Rep.  625  (1885).  If  the 
action  is  to  recover  back  the  stock,  the 
corporation  is  a  proper  party  in  order 
to  obtain  a  transfer.  Johnson  v.  Kirby, 
65  Cal.  482  (1884).  See  also  Gates  v. 
Sparkman,  73  Tex.  619  (1889);  §§  334, 
350,  supra.  Where  a  branch  corpora- 
tion faithfully  performs  its  duty  as 
agent,  the  contract  of  agency  cannot  be 
set  aside  on  the  ground  that  individuals 
supposed  to  be  hostile  to  the  principal 
own  a  majority  interest  in  a  corpora- 
tion which  in  turn  owns  a  majority  in- 
terest in  the  agent  corporation.  Brush 
Electric  Co.  v.  Brush-Swan,  etc.  Co.,  49 
Fed.  Rep.  8  (1892).  Minority  stockhold- 
ers cannot  have  an  accounting  on  the 
ground  that  the  company  is  managed 
in  the  interest  of  one  stockholder,  who 
owns  a  majority  of  the  stock;  also  that 
the  corporation  is  insolvent,  and  that 
under  different  management  it  would 
be  profitable,  no  fraud  being  alleged. 
Wheeler  v.  Pullman  Iron,  etc.  Ca,  143 
IlL  197  (1892).  A  majority  of  the  mem- 
bers of  a  corporation  organized  not  for 
profit  cannot  vote  a  part  of  the  assets 
to  themselves.  Another  member  may 
prevent  it.  Ashton  i\  Dashaway  Assoc, 
84  Cal.  61  (1890).     Damages  may  be  re- 


covered by  a  corporation  for  a  fraud 
practiced  upon  it,  even  though  an  agent 
of  the  corporation  who  aided  in  the 
perpetration  of  the  fraud  was  a  stock- 
holder in  the  corporation.  Grand 
Rapids,  etc.  Co.  v.  Cincinnati,  etc.  Co., 
45  Fed.  Rep.  671  (1891).  Where  the 
stockholders  in  a  power  company  sell 
their  stock  and  then  obtain  control  of 
water  rights  on  which  the  company  had 
an  option,  which  option  has  expired, 
the  party  purchasing  the  stock  may  by 
a  suit  in  equity  compel  them  to  turn 
over  such  water  rights.  Valentine  v. 
Berrien,  etc.  Co.,  87  N.  W.  Rep.  370 
(Mich.  1901).  The  largest  stockholder 
in  a  corporation  may,  as  the  holder  of 
its  purchase-money  bonds  and  mort- 
gage, foreclose  the  same,  and  may  join 
as  party  defendant  the  person  to  whom 
the  corporation,  subsequently  to  the 
execution  of  the  mortgage,  contracted 
to  sell  the  property.  Blair  v.  Silver 
Peak  Mines,  93  Fed.  Rep.  332  (1899). 

1  Mason  v.  Pewabic  Min.  Co.,  133  U.  S. 
50  (1890).  See  also  §  671,  infra.  A  cor- 
poration owning  a  majority  of  the  stock 
of  another  company  may  legally  take 
the  latter's  bonds  at  a  fair  price,  ninety 
cents  on  the  dollar  in  this  case.  Glon- 
inger  v.  Pittsburgh,  etc.  R.  R.,  139  Pa.  St. 
13  (1891). 

2  Chicago  Hansom  Cab  Co.  v.  Yerkes, 
141111320(1892). 


1531 


§  062.] 


FEAUDS    OF    DIKEOTOKS,  PROMOTERS,  ETC.  [CH.  XXXIX. 


and  ^vrecks  the  corporation,  he  is  liable  in  damages  to  other  stock- 
holders.* 

Where  the  majority  stockholders  through  directors  who  are  their 
tools,  having  sold  property  to  the  corporation  and  agreed  to  pay  a 
mortgage  on  such  property,  afterwards  cause  the  corporation  to 
assume  and  pay  the  mortgage,  the  minority  stockholders  may  have 
the  transaction  set  aside.'- 

A  contract  by  which  a  purchaser  of  a  majority  of  the  stock  of 
three  corporations  agrees  that  the  corporations  should  employ  the 
seller  of  the  stock  at  a  fixed  salary  for  a  certain  time,  and  after  a 
certain  time  should  give  him  a  sahiry  and  allow  him  to  name  one- 
half  of  the  directors,  is  illegal,  and  cannot  be  enforced  by  the  vendor 
as  against  the  vendee,  even  though  the  stock  has  been  delivered 
and  paid  for  under  such  agreement.' 

Nevertheless,  although  a  person  holds  a  majority  of  the  stock 
and  causes  his  friends  to  be  made  directors,  he  may  sell  property 
to  the  .corporation  and  take  stock  in  payment,  if  the  transaction  is 
a  fair  one.*  And  the  fact  that  the  holders  of  a  majority  of  the 
stock  are  stockholders  in  another  contracting  corporation  does  not 


1  Hanley  v.  Balch,  94  Mich.  315  (1892). 
In  Ritchier.McMullen,79  Fed.  Rep.  522 
(1897),  the  court  held  that  if  a  pledgee, 
being  in  control  of  the  corporation,  re- 
fuses to  develop  the  property  and  to 
accept  subsidies  whicii  are  offered,  and 
to  accept  profits  under  a  contract  whicli 
are  possible,  and  to  sell  the  property  at 
a  large  price,  ail  for  the  purpose  of  de- 
preciating the  pledged  stock  and  thus 
obtain  the  stock  himself,  the  pledgor 
may  call  the  pledgee  to  account  for  the 
loss  suffered  from  this  conspiracy  and 
wrong.  The  court  held  also  that,  al- 
though the  damage  was  directly  to  the 
corporation,  yet  that,  indirectly,  it  was 
a  damage  to  the  pledgor,  and  that 
hence  the  pledgor  could  sue  in  his  own 
behalf  alone,  and  that  the  measure  of 
damage  is  the  difference  between  the 
market  value  at  the  time  of  suit  and 
what  it  would  have  been  if  the  con- 
spiracy had  not  been  set  on  foot.  The 
court  held,  however,  in  the  case  before 
it,  that  the  proofs  did  not  sustain  the 
allegations. 

■^  Woodroof  V.  Howes,  88  Cal.  184 
<1891),  holding  also  that  where  the  ma- 


jority stockholders  cause  the  directors 
to  purchase  stock  from  themselves 
for  the  corporation  at  a  price  higher 
than  the  market  price,  the  minority 
may  cause  the  transaction  to  be  set 
aside. 

3  Fennessy  v.  Ross,  5  N.  Y.  App.  Div. 
342  (1896).  On  this  subject,  see  §  622, 
snjyra. 

*  Russell  r.  Rock,  etc.  Co.,  184  Pa.  St. 
102  (1898).  Where  a  mining  corporation 
makes  a  contract  with  a  person  holding 
a  majority  of  its  stock,  and  who  has 
furnished  the  qualification  shares  for 
the  directors,  by  which  contract  the 
stock  is  issued  to  him  for  work  to  be 
done  on  the  mine,  minority  stockhold- 
ers may  cause  the  contract  to  be  set 
aside,  and  the  decree  may  provide  that 
the  stock  shall  be  delivered  back  upon 
the  repayment  of  the  money.  Jones  v. 
Green,  88  N.  W.  Rep.  1047  (Mich.  1901). 
A  mining  company  may  make  a  con- 
tract with  some  of  its  stockholders  for 
the  transportation  and  milling  of  the 
ore,  even  though  such  stockholders  own 
a  large  amount  of  the  stock  of  the  com- 
pany.   Fox  V.  Mackay,  125  CaL  57  (1899). 


1532 


CH.  XXXIX.] 


FKAUDS   OF    DIEECTORS,  PKOMOTEES, 


ETC. 


[§  662. 


render  the  contract  voidable.^  "  There  is  no  law  which  makes  it 
impossible  for  a  majority  stockholder  to  enter  into  a  contract  with 
his  company."-  Where  a  lease  of  its  property  is  made  by  a  corpo- 
ration, it  is  legal  for  the  lessee  to  pay  secretly  to  one  of  the  stock- 
holders of  the  lessor  a  sum  of  money  to  induce  such  stockholder  to 
favor  the  lease."*  A  stockholder  may  vote  for  the  dissolution  of  the 
corporation  as  allowed  by  the  statute,  even  though  his  object  is  to 
terminate  a  contract  which  he  has  with  the  corporation.*  A  stock- 
holder has  a  right  to  sell  his  stock  at  any  time  unless  he  has  spe- 
cifically agreed  otherwise.^  But  where  the  various  stockholders  of 
a  corporation  join  in  a  contract  for  the  sale  of  their  stock,  but 
secretly  one  of  them  receives  a  bonus  from  the  purchaser,  the  others 
may  compel  him  to  account  therefor  proportionately.''  The  em- 
ployment by  the  corporation  of  a  person  as  general  manager  is  not 
proved  by  proving  that  the  person  who  owned  all  the  stock  of  the 
corporation  so  employed  him.'' 
Where  two  companies  in  litigation  pass  under  the  same  control,. 


iZiegler  n  Lake  Street' El.  R  R,  69 
Fed.  Rep.  176,  183  (1895). 

2  Central  Trust  Co.  v.  Bridges,  57  Fed. 
Rep.  753,  767  (1893);  54  Atl.  Rep.  254, 

3  But  where  subsequently  the  stock- 
holder becomes  a  director  and  takes 
part  in  reducing  the  rent  paid  to  the 
corporation,  it  was  his  duty  to  disclose 
the  extra  price  which  he  was  continu- 
ally receiving,  and  for  failure  so  to  do 
he  must  account  to  the  corporation  and 
pay  over  an  equal  percentage  of  liis 
secret  profit  subsequently  received,  it 
being  presumed  that  a  reduction  on  his 
secret  profit  would  have  been  made  for 
the  benefit  of  the  corporation.  Bird, 
etc  Co.  V.  Humes,  157  Pa.  St.  278  (1S93> 
It  is  legal  for  a  person  who  is  endeavor- 
ing to  purchase  all  the  property  of  a 
corporation  to  pay  a  stockholder  for 
consenting  thereto.  Lamkin  v.  Palmer, 
24  N.  Y.  App.  Div.  255  (1897). 

♦jWindmuller  v.  Standard,  etc.  Ca, 
115  Fed.  Rep.  748  (1902).  A  corporation 
that  owns  stock  in  another  corporation 
may  vote  such  stock  in  favor  of  dissolu- 
tion of  the  latter,  even  though  it  was 
influenced  so  to  vote  by  the  fact  that  it 
has  guaranteed  dividends  on  the  stock 
of  the  latter  so  long  as  the  latter  exists. 
WindmuUer  v.  Standard,  etc.  Co.,  114 


Fed.  Rep.  491  (1902).  Compare  the  com- 
ments on  this  case  in  Robotham  v.. 
Prudential  Ins.  Co.,  53  Atl.  Rep.  843 
(N.  J.  1903). 

5 "  We  do  not  understand  that  one 
stockholder  is,  by  virtue  of  his  owner- 
ship of  stock,  bound  to  continue  in  the 
holding  of  it  in  order  to  allow  another 
stockholder  to  make  a  profit  out  of  the 
negotiations  then  pending.  .  .  .  We 
do  not  understand  that  a  stockholder 
is  under  obligations,  legal  or  moral,  to 
sacrifice  his  personal  interests  in  order 
to  secure  the  welfare  of  the  corporation 
of  which  he  is  a  stockholder,  or  to  en- 
able another  stockholder  to  make  gains 
and  profits."  Farmers',  etc.  Co.  v.  Chi- 
cago, etc.  Ry.,  163  U.  S.  31  (1896).  See 
§  622,  supra.  A  stockholder  cannot 
maintain  a  suit  against  the  corporation 
to  enjoin  other  stockholders  from  sell- 
ing their  stock  to  a  second  corporation, 
such  second  corporation  and  the  other 
stockholders  not  being  parties  to  the 
suit.  Ingraham  v.  National  Salt  Co.,  36 
IS.  Y.  Misc.  Rep.  646  (1902);  aff'd,  72  N.  Y. 
App.  Div.  582. 

"  Synnott  v.  Cummings,  116  Fed.  Rep. 
40  (1902) ;  120  id.  84.  and  ^g  320, 321.  650. 

'  Hammond  v.  Hammond,  etc.  Co.,  72 
Conn.  130  (1899).     See  also  g  709,  infra. 


1533 


§§  663,  6Q4:.'\       FRAUDS    of    directors,  promoters,  ETO.  [oh.  XXXIX. 

the  court  will  no  longer  retain  the  case,  inasmuch  as  the  same  par- 
ties control  both  sides,  but,  in  order  to  protect  the  minority  stock- 
holders, the  case  will  be  left  open.^ 

Where  on  a  winding  up  the  court  decrees  a  sale  of  the  corporate 
mining  property  at  public  sale,  any  one  or  more  of  the  stockholders 
may  bid,  and  the  court  will  not  readily  set  the  sale  aside  on  the 
ground  that  after  the  property  was  struck  off  some  one  offered  a 
higher  price.^ 

Sales  of  property  by  a  corporation  may  be  valid,  although  made 
at  the  instigation  of  stockholders  whose  stock  really  belongs  to 
others.^  Even  though  a  corporation  in  competing  with  another 
concern  is  selling  its  product  below  cost,  yet  a  stockholder  cannot 
enjoin  such  sales,  there  being  no  bad  faith  or  palpably  bad  judg- 
ment shown.'* 

A  corporate  creditor  cannot  complain  of  the  acts  specified  above 
to  the  same  extent  that  a  stockholdtir  may  complain.* 

§§  663,  Q64:.  ^^ Dummy  "  corporations  —  The  courts  2ciU  iqnore  the 
corporate  existence  where  it  is  fraudulentlij  used  to  do  what  the  stoclc- 
hoJders  cannot  lef/allt/ do  —  An  individual  or  corporation  owning 
all  the  stock  of  another  corporation  is  not  ordinarily  liahle  for  the 
dehts  of  the  latter. —  A  corporation  is  in  law  a  person  or  entity 
entirely  distinct  from  its  stockholders  and  oiRcers.  It  may  become 
insolvent  and  yet  not  make  them  insolvent.  It  may  commit  fraudu- 
lent or  ultra  vires  acts  and  yet  they  be  not  liable  therefor.  It  may 
do  acts  which  its  stockholders  as  individuals  may  be  under  contract 
not  to  do,  and  the  stockholders  may  do  acts  which  the  corporation 
cannot  do.     The  disabilities  of  the  corporation  are  not  disabilities 

1  South  Spring,  etc.  Co.  v.  Amador,  etc.  with  the  care  of  the  interests  of  the 
Co.,  145  U.  S.  300  (1892).  Where  an  in-  other  stockholders  They  act  for  them- 
solvent  corporation  passes  intoa  receiv-  selves."  Price  v.  Holcomb,  89  Iowa,  123 
er's  hands  and  the  receiver  acquires  all  (1893). 

the  interests  of  the  parties  to  the  suit.  « Gottfried  v.   Miller,  104  U.   S.   521 

an  outside  creditor  may  file  a  new  bill  (1881). 

to  reach  certain  equitable  assets  of  the  *  Trimble  v,  American,  etc.  Co.,  61  N. 

corporation.   Harpw  Abbeville,  etc.  Co.,  J.  Eq.  340  (1901).     See  also  ^  681,  infra.  • 

108  Ga.  168  (1899).  5 See  §  735,  infra.     A  company  is, not 

2  Pewabic  Min.  Co.  v.  Mason,  145  U.  S.  liable  for  the  contracts  of  a  person  who 
349  (1892).  A  stockholder  may  bid  for  makes  a  construction  contract  with  it, 
the  property  at  a  public  sale,  even  even  though  that  person  is  the  principal 
though  he  owns  a  majority  of  the  stock,  stockholder  and  dominates  and  controls 
Wilson  V.  Central  Bridge,  9  R.  L  590  the  action  of  the  corporation.  Although 
(1870).  The  person  owning  a  majority  other  stockholders,  bondholders,  or  the 
of  the  stock  of  a  failing  corporation  corporation  itself  might  question  such 
may  at  the  public  sale  of  its  property  a  contract,  yet  subcontractors  cannot. 
buy  such  property.  '•  He  has  his  own  Central  Trust  Co.  v.  Bridges,  57  Fed.  Rep. 
interests  to  protect,  and  is  not  charged  753  (1893). 

1534 


■CH.  XXXIX.]  FRAUDS    OF    DIRECTOKS,  PROMOTERS,  ETC.        [§§  663,  664. 


■of  the  stockholders,  nor  are  the  disabilities  of  the  stockholders  the 
disabilities  of  the  corporation.  Hence  it  is  that  a  corporation  is 
often  organized  to  act  as  a  "  cloak  "  for  frauds.  Such  cases  as  these 
are  becoming  common,  and  the  courts  are  becoming  more  and 
more  inclined  to  ignore  the  corporate  existence,  when  necessary,  in 
order  to  circumvent  the  fraud.^  Thus,  it  has  been  held  that,  where 
a  person  has  contracted  that  he  will  not  do  a  certain  act,  he  cannot 
form  and  control  a  corporation  and  have  the  corporation  do  that 
act.2  The  mere  fact,  however,  that  a  person  has  contracted  to  sell 
a  patent-right  does  not  affect  the  title  of  a  corporation  to  whom  he 
transfers  such  patent."  But  where  a  patentee  is  under  obligation 
to  assign  his  patent,  a  corporation  wholly  owned  by  him  is  not  pro- 
tected as  a  honafide  purchaser  of  the  patent  from  him.*     Although 


1  See  §  6,  supra. 

2  Beal  V.  Chase,  31  Mich,  490  (1875). 
When  a  person  sells  a  trade-mark  and 
then  sells  an  infringement  upon  it  to  a 
corporation  organized  and  controlled 
by  himself,  the  latter  may  be  enjoined 
from  using  it.  Le  Page  Co.  v.  Russia 
Cement  Ca,  51  Fed.  Rep.  941  (1892).  Un- 
less there  is  a  positive  allegation  and 
proof  that  the  corporation  was  fraudu- 
lently formed  to  violate  the  individual 
contract,  the  suit  will  fail.  Moore,  etc. 
Co.  V.  Towers  Hardware  Co.,  87  Alfi. 
206  (1888).  A  contract  by  a  person  to 
sell  all  lumber  manufactured  by  him 
through  certain  agents  cannot  be 
evaded  by  his  forming  a  corporation 
and  manufacturing  and  selling  through 
it.  Hagy  v.  McGuire,  147  Pa.  St  187 
(1892). 

3  Davis,  etc.  Co.  v.  Davis,  etc.  Co.,  20 
Fed.  Rep.  699  (1884);  Averill  v.  Barber, 
6  N.  Y.  Supp.  255  (1889).  See  also  §  727, 
infra,  on  Notice.  The  vendor  of  a  good- 
will who  agrees  not  to  engage  in  the 
same  business  again  in  a  certain  terri- 
tory cannot  evade  his  agreement  by  be- 
coming a  stockholder  in,  or  organizing, 
or  managing  a  competing  corporation; 
but,  there  being  other  stockholders  in 
the  corporation,  an  injunction  will  not 
be  granted  against  the  corporation  or 
such  other  stockholders.  Kramer  v. 
Old,  119  N.  C.  1  (1896).  A  foreign  cor- 
poration cannot  prevent  a  domestic 
corporation  from  using  the  same  name. 


especially  where  the  latter  was  incor- 
porated first,  even  though  the  public 
may  be  misled.  In  this  case  a  party 
sold  out  to  individuals,  but  did  not  sell 
any  trade-marks.  He  then  incorporated 
a  company  under  the  name  of  the 
trade-mark.  Hazelton  Boiler  Co.  v. 
Hazelton,  etc.  Co.,  143  III  494  (1892).  In 
Gormully,  etc.  Co.  v.  Bretz,  64  Fed.  Rep. 
612  (1894),  where  a  firm,  being  under 
contract  to  manufacture  and  sell  only 
certain  bicycle  patents  and  machines, 
formed  a  corporation  to  manufacture 
and  sell  other  machines,  the  court  held 
that  if  the  holdings  of  stock  showed 
that  the  two  concerns  were  practically 
one,  then  that  the  corporation  would 
be  enjoined.  See  also  Pratt  v.  Wilcox 
Mfg.  Co.,  64  Fed.  Rep.  589  (1894).  Where 
a  person  contracts  to  give  to  another 
person  a  fourth  intei'est  in  any  mines 
which  the  former  may  buy,  the  former 
must  give  the  latter  a  fourth  of  stock 
which  the  former  purchases  in  a  min- 
ing company.  Dennison  v.  Chapman, 
105  Cal.  447  (1895).  See  also  Fitzgerald 
V.  Fitzgerald,  etc.  Co.,  41  Neb.  374  (1894), 
to  the  effect  that  the  corporation  is  lia- 
ble for  the  fraud  of  its  board  of  direct- 
ors against  another  corporation  which 
the  same  board  controlled. 

*  National,  etc.  Co.  v.  Connecticut,  etc. 
Co.,  73  Fed.  Rep.  491  (1896).  See  also 
§  727,  infra.  Where  an  attorney  m  fact 
for  the  sale  of  a  patent  causes  his 
friends  to  organize  a  corporation,  and 


1535 


§§  663,  664.]        FRAUDS    of    directors,   I'UO.MOTKRS,  ETC.  [CH.   XXXIX. 

a  lessee  corporation  has  a  right  to  payment  for  improvements,  if 
the  lessor  does  not  renew,  such  payment  need  not  be  made,  if  the 
new  lease  is  to  a  new  corporation  organized  by  the  same  stock- 
holders as  are  in  the  old.^  Where  it  would  be  illegal  for  two  or 
more  corporations  to  unite  in  regulatmg  the  production  and  price 
of  an  article,  it  is  illegal  to  accomplish  that  result  by  placing  all  the 
shares  of  stock  of  those  corporations  in  the  hands  of  trustees  and 
thereby  securing  co-operating  boards  of  directors.^ 

There  are  many  other  instances  in  which  the  corporate  existence 
will  not  suffice  to  evade  liabilities,  disabilities,  and  frauds.  An  in- 
dividual or  partnership  cannot  transfer  all  of  his  or  its  property  to 
a  corporation  for  shares  of  stock  and  thereby  defraud  the  creditors 
of  the  partnership.'  The  officers  and  agents  of  a  corporation  AvhO' 
cause  the  corporation  to  defraud  its  creditors  or  subscribers  to  its 
stock  by  means  of  fraudulent  misrepresentations  are  liable  to  the 
persons  so  defrauded.*  The  stockholders  and  officers  of  a  corpora- 
tion which  was  not  properly  organized  may  be  liable  as  partners  for 
all  of  its  debts,^  but  this  liability  is  not  based  on  fraud. 

A  few  cases  hold  that  a  corporation  incorporated  in  one  state  for 
the  purpose  of  doing  all  its  business  in  another  state  is  a  fraud  on 
the  law,  and  is  only  a  partnership;  but  the  weight  of  authority 
holds  otherwise.^  If  the  promoters  or  officers  or  a  majority  of 
stockholders  defraud  the  corporation  itself  or  the  minority  stock- 
holders, a  court  of  equity  will  give  full  and  ready  relief.^  "Where 
persons  in  control  of  a  corporation  use  that  control  to  defraud  per- 
sons with  whom  they  have  contracted  in  reference  to  stock,  a  court 
of  equity  will  aid  the  persons  so  defrauded.**  The  stockholders  of 
a  corporation  are  distinct  from  the  corporation  itself,^  and  may  of 
course  transact  business  irrespective  of  its  contracts  or  obligations; 

then  sells  the  patent  to  the  corpora-  *  See  ch.  XIII,  siiprcu 

tion    on    terms    entirely  beyond    his  ^  See  §§  237-240,  st/jpro. 

authority,  his  principal  may  repudiate  '  See  the    previous    sections  of  this 

the  sale,  and  the  company  is  not  a  hona  chapter  for  many   instances  of    such 

iide  purchaser,   inasmuch  as  its    pro-  frauds. 

jector  and  organizer  was  the  attorney.  8  gee    §    350,  svpra,  and    the    notes 

Another  company  to  which  the  princi-  thereto.     A  stockholder  who  desires  to 

pal  again  assigns  his  patent  may  sue  have    the    corporation    purchase    cer- 

the  former  company  for  infringement,  tain  property  may  purchase  a  mortgage 

Young,  etc.  Co.  v.  Young,  etc.  Co.,  72  against  that  property  and  compel  the 

Fed.  Rep.  62  (1896).  owner  to  sell  to  the  corporation  under 

1  New  York,  etc.  Ferry  Co.  v.  New  threat  of  foreclosure.  Martin  v.  New 
York,  146  N.  Y.  145  (1895).  Eochelle  Water  Co.,  11  N.  Y.  App.  Div.. 

2  See  ch.  XXIX,  siipra.  177  (1896);  afE'd,  162  N.  Y.  599. 
»  See  §  672,  infra.  9  See  §  709,  infra. 

*  See  §  48;  also  chs.  IX  and  XX,  and 
§  243,  supra, 

1536 


CH.  XXXIX.J  FKAUDS    OF   DIKECTOES,  PEOMOTEES,  ETC.        [§§  663,  Q()-k 

but  an  injunction  against  their  doing  a  specified  act  is  violated  if 
they  cause  or  aid  the  corporation  to  do  that  act.^ 

TVhere  a  corporation  secures  a  rebate  from  a  railroad  company, 
not  only  on  shipments  made  by  the  former,  but  on  shipments  made 
by  other  parties,  the  active  agents  of  such  corporations  receiving 
such  mone3's  may  be  held  personally  liable  for  them.  The  court 
said  that  inasmuch  as  the  company  ""was  organized  by  the  pro- 
moters, the  defendants,  simply  for  the  purpose  of  consummating 
the  illegal  as^reement  and  shieldinsr  themselves  from  the  conse- 
quences  of  receiving  the  illegal  exactions  made  under  it,  the  act  of 
incorporating  can  be  of  no  avail  to  them  as  a  defense.''  - 

The  subject  of  the  personal  liability  of  officers  and  directors  of 
corporations  is  more  fully  considered  elsewhere.' 

The  2s^ew  York  court  of  appeals  has  laid  down  a  general  rule 
as  follows:  "In  no  legal  sense  can  the  business  of  a  corporation 
be  said  to  be  that  of  its  individual  stockholders.  It  is  true  that 
they  have  an  interest  in  the  business  carried  on,  and  an  influence 
in  controlling  its  conduct;  but  they  have  created  a  legal  entity 
to  prosecute  such  business,  make  its  contracts,  and  be  responsible 
for  its  obligations,  and  that  entity  is  alpne  responsible  to  persons 
dealing  with  it  for  the  conduct  of  such  business."^     This  rule  is 


^  See  King  r.  Barnes,  113  N.  Y.   476    the  case  of  St  Louis  Breweries,  Ltd.  v. 


(1889).  An  injunction  against  certain 
directors  of  the  corporation  from  using 
patented  articles  is  violated  by  their 
forming  a  new  corporation  to  do  the 
same  acts,  they  being  directors  also  of 
the  latter.  Iowa,  etc.  Wire  Ca  v.  South- 
ern, etc.  Wire  Co.,  30  Fed,  Rep.  123 
(1SS7). 

2Brundred  v.  Rice,  49  Ohio  St  640 
(189-2). 

3  See  g  682,  infra, 

4  People  l\  American  Bell  Tel.  Co,  117 
N.  Y.  241,  255  (1889).  The  fact  that  the 
stockholders  in  two  corporations  are 
the  same,  or  that  one  corporation  exer- 
cises a  control  over  the  other  through 
ownership  of  its  stock  or  through  the 
identity  of  the  stockholders,  such  cor- 
porations being  separately  organized 
under  distinct  charters,  does  not  make 
either  the  agent  of  the  other,  nor  merge 
them  into  one  so  as  to  make  a  contract 
of  one  corporation  binding  upon  the 
other.  Richmond,  etc.  Co.  v.  Richmond, 
etc.  R  R,  68  Fed.  Rep.  105  (1895).     In 


Apthorpe,  79  L.  T.  Rep.  551  (1898),  where 
an  English  corporation  held  all  the  stock 
of  an  American  corporation,  and  divi- 
dends paid  by  the  American  corpora- 
tion were  paid  directly  to  the  stock- 
holders in  the  English  corporation,  the 
court  held  that  the  income  tax  on  the 
English  corporation  applied  also  to 
dividends  paid  by  the  American  cor- 
poration to  American  stockholders  in 
the  English  corporation.  The  coiirt  de- 
clined, however,  to  hold  that  it  would 
ignore  the  existence  of  the  American 
corporation,  "because  experience  has 
certainly  satisfied  me  that  if  you  give 
a  decision  embodying  large  principles 
and  large  considerations  without  hav- 
ing felt  exactly  where  the  shoe  pinches, 
it  is  very  likely  that  the  next  case  that 
may  turn  up  will  show  that  some  con- 
sideration has  been  omitted  which 
might  have  been  very  vital,  or  might 
have  affected  one's  judgment"  Never- 
theless the  court  said,  "I  cannot  say 
that  the  commissioners  were  not  justi- 


(97) 


1537 


§§  GG3,  664.]        FKAUDS    of    DIKECTORS,  PKOMOTERS,  etc.  [CH.  XXXIX. 


fundamental.  It  is  the  explanation  and  cause  of  the  marvelous  in- 
crease of  corporations  in  modern  times.  The  stockholders  are  not 
liable  on  the  contracts  of  the  corporation.  The  separate  existence 
and  entity  of  the  corporation  is  recognized  and  preserved.  The 
courts  will  refuse  to  ignore  the  corporate  existence,  even  though  all 
the  stock  is  owned  by  one  person  or  by  another  corporation.^ 


fied  in  coming  to  the  conclusion  that 
'the  head  and  seat  and  directing  power 
of  the  appellant  company  were  at  the 
appellant  company's  registered  offices 
in  the  city  of  London,  and  that  if  the 
business  at  St.  Louis  and  the  profits 
made  thereby  were  technically  the  busi- 
ness and  profits  of  the  American  com- 
pany, the  American  company  was  for 
such  purpose  the  agent  of  the  appellant 
company.' " 

1  A  railroad  company  owning  all  the 
stock  and  bonds  of  another  company 
does  not  own  the  property  of  the  latter 
and  cannot  sue  on  a  cause  of  action  be- 
longing to  the  latter.  Fitzgerald  v. 
Missouri  Pac.  Ry.,  45  Fed.  Rep.  812  (1891). 
Although  one  corporation  owns  all  the 
stock  of  another  corporation,  the  prop- 
erty of  the  latter  is  not  subject  to  a 
mortgage  given  by  the  former,  but  an 
independent  first  mortgage  may  be 
given  by  the  latter  company.  William- 
son V.  New  Jersey  Southern  R.  R.,  28  N. 
J.  Eq.  377  (1877);  aff'd,  29  N.  J.  Eq.  311 
(1878);  Central  Trust  Co.  v.  Kneeland, 
138  U.  S.  414, 423  (1891);  Toledo,  etc.  R.  R. 
V.  Hamilton,  134  U.  S.  296,  304  (1890), 
and  §§  852,  857,  infra.  Although  one 
water-works  company  owns  all  the 
stock  of  another  water-works  company, 
a  mortgage  given  by  the  former  com- 
pany on  all  its  property  does  not  cover 
the  property  of  the  latter  company  as 
against  bona  fide  purchasers  of  bonds 
of  the  latter  company.  National  Water- 
Works  Co.  V.  Kansas  City,  78  Fed.  Rep. 
428  (1896). 

A  bridge  owned  by  a  bridge  corpora- 
tion is  not  to  be  taxed  as  railroad  prop- 
erty, even  though  its  stock  is  owned  by 
the  stockholders  in  a  railroad  corpora- 
tion, and  the  stock  has  been  pledged  to 
such  railroad  corporation  and  the  bridge 


itself  leased  to  the  latter.  St.  Louis, 
etc.  Ry.  V.  Williams,  53  Ark.  58  (1890). 
Even  though  one  man  owns  a  majority 
of  the  stock  of  two  corporations,  and 
they  have  dealings  with  each  other,  yet 
upon  the  insolvency  of  the  one  a  claim 
of  the  other  is  to  be  allowed  the  same 
as  the  debt  of  any  other  creditor.  Lange 
V.  Burke,  09  Ark.  85  (1901).  A  mort- 
gage covering  after-acquired  property 
of  an  irrigation  company  does  not  cover 
property  of  another  company  subse- 
quently organized  by  parties  interested 
in  the  first  company,  even  though  the 
second  company  used  the  property  of 
the  first  company.  Farm.  etc.  Co.  v, 
Alta,  etc.  Co.,  65  Pac.  Rep.  32  (Colo. 
1901). 

Although  one  railroad  owns  or  con- 
trols all  the  stock  of  another  railroad, 
yet  the  former  is  not  personally  liable 
for  the  negligence,  debts,  etc.,  of  the 
latter.  Atchison,  etc.  R.  R.  v.  Cochran, 
43  Kan.  225  (1890).  A  corporation  own- 
ing all  the  stock  of  another  corporation 
is  not  liable  for  the  rent  due  from  the 
latter  to  a  third  corporation,  even 
though  said  third  corporation  charges 
that  the  accounts  of  the  lessee  are  not 
properly  kept  by  such  owner  of  all  its 
stock.  East  St.  Louis,  etc.  Ry.  v.  Jarvis, 
92  Fed.  Rep.  735  (1899).  The  fact  that 
the  same  persons  own  all  the  stock  in 
two  corporations  does  not  make  one 
corporation  responsible  for  the  con- 
tracts of  the  other.  Wajcross,  etc.  R. 
R.  V.  Offerman,  etc.  R.  R.,  109  Ga.  827 
(1900j.  Even  though  a  person  buys  all 
the  stock,  bonds,  and  property  of  a  cor- 
poration, and  a  suit  is  pending  against 
the  corporation  for  negligence,  yet  he 
is  not  liable  for  a  judgment  thereon. 
Tilley  v.  Coykendall,  69  N.  Y.  App.  Div. 
92   (1902).     Where   an    individual  con- 


1538 


CH.  XXXIX.]  FRAUDS    OF    DIRECTOKS,  PROMOTERS,  ETC.        [§§  663,  664. 


The  lower  English  courts  recently  held  that  where  a  merchant 
transfers  all  his  business  to  a  corporation  formed  for  that  purpose, 
and  continues  to  carry  on  the  business  in  the  name  of  the  corpora- 


structs  an  electric  light  system  in  a  -vil- 
lage and  then  transfers  it  to  a  corpora- 
tion in  which  he  holds  most  of  the 
stock,  he  may  be  personally  liable  for 
the  death  of  a  person  by  reason  of  the 
crossing  of  the  electric  wire  with  a 
telephone  wire,  causing  the  electric 
wire  to  melt  and  fall  and  convey  the 
current  through  sach  person,  the  negli- 
gent construction  of  the  electric  sys- 
tem having  been  made  by  him  before 
the  property  was  transferred  to  the 
corporation,  Gordon  v.  Ashley,  34  N.  Y. 
Misc.  Rep.  743  (190 1 1.  The  fact  that  one 
corporation  owns  a  large  amount  of 
stogk  in  another  corporation  does  not 
affect  the  identity  of  the  two.  Ex 
parte  Fisher,  20  S.  C.  179  (1883).  Al- 
though a  stockholder  purchases  corpo- 
rate property  at  a  tax  sale  this  does  not 
constitute  payment  of  the  taxes  in  favor 
of  the  mortgagee  of  the  property.  Jenks 
V.  Brewster,  96  Fed,  Rep.  625  (1899). 
Upon  the  expiration  of  a  charter  and 
the  winding  up  of  its  affairs,  stock 
which  it  holds  in  another  corporation 
may  be  sold,  but  not  the  property  of 
the  latter  corporation,  even  though  the 
former  corporation  owned  all  of  the 
stock  of  the  latter.  Stewart  v.  Pierce, 
89  X.  W.  Rep.  234  (Iowa,  1902).  Even 
though  a  bank,  in  order  to  handle  real 
estate  which  it  acquires  on  foreclosure, 
organizes  a  corporation  and  owns  all 
the  stock  and  is  the  sole  creditor  of  such 
corporation,  yet  it  cannot  ignore  the 
corporate  existence  and  convey,  incum- 
ber, or  deal  with  the  property  as  its  own. 
Watson  V.  Bonfils,  116  Fed.  Rep.  157 
(1902).  Even  though  an  English  corpo- 
ration owns  ninety-five  per  cent,  of  the 
stock  of  an  American  corporation,  yet 
the  separate  identity  of  the  two  corpo- 
rations continues,  and  the  income  of 
the  American  corporation  cannot  be 
taxed  in  England  as  the  income  of  the 
English  corporation.    Kodak  Limited  u. 

1 


Clark,  87  L.  T.  Rep.  99  (1902).  The  fact 
that  two  irrigation  companies  have  the 
same  officers  and  the  same  stockhold- 
ers and  the  same  purposes,  except  that 
one  operates  in  one  state  and  the  other 
in  another  state,  does  not  make  one  of 
them  liable  for  the  debts  of  the  other. 
White  V.  Pecos,  etc.  Co.,  18  Tex.  Civ. 
App.  634  (1898).  A  statutory  lien  which 
is  good  against  a  lessee  mining  company 
is  not  good  against  a  lessor  mining 
company,  even  though  the  stockhold- 
ers are  substantially  the  same.  United 
Mines  Co.  v.  Hatcher,  79  Fed.  Rep.  517 
(1897),  rev'g  Hatcher  v.  United  Leasing 
Co.,  75  Fed.  Rep.  368.  A  deed  of  corpo- 
rate property  by  a  person  who  owns  all 
the  stock  does  not  convey  good  title, 
especially  where  he  has  pledged  some 
of  the  stock.  Parker  v.  Bethel,  etc.  Co., 
96  Tenn.  2-52  (1896).  Even  though  one 
corporation  is  a  stockholder  in  another, 
yet  a  debt  due  from  the  latter  te  the 
former  may  be  enforced,  although  one 
company  is  practically  a  branch  of  the 
other.  Alabama,  etc.  Co.  n  Chatta- 
nooga, etc.  Co.,  37  S.  W.  Rep.  1004  (Tenn. 
1896).  Although  a  construction  com- 
pany owns  all  the  stock  of  a  railroad 
company,  and  a  bank  has  loaned  large 
sums  of  money  to  the  construction  com- 
pany, yet  mortgage  bonds  issued  by  the 
railroad  company  have  priority  over 
the  claims  of  the  bank.  Exchange  Bank 
V.  Macon  Const.  Co.,  97  Ga.  1  (1895). 
Where  a  failing  bank  organizes  a 
trust  company  and  owns  all  its  stock, 
the  stock  standing  in  the  names  of 
"dummies,"  and  uses  the  funds  of  the 
trust  company,  it  is  a  debtor  of  the 
trust  company.  Fisher  v.  Adams,  63 
Fed.  Rep.  674  (1894).  See  also  the 
cases  in  the  notes  below.  A  com- 
pany is  not  liable  for  the  contracts  of 
a  person  who  makes  a  construction  con- 
tract witii  it,  even  though  that  person 
is  the  principal  stockholder  and  domi- 
539 


5§  6G3,  664:.'}     frauds  of  directors,  promoters,  etc.        [ch.  xxxix. 


tion,  he  being  practically  the  only  stockholder,  he  is  liable  for  the 
corporate  debts  on  the  theory  of  principal  and  agent;  but  the 
House  of  Lords  reversed  all  this  and  held  that  he  is  not  liable.' 

This  principle  of  law  is  particularly  applicable  to  the  plan  of  a 
parent  company  owning  all  or  a  majority  of  the  shares  of  stock  of 
numerous  subsidiary  companies,  such  subsidiary  companies  being 
local  in  their  operations  for  the  purpose  of  dividing  the  responsi- 
bilities, liabilities,  duties,  and  details  of  the  business,^  or  for  the 
purpose  of  regulating  taxes,^  or  for  the  purpose  of  exercising  the 


nates  and  controls  the  action  of  the 
corporation.  Althougli  other  stockhold- 
ers, bondholders,  or  the  corporation 
itself  might  question  such  a  contract, 
yet  subcontractors  cannot.  Central 
Trust  Co.  V.  Bridges,  57  Fed.  Rep.  753 
(1893).  Where  the  president  owns  nearly 
all  of  the  stock,  and  keeps  no  proper 
accounts,  and  mingles  the  business  with 
his  own  business,  and  the  corporation 
is  insolvent,  a  creditor  of  the  corpora- 
tion may  attach  its  property  on  the 
ground  that  it  is  being  fraudulently 
disposed  of.  Senour  Mfg.  Co.  v.  Clarke, 
96  Wis.  469  (1897). 

1  Salomon  v.  Salomon  &  Co.,  [1897] 
A.  C.  22.  The  supreme  court  of  Loui- 
siana, however,  has  held  that  in  such  a 
case  the  corporate  existence  will  be  ig- 
nored, Samuel,  etc.  Co.  v.  Illinois,  etc. 
Co.,  51  La.  Ann.  64  (1898). 

2  Such  is  the  case  of  the  Bell  Tele- 
phone Company. 

3  Such  was  the  original  purpose  of 
the  Standard  Oil  Companies.  Mr.  John 
D.  Rockefeller  on  January  10,  1900,  be- 
fore the  Industrial  Commission  of  Con- 
gress, said  in  reply  to  a  question  as  to 
what  are  the  chief  advantages  of  indus- 
trial combinations :  "  All  the  advantages 
which  can  be  derived  from  co-opera- 
tion of  persons  and  aggregation  of  capi- 
tal. Much  that  one  man  cannot  do  alone 
two  can  do  together,  and  once  we  ad- 
mit the  fact  that  co-operation,  or,  what 
is  the  same  thing,  combination,  is 
necessary  on  a  small  scale,  the  limit 
depends  solely  upon  the  necessities  of 
business.  Two  persons  in  partnership 
may  be  a  sufficiently  large  combination 
for  a  small  business,  but  if  the  business 


grows  or  can  be  made  to  grow,  more 
persons  and  more  capital  must  be  taken 
in.  The  business  may  grow  so  large 
that  a  partnership  ceases  to  be  a  proper 
instrumentality  for  its  purposes,  and 
then  a  corporation  becomes  a  necessity. 
In  most  countries,  as  in  England,  this 
form  of  industrial  combination  is  suffi- 
cient for  a  business  co-extensive  with 
the  parent  country,  but  it  is  not  s6  in 
this  country.  Our  federal  form  of 
government,  making  every  corporation 
created  by  a  state  foreign  to  every 
other  state,  renders  it  necessary  for 
persons  doing  business  through  cop 
porate  agency  to  organize  corporations 
in  some  or  many  of  the  different  states 
in  which  their  business  is  located.  In- 
stead of  doing  business  through  the 
agency  of  one  corporation,  they  must 
do  business  through  the  agencies  of 
several  corporations."  For  a  careful 
and  clear  statement  of  the  plan  of  hav- 
ing a  parent  company  own  stock  in 
subsidiary  companies,  see  People  i\ 
American  Bell  Telephone  Co.,  117  N.  Y. 
241,  244,  255  (1889).  A  receiver  of  the 
parent  company  will  not  necessarily  be 
appointed  receiver  of  the  branch  com- 
panies. Evans  v.  Union  Pac.  Ry.,  58 
Fed.  Rep.  497  (1893).  As  to  the  power 
of  one  company  to  acquire  the  stock  of 
another  company,  see  ch.  XIX,  svpra. 
Where  a  parent  company,  owning  the 
stock  of  branch  companies,  passes  into 
a  receiver's  hands,  and  the  latter  ex- 
pends money  in  operating  one  of  the 
branch  companies,  he  cannot  recover  it 
as  against  a  mortgagee  of  the  branch 
company.  The  rule  is  otherwise  as  to 
necessary  improvements.  Coupons  paid 


1540 


CH.  XXXIX.]  FRAUDS    OF   DIEECTOKS,  PKOMOTEKS,  ETC.        [§§  663,  QQ4:. 

power  of  eminent  domain.  The  fact  that  a  Kew  Tork  telegraph 
corporation,  a  parent  company,  owns  practically  all  the  stock  of 
an  Idaho  corporation,  does  not  prevent  the  latter  exercising  its 
power  of  eminent  domain  in  Idaho.^  A  contract  by  a  subsidiary 
company  is  not  illegal  on  the  ground  that  the  parent  company  is 
avoiding  the  statutory  obligations  relative  to  foreign  corporations 
doing  business  within  the  state.-    Even  though  a  Nebraska  railroad 


by  the  receiver  on  bonds  issued  by  the 
branch  road  rank  next  after  the  bonds 
and  other  coupons  are  paid.  Phinizy  v. 
Augusta,  etc.  R  R,  63  Fed.  Rep.  771 
(1894).  Where  one  street  railway  owns 
all  the  stock  of  another  street  railway 
(excepting  five  shares,  the  owner  of 
which  does  not  object),  and  the  former 
makes  a  contract  authorizing  a  third 
street  railway  to  run  its  cars  over  the 
tracks  of  the  company  whose  stock  is  so 
owned,  such  contract  is  legal  and  will 
be  enforced.  South,  etc.  Ry.  v.  Second 
Ave.  etc.  Ry..  191  Pa.  St.  493  (1899). 

1  Oregon,  etc.  R  R  v.  Postal,  etc.  Co. 
of  Idaho,  111  Fed.  Rep.  843  (1901).  In  a 
condemnation  proceeding  instituted  by 
a  local  telegraph  corporation  it  is  no 
defense  that  such  corporation  is  a  mere 
"dummy  "for  a  non-resident  corpora- 
tion. Postal,  etc.  Co.  v.  Oregon,  etc.  R 
R,  114  Fed.  Rep.  787  (1903).  The  fact 
that  a  Xew  York  telegraph  company 
owns  all  the  stock  of  a  Utah  telegraph 
company  does  not  prevent  th6  latter 
exercising  the  power  of  eminent  do- 
main under  the  Utah  statutes.  More- 
over, tiie  dejure  existence  of  a  corpora- 
tion which  is  a  de  facto  corporation 
will  not  be  inquired  into  in  condemna- 
tion proceedings,  unless  fraud  in  its 
organization  is  involved.  Postal  Tel. 
etc.  Co.  V.  Oregon,  etc.  R  R,  33  Utah, 
474  (1901).  The  fact  that  a  Colorado  tele- 
graph company  is  but  a  subsidiary  com- 
pany of  a  New  York  corporation,  does 
not  prevent  the  former  condemning 
a  right  of  way  on  a  railroad  as  allowed 
by  the  statutes  of  Colorado.  Union 
Pacific  R  R  v.  Colorado,  etc.  Co.,  69 
Pac.  Rep.  564  (Colo.  1903).  A  railroad 
company  regularly  organized  is  enti- 


tled to  condemn  a  right  of  way,  even 
though  it  was  organized  in  the  interest 
of  a  coal  company  which  furnished 
the  capital  for  such  railroad.  The  claim 
that  the  railroad  company  is  merely  a 
dummy  for  the  coal  company  is  no 
defense  to  the  condemnation  proceed- 
ings. Kansas,  etc.  Ry.  v.  Northwestern, 
etc.  Co.,  161  Mo.  388  (1901).  In  Central 
R  R  V.  Pennsylvania  R.  R,  31  N.  J.  Eq. 
475,  494  (1879),  the  defendant  was  en- 
joined from  building  another  railroad 
by  means  of  an  independent  corpora- 
tion operated  by  "dummies."  The 
court  said:  "A  corporation  cannot  in 
its  own  name  subscribe  for  stock  or  be 
a  corporator  under  the  general  railroad 
law,  nor  can  it  do  so  with  a  simulated 
compliance  with  the  provisions  of  the 
law  through  its  agents  as  pretended 
corporators  and  sub.scribers  of  stock." 
Although  a  new  railroad  corporation 
is  clearly  a  "  dummy  "  corporation,  its 
incorporators  and  officers  being  officers 
in  another  railroad  corporation,  and  its 
expenses  being  paid  by  the  latter  com- 
pany, still  it  is  a  legal  corporation. 
Southern  Kansas,  etc.  R  R.  v.  Towner. 
41  Kan,  73  (1889);  Atchison,  etc.  R  R 
V.  Cochran,  43  Kan.  235  (1890).  In  Ne- 
braska a  "dummy  "  domestic  corpora- 
tion cannot  condemn  land  for  a  foreign 
corporation.  Koenig  v.  Chicago,  etc. 
R  R,  37  Neb.  699(1889;. 

2  Cunningham  v.  City  of  Cleveland, 
98  Fed.  Rep.  657  (1899),  the  court  say- 
ing: "It  is  a  common  plan  to  have  a 
parent  company  engaged  in  a  national 
business  of  installing  local  companies 
and  taking  stock  in  the  local  com- 
panies, but  they  are  distinct  legal  enti- 
ties, and  the    interest    of    the 


larger 


1541 


§§  663,  664:.]        FRAUDS    OF   DIKECTORS,  PEOMOTERS,  ETC.  [CH.  XXXIX. 

corporation  sells  all  its  property  to  an  Illinois  railroad  corporation 
in  exchange  for  stock  of  the  latter,  which  is  issued  to  the  stock- 
holders of  the  former,  the  latter  does  not  thereby  become  a 
Nebraska  corporation,  preventing  the  removal  of  cases  to  the  fed- 
eral court.^  The  agreement  of  a  telephone  company  to  pay  to  an- 
other company  twenty  per  cent,  of  all  rentals  or  royalties  received 
by  the  former  does  not  entitle  the  latter  to  any  interest  in  stock 
of  subsidiary  companies  which  the  telephone  company  has  formed 
and  to  which  it  has  given  licenses,  where  the  rental  above  men- 
tioned is  paid  on  the  telephones  used  by  such  subsidiary  companies.'' 
Sometimes  a  "dummy"  corporation  is  used  to  hold  land,  the 
stockholders  being  aliens  or  foreign  corporations.^ 

This  general  rule,  however,  like  all  general  rules,  has  exceptions, 
and  the  New  York  court  of  appeals  stated  the  exception  forcibly  as 
follows:  "We  have  of  late  refused  to  be  always  and  utterly  tram- 
meled by  the  logic  derived  from  corporate  existence  where  it  only 
serves  to  distort  or  hide  the  truth."*  And  again:  "The  abstrac- 
tion of  the  corporate  entity  should  never  be  allowed  to  bar  out 
and  pervert  the  real  and  obvious  truth."  ^ 

The  chief  application  of  this  statement  of  law  is  in  cases  of  fraud,^ 
but  there  is  a  line  of  cases  which  apply  this  rule  where  there  is  no 
fraud,  and  where  the  owner  of  the  stock  is  held  liable  merely  be- 
cause he  owns  all  the  stock  of  the  corporation.  Thus,  it  has  been 
held  that  where  a  railroad  company  causes  a  telegraph  company  to 
be  incorporated,  and  subscribes  to  all  its  stock,  and  appoints  all  its 
officers,  and  holds  it  out  as  the  future  owner  of  a  telegraph  system 
which  the  railroad  owns,  and  then  sells  that  system  to  someone  else, 
a  person  contracting  with  the  telegraph  company  on  the  faith  of 
the  scheme  being  carried  out  may  hold  the  railroad  company  liable 
on  the  contract,  on  the  principle  of  a  principal  being  liable  on  the 
contracts  of  its  agent.''  It  has  also  been  held  that  where  the  cor- 
poration does  business  by  organizing  branch  corporations,  and  the 

company  in  the  smaller  is  no  reason  for  Buie  v.  Chicago,  etc.  Ry.,  65  S.  W.  Rep. 

holding  otherwise."    Where  a  railroad  27  (Tex.  1901). 

company  of  one  state  organizes  a  rail-  i  Walters  v.  Chicago,  etc.  R.  R.,  104 

road  company  in  another  state  to  con-  Fed.  Rep.  377  (1900). 

struct  and  operate  a  connecting  rail-  2  Western  U.  T.  Co.  v.  American  Bell 

road  in  the  latter  state,  and  owns  a  TeL  Co.,  105  Fed.  Rep.  684  (1900). 

majority  of  the  stock  pnd  bonds  of  the  ^  geg  g  694^  infra. 

latter    corporation    and    controls    its  *  Anthony  v.  American  Glucose  Co., 

policy  and  divides  rates  on  a  mileage  146  N.  Y.  407  (1895). 

basis,   it  will  be  considered  as  doing  ^  Seymour  v.  Spring,  etc  Assoc,  144 

business  in  the  latter  state  sufficiently  N.  Y.  333,  340  (1895). 

to  enable  a  non-resident  to  bring  suit  ^  See  §  663,  supra. 

against  it  in  the  latter  state  for  an  in-  '  Interstate  Tel.  Co.  r.  Baltimore,  etc 

jury  occurring    outside   of  the  state.  Tel.  Co.,  51  Fed.  Rep.  49  (1892). 

1543 


CH.  XXXIX.]  FRAUDS    OF    DIEECTORS,  PROMOTEKS,  ETC.        [§§  663,   GQ4:. 


stockholders  in  the  latter  are  disregarded,  and  the  main  corpora- 
tion pays  up  the  stock  and  manages  it  without  regard  to  its  cor- 
porate character,  the  property  of  the  branch  corporation  is  subject 
to  the  debts  of  the  parent  company.'  And  there  are  other  decis- 
ions to  practically  the  effect  that  the  courts  will  ignore  the  corpo- 
rate existence  under  certain  circumstances.^ 


iDay  V.  Postal  Tel.  Co.,  66  Md.  354 
(1887). 

2  For  an  interesting  discussion  of  the 
question  as  to  why  the  artificial  exist- 
ence of  the  corporation,  as  distinguished 
from  that  of  stockholders,  should  be 
ignored,  see  Cincinnati,  etc.  Co.  v.  Hoff- 
meister,  56  N.  E.  Rep.  1033  (Ohio,  1900); 
and  Andres  v.  Morgan,  56  N.  E.  Rep. 
875  (Ohio,  1900).  Where  all  the  stock- 
holders of  a  company  transfer  their 
stock  to  a  trustee  and  receive  in  ex- 
change tlierefor  bonds  of  the  company 
guaranteed  by  another  company  and 
secured  by  such  stock,  the  latter  com- 
pany, being  the  owner  of  the  equity  of 
redemption,  may  be  considered  as  prac- 
tically owning  the  property  of  the 
former  company.  Chicago,  etc.  Co.  v. 
City  of  Chicago,  65  N.  E.  Rep.  470  (111. 
1903).  Where,  in  order  to  develop  the 
property  of  a  land  company,  its  stock- 
holders organize  a  railroad  company 
and  also  a  light,  heat,  and  power  com- 
pany, tlie  respective  interests  of  the  va- 
rious companies  being  practically  the 
same,  it  is  legal  for  the  land  company 
to  indorse  and  guarantee  the  notes  of 
the  other  companies,  the  court  saying, 
"  for  purposes  of  equitj',  courts  will  look 
behind  that  artificial  personality,  and, 
if  need  be,  ignore  it  altogether,  and 
deal  with  the  individuals  wlio  consti- 
tute the  corporation;  and  that  is  what, 
in  justice  and  fairness,  must  be  done 
here,  where  practically  the  same  per- 
sons were  associated  together  for  one 
common  purpose,  under  three  or  four 
different  names,  corresponding  to  the 
several  branches  of  the  single  common 
enterprise,  and  acted  together  only 
formally  as  distinct  organizations,  each 
devoted  to  the  corporate  pursuit  of  its 
appropriate  branch."    Kendall  v.  Klap- 


perthal  Co.,  203  Pa.  St.  596  (1903). 
Where  a  person,  who  is  carrying  on  a 
dairy  business,  buys  all  the  stock  of  a 
dairy  company  and  becomes  its  general 
manager  and  conducts  both  businesses 
the  same  as  one,  the  bank  in  which  the 
accounts  are  kept  is  not  responsible  for 
the  funds  of  the  dairy  company  being 
transferred  to  him.  Bank  of  New  South 
Wales  V.  Goulburn.  etc.  Co.,  87  L.  T. 
Rep.  88  (1903).  Where  a  bank,  in  order 
to  handle  real  estate  which  it  acquires 
on  foreclosure,  organizes  a  corporation 
and  owns  all  the  stock  and  is  the  sole 
creditor  of  such  corporation,  the  object 
of  the  whole  transaction  being  to  con- 
ceal the  amount  of  money  the  bank  has 
invested  in  real  estate,  the  transaction 
is  fraudulent  as  to  creditors  of  the  bank 
and  the  real  estate  may  be  attached  as 
the  property  of  the  bank.  Watson  v. 
Bonfils,  116  Fed.  Rep.  157  (1903).  A 
railroad  corporation  that  has  been  op- 
erating a  railroad  cannot  avoid  liabil- 
ity for  accidents  on  the  ground  that  it 
leased  the  same  to  another  company, 
such  other  company  being  a  mere  nom- 
inal corporation  and  the  interest  being 
the  same.  Chesapeake  &  Ohio  R.  R.  v. 
Howard,  14  A  pp.  Cas.  Dist.  of  Col.  263 
(1899).  A  judgment  against  a  West 
Virginia  corporation  cannot  be  en- 
forced against  the  president,  even 
though  it  is  alleged  that  the  corpora- 
tion was  a  myth  and  did  not  exist,  and 
that  its  organization  had  not  been  kept 
up  and  that  the  president  was  the  real 
owner  and  carried  on  the  business.  The 
remedy  is  an  original  suit  against  him. 
Tilley  v.  Coykendall,  172  N.  Y.  587  (1902). 
An  officer  is  not  personally  liable  for 
an  infringement  by  the  corporation, 
vmless  it  is  insolvent  or  it  is  a  mere 
dummy  to  protect  others.     Southern, 


1543 


§§  663,  664:.]     FRAUDS  or  directors,  promoters,  etc.        [ch.  xxxix. 


"Where  one  corporation  is  merely  a  "dummy"  of  another  corpo- 
ration, a  mortgage  on  the  property  of  the  latter  may  attach  to  prop- 
erty of  the  former,  even  in  priority  to  a  new  mortgage  on  the 


etc.  Assoc.  V.  Gary,  117  Fed,  Rep.  325 
<1903). 

Where  a  raih-oad  pays  for  the  con- 
itruction  of  another  railroad  company's 
<ine  on  an  understanding  that  they 
should  be  consolidated,  and  assumes  all 
the  obligations  of  the  latter  and  prac- 
tically owns  all  its  stock  and  takes  pos- 
session and  operates  it,  the  two  roads 
may  be  considered  as  having  been  con- 
solidated, sufficient!}'  at  least  to  come 
within  the  meaning  of  a  statute  author- 
izing the  consolidation  of  certain  con- 
solidated companies.  Toledo,  etc.  R.  R. 
V.  Continental  Trust  Co.,  95  Fed.  Rep. 
497  (1899).  A  railroad  contractor  in 
suing  the  construction  company  may 
join  also  the  railroad  company  on  an 
allegation  that  the  construction  com- 
pany is  a  mere  dummy  of  the  railroad 
company.  O'Brien  v.  Champlain,  etc. 
Co.,  107  Fed.  Rep.  338  (1901).  Where  a 
corporation  owns  and  operates  a  hotel 
and  then  leases  it  to  another  corpora- 
tion without  notice  to  the  employees, 
and  the  latter  fails,  the  former  may  be 
held  liable  to  them.  Oriental,  eta  Co.  v. 
Barclay,  64  S.  W.  Rep.  80  (Tex.  1901). 
Where  the  only  stockholders  in  a  corpo- 
ration are  two  men  and  their  wives,  and 
the  corporation  is  merely  an  instrument 
for  their  business,  and  they  are  ad- 
judged bankrupts,  the  assets  of  the  cor- 
poration belong  to  them  and  may  be 
administered  in  the  bankruptcy  court. 
In  re  Horgan,  97  Fed.  Rep.  319  (1899). 
Where  the  president  owns  all  or 
nearly  all  of  the  stock  and  mingles 
his  business  with  that  of  the  company, 
and  causes  a  debtor  of  the  company  to 
make  a  payment  on  his  individual  debt 
to  a  bank,  the  payment  is  legal.  Bruns- 
wick, etc.  Co.  V.  Nat.  Bank,  etc.,  99 
Fed.  Rep.  635  (1900).  Where  one  per- 
son is  president  and  general  manager 
and  ownsaVl  the  stock,  a  note  executed 
by  him  m  the  name  of  the  corporation 


is  valid,  the  proceeds  being  used  in  the 
corporate  business.  Africa  v.  Duluth, 
etc.  Co.,  84  N.  W.  Rep.  1019  (Minn.  1901). 
A  promoter's  agreement  involving  the 
getting  in  to  a  new  organization  of 
many  properties  is  satisfied  as  to  one 
property  if  ninety-five  per  cent,  of  the 
stock  of  the  latter  is  obtained.  Jewell 
V.  Mclntyre,  33  N.  Y.  Misc.  Rep.  26 
(1900).  Where  a  person  has  turned 
in  securities  under  a  plan  of  consolida- 
tion which  states  the  aggregate  capac- 
ity of  properties  which  it  is  proposed 
to  acquire,  or  so  many  of  them  as  the 
organizers  may  deem  best,  the  party 
cannot  withdraw,  where  the  plan  has 
been  carried  out,  even  though  less  than 
half  of  the  properties  have  been  act- 
ually acquired.  And  even  though  the 
preliminary  contract  provided  for  the 
acquisition  of  a  certain  company,  yet 
if  the  consolidated  company  acquires 
practically  all  the  stock  and  bonds  of 
that  company,  the  party  turning  in  se- 
curities cannot  withdraw,  and  espe- 
cially cannot  reclaim  the  securities  as 
against  a  transferee  in  good  faith  who 
had  no  notice  of  personal  representa- 
tions. Jewell  V.  Mclntyre,  62  N.  Y. 
App.  Div.  396  (1901).  Where  a  person 
owns  the  entire  capital  stock  of  a  cor- 
poration and  contributes  money  to  it, 
by  reason  of  its  capital  stock  being  im- 
paired, and  then  sells  all  the  stock,  he 
cannot  claim  that  the  corporation  owes 
him  the  money  so  contributed,  such 
money  having  been  charged  by  him  on 
the  books  to  profit  and  loss.  Times,  etc. 
Co.  V.  Given,  106  Fed.  Rep.  253  (1900). 
Even  though  two  persons  own  the  en- 
tire capital  stock  of  a  railroad  com- 
pany, yet  if  they  use  a  part  of  its  assets 
for  their  own  individual  purposes  and 
make  false  entries  on  the  books,  some 
of  the  entries  showing  cash  on  hand, 
but  which  is  not  on  hand,  they  are  lia- 
ble to  the  company  later  when  it  has 


1544 


CH.  XXXIX.]  FRAUDS   OF   DIEECTORS,  PROMOTERS,  ETC.        [§§  663,  ()Q4:. 


property  of  the  former.*     And  where  a  corporation  or  person  owns 
all  the  stock  and  bonds  of  another  corporation  and  causes  the  lat- 


passed  into  other  hands.  Saranac,  etc. 
R.  R.  V.  Arnold,  167  N.  Y.  368  (1901). 
Where  a  partnership  owns  all  the  stock 
of  a  corporation  which  was  organized 
for  the  purpose  of  holding  timber  lands, 
the  court  in  appointing  a  receiver  of 
the  partnership  may  ignox'e  the  incor- 
poration and  may  authorize  the  re- 
ceiver to  take  possession  of  the  prop- 
erty of  the  corporation,  it  being  merely 
an  organization  for  convenienca  Cole 
V.  Price,  23  Wasli.  18  (1900).  Where  an 
Arkansas  mercantile  company  and  an 
Ohio  real  estate  company  are  practi- 
cally one  company,  having  the  same 
stockholders  and  officers,  two  contracts 
between  a  third  person  and  each  of 
them  may  be  considered  as  one  con- 
tract, where  practically  two  parts  of 
the  same  transaction  are  involved. 
Bloch,  etc.  Co.  v.  Metzger,  65  S.  W.  Rep. 
929  f  Ark.  1901).  A  railroad  company 
owning  practically  all  the  stock  of  an- 
other company  may  lease  the  line  of 
the  latter  company  to  another  company. 
Chicago,  etc.  Ry.  v.  Union  Pac.  Ry.,  47 
Fed.  Rep.  15  (1891).  Where  a  bank  buys 
wall  paper  at  a  sheriff's  sale  and  organ- 
izes a  corporation  to  sell  the  paper,  all 
the  stock  of  the  corporation  being 
owned  by  the  bank,  and  guarantees 
debts  thereafter  incurred  by  such  cor- 
poration, the  bank  is  liable  on  such 
debts.  American  Nat.  Bank  v.  Na- 
tional Wall-Paper  Co.,  77  Fed.  Rep.  85 
(1896).  Where  the  contractor  to  con- 
struct the  road  is  merely  a  "  dummy  " 
for  the  officers  and  stockholders,  and 
there  is  evidence  that  the  company's 
name  and  credit  were  used  to  construct 
the  road,  it  is  for  the  jury  to  say 
whether  the  company  is  liable  for  the 
debts  incurred  by  the  contractor  in  con- 
struction. Hirschmann  v.  Iron  Range, 
eta  R.  R.,  97  Mich.  384  (1893).  Where  a 
railroad  company  is  interested  in  the 
<>onstruction  of  a  connecting  line,  it  is 


liable  for  the  services  of  an  attorney 
employed  by  it  in  connection  therewith. 
St.  Louis,  etc.  R.  R.  v.  Kirkpatrick,  52 
Kan.  104  (1893).  A  firm,  one  of  the 
members  of  which  owns  all  the  stock 
of  a  corporation  which  owes  money  to 
such  firm,  cannot  participate  with 
other  creditors  of  the  corporation  in  the 
distribution  of  thelatter's  assets,  where 
the  firm  have  treated  the  debt  as  the 
individual  debt  of  that  member  of  the 
firm.  Pott  V.  Schmucker,  84  Md.  535 
(1897).  A  contract  between  three  local 
companies,  by  which  one  runs  over  the 
tracks  of  another  for  a  consideration 
paid  to  the  third,  is  legal  as  to  the  sec- 
ond corporation,  where  such  second  cor- 
poration is  a  mere  dummy  of  the  third 
corporation  and  the  earnings  of  both 
corporations  went  together.  Union,  etc. 
Ry.  V.  Chicago,  etc.  Ry.,  163  U.  S.  564, 
592  (1890).  Under  the  usual  contract, 
by  which  a  construction  company 
takes  all  the  stock  and  bonds  and  does 
all  the  work,  and  the  railroad  company 
is  dormant  until  the  road  is  finished,  a 
creditor  of  the  construction  company 
may  file  a  lien,  under  the  statute,  the 
same  as  though  he  furnished  the  labor 
and  materials  to  the  railroad  company 
itself.  McDonald  v.  Charleston,  etc.  R. 
R.,  93  Tenn.  281  (1893).  If  one  person 
buys  all  the  stock  of  another  company, 
it  thereby  becomes  dormant,  and  he  is 
liable  for  the  debts  incurred  thereafter, 
except  as  to  those  debts  which  were  in- 
curred on  the  credit  of  the  company 
only.  Louisville  Banking  Co.  v.  Eisen- 
man,  94  Ky.  83  (1893).  Under  a  con- 
stitutional provision  that  conveyances 
to  a  corporation,  a  majority  of  the 
stock  of  which  is  held  by  aliens,  shall 
be  void,  the  attorney-general  may  com- 
mence suit  to  have  certain  conveyances 
declared  void,  even  though  a  majority 
of  the  stock  was  owned  by  citizens  at 
the  time  of  the  conveyance,  such  ma- 


I  Central  T.  Co.  v.  Kneeland,  138  U.  S..414  (1891). 

1545 


§§  665,   6C6.]       FKAKJDS   OF   DIRECTORS,  PROMOTERS,  ETC.  [CH.   XXXIX. 

ter  to  lease  all  its  property,  it  is  legal  to  have  the  rent  made  pay- 
able to  the  first-named  corporation  or  person.' 

It  is  to  be  borne  in  mmd,  however,  that  these  decisions  arose  out 
of  unusual  circumstances  and,  hence,  are  applicable  only  to  cases  of 
unusual  equitable  considerations. 

The  liability  of  a  corporation  on  the  obligations  of  another  corpo- 
ration whose  entire  assets  it  purchases  at  private  sale,-  or  at  judi- 
cial sale,^  is  considered  elsewhere,  such  a  purchase  being  different 
from  a  purchase  of  the  stock  of  such  other  corporation. 

§  665.  Participation,  ratijicatiou,  and  laches  as  ahar  to  stocklwld- 
ers*  complaints. —  This  subject  is  considered  elsewhere.* 

§  6QQ.  PartieSf  pleadings,  etc —  This  subject  also  is  considered 
elsewhere.* 

jority  having  since  that  time  passed  As  to  the  power  of  one  corporation  to 
into   alien    hands.      State  v.   Hudson  buy  the  stock  of  other  corporations,  see- 
Land  Co.,  19  Wash.  85  (1898).  A  domes-  ^§  315-317,  supra.     On  this  general  sub- 
tio  corporation  cannot  obtain  a  patent  ject  see  also  §  709.  infra. 
to  a  mining  claim  under  the  federal  ^  Union  Pac.  Ry.  v.  Chicago,  etc  Ry., 
statutes  unless  all  of  its  stockholders  51  Fed.  Rep.  309  (1893), 
are  citizens  of  the  United  States,  and  ^  See  §  672,  infra. 
are  severally  and  individually  qualified  3  gee  i;  890,  infra. 
and  competent  to  make  the  location.  ♦  See  ch.  LXIV,  infrcu 
Thomas  v.  Chisholm,  13  Colo.  105  (1889).  »  See  ch.  XLV,  infra, 

1546 


CHAPTER  XL. 

ULTRA  VIRES  ACTS  AND  CONTRACTS  — IN  OTHER  WORDS,  ACTS 
AND  CONTRACTS  WHICH  ARE  IN  EXCESS  OF  THE  CHARTER 
POWERS  OF  THE  CORPORATION.  DIRECTORS,  OR  STOCKHOLDERS. 


667.  Meaning  of  the  term  ultra  vires. 

668.  Method  of  treatment  of  the  sub- 

ject. 

669.  A  stockholder  may  object  to  an 

ultra  vires  act. 

670.  Neither  the  directors  nor  a  ma- 

jority of  the  stockholders  have 
power  to  sell  all  the  corporate 
property  as  against  the  dissent 
of  a  single  stockholdeF,  unless 
the  corporation  is  in  a  failing 
condition. 

671.  Sale  of  corporate  property  to  an- 

other corporation  in  exchange 
for  stock  and  bonds  of  the 
latter  —  Distribution  of  such 
stock  and  bonds. 

672.  Corporate  creditors'  rights  where 

the  corporation  sells  all  its 
property  to  another  corpora- 
tion for  stock  of  the  latter  — 
Rights  and  remedies  of  credit- 
ors of  an  individual  or  partner- 
ship, all  of  whose  assets  are 
transferred  to  a  corporation  in 
exchange  for  stock  or  bonds. 


673.  A  corporation   taking   over  all 

the  property  of  another  cor- 
poration may  be  liable  for  the 
debts  of  the  latter. 

674,  Rights  and   liabilities  of  mort- 

gagees of  a  corporation  that 
purchases  property  and  issues 
stock  in  payment  therefor. 
675-677.  Consolidations,    leases,    and 
sales  of  railroads. 

678.  A  corporation  cannot  be  a  part- 

ner in  a  partnership,  unless 
special  ly  authorized  by  statute. 

679.  A  corporation  cannot  be  an  exec- 

utor or  administrator  or  trus- 
tee, unless  expressly  author- 
ized by  charter. 

680.  Stockholder's  right  to   prevent 

the  corporation  from  under- 
taking a  new  business. 

681.  Miscellaneous  ttZ^ra  w'res  acts  — 

Enforcement    of    ultra    vires 
contracts. 
683.  Personal  liability  of  the  direct- 
ors and  officers  for  ultra  vires 
acts. 


§  667.  Meaning  of  the  term  iiUra  vires. —  The  terra  ultra  vires,  as 
used  in  this  treatise,  means  any  act  of  a  corporation  which  the  cor- 
poration is  not  authorized  to  do,  either  by  its  express  or  implied 
powers.  This  term  has  been  objected  to  as  having  no  fixed  and 
clear  meaning,  and  to  some  extent  the  objection  is  reasonable. 
There  is  no  other  term,  however,  that  has  acquired  the  significance, 
general  use,  and  peculiar  meaning  that  are  attached  to  the  words 
ultra  vires;  and  consequently  the  term  probably  has  acquired  a  per- 
manent place  in  the  vocabulary  of  corporation  law.^ 


J  "  The  contracts  of  corporations  are 
said  tohe ultra  vires  when  they  involve 
some  adventure  or  undertaking  not 
within  the  scope  of  their  charter,  which 
is  their  rule  of  corporate  action."  Les- 
lie V.  Lorillard,  110  N.  Y.  519  (1888).  For 
various  definitions  of  the  words  ultima 
vires,    see    Pierce,    Railroads  (2d   ed.). 


p.  516;  Taylor  r.  Chichester,  etc.  Ry.,  L. 
R.  2Exch.  356,378  (1867);  Bissell  v.  Mich- 
igan, etc.  R.  R.  Cos.,  22  N.  Y.  258,  293 
(18G0);  National  Pemberton  Bank  v. 
Porter,  125  Mass.  333  (1878);  Whitney 
Arms  Co.  v.  Barlow,  63  N.  Y.  62  (1875); 
Shrewsbury  v.  North  Staffordshire  Ry.,^ 
35  L.  J.  (Ch.)  166  (1865);  Nassau  Bank  v. 


1547 


§  668.] 


CLTKA    VIRES    ACTS    AND    CONTRACTS. 


[on.  XL. 


§668.  Method  of  treatment  of  tUe  suhject. —  There  has  been  ex- 
treme difficulty  and  confusion  in  defining  the  validity,  effect,  rights, 
and  remedies  of  an  ultra  vires  act.  The  attempt  to  formulate 
general  rules  on  this  subject  has  only  added  to  the  confusion.^  Ac- 
cordingly, the  plan  of  explanation  pursued  in  this  work  is  to  state 
those  acts  which  have  been  adjudged  ultra  vires,-  and  also  those 


Jones,  95  N.  Y.  115  (1884);  Green's  Brice, 
Ultra  Vires  (2d  ed.).  35;  Miners*  Ditch 
Co.  V.  Zellerbach,  37  Cal.  543.  579  (1869); 
McPJierson  v.  Foster,  43  Iowa,  48,  64,  65 
<1876);  Ashbury,  etc.  Co.  v.  Riche,  L.  R. 
7  H.  L.  653,  673  (1875);  2  Kenfs  Com. 
*300  (12tli   ed.),  note.   Two  dilHculties 
have  arisen  in  agreeing  upon  a  defini- 
tion of  this  terno.     First,  the  term  ultra 
vires  was  often  used  to  designate  not 
only  acts  beyond  the  express  and  im- 
plied powers  of  the  corporation,  but  also 
acts  which  are  contrary  to  public  policy, 
and  are  void  whether  done  by  corpora- 
tions or  individuals.     Sucli  acts  when 
done  by  coi'porations  are  now  termed 
"  illegal  "  acts,  and  the  term  ultra  vires 
is  not  used  so  as  to  include  them.    Sec- 
ond, the  term  ultra  vires  has  been  ap- 
plied to  acts  which  are  beyond  the  pow- 
ers of  the  directors,  but  within  the  pow- 
ers of  the  majority  of  the  stockholders. 
This  use  of  the  term,  however,  is  now 
discarded,  and  it  is  used  to  designate 
acts  which  are  beyond  the  powers  of  a. 
majority  of  the  stockholders  as  against 
a  minority ;  or  are  beyond  the  powers  of 
the  stockholders  acting  utianimously  as 
against  the  state.     In   Taylor  v.  Chi- 
chester, etc.  Ry.,  L.  R.  2  Exch.  356,  378 
(1867),  Blackburn,  J.,  said:     "  I  think  it 
very  unfortunate  that  the  same  phrase 
ultra  vires  has  been  used  to  express 
both  an  excess  of  authority  as  against 
the  shareholders,  and  the  doing  of  an 
act  illegal  as  being  malum  prohibitum; 
for  the  two  things  are   substantially 
different;  and  I  think  the  use  of  the 
same  phrase  for  both  has  produced  con- 
fusion."   Even  though  a  railroad  is  giv- 
ing a  lower  rate  to  one  customer  than 
to  another,  yet  a  stockholder  cannot 
maintain  a  suit  of  injunction  to  com- 

1.548 


pel  the  party  to  pay  what  he  should 
have  paid.     While  the  act  is  illegal,  it 
is  not  ultra  vires,  and  as  to  the  illegal 
act  it  is  for  the  corporation  to  decide 
whether  or  not  it  will  sua     Anderson 
V.  Midland  Ry.,  85  L.  T.  Rep.  408  (1901). 
1  For  instance,  the  general  rule  that 
"any  ambiguity  in   the  terms  of  the 
grant  must  operate  against  the  corpora- 
tion and  in  favor  of  the  public,  and  the 
corporation  can  claim  nothing  that  is 
not   clearly   given    by   the    law,"  etc. 
(Perrine  i'.  Chesapeake,  etc.  Co.,  9  How. 
172  —  1850).  is  sound  law,  and  has  been 
laid   down   in    many  cases;   but  as  a 
matter  of  fact,  this  principle  gives  little 
light  or  satisfaction  to  the  bench,  bar, 
or  layman.     Each  case  turns  largely  on 
its  own  facts.     Moreover,  the  decision 
turns  largely  on  who  sues,  who  is  sued, 
what  relief  is  sought,  and  whether  the 
act  has  been  performed  by  one  side  or 
not.    General  rules  cannot  clearly  make 
the  distinctiona     The  old   ideas  have 
been  changed.  Indeed  it  is  refreshing  to 
hear  from  that  great  judge,  Mr.  Justice 
Miller,  such  sound  sense  as  this:    "The 
truth   is,  that,  with  the  great  increase 
in  corporations   in  very  recent  times 
and  in  their  extension  to  nearly  all  the 
business  transactions  of  life,  it  has  been 
found  nece.ssary  to  hold  them  respon- 
sible for  acts  not  strictly  within   their 
corporate  powers,  but  done  in  their  cor- 
porate name,  and  by  corporation  officers 
who  were  competent  to  exercise  all  the 
corporate  powers."    Salt  Lake  City  v. 
HoUister,  118  U.  S.  256  (1886).    See  also 
Pennsylvania  R  R.  v.  Keokuk,  etc.  Co., 
131   U.   S.  371,   384.   389  (1889);   Stour- 
bridge Canal  r.  Wheeley.  2  Barn.  &  Ad. 
792  (1831). 

This  is  the  subject  of  this  chapter. 


CH,  XL.]  ULTRA    VIRES    ACTS    AND    CONTRACTS,  [§  GG9. 

acts  which  have  been  adjudged  to  be  inty^a  vires}  It  must  be  borne 
in  mind  that  nearly  every  corporate  act  is  ultra  vires  or  intra  vires 
in  a  broad  sense.  It  was  from  this  standpoint  that  Professor  Brice's 
work  on  Ultra  Yires  was  written.  The  plan  of  this  book,  however, 
has  been  to  divide  the  subject  into  other  and  more  practical  head- 
ings, such  as  •'  preferred  stock  "  and  the  various  other  chapter  head- 
ings herein  contained,  rather  than  to  group  everything  under  the 
heading  of  ultra  vires  or  intra  vires.  Most  corporate  acts,  whether 
ultra  vires  or  intra  vires^  have  been  or  will  be  considered  in  other 
parts  of  this  book.  Hence  only  such  subjects  are  treated  here  as 
are  not  extensive  enough  or  important  enough  for  separate  chap- 
ters. 

In  general,  it  remains  to  add  that  at  common  law  an  tdira  vires 
act  may  be  objected  to  by  the  state,  a  stockholder,  the  corpora- 
tion, or  the  person  contracting  with  the  corporation;  and  since 
often  one  of  these  parties  may  sustain  the  objection,  where  the 
others  are  not  allowed  to  do  so,  it  is  necessary  to  consider  always 
the  four  questions:  Who  brings  the  suit;  who  is  sued;  what  act  is 
complained  of;  and  what  performance  has  already  been  had.  It 
rarely  happens  that  the  state  objects  to  an  ultra  vires  act.  That 
it  has  a  right  to  object  by  quo  warranto  is  undoubted.^  The  question 
of  when  and  whether  the  stockbolder  must  first  apply  to  the  di- 
rectors or  stockholders  to  remedy  the  wrong  before  he  brings  suit,' 
and  also  the  question  of  when  a  ratification  of  the  act  by  the  other 
stockholders  is  a  bar,'*  is  considered  elsewhere. 

The  tendency  is  to  limit  the  application  of  the  doctrine  of  ultra 
vireSy  especially  in  regard  to  partially  executed  contracts.  In  this 
respect  the  New  York  court  of  appeals  is  in  conflict  with  the  supreme 
court  of  the  United  States."^ 

§  669.  A  stockholder  may  o\ject  to  an  ultra  vires  act. —  That  a 
charter  constitutes  a  contract  between  the  corporation  and  its  stock- 
holders is  a  principle  of  law  that  has  become  firmly  imbedded  in 
the  jurisprudence  of  modern  times.**  Upon  this  principle  of  law  rest 
the  stability,  permanence,  and  honesty  of  management  of  many  cor- 
porations, particularly  those  of  railroads,  and  from  it  arises  much 
of  the  confidence,  safety,  and  protection  of  the  stockholder  himself. 
It  was  first  promulgated  in  America,  in  1820,  in  Livingston  v. 
Lynch,'^  and  was  applied  to  corporations  in  Hartford  &  New  Haven 
Kailroad   Company  v.  Crosweli,^  and  in  England,  in  1824,  in  Na- 

1  This  is  the  subject  of  the  following  ^  Quoted  and  approved  in  Harding  v. 
chapter,  XLL  American,  etc.  Co.,  183  111.  551  (1899).. 

2  See  g  635,  supra.  See  §§  492-496,  siqwa. 

3  See  ?5  740,  infra.  ^  4  Johns.  Ch.  573. 
<  See  i^§  649, 652,  663,  and  ch.  XLIV.  8  5  Hill,  383  (1843). 
6  See  §  681,  infra. 

1549 


§  070.] 


ULTRA    VIKKS    ACTS    AND    CONTRACTS. 


[CH.  XL. 


tusch  V.  Irving.^  These  cases  have  been  followed  by  a  long  list  of 
supporting  decisions.  They  were  the  first  to  establish  clearly  the 
doctrine  that  any  act  or  proposed  act  of  the  corporation,  or  of  the 
directors,  or  of  a  majority  of  the  stockholders,  which  is  not  within 
the  express  or  implied  powers  of  the  charter  of  incorporation  or  of 
association — in  other  words,  any  ultra  vires  act  —  is  a  breach  of 
the  contract  between  the  corporation  and  each  one  of  its  stockhold- 
ers, and  that  consequently  any  one  or  more  of  the  stockholders  may 
object  thereto  and  compel  the  corporation  to  observe  the  terms  of 
the  contract  as  set  forth  in  the  charter.^ 

§  670.  Neither  tlie  directors  nor  a  majority  of  ilic  stocJiholders 
have  power  to  sell  all  the  corporate  property  as  against  the  dissent 
ofasinglestoGliholdeVyiinh'ss  the  corporation  is  in  a  failing  condi- 
tion.—  Ever  since  the  case  of  Abbot  v.  American  Hard  Rubber  Com- 
pany' the  law  has  been  clearly  established  in  this  country  that  a 
dissenting  stockholder  mny  prevent  the  sale  of  all  the  corporate 
property  by  the  directors  or  by  a  majority  of  the  stockholders, 
where  the  corporation  is  a  solvent,  going  concern.*     And  even 


1 2  Coopers  Ch.  358,  by  Lord  Eldon: 
also  reported  in  Gow  on  Partnership, 
398.  Thus,  Lord  Chancellor  Campbell, 
in  Simpson  v.  Westminster,  etc.  Co.,  8 
H.  L.  Cas.  713  (1860),  said:  "  1  bow  to 
the  authority  of  Natusch  v.  Irving.  .  .  . 
The  funds  of  a  joint-stock  company 
established  for  one  undertaking  cannot 
be  applied  to  another.  If  an  attempt 
to  do  so  is  made,  this  act  is  ultra  vires; 
and,  although  sanctioned  by  all  the  di- 
rectors and  by  a  large  majority  of  the 
shareholders,  any  single  shareholder 
has  a  right  to  resist  it,  and  a  court  of 
equity  will  interpose  on  his  behalf  by 
injunction."  In  Pickering  v.  Stephen- 
son, L.  R  14  Eq.  323  (1873),  the  court 
said:  "  It  is  difficult  to  conceive  any 
system  of  jurisprudence  in  which  Na- 
tusch V.  Irving  would  have  been  differ- 
ently decided." 

2  Quoted  and  approved  in  Harding  v. 
American,  etc.  Co.,  183  III  551  (1899). 
A  stockholder  may  file  a  bill  to  enjoin 
or  set  aside  an  ultra  vires  act,  even 
though  every  other  stockholder  is 
opposed  to  him.  Hoole  v.  Great  West- 
ern Ry.,  L.  R.  3  Ch.  A  pp.  262  (1867); 
Beeman  v.  Rufford,  1  Sim.  (N.  S.)  550 
<1851),  where  a  majority  of  the  stock- 

15 


holders  had  even  voted  to  ratify  the 
illegal  act;  Bagshaw  n  Eastern  Union 
Ry.,  19  L.  J.  (Ch.)  410  (1850);  Harer.  Lon- 
don, etc.  Ry.,  :J0  L.  J.  (Ch.)  817, 829  (1861); 
Winch  XK  Birkenhead,  etc.  Ry.,  10  Jur. 
1035  (1852).  A  stockholder  in  a  trust 
company  may  file  a  bill  in  equity  to  en- 
join the  company  from  paying  an  ille- 
gal income  tax  to  the  federal  govern- 
ment Pollock  V.  Farmers'  L.  &  T.  Co., 
157  U.  S.  429  (1895).  Cf.  187  U.  S.  271. 
333  Barb.  578  (1861).  See  also  Abbot 
r.  American  Hard  Rubber  Co.,  4 
DIatchf.  489  (1861):  s.  c.  1  Fed.  Cas.  13. 
*  People  V.  Ballard,  134  N.  Y.  269 
(1892),  reviewing  the  cases  (rehearing 
denied,  136  N.  Y.  639);  Re  Sovereign  L. 
Ass.  Co.,  L.  R.  42  Ch.  D.  540  (1889).  See 
also  Smith  v.  New  York,  etc.  Co.,  18 
Abb.  Pr.  419,  435  (1865);  Rollins  v.  Clay, 
33  Me.  132  (1851);  Sheldon,  etc.  Co.  v. 
Eickmeyer,  etc.  Co.,  56  How.  Pr.  70 
(1878);  Barclay  v.  Quicksilver  Min.  Co., 
9  Abb.  Pr.  (N.  S.)  283  (1870);  Copeland 
V.  Citizens'  Gas  Light  Co.,  61  Barb.  60 
(1871):  Conro  v.  Port  Henry  Iron  Ca, 
12  Barb.  27  (1851);  Astor  v.  Westches- 
ter Gas  Light  Co.,  33  Hun,  333  (1884); 
Bird  V.  Bird's,  etc.  Co.,  L.  R.  9  Cli.  App. 
358  (1874);  Adriance  v.  Roome,  52  Barb. 
50 


•CH.  XL.] 


ULTEA    VIRES    ACTS    AND    CONTRACTS. 


L§  «70. 


where  a  dissolution  is  the  purpose  in  view,  yet,  if  the  corporation 
is  a  prosperous  one,  such  a  sale  cannot  be  made.^     Indeed  it  is  very 


399  (1868);  Brady  v.  New  York,  16  How. 
Pr.  433  (1857);  Middlesex  R.  R.  v.  Bos- 
ton, etcj.  R.  R.,  115  Mass.  347  (1874).    Of. 
Dana  v.  Bank  of  U.  S.,  5  Watts  &  S. 
(Pa.)  233,  247  (1843);  Union  Bank  v.  El- 
licott,  6  Gill  &  J.  (Md.)  363  (1834).     See 
also  Sheldon,  etc  Co.  v.  Eickemeyer, 
etc.  Co.,  90  N.  Y.  607  (1883);  Balliet  n 
Brown,  103  Pa.  St,  546  (1883);  Gray  v. 
New  York,  etc.  Steamship  Co.,  5  Thomp. 
&  C.  224  (1875).     But  see  Hutchinson  v. 
<Jre,en,  91  Mo.  367  (1886),  and  Mills  v, 
Hurd.  39  Fed.  Rep.  410  (1887),  relative 
to     unincorporated     associations.      A 
stockholder  of  a  manufacturing  com- 
pany may  enjoin  a  lease  of  all  its  prop- 
erty and  business  to  another  corpora- 
tion for  twenty-five  years  at  a  rental 
equal  to  one-half  of  the  profits  of  the 
business.    Small    v.   Minneapolis,    etc. 
Co.,  45  Minn.  364  (1891).     The  board  of 
directors  have  no  power  to  sell  all  the 
property  of  the  company  without  ac- 
tion by  the  stockholders.  Consolidated, 
etc  Cc  V.  Nash,  85  N.  W.  Rep.  485  (Wis. 
1901).    A  lease    of    all   the    corporate 
property  made  by  a  majority  vote  of 
the  stockholders  and  directors  may  be 
set  aside  at  the  instance  of  a  dissenting 
stockholder  where  the  lessee  owned  a 
majority  of  the  stock  and  controlled 
the  board  of  directors  of  the  lessor. 
Parsons  v.  Tacoma,  etc  Co.,  85  Wash. 
493  (1901).    A  transfer  of  a  lease  of 


property  by  the  general  manager,  who 
has   exercised  all  the  powers  of  the 
company,  is  valid,  even  though  there 
is  no  vote  of  the  stockholders,  where 
such  lease  does  not  constitute  all  the 
assets  of  the  corporation  and  the  trans- 
action was  fair  in  itself.  Pennsylvania, 
etc  Ca  V.  Pure-Oil    Ca,   195    Pa.   St. 
388  (1900).     A  member  of  a  mutual  in- 
surance company  may  enjoin  the  com- 
pany from  transforming  itself  into  a 
joint-stock  company.   Schwarzwaeld'er 
V.   German   Ins.   Co.,  59  N.    J.  Eq.  589 
(1899).  In  the  case  of  Arents  v.  Black- 
well's,  etc  Ca,  101  Fed.  Rep.  338  (1900), 
where  the  holders  of  159,769  shares  out 
of  160,000  shares  of  the  stock  of  a  to- 
bacco company  wished  to  accept  the 
offer  of  another  company  to  buy  it  out 
for  $3,800,000,  and  a  person  had  pur- 
chased one  share  for  the  purpose  of 
stopping  the  sale  and  having  the  char- 
ter repealed,  the  court  appointed  a  re- 
ceiver to  sell  the  property  as  prelimi- 
nary to  a  dissolution  and  distribution 
of  the  assets.    Where  the  president  of 
an  unincorporated   association   issues 
treasury  stock  and  thereby  obtains  con- 
trol of  the  association,  and  sells  it  out 
to  a  corporation  organized  by  himself, 
the  minority  stockholders  of  the  asso- 
ciation may  compel  him  to  account  for 
the  property.     As  regards  the  person 
to  whom  the  stock  was  issued,  how- 


1  Quoted  and  approved*  in  Harding  v. 
American,  etc  Co.,  183  III.  551  (1899); 
People  V.  Ballard,  134  N.  Y.  369;  136 
N.  Y.  639  (1893).  A  minority  stock- 
holder may  enjoin  a  public  sale  of  the 
property  of  a  prosperous  corporation, 
even  though  the  company  has  been  dis- 
solved, under  the  New  York  statute, 
where  he  shows  that  the  public  sale  is 
not  being  fairly  advertised  and  con- 
ducted, and  shows  also  that  the  disso- 
lution is  for  the  purpose  of  reorganizing 
under  the  laws  of  another  state  and 
freezing  out  the  minority,  and  that  in- 

1551 


formation  could  not  be  obtained  as  to 
the  actual  condition  of  the  company. 
Treadwell  u  United,  etc  Co.,  47  N.  Y. 
App.  Div.  613  (1900).  The  voluntary 
dissolution,  under  the  New  York  stat- 
ute, of  a  prosperous  corporation  will  be 
enjoined  at  the  instance  of  minority 
stockholders  where  it  is  alleged  that  it 
is  a  mere  scheme  to  freeze  out  the  lat- 
ter and  to  buy  in  the  property  for  a 
partnership.  Elbogen  v.  Gerbereaux,  etc 
Co.,  30  N.  Y.  Misc  Rep.  264  (1900).  See 
also  §  639,  supra. 


§  670.] 


ULTRA    VIRES    ACTS    AND    CONTRACTS. 


[cn. 


XL. 


doubtful  whether  a  dissolution  can  ever  be  had  at  common  law  by 
a  majority  of  the  stockholders  where  the  corporation  is  a  going, 


ever,  a  general  allegation  that  he  acted 
in  connection  with  the  president  is  not 
suflScient  to  render  him  liable  on  the 
ground  of  fraud.  Booth  v.  Dodge,  60 
N.  Y.  App.  Div.  23  (1901).  In  the  case 
of  De  La  Vergne.  etc.  Co.  v.  German, 
etc.  Inst.,  175  U.  S.  40  (1899).  a  contract 
was  made  by  which  the  president  of 
an  Illinois  manufacturing  corporation 
sold  all  its  assets  to  a  rival  New  York 
corporation,  and  all  the  shares  of  stock 
in  the  Illinois  corporation  were  also  de- 
livered to  the  New  York  corporation. 
The  court  held  the  transaction  to  be 
illegal  on  the  ground  that  the  president 
was  not  authorized  to  sell  the  assets, 
and  that  on  the  other  hand  tlie  New 
York  corporation  was  prohibited  by  its 
charter  from  purchasing  stock  in  other 
corporations.  A  mining  corporation 
thay  at  common  law  lease  its  property 
for  five  years  for  a  rental,  payable  in  a 
certain  portion  of  the  product  of  the 
mine.  A  stockholder  cannot  complain, 
even  though  the  contract  be  an  error 
of  judgment.  Hennessy  v.  Muhleman, 
40  N.  Y.  App.  Div.  175  (1899).  A  re- 
ceiver was  appointed  at  the  instance  of 
minority  stockholders,  under  the  Loui- 
siana statutes,  in  the  case  of  Davies  v. 
Monroe,  etc.  Co.,  107  La,  145  (1901), 
where  the  majority  were  about  to  sell 
out  an  electric-light  and  water- works 
plant  to  a  foreign  corporation  con- 
trolled by  the  president  at  a  price  less 
than  the  debts,  and  the  president,  in 
addition  to  his  salary,  had  been  charg- 
ing for  traveling  expenses.  A  sale  of 
all  the  corporate  property  to  an  indi- 
vidual who  purchases  in  good  faith 
cannot  be  set  aside  by  the  corporation 
as  xiltra  vires.  Miners'  Ditch  Co.  v. 
Zellerbach,  37  Cal.  543  (1869).  An  in- 
junction against  transferring  all  the 
property  to  another  corporation  will 
not  be  granted  where  only  a  leasing  of 
part  of  the  property  is  contemplated. 
Small  V.  Minneapolis,  etc  Co.,  10  N.  Y. 


Supp.  456  (1890).  A  vendee  of  all  the 
property  of  a  corporation  cannot  avoid 
the  purchase  on  the  ground  that  the 
stockholders  had  not  assented  thereto. 
Stokes  V.  Detrick,  75  Md.  256  (1892).  A 
charter  cannot  be  assigned.  Only  the 
property  or  shares  of  stock  can  be  as- 
signed. Welch  V.  Old  Dominion,  etc. 
Co..  10  N.  Y.  Supp.  174  (1890).  Directors 
who  are  merely  vested  with  the  ordi- 
nary powers  of  executive  management 
cannot  radically  affect  the  chartered 
rights  of  stockholders  (Bakers  Appeal, 
109  Pa  St.  461  (1885),  42  Leg.  Int.  226); 
and  hence  have  no  authority  to  dispose 
of  the  corporate  plant  by  lease,  sale,  or 
otherwise.  Martin  r.  Continental,  etc. 
Ry.,  14  Phila.  10  (1880).  A  secession  of 
the  majority,  carrying  corJDorate  funds 
to  a  new  corporation,  is  a  fraud  on  the 
old  corporation.  Tomlinson  v.  Brick- 
layers' Union,  87  Ind.  308  (1882).  Where 
all  the  property  of  the  corporation  is 
sold,  together  with  the  stock  of  the 
company,  the  directors  cannot  subse- 
quently act  as  a  board,  they  no  longer 
being  stockholders,  as  required  by  the 
statute.  Orr,  etc.  Co.  v.  Reno  W'ater 
Co.,  17  Nev.  166  (1882).  In  Citizens' 
Street  R  R.  v.  Robbins,  144  Ind.  671 
(1896),  the  administratrix  had  illegally 
sold  stock  to  a  party,  who  then  caused 
the  corporation  to  sell  all  its  property 
to  another  corporation.  A  subsequent 
administrator  sued  to  set  aside  the  sale 
of  the  corporate  property  or  for  dam- 
ages. The  court  held  that,  as  the  pur- 
chasing corporation  had  expressly  as- 
sumed the  liabilities  of  the  vendor 
corporation,  it  must  pay  for  the  value 
of  the  stock,  inasmuch  as  the  vendor 
corporation  was  liable  for  allowing  the 
transfer.  It  is  legal  for  a  person  who 
is  endeavoring  to  purchase  all  the  pro]> 
erty  of  a  corporation  to  pay  a  stock- 
holder for  consenting  thereto.  Lamkin 
V.  Palmer,  24  N.  Y.  App.  Div.  255  (1897); 
aflf'd,  164  N.  Y.  201.   The  case  of  Hirsch. 


1.552 


CH.  XL.] 


TJLTKA    VIBES    ACTS    AND    CONTKAOTS. 


[§  670. 


prosperous  concern.^  And  certainly  if  the  purpose  of  such  dissolu- 
tion is  not  the  honafide  discontinuance  of  the  business,  but  is  the 
continuance  of  that  business  by  another  new  corporation,  then 
the  rule  is  that  a  dissenting  stockholder  may  prevent  the  sale,  even 


tt  Bums,  74  L.  T.  Rep.  769  (1897),  was 
affirmed  in  77  L.  T.  Rep.  377,  to  the  ef- 
fect that  a  person  having  an  option  to 
purchase  the  unissued  stock  of  a  com- 
pany has  a  claim  for  damage  in  case 
the  company  sells  the  business  to  an- 
other company  without  protecting 
such  option. 

Where,  by  a  majority  vote  of  the 
stockholders,  all  the  assets  of  a  Maine 
corporation  are  transferred  to  a  New 
Jersey  corporation,  the  latter  agreeing 
to  pay  all  the  debts  and  to  issue  one 
share  of  its  stock  for  every  two  shares 
of  the  stock  in  the  former  corporation, 
and  for  two  years  the  New  Jersey  cor- 
poration fails  to  pay  such  debts  and  the 
stock  of  the  Maine  corporation  has  not 
been  fully  delivered,  a  dissenting  stock- 
holder in  the  Maine  corporation  may 
enjoin  the  New  Jersey  corporation 
from  disposing  of  such  assets.  Eldred 
V.  American  Palace-Car  Co.  etc.,  96 
Fed.  Rep.  59  (1899).  In  a  stockholder's 
suit  to  set  aside  an  illegal  transfer  of 
the  assets  of  his  corporation  to  another 
corporation  and  to  compel  a  re-transfer, 
the  persons  through  whom  the  prop- 
erty was  transferred  need  not  be  made 
parties  if  the  persons  in  possession  of 
the  assets  are  made  parties.  Eldred  v. 
American,  etc.  Co.,  99  Fed.  Rep.  168 
(1900).  But  the  federal  court  in  New  Jer- 
sey has  no  jurisdiction  of  a  suit  brought 
by  stockholders  in  a  Maine  corporation 
against  that  corporation  and  a  New 
Jersey  corporation  to  set  aside  an  ille- 
gal transfer  of  propertj'  from  the  Maine 
corporation  to  the  New  Jersey  corpora- 
tion, the  property  itself  not  being  in 
New  Jersey.  Eldred  v.  American,  etc. 
Co.,  105  Fed.  Rep.  455  (1900).  Moreover, 
if  the  Maine  corporation  is  not  served 
and  does  not  voluntarily  appear,  final 


relief  cannot  be  granted  and  a  prelimi- 
nary injunction  will  be  dissolved.  El- 
dred V.  American,  etc.  Co.,  105  Fed. 
Rep.  457  (1900).  In  a  stockholder's  suit 
to  set  aside  a  sale  by  a  Maine  corpora- 
tion of  all  its  assets  to  a  New  Jersey 
corporation,  the  suit  being  in  New  Jer- 
sey, the  Maine  corporation  is  a  neces- 
sary party  defendant,  and  a  court  in 
Maine  will  not  appoint  a  receiver  of  the 
same  for  the  sole  purpose  of  appearing 
in  the  suit  in  New  Jersey,  Hutchin- 
son V.  American,  etc.  Co.,  104  Fed. 
Rep.  182  (1900).  A  New  York  court 
will  not,  at  the  instance  of  a  New  York 
stockholder  in  an  Arizona  mining  com- 
pany, enjoin  the  company  from  trans- 
ferring its  property  in  Arizona,  and  ap- 
point a  receiver  thereof,  inasmuch  as 
such  an  injvmction  will  not  be  effec- 
tive except  with  the  aid  of  the  Arizona 
courts,  and  the  question  involved  is 
one  relating  to  the  internal  affairs  of 
the  company  which  should  be  con- 
trolled by  the  statutes  and  public  pol- 
icy of  Arizona.  The  court,  however, 
in  the  final  decree,  may  set  aside  ille- 
gal sales,  even  though  the  property  is 
beyond  the  jurisdiction.  Hallenborg 
V.  Greene,  66  N.  Y.  App.  Div.  590  (1901). 
Where  the  secretary  and  treasurer  has 
managed  the  business  as  though  the 
property  was  his  own,  a  sale  of  all  the 
property  with  the  consent  of  ninety- 
five  per  cent,  of  the  stockholders  to  an 
innocent  purchaser  for  value  is  legal, 
even  though  no  meeting  of  the  direct- 
ors or  stockholders  authorized  the  sale. 
Magowan  v.  Groneweg,  86  N.  W.  Rep. 
626  (S.  D.  1901).  Where,  in  a  stock- 
holder's suit  in  the  federal  court  to  set 
aside  a  sale  of  all  the  assets  of  the  com- 
pany to  another  company,  an  injunc- 
tion has  been  denied  on  the  giving  of  a 


»See 


(98) 


;  629,  supra. 
1553 


§  670.] 


ULTRA   VIRES    ACTS    AND    CONTRACTS. 


[CH.  XL. 


though  it  is  made  with  a  view  to  dissolution  of  the  corporation. 
This  is  the  law  as  laid  down  in  the  well  considered  case  of  Kean  v. 
Johnson. •  Such  a  dissolution  is  practicall}''  a  fraud  on  dissenting 
stockholders.  It  seeks  to  do  indirectly  that  which  cannot  legally  be 
done  directly.^ 

If,  however,  the  corporation  is  an  unprofitable  and  failing  enter- 
prise, then  a  sale  of  all  the  corporate  property  with  a  view  to  dis- 
solution may  be  made.* 


bond,  an  injunction  will  not  be  granted 
in  a  similar  suit  by  the  same  parties  in 
the  state  court,  especially  where  the 
purchaser  is  outside  of  the  jurisdiction 
of  the  court,  and  the  advantage  to  tiie 
complainant  will  be  small  as  compared 
with  the  injury  to  the  defendant 
Mum  ford  v.  Ecuador,  etc.  Co.,  50  Atl. 
Rep.  476  (N.  J.  1901).  "Where  a  minority 
stockholder  starts  a  suit  in  the  fed- 
eral court  to  set  aside  a  sale  of  the 
property  of  the  company  to  another 
corporation,  but  does  not  bring  in  as  a 
party  defendant  a  railway  company 
which  is  about  to  issue  securities,  in 
accordance  with  contracts  with  the 
two  companies,  and  afterwards  starts 
a  suit  in  the  state  court  for  the  same 
relief,  and  brings  in  the  railway  com- 
pany as  party  defendant,  laches  in 
bringing  in  the  railway  company  is  a 
bar  to  relief  against  that  company.  A 
protest  not  followed  by  prompt  appli- 
cation to  a  court  does  not  excuse  laches. 
Mumford  v.  Ecuador,  etc.  Co.,  50  Atl. 
Rep.  476  (N.  J.  1901).  In  the  case  of 
Drake  v.  New  York,  etc.  Co.,  36  N.  Y. 
App.  Div.  275  (1899),  where  the  owner 
of  ten  out  of  two  thousand  shares  of 
stock  attacked  a  foreclosure  decree  on 
the  ground  of  fraud,  the  court  refused 
to  grant  relief,  the  purchaser  at  the 
foreclosure  sale  being  willing  to  pay  to 
such  stockholder  his  proportion  of  the 
actual  value  of  the  property,  irrespect- 
ive of  the  price  realized  at  the  fore- 
closure sale.  The  court  said  that  the 
expense  of  further  litigation  would  be 
many  times  the  actual  value  of  the 
plaintiff's  interest,  and  that,  while  the 
plaintiff  in  a  court  of  law  would  be  en- 

15 


titled  to  the  full  measure  of  his  legal 
rights,  yet  in  a  court  of  equity  a  differ- 
ent rule  prevails,  and  he  may  be  com- 
pelled to  take  his  actual  interest. 

1 9  N.  J.  Eq.  401  (1853);  Ervin  v.  Oregon, 
etc.  Nav.  Co.,  27  Fed.  Rep.  625  (1886). 
"Where  before  the  dissolution  of  an  in- 
surance company  all  of  its  assets  were 
transferred  to  another  responsible  com- 
pany which  contracted  to  meet  all  ob- 
ligations, the  court  will  not  necessarily 
set  the  transfer  aside  and  appoint  a  re- 
ceiver, but  will  allow  tiie  transfer  to 
stand,  if  fair  and  best.  The  minority 
are  not  absolutely  entitled  to  a  receiver- 
ship and  sale.  Baltimore,  etc.  R  E.  v. 
Cannon,  73  Md.  493  (1890). 

2  Boston,  etc.  R.  R.  v.  New  York,  etc. 
R.  R.,  13  R.  I.  260  (1881).  See  §^5  629,630. 
supra. 

3  Quoted  and  approved  in  Price  v. 
Holcomb,  89  Iowa,  123  (1893),  and  Hard- 
ing V.  American,  etc.  Co.,  182  111.  551 
(1899);  Doyle  r.  Leitelt,  97  Mich.  298 
(1893);  Lauman  v.  Lebanon  Valley  R.  R., 
30  Pa.  St  42  (1858).  An  embarrassed 
corporation  may  lease  its  property  for 
a  year  in  order  to  keep  afloat,  such  lease 
being  reasonable  in  its  terms.  Plant  v. 
Macon,  etc.  Co.,  103  Ga.  666  (1898). 
Where  the  stockholders  of  an  insolvent 
corporation  have  authorized  the  direct- 
ors to  sell  the  property  and  public  sale 
is  thereupon  made,  the  court  will  not 
set  the  sale  aside,  although  directors 
who  were  creditors  of  the  corporation 
purchased  at  such  sale  at  a  low  figure. 
Patterson  v.  Portland,  etc.  "Works,  35 
Or.  96  (1899).  The  holder  of  seventy- 
five  shares  cannot  enjoin  the  holders  of 
three  thousand  six  hundred  and  sev- 

54 


CH.  XL.] 


ULTRA    VIRES    ACTS    AND    CONTRACTS. 


[§  670. 


Where  an  insurance  corapan}^  having  authority  to  sell  its  prop- 
erty, proceeds  to  sell  to  another  company  which  has  no  authority 
to  buy,  the  transaction  is  illegal,  and  a  stockholder  in  the  former 
who  agrees  to  take  stock  in  the  latter  in  exchange  for  his  old  stock  is 
not  bound  to  carry  out  the  transaction.^  But  even  thoug-li  a  note 
given  by  one  insurance  company  to  purchase  the  business  of  another 
fnsurance  company  is  not  legal,  yet  if  the  assets  of  the  corporation 
that  issued  the  note  are  used  to  take  it  up,  the  money  cannot  be 


enty-five  shares  from  making  a  private 
sale  of  the  corporate  assets  at  a  fair 
price,  where  the  corporate  business  is 
unprofitable  and  each  stockholder  has 
an  opportunity  of  participating  in  the 
purchase.     Phillips  v.  Providence,  etc. 
Co.,  21  R.  I.  302  (1899).   Where  the  busi- 
ness was  a  losing  one,  a  lease  of  all  the 
property  by  the  stockholders,  having 
wide  powers  by  the  charter,  was  up- 
held. Featherstonhaugh  v.  Lee,  etc.  Co., 
L.  R.  1  Eq.  318  (1865).     A  dissenting 
stockholder  cannot  enjoin  the  corpora- 
tion from  selling  all  its  property  where 
its  debts  are  large  and  a  mortgage  is 
about  to  be  foreclosed,  and  a  sale  is  the 
only  means  of  protecting  the  company, 
and  there  is  no  fraud  Involved,  and  a 
large  majority  of  the  stockholders  are 
in  favor  of  the  sale,  and  the  company 
will  have  the  proceeds  of  the  sale  in  its 
treasury  to  continue  business.    Sewell 
r.  East,  etc.  Co.,  50  N.  J.  Eq.  717  (1893). 
A  manufacturing  corporation  may,  for 
the  purpose  of  protecting  its  stockhold- 
ers from  further  loss,  discontinue  its 
operations  when  unprofitable,  and  may 
sell  or  lease  the  property.     Skinner  v. 
Smith,  134  N.  Y.  240  (1892).     To  discon- 
tinue a  failing  business  and  proceed  to 
sell  the  property  and  pay  the  debts  is 
not  a  breach  of  trust.  Roth  well  v.  Rob- 
inson, 44  Minn.  538  (1890).    A  sale,  how- 
ever,  of  all  the  corporate  assets   for 
stock  in  another  company  is  not  legal, 
even  though  the  vendor  corporation  is 
insolvent,  where  the  intent  is,  not  to 
wind  up  the  insolvent  company,  but  to 
hold  the  stock  indefinitely  in  the  names 
of  trustees.   Byrne  v.  Schuyler,  etc.  Co., 
m  Conn.  336  (1895).     By  a  vote  of  the 

•  1555 


board  of  directors  and  a  majority  of  the 
stockholders,  in  a  meeting  assembled, 
a  rubber  manufacturing  company  may 
lease  its  entire  business  to  another  rub- 
ber manufacturing  company,  the  finan- 
cial condition  of  the  leasing  company 
being  depressed  and  its  business  not 
profitable  for  want  of  capital,  and  the 
lease  being  the  best,  if  not  the  only, 
means  of  preventing  insolvency,  and 
there  being  no  fraud  in  the  casa     Bar- 
tholomew V.  Derby  R.  Co.,  69  Conn.  521 
(1897).     In  New  Jersey  a  failing  corpo- 
ration cannot  sell  out  all  its  assets  to 
another  corporation,  inasmuch  iis  the 
statutes  authorize  a  dissolution  by  a 
failing  corporation,  and  the  sale  can  be 
made  in  connection  with  such  dissolu- 
tion.    Hunt  V.  American,  etc.  Co.,  81 
Fed.  Rep.  533  (1897).  If  the  corporation 
is  financially  embarrassed,  a  majority 
of  the  stockholders  may  authorize  the 
directors  to  sell  all  its  property  at  pub- 
lic auction,  and  a  reorganization  com- 
mittee representing  a  part  of  the  stock- 
holders may  buy  it  in,  the  price  paid 
being  a  fair  one.  Hayden  v.  OflBcial,  eta 
Co.,  42  Fed.  Rep.  875  (1890).    Where  one 
building  association    absorbs    another 
and  takes  all  its  assets  and  tries  to  force 
the  minority  stockholders  to  transfer  or 
surrender  their  stock,  and  caiises  the 
absorbed  association  to  become  insolv- 
ent, a  receiver  will  be  appointed  at  the 
instance  of  minority  stockholders,  even 
though  the  absorbed  association  is  a 
failing  one.     Continental,  etc.  Assoc,  v. 
Miller,  33  S.  Rep.  404  (Fla.  1902). 

iDougan's    Case,  28    L.   T.    Rep.   60 
(1873);  aff'd,  L.  R  8  Ch.  App.  540  (1873). 


670.] 


ULTRA    VIRES    ACTS    AND    CONTRACTS. 


[on. 


XL. 


recovered  back.^  "Where  a  sale  of  all  the  corporate  assets  is  sot 
aside,  and  a  receiver  is  authorized  to  borrow  nionoy  to  repay  the 
money  received  on  the  sale,  the  loan  made  by  him  is  legal.'- 

By  the  unanimous  consent  of  the  stockholders  it  is  always  legal 
to  sell  all  the  property  of  a  private  corporation,^  proper  provision 


1  McCIure  u  Trask,  161  N.  Y.  82  (1899). 

2  St  Paul  Trust  Co.  v.  St.  Paul  Globe 
Pub.  Co.,  60  Minn.  105  (1895). 

^  See  §  671,  infra.  A  corporation  may 
convey  its  property  with  the  consent  of 
stockholders.  State  v.  Western,  etc. 
Co.,  40  Kan.  96  (1888).  Where  an  iron 
manufacturing  concern  owns  an  iron 
manufacturing  plant  and  stocks  in  an 
ore  company  and  a  railway  company 
and  a  steamboat  company  and  other 
corporations,  and  also  a  farm,  and  by 
consent  of  all  the  partners  the  firm  is 
transformed  into  a  corporation  which 
takes  all  the  property,  including  the 
stocks  and  the  farm,  one  of  the  partici- 
pants cannot  afterwards  complain  that 
it  was  illegal  for  the  corporation  to 
acquire  such  stocks  and  the  farm.  Bur- 
den V.  Burden,  159  N.  Y.  287  (1899).  The 
agreement  of  a  creditor  of  a  corpora- 
tion with  a  stockholder  who  is  also  a 
creditor  of  the  same,  that  if  the  latter 
will  consent  to  a  sale  of  the  property 
the  former  will  pay  the  latters  debt,  is 
enforcible,  even  though  oral.  Lamkin 
V.  Palmer,  164  N.  Y.  201  (1900).  So  long 
as  a  corporation  is  solvent  it  may, 
with  the  consent  of  its  stockholders, 
dispose  of  property  at  such  price  as  it 
sees  fit.  and  may  even  make  a  gift 
of  property,  and,  present  creditors 
being  protected,  future  creditors  can- 
not complain.  Hamilton  v.  Menominee, 
etc.  Co.,  106  Wis.  352  (1900).  Stock- 
holders in  selling  their  stock  in  connec- 
tion with  the  transfer  of  all  the  prop- 
erty to  a  new  corporation  may  reserve 
what  may  be  thereafter  realized  from  a 
suit  Independent,  etc.  Co.  v.  Ander- 
son, 106  La.  55  (1901).  Where  the  pur- 
chaser  of  a  plant  and  stock  is  sued  for 
the  price  and  judgment  is  recovered, 
he  may  afterwards  bring  suit  for  the 
stock  and  for  dividends  paid  after  the 


time  when  he  would  have  been  entitled 
to  the  stock,  if  he  had  fully  complied 
with  his  contract  Beaty  v.  John.ston, 
66  Ark.  529  (1899).  The  board  of  direct- 
ors with  the  consent  of  the  stockholders 
may  sell  all  the  property.  Robinson, 
etc.  Co.  V.  De  Bautte,  50  La.  Ann.  1281 
(18981  A  stockholder  who  knows  that 
her  stock  has  been  voted  by  her  hus- 
band in  favor  of  selling  all  the  corpo- 
rate property  for  stock  in  another  cor- 
poration cannot  object  thereto  where 
she  afterwards  disposes  of  part  of  the 
new  stock  so  issued.  Hoene  v.  Pollak, 
118  Ala.  617  (1898).  Where  but  one 
meeting  of  the  board  of  directors  was 
ever  held  and  then  the  charter  was 
forfeited,  and  the  president,  with  the 
consent  of  the  directors  individually, 
and  of  all  the  stockholders  conveyed 
away  the  property,  and  creditors  were 
not  injured,  the  transaction  is  legal. 
Aransas,  etc.  Ca  v.  Manning,  63  S.  W. 
Eep.  627  (Tex.  1901).  By  unanimous 
consent  of  the  stockholders  a  mercan 
tile  company  may  sell  all  its  property  , 
and  take  land  in  part  payment  therefo 
for  the  purpose  of  winding  up  the  busi- 
ness. IMorisette  v.  Howard,  63  Pac. 
Rep.  756  (Kan.  1901).  Where  a  private 
corporation  sells  all  its  property  to 
another  corporation  on  tiie  agreement 
of  the  latter  to  pay  the  debts  of  the 
former,  and  the  latter  has  paid  a  part 
of  such  debts,  the  selling  corporation 
cannot  claim  that  the  deed  is  ultra 
vires  and  retake  possession.  Savings  & 
T.  Co.  V.  Bear  Valley,  etc.  Co.,  112  Fed. 
Rep.  693  (1902).  Even  though  the  pur- 
chaser of  the  property  of  a  corporation 
takes,  in  addition  to  the  deed,  all  of  the 
shares  of  stock,  the  consideration  going 
directly  to  the  stockholder,  the  trans- 
action is  a  sale  of  the  property  and 
not  of  the  stock,  and  hence  the  proceeds 
156 


CH.  XL.] 


ULTKA    YIEES    ACTS    AND    COXTEACTS. 


[§  670. 


being  made  for  the  protection  of  corporate  creditors.^  Moreover, 
where  by  the  written  consent  of  all  the  stockholders  of  a  Kew 
Jersey  corporation,  and  the  action  of  its  board  of  directors,  a  cor- 
poration sells  all  its  property  for  stock  and  bonds  of  a  new  com- 
pany to  be  distributed  among  the  old  stockholders,  a  pledgee  of 
one  of  the  old  stockholders  cannot  object,  especially  where  the 
statute  authorizes  the  pledgor  of  stock  to  represent  the  stock  and 
no  notice  had  been  given  of  the  pledge.^     These  rules  do  not  apply, 


of  the  sale  belong  to  the  corporation. 
Pendery   v.  Carleton,  87   Fed.  Rep.   41 
(1898 1.    Where  a  corporation  sells  its 
property   through    misrepresentations, 
and  in  deeding  the  property  causes  all 
its  outstanding    capital   stock    to    be 
delivered  to  the  vendee,  the  vendor  in 
suing  to  recover  back  the  money  need 
not  allege  that  the  stock  was  valueless, 
there    being    an    allegation    that   the 
propert}'     was    valueless.      Keener    v. 
Baker.  93  Fed.  Rep.  377  (1899).     A  cor- 
poration  in  acquiring  the  assets  of  a 
partnership   may  acquire    a  cause   of 
action   which  the  latter    has  against 
another  corporation  for  negligence  and 
may  enforce  such  cause  of  action,  even 
though  it  would  have  had  no  power  to 
buy  it  separately  from  the  other  prop- 
erty.    Central,  etc.  Co.  v.  Capital,  etc. 
Co.,  60  Ohio  St.   96  (1899).      Where  a 
corporation  has  sold  all   its   property 
with  the  consent  of  all  its  stockholders, 
the  transaction  cannot  subsequently  be 
attacked  by  a  subsequent  purchaser  of 
stock.     City    of    Spokane    v.   Amster- 
damsch.  etc.,  23  Wash.  172  (1900).     The 
sale  of  a  business  of  a  corporation  which 
does  not  specifically  transfer  the  trade 
name  and  good  will  does  not  enable  a 
purchaser  of  the  business  from  the  cor- 
poration to  claim  such  trade  name.  Cut- 
ter V.  Gudebrod,  etc.  Co.,  44  N.  Y.  App. 
Div.  605  (1899).    Where  in  a  dissolution 
proceeding   an    injunction    has    been 
issued    against   a    corporation    doing 
any  further  business  or  disposing  of  its 
property,  a  sale  or  mortgage  of  its  prop- 
erty to  one  of  its  stockholders  is  illegal 
and   will   be  set   aside   by  the    court, 
especially  where  it  is  made  to  a  director 


for  an  inadequate  consideration.  Grant 
V.  Lowe,  89  Fed.  Rep.  881  (1898).    Where 
the  various  stockholders  of  a  corpora- 
tion join  in  a  contract  for  the  sale  of 
their  stock,  but  secretly  one  of  thera 
receives  a  bonus  from  the  purchaser, 
the  others  may  compel  him  to  account 
therefor    proportionately.      Synnot   v. 
Cummings,    116    Fed.   Rep.   40     (1902). 
Where  the  directors  own  all  the  stock 
of  a  corporation,  they  may  authorize  its 
president  to  sell  its  assets;  and  the  fact 
that  the  authority  was  not  given  at  a 
regular  directors'  meeting    is    imma- 
terial.   Jordan  v.  Collins,  107  Ala.  573 
(1895).     A  sale  by  a  corporation  of  all 
its  property  does  not  entitle  the  vendee 
to  stock  in  the  corporation  which  the 
corporation  itself  has  purchased  on  a 
sale  for  a  delinquent  assessment  and 
not    re-issued.     Tulare,    etc.    Dist.   v. 
Kaweah,  etc.  Co.,  44  Pac.  Rep.  662  (Cal. 
1896).     The  new  company  may  enforce 
the  right  of  the  old  one  to  indemnity. 
Miller  v.  Lancaster,  5    Coldw.  (Tenn.) 
514  (1868).     Or  may  settle  a  suit  against 
the  old  one.     Paine  v.  Lake  Erie,  etc. 
R.  R,  31   Ind.  283   (1869).     In   general 
see  Slattery  v.  St  Louis,  etc.  Co.,  91  Mo. 
217  (1886).    The  incorporation  of  a  re- 
organized company,  giving  it  all   the 
rights,  etc.,  of  the  old  company,  does 
not  give  it  title  to  a  judgment  obtained 
by  the  old  company.     Wilmington,  etc. 
R.   R.  V.  Downward,  14  Atl.   Rep.   720 
(Del.    1888).    Sometimes  the  stock  as 
well  as  the  property  is  delivered.  Pen- 
dery V.  Carleton,  87  Fed.  Rep.  41  (1898> 

1  See  §  672,  infra. 

2  Elyea  u  Lehigh,  etc.  Co.,  169  N.  Y. 
29  (1901). 


1557 


§  670.] 


ULTKA   VIRES    ACTS    AND    CONTRACTS. 


[CH.  XL. 


however,  to  railroad  and  certain  other  quasi-public  corporations. 
The  state  has  an  interest  in  their  continuance,  and  the}'  cannot  sell 
their  property  except  upon  the  express  consent  of  the  state.' 

Where  the  by-laws  of  a  private  corporation  authorize  a  sale  of 
all  its  property,  such  sale  may  be  made  even  against  the  wishes  of 
a  minority  of  the  stockholders.-  So  also,  where  the  charter  ex- 
pressly authorizes  such  a  sale,  it  is  legal.'    But  statutory  power  to 


1  See  ch.  LIII,  infra. 

2  It  is  legal  for  the  by-laws  to  provide 
that  the  company  may  sell  out  all  its 
property  at  any  time.  Cotton  v.  Im- 
perial, etc.  Corp.,  [1892]  3  Ch.  454.  The 
by-laws  may  provide  that  the  company 
may  sell  out  its  entire  business.  Re- 
publican, etc.  Mines  v.  Brown,  58  Fed. 
Rep.  644  (1893),  reversing  Brown  v.  Re- 
publican, etc.  Mines.  55  Fed.  Rep.  7. 

3  See  §  892,  notes,  infra.  The  sale 
may  have  to  be  a  public  sala  SeegCTl, 
infra.  The  principle  that  the  board  of 
directors  has  no  power  to  sell  out  the 
entire  property  does  not  apply  where 
the  statute  uhder  which  it  was  incor- 
porated authorized  such  a  sale.  St 
Louis  V.  St.  Louis  Gaslight  Co.,  70  Mo. 
69,  98  (1879).  Under  the  English  stat- 
utes authorizing  the  holders  of  the  se- 
curities to  reorganize  or  modify  the 
original  plan,  provided  the  court  ap- 
proves the  same,  the  plan  may  be 
amended  so  that  dissenting  security- 
holders be  paid  in  cash  their  proportion 
of  the  assets  as  they  then  exist.  Foreign, 
etc.  Trust  Co.  v.  Sloper.  [1894]  3  Ch.  716, 
rev'g  [1898]  2  Ch.  96.  Where  a  water- 
works company  has  power  to  sell  its 
entire  pi'operty,  and  the  sale  has  been 
authorized  by  a  vote  of  1,100  shares 
out  of  1,350  shares,  the  court  will  not 
enjoin  the  sale  at  the-  instance  of  the 
minority  stockholders,  on  the  ground 
that  the  price  is  inadequate.  Peabody 
V.  Westerly  Waterworks,  20  R.  L  176 
(1897).  In  Re  Buenos  Ayres,  etc.  Co.,  66 
L.  T.  Rep.  408  (1892),  a  sale  of  the  com- 
pany's enterprise  to  the  government 
upon  terms  which  paid  something  to 
the  preferred  stockholders,  but  left 
nothing  for  the  common  stockholders. 

1558 


was  sustained.  Power  to  sell  to  a  com- 
pany does  not  authorize  a  sale  to  an 
individual.  Bird  v.  Bird's,  etc.  Co.,  L.  R. 
9  Ch.  App.  358  (1874).  In  Clinch  v.  Fi- 
nancial Corp.,  L,  R,  5  Eq.  450  (1868),  the 
company  had  power  to  consolidate 
with  another  company  if  the  liabilities 
of  the  stockholders  were  not  increased. 
A  stockholder  enjoined  a  consolidation 
in  which  such  liabilities  would  be  in- 
creased. Where  a  corporation  is  given 
power  to  lease  its  property  without  the 
mode  of  making  the  lease  being  pre- 
scribed, it  may  be  by  a  vote  of  the  ma- 
jority of  the  stockholders.  Dickinson 
V.  Consolidated,  etc.  Co.,  114  Fed.  Rep. 
232  (1902).  A  statute  authorizing  a  sale 
of  corporate  property  in  whole  or  in 
part  upon  a  vote  of  the  stockholdei's 
does  not  require  such  vote  upon  an  or- 
dinary sale  of  real  estate.  Marvin  v. 
Anderson,  111  Wis.  387  (1901).  Where 
a  corporation  sells  or  leases  all  its  prop- 
erty to  another  corporation  which  the 
majority  of  the  stockholders  of  the 
former  corporation  own  or  control, 
the  contract  may  not  be  illegal  in  it- 
self, but  it  will  be  scrutinized  carefully 
by  the  court,  and,  if  unfair,  will  be  set 
aside.  Mumford  v.  Ecuador,  etc.  Co., 
Ill  Fed.  Rep.  639  (1901).  Under  a  stat- 
ute requiring  the  lessee  of  a  railroad  to 
purchase  dissenting  stock  of  the  lessor 
within  thirty  days  on  an  appraisal  of 
its  value,  stock  which  has  been  voted 
in  favor  of  the  lease  cannot  afterwards 
be  the  basis  of  a  claim  that  it  be  ap- 
praised and  paid  for.  In  the  appraisal 
proceedings  all  questions  arising  may 
be  adjudicated.  If  the  dissenting  stock 
is  not  purchased  under  the  statute,  the 


lessee  runs  the  risk  of  the  lease  being 


OH.  XL.] 


ULTKA    VIKES    ACTS   AND    CONTKACTS. 


[§  671. 


transfer  the  business  and  property  of  a  corporation  does  not  au- 
thorize a  transfer  of  its  unpaid  subscriptions.^  A  hotel  company 
may  sell  its  hotel  and  with  the  proceeds  purchase  another  hotel.^ 
And  in  any  case  the  right  of  a  dissenting  stockholder  to  object  may 
be  lost  by  laches  or  ratification.^ 

The  subject  of  the  reorganization  of  corporations  upon  foreclos- 
ure is  considered  elsewhere.* 

§671.  Sale  of  corporate  iwoperty  to  another  corporation  in  ex- 
change for  stoch  ancUonds  of  the  latter  —  Distribution  of  such  stoclz 
and  honds.—  In  addition  to  the  objections  to  a  sale  of  all  the  cor- 
porate property  to  another  corporation,  referred  to  in  the  preceding 
section,  there  often  is  involved  the  question  of  whether  the  sale 
may  be  in  exchange  for  the  bonds  and  stock  of  the  vendee  com- 
pany. In  these  days  of  consolidations,  reorganizations,  and  mergers 
of  corporations  it  frequently  happens  that  the  purchase  price  is  paid 
in  the  stock  and  bonds  of  the  purchasing  company.  The  question 
then  arises  whether  the  selling  company  has  power  to  take  stock 
and  bonds  in  payment,  and  whether  it  may  compel  its  stockholders 


held  void  at  the  instance  of  a  dissent- 
ing stockholder.  Boston,  etc.  R.  R.  v. 
Graham,  60  N.  E.  Rep.  405  (Mass.  1901). 
As  to  such  an  appraisement,  see  also 
g  671,  inf7'a. 

1  Bank  of  China  v.  Morse,  168  N.  Y. 
458  (1901).  In  this  case  a  New  York 
subscriber  to  stock  in  an  English  cor- 
poration was  sued  by  the  company  for 
the  amount  of  such  subscription,  such 
company  having  been  reorganized 
under  the  peculiar  English  statutes. 
The  court  refused  to  enforce  the  lia- 
bility on  the  ground  that  the  funds 
were  not  for  the  purpose  of  paying 
debts  of  tlie  old  corporation,  but  were 
partially  for  the  purposes  of  the  new 
corporation  which  the  New  York  sub- 
scriber did  not  become  interested  in 
and  had  no  notice  thereof,  and  on  the 
further  ground  that  the  reorganization 
scheme  was  practically  a  sale  by  the 
old  company  to  the  new  company. 

2  Freeman  v.  Sea  View  Hotel  Co.,  57 

N.  J.  Eq.  68  (1898).     A  sale  of  the  entire 

property  is  different  from  the  sale  of 

the  whole  of  its  business,  and  the  former 

may  be  legal  where  the  latter  would  be 

illegal.    Ritchie  u  Vermillion  Min.  Co., 

1  Ont  L.  Rep.  654  (1901). 

1559 


8  See    ch.    XLIV,  ivfra;    Banks    v. 
Judah,  8  Conn.  145  (1830),  holding  that 
long  delay  of  a  dissenting  stockholder 
in  bringing  suit  will  bar  his  remedy. 
This,  perhaps,  is  the  first  reorganization 
case  that  is  to  be  found  in  the  books. 
The  whole  business  ef  the  corporation 
cannot  be  sold  out  except  by  unani- 
mous consent  of  the  stockholders,  but 
a  stockholder  who  acquiesces  in  it  can- 
not afterwards  complain.    Feld  v.  Ro- 
anoke   Inv.    Co.,   123    Mo.    609    (1894). 
Where  a  part  of  a  charter  is  illegal,  and 
a   new   corporation  is  formed  to  take 
over  the  property  and  debts  and  issue 
share  for  share  of  stock  in  the  old,  a 
stockholder  who  assented  cannot  now 
refuse  to  take  the  new  stock.    Glymont 
Imp.  etc.  Co.  V.  Toller,  80  Md.  278  (1894). 
Five  years  after  a  corporation  has  sold 
all  its  property  to  another  corporation, 
and  received  the  consideration,  it  can- 
not maintain  a  bill  to  set  aside  the  sale 
as  ultra  vires,  the  rights  of  third  par- 
ties having  intervened  in  the  mean- 
time.    Bear  Valley,  etc.  Co.  v.  Savings, 
etc.  Co..  117  Fed.  Rep.  941  (1903). 
*  See  ch.  LI  I,  infra. 


§  671.] 


ULTRA    VIRES    ACTS    AND    CONTRACTS. 


[oh.  XL. 


to  accept  such  stock  and  bonds  upon  a  distribution  of  the  assets  of 
such  selling  company.  The  general  rule  has  been  that  the  stock 
of  the  vendee  company  received  by  the  vendor  company  in  ])ay- 
ment  for  the  property  cannot  be  forced  upon  dissenting  stockhold- 
ers of  the  vendor  company  in  a  distribution  of  its  assets.  They 
are  entitled  to  money.  Such  of  them  as  do  not  wish  to  accept  the 
stock  of  the  new  corporation  are  entitled  to  the  value  of  their 
stock  in  the  old  corporation  in  cash,  and  may  have  an  injunction 
until  they  are  secured,^     A  stockholder  may  enjoin  a  sale  of  all  the 


1  State  V.  Bailey,  16  Ind.  46  (1861); 
Kelly  V.  Mariposa  Land.  etc.  Co.,  4  Hun, 
633  (1875).  Cf.  New  Jersey  Zinc  Co.  v. 
New  Jersey  Franklinite  Co.,  13  N.  J. 
Eq.  322  (1861);  S.  a,  15  N.  J.  Eq.  418 
(1862).  Contra,  Sawyer  v.  DubiKiue 
Printing  Co.,  77  Iowa,  242  (1889).  Tiie 
New  York  courts  refused  to  hold  a  New 
York  stockholder  in  an  English  corpo- 
ration liable  for  his  unpaid  subscrip- 
tion where  under  a  plan  of  reorganiza- 
tion, sanctioned  by  the  English  courts, 
in  accordance  with  English  law,  the 
amount  collected  is  to  go  to  the  reor- 
ganized company,  while  other  stock- 
holders need  not  pay  their  subscrip- 
tions if  they  take  part  in  the  reorgan- 
ized company  and  pay  a  small  sum, 
especially  where,  if  all  the  stockholders 
paid  in  full,  the  amount  would  be  more 
than  necessary  to  pay  the  debts.  Bank 
of  China  v.  Morse,  168  N.  Y.  458  (1901). 
Under  an  English  floating  debenture, 
stockholders  have  no  right  to  sell  out 
the  entire  property  to  another  corpora- 
tion in  exchange  for  stock  unless  the 
debenture  holders  consent,  Foster  v. 
Borax  Co..  [1899J  2  Ch.  130,  or  unless 
money  is  deposited  in  court  to  pay  the 
dissenting  debenture  holders.  Foster 
V.  Borax  Co.,  [1899]  2  Ch.  130,  187. 
Under  a  statute  authorizing  one  com- 
pany to  sell  out  to  another  for  any  con- 
sideration that  may  be  agreed  upon 
between  them,  it  is  legal  that  the  con- 
sideration be  a  right  extended  by  the 
new  company  to  the  old  stockholders 
to  demand  partly  paid  up  stock  of  the 
new  company  within  a  limited  time,  a 
dissenting  stockholder  being  given  the 


right  to  have  the  fairness  of  the  pro- 
posed sale  passed  ujion  by  the  court. 
It  is  the  duty  of  the  stockholder  in  such 
a  case  to  attend  the  meeting  and  vote 
against  it  if  he  objects.  It  is  no  excuse 
that  he  was  ill  or  abroad  or  negligent 
in  dissenting  under  the  English  statute. 
Burdett-Coutts  v.  True  Blood,  etc.  Ltd., 
[1899]  2  Ch.  6ia  It  is  not  legal  for  a 
receiver,  even  under  an  order  of  tlie 
court,  to  sell  nearly  all  the  property  of 
the  company  to  another  corporation  in 
exchange  for  stock  of  the  latter  to  be 
given  to  stockholders  of  the  former, 
■  with  a  provision  that  dissenting  stock- 
holders should  be  paid  on  a  certain 
basis  which  is  different  from  stock  of 
the  former  corporation  acquired  b}-  the 
latter  corporation.  People  v.  Anglo- 
American,  etc.  Assoc,  60  N.  Y.  A  pp.  Div. 
389(1901).  A  minor  who  has  suKscribed 
and  paid  for  stock  in  a  corporation, 
which  corporation  was  afterwards 
merged  in  another  corporation,  for  stock 
of  the  latter,  cannot  recover  back  his 
money  from  the  second  corporation. 
"White  V.  Mount  Pleasant,  etc.  Corp.,  172 
Mass.  462  (1899).  Even  though  an  offi- 
cer of  a  mortgagor  owns  a  majority  of 
the  stock,  and  is  also  a  creditor,  and 
promotes  a  suit  for  a  receivership  and 
sale  of  the  corporate  property,  yet  he 
may  purchase  at  the  foreclosure  sale, 
even  at  a  nominal  figure,  and  a  corpo- 
ration to  which  he  transfers  it  in  ex- 
change for  the  latter's  capital  stock 
may  be  a  bona  fide  purchaser  for  value, 
even  though  it  is  chargeable  with  no- 
tice of  all  the  facts,  and  may  insure  the 
property  for  its  own  benefit  and  not 


1560 


CH.  XL.] 


ULTEA   VIKES    ACTS    AND    CONTEACTS. 


[§  671. 


corporate  property  to  another  corporation  in  exchange  for  the  stock 
and  mortgage  bonds  of  the  latter,  even  though  the  corporation 
offers  to  pay  in  cash  the  full  value  of  his  stock.  Not  even  a  statute 
can  deprive  a  stockholder  of  this  right.  To  compel  the  stockholder 
to  take  such  cash  would  be  compelling  him  to  sell  his  stock.'  To 
compel  the   stockholders   of  the   old    corporation    to   accept  the 


for  the  benefit  of  an  underlying  mort- 
gage. Farmers',  etc.  Co.  v.  Penn,  etc. 
Co.,  103  Fed.  Rep.  132,  157  (1900). 
Where  the  directors  of  a  corporation 
sell  out  its  assets  in  consideration  of 
a  person  paying  the  debts,  and  the 
latter  organizes  a  new  corporation 
and  gives  to  the  old  directors  stock  in 
the  new  corporation  equal  to  their 
stock  in  the  old,  but  does  not  give  any- 
thing to  the  other  stockholders  of  the 
old  corporation,  the  directors  and  the 
persons  so  purchasing  the  assets  are 
liable  to  the  old  corporation  for  the 
value  of  the  stock  so  given  to  the  di- 
rectors. A  pledgee  of  the  stock  of  the 
old  corporation  may  bring  suit  for  that 
purpose.  Smith  i\  Smith,  etc.  Co.,  84 
N.  W.  Rep.  144  (Mich.  1900).  Taylor  v. 
North  Star,  etc.  Co.,  79  Cal.  285  (1889), 
holds  that  laches  may  bar  the  stockhold- 
ers' right  to  object.  Although  a  cor- 
poration is  authorized  by  its  charter 
"  to  take  stock  "  in  other  corporations, 
this  does  not  authorize  it  to  sell  all  its 
property  to  another  corporation  in  pay- 
ment for  stock  of  that  corporation  to 
be  distributed  among  the  stockholders 
of  the  vendor  corporation.  Elyton 
Land  Co.  v.  Dowdell,  113  Ala.  177  (1896). 
Where  a  corporation  sells  its  business 
for  stock  in  another  company,  it  may 
distribute  the  stock  among  those  of  its 
stockholders  who  are  willing  to  take 
it;  but  any  stockholder  may  demand 
money  instead.  If  he  accepts  the  stock, 
however,  he  cannot  afterwards  com- 
plain. Feld  V.  Roanoke  Inv.  Co.,  123  Mo. 
•603  (1894).  Where  a  company  is  reor- 
ganized by  a  new  company  buying  the 
property  of  the  old,  and  giving  the 
stock  of  the  new  company  to  the  old 
company  in  payment  therefor,  the 
transaction  being  carried  out  by  100,165 


shares  out  of  164,211  shares,  over  4,000 
shares  not  being  represented,  the  old 
company  cannot  distribute  the  stock 
among  the  stockholders  unless  the  com- 
pany is  dissolved.  Kohl  v.  Lilienthal, 
81  Cal.  378  (1889);  94  N.  W.  Rep.  19, 

1  Morris  v.  Elyton,  etc.  Co.,  125  Ala. 
203  (1900).  A  statute  forbidding  the 
officers  of  a  mining  corporation  from 
selling  its  property,  without  such  sale 
being  approved  by  a  certain  proportion 
of  the  stock  at  a  meeting  of  the  stock- 
holders, does  not  authorize  a  sale  of  all 
the  assets  of  a  prosperous  mining  cor- 
poration as  against  the  dissent  of  mi- 
nority stockholders,  where  such  sale  is 
not  for  cash  but  for  the  capital  stock 
of  a  foreign  corporation,  even  though 
such  latter  company  offers  to  pay  a 
fixed  price  in  cash  to  stockholders  who 
do  not  care  to  take  new  stock  in  ex- 
change for  the  old.  A  minority  stock- 
holder may  enjoin  the  sale  even  though 
the  selling  corporation  offers  to  give  to 
such  minority  stockholder  a  bond  that 
the  dissenting  stockholders  should  re- 
ceive the  value  of  their  stock.  A  court 
has  no  power  to  compel  dissenting 
stockholders  to  so  dispose  of  their  shares 
in  invito.  Forrester  v.  Boston,  etc.  Co., 
21  Mont.  544,  565  (1898).  A  by-law,  even 
though  passed  upon  the  organization  of 
the  company,  cannot  legally  provide 
that  upon  a  sale  of  the  company's  prop- 
erty for  stock  in  another  company,  the 
stock  going  to  dissenting  stockholders 
might  be  sold  in  such  manner  as  the 
old  company  thought  fit,  and  the  pro- 
ceeds paid  over  to  the  dissenting  stock- 
holder, where  the  statute  provided  that 
the  interest  of  dissenting  stockholders 
should  be  ascertained  by  arbitration. 
Payne  v.  Cork  Co.,  [1900]  1  Ch.  303.  See 
88  L.  T.  Rep.  337. 


1561 


§  671.] 


ULTRA    VIBES    ACTS    AND    CONTRACTS. 


[CH.  XL. 


stock  of  the  new  corporation  in  payment  for  their  interest  in  the  old 
would  be  in  effect  to  compel  them  to  join  the  new  corporation,  or, 
what  is  the  same  thing,  compel  them  to  consent  to  a  consolidation.' 
A  well-considered  case  in  the  United  States  circuit  court  of  appeals, 
however,  takes  a  different  view  of  the  law  and  holds  that  where 
one  railroad  company  is  authorized  by  statute  to  sell  its  railroad 
property  and  franchises  to  another  company,  it  may  receive  in 
payment  therefor  shares  of  stock  in  the  vendee  company,  and  its 
stockholders  are  obliged  to  accept  such  payment  in  stock.-  This 
conclusion  is  certainly  logical  and  puts  all  the  stockholders  on  the 
same  basis,  although  it  is  open  to  the  objection  that  it  forces  dis- 
senting stockholders  into  a  new  enterprise  and  business  which 
they  may  not  have  contemplated.  On  the  other  hand,  if  dissent- 
ing stockholders  must  be  paid  in  cash,  another  difficulty  arises. 
The  only  way  to  ascertain  the  real  value  of  the  property,  if  the  sale 
is  to  a  new  corporation,  in  which  a  majority  of  the  old  stockhold- 
ers are  interested,  is  by  a  public  sale  of  the  property.  The  dissent- 
ing stockholders  may  insist  upon  this,  in  such  a  case.  The  supreme 
court  of  the  United  States  has  so  decided.  The  majorit}'  stock- 
holders have  no  right,  upon  dissolution,  to  sell  the  corporate  prop- 


1  Ex  parte  Bagsliaw,  L.  k.  4  Eq.  -Hi 
(1867);  McCurdy  v.  Myers.  44  Pa.  St.  535 
(l863);Frothinghamu.  Barney,6Hun.;3(5U 
(1876);  Lauman  v.  Lebanon  Valley  R.  R, 
30  Pa,  St.  42(1858).  A  single  stockholder 
may  enjoin  his  company  from  selling 
substantially  all  its  property  to  another 
company  for  shares  of  stock  in  the  latter. 
Carter  v.  Producers',  etcj.  Co.,  164  Pa.  St. 
463  (1894). 

2  Farmers',  etc.  Co.  v.  Toledo,  etc.  R  R., 
54  Fed.  Rep.  759  (1893).  Judge  Taft  dis- 
sented from  this  conclusion.  A  dissent- 
ing stockholder  may  enjoin  a  New  Jersey 
street  railway  company  from  selling  its 
property  to  another  street  railway  com- 
pany in  exchange  for  stock  of  the  latter, 
unless  such  sale  is  made  in  connection 
with  dissolution  proceedings.  He  may 
enjoin  a  sale  of  the  property  to  a  Washi  n  g- 
ton  street  railway  company  for  twenty 
thousand  shares  of  the  full-paid  stock  of 
the  latter,  wheredissenting  stockholders 
of  the  former  are  to  be  paid  only  $35  cash 
in  lieu  of  each  share  of  the  Washington 
corporation,  which  he  would  be  entitled 
to.     On  its  face  this  is  an  issue  of  the 


Washington  stockat$35  pershare.and  is 
in  violation  of  the  Washington  statutes* 
The  court  .said:  "Totheextent  of  sixty- 
five  per  cent,  of  the  issue  the  increase  of 
capitalstock  will  be,  therefore, 'fictitious* 
and,accordingto  the  constitution,  'void.' 
Such  a  scheme  ought  not  to  be  forced 
upon  an  unwilling  stockholder  of  the 
New  Jersey  company."  Moreover,  it  be- 
ing illegal  in  Washington  for  one  corpo- 
ration to  own  stock  in  another  corpora- 
tion,a  New  Jersey  corporation  cannot  le- 
gally own  stock  in  a  Washington  street 
railway  company.  Colerr.  Tacoma  Ry. 
etc.,  54  Atl.  Rep.  413  (N.  J.  1903).  Where 
the  statute  authorizes  corporations  to 
consolidate,  a  stockholder  cannot  object 
thereto  on  the  ground  that  he-is  given 
stock  in  the  consolidated  company  in- 
stead of  cash,  and  even  though  the  au- 
thorized capitalstock  of  the  consolidated 
company  is  much  larger  than  that  of  the 
constituent  company  and  no  provision 
has  been  madefor  the  issue  of  the  balance. 
Mayfield'y.  Alton,  etc.  Co.,  65  N.  E.  Rep. 
100  (111.  1903).  See  also  Metcalf  v.  Amer- 
ican, etc.  Co.,  123  Fed.  Rep.  115  (1903). 


1563 


CH.  XL.] 


ULTRA    VIRES    ACTS    AND    CONTRACTS. 


[§  671. 


erty  to  a  new  corporation  for  stock  in  the  latter,  and  then  say  to 
the  minority,  "We  have  formed  a  new  company  to  conduct  the 
business  of"^  this  old  corporation,  and  we  have  fixed  the  value  of 
the  shares  of  the  old  corporation.     We  propose  to  take  the  whole 
of  it  and  pay  you  for  your  shares  at  that  valuation,  unless  you  come 
into  the  new  corporation,  taking  shares  in  it  in  payment  of  your 
shares  in  the  old  one."  *     At  the  public  sale  the  majority  stock- 
holders may  buy  in  the  property  ;2  but  they  have  no  right  to  buy 
it  at  private  sale  at  a  price  which  they  themselves  put  upon  it. 
Where,  however,  the  price  is  a  fair  one,  and  all  stockholders  are 
allowed  to  participate,  it  is  not  likely- that  a  court  would  order  a 
public  sale,  there  being  no  tangible  prospect  of  benefit  from  such 
a  public  sale.^     As  to  a  sale  of  the  corporate  property  for  purchase- 
money  bonds  in  payment,  this  is  equivalent  to  a  sale  for  money 
payable  in  the  future,  and  hence  the  transaction  is  not  open  to  the 
same  objections  as  in  the  case  of  stock.     Actual  fraud,  however, 
will  of  course  always  invalidate  such  a  sale.*     Frequently  the  stat- 
utes provide  for  buying  out  dissenting  minority  stockholders  at  the 
appraised  value  of  their  stock.*     Such  a  statute   exists  in  New 
York.^     Sometimes  a  more  formal   condemnation   is   authorized.'^ 


1  Mason  v.  Pewabic  Min.  Co.,  183  U.  S. 
50  (1890).  The  result  of  this  Pewabic 
Mining  Company  litigation  was  that 
the  original  sale  of  the  property  for 
$50,000  was  set  aside,  and  the  property 
then  sold  for  $710,000.  See  Mason  v. 
Pewabic  Min.  Co..  66  Fed.  Rep.  391  (1894). 
Cf.  Treadwell  v.  Salisbury  Mfg.  Co.,  73 
Mass.  393  (18o6).  See  also  Buford  v. 
Keokuk,  etc.  Co.,  3  Mo.  App.  159  (1876); 
Black  V.  Delaware,  etc.  Canal  Co.,  33 
N.  J.  Eq.  130,  415  (1871);  S.  G,  24  N.  J. 
Eq.  455  (1873);  Lauraan  v.  Lebanon  Val- 
ley R.  R.,  30  Pa.  St.  42  (1858). 

2  A  reorganization  committee  repre- 
senting a  part  of  the  stockholders  may 
buy  in  the  property  at  a  public  sale  by 
the  directors,  the  business  being  finan- 
cially em  barrassed,  and  the  price  being  a 
fair  ona  Hayden  v.  Official,  etc.  Co.,  43 
Fed.  Rep.  875  (1890).  See  also  ch.  LII, 
infra. 

3  See  §  663,  supra,  and  §  893,  infra. 
Where  the  articles  of  association  of  an 
unincorporated  joint-stock  association 
authorize  dissolution  at  any  time  upon 


the  vote  of  a  majority  in  interest,  such 
dissolution  may  be  had.  although  it  is 
for  the  purpose  of  transferring  all  the 
assets  to  a  foreign  corporation  for  stock 
of  the  latter,  the  privilege,  however, 
being  given  to  each  stockholder  to  re- 
ceive payment  in  cash  on  tiie  basis  of  a 
certain  valuation  of  the  assets,  which 
valuation  is  fair  and  adequate.  Francis 
V.  Taylor,  31  N.  Y.  Misc,  Rep.  187  (1900). 

4  See  ii  884,  infra. 

5  Under  a  statute  requiring  the  lessee 
of  a   railroad   to  purchase    dissenting 
stock  of  the  lessor  within  thirty  days 
on  an  appraisal  of  its  value,  stock  which 
has  been  voted  in  favor  of  the  lease 
cannot  afterwards  be  the  basis  of  a 
claim  that  it  be  appraised  and  paid  for. 
In  the  appraisal  proceedings  all  ques- 
tions arising  may  be  adjudicated.     If 
the  dissenting  stock  is  not  purchased 
under  the  statute  the  lessee  runs  the 
risk  of  the  lease  being  held  void  at  the 
instance  of  a   dissenting  stockholder. 
Boston,  etc.  R,  R.  u  Graham,  60  N.  K 
Rep.  405  (Mass.  1901).     In  determining 


«  See  Laws  1901,  ch.  130. 


•Seeg896,in/^a. 


1563 


§  ^n.j 


ULTRA    VIRES    ACTS    AND    CONTRACTS. 


[cn.  XL. 


A  question  may  also  arise  as  to  whether  the  selling  corporation 
has  power  to  acquire  the  stock  and  bonds  of  another  corporation; 
but  it  seems  that  where  all  the  stockholders  of  the  company  ac- 
cepting the  stock  assent,  no  one  else  can  object.^     By  unanimous 


the  value  of  a  dissenting  stockholder's 
stock  vvliich  is  condemned,  in  connec- 
tion witii  a  lease  in  accordance  with 
the  statute,  it  is  immaterial  that  the 
stock  three  years  prior  thereto  was 
worth  more,  but  that  on  account  of  bad 
management  its  value  had  diminished; 
and  it  is  immaterial  that  three  years 
prior  thereto  a  lease  might  have  been 
made  at  a  higher  rental.  The  market 
value  of  the  stock  after  the  lease  may 
bo  shown,  even  thougii  the  condemna- 
tion was  by  reason  of  such  lease.  The 
regular  market  value  should  be  the 
basis  of  the  award.  Gregg  v.  Northern 
R.  R.,  G7  N.  H.  453  (1893).  A  provision 
in  a  general  act  authorizing  leases  that 
a  dissenting  stockholder  may  have  the 
value  of  iiis  stock  appraised  and  paid  is 
legal.  Dickinson  v.  Consolidated,  etc. 
Co.,  114  Fed.  Rep.  232  (1902).  Where,  in 
order  "  to  enable  the  company  to  keep 
its  stock  in  the  ownership  of  stockhold- 
ers of  its  own  choosing."  each  stock- 
holder enters  into  an  agreement  with 
the  corporation  that  in  case  he  wishes 
to  sell  his  stock  it  shall  first  be  ap- 
praised and  then  offered  to  the  corpora- 
tion before  it  is  offered  to  any  one  else, 
the  refusal  of  the  board  of  directors  to 
make  an  appraisal,  in  accordance  with 
the  agreement,  does  not  render  the  cor- 
poration liable  in  damages,  inasmuch 
as  it  is  clear  that  even  though  the  stock 
were  appraised,  the  corporation  would 
not  buy  it.  Whiton  v.  Batchelder,  etc. 
Corp.,  179  Mass.  169  (1901).  Under  the 
English  Companies  Act  all  the  property 
of  a  company  may  be  sold  to  another 
company,  but  provision  is  made  for  the 
protection  of  the  minority  by  paying 
them  the  value  of  their  shares.  Re  Lon- 
don, etc.  Bread  Co.,  63  L.  T.  Rep.  224 
(1890).  See  also  Baring-Gould  v.  Sharp- 
ington,  etc.  Syndicate,  [1899]  2  Ch, 
■80.     In  England   it  seems   that  under 


the  statutory  power  of  one  company  to 
sell  out  to  another,  the  sale  may  be  for 
cash,  and  tlie  mmority  are  bound,  even 
though  the  majority  own  the  purchas- 
ing company.  But  all  the  cash  must 
be  paid,  and  not  merely  the  part  that 
goes  to  the  minority.  Hoist  r.  Sydney, 
eta  Ry..  69  L.  T.  Rep.  132  (1893).  Where, 
upon  the  voluntary  dissolution  of  a  cor- 
poration, a  reorgani7,ation  scheme  is 
carried  out  by  which  the  property  is 
turned  over  to  a  new  company  for  its 
shares  and  a  reasonable  time  is  fixed 
within  which  the  old  stockholders  must 
exercise  tiieir  option  to  taUe  stock  or 
have  it  sold  by  the  liquidator,  a  stock- 
holder cannot  exercise  his  option  after 
that  time,  although  he  was  ignorant  of 
the  whole  matter,  nor  can  he  have  the 
scheme  set  aside.  Postlethwaite  v.  Port 
Phillip,  etc.  Co.,  L.  R  43  Ch.  D.  552 
(1889);  Weston  i'.  New  Guston  Co.,  62 
L.  T.  Rep.  275  (1889);  &  C,  60  L.  T.  Rep. 
805;  aff'd,  64  L.  T.  Rep.  815.  Where  an 
appraisal  of  the  stock  of  a  dissenting 
stockholder  is  made  under  a  statute 
authorizing  a  consolidation,  and  there 
is  no  market  value  for  the  stock,  the 
award  is  like  an  unliquidated  account 
and  bears  interest  only  after  the  ap 
praisers'  report.  Trask  v.  Peekskill 
Plow  Works,  6  Hun,  236  (1875).  Where, 
according  to  contract,  stock  sold  to  the 
corporation  is  appraised  by  the  cor- 
poration, and  the  appraised  price  is 
actually  paid  to  and  received  by  the 
stockholder,  he  cannot  maintain  a  bill 
to  obtain  a  larger  price,  but  must  either 
rescind  or  sue  at  law.  Tuttle  v.  Batch- 
elder,  etc.  Co.,  170  Mass.  315  (1898). 

1  Although  a  corporation, cannot  pur- 
chase or  deal  in  stocks  of  other  corpo- 
rations unless  expressly  authorized  by 
law  so  to  do,  yet  it  may  take  stock  in 
payment  for  a  debt.  And  where  all  the 
stockholders  of  a  manufacturing  cor- 
53  i 


CH.  XL,] 


ULTKA    VIRES    ACTS    AND    CONTRACTS. 


[§  671. 


consent  of  the  stockholders  it  is  legal  for  a  private  corporation  to- 
sell  all  its  property  to  another  company,  take  its  stock  in  payment, 


poration  consent  to  the  sale  of  all  its 
property  to  another  corporation  in  ex- 
change for  stock  in  the  latter,  even 
though  the  former  corporation  was  for- 
bidden by  statute  to  purchase  the  stock 
of  other  corporations,  the  corporation 
may  then  sell  the  stock,  and  the  vendee 
cannot  set  up  ultra  vires  on  tlie  part  of 
the  vendor.  Holmes,  etc.  Co.  v.  Holmes, 
etc.  Co.,  127  N.  Y.  253  (1891).  A  con- 
tract whereby  a  corporation  agrees  to 
sell  all  its  property  to  another  corpora- 
tion for  bonds  and  stock  of  the  latter 
company  cannot  be  enforced,  nor  be 
the  basis  of  damages  for  breach,  inas- 
much as  one  corporation  has  no  power 
to  buy  the  stock  of  another  corpora- 
tion. Easun  v.  Buckeye  Brewing  Co., 
51  Fed.  Rep.  156  (1892).  An  offer  of  a 
corporation  to  sell  out,  in  consideration 
of  stock  in  another  corporation,  the  lat- 
ter to  pay  all  existing  debts,  is  riot  en- 
forceable by  the  former  company,  where 
the  latter  company  accepted  the  offer 
on  condition  that  the  debts  should  not 
exceed  a  certain  aniount.  Not  even 
the  assent  of  the  president  of  the  former 
company  to  the  condition  is  sufficient. 
Bi-Spool,  etc.  Co.  v.  Acme  Mfg.  Co.,  153 
Mass.  404  (1891).  The  stockholders  of  a 
corporation  may,  together  with  the  di- 
rectors, cause  the  corporate  property  to 
be  sold  to  a  new  corporation  in  ex- 
change for  the  stock  of  the  latter.  A 
pledgee  of  stock  in  the  former  corpora- 
tion cannot  after  the  sale  undo  the  sale 
or  hold  the  latter  corporation  liable. 
His  remedy  is  against  the  pledgor  and 
the  first  corporation.  Leathers  v.  Jan- 
ney,  41  La.  Ann.  1120  (1889),  holding 
also  that  a  purchasing  corporation  is 
not  bound  to  see  that  the  selling  corpo- 
ration distributes  the  stock  of  the  for- 
mer legally  among  the  stockholders  of 
the  latter  corporation.  "Where  a  con- 
solidation is  effected  by  one  company 
buying  all  the  stock  of  another  com- 


pany, and,  just  before  the  transaction 
is  completed,  the  company  whose  stock 
is  thus  sold  issues  a  dividend  of  inter- 
bearing  securities  in  order  to  defraud 
the  purchasing  company,  the  latter 
may,  by  a  bill  in  equity,  have  such  se 
curities  canceled.  Bailey  v.  Citizens" 
Gaslight  Co.,  27  N.  J.  Eq.  196  (1876).  A 
corporation  organized  to  deal  in  the 
stock  of  a  stockyard  corporation  and 
hold  personal  and  real  estate  may  buy 
competing  stockyards;  and  may  buy 
the  stock  of  a  contemplated  competing 
company;  also  buy,  guarantee,  and  sell 
the  bonds  of  such  competing  company; 
also  pay  money  to  settle  suits  against 
the  first-named  stockyard  company, and 
to  bind  stockyard  men  not  to  erect  com- 
peting yards  for  a  specified  term  of 
years  within  a  certain  territory;  and 
may  sell  any  or  all  of  the  above  proj- 
erty  and  right  to  the  first-named  com 
pany.  EUerman  v.  Chicago,  etc.  Co., 
49  N.  J.  Eq.  217  (1891).  A  Michigai 
capsule  company  has  no  right  or  powei 
to  sell  all  its  property  to  a  New  Jersey 
capsule  company  —  a  combination  com- 
pany—  in  exchange  for  or  payment  of 
stock  of  such  New  Jersey  company. 
The  agreement  so  to  do  cannot  be  en- 
forced, even  though  every  stockholder 
assented  to  it.  Merz  Capsule  Co.  v.  U.  S. 
Capsule  Co.,  67  Fed.  Rep.  414  (1895). 
Even  though  it  be  illegal  for  an  irriga- 
tion company  to  subscribe  for  the  stock 
of  a  land  company,  yet  where  it  does 
so  subscribe  and  turns  in  property  in 
payment,  and  the  stock  is  taken  in  the 
name  of  its  secretary  individually  and 
not  as  secretary,  the  company  may 
compel  him  to  turn  over  the  stock,  even 
though  he  has  pledged  it  for  his  per- 
sonal debt,  the  pledgee,  however,  hav- 
ing taken  with  knowledge  of  all  tha 
facts.  Bear  River,  etc.  Ca  v.  Hanley, 
15  Utah,  506  (1897).  See  in  general  54- 
Atl.  Rep.  413. 


1565 


^671.] 


ULTRA    VIUES    ACTS    AND    CONTKACTS. 


[CH.  XL. 


and  divide  the  stock  among  the  stockholders,  all  creditors  being 
paid.' 


1  Where  an  iron  manufacturing  con- 
cern owns  an  iron  manufacturing  plant 
and  stocks  in  an  ore  company  and  a 
railway  company  and  a  steamboat  com- 
pany and  other  corporations,  and  also 
a  farm,  and  by  consent  of  all  the  part- 
ners the  firm  is  transformed  into  a  cor- 
poration which  takes  all  tlie  property, 
including  the  stocks  and  the  farm,  one 
of  the  participants  cannot  afterwards 
complain  that  it  was  illegal  for  the  cor- 
poration to  acquire  such  stocks  and  tlie 
farm.  Burden  r.  Burden,  159  N.  Y. 
Rep.  287  (1899).  In  tiie  case  of  Hoene  v. 
Pollak,  118  Ala.  617  (1898),  where  one 
corporation  sold  all  its  property  to  an- 
other corporation  for  stock  of  the  latter, 
the  stock  of  the  latter  was  issued  di- 
rectly to  the  stockholders  of  the  former. 
A  committee  appointed  by  the  stock- 
holders to  sell  the  property  for  stock  in 
a  new  corporation  and  dissolve  the  old 
corporation  and  distribute  the  assets 
may  be  liable  to  the  stockholders,  if, 
after  making  such  sale,  they  delay  in 
dissolving  the  old  corporation  and  dis- 
tributmg  the  assets  until  the  new  stock 
becomes  worthless.  Their  liability  is  a 
question  of  negligence  for  the  jury.  In 
re  Lincoln,  etc.  Co.,  190  Pa.  St.  124  (1899). 
See  also  g§  548,  671,  supra,  and  §  766, 
infra.  The  distribution  of  the  stock  of 
the  vendee  corporation  among  the 
stockholders  of  the  vendor  corporation 
amounts  to  a  distribution  of  the  capital 
stock  of  the  vendor  corporation  among 
its  stockholders.  But  this  is  not  neces- 
sarily illegal  See  §§  3,  641,  supra.  A 
statutory  liability  for  dividends  paid 
out  of  the  capital  stock  abi-ogates  all 
common-law  liability,  and  if  such  stat- 
ute does  not  prohibit  buch  dividends 
they  may  be  declared  and  paid  subject 
to  such  liability.  People  v.  Barker,  141 
N.  Y.  251  (1894).  The  company  may 
distribute  the  assets,  provided  all  cred- 
itors are  paid.  Rorke  v.  Thomas,  56 
N.  Y.  559  (1874).     See,  to  same  effect. 


cases  in  g  670,  supra.  A  corporate  cred- 
itor cannot  maintain  a  bill  to  enjoin  the 
declaration  of  a  dividend  out  of  the 
capital  stock.  Mills  v.  Northern  Ry., 
L.  R.  5  Ch.  App.  631  (1870).  Cf.  ch. 
XXXIl,  siipra,  "Where  a  company 
leases  its  property  to  anotlier  company 
at  a  nominal  rental,  and  the  stockhold- 
ers of  the  first  company  transfer  their 
stock  to  the  second  company  in  ex- 
change for  stock  of  the  latter,  no  divi- 
dend is  involved,  and  a  tax  on  dividends 
of  the  first  corporation  does  not  attach. 
Allegheny  v.  Pittsburgh,  etc.  R.  R-,  179 
Pa.  St.  414  (1897).  Practically,  there 
was  a  division  of  the  corporate  as.sets 
among  the  stockholders  in  the  case  of 
Boston,  etc.  Co.  v.  Bankers',  etc.  Co.,  36 
Fed.  Rep.  288;  aff'd  sub  nom.  United 
Lines  Tel.  Co.  v.  Boston,  etc.  Co.,  147 
U.  S.  431  (1893).  In  this  case  the  usual 
and  simple  process  of  one  company 
selling  all  its  property  to  the  other 
company,  and  taking  purchase-money 
mortgage  bonds  in  payment,  and  then 
distributing  the  bonds  among  its  stock- 
holders, was  not  adopted,  but  the  mort- 
gage was  given  by  the  vendor  company, 
the  object  being  not  to  have  the  mort- 
gage cover  existing  property  of  the 
vendee  company.  The  vendee  company 
at  the  same  time  agreed  to  construct 
new  lines  and  place  them  under  the 
mortgage.  The  whole  scheme  was 
awkward,  and  was  sustained  by  the 
courts  only  after  prolonged  litigation. 
In  a  suit  to  compel  stockholders  of  a 
foreign  corporation  to  discover  and  ac- 
count for  corporate  property  illegally 
divided  among  them,  the  property  must 
be  definitely  described.  Service  on  the 
corporation  by  publication  is  insuffi- 
cient. King  V.  Sullivan,  93  Ga,  621 
(1894).  If  the  stockholders  and  corpo- 
rate creditors  who  are  prejudiced 
thereby  do  not  object,  a  going  corpora- 
tion may  sell  all  its  property  to  another 
corpoi'ation,  payment  being  by  the  issue 


1566 


■CH.  XL.] 


ULTEA    VIRES    ACTS    AND    CONTKACTS. 


[§671. 


A  solvent  copartnership  may,  by  consent  of  the  whole  Arm,  merge 
itself  into  a  corporation,  proper  provision  being  made  for  the  pay- 
ment of  creditors.*     Where  a  person  who  holds  property  which 

of  stock  of  the  latter  corporation  to  the    fails  to  have  the  transfer  recorded  in 

the  books  of  the  Kansas  corporation  he 
IS  liable  on  such  Kansas  stock.  Pine  v. 
Western,  etc.  Bank,  65  Pac.  Rep.  690 
(Kan.  1901).  Even  though  a  Nebraska 
railroad  corporation  sells  all  its  prop- 
erty to  an  Illinois  railroad  corporation 
in  exchange  for  stock  of  the  latter, 
which  is  issued  to  the  stockholders  of 
the  former,  the  latter  does  not  thereby 
become  a  Nebraska  corporation,  pre- 
venting the  removal  of  cases  to  the 
federal  court.  Walters  v.  Chicago,  etc. 
R.  R.,  104  Fed.  Rep.  377  (1900  .  A  cor- 
porate creditor  cannot  attack  a  sale  of 
all  the  assets  of  the  corporation  for  a 
valuable  consideration  and  in  good 
faith,  even  though  such  sale  v^as  not 
formally  authorized  by  the  board  of 
directors  or  stockholders.  Magowan  v. 
Groneweg,  86  N.  W.  Rep.  626  (So.  Dak. 
1901). 

1  Partners  who  merge  their  partner- 
ship into  a  corporation  and  take  stock 
rn  payment,  thereby  waive  liens  which 
existed  in  the  partnership.  Francklyn 
V.  Sprague,  121  U.  S.  215  (1887).  A  solv- 
ent mercantile  firm  may  transfer  all 
their  assets  to  a  new  corporation  in 
payment  for  stock,  and  then  pledge  the 
stock  to  certain  of  their  creditors. 
Coaldale  Coal  Co.  v.  State  Bank,  142  Pa. 
St.  288  (1891).  Where  a  person  sells 
goods  to  a  corporation  and  agrees  to 
take  payment  in  stock,  he  must  take 
the  stock  at  par,  even  though  its  actual 
and  market  value  is  much  less  than 
par.  Tilkey  v.  Augusta,  etc.  R  R.,  83 
Ga.  757  (1889).  Where  two  members  of 
a  firm  give  notice  of  a  dissolution  of 
the  firm,  and  then  transfer  all  the  as- 
sets to  a  newly-formed  corporation,  the 
court  will  place  all  the  property  in  the 
hands  of  the  third  member  of  the  firm  for 
the  purpose  of  winding  it  up.  Macdon- 
ald  V.  Trojan,  etc.  Co.,  10  N.  Y.  Supp.  91 
(1890).     Where  by  agreement   a  part- 


stockholders  of  the  former  corporation, 
together  with  the  right  to  such  stock- 
holders to  subscribe  for  additional  stock 
in  the  purchasing  corporation.  Dis- 
senting stockholders  who  under  protest 
subscribe  for  the  new  stock,  and  then 
wait  eighteen  months  before  com- 
mencing legal  proceedings,  are  estopped 
from  objecting.  Post  v.  Beacon,  etc. 
Co.,  84  Fed.  Rep.  371  (1898).  Where  a 
railroad  is  sold,  the  proceeds  cannot  be 
distributed  among  the  stockholders 
without  paying  creditors.  Where  bonds 
are  recei  ved  in  pa5'ment,  and  distributed 
among  the  stockholders  and  income 
bondholders,  the  general  creditors  may 
reacli  such  bonds.  Chattanooga,  etc. 
R.  R.  y.  Evans,  60  Fed.  Rep.  809  (1895). 
The  sale  of  a  business  of  a  corporation 
which  does  not  specifically  transfer  the 
trade  name  and  good  will  does  not  en- 
able a  purchaser  of  the  business  from 
the  corporation  to  claim  such  trade 
name.  Cutter  v,  Gudebrod,  etc.  Co.,  44 
N.  Y.  App.  Div.  605  (1899).  Where  a 
company  is  in  difficulties  and  an  agree- 
ment is  made  by  which  creditors  are 
given  the  right  to  sell  all  the  assets  in 
case  the  business  does  not  succeed 
within  a  certain  time,  and  they  do  so, 
the  purchaser  has  no  right  to  organize 
a  corporation  having  the  same  name  as 
the  old  corporation,  unless  that  was  a 
part  of  the  original  agreement,  and  not 
even  a  majority  of  the  stockholders 
have  a  right  to  vote  to  allow  such  use 
of  the  name,  unless  there  is  a  new 
consideration  therefor.  Armington  v. 
Palmer,  21  R.  I.  109  (1898).  Even  though 
a  Colorado  corporation  is  organized  for 
the  issue  of  stock  in  exchange  for  stock 
in  a  Kansas  corporation,  and  a  stock- 
holder in  the  latter  assigns  his  Kansas 
certificate  to  another  person  and  causes 
the  Colorado  corporation  to  issue  its 
stock  to  such  other  person,  yet  if  he 


156: 


§  671.] 


TJLTKA    VIRES    ACTS    A>fD    CONTRACTS. 


[CII.  XL. 


belongs  to  another  person  sells  the  property  for.  stock  in  a  corpora- 
tion, the  latter  person  may  claim  the  stock.'  If  one  corporation 
sells  out  to  another  for  stock  of  the  latter,  a  stockholder  in  the  former 
may  sue  the  purchasing  corporation  for  his  part  of  such  stock,  it 
not  havincr  been  delivered.- 


nership  is  merged  into  a  corporation, 
and  then  one  partner  is  refused  his  part 
of  tlie  stock,  he  may  sue  for  an  account- 
ing and  payment  in  cash.  Crosby  Lum- 
ber Co.  V.  Smith,  51  Fed.  Rep.  6;i  (1892). 
Under  a  partnershipagreement  provid- 
ing for  incorporation,  part  of  the  part- 
ners may  incorporate,  transfer  the 
property  to  the  corporation,  and  com- 
pel the  other  partners  to  pay  in  to  the 
corporation  the  amounts  of  money  con- 
templated by  the  partnership  agree- 
ment before  the  stock  is  issued  to  them. 
Hennessy  v.  Griggs,  1  N.  D.  52  (1890).  A 
corporation  formed  to  purchase  the  as- 
sets of  a  firm  may  sue  on  claims  of  such 
firm  which  have  been  assigned  to  it, 
and  the  tirra  are  not  proper  parties  to 
the  suit.  Lottman,  etc.  Co.  v.  Houston, 
etc.  Co.,  38  S.  W.  Rep.  357  (Tex.  1896). 
Although  two  partners  desire  to  incor- 
porate, and  each  to  have  the  same  in- 
terest, and  a  third  party  to  have  a 
smaller  interest,  thereby  holding  the 
balance  of  power,  and  such  arrange- 
ment is  carried  out,  and  the  third  party 
is  really  a  dummy  of  one  of  the  jjart- 
ners,  and  thereby  gives  the  control  of 
the  corporation  to  that  partner,  yet  the 
other  partner  has  no  legal  cause  of  com- 
plaint, notwithstanding  the  general  un- 
derstanding as  to  the  division  of  control. 
Baumgarten  u  Nichols,  69  Hun,  216 
(1893).  A  partnership  consisting  of  re- 
sponsible persons  may  sell  its  business  for 
stock  to  a  corporation  organized  for  that 
purpose.  The  creditors  of  the  partnership 
cannot  claim  a  lien  on  the  property. 
Bristol,  etc.  Trust  Co.  v.  Jonesboro,  etc. 
Trust  Co.,  101  Tenn.  545  (1898).  Where 
a  person  sells  his  business  to  a  corpora- 
tion for  the  stock  of  the  latter,  with 
the  agreement  of  the  latter  to  indorse 
the  notes  of  the  vendor,  such  indorse- 
ments are  legal.     Nat.  Bank  of  Com 

1 


merce  r.  Allen,  90  Fed.  Rep.  545  (1898). 
Wher6  an  individual  transfers  ail  his 
property  to  a  corporation  in  exchange 
for  its  capital  stock  and  a  mortgage, 
neither  he  nor  the  corporation  can 
subsequently  attack  the  transaction. 
Burke,  etc.  Co.  v.  Wells,  etc.  Co.,  60 
Pac.  Rep.  87  (Idaho,  1900). 

iCIiapman   r.   Porter,    69  N.  Y.    276 
(1877);  Re  Gilbert.  104  N.  Y.  212  (1887). 

-Tlie  court  said:  "We  have  of  late 
refused  to  be  always  and  utterly  tram- 
meled by  the  logic  derived  from  cor- 
porate existence  where  it  only  serves 
to  distort  or  hide  the  truth."  Anthony 
V.  American  Glucose  Co.,  146  N.  Y.  407 
(1895).  Where  one  comjiany  is  sold  out 
to  another  company  on  the  basis  of  the 
latter  company  issuing  its  stock  share 
for  share  for  the  stock  of  the  former 
company,  a  stockholder  of  the  former 
company  may  sue  the  latter  company 
for  his  stock  without  joining  the  old 
company  or  any  of  the  old  stockhold- 
ers. Fletcher  v.  Newark,  etc.  Co.,  55  N. 
J.  Eq.  47  (1896).  Where  by  the  terms 
of  a  lease  of  all  the  corporate  propertj- 
the  rent  is  to  be  paid  directly  to  the 
stockholders  as  dividends,  and  a  prior 
mortgage  of  the  lessee  is  foreclosed, 
and  the  lease  is  not  assumed  by  the  re- 
ceiver, a  .stockholder  of  the  lessor  can- 
not object  to  a  subsequent  arrange-  , 
ment  between  the  lessor  and  the  re- 
organized company  of  the  lessee  by 
which  a  certain  sum  is  paid  to  the  les- 
sor to  be  used  for  other  purposes  than 
dividends.  Central,  etc.  Co.  v.  Farm- 
ers', etc.  Co.,  112  Fed.  Rep.  81  (1901). 
Where  various  properties  are  trans- 
ferred to  a  coal  company  for  stock  on 
the  further  understanding  that  all 
moneys  already  expended  on  such 
properties  should  be  repaid  in  bonds  of 
a  railway  to  be  guaranteed  by  the  coal 


OH. 


XL.] 


ULTRA   VIRES    ACTS    AND    CONTRACTS. 


[§  «''2. 


§  672.  Corporate  creditors'  rights  where  the  corporation  sells  all 
its  property  to  another  corporation  for  stoclc  of  the  latter  —  Bights 
and  remedies  of  creditors  of  an  individual  or  partnership,  all  of 
whose  assets  are  transferred  to  a  corporation  in  exchange  for  stock 
or  honds.— Where  a  corporation  sells  all  its  propert^^for  cash  there 
is  no  difficulty  in  regard  to  creditors,  the  sale  being  an  honest  one, 
inasmuch  as  the  cash  must  be  applied  to  the  corporate  debts  before 
any  distribution  is  made  among  the  stockholders.  But  where  the 
property  is  sold  for  stock  a  more  difficult  question  arises.  A  cred- 
itor of  the  corporation  then  has  several  remedies  open  to  him.  He 
may  subject  the  stock  to  the  payment  of  his  debt;  ^  and  if  the  stock- 


company,  but  such  distribution  of  bonds 
is  never  made  on  account  of  the  impos- 
sibility of  such  a  guaranty  being  legally 
made,  one  of  the  parties  who  turned  in 
his  property  may  hold  the  coal  com- 
pany liable  in  damages  for  the  amount 
of  money  expended  by  him  on  the  prop- 
erty before  turning    it  in    for    stock. 
Crown,  etc.  Co.  v.  Thomas,  177  III.  534 
(1898).     A  contract  between  two  com- 
panies, by  which  one  buys  out  the  other 
and  agrees  to  issue  certain  securities  to 
stockholders  of  the  vendor  does  not  give 
such    stockholders    a    direct    right  as 
against  the  purchasing  company.     Re 
Metropolitan,  etc.  Co.,  [1900]  3  Ch.  671. 
Although    a    new  company   with   the 
same  name  and  capital  stock  buys  out 
the  old.  yet  a  stockholder  in  the  old 
cannot  compel  a  transfer  of  his  stock 
on  the  books  of  the  new.     Huggins  v. 
Milwaukee  B.  Co.,  10  Wash.  579  (1895). 
Where  the  sale  of  one  company  to  an- 
other was  induced  by  fraud,  the  vendor 
may  rescind,  even  though  the  stock  of 
the  vendor  was  canceled  as  a  part  of 
the  sale.     Texas,  etc.  Assoc,  .v.  Dublin, 
etc.  Co.,  38  S.  W.  Rep.  404  (Tex.   1896). 
Where  the  vendor  of  a  majority  of  the 
stock  of  a  corporation  agrees  that  the 
company  owes  no  debts  except  certain 
specific  ones,  the  vendee  may  recover 
back  any   excess  of  debts  over  those 
specified.   Where  the  debts  of  one  class 
were  not  to  exceed  a  certain  sum,  but 
did  exceed  that  sum,  the  vendee  may 
recover  the  difference,  even  though  the 
debts  of  another  class  were  less  than  a 


sum  specified  in  the  contract  of  sale. 
Chicago,  etc.  Ry.  v.  Hoyt,  89  Wis.  314 
(1895).  Where  the  assets  of  a  corpora- 
tion are  turned  over  to  a  new  corpora- 
tion and  all  the  stockholders  exchange 
their  stock  for  new  stock,  they  cannot 
afterwards  claim  that  a  surplus  of  the 
old  corporation  should  have  been  di- 
vided. Boynton  v.  Roe,  114  Mich.  401 
(1897).  As  to  a  suit  to  collect  guaran- 
teed dividends,  see  §  775,  infra. 

1  Corporate  creditors  may  object  to 
the  company  selling  out  all  its  property 
to  another  corporation   and  receiving 
pay  in  the  stock  of  the  latter  corpora- 
tion.    Such  stock  may  be  subjected  by 
the  creditors  to  their  debts,  or  the  con- 
veyance may  be  set  aside  and  the  com- 
pany wound  up  as  insolvent.     Vance  v. 
McNab,    etc.   Co.,  92  Tenn.    47  (1893); 
Fort  Payne    Bank  v,  Alabama  Sanita- 
rium, 103  Ala.   358  (1894).     Where  the 
corporation  sells  all  its  assets,  and  the 
purchasing  corporation  gives  its  bonds 
to  the  stockholders  of  the  former,  such 
bonds  belong  to  the  corporate  credit- 
ors.    Peters  v.  Fort  Madison  Const.  Co., 
73  Iowa,  405  (1887).     Where  a  railroad 
is  sold,  the  proceeds  cannot  be  distrib- 
uted among  the  stockholders  without 
paying  creditors.     Where  bonds  are  re- 
ceived   in    payment    and    distributed 
among    the    stockholders  and  income 
bondholders,  the  general  creditors  may 
reach  such  bonds.     Chattanooga,  etc. 
R  R.  V.  Evans,  66  Fed.  Rep.  809  (1895). 
Where  the  stockholders  distribute  the 
assets  of  the  corporation  among  them- 


(99) 


1569 


§  G7±] 


ULTKA    VIKE8    ACTS    AND    CONTRACTS. 


[CU.   XL. 


holders  hate  distributed  the  stock  among  themselves  without  pay- 
ing the  corporate  debts,  he  may  compel  them  to  return  the  stock 
and  appl}'  it  to  his  debt; '  or  he  ma}'  levy  an  attachment  or  execu- 
tion upon  the  property  which  was  transferred;-  or,  after  obtaining 


selves,  leaving  enough,  as  they  suppose, 
to  pay  the  debts  of  the  company,  and  it 
turns  out  that  the  amount  left  is  not 
sufficient,  the  stockholders  must  pay 
back  enough  to  liquidate  such  debts. 
Grant  v.  Ross,  100  Ky.  44  (1S96).  A 
treasurer  cannot  interplead  between 
the  stockholders  and  a  corporate  cred- 
itor who  is  seeking  to  reach  bonds 
received  by  the  corporation  in  pay- 
ment for  its  property.  Stone  i:  Reed, 
1.53  Mass.  179  (1890).  Where  the  offi- 
cers of  a  bank  use  its  funds  to  buy 
property,  which  they  then  turn  in  to  a 
corporation  in  payment  for  stock,  the 
property  is  impressed  with  a  trust  and 
may  be  followed.  The  fact  .that  tliey 
were  officers  of  the  corporation  also  is 
sufficient  to  give  it  notice.  The  bank 
may  follow  the  stock  or  the  property, 
at  their  option.  Farmers',  etc.  Bank  v. 
Kimball  Milling  Co.,  1  S.  D.  388  (1890). 
Wliere  a  mortgagee  in  possession  of  the 
property  leases  it  with  other  property 
and  takes  stock  in  payment,  he  must 
account  to  the  mortgagor  for  the  divi- 
dends received  on  the  stock  represent- 
ing the  mortgaged  property.  The  stock 
is  impressed  with  a  trust  character. 
Entries  on  the  stock  ledger  and  corpo- 
rate books  are  competent  evidence  of 
the  issua  Chapman  v.  Porter,  69  N.  Y. 
276  (1877). 

1  Where  the  stockholders  distribute 
the  assets  among  themselves,  a  creditor 
may  follow  the  assets.  Panhandle  Nat. 
Bank  v.  Emery,  78  Tex.  498  (1890). 
Creditors  may  reach  stock  which  the 
corporation,  which  becomes  insolvent, 
has  distributed  without  a  dividend. 
McKusick  V.  Seymour,  etc.  Co.,  48  Minn. 
172  (1892).  Where  a  corporation  sells 
its  property  to  another  corporation  for 
stock  of  the  latter  to  be  delivered  to 
stockholders  of  the  former,  the  creditors 
of   the   former  may   hold  each  stock- 

15' 


holder  liable  for  the  amount  received 
by  him,  or  such  creditors  may  follow  the 
property  itself.  Vance  v.  McNabb.  etc. 
Co.,  48  S.  W.  Rep.  235  (Tenn.  1897). 
WMiere  a  construction  company  distrib- 
utes its  assets  among  its  stockholders 
without  paying  its  creditors,  the  stock- 
holders may  be  compelled  to  disgorge 
to  the  extent  of  the  debts  so  remaining 
unpaid.  Grant  v.  Southern  Contract 
Co.  etc..  47  S.  W.  Rei^.  1091  (Ky.  1898). 
2  A  creditor  of  an  insolvent  corpora- 
tion may  attach  its  property  which  ha.<' 
been  transferred  by  it  to  another  cor- 
poration in  payment  for  the  whole  cap- 
ital stock  of  the  latter  corporation.  Mc- 
Vicker  v.  American  Opera  Co.,  40  Fed. 
Rep.  861  (1889).  A  judgment  creditor 
of  an  insolvent  corporation  may  levy 
on  and  sell  under  execution  the  prop- 
erty of  the  corporation  which  has  been 
conveyed  to  a  new  company,  under  a  re- 
organization plan  to  which  all  of  the  old 
stockholders  and  most  of  the  creditors 
have  assented.  Montgomery  Web  Co.  v. 
Dienelt,  133  Pa.  St.  585  (1890).  A  creditor 
of  the  corporation  that  sells  out  all  its 
property  to  another  corporation  for 
stock  in  the  latter  may  levy  an  execu- 
tion on  the  property  on  the  ground  that 
it  is  conveyed  in  fraud  of  creditors. 
Couse  V.  Columbia,  etc.  Co.,  33  At).  Rep. 
297  (N.J.  1895).  A  stockholder,  to  whom 
an  insolvent  corporation  has  transferred 
all  its  property  in  exchange  for  his 
stock,  cannot  enjoin  a  judgment  cred- 
itor from  selling  out  such  assets  under 
execution  against  the  corporation. 
Moffat  u  Smith,  101  Fed.  Rep.  771  (1900). 
Where  a  corporation  that  is  in  debt 
transfers  all  its  assets  to  a  new  corpora- 
tion in  exchange  for  the  stock  of  the 
latter,  a  creditor  of  the  former  may  levy 
an  attachment  on  such  assets.  Buck- 
waiter  V.  Whipple,  41  S.  E.  Rep.  1010  (Ga. 
1902). 
70 


CH.  XL.] 


ULTRA   VIRES    ACTS    AND    CONTRACTS. 


[§  672. 


an  unsatisfied  judgment  against  the  corporation/  he  may  file  a  bill 
in  equity  to  set  aside  the  sale  as  being  in  fraud  of  creditors  ;2  or 


lA  corporate  creditor  seeking  to 
reach  the  assets  of  the  company  which 
have  been  distributed  among  the  stock- 
holders, upon  a  sale  of  all  the  property 
of  the  company,  cannot  file  a  bill  in 
equity  for  that  purpose  until  he  has 
first  obtained  judgment  against  the 
company.  Swan,  etc.  Co.  v.  Frank,  148 
U.  S.  603  (1893);  Central  R.  R.  v.  Pettus, 
113  U.  S.  116  (1885).  A  creditor  of  a 
stockholder  cannot  complain  that  all 
the  corporate  property  was  sold  to  the 
stockholders  for  their  stock.  Wagner 
V.  Marple,  10  Tex.  Civ.  App.  505  (1895). 

2 In  a  judgment    creditors  suit    to 
reach  assets  of  an  insolvent  corpora- 
tion which  have  been  turned  over  to 
the  stockholders  in  fraud  of  creditors; 
the  judgment  of  the  creditor  against 
tlie  corporation  cannot  be  impeached 
except  by  fraud  and  jurisdiction.     All 
of  the  stockholders  need  not  be  joined, 
but  if  any  stockholder  wishes  the  equi- 
ties adjusted  as  between  the  various 
stockholders,   he  can  file  a  cross-bill. 
Singer  v.  Hutchinson,  183  111.  606  (1900). 
A  creditor  may  file  a  bill  to  set  aside  a 
transfer  of  all  the  assets  of  a  corpora- 
tion without  consideration,  leaving  the 
company  insolvent,  and  to  compel  the 
officers    to   account    therefor.     South 
Bend,  etc.  Co.  v.  George  C.  Cribb  Co., 
81  N.  W.  Rep.  675  (Wi&   1900).     Where 
one  company  has  sold  all  of  its  assets 
to  another  company,  a  creditor  of  the 
former  may  tile  a  bill  in  equity  against 
the  latter  to  collect  from  the  assets  so 
transferred,  even  though  the  damages 
are  unliquidated,  the  bill  charging  that 
the  sale  was  not  in  good  faith  and  the 
transaction  being  practically  a  consoli- 
dation.    Vicksburg.  etc.  Co.  v.  Citizens' 
TeL  Co.,  79  Miss.  341  (1901).     A  deed  of 
all  the  corporate  property  authorized 
at  a  meeting  of  the  board  of  directors 
of  which  no  notice  was  given,  and  only 
four  out  of  seven  were  present,  and 
three  of  the  four  were  interested  in  the 


company  which  purchased  the  prop- 
erty, is  invalid  and  may  be  set  aside  by 
a  judgment  creditor  of  the  selling  cor- 
poration.   Summers  v.  Glenwood,  etc. 
Co.,  86  N.  W.  Rep.  749  (So.  Dak.  1901). 
A  judgment  creditor  who  causes  fraud 
ulent  preferences  by  an  insolvent  cor- 
poration to  be  set  aside  does  not  thereby 
himself  obtain  a  preference  over  other 
creditors  who  did  not  institute  proceed- 
ings.   Lodi,   etc.   Co.  v.  National,  etc. 
Co.,    41    N.   Y.   App.   Div.    535    (1899). 
Where  a  New  Jersey  corporation  is  sold 
out  to  a  New  York  corporation,  a  judg- 
ment creditor  of  the  former  may  file  a 
bill  in  New  York  to  reach  the  assets  of 
the  former  corporation,  and  may  join 
as    a  party   defendant  a   director    in 
the  fonmer   corporation   who  brought 
about    the    transfer    of    such    assets. 
Clokey  v.   International,   etc.   Co.,    28 
N.  Y.   Misc.   Rep.   326  (1899).    Where, 
in  a  foreclosure  suit  and  before  sale, 
the    corporation    and    the    bondhold- 
ers agree  to  rent  the  railroad  to  another 
company,  and  do  so  rent  it  at  a  rental 
which   meets  the  interest  but  leaves 
nothing  for  the  unsecured   creditors, 
the  latter  may  have  the  railroad  sub- 
jected to  the  payment  of  their  debts. 
Farmers',  etc.  Co.  v.  Missouri,  etc.  Ry., 
21  Fed.  Rep.  264  (1884).     Although  one 
company  owns  a  majority  of  the  stock 
of  another  company,  and  the  property 
of  the  latter  company  is  leased  to  the 
former  at  a  fixed  rental,  the  rent  to  be 
paid  to   bondholders  of  the  latter,  a 
judgment  creditor  of  the  latter  cannot 
have  the  lease  set  aside  unless  he  can 
show  that  the  incomeof  the  latter  com- 
pany is  more  than  sufficient  to  pay  the 
rental,  there  being  no  proof  that  the 
rental    was  unfair,   and    there    being 
proof  that  the  rental  is  more  than  the 
company  earned.     The  principle  that 
the  owner  of  a  majority  of  the  stock 
will  not  be  permitted  to  defraud  stock- 
holders   or  creditors   does  not  appl}'. 


1571 


§  672.] 


ULTRA    VIRES    ACTS    AND    CONTRACTS. 


[ce.  XL. 


under  some  circumstances  he  may  hold  liable  the  corporation  that 
purchased  the  property  from  the  corporation  that  is  indebted  to 


Sidell  V.  Missouri  Pac.  Ry..  78  Fed.  Rep. 
724(1897).     Where  a  brewery  company 
is  dissolved  in  order  that  its  assets  may 
be  sold  and  consolidated   with  other 
breweries,  a  person  who  had  a  bottling 
contract  with  it  may  follow  its  assets 
and  subject  them  to  his  claim.  Schleider 
V.    Dielman,    44    La.    Ann.   462   (1892). 
Where  a  creditor  of  a  corporation  seeks 
to  reach  property  which  has  been  fraud- 
ulently conveyed  away  by  the  com- 
pany, he  need  not  make  tiie  corpora- 
tion  a  party    defendant    to  the  suit 
which  he  brings  against  the  party  who 
received  the  property.     Blanc  v.  Pay- 
master Min.  Co..  95  Cal.  524  (1892).  The 
formation  of  a  new  corporation  and  a 
transfer  to  it  of  all  the  assets  of  the  old 
one  may  be  a  fraud  on  the  creditors  of 
the  old    corporation.     San   Francisco, 
etc.  R.  R.  V.  Bee,  48*  Cal.  398  (1874).     It 
is  legal  for  a  coal  corporation,  with  the 
assent  of  all  its  stockholders,  to  sell  all 
its  property  to  its  president,  and  for 
him  to  pay  therefor  in  cash  and  by  a 
mortgage  on  the  property  so  purchased, 
he  also  agreeing  to  pay  all  the  debts  of 
the  company.     Payment  was  made  di- 
rectly to  the  stockholders,  and  they 
transferred  their  stock  to  him  in  addi- 
tion to  the  transfer  of  the  property.    A 
subsequent    creditor  of  the  company 
who  knew  all  of  the  facts  cannot  com- 
plain.    Parke,  etc.  Co.  v.  Terre  Haute, 
etc.  Co.,  129  Ind.  73  (1891).     A  creditor 
whose  claim  for  $1,000  is  contested  can- 
not have  a  conveyance  of  all  the  cor- 
porate property  to  another  corporation 
set  aside.     Missouri,  etc.  Co.  v.  Rein- 
hard,    114    Mo.    218    (1893).     Contract 
creditors  cannot  cause  a  bona  fide  sale 
of  all  the  property  of  a  corporation  to 
be  set  aside  merely  because  the   cor- 
poration —  a    going    concern  —  is    in- 
solvent.    Chattanooga,    etc.    R.   R.    v. 
Evans,   66  Fed.    Rep.    809   (1895).     The 
Tennessee  statute  against  liens  prior  to 
labor  and  damage  claims  does  not  give 

1 


such  claims  a  lien  ahead  of  an  out-and- 
out  bona  fide    sale    of    the    property. 
Chattanooga,  etc.   R    R.   v.  Evans,    66 
Fed.   Rep.   809  (1895).     Where  all  the 
stock  of  a  corporation  is  sold  to  a  ven- 
dee, who  then  takes  possession  of  the 
corporate  assets  and  ignores  the  corpo- 
rate existence,  the  court  may  construe 
this  as  a  sale  of  the  corporate  assets. 
Cusick  r.  Bartlett,  91  Me.  153  (1898).    It 
has  been  held  by   the  lower  court  in 
New  York  that  a  creditor  of  a.solvent 
corporation  cannot  maintain  a  bill  in 
equity  to  reach  corporate  property  that 
has  been  transferred  to  another  cor- 
poration in  exchange  for  stock  of  the 
latter,  even  though  such  stock  has  been 
divided    among    the    vendor's    stock- 
holders, where  it  is  shown  that  there 
was  no  actual  fraud  and  that  the  cred- 
itor's claim  was  in  dispute  at  the  time 
of  the  conveyance.     Hurd  v.  New  York, 
etc.  Co.,  52  N.  Y.  App.  Div.  467  (1900). 
Where  a  corporation  is  under  contract 
to  pay  royalties,  and  subsequently  all 
its  assets  are  sold  to  another  corpora- 
tion for  stock  of  the  latter,  which  is 
distributed  among  the  stockholders  of 
the   former,  and  subsequent  royalties 
are  not  paid,  judgment  therefor  may 
be  obtained  against  the  old  corporation, 
and,  upon  execution  returned  unsatis- 
fied, a  bill  in  equity  may  then  be  filed 
to  reach  the  assets  so  transferred  to  the 
new    corporation.     Wilson  v.    Aeolian 
Co.,  64  N.  Y.  App.  Div.  337  (1901).  Where 
one  corporation  transfers  ail  its  prop- 
erty to  another  in  consideration  of  the 
issue  of  the  stock  of  the  latter  to  the 
stockholders  of  the  former,  a  superin- 
tendent and  patentee  having  a  con- 
tract with  the  former  corporation  by 
which    he    is  entitled   to  twenty-five 
per   cent,    of   all    profits   frcrm    manu- 
facturing,   use,    or    sale    under    said 
patents,    in    addition     to     his    salary, 
and  also  an  interest  in   all   machines 
sold,  may  file  a  bill  for  an  actual  ac- 
o72 


ClI.  XL.] 


ULTRA    VIKES    ACTS    AND    CONTRACTS. 


[§  672. 


him.^  But  any  unreasonable  delay  on  the  part  of  the  creditor  in 
applying  for  relief  will  be  fatal  to  his  application.^  Where  all  the 
property  of  a  telegraph  company  is  sold   and   the   proceeds  dis- 


counting as  to  the  value  of  his  in- 
terest so  transferred  to  the  new  cor- 
poration, and  may  join  all  the  stock- 
holders as  parties  defendant.     Schaake 
V.   Eagle,  eta  Co.,  135  Cal.  472  (1901). 
Even  though  a  corporation  is  put  into 
a  receivers  hands,  under  a  statute  rela- 
tive to  insolvent  corporations,  and  no- 
tice for  the  presentation  of  claims  is 
given,    and,   in   accordance    with    the 
statute,  all  claims  not  presented  within 
four  months  are  barred  and  the  prop- 
erty  is  then  sold,   yet  a   non-resident 
creditor  who  had  no  actual  notice  may 
attack  the  proceedings  on  the  ground 
tjiat  they  were  fraudulent  and  for  the 
purpose  of  reorganizing  the  company 
in  fraud  of  creditors.     Dobson  v.  Peck 
Bros.  &  Co.,  103  Fed.  Rep.  901  (1900).     A 
general  creditor  of  a  solvent  corpora- 
tion cannot  maintain  a  bill  in  equity 
against  a  person  to  whom  the  corpora- 
tion has  assigned  all  its  property.  Ames 
&  Harris  v.   Sabin,   107  Fed.   Rep.    582 
(1901).     An  insolvent  Ohio  corporation 
may  transfer  all  its  assets  to  a  New 
Jersey  corporation  which  assumes  all 
the    debts.     The    bondholders    of    the 
Ohio  corporation  cannot  object.     Such 
bondholders    become   creditors  of  the 
New  Jersey  corporation.     Blake  v.  Do- 
mestic, etc.  Co.,  38  Atl.  Rep.  241  (N.  J. 
1897).   Even  though  a  railroad  company 
has  guaranteed  the  bonds  of  another 
railroad  company,  and  then  sells  all  its 
property  to  a  third  railroad  company, 
yet   the  guaranteed   bondholders  can- 
not have  a  receiver  appointed  of  the 
price  received  on   such  sale,  nor  can 
they  prevent  a  distribution  of  the  pr;C3 
among  the  stockholders  of  the  selling 
company,    unless    it    is    shown    that 
thereby    the    guarantor    is    made    in- 
solvent.    Guilmartin  v.  Middle  G.  &  A. 
Ry.,  101  Ga.  .565  (1897). 

1  See  §  673,  infra. 

2  Seven  years'  delay  on  the  part  of  an 


alleged  creditor  of  the  old  company  is 
fatal  to  any  relief.      Townsend  v.  St. 
Louis,  Sandoval,   etc.  Co.,  159  U.  S.  21 
(1895).     A  creditor  of  a  corporation  who 
wishes  to  object  to  a  transfer  of   its 
assets  to  another  corporation  must  do 
so  promptly  after  he  learns  of  the  same, 
and  a  delay  of  three  or  four  years,  dur- 
ing which  others  become  creditors  of 
the  new  corporation  and  the  latter  be- 
come insolvent,  will  bar  his  claim  for 
an  equitable  lien  on  the  assets.      An- 
thony V.  Campbell,  112   Fed.  Rep.  212 
(1901 1.    "Where  one  of  the  partners  in  a 
6rm  organized  to  locate,  develop,  and 
operate  mines  does  not  turn  into  the 
firm  a  mine  located  by  him,  but  trans- 
fers the  same  to  a  corporation  for  stock, 
and  the  other  partners  delay  for  two 
years  after  knowledge  thereof  before 
filing  a  bill  claiming  an  interest  in  the 
stock,  and  in  the   meantime  the   cor- 
poration has  expended  money  and  the 
stock  may  have  passed  into  other  hands, 
the  court  will  refuse  relief,  inasmuch 
as  the  firm  evidently  intended  to  deny 
any  obligation  if  the  mine  turned  out 
to  be  worthless,  but  to  claim  an  interest 
if  it  turned  out  to  be  valuable.    Curtis 
V.  Lakin,  94  Fed.  Rep.  251  (1899).    Where 
the  corporate  creditor  delays  and  allows 
the  corporation  taking  over  the  prop- 
erty  to   incur   debts,  he   cannot   then 
complain.     Vaughn  v.  Comet,  etc.  Co., 
21  Colo.  54  (1895).     Corporate  creditors 
of  an*  insolvent  corporation    may  set 
aside  a  sale  of  all  its    property  to  an- 
other corporation  for  bonds  of  the  latter, 
the  bonds  being  then  distributed  among 
stockholders  of  the  former,  even  though 
such  creditors  knew  of  and  acquiesced 
in  the  sale  at  the  time.      Fort  Payne 
Bank  v.  Alabama  Sanitarium,  103  Ala. 
358   (1894),     Creditors  who  assent  to  a 
corporation  turning  over  all  its  assets 
to  a  partnership,  and  agree  to  accept 
the  partnership  as  their  debtor,  cannol 


1573 


§  672.]  ULTRA    VIKES    ACTS    AND    CONTRACTS.  [CH.  XL. 

tributecl  among  the  stockholders,  a  creditor  of  the  company  may, 
by  a  bill  in  equity,  compel  the  stockholders  to  pay  the  claim  against 
the  corporation,  the  proceeds  being  a  trust  fund.^  Even  though  a 
sale  of  all  the  corporate  property  to  an  individual  may  be  invalid 
as  to  corporate  creditors,  yet  a  purchaser  cannot  defend  against 
the  price  on  the  ground  of  such  invalidity .^ 

Where  the  officers  of  the  corporation  have  aided  in  transferring 
its  assets  to  another  corporation,  a  civil  action  for  damages  for  a 
conspiracy  to  defraud  may  lie.'  The  receiver  of  an  insolvent  cor- 
poration which  has  been  rendered  insolvent  by  reason  of  its  assets 
having  been  disposed  of  by  another  corporation  may  hold  its  direct- 
ors liable  for  the  loss,  and  his  suit  may  be  at  law  or  in  equity.* 
Where  the  purchasing  company  is  a  mere  "  dummy  "  for  the  selling 
company,  a  creditor  of  the  latter  may  sometimes  disregard  the  iden- 
tity of  the  purchasing  company.^  An  insolvent  corporation  cannot 
transfer  all  its  assets  to  one  of  its  directors  upon  his  guarantee  to 
pay  all  the  debts.  A  creditor  may  file  a  bill  to  set  aside  a  sale  by 
such  director  of  part  of  the  assets  to  one  of  the  creditors  in  dis- 
charge of  a  debt."  The  agreement  of  a  creditor  of  a  corporation 
to  take  stock  in  a  proposed  reorganized  company  may  be  revoked 
by  the  creditor  at  any  time  before  actual  performance.'^  The  cred- 
itor of  a  corporation  may  garnishee  a  person  owing  such  corpora- 
tion on  a  subscription  for  stock,  even  though  such  corporation  has 
sold  its  assets  to  another  corporation.^  Where  an  insolvent  corpo- 
ration sells  its  assets  for  bonds  arid  stock  in  another  corporation,  it 
may  sell  such  bonds  and  stock  to  one  of  its  directors  at  a  fair  price, 
no  actual  fraud  being  involved.^ 

afterwards  complain  of  the  transaction,  creditors  the  company  cannot  trade  off 

Tenney  v.  Ballarcl,  etc.  Co.,  17  Tex.  Civ.  all  its  assets  for  other  property,  where 

App.  144  (1897).  the  latter  property  is  not  of  a  character 

1  Baltimore,  etc.  Tel.  Co.  v.  Interstate,  to  be  used  to  pay  debts,  even  though 

etc.  Tel.  Co.,  54  Fed.  Rep.  50  (1893).  ultimately  it  will  probably  be  very  val- 

2Clappy.  Allen,  20  Ind.  App.  263(1898).  uable,  such  trade  being  with  the  gen- 

3 Russell  V.  Post,  138  U.  S.  425  (1891).  eral  manager  of  the  company.     Levins 

AVhere  a  corporation  turns  over  all  its  v.  Peeples,  etc.  Co.,  38  S.  W.  Rep.  733 

assets  to  its  president  to  pay  its  debts,  (Tenn.  1896).    Cf.  33  S.  Rep.  866. 

and  he  pays  all  but  one  debt  and  then        T Providence,  etc.  Co.  v.  Kent,  etc.  Co., 

distributes    the    balance    among     the  19  R.  I.  561  (1896). 

stockholders,  he  is  personally  liable  on        sprentice  v.  United  States,  etc.  Co., 

that  one  debt,  the  amount  turned  over  78  Fed.   Rep.   106  (1897).     In   Long  v. 

by  him  to  the  stockholders  being  suf-  Evening  News   Assoc,    113   Mich.  261 

ficient  to  pay  it.     Carter  v.  Forbes,  etc.  (1897),  a  judgment  creditor  of  the  cor- 

Co..  22  Tex.  Civ.  App.  549  (1900).  poration  that  had  sold  all  its  assets  to 

4  Mason  v.  Henry,  152  N.  Y.  529  (1897).  another  corporation  in  payment  of  a 

*See  §g  6,  663,  supra,  and  g  709,  infra,  debt  garnished  the  latter*  for  his  debt. 

«Berney    Nat.    Bank  v.    Guyon,    111        » Graham  v.  Carr,  41  S.  E.  Rep.  379 

Ala.  491  (1896).     As  against  corporate  (N.  C.  1902). 

1574 


CH.  XL.] 


ULTRA   TIRES    ACTS   AND    CONTRACTS. 


[§  672. 


The  rules  above  laid  down  are  applicable  in  most  respects  to  a 
sale  by  a  partnership  of  all  its  property  to  a  corporation  in  ex- 
change for  stock.  Such  sales  often  are  made  in  order  to  merge  a 
solvent  copartnership  into  a  corporation.  They  are  also  made 
sometimes  by  an  embarrassed  or  insolvent  firm.  In  such  a  case 
the  creditors  of  the  firm  may  object.  They  may  levy  an  attach- 
ment or  execution  on  the  property/  or  reach  the  stock,^  or  file  a 
bill  in  equity  to  set  the  sale  aside.* 


1  Booth  V.  Bunce,  33  N.  Y.  139  (1865); 
San  Francisco,  eta  R  R  v.  Bee,  48  Cal. 
398  (1874).  Creditors  of  an  insolvent 
individual  who  transfers  his  projierty 
to  a  corporation  for  stock  may  attach 
the  property  on  the  ground  that  the 
act  hindered  and  delayed  creditors. 
Dolan  r.  Wilkerson,  57  Kan.  758  (1897). 
Creditors  of  a  person  who  sells  his 
property  to  a  corporation  for  stock  of 
the  latter  cannot  attach  the  corpora- 
tion as  garnishee,  inasmuch  as  they 
may  levy  on  the  stock.  Plant  v.  Bil- 
lings-Drew Co.,  137  Mich.  11  (1901). 
Where  an  insolvent  partnership  .sells 
all  its  assets  to  a  corporation  for  stock 
of  the  latter,  a  judgment  creditor  of 
such  partnership  may  levy  on  such  as- 
sets, inasmuch  as  the  stock  so  received 
had  no  value,  the  corporation  itself  be- 
coming insolvent  within  two  months. 
Mulford  V.  Doremus,  45  Atl.  Rep.  688 
(N.  J.  1900).  A  creditor  of  an  insolvent 
individual  who  transfers  his  property 
to  a  corporation  in  exchange  for  stock 
and  then  distributes  the  stock  pro  rata 
among  his  creditors  may  levy  an  at- 
tachment upon  the  property  as  having 
been  transferred  with  the  result  of  de- 
laying creditors.  Curran  v.  Rothschild, 
14  Colo.  App.  497  (1900).  A  creditor  of 
an  insolvent  firm  which  has  turned  over 
all  its  assets  to  a  corporation  for  stock 
may  levy  upon  the  property  so  trans- 
ferred, especially  where  one  creditor 
was  given  a  part  of  the  stock  for  his 
debt.  Colorado,  etc.  Co.  v.  Acres,  etc. 
Co.,  70  Pac.  Rep.  954  (Colo.  1902). 

2  Where  a  firm  turns  all  its  property 
into  a  corporation  for  stock,  a  firm 
creditor  cannot  reach  the  stock  of  one 

15' 


member  of  the  firm  in  preference  to 
other  creditors  of  that  member.  Singer, 
eta  Co.  V.  Carpenter,  125  111.  117  (1888). 
If  the  partnership  is  insolvent,  then 
the  stock  issued  is  "watered,"  and  the 
subscribers  are  liable  as  though  no  pay- 
ment was  attempted.  Sayler  v.  Simp- 
son, 45  Ohio  St.  141  (1888). 

3  The  creditors  of  a  person  may,  by 
bill  in  equity,  set  aside  a  transfer  of  all 
his  property  to  a  corporation  in  ex- 
change for  shares  of  stock.  Strieby  v. 
Clinton,  etc.  Co.,  29  Atl.  Rep.  589  (N.  J. 
1894).  Judgment  creditors  of  an  indi- 
vidual may  file  a  bill  to  set  aside  a 
transfer  of  his  property  to  a  corpora- 
tion for  stock,  the  stock  having  been 
distributed  among  his  relatives.  Met- 
calf  V.  Arnold,  110  Ala.  180  (1896). 
Where  a  person  deeds  land  to  a  corpo- 
ration for  stock,  but  does  not  record  it 
until  the  date  when  he  makes  an  as- 
signment, and  there  was  no  delivery  of 
the  deed  except  to  himself  as  pi'esi- 
dent,  the  deed  may  be  set  aside.  Tay- 
lor V.  Seiter,  65  N.  E.  Rep.  433  (III.  1902). 
Where  an  insolvent  person  transfers 
all  his  property  to  a  corporation  for 
stock  and  bonds  and  practically  ignores 
the  corporate  existence,  except  to 
transfer  certain  of  its  property  to  his 
sons  for  services,  and  he  then  transfers 
property  to  his  wife,  his  creditors  may 
have  the  transfer  set  aside  as  fraudu- 
lent. Goodale  v.  Wheeler,  68  Pac.  Rep. 
753  (Greg.  1903).  A  judgment  creditor 
of  a  partnership  may  set  aside  a 
transfer  of  its  property  to  a  corporation 
in  exchange  for  stock  of  that  corpora- 
tion, Buell  V.  Rope,  6  N.  Y.  App.  Div. 
113  (1896).  In  Tradesmen's  Nat.  Bank  v. 
75 


§  672.] 


ULTKA    VIRES    ACTS    AND    CONTRACTS. 


[CU.  XL. 


Even  though  a  partnership  becomes  incorporated,  yet  a  party 
who  has  dealt  with  the  partnership,  and  supposes  that  he  is  still 


Young.  15  N.  Y.  App.  Div.  109  (1897). 
the  court  refused  to  set  aside  a 
transfer  of  all  the  assets  of  an  in- 
solvent partnership  to  a  corporation 
for  stock,  inasmuch  as  the  cred- 
itors of  the  partnersliip  would  se- 
cure more  by  having  tlie  transaction 
stand  than  set  aside.  Where  one  mem- 
ber of  a  firm  buys  out  the  other  mem- 
ber and  gives  his  note,  and  then  forms 
a  corporation  and  turns  in  the  property 
for  stock,  and  the  corporation  becomes 
insolvent,  the  property  cannot  be  turned 
over  to  the  retiring  partner  in  payment 
of  such  note.  Hall  v.  Goodnight,  138 
Mo.  576  (1896).  Where  an  insolvent  per- 
son transfers  his  property  to  a  corpora- 
tion for  all  the  stock  of  the  coriwration, 
and  the  corporation  assumes  a  certain 
debt  of  such  person,  and  subsequently 
conveys  its  property  to  such  creditor, 
the  whole  plan  being  in  order  to  make 
payment  that  way.  other  creditors  of 
tlie  corporation  may  object  Folsom  v. 
Detrick,  etc.  Co.,  85  Md.  52  (1897).  Where 
an  insolvent  individual  transfers  all  his 
property  to  a  corporation  for  stock,  and 
his  principal  creditor  acquiesces  and 
loans  money  to  the  corporation,  and 
then  takes  the  notes  of  the  corporation 
for  the  old  debt  which  such  creditor 
had  against  the  insolvent  individual, 
the  transaction  is  illegal  as  against 
other  creditors  of  the  corporation.  Craig 
V.  California,  etc.  Co.,  30  Oreg.  43  (1896). 
Where  a  corporation  is  formed  to  make 
advances  to  an  insolvent  copartnership, 
taking  a  lien  on  the  property  of  the 
latter,  and  the  latter  continues  the 
business  in  its  own  name  and  turns 
over  the  proceeds  of  the  sales  to  the 
former,  the  scheme  is  illegal  as  giving 
the  firm  a  false  credit  and  as  being  in- 
consistent with  the  nature  of  a  chattel 
mortgage.  Mathews  v.  Hardt,  37  N.  Y. 
Misc.  Rep.  653  (1902).  A  deed  of  land  to 
a  corporation  for  stock  will  not  be  set 
aside  at  the   instance  of  creditors  of 

15 


the  grantor  where  the  corporation  has 
other  property  and  took  the  property  in 
question  in  good  faith,  even  though  the 
grantor  immediately  transferred  the 
stock  to  his  relatives.  Shu'maker  v. 
Davidson,  87  N.  W.  Rep.  441  (Iowa, 
1901).  In  the  case  of  Collins  v.  Stofers 
Ex'rs,  52  S.  W.  Rep.  940  (Ky.  1899),  the 
court  held  that  where  the  purchaser  at 
foreclosure  sale  of  a  gas  plant  sold  the 
property  to  an  individual  on  credit,  and 
the  latter,  instead  of  operating  it  him- 
self, operates  it  in  the  name  of  the  in- 
solvent corporation,  creditors  who  be- 
come such  thereafter  have  no  lien  prior 
to  tiie  purchase-money  lien  of  the  ven- 
dor of  the  property,  no  deed  by  the  lat- 
ter having  been  made.  Where  a  hus- 
band and  wife  accumulate  property  by 
their  joint  efforts  and  transfer  it  to  a 
corporation  for  stock,  a  creditor  of  the 
husband  may  subject  one-half  of  the 
stock  to  the  payment  of  his  debt.  Croar- 
kin  V.  Hutchinson,  187  111.  033  (1900). 
Where  a  partnership  buys  goods  in  the 
name  of  a  person  as  agent  and  after- 
wards incorporates,  and  the  corporation 
makes  purchases  in  the  same  name  as 
agent,  the  members  of  the  former  firm 
are  liable  for  the  goods  so  bought  for 
the  corporation  if  the  vendor  had  no 
notice  of  the  incorporation.  Bynum  v. 
Clark,  125  N.  C.  352  (1899).  A  transfer 
of  a  business  by  an  insolvent  person  to 
a  corporation  for  stock  is  void  under 
the  statute  of  Elizabeth  as  defeating 
and  delaying  creditors.  Re  Carey,  Sol. 
Jour.,  June  8,  1895,  p.  541.  A  receiver 
of  the  corporation  was  appointed  in 
Bonner  v.  Villaume,  etc.  Co..  N.  Y.  L.  J., 
Feb.  14, 1895  (Com.  PI.).  A  conveyance 
of  real  estate  to  a  corporation  for  all  its 
shares  of  stock  is  fraudulent  as  against 
a  mechanic's  lien.  Gross  w  Daly,  5  Daly, 
540  (1875).  Creditors  of  an  insolvent  indi- 
vidual who  has  transferred  his  property 
to  a  corporation  may  file  a  bill  to  set 
aside  the  sale  and  to  have  the  property 
76 


€H.  XL.] 


ULTKA   VIEES    ACTS    AND    CONTRACTS. 


[§  672. 


dealing  with  it,  may  hold  the  partners  liable  for  goods  furnished 
after  the  incorporation.^  If  an  insolvent  person  sells  his  prop- 
erty to  a  corporation  for  practically  all  of  the  capital  stock  of  the 
latter,  and  his  creditors  attach  not  only  the  stock  but  also  the 
property,  the  corporation  may  compromise  with  the  creditors  and 
buy  such  stock  and  the  creditors'  interest  in  the  property.'^  Where 
preferences  are  not  forbidden,  an  insolvent  person  may  transfer  his 
property  to  a  corporation  in  exchange  for  stock  of  the  latter  and 
pledge  such  stock  with  a  portion  of  its  creditors.  The  other  cred- 
itors cannot  set  aside  the  transfer  as  being  in  fraud  of  creditors 
where  the  corporation  owned  other  property  also  and  was  organ- 
ized in  good  faith.  The  creditors,  however,  may  reach  any  such 
stock  which  the  debtor  has  fraudulently  disposed  of.' 


sold.     Cass  t\  Sutherland,  98  Wis.  551 
(1898).     A  creditor  of  an  insolvent  indi- 
vidual may  cause  to  be  set  aside  a  trans- 
fer of  all  his  property  to  a  corporation 
formed  for  that  purpose  in  exchange 
for  stock.    Reille  v.  Reid,  28  Ont.  Rep. 
497  (1897).     In  Ex  parte  Kenmore,  etc. 
Co.,  50  S.  C.  140  (1897),  the  court  allowed 
the  corporate  creditors  to  participate 
with   the   creditors    of    the    insolvent 
debtor  in   the    assets  that   had    been 
turned  over  to  the  corporation  for  stock. 
A  creditor  of  an  insolvent  person  may 
treat  as  void  a  conveyance  of  all  his 
property  to  a  corporation  in  exchange 
for  its  shares  of  stock.     He  may  file  a 
bill  to  set  aside  the  conveyance.     Ter- 
hune  V.  Skinner,  45  N.  J.  Eq.  344  (1889). 
In  an  action  by  a  judgment  creditor  of 
a  partnership  to  set  aside  aconvej'ance 
of  all  its  property  to  a  corporation  in 
consideration  of  its  stock,  the  corpora- 
tion, its  mortgagee,  the  copartners,  and 
creditors  assenting  to  the  transfer  are 
all  necessary  parties.     National  Broad- 
way Bank  v.  Yuengling,  58  Hun,  474 
(1890).     A  judgment  creditor  of  a  fail- 
ing firm  may  set  aside  an  assignment 
of    their    property    to    a    corporation 
formed  to  take  over  the  property,  even 
though  the  shares  of  stock  have  been 
sold.     Gardner  v.  Keogh  Mfg.  Co.,  68 
Hun,  519   (1892).     Creditors  of  a  firm 
that  is  transformed  into  a  corporation 
may  pursue  the  firm's  assets  so  trans- 


ferred. Williams  v.  Colby,  6  N.  Y.  Supp. 
459  (1889).  Where  partnership  assets 
are  transferred  to  a  corporation  in  pay- 
ment for  its  stock,  and  the  corporation 
pays  part  of  the  debts  of  the  partner- 
ship and  becomes  insolvent,  a  member 
of  the  partnership  who  individually 
gave  security  for  some  of  the  partner- 
siiip  debts  cannot  claim  a  lien  on  the 
corporate  assets  in  priority  to  corporate 
creditors.  Be  Warner,  82  Mich.  624 
(1890). 

iReid  V.  Kreling's  Sons'  Co.,  125  CaL 
117  (1899).  Where  a  firm  sells  its  busi- 
ness to  a  corporation,  but  the  employ- 
ees are  not  given  actual  notice  thereof, 
and  the  business  continues,  the  firm 
may  be  liable  for  an  injury  incurred  in 
the  course  of  the  business.  Goodwin 
V.  Smith,  66  S.  W.  Rep.  179  (Ky.  1902). 
See  also  §  243,  supra.  Cf.  54  Atl.  Rep.  356. 

2  Sutton  V.  Dudley,  193  Pa.  St.  194 
(1899).  Where  an  individual  who  owes 
a  debt  transfers  property  to  a  corpora- 
tion, and  later  the  corporation,  with 
the  consent  of  all  the  stockholders  and 
creditors,  gives  a  bill  of  sale  of  certain 
property  to  pay  such  debt,  the  corpora- 
tion itself  cannot  subsequently  com- 
plam.  Quee  Drug  Ca  v.  Plaut,  55  N.  Y. 
App.  Div.  87  (1900). 

3  Fischer  v.  Campbell,  101  Fed.  Rep. 
156  (1900).  An  insolvent  individual 
may  transfer  his  property  to  a  corpora- 
tion for  stock  and  pledge  the  stock  to 


1577 


§  673.] 


ULTKA    VIKES    ACTS    AND    CONTRACTS. 


[CH. 


XL. 


§  673.  A  corporation  taldng  over  all  tlie  proper tij  of  another  cor- 
poration may  he  liable  for  the  debts  of  the  latter. —  The  general  rule 
undoubtedly  is  that  a  corporation  which  purchases  all  the  property 
of  another  corporation  is  not  liable  for  the  debts  of  the  latter.^ 


one  of  his  creditors.  Haring  v.  Hamil- 
ton, 107  Wis.  113  (1900).  An  insolvent 
partnership  may  transfer  its  property 
to  a  corporation  in  exchange  for  stock 
and  then  give  the  stock  to  certain  of 
its  creditors.  Such  a  transaction  is 
merely  a  method  of  giving  a  preference 
allowable  at  common  law.  Troy  v. 
Morse,  33  Wash.  280  (1900).  Where 
preferences  by  an  insolvent  debtor  are 
allowed,  such  insolvent  debtor  may 
turn  over  his  property  to  a  corporation 
in  exchange  for  stock  of  the  latter  and 
may  transfer  such  stock  to  one  of  his 
creditors,  it  being  proved  that  this  was 
a  good  business  move  and  that  no  prop- 
erty was  covered  up  thereby.  Scripps 
V.  Crawford,  123  Mich.  173  (1900). 
Where  an  insolvent  person  transfers 
all  his  property  to  a  corporation  in  ex- 
change for  its  stock  and  then  pledges 
the  stock  to  a  few  of  his  creditors,  the 
transfer  is  a  preference  within  the 
meaning  of  the  bankruptcy  act,  and 
may  be  set  aside,  and  is  also  illegal  at 
common  law  where  the  transfer  was 
intended  to  place  the  stock  beyond  tlie 
reach  of  his  creditors.  Allen  v.  French, 
180  Mass.  487  (1901).  A  transfer  by  an 
insolvent  person  of  all  his  property  to 
a  corporation  for  stock  is  not  fraudu- 
lent as  a  matter  of  law,  and  where  it 
was  done  with  the  knowledge  of  all  his 
creditors,  and  the  stock  was  then  with 
their  knowledge  transferred  to  a  per- 
son who  guaranteed  payment  of  the 
debts  to  the  extent  of  thirty-five  per 
cent.,  a  single  creditor  who  stands  out 
for  fifty  per  cent,  will  not  be  allowed 
to  set  aside  the  transfer.  Kingman  & 
Co.  V.  Mowry,  183  111.  256  (1899).  But 
where  such  assignment  was  not  in 
good  faith  a  judgment  creditor  may 
cause  it  to  be  set  aside.  Hinkley  v. 
Reed,  183  111.  440  (1899).  In  the  case  of 
First  National  Bank,  etc  v.  F.  G.  Tre- 


bein  Co..  59  OJiio  St.  316  (1898),  where 
an  insolvent  person  formed  a  corpora- 
tion and  transferred  all  his  property  to 
the  corporation  in  exchange  for  the 
stock  thereof,  and  then  transferred  the 
stock  to  certain  of  his  creditors  as  col- 
lateral security,  the  court  held  that  as 
a  court  of  equity  it  would  set  aside  the 
transfer  as  being  fraudulent  and  also 
on  the  ground  that  the  fiction  of  cor- 
porate existence  will  be  disregarded 
where  fraud  is  involved.  See  §  663, 
supra. 

>  Gray  v.  National  Steamship  Co..  115 
U.  S.  116  (1885).  Even  though  a  corpo- 
ration transfers  all  its  property  to  an- 
other corporation  on  a  contract  made 
prior  to  incorporation  of  the  latter,  yet 
the  latter  is  not  liable  unless  it  ac- 
cepted the  property  with  knowledge  of 
the  contract  and  upon  an  express  or 
implied  undertaking  to  carry  it  out. 
Holyoke,  etc.  Co.  v.  United  States,  etc. 
Co.,  65  N.  E.  Rep.  54  (Mass.  1902).  A 
railroad  corporation  which  purchases 
the  property  of  another  railroad  corpo- 
ration is  not  liable,  upon  the  dissolution 
of  the  latter,  for  a  tort  committed  by 
it.  Chesjipeake,  etc.  R.  R.  v.  Griest,  85 
Ky.  619  (1887).  Cf.  Batterson  v,  Chi- 
cago, etc.  Ry.,  53  Mich.  125  (1884).  See 
also  §  890,  infra.  And,  in  general,  that 
the  new  corporation  is  not  liable  for 
the  debts  of  the  old,  see  Ewing  v.  Com- 
posite B.  S.  Co.,  169  Mass.  73  (1897);  Port 
Gibson  v.  Moore,  21  Miss.  157  (1849); 
Shaw  V.  Norfolk  County  R.  R..  83  Mass. 
407  (1860);  Pennsylvania  Transp.  Cc's 
Appeal.  101  Pa.  St.  576  (1883);  Smith  v. 
Chicago,  etc.  Ry.,  18  Wis.  17  (1864); 
Neff  V.  Wolf  River  Boom  Co.,  50  Wis. 
585  (1880);  Houston,  etc.  R.  R,  v.  Shir- 
ley, 54  Tex.  125  (1880);  Commercial 
Bank  v.  Lockwood,  2  Harr.  (Del.)  8 
(1835);  Menasha  v.  Milwaukee,  etc.  R. 
R.,  53  Wis.  414  (1881);  Lake  Erie,  etc. 


1578 


CH.  XL.] 


ULTRA    VIKES    ACTS    AND    CONTRACTS. 


[§  673. 


Nevertheless  there  are  circumstances  under  which  the  purchasing 
corporation  is  liable  for  the  debts  of  the  old  company.  Thus,  where 
the  purchasing  corporation  assumes  all  liabilities,  a  creditor  of  the 


Ry.  V.  Griffin,  92  Ind.  487  (1883);  Gil- 
man  V.  Sheboygan,  etc.  R.  R.,  37  Wis. 
317  (1875);  Sappington  v.  Little  Rock, 
etc.  R.  R.,  37  Ark.  23  (1881);  Cook  v. 
Detroit,  etc.  Ry.,  43  Mich.  349  (1880). 
Where  property  is  to  be  turned  in  to  a 
corporation  for  stock,  but  work  is  to  be 
done  by  the  owners  on  the  property 
before  it  is  so  turned  in,  the  corpora- 
tion is  not  liable  to  third  persons  for 
such  work,  the  deeds  never  having 
been  made  to  it.  Rathbun  v.  Snow, 
123  N.  Y.  343  (1890).  See  also,  on  this 
subject,  ch.  LII;  infra,  as  to  the  liabil- 
ity of  a  purchaser  of  a  railroad  at  a 
foreclosure  sale.  Where  two  banks 
are  consolidated  into  a  third  bank,  the 
stock  of  the  new  bank  being  issued  in 
exchange  for  stock  of  the  old,  the  new 
bank  is  not  liable  on  the  debts  of  either 
of  the  old  banks.  Donnally  v.  Hearn- 
don,  41  W.  Va.  519  (1895).  A  new  bank 
which  takes  over  a  part  of  the  assets  of 
another  bank  is  not  liable  for  the  debts 
of  the  latter,  even  though  the  individ- 
uals interested  in  both  banks  are  prac- 
tically the  same.  Campbell  v.  Farmers', 
etc.  Bank,  49  Neb.  143  (1896).  A  pur- 
chasing corporation  is  not  liable  unless 
it  has  expressly  assumed  such  liability. 
Fernschild  v.  Yuengling  Brewing  Co., 
15  N.  Y.  App.  Div.  29  (1897);  aff'd,  154 
N.  Y.  667. 

A  corporation  which  issues  stock  in 
payment  for  the  assets  of  a  partnership 
is  not  liable  for  taxes  assessed  against 
the  partnership,  unless  it  has  assumed 
the  same.  Lamkin  v.  Baldwin,  etc.  Co., 
72  Conn.  57  ^899),  A  company  that 
buys  all  the  assets  of  another  company 
is  not  liable  for  the  debts  of  the  latter 
unless  there  is  an  express  contract  to 
that  effect,  it  being  shown  that  the  lat- 
ter is  able  to  pay  its  own  debts.  Ad- 
vance, etc.  V.  Penn.  etc.  Co.,  195  Pa. 
St.  602  (1900).  A  street  railway  com- 
pany which  purchases  the  street  rail- 

15 


ways  and  property  of  another  company 
is  not  bound  to  honor  passes  issued  by 
the  latter,  even  though  sucli  passes 
were  issued  for  rights  of  way.  Wal- 
lace V.  Ann  Arbor,  etc.  Ry.,  121  Mich. 
588  (1899).  A  telephone  company  that 
purchases  all  the  property  and  assets  of 
another  telephone  company  is  not  lia- 
ble for  damages  for  personal  injuries 
due  to  the  negligence  of  the  latter. 
Chase  v.  Michigan,  etc.  Co.,  80  N.  W. 
Rep.  717  (Mich.  1899).  A  railroad  com- 
pany is  not  liable  for  the  debts  of  a  de- 
funct company  that  started  work  and 
abandoned  the  work,  even  though  an 
irregular  transfer  of  its  assets  was 
made  by  the  latter  to  the  former.  Gulf, 
etc  Ry.  V.  Winder,  63  S.  W.  Rep.  1043 
(Tex.  1901).  Even  though  a  bank  as 
mortgagee  of  a  glass  factory  takes  pos- 
session and  undertakes  to  continue  the 
business  in  the  name  of  the  glass  com- 
pany, yet  the  bank  cannot  be  held  lia- 
ble on  a  contract  of  the  latter,  inas- 
much as  the  bank  had  no  authority  to 
carry  on  such  business.  Louis  Bletz  & 
Co.  V.  Bank  of  Kentucky,  55  S.  W.  Rep. 
697  (Ky.  1900).  Even  though  a  New 
York  corporation  organizes  a  West  Vir- 
ginia corporation  and  transfers  to  the 
latter  all  its  property,  and  the  latter  is 
managed  by  the  same  parties,  yet  the 
latter  is  not  liable  on  a  contract  of  the 
old  corporation.  Goldmark  v.  Magno- 
lia, etc.  Co.,  44  N.  Y.  App.  Div.  35  (1899; 
Even  though  a  person  buys  all  the 
stock,  bonds,  and  property  of  a  corpora- 
tion, and  a  suit  is  pending  against  the 
corporation  for  negligence,  yet  he  is 
not  liable  for  a  judgment  thereon.  Til- 
ley  V.  Coykendall,  69  N.  Y.  App.  Div.  92 
(1902).  Where  a  lessee  corporation 
transfers  all  its  property  to  a  new  cor- 
poration in  exchange  for  the  stock  of 
the  latter,  the  latter  is  liable  on  the 
lease.  Higgins  v.  California,  etc.  Co., 
122  Cal.  373  (1898).  Where  a  corpora- 
79 


§  673.] 


ULTRA    VIRES    ACTS    AND    CONTRACTS. 


[CH. 


XL. 


vendor  corporation  nicay  in  some  jurisdictions  sue  the  vendee  cor- 
poration on  his  claim;'  but  in  jurisdictions  where  a  contract  be- 
tween two  persons  for  the  benefit  of  a  third  cannot  be  enforced  by 


tion  sells  all  its  property  to  another 
corporation  for  stock  of  the  latter,  to 
be  given  to  stockholders  of  the  former, 
an  infant  stockholder  in  the  old  cor 
poration  may  hold  the  latter  liable  for 
the  value  of  the  stock,  after  he  becon?es 
of  age,  even  though  he  consented  to 
the  transaction  and  took  new  stock, 
which  he  aftervrards  returned.  Wliite 
V.  Nevr  Bedford,  etc.  Corp.,  178  Mass.  20 
(1901).  Where  the  mortgaged  property 
is  burned  and  the  insurance  money  is 
paid  over  to  the  trustee,  and  the  trus- 
tee, vs^ith  the  consent  of  all  the  bond- 
holders and  in  pursuance  of  an  order  of 
the  court,  pays  over  the  money  to  the 
reorganized  company  on  representa- 
tions that  the  money  will  be  used  to 
rebuild  the  buildings,  and  the  reorgan- 
ized company  uses  only  part  of  the 
money  for  that  purpose,  a  bill  in  equity 
to  compel  the  new  company  to  account 
for  the  remaining  part  and  to  apply  it 
to  the  rebuilding  of  the  buildings  will 
not  lie.  Dallett  v.  Staten  Island,  etc. 
Co.,  61  N.  J.  Eq.  39  (1901). 

1  Tecumseh  Nat.  Bank  v.  Best,  50  Neb. 
518  (1897).  Where  one  company  buys 
out  another  and  assumes  the  debts  of 
the  latter,  a  creditor  of  the  latter  com- 
pany may  assign  his  claim  as  collateral 
security;  but  the  pledgee  is  not  bound 
to  institute  suit  to  collect  such  claim, 
and  is  not  liable  for  failure  so  to  do, 
even  though  the  claim  is  finally  lost. 
Sampson  v.  Fox,  109  Ala.  662  (1896).  A 
purchasing  company  may  be  held  lia- 
ble on  the  debts  of  the  vendor  company 
where  the  former  expressly  agrees  ia 
the  contract  of  purchase  to  pay  said 
debts.  Noll  v.  Chattanooga  Co..  38  S. 
W.  Rep.  287  (Tenn.  1898).  Where  a  de 
facto  corporation  incurs  debts,  and  sub- 
sequently a  new  corporation  legally  or- 
ganized takes  over  the  business  and  as- 
sumes the  debts,  the  creditors  of  the  de 
facto  corporation  may  hold  the  latter 


corporation  liable.  Calumet  Paper  Co. 
V.  Stotts  Inv.  Co.,  96  Iowa,  147  (1895). 
Where  a  corporation  sells  all  its  prop- 
erty to  another  corporation  in  payment 
for  stock  of  the  latter,  and  the  new  cor- 
poration assumes  all  the  liabilities  of 
the  old  corporation,  a  creditor  of  the 
old  corporation  may  sue  the  new  cor- 
poration on  his  claim.  Friedenwald 
Ja  V.  Asheville  Tobacco  Works,  117  N. 
C.  544  (1895).  Even  though  one  corpo- 
ration assumes  all  the  liabilities  of  an- 
other corporation,  the  remedy  of  a  cred- 
itor to  enforce  such  liability  against 
the  former  corporation  is  in  equity  and 
not  in  law.  Harvey  v.  Maine,  etc.  Co., 
92  Me.  115  (1898).  Where  one  company 
buys  all  the  assets  and  assumes  all  the 
liabilities  of  anotlier.  the  court  may  ap- 
point a  receiver  of  the  latter  to  enforce 
such  liabilities  against  the  former.  Bar- 
ber V.  International  Co.,  48  Atl.  Rep. 
758  (Conn.  1901).  Where  one  railroad 
owns  all  the  stock  of  another  railroad, 
and  takes  a  transfer  of  its  property,  sub- 
ject to  its  debts,  it  is  liable  for  a  tort 
committed  by  such  other  railroad.  Lou- 
isville, etc.  Co.  V.  Bidden,  66  S.  W.  Rep. 
34  (Ky.  1902).  In  Texas,  where,  after 
judgment  against  a  corporation,  it  is 
dissolved  and  a  new  corporation  takes 
over  all  its  assets  and  assumes  all  its 
obligations,  the  judgment  may  be  en- 
forced against  the  new  corporation. 
Proctor  V.  San  Antonio,  etc.  Ry.,  62  S. 
W.  Rep.  938  (Tex.  1901).  Where  one 
company  is  sold  to  another,  the  latter 
assuming  the  debts  of  the  former,  a 
creditor  of  the  fomier  may  hold  the 
latter  liable,  and  it  is  no  defense  that 
the  sale  was  ultra  vires.  Rehberg  v. 
Tontine  Surety  Co.,  91  N.  W.  Rep.  132 
(Mich.  1902).  Where  an  insolvent  cor- 
poration transfers  its  assets  to  a  new 
corporation,  which  agrees  to  pay  the 
debts  of  the  former,  the  liability  of  the 
latter  may  be  enforced  by  creditors  of 


158C 


Cli.  XL.] 


TLTRA    TTEES    ACTS    AND    CONTRACTS. 


[^  073. 


the  latter,  a  different  rule  prevails.^  In  New  York  a  judgment  cred- 
itor of  a  company  whose  assets  have  been  transferred  to  another 
company  in  a  consolidation,  in  exchange  for  stock  of  the  latter, 
issued  to  stockholders  of  the  former,  may  hold  the  consolidated 
company  liable  on  his  judgment.- 

It  is  also  a  principle  of  law  that  a  corporation  buying  all  the 
property  of  another  corporation,  and  paying  therefor  in  stock  of 
the  former  corporation  issued  to  the  stockholders  of  the  latter  cor- 
poration, must  either  pay  the  obligations  of  the  latter  corporation 
or  have  the  property  sold  to  pay  such  obligations.'     A  creditor  of 


the  former  corporation.     Island   City 
Sav.  Bank  v.  Sachtleben,  3  S.  W.  Rep. 
783  (Tex.  1887).     Where  a  reorganized 
company  continues  and  assumes  pay- 
ment of  a  liability  of  the  old  company, 
and  new  advances  are  made  thereunder, 
the   new   company  is    liable   thereon. 
Baker  v.^  Harpster,  42  Kan.   511  (1889). 
Where  the  assets  of  a  corporation  are 
transferred  to  a  party  who  agrees  to 
pay  the  debts,  the  creditors  may  enforce 
the  agreement  and  collect  from  him. 
Dimmick  v.  Register,  92  Ala.  458  (1891). 
Where  a  corporation  is  formed  to  take 
over  the  business  of  a  loaning  agent. 
and  does  so,  and  carries  on  the  business 
for  five  years  without  any  new  agree- 
ment, it  is   bound  by  the  terms  of  the 
agreement  between  the  agent  and  his 
principal.     North    Am.  etc.   T.    Co.   v. 
Colonial,  etc.  Co.,  83  Fed.  Rep.  796  (1897). 
A  corporation  may  give  a  mortgage  to 
raise  an  attachment  which  was  levied 
on  land   prior  to  its  purchase   by  the 
corporation.     Leonard,  etc.  Co.  v.  Bank 
of  America,  86  Fed.  Rep.  002  (1898  >. 

1  Even  though  one  company  assumes 
the  payment  of  the  bonds  of  another 
company,  yet  this  does  not  entitle  the 
holder  of  such  bonds  to  hold  the  former 
company   liable  by  a  suit   in  his  own 
name,  the  bonds  being  already  out  at 
the  time  the  debt  was  assumed  by  the 
former  company.     The  rule  might  be 
different  where  the   former  company 
has  assets  which  in  equity  belong  to 
the  bondholders  or  where  the   bond- 
holder is  the  party  interested.    National 
Bank  V.  Grand  Lodge,  98  U.  S.  123  (1878). 

1 


Even  though  by  a  reorganization  plan 
a  new  company  is  to  assume  certain 
floating  debts  of  theold  company,  whose 
property  is  purchased  at  the  foreclosure 
sale,  yet  the  holders  of  such  debts  have 
no  claim,  either  in  law  or  in  equity, 
against  the  new  company.  Columbus, 
etc.  R.  R.  Appeals,  109  Fed.  Rep.  177 
(1901).     Cf.  120  Fed.  Rep.  925. 

2  Hurd  V.  N.  Y.  etc.  Co.,  167  N.  Y.  89 
(1901),   rev'g  52  N.   Y.    App.  Div.  467. 
Where  a  corporation  as  licensee  of  pat- 
ents consolidates  with  another  corpora- 
tion,  the  consolidated    company,  if  it 
continues  to  manufacture  the  articles, 
is   liable  under  the  provisions  of  the 
license,  even   for  similar  articles  not 
manufactured  under  the  patents,  the 
original  license  contract  being  to  that 
effect.    Wilson  v.  Mechanical,  etc.  Co., 
170  N.  Y.   542  (1902).     A  consolidation 
differs  from  a  sale  by  one  company  to 
another  in  that  a  creditor  of  one  of  the 
consolidated  companies  may  hold  the 
consolidated    company    liable   on   his 
claim.    Morrison  v.  American  Snuff  Co., 
79  Miss.  330  (1901).  Where  one  street  rail- 
way company  transfers  all  its  property 
to  another  street  railway  company  for 
bonds  and  stock  of  the  latter,  to  be  dis- 
tributed among   the  bondholders  and 
stockholders  of  the  former,  in  exchange 
for  their  bonds  and  stock  in  the  former, 
the  purchasing  company  is  liable  on  the 
debts  of  the  selling  company,  the  trans- 
action  being   practically  a  consolida- 
tion.    Shadford  v.  Detroit,  etc.  Ry.,  89 
N.  W.  Rep.  960  (Mich.  1902). 
3  Grenell  v.  Detroit,  etc.  Co.,  112  Mich. 
581 


.§  G73.J 


ULTKA    \  n:KS    ACrS    ANIt    (oMKALTS. 


[cu 


XI. 


the  old  company  may  suo  the  new  company  to  charge  tlio  assets 
taken  over  by  it  with  payment  of  tlie  old  company's  debts,  and  may 
recover  his  prorata  share  of  the  value  thereof.'  A  mere  device  by 
which  corporate  property  is  sold  under  an  execution,  is  purchased 
by  a  person  interested  in  the  corpfjration,  and  then  transft-rred  to 
a  now  corporation  having  the  same  stock h<ihh.»rs  as  the  ohl  one,  is 


70  (1897).  In  Masstichusetts  the  rem- 
edy of  a  creditor  of  a  corporation  whicli 
has  sold  its  assets  to  another  corpora- 
tion for  stock  is  at  law  and  not  in 
equity.  Tiie  new  corporation  is  not 
liable  on  the  debt.  Ewinp:  v.  Compos- 
ite  B.  S.  Co.,  16'J  Ma'^s.  7J  (1897). 

1  First  Nat  Bank  v.  Chattanooga,  etc. 
Co.,  97  Tenn.  308  (1896).  W.here  an  in- 
solvent corporation  causes  land  owned 
by  it  to  be  conveyed  to  a  new  corpora- 
tion formed  by  its  directors,  and  in 
which  its  directors  subscribed  for  stock, 
and  both  corporations  pass  into  the 
hands  of  receivers,  the  subscriptions 
for  stock  in  the  new  corporation  may 
be  collected  for  the  benefit  of  creditors 
of  the  old  corporation.  Butler  v.  Cock- 
rill,  73  Fed.  Rep.  945(1896).  A  corpora- 
tion may  be  liable  for  the  debts  of  an- 
other corporation  whose  property  it 
takes,  to  the  extent  that  such  property 
is  impressed  with  a  trust  In  this  case 
all  the  property  of  an  insolvent  com- 
pany was  leased  to  another  company. 
Chicago,  etc.  Ry.  u  Third  Nat  Bank, 
134  U.  S.  276  (1890).  Where  railroad 
property  purchased  at  foreclosure  sale 
was  transferred  by  the  purchaser  to  a 
corporation  for  the  bonds  and  stock  of 
the  latter,  the  New  York  court  of  ap- 
peals held  that  such  corporation  "  paid 
no  value,  and  held  the  property  subject 
to  any  equitable  lien  to  which  it  was 
subject  in  the  hands  of  its  grantors." 
Vilas  V.  Page,  106  N.  Y.  439.  405  (1887). 
In  some  cases  the  creditors  of  the  old 
company  may  follow  its  property  into 
the  hands  of  a  new  company  to  which 


receiver.  A  crt'ditor  holding  an  uu|Hiid 
I)roinis.sory  nolo  cannot  by  bill  in  equity 
bring  in  the  directors  to  hold  them  lia- 
ble for  false  representations,  and  also 
claim  that  the  company  was  not  duly 
iiiforp<irat<»d,  and  also  bring  in  a  subse- 
quent corponition  that  took  all  the  as- 
sets of  the  first  and  also  bring  in  those 
persons  who  finally  obtained  such  as- 
sets,—  all  in  one  bill  brought  to  collect 
the  debt  JelTerson  Nat.  Bank  r.  Te.xas 
Inv.  Co.,  74  Tex.  4'Jl  (18Sl)».  Where  a 
comjiany  leases  all  its  pro|H;rty  to  an- 
other, the  stockholders  in  both  compa- 
nies being  the  same,  a  mechanic's  lien 
good  again.>>t  the  latter  is  good  also 
against  the  fornier.  Hatcher  v.  United 
Leasing  Co.,  75  Fed.  Ke{x  368  (1896).  A 
new  corporation  taking  the  assets  of 
an  old  corjwration  is  liable  to  creditors 
of  the  latter  to  the  extent  of  the  prop- 
erty so  taken.  Brum  v.  Merchant.s' 
Mut  Ins.  Co.,  10  Fed.  Rep.  140(1883);  Ili- 
bernia  In.H.  Ca  v.  New  Orleans  Transp. 
Co,  13  Fed.  Rep.  516  (1882);  Hibernia 
Ins.  Co.  r.  St  Louis,  etc.  Ca,  10  Fed. 
Rep.  596  (1883).  For  a  case  where  the 
stockholders  of  tlie  new  corporation 
gave  a  bond  to  pay  the  debts  of  the  old 
one,  see  Planters'  Ins.  Ca  v.  Wicks,  4  S. 
W.  Rep.  172  (Tenn.  1887).  Where  a  cor- 
poration sells  all  its  property  to  another 
corporation  in  exchange  for  stock  of 
the  latter,  a  creditor  of  the  former  may 
hold  the  latter  liable  to  the  extent  of 
the  value  of  the  property  so  turned 
over.  United  States,  etc.  Co.  r.  Isaacs, 
23  Ind.  App.  533  (1899).  The  creditors 
of   an    insolvent    corporation    which 


the  property  is  sold  by  an  ordinary  transfers  all  its  property  to  another 
sale.  Marshall  v.  Western,  etc.  R.  R.,  corporation  for  stock  of  the  latter  may 
93  N.  C.  332  (1885);  Western  N.  C.  R.  R.  hold  the  latter  liable  for  the  value  of 
V  Rollins,  82  N.  C.  523  (1880);  Young  v.  such  property.  Hurd  v.  New  York,  etc. 
Rolhns.  85  N.  C.  48.5  (1881),  involving  a    Ca,  29  N.  Y.  Misa  Rep.  183  (18891 

1583 


CH.  XL.] 


ULTRA    VIRES    ACTS    AND    CONTRACTS. 


[§  073. 


void  as  against  creditors  of  the  first  corporation.  They  may  hold 
the  new  corporation  liable  to  the  extent  of  the  value  of  the  property 
so  conveyed.^  A  foreclosure  which  is  brought  about  by  the  stock- 
holders for  the  purpose  of  buying  in  the  property  and  reorganizing 
the  property  so  as  to  protect  the  mortgage  bondholders  and  also 
the  stockholders,  but  to  cut  off  the  claims  of  unsecured  creditors, 
and  particularly  to  cut  off  a  guaranty  on  the  bonds  of  another  cor- 
poration, is  illegal,  and  if  such  facts  are  proved  the  foreclosure  sale 
will  be  set  aside.-  Where  the  officers  of  a  corporation  in  their  in- 
dividual capacity  took  part  in  a  transaction  before  the  corporation 
was  formed,  whereby  a  business  was  taken  over  by  the  corporation 
on  an  agreement  that  title  should  not  pass  until  payment  was 
made,  the  corporation  takes  with  notice  of  the  facts.''     Where  a 


•Hancock  v.  Holbrook,  40  La.  Ann. 
53  (1888).  See  also  Railroad  v.  Howard, 
7  Wall.  392  (1868).  Where  tbe  officers 
and  stockholders  of  one  corporation 
form  another,  and  convey  all  the  prop- 
erty of  the  former  to  it  in  fraud  of 
creditors,  the  latter  will  be  regarded  as 
a  continuation  of  the  former,  and  a 
court  of  equity  will  hold  tlie  assets  of 
the  latter  liable  for  a  debt  of  the  for- 
mer, though  there  has  been  no  recovery 
of  judgment  for  the  debt.  Blanc  v. 
Paymaster  Min.  Co..  93  Cal.  524  (1^92). 
A  sale  of  one  railroad  to  another  may 
be  in  fraud  of  creditors  of  the  former, 
and  even  a  subsequent  foreclosure  may 
be  in  pursuance  of  the  same  scheme. 
A  suit  against  it  may  be  at  law  and 
the  questions  submitted  to  a  jury. 
Houston,  etc.  Ry.  v.  Shirley.  24  S.  W. 
Rep.  809  (Tex.  1894).  In  Angle  v.  Chi- 
cago, eta  Ry.,  151  U.  S.  1  (1894),  a  con- 
tractor was  harassed  and  prevented 
from  completing  his  contract  by  the 
company,  which  had  passed  under  the 
control  of  another  company  that  was 
seeking  to  get  a  land  grant  that  had 
been  given  conditionally  to  the  former 
company.  The  contractor  was  ruined, 
the  road  not  completed,  and  the  second 
company  got  the  land  grant  by  a  sub- 
sequent legislative  act.  The  contractor 
got  judgment  against  the  first  com- 
pany, and  then  filed  a  bill  against  the 
second  company  to  reach  the  land, 
charging     conspiracy,     bribery,     and 

1583 


fraud.  The  court,  overruhng  the  de- 
cision below,  held  that  a  demurrer  to 
the  bill  was  not  good.  See  also  g§  674, 
890,  infra. 

'•^Louisville,  etc  Ry.  v.  Louisville 
Trust  Ca,  174  U.  S.  674  (1899),  the  court 
saying  (p.  683):  "No  such  proceedings 
can  be  rightfully  carried  to  consumma- 
tion wliich  recognize  and  preserve  an 
interest  in  the  stockholders  without  also 
recognizing  and  preserving  the  inter- 
ests, not  merely  of  the  mortgagee,  but 
of  every  creditor  of  the  corporation. 
In  other  words,  if  the  bondholder 
wishes  to  foreclose  and  exclude  inferior 
lien  holders  or  general  unsecured  credit- 
ors and  stockholders  he  may  do  so,  but 
a  foreclosure  which  attempts  to  pre- 
serve any  interest  or  right  of  tlie  mort- 
gagor in  the  property  after  the  sale 
must  necessarily  secure  and  preserve 
the  prior  rights  of  general  creditors 
thereof.  This  is  based  on  the  familiar 
rule  that  the  stockholders'  interest  in 
the  property  is  subordinate  to  the 
rights  of  creditors;  first  of  secured  and 
then  of  unsecured  creditors.  And  any 
arrangement  of  the  parties  by  which 
the  subordinate  rights  and  interests  of 
the  stockholders  are  attempted  to  be 
secured  at  the  expense  of  the  prior 
rights  of  either  class  of  creditors  comes 
within  judicial  denunciation." 

3  Adams  v.  Roscoe,  etc.  Co.,  159  N.  Y. 
176  (1899).  Where  one  of  the  organizers 
of  the  corporation,  who  is  also  its  presi- 


<j  073.] 


ULTUA    VIUKS    ACTS    AMJ    CoNTUACIS. 


[CU.   XL. 


porson  owning  all  the  stock  of  a  corporation  sells  it  under  circum- 
stances which  induce  the  purchaser  to  believe  that  the  former  has 
no  claim  against  the  corporation,  he  may  be  enjoined  from  enforc- 
ing any  such  chiim.'  The  subject  of  "dummy"  corporations  is 
considered  elsewhere.-  Sometimes  the  statutes  of  the  state  make 
the  purchasing  corporation  liable, especially  in  cases  of  consolidation.' 
ISimilar  rules  t(^  the  above  prevail  as  to  liability  of  a  corporation 
that  issues  stock  in  payment  for  the  property  of  an  insolvent  indi- 
vidual or  copartnership.  A  corporation  that  has  taken  over  the 
property  of  a  partnership  is  not  liable  for  the  debts  of  the  latter 
unless  there  was  an  express  contract  assuming  such  liability,  or  the 
transaction  was  a  mere  continuation  of  the  partnership.*  A  cor- 
poration taking  over  tin;  business  of  a  partnership  may  assume  any 

dent,  sells  good.s  to  it  for  stock,  the  cor-  hands  of  a  con.solidnted    company   to 

poration  is  protected  in  its  title,  even  which  it  was  transferred,  stock  being 

tliougii  it  turns  out  that  he  held  part  theri'for  i.ssued  to  the  old  stockholders, 

of  the  goods  to  sell  on  coininissioii,  but  Martin  r.  Zellerbach,  3S  Cai.  .'JOG  (IsG'.t). 

if  lie  retains  the  stock  and   the  com-  *  Austin   v.  Tecumseh  Nat  Bank.  49 

pany  is  dissolved,  it  is  bound  to  respect  Neb.  41"i    (1896).     Cf.  Reed  Bros.  Co.  r, 

the  rights  of  the  owner  of  the  goods  in  First   Nat-    Bank,   40   Neb.    lOS   (189">). 

distributing  its  assets.    Wyeth  v.  Renz-  See   §  890,  infra,      A    corporation    to 

Bowles  Co.,  (56  S.  W.  Rej*.  8-'5  (Ky.  1902  .  •  winch  an  insolvent  firm  has  Iransferreil 

•Given  v.  Times-Republican,  etc  Co.,  their  property  for  stock  is  not  liable  on 

114  Fed.  Rep.  92  (1902).  the  debts  of  such  individuals  unless  it 

-See  ^?;  G(i.'>,  Cr>4,  supra,  has  expressly  assumed  or  has  ratifleii  or 

'  See  cases  in  g  897,  infra,  relative  to  adopted  the  sam&     Hart,  etc.  v.  Coryell, 


consolidation;  also  Indianola  R.  R.  i: 
Fryer,  56  Tex.  609  (1882);  Louisville,  etc. 
Ry.  V.  Boney,  117  Ind.  501  (1888);  Indian- 


8  Kan.  A  pp.  496  (1898).  Where  a  cred- 
itor of  an  indiviilual  consents  to  his 
transferring  his  property  to  a  corpora- 


apolis,  etc.  R  R.  v.  Jones,  29  Ind.  465  tion  for  iitock,  wliich  the  creditor  then 

(1868);  Columbus,  etc.  Ry.  v.  Powell,  40  takes  as  collateral  security,  such  cred- 

Ind.  37  (1872);  Montgomery,  etc.  R  R  itor  cannot  hold  the  corporation  liabU 

V.  Boring,  51  Ga.  582  (1874);  Thompson  on  the  debt  even  though  the  corpor>v- 

V.  Abbott,  61  Mo.  176  (1875),  where  the  tion  afterward  voluntarily  gave  a  note 

property  of  the  old  was  given  by  the  and  a  mortgage  to  secure  the  same, 

legislature  to  the  new  corporation  —  a  State,  etc.  v.  A.  F.  Shapleigh,  etc.  Co., 

municipal  case.     See  also  Rome,  etc.  147  Ma   366  (1898).     A  corporation  to 

R.  R  V.  Ontario,  etc.  R.  R,  16  Hun,  445  which  an  insolvent  individual  transfers 

(1879).     Where'  the  consolidated  com-  all  his  property  in  exchange  for  stock 

pany  is  by  statute  liable  for  the  debts  of  the   corporation  is  not  liable  «n  a 

of  the  old  company,  a  creditor  of  one  chattel  mortgage  which  it  gives  to  one 

of  the  latter  who  has  the  right  to  de-  of  the  creditors  of  such  individual,  the 

mand  stock  in  exchange  may  demand  corporation    not   having  assumed  the 

the  same  of  the  consolidated  company  debt.     Durlacher  v,  Frazer,  8  Wyo.  58 

and  hold  it  liable  in   damages    if    it  (1898). 

refuses.      John    Hancock,  etc.    Co.   v.        There  are  decisions,  however,  to  the 

Worcester,   eta    R   R.,  149  Ma.ss.   214  contrary  as  follows:     Where  a  partner- 

(1889).     A  creditor  of  an   old  corpora-  ship  incorporates  a  company  and  trans- 

tion  may  follow  its  property  into  the  fers  to  that  company   all  the    firm's 

1584 


OH.  XL.] 


ULTEA    VIEES    ACTS    AND    CONTRACTS. 


[§  674. 


contract  of  the  latter,  but  the  assumption  of  one  contract  does  not 
prove  the  assumption  of  other  contracts.  The  assumption  of  such 
a  contract  may  arise  by  the  corporation  proceeding  to  live  up  to  it 
and  carry  it  out.' 

§  674.  Riijlits  and  UaMlities  of  mortgagees  of  a  corporation  that 
imrcliases  property  and  issues  stock  in  payment  therefor. —  Where 
a  corporation  transfers  all  its  property  to  another  corporation,  and 
the  latter  company  immediately  gives  a  mortgage  on  all  the  prop- 
erty, a  judgment  creditor  of  the  former  company  may  cause  the 
sale  and  the  mortgage  to  be  set  aside  as  a  fraud  upon  his  rights,  and 
the  property  may  be  subjected  to  the  payment  of  his  debt.^ 


assets  in  exchange  for  stock,  the  corpo- 
ration is  liable  for  the  debts  of  the  part- 
nership. Such  transaction  is  not  a 
purchase,  but  simply  a  change  in  the 
mode  of  doing  business.  Andres  v. 
Morgan,  6-3  Ohio  St.  230  (1900).  Where 
an  insolvent  firm  purchases  goods  on 
credit  by  false  representations  and  then 
transfers  its  assets  to  a  corporation 
without  consideration,  the  vendor  may 
follow  the  proceeds  of  the  goods  into 
the  hands  of  the  corporation.  Sheffield 
v.  Mitcliell,  31  N.  Y.  App.  Div.  266 
(1808).  Under  the  facts  in  Brenian,  etc. 
Bank  v.  Branch,  etc.  Co.,  10-4  Mo.  425 
(1891),  it  was  held  that  a  corporation 
organized  by  a  business  man,  and  to 
which  he  had  conveyed  all  his  property, 
was  liable  on  his  note,  altiiougii  it  had 
not  assumed  any  of  his  debts.  See  also 
Fort  Worth  Pub.  C-'o.  v.  Hitson,  80  Tex. 
216  (1891).  Where  a  partnership  turns 
itself  into  a  corporation,  the  latter  is 
not  a  bona  fide  holder  of  notes  owned 
by  the  former.  McElwee  Mfg.  Co.  v. 
Trowbridge,  62  Hun,  471  (1891).  A  cor- 
poration taking  all  the  assets  of  a  part- 
nership under  an  agreement  with  the 
partners  that  it  would  pay  the  liabili- 
ties to  the  extent  of  the  assets  cannot 
be  made  liable  on  a  debt  due  one  of  tiie 
partners  until  it  is  ascertained  that  the 
assets  exceed  the  liabilities  and  until 
it  has  agreed  to  pay  the  liabilities, 
Adams  v.  Empire,  etc.  Co.,  4  N.  Y. 
Supp.  738  (1889).  As  regards  the  power 
of  the  corporation  to  assume  the  obliga- 


(100) 


tions  of  the  copartnership,  see  McLellan 
V.  Detroit  File  Works,  56  Mich.  579 
(1885).  A  corporation  may  be  liable 
for  the  debts  of  the  partnership  where 
it  has  placed  such  liabilities  on  its  books 
as  a  part  of  the  corporate  liabilities, 
and  upon  becoming  insolvent  the  cor- 
poration may  give  a  preference  to  such 
liabilities.  Shufeldt  v.  Smith,  139  Mo. 
367  (1897). 

1  Hall  V.  Herter,  83  Hun,  19  (1894).  A 
corporation  succeeding  a  firm  may,  by 
carrying  out  a  contract  of  the  firm,  as- 
sume the  obligation  thereof.  Hall  v. 
Herter,  90  Hun,  280  (1895);  aff'd,  157 
N.  Y.  694.  Where  a  firm  is  turned  into 
a  corporation,  the  latter  may  assume  a 
contract  of  the  former  for  a  purchase 
of  lumber,  by  adopting  it  through  its 
manager.  Pratt  t\  Oshkosh  Match  Co., 
89  WMs.  406  (1895).  Where  the  corpora- 
tion assumes  the  debts  of  the  partner- 
ship which  it  buys  out,  its  liability  is 
not  released  by  the  fact  that  the  part- 
nership subsequently  gives  notes  for 
such  debts.  Johnston  v.  Gumbel,  19 
S.  Rep.  100  (Miss.  1895). 

2  And  a  receiver  will  be  appointed. 
Cole  V.  Millerton  Iron  Co.,  133  N.  Y.  164 
(1892).  A  corporate  creditor  may  at- 
tack a  transfer  of  all  the  corporate 
property  to  another  corporation,  even 
though  the  latter  agrees  to  pay  the 
debts  of  the  former.  A  trustee  of  a 
mortgage  given  by  the  vendee  company 
on  the  property  is  not  bona  fide  when 
the  officers  of  the  two  companies  are 


1585 


§  G74.] 


ULTKA    VIKES    ACTS    AND    CoMUACTS. 


[cii. 


XI« 


"Where  a  corporation  issues  stock  for  property  it  is  not  a  hmafide 
purcliaser  of  tliat  property.'  But  a  claim  against  one  company, 
which  is  assumed  by  another  company  upon  the  hitter  company 
buyin<^-  out  the  former,  is  not  to  be  paid  out  of  the  assets  of  the 
hitter  company  in  preference  to  a  mortgage  upon  all  of  its  pro|> 
erty.2 

Jn  case  property  is  sold  to  the  corporation  for  shares  of  stock, 
and  the  corporation  issues  a  mort^j^atre  on  the  property  and  refuses 
to  deliver  tlie  stock,  the  claim  of  the  vendor  for  damages  does  not 
liave  priority  over  the  mortgage.' 

AVhere  a  stockholder  of  a  vendor  corporation  sets  aside  the  sale 
of  the  railroad  as  ultra  vires,  a  mortgage  given  by  the  vendee  cor- 
poration is  void.  The  bondholders  are,  however,  entitled  to  enforce 
payment  from  any  other  property  own<Ml  by  the  vendee.* 

A  mortgage  by  a  consolidated  railroad  may  not  take  precedence 
over  the  unsecured  debts  of  the  constituent  companies,  and  by 
statute  the  consolidated  comjiany  may  be  liable  lor  those  debts, 
unless  the  articles  of  consolidation  provide  otherwise.*     Although 


the  same  and  the  trustee  knew  thereof. 
The  boiulliolders  are  chargeable  with 
notice  of  facts  known  to  the  trustee. 
Colo  V.  Millerton  Iron  Co.,  39  Hun,  217 
(1891).  Bondholders  who-  took  with 
notice  that  the  property  was  received 
bj-  the  corporation  from  another  corpo- 
ration in  payment  for  stock,  and  that 
the  latter  corporation  was  in  debt,  can- 
not hold  as  against  such  creditors. 
Blair  v.  St.  Louis,  etc  R.  R..  23  Fed. 
Rep.  36  (1884).  Where  a  corporation 
conveys  all  its  property  to  another  cor- 
poration in  payment  for  its  stock,  the 
latter  corporation  agreeing  to  pay  all  the 
debts  of  the  former,  a  mortgagee  of  the 
latter  company  takes  precedence  over 
the  judgment  of  a  creditor  of  the  for- 
mer company,  such  judgment  being 
subsequent  to  the  mortgage.  Blair  v. 
St.  Louis,  etc  R.  R.,  25  Fed.  Rep.  684 
(1885).  But  contra,  if  the  mortgagee 
took  with  actual  knowledge.  Blair  v. 
St.  Louis,  etc  R  R.,  24  Fed.  Rep.  148 
(1885).  A  creditor  of  a  corporation 
owning  an  uncompleted  railroad  cannot 
claim  a  lien  thereon  prior  to  that  of  the 
mortgage  of  a  subsequent  corporation 
which  purchased  the  road,  when  tliere 
never  was  any  record  evidence  of  any 


lien  and  the  subsequent  corporation 
had  no  actual  notice  of  the  claim. 
Biair  r.  St.  Louis,  etc  It  R..  27  Fed. 
Rep.  176  (1886).  A  sale  of  one  railroad 
to  anotlier  may  be  in  fraud  of  creditors 
of  the  former,  and  even  a  subsequent 
foreclosure  may  be  in  pursuance  of  the 
same  scheme.  A  suit  against  it  may 
be  at  law  and  the  questions  submitted 
to  a  jury.  Houston,  etc  Ry.  v.  Shirley, 
24  S.  W.  Rep.  809  (Tex.  1894). 

1  Rogers  v.  New  York,  etc  Land  Co., 
134  N.  Y.  197  (1892).  Cf.  §  727,  infra,  on 
notice,  and  g  890,  infra, 

2  Fogg  V.  Biair,  133  U.  S.  534  (1890). 
See  also  ^  860,  infra. 

3  Farmers',  etc.  Ca  v.  Toledo,  etc  R. 
R,  54  Fed.  Rep.  759  (1893). 

*  Knoxville  v.  Knoxville,  etc.  R.  R, 
22  Fed.  Rep.  758  (1884). 

5  Compton  V.  Jesup,  167  U.  S.  1  (1897). 
Cf  Tysen  v.  Wabash  Ry.,  15  Fed,  Rep. 
763  (1883);  but  see  Wabash,  etc.  Ry.  v. 
Ham,  114  U.  S.  587  (1885).  The  case  of 
Compton  V.  Wabash,  etc  Ry.,  45  Ohio 
St.  592  (1888),  passed  upon  the  same 
bonds,  and  it  was  held  that  these  bonds 
constituted  a  lien  on  the  property  of 
the  old  company,  and  were  prior  in 
right  to  the  mortgage  bonds  of  the  con- 


1586 


CH. 


XL.] 


ULTKA    VIRES    ACTS    AND    OONTKACTS. 


[§  674. 


a  corporation  sells  all  its  property  to  an  individnal  for  purchase- 
money  mortgage  bonds,  and  distributes  these  bonds  among  its 
stockholders  without  paying  the  creditors,  nevertheless  a  honajide 
purchaser  of  such  bonds  is  protected  as  against  the  corporate  cred- 
itors.^ 

Where  an  insolvent  corporation  gives  a  mortgage  to  secure  bonds 
and  insists  that  its  creditors  shall  accept  the  bonds  in  payment  of 
its  debts  or  else  have  recourse  to  the  equity  of  redemption,  the 
mortgage  is  illegal,  and  a  suit  to  foreclose  may  be  contested  by  a 
receiver  of  the  corporation.^ 

Even  though  an  insolvent  partnership  is  turned  into  a  corpora- 
tion, and  bonds  of  the  corporation  are  given  to  a  creditor  of  the 
partnership  for  his  debt,  yet  such  bonds  may  be  legal.' 


solidated  company:  refusing  to  follow 
Wabash,  etc.  Ry.  v.  Ham,  114  U.  S.  587 
(1885).  General  creditors  of  a  road  that 
is  consolidated  with  another  have  no 
equitable  lien  on  the  bonds  issued  by 
the  consolidated  company.  Hervey  v. 
Illinois  Mid.  Ry.,  28  Fed.  Rep.  169  (1884). 
Mortgage  bonds  issued  in  exchange  for 
notes  lield  by  a  former  company  must 
be  clearly  and  fully  explained  in  a  fore- 
closure suit  based  thereon.  Central 
Trust  Co.  V.  Worcester  Cycle  Mfg.  Ca, 
90  Fed.  Rep.  584  (1898). 

*  A  former  decree  in  a  court  of  equity 
against  the  trustee  of  the  mortgage  in 
regard  to  the  matter  does  not  bind  the 
bondholders,  although  a  suit  at  law 
against  the  trustee  would  have  bound 
them.  Lebeck  v.  Fort  Payne  Bank,  115 
*Ala.  447  (1897).  Where  a  municipality 
is  the  vendor  of  land  to  a  corporation 
and  brings  suit  to  set  aside  the  trans- 
fer as  fraudulent  and  illegal,  and  joins 
the  three  trustees  of  a  mortgage  of  the 
corporation  as  parties  defendant  and 
serves  them  by  publication,  and,  two 
of  the  trustees  having  died,  causes  suc- 
cessors to  be  appointed  by  the  court, 
and  obtains  decrees  against  the  corpo- 
ration and  the  trustees  of  the  mortgage 
canceling  their  title  to  the  land,  the 
decree  is  effective;  and  even  though 
the  mortgage  is  afterwards  foreclosed, 
the  purchaser  at  such  sale  takes  no 
title  to  such  land,  he  having  waited 
thirty  years  before  attacking  such  de- 

158' 


cree.  Bump  v.  Butler  County,  93  Fed. 
Rep.  290  (1899).  On  the  other  hand, 
where  a  municipality  delays  for  thirty 
years  in  complaining  of  fraud  and  ille- 
gality whereby  it  conveyed  land  to  a 
corporation,  the  court  will  not  grant  it 
any  relief.  Rummel  v.  Butler  County, 
93  Fed.  Rep.  304  (1899). 

2  Jenkins  v.  John  Good,  etc.  .Co.,  56 
N.  Y.  App.  Div.  573  (1900).  An  insolv- 
ent New  Jejsey  corporation  cannot,  as 
against  some  of  its  creditors,  issue 
mortgage  bonds  to  other  creditors. 
Skirm  v.  Eastern,  etc.  Co.,  57  N.  J.  Eq. 
179  (1898).  It  is  a  disposal  of  property 
for  the  purpose  of  hindering  and  delay- 
ing creditors,  within  the  meaning  of 
the  second  section  of  the  statute  of 
frauds,  for  an  insolvent  firm  to  mort- 
gage all  their  property  to  a  trustee  and 
take  the  bonds  secured  by  that  mort- 
gage, even  though  they  take  the  bonds 
to  turn  over  to  their  creditors.  But 
the  act  is  voidable  only  as  to  those 
creditors  who  object  and  contest  the 
matter.  National  Bank  v.  Sprague,  21 
N.  J.  Eq.  530  (1870). 

3Seligman  v.  Prince,  [1895]  2  Ch.  617. 
Where  a  corporation  is  in  debt,  and  in 
order  to  enable  it  to  borrow  money  the 
chief  stockholder,  who  is  also  in  debt, 
transfers  valuable  property  to  the  cor- 
poration, and  then  the  corporation 
gives  a  mortgage  upon  all  its  property, 
including  the  property  so  transferred, 
a  honajide  holder  of  the  bonds  is  pro- 


§§  075    C78.J  ULTRA    VIKKS    ACrS    AND    CONTKACrS. 


[cn.  XL. 


§§  675-077.  Cousolidations,  leases,  and  sales  of  rail ruads. —  This 
subject  is  consitlored  elsewhere.^ 

§  078.  A  corporation  cannot  he  a  partner  in  a  partnership. — 
This  is  an  old  principle  of  law,  but  it  is  subject  to  oxcejitions.  It 
is  held  to  be  an  ultra  i'm.y  act,  because  the  stoekhoUlers  are  entitled 
to  have  thoir  directors  conduct  the  business  without  sharing  that 
power  with  a  ])artner.^  But  if  a  partnership  has  been  formed  with 
an  individual,  the  latter  cannot  throw  the  business  into  statutory 
insolvency  proceedin<,'s; '  and  the  corporation  cannot  avoid  the  pay- 
ment of  a  liability  which  the  partnership  has  incurred;*  nop  can  an 
obligation  to  the  corporation  be  repudiated  on  that  grouml.*     The 

tected  as    against  a    creditor    of  the  Courier  Co.,  67  Mich.  1.'J2(1S,S7).     A  cor- 

stockholder.     King  v.  Holland  T.  Co.,  8  poration  cannot  avoid  liability  for  the 

N.  Y.  App.  Div.  112  (1890X     In  the  c-aso  del)t  of  a   firm,   in  which  (irni  it  is  a 

of  Bad^or  v.  Sutton,  30  N.  Y.  Apji.  Div.  nieiiiher.  on  the  ground  that  it  had  no 

294  (1898),  where  an  insolvent  person  power  to  become  a  partner.     Cameron 

and  corporation  had  transferred  their  v.  First,  eta  Bank,  34  S.  W.  Rep.  178 

property   to  another  corporation   and  (Tex.  1890)i     Under  the  New  York  stat- 

had  taken  back  purchase-money  mort-  utes   bonds   may  be  issued  to  take  up 

gage  bonds,  the  court  set  the  transac-  past-due  notes,  and  where  ttie  business 

tion  kside  at  the  instance  of  creditors  of  a  partnership  and  of  a  cori)oration  is 

of  the  former.  .  carried  on  as  one  institution,  such  bonds 

1  See  ^g  892  897.  tJj/ra.  are   valid,  even   though    some  of  the 

*  "  It  is  a  violation  of  law  for  corpo-  notes  so  taken  up  grew  out  of  the  busi- 
rations  to  enter  into  a  partnership,"  ness  of  the  partnership,  but  were  in- 
and  their  charters  may  be  forfeited  for  dorsed  by  the  corporation.  Matter  of 
the  ofTense.  Teopleu.  North  River,  etc.  Snyder,  29  N.  Y.  Misc.  Rep.  1  (1899).  A 
Co.,  121  N.  Y.  582, 023(1890).  A  contract  corporation  as  a  member  of  a  copart- 
between  two  companies,  by  which  one  nership  may  be  liable  on  a  note  given 
is  to  name  four  of  the  six  directors  of  by  said  copartnership  and  indorsed  by 
the  other  (and  is  also  to  sell  the  stock  the  corporation.  Johnson  v.  Weed,  etc. 
of  the  latter,  carry  out  its  contracts,  Co.,  103  Wis.  291  (1899). 

and  pay  dividends  on  its  stock),  is  ille-  SFrench  v.   Donohue,   29  Minn.   Ill 

gal,    James  r.  Eve,  L.  R.  6  H.  L.  335  (1882),     A  corporation  may  enforce  an 

(1873).  accounting  in  a  partnership  of  which 

3  Whittenton  Mills  v.  Upton,  76  Mass.  it  is  a  member.     Standard  Oil  Co.  v. 

582(18r)8).  Scofield,    16    Abb.    N.    Cas.   373    (1885). 

*  Catskill  Bank  v.  Gray,  14  Barb.  471  Where  in  an  ultra  vires  contract  two 
(1852).  Contra,  Gunn  v.  Central  R  R.  railroads  are  operated  as  one,  and  more 
etc.  Co.,  74  Ga,  509  (1885),  where  a  rail-  of  the  income  is  used  to  repair  one  rail- 
road was  held  not  liable  for  injuries  to  road  than  the  other,  the  latter  may  sue 
a  passenger  sustained  while  traveling  the  former  for  reimbursement.  Nashua, 
upon  a  boat  operated  by  the  road  and  etc.  R.  R.  v.  Boston,  etc.  R.  R,  164  Mass. 
an  individual  as  partners.  But  see  222(1895).  Where  a  national  bank  forms 
Block  V.  Fitchburg  R.  R,  139  Mass.  308  ft  partnership  to  operate  a  mill,  it  may 
(1885).  A  corporation  and  a  person  to  recover  moneys  loaned  by  the  bank  to 
whom  it  has  agreed  to  sell  its  property  the  partnership.  Although  the  man- 
may  be  liable  as  partners  to  creditors  ager  of  tlie  mill  is  vit;e-president  of  the 
of  the  former.     Cleveland  Paper  Co.  v.  bank,  yet  the  bank  is  not  liable  for  his 

1588 


CH.  XL.] 


ULTRA    VIRES    ACTS    AND    CONTRACTS. 


[§  078. 


cash  which  a  corporation  has  invested  in  a  copartnership  as  a  part- 
ner cannot  be  recovered  back  by  the  corporation  after  the  insolvency 
of  the  partnership,  as  against  creditors  of  the  partnership,  even 
though  the  corporation  had  no  power  to  so  invest.^  If  the  corpo- 
ration has  but  one  stockholder,  he  may  make  it  a  partner  in  a  part- 
nership.- Sometimes  the  relationship  is  held  to  be  that  of  principal 
and  agent  instead  of  partnership.'  Where  a  corporation  has  been 
a  partner  in  a  partnership,  it  must  account  to  the  other  partners, 
even  though  such  partnership  was  illegal.*     The  corporation  also 


mismanagement.  The  bank  as  a  part- 
ner is,  however,  chargeable  with  notice 
of  a  rule  of  its  other  partner,  a  joint- 
stock  association,  that  no  money  should 
be  borrowed  except  by  the  board  of 
directors  of  the  latter.  Cameron  v. 
First  Nat.  Bank,  4  Tex.  Civ.  App.  309 
<1893).  A  party  receiving  work  and 
materials  from  a  partnersliip  consisting 
of  a  corporation  and  an  individual  can- 
not defend  against  the  price  on  the 
ground  tliat  the  corporation  had  no 
riglit  to  enter  a  partnership.  Wilson  v. 
Carter,  etc.  Co.,  46  W.  Va.  469  (1899). 
A  firm  consisting  of  an  individual  and 
a  foreign  corporation  which  is  not  au- 
tiiorized  to  do  business  in  tlie  state  can- 
not enforce  a  contract  in  the  state. 
Harris  v.  Columbia,  etc  Co.,  67  S.  W. 
Rep.  811  (Tenn.  1901). 

iWallerstein  v.  Ervin,  112  Fed.  Rep. 
124  (1901).  Where  a  corijoration  has 
entered  into  a  copartnership  which  be- 
comes insolvent  it  cannot,  as  against 
other  creditors,  file  claims  as  a  creditor 
of  such  copartnership  on  the  ground 
that  the  copartnership  was  ultra  vires. 
In  re  Ervin,  109  Fed.  Rep.  135  (1901). 

2  Allen  V.  Woonsocket  Co.,  11  R  I.  2S8 
(1876). 

marine  Bank  v.  Ogden,  29  111.  248 
(1862).  In  Holmes  v.  Old  Colony  R.  R, 
71  Mass.  58  (1855).  where  the  corporation 
shared  in  the  profits  only,  no  partner- 
ship was  held  to  exist.  A  lease  whereby 
the  lessee  is  to  pay  the  operating  ex- 
pense and  the  interest  on  the  debt  and 
the  cost  of  betterments,  and  is  then  to 
pay  one-half  of  the  balance  to  the  lessor, 
is  not  a  copartnership,  inasmuch  as  the 

1 


lessor  is  not  to  pay  any  losses.    South 
Carolina,  etc.  R.  R  v.  Augusta,  etc.  R.  R, 
107  Ga,  164  (1899).     Even  though  a  cor- 
poration in  renting  premises  is  to  re- 
ceive a  proportion  of  the  gross  receipts 
in  excess  of  a  specified  rental,  yet  this 
is  not  a  partnership  and  is  legal.    Nan- 
tasket,  etc.  Co.  v.  Shea,  65  N.  E.  Rep.  57 
(Mass.  1902).     A  corporation  by  the  ac- 
tion of  its  board  of  directors  and  con- 
sent of  all  its  stockholders  may  agree 
that  a  certain  percentage  of  its  profits 
shall  be  paiJ  annually  to  a  person  for 
services  already  rendered  by  him.     In 
a  suit  by  him  to  enforce  such  agree- 
ment and  asking  an  injunction  against 
any  sales  of  stock,  except  with  notice 
of  such  agreement,  stockholders    are 
necessary  parties  defendant.     Such  an 
agreement  is  not  an  exclusion  of  future 
boards  of  directors  from  the  manage- 
ment of    the   company.     Dupignac  v. 
Bernstrom,  76  N.  Y.  App.  Div.  105  (1902). 
While  a  corporation  cannot  be  a  part- 
ner, yet  it  may  share  profits  in  a  con- 
tract on  which  it  makes  advances.     L. 
J.  Mestier  &  Co.  v.  A.  Chevalier,  eta  Co., 
32  S.  Rep.  520  (La.  1901).     A  mining  cor- 
poration may  at  common  law  lease  its 
property  for  five  years  for  a  rental,  pay- 
able in  a  certain  portion  of  the  product 
of  the  mine.    A    stockholder   cannot 
complain,  even  though  the  contract  be 
an   error   of    judgment.     Hennessy  v. 
Muhleman,  40  N.  Y.  App.  Div.  175  (1899). 
*  Boyd  V.  American,  etc.  Co.,  182  Pa. 
St.  206  (1897).     Where  all  the  creditors, 
including  a  corporation,  form  a  partner- 
ship to  dis|)Ose  of  the  assets,  and  the 
assets  are  so  disposed  of,  the  corporation 
589 


§  C79.] 


ULTKA    VIRES    ACTS    AND    O^NTRAOTS. 


[CH.  XL. 


mav  enforce  the  provisions  of  the  contract.'  A  corporation  that 
has  entered  into  a  partnership  for  a  certain  period  of  time  cannot 
recover  damages  for  tlio  failure  of  the  other  party  to  continue  the 
partnership  during  that  time.^  There  have  been  many  dicta  to  tho 
effect  that  a  corporation  cannot  be  a  partner;'  and  the  question 
has  arisen  indirectly  in  many  cases  involving  railroad  tratlic  and 
pooling  contracts/  and  in  still  other  cases  where  illegal  combina- 
tions in  restraint  of  trade  have  been  made;*  but  there  are  few  au- 
thorities bearing  directly  on  the  sui^ject." 

§  070.  A  vorporulion  aoDiot  he  an  executor  or  an  administrator 
or  a  trustee,  unless  specially  authorized  hy  statute. —  The  duties  of 
the  otHce  are  personal  and  incapable  of  being  delegated  to  an  agent. 
Since  a  corporation  acts  only  through  agents,  it  cannot  assume  the 
duties  of  an  executor.^     A  person  who  makes  a  note  to  a  corpora- 


cannot  defend  aRainst  a  hill  for  nn  ac- 
counting on  the  ground  tliat  it  was 
ultra  vires  for  it  to  enter  the  partner- 
ship. Kellv  V.  Biddle.  1«0  Mass.  147 
(19U1).  A  corporation  cannot  be  a  part- 
ner, and  henco  where  two  corporations 
carry  on  the  business  jointly  in  an  as- 
sumed name  the  assets  belong  one-half 
to  each.  Geurinck  v.  Alcott,  66  Ohio 
St.  94  {1902). 

'A  contract  wliereby  a  manufactur- 
ing corporation  and  all  of  its  stockljold- 
ers  agree  to  sell  a  certain  proportion  of 
the  capital  stock  of  said  company,  and 
to  substitute  two  persons  nominated  by 
the  vendee  as  directors  in  such  corpo- 
ration, is  not  presumed  to  be  ultra  vires, 
and  a  provision  in  such  contract  that 
the  purchaser  will  carry  on  the  business 
and  divide  profits  every  six  months  may 
be  enforced  by  the  corporation.  Rider 
Life  Raft  Ca  v.  Roach,  97  N.  Y.  378 
(1884). 

2  Sabine,  etc.  Co.  v.  Bancroft,  16  Tex. 
Civ.  App.  170  (1897).  A  mere  allegation 
that  one  company  is  liable  for  the  debts 
of  another  on  the  grourd  that  they  are 
partners  is  an  insufficient  allegation. 
White  V.  Pecos,  etc  Co.,  18  Tex,  Civ. 
App.  634  (1898). 

8  New  York,  etc.  Canal  Co.  v.  Fulton 
Bank,  7  Wend.  413  (1831).  Cf.  1  Lindley, 
Partn.,  p.  86. 

*  See  ch.  LIII,  infra. 


5Ch.  XXIX.  aiipra, 

8  A  stage  company  may  be  a  co-owner 
of  a  stage  line  with  an  individual. 
Calvert  v.  Idalio  Stage  Ca,  2ri  Oreg.  412 
(1894).  In  State  v.  Port  Royal,  etc  Ry., 
79  Fed.  Rep.  397  (1897).  a  lease  of  a  rail- 
road seems  to  have  been  owned  by  a 
corporation  and  an  individual  as  part- 
ners. A  corporation  owning  water- 
works outside  of  a  city  may  agree  to 
furnish  water  to  one  inside  the  city,  the 
general  distribution  of  the  water  to  be 
under  the  joint  control  of  two  agents, 
each  corporation  appointing  one,  and 
the  j)roHts  to  be  divided  equally.  San 
Diego  Water  Ca  v.  San  Diego  Flume 
Co.,  108  Cal.  549  (1895).  A  corporation 
may  enter  into  a  land  speculation  with 
an  individual,  the  profits  and  losses  to 
be  divided  equally,  if  the  corporation 
is  to  have  entire  control  of  the  business. 
Bates  V.  Coronado  Beach  Co..  109  CaL 
160  (1895).  Where  a  railroad  company 
is  interested  in  the  construction  of  a 
connecting  line,  it  is  liable  for  the  serv- 
ices of  an  attorney  employed  by  it  in 
connection  therewith.  St.  Louis,  etc 
R  R.  r.  Kirkpatrick,  52  Kan.  104  (1893). 

"^  Georgetown  College  v.  Browne.  34 
Md.  450  (1871),  where  it  was  also  held 
that  a  corporation  will  not  be  allowed, 
as  in  England,  to  designate  a  person  to 
administer  with  the  will  annexed.  See 
also  Ee  Thompson,  33  Barb.  334  (1861). 


1590 


CH.  XL.]  ULTKA    VIKES    ACTS    AND    CONTKACTS.  [§  680. 

tion  as  administrator,  however,  cannot  defeat  it  by  alleging  that 
the  corporation  was  not  authorized  to  act  as  such.^  The  charter 
of  the  corporation  may,  however,  expressly  authorize  it  to  act  as 
executor  or  trustee.  But  where  the  statutes  of  a  state  provide  that 
no  foreign  corporation  shall  transact  business  which  a  domestic  cor- 
poration cannot  transact,  and  domestic  corporations  are  not  allowed 
to  act  as  executors,  a  foreign  corporation  cannot  act  as  such  in  the 
state."^ 

As  to  trusts  the  rule  is  not  so  rigid.  The  old  rule  that  corpora- 
tions could  not  take  property  in  trust  for  the  use  of  others  is  now  ob- 
solete.' A  corporation  may  be  a  trustee  to  hold  property  in  trust  for 
purposes  within  the  corporate  power.*  If  a  corporation  be  incom- 
petent to  act  as  trustee,  the  devise  or  grant  will  not  thereby  be- 
come void;  a  court  of  equity  will  appoint  a  proper  trustee  to  carry 
out  and  execute  the  trust.*  It  is  no  defense  to  an  action  by  a 
bondholder  to  reach  a  sinking  fund  that  the  corporation  holding 
the  fund  had  no  charter  right  to  act  as  custodian,  and  that  such 
custodian  had  illegally  guaranteed  the  bonds.^ 

§  6S0.  Stoclilwhler's  riglit  to  i)revent  the  corporation  from  under- 
taliing  a  new  husiness. —  It  is  ultra  vires  of  a  corporation  to  under- 
take to  carry  on  a  business  which  is  not  fairly  within  the  scope  of 
the  business  described  in  its  charter.  When  such  an  attempt  is 
made  on  the  part  of  the  directors  or  a  majority  of  the  stockholders, 
a  dissenting  stockholder  may  insist  upon  the  corporate  business 
being  confined  to  the  limits  of  the  corporate  charter;  and  he  may 
enjoin  or  set  aside  any  acts  which  do  not  conform  to  those  limits. 

1  Union,  etc.  Co.  v.  Wright,  58  S.  W.  Robertson  v.  Bullions,  11 N.  Y.  243  (1854), 
Rejx  755  (Tenn.  1900).  a  religious  society.     Re  Howe,  1  Paige, 

2  Farmers',  etc.  Co.  v.  Smith,  51  AtL  214  (1828),  holds  that,  while  corpora- 
Rep.  609  (Conn.  1903).  tions  cannot  be  trustees  in  matters  in 

3  Vidal  V.  Girard,  2  How.  127,  187  which  tliey  have  no  interest,  yet  if 
(1844),  where  Mr.  Justice  Story  said:  property  be  devised  or  granted  to  a 
"  Where  the  corporation  has  a  legal  corporation  upon  trust,  partly  for  itself 
capacity  to  take  real  or  personal  estate,  and  partly  for  another,  it  may  execute 
thereit  may  take  and  hold  it  upon  trust  the  trust.  One  mission  society  cor- 
in  the  same  manner  and  to  the  same  poration  may  take  property  in  trust  for 
extent  as  a  private  person  may  do; "  another  mission  society  corporation. 
Chapin  v.  Winchester  School  Dist.,  35  Sheldon  v.  Chappell,  47  Hun,  59  (1888). 
N.  H.  445  (1857),  holding  that  a  corpora-  *  White  v.  Rice,  112  Mich.  403  (1897). 
tion  may  be  trustee  of  a  charity  if  con-  5  Vidal  v.  Girard,  2  How.  127,  187 
sistent  with  the  object  of  its  creation.  (1844);  Chapin  v.  Winchester  School 
See  also  g  694,  infra;  Phillips  Academy  Dist.,  35  N.  H.  445  (1857). 

V.  King,  12  Mass.   546  (1815),   holding        «  Central,  etc.  Co.  u.  Farmers',  etc.  Co., 
that  a  corporation  aggregate   may  be    116  Fed.  Rep.  700  (1901). 
a  trustee;  Perry,  Trusts,  §  43  et  seq.; 

1591 


§  681.]  UI.TItA.    VIKES    ACTS    AND    OONTliAOTS.  [cil.    XL. 

Tlius,  a  corporation  formed  to  niaaufacture  iron  cannot  go  into  the 
Hour  and  mill  business.' 

§  681.  Miscelhnu'OUH  ultra  vires  acts  —  T^nf or  cement  of  ultra  vires 
contracts. —  A  judgment  on  an  -ultra  virea  contract  may  be  im- 
peached to  the  same  extent  that  the  contract  itself  might  have  been 
impeached.*  A  contract  whereliy  a  manufacturing  ci^rporation 
and  all  of  its  stockholders  agreed  to  st>ll  a  certain  proportion  of  the 
capital  stock  of  said  company  and  to  substitute  two  persons  nomi- 
nated by  the  vendee  as  directors  in  such  corporation  is  not  pre- 
sumed to  be  ultra  vires,  and  a  provision  in  such  contract  that  the 
purchaser  will  carry  on  tlie  business  and  divide  profits  every  six 
months  may  be  enforced  by  the  corporation.'  Even  though  a  note 
given  l)y  one  insurance  company  to  purchaso  the  business  of  an- 
other insurance  company  is  not  legal,  yet  if  the  assets  of  the  corpo- 
ration that  issued  the  note  are  used  to  take  it  up,  the  money  cannot 
be  recovered  back.*  Although  a  department  store  corporation  fur- 
nishes a  dentist,  as  a  part  of  its  business,  without  chartered  right 
so  to  do  and  in  violation  of  a  statute  regulating  dentistry,  it  cannot 
set  up  this  defense  in  a  suit  against  it  for  malpractice.*  Even 
though  a  corporation  is  selling  its  product  below  cost,  in  order  to 
force  another  corporation  to  combine  with  it,  yet  a  stockholder  in 
the  former  cannot  enjoin  such  sales,  where  neither  of  the  corpora- 
tions has  a  natural  monopoly,  and  no  bad  faith  or  palpaldy  bad 
judgment  is  shown.'' 

In  a  suit  by  a  lessee  to  enjoin  the  lessor  from  taking  possession 
of  the  property  for  an  alleged  breach  of  the  lease,  the  lessee  cannot 
set  up  that  the  lease  was  ultra  vires,  at  the  same  time  retaining  the 
past  benelits  of  the  lease.^  A  contract  of  a  corporation  is  legal  if 
it  is  not  expressly  prohibited,  and  if  it  has  "a  natural  and  reason- 
able tendency  to  aid  in  the  accomplishment  of  the  objects  for  which 
the  corporation  was  created,"^ 

1  Cherokee  Iron  Co.  v.  Jones,  52  Ga,  tliirtieth  of  one  per  cent  of  the  pre- 
27C  (1S74).     See  also  g  681,  infra.  ferred  stock,  and  his  reason  for  exam- 

2  Great,  etc  Ky.  v.  Charlebois,  [1899]  ining  the  books  is  tliat  he  believes  tlie 
A.  C.  114.  company  is  selling  its  product  at  less 

3  Rider  Life    Raft  Co.  v.  Roach,  97  than  cost  by  reason  of  competition,  and 
N.  Y.  378  (1884).  that  consequently  he  has  received  no 

<McClure    v.    Trask,   161    N.   Y.   83  dividends,  it  not  being  shown  that  the 

(1899).  market  price  of  the  stock  has  been  de- 

5  Hannon    v.   Siegel-Cooper  Co.,    167  creased.    Matter  of  Pierson,  28  N.  Y. 

N.  Y.  244  (1901).  Misc.   Rep.  726  (1899);    aff'd,  44  N.  Y. 

•■Trimble  v.  American,  etc.  Co.,  61  N.  -A pp.  Div.  215. 

J.  Eq.  340  (1901).     Mandamus  will  not  "  Pittsburgh,  etc.    R.  R,  v.    Altoona, 

be  granted  to  allow  a  stockholder  to  etc.  R.  R.,  196  Pa.  St.  452  (1900). 

examine   the   books  of  the    company  ^  Colorado,  etc.  Co.  v.  American,  etc 

•where  such  stockholder  owns  only  one-  Co.,  97  Fed.  Rep.  843  (1899), 

1592 


CH.  XL.]  ULTRA   VIRES    ACTS    AND   CONTRACTS.  [§  CSl. 

An  agreement  of  a  national  bank  that  it  will  pay  all  checks  of  a 
person  is  not  enforcible  by  a  party  who  cashes  such  checks  relying 
on  such  agreement,  it  appearing  that  the  bank  had  no  funds  of  the 
former  to  meet  such  checks.  This  is  an  ultra  vires  contract  of 
guaranty.^  Where  the  statutes  in  existence  at  the  time  of  incor- 
poration provide  for  the  extension  of  corporate  charters,  a  stock- 
holder cannot  prevent  the  corporation  from  extending  its  existence 
in  accordance  with  such  statutes.-  Where  a  bank  carries  on  a 
mercantile  business  without  the  charter  right  to  do  so,  and  fails, 
the  creditors  of  the  bank  in  its  legitimate  business  will  be  preferred 
over  the  creditors  in  the  mercantile  business.^ 

A  corporation  organized  to  manufacture  railway  cars  has  no 
power  to  lay  out  a  town  around  its  works  and  build  twenty-two 
hundred  homes  to  lease  to  its  employees,  to  build  and  run  a  hotel 
and  saloon,  and  also  a  theater,  a  gas  plant,  a  system  of  water-works 
and  a  brick  plant,  and  to  own  and  run  a  farm  for  supplies  to  sell 
and  for  its  employees,  and  to  own  stock  in  other  corporations  man- 
ufacturing and  selling  bar  iron  and  railroad  spikes;  but  may  erect 
an  office  building  containing  more  space  than  it  requires  at  the 
time;  and  may  purchase  morfe  real  estate  than  it  actually  requires 
at  the  time,  and  may  supply  liquor  to  passengers  on  its  cars,  and 
may  sell  surplus  steam  power.*  The  board  of  directors  of  an  in- 
surance company  have  no  power  to  employ  an  agent  on  a  basis  which 
will  give  the  agent  an  interest  in  premiums  for  ten  years,  and  cer- 
tainly an  executive  committee  has  no  such  power.*  A  stockholder 
in  a  hotel  company  cannot  enjoin  the  managers  from  leasing  apart 
of  the  property  for  other  purposes,  there  being  sufficient  accommo- 
dation left  for  the  hotel.**  And  it  has  been  held  that  a  stockholder 
cannot  enjoin  his  corporation  from  paying  money  to  a  rival  com- 
pany to  induce  the  latter  to  discontinue  business.'^  But  any  misap- 
plication or  waste  of  the  property  of  a  corporation  may  be  remedied 
by  a  member  thereof.^  It  is  illegal  for  the  directors  or  a  majority 
of  the  stockholders  to  give  away  the  assets  of  the  corporation  for 
the  promotion  of  other  enterprises.^     Nevertheless  a  note  given  by 

1  Bowen  v.  Needles,  etc  Bank,  94  Fed.     estate  was  properly  taxed.    People  v. 
Rep.  925  (1899).  Pullman's  Palace  Car  Co.,  175  IlL  125 

2  Smith  r.  Eastwood,  etc.  Co.,  58  N.  J.     (1898). 

Eq.  831  (1899X  ^  Caldwell  v.  Mutual,  etc  Assoc,  53 

3  State  V.   Bank  of  Hemingford,  58    N.  Y.  App.  Div.  245  (1900). 

Neb.  818  (1899).  *  Simpson  v.  Westminster,  etc.  Co.,  8 

4  The  state  may  bring  quo  warranto    H.  L.  Cas.  712  (1860). 

proceedings  to  forfeit  the  charter.    It        '  Leslie  v.   Lorillard,  110   N.   Y.  519 
is  no  defense  that  the  usurpations  had    (1888). 

continued  for  many  years  to  the  knowl-        «  Armstrong  v.  Church  Soc,  13  Grant 
edge  of  the  state,  or  that  a  legislative    Ch.  (U.  C.)  552  (1867). 
committee  had  reported  that  the  real        » See    ^    64,  supra,  and  §g   775,  909, 

1593 


§  CSl.] 


ULTRA    VIRES    ACTS    AND    CONTRAarS. 


[CU.   XL. 


an  improvement  company  to  adjust  a  contract  by  which  it  had 
agreed  to  give  a  right  of  way,  terminals,  and  a  bonus  to  a  street 
railway  may  be  enforced.'  An  improvement  company  having  wide 
powers  may  give  a  part  of  its  stock  to  a  railway  company,  in  order 
to  have  the  road  built  to  the  i)roperty  of  the  improvement  company, 
A  stockholder  who  has  voted  therefor  cannot  afterwards  complain. - 
A  street  railroad  may  donate  money  to  a  baseball  park.'  And  a 
land-improvement  company  may  agree  to  pay  one-third  of  the  ex- 
pense of  a  bridge  in  the  public  highway.*  A  bank  has  no  power 
to  make  a  donation  to  a  paper  mill.*  A  stockholder  may  enjoin 
any  act  on  the  part  of  the  state  which  is  in  violation  of  the  charter 


infra.  Back  pay  cannot  bo  voted  to  the 
directors  It  is  an  illof^al  gift.  See 
g  657,  supra.  But  an  educational  in- 
stitution may  donate  money  to  the  con- 
struction of  a  railroad.  Louisville,  etc. 
R  R  V.  St.  Rose  Literary  Soo..  91  Ky. 
8!).")  (1801).  A  town-site  corporation  may 
give  away  certain  lots  and  give  a  sum 
of  money  to  a  party  who,  in  considera- 
tion thereof,  agrees  to  remove  a  barn, 
eta,  to  another  location,  Sherman,  etc. 
Ca  V.  Russell,  46  Kan.  3S'3  (181)1);  Sher- 
man, etc.  Ca  r.  Fletcher,  46  Kan.  524 
(1891).  A  railroad  cannot  be  held  lia- 
ble on  its  contract  to  pay  for  the  exam- 
ination of  mines  of  wliich  the  railroad 
is  the  outlet  George  v.  Nevada  Cent, 
R  R,  23  Nev.  228  (1894V  But  directors 
may  compromise  corporate  claims. 
Frankfort  Bank  v.  Johnson,  24  Me.  490 
(1844),  and  §  750,  infra.  Directors  can- 
not legally  pay  out  money  which  is  not 
owed.  Salem  Bank  v.  Gloucester  Bank, 
17  Mass.  1, 30  ( 1820).  Directors  should  not 
use  corporate  funds  to  sue  for  a  libel 
on  themselves  as  directors;  but  where 
the  stockholders  were  informed  of  the 
payment  it  will  not  be  disturbed.  Stud- 
dert  V.  Grosvenor,  L.  R  83  Ch,  D.  528 
(1886).  The  money  of  a  city  cannot  be 
used  to  buy  a  gold  chain  for  the  mayor. 
Attorney-General  v.  Batley,  26  L.  T. 
Rep.  392  (1872).  Nor  to  give  extra  pay 
to  a  clerk.  Ex  xmrte  Hellish,  8  L  T. 
Rep.  47  (1863).  Nor  can  lodge  funds  be 
given  to  outside  charitable  purposes. 
Polar  Star  Lodge  v.  Polar  Star  Lodge, 


10  La.  Ann.  53  (1801).  Where  a  stock- 
holders' meeting  has  recotnmended  that 
a  week's  extra  pay,  as  a  gratuity  to  the 
workmen  of  a  manufacturing  corpora- 
tion, be  given,  and  the  directors  give 
it.  a  dissenting  stockholder  cannot  hold 
the  directors  liable  therefor,  Hampson 
V.  Price's,  eto.  Co.,  45  L.  J.  (Uh.)  437 
(1876);  Clarke  v.  Imperial  Gas  Light  & 
C.  Ca.  4  B.  «fe  Ad.  315  (1832),  upholding 
a  grant  of  an  annuity  to  a  disabled 
clerk.  A  bank  may  make  a  gift  to  the 
children  of  a  deceased  superintendent. 
Henderson  v.  Bank  of  Australasia,  K  R 
40  Ch.  D.  170  (1888V  As  against  its 
creditors,  a  corporation  cannot  give 
away  any  part  of  its  assets.  Mason  v. 
Fischer,  etc.  Co.,  21  S.  Rep.  5  (Miss. 
1896). 

1  Llano  Imp,  etc.  Ca  v.  Pacific  Imp. 
Ca,  66  Fed.  Rep.  526  (1895). 

2McGeorge  v.  Big  Stone  Gap  Imp. 
Ca,  57  Fed.  Rep.  262  (1893).  A  business 
corporation  may  donate  money  to  se- 
cure the  location  of  a  postoftice  near  its 
place  of  busmess.  B.  S.  Green  Co.  v. 
Blodgett.  159  111.  169  (1895V 

» Temple,  etc.  Ry.  v.  Hellman,  103  CaL 
634(1894). 

4  Fort  Worth  City  Co.  v.  Smith  Bridge 
Ca,  151  U.  S.  294  (1894).  The  directors 
may  regulate  the  rates  and  may  give 
away  free  passes  withm  reasonable 
limits.  Hasson  v.  Venango  Bridge  Co., 
1  Pa.  Dist.  521  (1892V 

*  Robertson  v.  Buffalo,  eta  Bank,  40 
Neb.  235  (1894). 


1594 


CH.  XL.]  ULTRA   VIRES    ACTS    AND    CONTRACTS.  [§  681. 

which  it  granted  to  the  corporation.  It  was  to  enjoin  a  tax  by  the 
state  under  such  circumstances  that  the  case  of  Dodge  v.  AYoolsey  ^ 
arose. 

Even  though  a  national  bank  buys  bonds  which  it  has  no  power 
to  buy,  and  agrees  to  sell  back  to  the  vendor  at  a  certain  price,  yet 
it  cannot  set  up  a  plea  of  ultra  vires  when  it  is  sued  by  the  vendor 
for  refusal  to  resell.^  Even  if  a  navigation  company  purchases  a 
hotel  property  ulira  vh^es,  yet  its  lessee  cannot  refuse  to  pay  the 
rent  on  that  ground,  nor  can  bondsmen  for  the  payment  of  such  rent 
defend  on  that  ground.' 

A  stockholder  in  a  company  organized  to  purchase  a  certain  mine 
may  enjoin  the  company  from  purchasing  a  mine  in  another  coun- 
try, even  though  the  certificate  of  incorporation  contains  some 
general  powers.* 

Even  though  a  railroad  is  giving  a  lower  rate  to  one  customer 
than  to  another,  vet  a  stockholder  cannot  maintain  a  suit  of  in- 
junction  to  compel  the  party  to  pay  what  he  should  have  paid. 
While  the  act  is  illegal,  it  is  not  ultra  vires,  and  as  to  the  illegal  act 
it  is  for  the  corporation  to  decide  whether  or  not  it  will  sue.' 

A  national  bank  has  power  to  take  a  lease  of  land  and  erect  an 
office  building  thereon  for  its  own  use  and  for  the  purpose  of  rent- 
ing what  it  does  not.  need.® 

A  corporation  may  be  liable  on  its  agreement  to  give  a  percent- 
age of  its  profits  to  a  manufacturer  of  certain  machinery,  other 
corporations  having  also  agreed  to  do  the  same.' 

A  savings  bank  and  trust  company  cannot  be  held  liable  for 
losses  on  speculations  in  cotton,  although  it  represented  that  its 
orders  were  for  responsible  customers.^ 

The  contract  of  a  railroad  company  not  to  oppose  the  passage 

1 18  How.  331  (1855).    The  court,  how-  3  Nantasket,  etc  Co.  v.  Shea,  65  N.  K 

ever,  refused  to  sustain  a  stockholder's  Rep.  57  (Mass.  1902). 

action  to  enjoin  the  corporation  from  *  Stephens  v.  Mysore,  etc.  Co.,  86  L.  T. 

paying  a  license  tax  imposed  by  the  Rep.  221  (1902). 

United  States  government  in  the  case  *  Anderson  v.  Midland  Ry.,  85  L.  T. 

of  Corbus  V.  Alaska,  etc.  Co..  187  U.  S.  Rep.  408  (1901). 

455  (1903).    Stockholders  may  enjoin  the  «  Brown  v.  Schleier,  118  Fed.  Rep.  981 

company  from  discounting  paper  usuri-  (1902),  holding'also  that  a  receiver  in  a 

ously  and  in  a  manner  contrary  to  its  national  bank  cannot  maintain  a  suit 

charter,  i.  e.,  without  the  paper  being  to  recover  back  from  the  lessor  of  prem- 

passed  on   by  the  directors.    The  in-  ises  to  the  bank  the  rent  and  cost  of  im- 

junction  lies  on  the  ground   that  the  provements,  on  the  ground  that    the 

charter  is  endangered.     Manderson  v.  lease  was  iiUra  vires,  especially  where 

Commercial  Bank,  28  Pa,  St.  379  (1857).  the  lease  has  been  in  existence  for  ten 

2  Logan  County  Bank  u  Townsend,  139  years. 

U.  S.  67  (1891);  s.  a,  3  S.  W.  Rep.  123  ^Good  v.  Daland,  121  N.  Y.  1  (1890). 

(Ky.  1887>.  sjemison  v.  Citizens'  Sav.  Bank,  123 

N.  Y.  135  (1890);  a.  c.,  44  Hun,  412. 
1595 


§  681.]  ULTRA    VIUKS    ACTS    AND    CONTKACTS.  [CH.   XL. 

of  a  law  giving  land  to  anotlier  corporation,  the  land  to  be  divided 
subsequently,  is  illegal  and  not  enforceable.' 

^lany  instances  and  examples  of  what  acts  and  contracts  of  a 
railroad  corporation  are  nlira  vires  are  given  elsewhere.' 

After  a  land  company  has  |Hircliased  a  stock  of  goods  and  sold 
them,  it  cannot  defeat  an  action  for  the  price  of  the  sale  to  it  by 
the  defense  of  id/ra  vires.     The  contract  lias  i)een  executed.' 

A  manufacturing  corporation  cannot  enforce  a  contract  of  sale 
of  oil  to  it,  which  it  bought  to  resell.* 

Where  a  manufacturing  corporation  enters  into  a  contract  with 
a  municipality  to  build  conduits,  such  contract  is  ultra  vires,  and  for 
a  breach  thereof  by  the  municipality  before  the  contract  is  carried 
out  the  company  cannot  collect  damages.' 

AltlK)Ugh  an  educational  institution  is  operating  a  ferry  without 
power  so  to  do,  yet,  if  a  person  is  injured  by  the  ferry,  the  institu- 
tion is  liable  in  damaires.* 

Where  the  lessee  of  a  car-company  plant  repudiates  the  lease  on 
the  ground  of  ultra  vires  and  refuses  to  pay  rent,  and  the  court 
holds  that  it  cannot  be  compelled  to  pay  rent,  the  lessor  company 
may  compel  the  lessee  to  pay  for  the  ])roperty  so  taken,  including 
the  value  of  the  contracts  taken  over." 

A  corporation  receiving  goods  ultra  vires  to  gell  on  commission  is 
nevertheless  liable  for  breach  of  contract  as  to  the  price  of  the  sale." 

An  iron  and  steel  manufacturing  company  has  no  power  to  oper- 
ate a  public  or  private  warehouse,  llence  warehouse  receipts 
issued  by  the  corporation  on  its  own  proj)erty  are  not  protected 
like  the  ordinary  warehouse  receipts,  and  corporate  creditors  who 
hold  such  receipts  are  not  protected  thereby,  and  the  transaction 
may  not  amount  to  a  pledge.' 

^Chippewa,  etc.  Ry.  u.  Chicago,  etc.  fortlieffood-will.  patents,  and  contracts 

Ry.,  75  Wis.  224  (1889).  which  expired  during   tlie  lease.     Ac- 

2  See  §909,  infra.  cordingly,  where  the  stipulated  rental 

3  Siierman,  etc.  Co.  v.  Morris,  43  Kan.  was  $264,000  a  year,  the  lower  court  al- 
282  (1890).  lowed  for  use  the  value  of  the  capital 

4  Bosshardt,  etc.  Co.  v.  Crescent  Oil  stoci<  of  the  lessor,  inasmucli  as  such 
Co.,  171  Pa.  St*  109  (1895).  value  had  been  consumed  in  connection 

5  Safety,  etc.  Co.  v.  Baltimore,  74  Fed.  with  the  lease,  and  such  value  was  fixed 
Rep.  363  (1896).  at  upwards  of  $2,500,000  and  interest, 

8  Nims  u  Mount  Hermon  Boys' School,  but  the    supreme  court  reduced    the 

160  Mass.  177  (1893).  compensation  to  $727,000  and  interest, 

7  In  Pullman's  P.  C.  Co.  v.   Central  being  the  actual  value  of  the  tangible 

Transp.  Co.,  171  U.  S.  138  (1898),  the  property. 

court  held  that,  where  a  lease  of  prop-  8  Union  Hardware  Co.  U  Plume,  etc. 

erty  was  ultra  vires  and  void,  the  only  Co.,  58  Conn.  219  (1889). 

compensation  for  the  actual  use  would  9  Franklin  Nat  Bank  v.  Whitehead, 

be  for  the  tangible  property,  and  not  149  Ind.  5p0  (1898). 

1596 


CH.  XL.] 


ULTRA   VIRES    ACTS    AND    CONTRACTS. 


[§  68L 


Where  one  railroad  company  agrees  to  expend  certain  money  on 
anotber  railroad,  and  the  repayment  of  the  money  is  guaranteed 
by  a  third  person,  such  third  person  cannot  repudiate  the  guaranty 
after  the  money  has  been  expended,  on  the  ground  that  the  act  was 
ultra  vires} 

A  bank  sued  as  bailee  for  a  loss  of  a  special  deposit  cannot  set  up 
ultra  vires} 

A  bank  cashier  cannot  buy  boots  and  shoes  for  another  person  in 
the  name  of  the  bank.' 

A  party  with  whom  an  iron  company  contracts  to  deliver  ice 
cannot  recover  damages  for  a  breach  of  the  contract.*   • 

A  warehouse  company  will  not  be  allowed  to  set  up  ultra  vires 
as  a  defense  to  notes  given  by  it  in  payment  for  grain,  the  articles 
of  incorporation  having  provided  therefor,  although  -probably  ille- 
gally so.^ 

a"  land  company  must  pay  for  services  rendered  in  organizing 
other  companies  to  rent  and  locate  on  the  land  of  the  former.® 

Many  other  examples  and  illustrations  of  ultra  vires  acts  and 
intra  vires  acts  are  given  in  the  notes  hereto. 


1  Alexandria,  etc.  R.  R.  r.  Johnson,  58 
Kan.  175  (1897). 

2  First  Nat.  Bank  v.  Strang.  138  111. 
347  (1891);  Pattison  v.  Syracuse  Nat 
Bank,  80  N.  Y.  82  (1880). 

» North  Star,  etc.  Co.  v.  Stebbins,  2  S. 
D.  74  (1891). 

<  Simmons  v.  Troy  Ironworks,  93  Ala. 
427  (1890). 

5  Carson  City  Sav.  Bank  v.  Carson 
City  Elev.  Co.,  90  Mich.  550  (1892). 

6  Schurr  v.  New  York,  etc.  Co.,  18  N. 
Y.  Supp.  454  (1892). 

7  In  Safety,  etc.  Co.  v.  Mayor.  74  Fed. 
Rep.  363,  370  (1896),  the  court  said  in 
regard  to  ultra  vires  acts:  "It  is  evi- 
dent that  no  general  principle  can  be 
laid  down  whereby,  with  absolute  cer- 
tainty, it  can  be  determined  that  many 
transactions  are  or  are  not  among  the 
incidents  to  the  business  of  a  corpora- 
tion authorized  by  its  charter.  The  an- 
swer to  the  question  must  depend  upon 
the  facts  of  each  particular  case."  See 
cases  in  §  909. 

Federal  Courts:  See  the  cases  at  the 
end  of  this  section.  A  receiver  cannot 
have  a  contract  of  a  corporation  set 
aside  as  ultra  vires  and  cannot  recover 


back  payments  already  made  thereon, 
especially  where  the  contract  was  car- 
ried out  by  the  corporation  for  several 
years,  and  was  then  canceled  by  mut- 
ual agreement  before  the  receiver  was 
appointed,  the    contract    in  this  case 
being  a  ninety-nine  year  lease  of  real 
estate  to  a  bank,  upon  which  real  es- 
tate the  bank  erected  a  building  for  its 
own   use  and   for  rental.       Brown  v. 
Schleier.  112  Fed.   Rep.  577  (1901).      A 
corporation  formed  to  publish  a  paper 
in  a  particular  trade  may  publish  a  di- 
rectory of  that  particular  trade.    Jew- 
elers', etc.  Co.  V.  Jacobs,  109  Fed.  Rep. 
509  (1901).     A  stockholder  in  a  corpora- 
tion cannot  maintain  a  bill  to  enjoin 
the  payment  by  the  corporation  of  the 
tax  imposed  by  act  of  congress  upon 
such  corporation  for  doing  business  in 
Alaska.      Corbus  v.  Alaska,  etc.  Co..  99 
Fed.  Rep.  334  (1899).     A  bank  which  as 
pledgee  causes  by  its  statements  a  party 
to   purchase  the  stock  held  in  pledge 
may  be  held  liable  in  damages  if  such 
statements  were  false.  Hindman  v.  First 
Nat.  Bank,  etc.,  98  Fed.  Rep.  562  (1899). 
A  state  bank  has  no  power  to  purchase 
stock  in  a  national  bank  as  an  invest- 


1597 


§  C81.] 


ULTRA    VIRUS    ACTS    AND    CONTRACTS. 


[on.   -XL. 


Out  of  the  various  cases  set  forth  in  this  chapter  a  few  general 
rules  may  be  clearly  drawn  and  stated.     First,  there  is  no  clearly- 


ment,  and  hence  is  not  liable  on  such 
stock  in  case  the  national  bank  becomes 
insolvent     Schofield  v.  Goodrich,  etc. 
Co.,  98  Fed.  Rep.  271  (1899).    A  national 
bank  has  power  to  jnirchase  the  assets 
and  assume  tiie  liabilities  of  anotlier 
national  bank.    Scofield  v.  State   Nat. 
Bank,  etc.,  97  Fed.  Rep.  282  (1809).     Al- 
thouj^li  a  hardware  corporation  has  no 
power  to  becotne  a  stockholder  in  and 
borrower  from  a  building  association, 
yet  if  it  does  so  it  cannot  repudiate  a 
mortgage  which  it  gave  in  connection 
with    tiie    transaction.       Bowman    r. 
Foster,  eto.  Co..  91  Fed.  Rep.  592  (1899). 
A  stockholder  may  enjoin  the  corpora- 
tion from  obeying  an  illegal  order  of 
railroad  cnnunissioners  of  a  state  ro- 
c[uiriiig  shipptTS  to  pay  a  war  revenue 
stamp  tax.     Dinsmore  v.  Southern,  etc. 
Co..  92  Fed.  Rep.  714  (1899).     A  stock- 
holder in  a  railroad  corporation  that 
has  taken  a  lease  from  another  railroad 
corporation  cannot  object  thereto  on 
the  ground  that  the  lessor  had  no  power 
originally  to  acquire  and  own  the  rail- 
road.     Rogers  v.  Nashville,  etc.  Ry.,  91 
Fed.  Rep.  299  (1898).  Under  the  statute 
authorizing  corporations  for  any  lawful 
"  business  "  or  *'  pursuit,"  a  corporation 
may  be  formed  to  guarantee  the  bonds 
of  an  educational  institution, and  at  any 
rate  tlie  stockholders  in  such  corpora- 
tion cannot  question  the  power  of  the 
corporation  to  make  such    guaranty. 
Maxwell    v.   Akin,    89    Fed.   Rep.    178 
(1898).      Even    though    a  contract   by 
which  one  railroad  operates  another  is 
ultra  vires,  and  even  though  the  operat- 
ing road  by  another  ultra  vires  con- 
tract consents  to  a  mortgage    being 
placed  upon  the  other  road,  and  agrees 
to  protect  the  latter  by  paying  the  in- 
terest if  necessary,  nevertheless,  in  case 
of  a  default  and  foreclosure,  the  operat- 
ing road  cannot  claim  a  lien  for  better- 
ments in   priority  to  such   mortgage. 
Terre  Haute  &  I.  R.  R.  v.  Harrison,  88 
Fed.  Rej).  913  (1898).     A  corporation  or- 


ganized  to  manufacture  and  sell  cotton- 
seed oil  cannot  legally  buy  fertilizersund 
sell  thesamefor  a  profit.and  lienconotea 
given  therefor  are   void.      Richmond, 
etc.  Co.  V.  Farmers',  etc.,  119  Fed.  Rep. 
709  (1902).      Even  though  it  may   bo 
ultra  vires  for  a  national  bank  to  take 
charge  of  securities  and  collect  anil  re- 
invest the  i)roceeds.  yet  the  bank  must 
account  for  the  saraa    Emmerling  v. 
First  Nat  Bank,  etc.,  97  Fed.  Rep.  739 
(1899X     A  national  bank  may  give  a 
bond  to  secure  funds  deposited  with  it 
State  of  Nebraska  f.  First  Nat  Bank, 
88  Fed.  Rep.  947   (1898).      A  national 
bank  owning  stock  in  a  savings  bank 
may  defeat  tl)e  statutory  liability  at- 
tached thereto  by  a  plea  of  ultra  vires. 
California  Bank  v.  Kennedy,  167  U.  S. 
3«J2  (1897).     Cf.  Citizens'  State  Bank  v. 
Hawkins,  71  Fed.   Rep.  369  (189G),  and 
Cooper  Ina  Ca  v.  Hawkins,  71  Fe<l.  Rep. 
372  (1896).      Notes  given   by  a  lumber 
manufacturing  corporation  to  pay  for 
stock  in  a  bank  cannot  be  enforced. 
Sumner  v.  Marcy,  3  Woodb.  &  ]\J.  105 
(1847):  s.  a,  23  Fed.  Cas.  384.     A  corpo- 
ration  is  presumed  to  have  power  to 
purchase  a  patent  whose  use  pertains 
to  the  business  indicated  by  the  name 
of  the  corporation.     Dorsey,  etc,  Ca  v. 
Marsh,  6  Fish.  Pat  Cas.  387  (1873);  8.  C, 
7  Fed.  Caa  939.     In  Germania,  eta  Ca 
V.  Boynton,  71  Fed.  Rep.  797  (1896),  it 
was  held  that  even  though  every  stock- 
holder and  director  acquiesces  in  cor- 
porate bonds  being  issued  to  secure  the 
private  debt  of  an  officer,  yet  that  a 
party  receiving  such  bonds  with  notice 
could  not  enforce  them.      A  national 
bank  may  agree  that  a  person  going  se- 
curity on  an  attachment  bond  will  be 
protected  by  the  bank,  although  the 
bond  is  not  given  for  the  benefit  of  the 
bank.  Seeber  i\  Commercial  Nat  Bank, 
77  Fed.  Rep.  957  (1897).  See  189  U.  S.  122. 
Alabama:  A  mining  company  is  not 
liable  for  the  price  of  goods  which  it 
purchases  to  carry  on  an  ultra  vires 


1598 


CH.  XL.] 


ULTKA    VIEES    ACTS    AND    CONTRACTS. 


[§  681. 


defined  principle  of  law  that  determines  whether  a  particular  act 
is  ttltra  vires  or  intra  vires.  The  courts  are  becoming  more  liberal, 
and  many  acts  which  fifty  years  ago  would  have  been  held  to  be 


mercantile  business.  Chewacla  Lime 
Works  V.  Dismukes,  87  Ala.  344  (1889). 
Where  a  lime  and  limestone  corpora- 
tion engages  in  the  mercantile  business, 
it  is  not  liable  for  the  price  of  goods 
sold  and  delivered  to  it.  Chewacla 
Lime  Works  v.  Dismukes,  87  Ala.  344 
(1889). 

California:  Vandall  v.  South  San 
Francisco  Dock  Co.,  40  Cal.  83  (1870), 
liolding  that  a  corporation  empowered 
to  buy,  improve,  etc.,  real  estate  may- 
appropriate  a  portion  of  its  funds  to  a 
railroad  in  consideration  of  lower  rates 
and  more  frequent  trains.  Where  an 
improvement  company  engages  in  the 
hotel  business,  it  cannot  repudiate  the 
liabilities  of  an  innkeeper  on  the  ground 
that  the  hotel  business  was  beyond  its 
powers.  Magee  v.  Pacific  Imp.  Co.,  98 
Cal.  G78  (1893).  A  mortgagor  of  land 
to  a  national  bank  cannot  defend 
against  it  on  the  ground  that  the  bank 
had  no  power  to  take  the  raortgaga 
Camp  V.  Land,  122  Cal.  167  (1898). 

Colorado:  Minority  stockholders  may 
complain  when  the  majority  hold 
stockholders'  meetings  out  of  the  state, 
keep  no  office  or  books  in  the  state, 
appropriate  treasury  stock,  etc.  Jones 
V.  Pearl  Min.  Co.,  20  Colo.  417  (1894). 
An  improvement  company  has  no 
power  to  purchase  a  cause  of  action 
for  damages  to  land,  by  reason  of  a 
public  improvement,  even  though  prior 
thereto  it  had  purchased  the  land  it- 
self, and  if  it  sues  the  city  for  such 
damages  the  defense  of  ultra  vires  is 
good.  City  of  Pueblo  v.  Shutt  Inv.  Co., 
67  Pac.  Rep.  162  (Colo.  1901). 

Dakota:  A  party  who  loans  money 
to  a  corporation,  knowing  that  the 
money  is  to  be  used  by  the  company  to 
buy  shares  of  its  own  capital  stock,  can- 
not collect  his  debt,  the  act  being  ultra 
virts.  Adams,  etc  Ca  v.  Deyette,  8 
S.  D.  119  (1895). 


Georgia:  A  bank  which  buys  in  a 
manufactory  on  an  execution  sale,  in 
order  to  protect  itself,  may  carry  on  the 
business  and  is  liable  for  debts  incurred 
thereby.  Reynolds  v.  Simpson,  74  Ga. 
454  (1885).  A  cotton  ginning  company 
cannot  defend  against  its  note  in  bona 
fide  hands,  given  by  the  company  to  pur- 
chase an  ice  machine,  especially  where 
there  is  no  attempt  to  rescind.  Towers, 
etc.  Co.  V.  Inman,  96  Ga.  506  (1895). 
Where  one  corporation  sells  its  prop- 
erty to  another,  and,  after  part  pay- 
ment is  made,  the  president  of  the 
vendee  turns  back  the  property,  but 
the  vendee  corporation  sues  for  the  re- 
turn of  the  property,  such  vendee  cor- 
poration cannot  afterwards  claim  that 
tlie  transaction  was  ultra  vires.  Steele 
Lumber  Co.  v.  Laurens  Lumber  Co.,  98 
Ga.  329  (1896).  Where  a  corporation 
SUBS  on  notes  which  it  has  purchased, 
the  defense  of  ultra  vires  is  not  suffi- 
cient. The  answer  must  be  more  spe- 
cific. Hart  V.  Phenix,  etc.  Co.,  113  Ga. 
859  (1901). 

Illinois:  A  building  corporation  being 
sued  for  breach  of  its  contract  to  keep 
property  insured  cannot  set  up  that  it 
had  no  power  to  insure.  Chicago  Bldg. 
Soc.  V.  Crowell,  65  IlL  453  (1872).  A 
bank  may  establish  a  savings  depart- 
ment and  may  pay  interest  on  the  sav- 
ings deposits,  and  may  assign  in  trust 
certain  securities  to  secure  such  depos- 
its. Ward  V,  Johnson,  95  111.  215  (1880). 
Having  enjoyed  the  benefits  of  a  con- 
tract, a  corporation  cannot  refuse  pay- 
ment of  the  amount  due  on  the  plea  of 
ultra  vires.  So  held  where  a  brewing 
company  took  a  lease  of  a  saloon. 
Heims  Brewing  Co.  v.  Flannery,  137  111. 
309  (1891).  Inasmuch  as  a  national 
bank  cannot  transact  business  until 
authorized  so  to  do  by  the  comptroller 
of  the  currency,  a  lease  made  before 
such  consent  is  void,  and  the  only  re- 


1599 


§  681.] 


ULTRA    VIRKS    ACTS    AND    CONTRACTS. 


[cil.   AL. 


ulty^a  vires  would  now  bo  held  to  bo  intra  vires.  The  courts  havo 
gradually  enlarged  the  implied  \)0\\gys  of  ordinary  corporations, 
until  now  such  corporations  may  do  almost  anything  that  an  indi- 


covery  can  be  for  use  and  occupation. 
McCorinirk  i'.  Market  Nat.  Bank,  162 
111.  100  (1890).  A  building  association 
having  statutory  power  to  purchase 
land  on  wliich  it  has  a  lien  has  no 
power  to  purcliase  land  upon  wliich  it 
has  no  lien,  and  hence  tiie  association 
cannot  be  held  liable  for  a  deficiency 
in  the  foreclosure  of  a  mortgage  which 
rested  upon  such  proi)erty,  when  pur- 
chased by  the  association  anil  which 
the  association  assumed,  it  being  shown 
also  that  the  transaction  had  not  been 
authorized  by  tiie  board  of  directors, 
but  that  on  the  contrary  thoy  repudi- 
ated it.  National,  etc.  Assoc,  v.  Home, 
etc.  Bank,  181  111.  3.1  (1899).     A  corpora- 


titled  to  one  vote,  cannot  maintain 
suit  against  a  city  for  diverting  the 
water  where  the  title  to  the  water 
rights  was  not  vested  in  the  corpora- 
tion, the  business  of  the  corjioration 
being  to  maintain  the  dam  and  race- 
ways and  preserve  the  water-power,  the 
expense  being  paid  by  a.sses.sment. 
Elgin,  etc.  Co.  v.  City  of  Elgin.  C2  N.  E. 
Kep.  929  (III.  1902).  A  compjiny  or::an' 
izeil  to  deal  in  pneumatic  bells  is  not 
liable  for  the  price  of  mica  washers  de- 
livered to  it  on  its  contract  to  pay  for 
the  sjima  Chicago,  etc.  Ca  r.  Jones, 
etc.  Co.,  91  III.  App.  TAl  (1S99). 

Indiana:  Even  though  a  person  loan- 
ing money  on  the  bonds  and  mortgage 


tion  organized  to  carry  on  the  brewing    of  a  corporation  knows  that  the  money 


business  antl  to  manufacture  and  sell 
soda  water  may  rent  a  place  for  a  "sa- 
loon," inasmuch  as  such  "  saloon  "  may 
be  to  sell  soda  water  only.  Brewer, 
etc.  Co.  V.  Boddie.  181  III.  622  (1899). 
A  brewing  company  cannot  become 
surety  on  an  appeal  bond,  even  though 
thereby  it  continues  to  sell  beer  to  the 
appealing  party.  The  company  is  not 
liable.  Best,  etc.  Co.  v.  Klassen,  185  III. 
37  (1900).  The  plea  of  ultra  vires  may 
be  interposed  in  a  collateral  proceed- 
ing only  when  the  corporation  has  per- 
formed an  act  which  it  is  not  under 
any  circumstances  authorized  to  per- 
form, even  in  part.  Rector  v.  Hart- 
ford Deposit  Co.,  60  N.  K  Rep.  528  (III. 
1901).      A    second    mortgagee    cannot 


is  to  l)e  used  for  an  nitra  vires  furiiose, 
yet  he  m.ay  enforce  the  same,  Wright 
V.  Hughes,  119  Ind.  324  (1889).  Where  a 
lumber  company  becomes  surety  on 
the  bond  of  a  con  tractor  against  mechan- 
ics' liens  on  a  building  which  he  in 
about  to  build  and  for  which  the  com- 
pany is  to  furnish  the  lumber,  the  de- 
fense of  ttltra  vires  is  not  good.  G.  F. 
Wittmer,  etc,  Co.  r.  Rice,  23  Ind.  App. 
586  (1900).  See  also  §§  774,  775.  ivfrii. 
A  person  loaning  money  to  a  corpora- 
tion on  its  note  may  collect  it,  even 
though  he  knew  the  money  was  to  be 
used  for  an  ttltra  I'ircs  i)urpose,  pro- 
vided he  did  not  take  part  in  such  use, 
and  such  use  was  not  made  a  condition 
of  the  loan.     Marion,  etc.   Co.  v.  Cres- 


complain  that  the  first  mortgage  has    cent,   etc.  Co.,  01  N.  E.  Rep.  688  (Ind. 
been  purchased  ultra  vires  by  a  corpo-    1901). 


ration.  Daniels  v.  Belvidere,  etc.  Assoc, 
61  N.  R  Rep.  1031  (111.  1901).  A  wateV- 
power  corporation  organized  under  a 
special  act  of  the  legislatui'e  by  which 


Iowa:  When  the  corporation  sues  on 
a  contract  a.ssigned  to  it,  its  want  of 
power  to  take  the  assignment  must  be 
proved    by  the  defendant.      Wardner, 


the  various  owners  of  riparian  rights  etc.  Ca  v.  Jack,  82  Iowa,  435  (1891)l 
and  of  the  dam  and  of  the  water-power  Where  the  statute  requires  gas  and  elec- 
therefrom  became  mterested  in  such  trie-light  franchises  to  be  voted  on 
company,  no  stock  being  issued,  but  by  the  people,  an  electric-light  corn- 
each  owner  of  water-power  being  en-     pany  is  not  liable  in  damages  for  fail- 

1600 


CH.  XL.] 


ULTRA    VIRES    ACTS    AND    CONTRACTS. 


[§  681. 


vidual  may  do,  provided  the  state  and  the  stockholders  and  credit- 
ors do  not  object.  In  the  case  of  railroads  the  courts  are  more 
strict.     The  public  are  interested  in  the  acts  and  operations  of  Fail- 


ure tosuppiy  the  number  of  lights  called 

for  by  its  contract  with  the  city,  where 
the  people  had  not  voted  on  the  fran- 
chise.    Even  though  the  city  had  paid 
for  lights   furnished,   this  is  the  rule. 
Keokuk    v.   Ft.    Wayne   Elec.   Co.,    90 
Iowa,  67  (1894).     A   mutual   insurance 
company  cannot  take  insurance  from 
a  stockholder  on  a  premium   paid.     In 
case  of  a  loss  the  company  may  defend 
on  that  ground.    In  re  Mutual,  etc  Ins. 
Co.,  107  Iowa,  143  (1899).    An  insurance 
company  cannot  defend  against  a  pol- 
icy on  the  ground  that  the  assessments 
called   for  by  the  policy   were  lower 
than  was  allowed  by  the  charter  of  the 
company.      Watts    v.    Equitable,    eta 
Assoc,  83  N.  W.  Rep.   441  (Iowa,   1900). 
Kansas:.  A  town-site  company  may 
be  liable  for  the  contract  of  its  general 
agent  with  a  store-keeper  guaranteeing 
that  a  railroad  would  be   constructed 
to  the  town  site  within  a  certain  time. 
Arkansas  Valley,  etc.  Co.  v.  Lincoln,  56 
Kan.  145  (1895).     An  opera  house  com- 
pany which  has  taken  stock  in  a  build- 
ing  association,    in   order  to  obtain  a 
loan,  cannot  repudiate  the  loan  on  the 
ground  that  it  was  not  authorized  to 
take  such  §tock.     Blue,  etc  Co.  v.  ]\Ier- 
cantile,   etc.    Assoc,   53  Pac  Rep.  761 
(Kan.  1898).  In  the  case  of  City  of  Kan- 
sas City  V.  Wyandotte,  etc  Ca,  61  Pac. 
Rep.  317  (Kan.    1900),   the  court  said: 
"  The  plea  of  ultra  vi7'es,   when  inter- 
posed   for  or    against    a    corporation, 


not  create  a  lien  on  the  property  men- 
tioned in  the  receipts.  Bell,  etc.  Co.  v. 
Kentucky,  etc  Cc,  48  S.  W.  Rep.  440 
(Ky.  1898).  A  gas  company  organized 
to  carry  on  business  under  a  specified 
contract  with  a  city  has  power  to  ac- 
cept a  new  franchise  in  lieu  thereof. 
Keith  V.  Johnson,  59  S.  W.  Rep.  487 
(Ky.  1900).  A  corporation  cannot  hold 
its  agent  liable  for  money  which  it  paid 
him  to  buy  articles  which  it  had  no 
power  to  buy,  the  goods  having  been 
delivered.  Louisville,  etc  Co.  v.  Stew-- 
art,  70  S.  W.  Rep.  285  (Ky.  1902). 

Louisiana:  The  state  may  enjoin  a 
foreign  railroad  company  from  carry- 
ing on  the  warehouse  business,  except 
so  far  as  the  same  is  incidental  to  the 
railroad  busmess,  the  charter  of  such 
company  not  including  warehouse 
business  as  a  business  in  itself.  State 
V.  Southern,  etc  Cc,  52  La.  Ann.  1823 
(1900). 

Maryland:  A  contract  by  a  packet 
company  to  pay  for  harbor  improve- 
ments is  ultra  vires  and  not  enforce- 
able. Abbott  V.  Baltimore,  etc.  Co.,  1 
Md.  Ch.  542  (1850).  '     • 

Massachusetts:  City  Hotel  v.  Dickin- 
son, 72  Mass.  586  (1856),  holds  that  a 
hotel  company  may  let  a  part  of  its 
building  for  shops.  A  ferry  company 
having  a  surplus  boat  may  rent  it. 
Brown  v.  Winnisimmet  Co.,  98  Mass, 
326  (1865).  A  company  engaged  in 
manufacturing  and  selling  glass  may 


;ht  not  to  be  permitted  to  prevail    purchase  glass  in  order  to  keep  up  its 


oug 

when  it  would  not  advance  justice,"and 
the  court  applied  this  rule  to  the  de- 
fense of  a  city  against  a  gas  bill  A 
corporation  organized  to  do  a  real  es- 
tate business  may  act  as  agent  in  tak- 
ing charge  of  real  estate,  collecting 
rents,  etc  Neosho,  etc.  Co.  v.  Hannuui, 
63  Pac.  Rep.  92  (Kan.  1900). 

Kentucky:  Warehouse  receipts  issued 
by  a   glass  manufacturing  company  do 


stock.  Lyndeborough  Glass  Co.  v.  Mas- 
sachusetts Glass  Cc,  111  Mass.  315(1873). 
In  Dupee  v.  Boston  Water  Power  Co., 
114  Mass.  37  (1873),  the  sale  by  the  com- 
pany of  surplus  land,  receiving  in  pay- 
ment stock  of  the  corporation  itself, 
was  upheld  as  against  a  dissenting 
stockholder's  action.  A  bank  which 
has  bought  in  property  on  a  foreclosure 
sale,  with  a  secret  agreement  that  it 


(101) 


1601 


§  CSl.] 


ULTRA    VIUES    ACTS    AND   COXTltACTS. 


[cn. 


XL. 


roads.     Ilence,  ordinarily,  the  courts  will  not  sustain  tho  acts  of 
railroads  in  selling,  leasing,  or  mortgaging  their  property,  or  ea- 


will  liokl  the  property  in  trust  for  cer- 
tain   purposes,   cannot    repudiate    the 
trust  on  the  ground  that  itis  ultra  vires. 
Wiutney  v.  Leominster  Sav.  Bank,  141 
Mass.  85  (188G).     A  manufacturing  cor- 
poration which  runs  a  store  and  sells 
goods  may  collect  for  goods  thus  sold, 
though  the  sales  were  made  by  its  un- 
disclosed a^ent.     Slater  Woollen  Co.  v. 
Lamb.    143   Mass.   420   (1887);    Ciiester 
Glass  Co.  V.  Dewey,  10  Mass.  94  (1819). 
Stockholders  cannot  enjoin   an   intra 
vires  act  on    the   ground   that  it  was 
promised  that   the  corporation   would 
not  enter  into  that  act.     Converse  v. 
Hood,  149  Mass,  471   (1889).     Although 
the  charter  of  a  water-works  company 
limits  the  amount  of  property  which  it 
may   hold,  yet,  if  it   holds  a  greater 
amount,  a    municipality   cannot  con- 
demn the  property  on  the  basis  of  the 
charter  limit.     Only  the  state  can  ob- 
ject that  the  company  holds  more  prop- 
erty  than   is    allowed   by   law.     West 
Springfield  v.  West  Springfield  Aque- 
duct Co.,  167  Mass.  128  (189G).    The  gen- 
eral incorporating  law  of  Massachusetts, 
wliich  does  not  allow  incorporation  for 
manufacturing  liquor,  does  not  prevent 
incorporation   for    selling  liquor,   and 
hence  a  foreign  corporation  may  sell 
liquor  in  that  stata     Enterprise,  etc. 
Co.  V.  Grimes,  173  Mass.  252  (1899). 

Michigan:  A  person  who  has  taken 
from  a  corporation  an  exclusive  right 
to  manufacture  under  a  patent,  and  has 
so  manufactured,  cannot  defeat  an  ac- 
tion for  the  royalties  agreed  upon  for 
the  goods  already  manufactured  by  al- 
leging that  the  contract  was liZfrarires. 
Hall  Mfg.  Co.  V.  American,  etc.  Co..  48 
Mich.  331  (1882).  A  person  having  sold 
and  partly  delivered  an  article  to  a  cor- 
poration which  the  corporation  had  no 
right  to  purchase  may  refuse  to  com- 
plete delivery,  and  may  sue  for  the  part 
delivered.  Day  v.  Spiral,  etc.  Co.,  57 
Mich.  146  (1885).     A  subscriber  or  do- 


nator  of  money  to  a  factory  cannot  pre- 
vent its  moving  away  if  it  is  a  losing 
enterprise.  Ayres  v.  Dutton,  87  Mich. 
528  (1891).  A  corporation  that  has  pur- 
chased a  judgment  and  collected  it  can- 
not refu.se  to  pay  the  vendor  of  the 
judgment  on  the  ground  of  ultra  vires, 
Clement,  eta  Co.  r.  Michigan,  etc.  Ca, 
110  Mich.  458  (1896).  Where  a  corpora- 
tion organized  to  do  a  jewelry  business 
is  really  a  scheme  to  carry  on  an  ille- 
gal and  fraudulent  investment  busi- 
ness, a  person  defrauded  may  file  a  bill 
in  equity  to  hold  the  corporation  and 
its  ofTicers  ar)d  stockholders  personally 
liable  and  enjoin  them  from  disposing 
of  the  assets  and  for  discovery.  Ed- 
wards V,  Michigan,  etc,  Ca,  92  N.  W. 
Kep.  491  (Mich.  19U2). 

Min  nesota:  The  admission  that  a  con- 
tract was  executed  by  a  corporation  is 
an  admission  that  the  corporation  had 
power  to  make  it,  and  the  ollicer  had 
power  to  sign  it.  Bausman  r.  Credit 
Guarantee  Ca,  47  Minn.  377  (1891).  A 
corporation  organized  to  improve  a  river 
for  driving  logs  cannot  itself  drive  logs 
or  collect  therefor.  Northwestern,  eta 
Ca  V.  O'Brien,  75  Minn.  335  (1899). 

JUississippi:  A  corporation  may  ofifer 
a  reward  for  the  detection  of  criminals 
who  have  committed  a  crime  against  it. 
Norwood,  etc.  Co.  v.  Andrews,  71  Miss. 
641  (1894).  Although  two  cotton  com- 
press companies  have  agreed  to  consoli- 
date, and  have  put  their  property  in  the 
hands  of  a  governing  committee  to  man- 
age until  a  new  charter  is  obtained,  yet 
either  corporation  may  withdraw  from 
the  arrangement,  it  being  ultra  vires. 
Greenville,  etc.  Co.  v.  Planters',  etc.  Co., 
70  Miss.  6C9  (1893).  A  loan  in  excessof  the 
amount  allowed  by  charter  may  never- 
theless be  collected.  Fargason  v.  Ox- 
ford, eta  Ca,  78  Miss.  65  (1900). 

Missouri:  A  coal  mining  and  trans- 
porting corporation  may  purchase  and 
use  a  steamboat  for  transporting  coaL 


1602 


on.  XL.] 


ULTKA    VIKES    ACTS    AND    CONTEACTS. 


[§  681. 


gaging  in  any  outside  business,  unless  the  public  assent  through 
the  legislature.  But  as  to  the  ordinary  private  corporation  the 
rules  of  ultra  vires  have  been  greatly  relaxed. 


Callaway,  etc.  Co.  v.  Clark,  33  Mo.  305 
(1862).  A  contract  to  convey  land  for 
purposes  of  speculation  to  a  company 
in  consideration  of  a  certain  location  of 
a  railroad  was  held  unenforceable  as 
against  public  policy.  Pacific  R.  R.  v. 
Seely,  45  Mo.  212  (1870).  See  also  §  650, 
sujjra.  A  private  party  seeking  to  en- 
join a  corporation  from  using  public 
property  wliich  the  city  has  leased  to 
such  corporation  cannot  set  up  that  the 
lessee  corporation  is  acting  ultra  vires. 
Only  the  state  or  the  stockholders  can 
raise  that  objection.  Belcher,  etc.  Co. 
V.  St.  Louis,  etc.  Co.,  101  Mo.  192  (1890). 
It  is  ultra  vires  for  a  bank  to  allow  an 
overdraft.  MarketStreetBankr. Stump, 
2  Mo.  App.  645  (1876).  A  pledge  is  not 
illegal  though  it  secures  a  greater 
amount  than  the  pledgee  bank  is  en- 
titled to  loan  to  one  person.  McClin- 
tock  V.  Central  Bank,  etc.,  120  Mo.  127 
(1894).  A  trust  company  authorized  to 
accept  deposits  and  pay  interest  thereon 
has  no  power  to  accept  deposits  with- 
out paying  interest  thereon.  State  v. 
Lincoln  Trust  Co.,  144  Mo.  562  (1898). 

Montana:  A  corporation  having  a 
claim  against  another  corporation  may 
purchase  a  lien  on  the  property  of  the 
latter  corporation  in  order  to  protect 
its  claim.  Mahoney  v.  Butte  Hardware 
Co.,  19  Mont.  377  (1897). 

Nebraska:  A  general  denial  does  not 
raise  the  defense  of  ultra  vires.  Citizens' 
State  Bank  v.  Pence,  81  N.  W.  Rep.  623 
(Neb.  1900). 

New  Jersey:  While  it  is  true  that  a 
stockholder  may  enjoin  his  company 
from  proceeding  with  its  business,  if 
the  objects  thereof  have  become  un- 
attainable or  illegal,  yet  an  unconstitu- 
tional statute  in  Indiana  forbidding  tlie 
piping  of  natural  gas  to  places  outside 
of  the  state  does  not  justify  the  suit  of 
a  stockholder  in  a  New  Jersey  construc- 
tion company  to  enjoin  his  company 


from  proceeding  to  construct  a  pipe 
line  from  Indiana  to  Chicago.  Benedict 
V.  Columbus  Const.  Co.,  49  N.  J.  Eq.  23 
(1891).  A  stockholder  may  enjoin  the 
company  from  removing  the  plant  from 
the  state,  where  the  charter  provides 
for  the  manufacturing  to  be  done  in 
the  state.  Stickle  v.  Liberty,  etc.  Co., 
32  At).  Rep.  708  (N.  J.  1895).  The  fact 
that  a  charter  authorizes  a  corporation 
to  do  business  at  a  certain  place  outside 
of  the  state  does  not  prevent  its  doing 
business  in  other  states.  Meredith  v. 
New  Jersey,  etc.  Co.,  59  N.  J.  Eq.  257 
(1899);  aflf'd,  60  N.  J.  Eq.  445  (1900).  In 
a  suit  to  enjoin  a  corporation  from  en- 
gaging in  ultra  vires  business  the 
articles  of  incorporation  should  be  al- 
leged in  part  at  least.  Trimble  v. 
American,  etc.  Co.,  61  N.  J.  Eq.  340 
(1901).  A  minority  stockholder  cannot 
enjoin  the  company  from  issuing  its 
stock  in  payment  for  the  stock  of  other 
similar  companies  on  the  ground  that 
tlie  price  to  be  paid  is  exces.sive  and 
that  three  of  the  directors  are  interested 
as  stockholders  in  the  other  companies, 
where  he  does  not  prove  that  the  price 
is  excessive,  and  it  appears  that  the 
stockholders  will  have  to  approve  the 
transaction  before  the  directors  can 
issue  the  stock,  and  it  appears  also  that 
•the  plaintiff  owns  but  a  very  small 
amount  of  stock.  Geer  v.  Amalgamated, 
etc.  Co.,  61  N.  J.  Eq.  364  (1901). 

New  York:  It  is  within  the  power  of 
a  bank  to  receive  special  deposits  of 
bonds,  etc.,  for  safe-keeping,  gratui- 
tously and  for  mere  accommodation, 
and  the  bank  is  liable  for  their  loss  by 
gross  negligence.  Pattison  v.  Syracuse 
Nat.  Bank,  80  N.  Y.  82  (1880).  A  cor- 
poration and  stockholders  agreed  to 
turn  over  to  defendant  and  others  the 
control,  but  the  latter  were  to  account 
for  rafts  built.  Held,  they  could  not 
set  up  ultra  vires.    Each  of  the  defend- 


1603 


§  681.] 


ULTRA    VIKES    ACTS    AND    CONTKACTS. 


[cn.  XL. 


Second,  the  decision  in  any  particular  case  turns  largely  on  the 
questions  of  who  is  complaining;  against  whom  the  complaint  i» 


made;   and   what  relief  is  sought. 


The    stockholder's   action    is. 


ants  is  liable  for  all  as  to  accounting. 
Rider  Life  Kaft  Co.  r.  Roach,  97  N.  Y. 
878  (1884).  A  lock  company  sued  for 
the  price  of  locks  sold  to  it  by  a  com- 
pany incorporated  to  manufacture  firo- 
arnis  cannot  defeat  tlie  suit  by  setting 
up  tliat  the  latter  corporation  had  no 
power  to  manufacture  such  articles. 
Whitney  Arms  Co.  v.  Barlow.  C:J  N.  Y. 
62  (187')).  One  director  may  enjoin 
other  directors  from  using  corporate 
funds  to  buy  liabilities  of  an  insolvent 
competing  concern  for  the  purpose  of 
suing  thereon,  and  from  paying  money 
to  prevent  the  rival  concern  getting  its 
work  done.  CoUes  v.  Trow,  etc.  Co.,  11 
Hun,  397  (1877).  A  manufacturing  cor- 
poration selling  a  store  with  a  guaranty 
of  the  continued  patronage  of  its  em- 
ployees, or  else  a  lixed  sum  as  indemnity, 
is  liable  thereon.  De  GrotT  r.  American 
Linen  T.  Co.,  21  N.  Y.  134  (1860).  A 
smelting  corporation  may  purchase 
smelting  works.  Moss  v.  Averell.  10 
N.  Y.  449  (1853).  Persons  who  with  a 
corporation  jointly  purchase  property 
cannot  defend  against  the  price  by  al- 
leging that  it  was  ultra  vires  of  the  cor- 
poration to  purchase.  State  v.  Woram, 
6  Hill,  33  (1843).  In  Lafond  v.  Deems, 
81  N.  Y.  507  (1880),  a  voluntary  benevo- 
lent association,  having  been  com- 
pelled to  hire  more  room  than  it 
needed,  was  held  to  have  power  to  fit 
up  and  let  the  portion  not  required. 
Temple  Grove  Seminary  v.  Cramer,  98 
N.  Y.  121  (1885),  holds  that  a  seminary 
of  learning  may  let  its  building  as  a 
boarding-house  during  the  summer  va- 
cation. A  rural  cemetery  company 
may  sell  a  large  number  of  its  lots,  al- 
though the  vendee  intends  to  resell 
them.  Palmer  v.  Cypress  Hill  Ceme- 
tery, 122  N.  Y.  429  (1890).  A  corpora- 
tion organized  to  act  as  a  broker  in 
buying  and  selling  gram  is  subject  to 
the  same  rule  as  regards  gambling  con- 


tracts that  individuals  are.  Peck  v. 
Doran.  etc.  Co.,  57  Hun.  343  (18901 
Power  to  manufacture  and  sell  good* 
does  not  give  power  to  buy  aiul  sell 
good.s.  People  v.  Campbell,  144  N.  Y. 
100  (1894),  a  taxation  case.  Even  if  \l\& 
agreement  of  a  buildmg  association 
with  a  member  is  ultra  vires  in  that 
the  association  agrees  to  pay  more  than 
it  ought,  yet  if  the  member  lias  carried 
out  his  part  of  the  contract  and  made 
full  payments,  he  is  entitled  to  the 
amount  the  association  has  agreed  to 
pay,  the  latter  being  "estopped  from 
asserting  its  own  wrong  ami  cannot  l>e 
excused  from  payment  upon  the  plea 
that  the  contract  was  beyond  its 
power."  Vought  v.  Eastern  Bldg.  etc. 
AS.SOC.,  172  N.  Y.  508  (1902).  A  receiver 
of  a  savings  bank  may  enforce  a  bond 
given  to  it  by  an  individual  agreeing 
to  pay  to  the  bank  a  certain  sum  if  it 
would  continue  business,  which  the 
bank  did.  Hurd  v.  Kelly.  78  N.  Y.  588 
(1879).  aflf'g  17  Hun.  327  (1879).  A  manu- 
facturing corporation  borrowing  bonds 
in  order  to  use  them  as  collateral  to  a 
loan  is  liable  to  the  owner  for  their  re- 
turn. Beck  with  v.  Rochester  Iron,  etc. 
Co.,  12  N.  Y.  Week.  Dig.  528  (1881).  A 
brewery  company  may  guarantee  the 
rent  of  a  saloon-keeper  who  buys  his 
beer  of  the  company.  Koehler  &  Co.  v. 
Reinheimer,  26  N.  Y.  App.  Div.  1  (1898). 
An  indorser  of  a  corporate  note  cannot 
set  up  that  such  note  is  ultra  vires. 
Donohoe  v.  Meeker,  35  N.  Y.  App.  Div. 
43  (1898).  A  mining  company  has  no- 
power  to  furnish  the  play  and  perform- 
ers for  a  theatre,  and  a  contract  to  that 
effect  cannot  be  enforced,  even  though 
all  the  stockholders,  except  the  owner 
of  four  shares,  assent  thereto.  Broad- 
way, etc.  Co.  V.  Dessau  Co.,  45  N.  Y. 
Ai)p.  Div.  475  (1899).  A  corporation  is 
bound  by  its  superintendent's  employ- 
ment of  an  undertaker  to  bury  an  em- 


1604 


CH.  XL.] 


ULTRA   VIRES    ACTS    AND    CONTRACTS. 


[§  6S1. 


looked  upon  most  favorably  if  he  is  not  guilt}'-  of  delay.  But  an 
action  by  the  state  to  enjoin  the  act  or  to  forfeit  franchises  is  an 
unusual,  extraordinary,  and  somewhat  harsh  remedy,  and  is  not  fa- 


ployee  killed  in  the  employ  of  the 
company.  Noll  v.  Archer- Pancoast  Co., 
60  N.  Y.  A  pp.  Div.  414  (1901).  Ultra 
vires  is  an  aflSrmative  defense  and  must 
be  pleaded.  Keating u  American,  etc. 
Co.,  62  N.  Y.  App.  Div.  501  (1901).  The 
defense  of  ultra  vires  is  not  good  unless 
pleaded.  Hess  v.  Sloane,  66  N.  Y.  App. 
Div.  523  (1901).  Where  the  president  of 
a  bank  is  acting  as  the  agent  of  a  per- 
son and  sells  to  the  latter  securities  of 
the  bank  by  means  of  false  representa- 
tions, the  bank  is  liable,  even  though 
the  purchaser  did  not  know  that  the 
sale  was  in  behalf  of  the  bank.  Carr 
V.  National  Bank  &  L.  Co.,  167  N.  Y. 
375  (1901).     In  general  see  also  p.  1608, 

North  Carolina:  Gruber  v.  Washing- 
ton, etc,  R.  R,  92  N.  C.  1  (1885),  holds 
that  a  lumber  company,  in  providing 
transportation  for  its  product,  could,  as 
incidental  to  its  business,  carry  the 
goods  of  others  and  also  passengers. 

Ohio:  A  corporation  in  acquiring  the 
assets  of  a  partnership  may  acquire  a 
cause  of  action  which  the  latter  has 
against  another  corporation  for  negli- 
gence and  may  enforce  such  cause  of 
action,  even  though  it  would  have  had 
no  power  to  buy  it  separately  from  the 
other  property.  Central,  etc.  Co.  v. 
Capitiil,  etc.  Co.,  60  Ohio  St.  96  (1899). 
A  college  need  not  obtain  an  amend- 
ment to  its  charter  in  order  to  add  a 
new  subject  to  its  curriculum.  State 
V.  Hygeia,  etc.  College,  60  Ohio  St.  122 
(1899). 

Oregon:  A  hardware  company  is  lia- 
ble for  lime  purchased,  even  though  it 
was  not  organized  for  the  purpose  of 
dealing  in  that  commodity.  Re  Pendle- 
ton, etc.  Co.,  24  Oreg.  330  (1893).  A  cor- 
poration may  by  its  charter  be  given 
the  power  to  act  as  an  attorney  in  fact, 
and  it  may  execute  a  deed  as  such 
attorney.     Killingsworth    v.    Portland 


Trust  Co.,  18  Oreg.  351  (1890).  A  lum- 
ber  manufacturing  company  may  take 
an  assignment  of  a  judgment  and  brmg 
suit  thereon.  Capital,  etc.  Co.  v.  Learned, 
30  Oreg.  544  (1899). 

Pennsylvania:  A  stockholder  may 
enjoin  his  company  from  doing  acts 
forbidden  by  statute.  Sparhawk  v. 
Union  Pass.  Ry.,  54  Pa,  St.  401,  453 
(1867).  A  corporation  with  power  to 
own  land  and  promote  settlement  may 
build  saw-mills  and  erect  a  hotel. 
Watts'a  Appeal,  78  Pa.  St.  370  (1875). 
A  corporation  with  power  to  manufact- 
ure and  supply  gas  may  deal  in  gas 
appliances.  Malone  v.  Lancaster,  etc. 
Co..  182  Pa.  St.  309  (1897).  A  corpora- 
tion has  no  right  to  change  the  grade 
of  its  road  as  fixed  by  its  charter  when 
such  change  would  place  it  in  a  differ- 
ent category  under  the  statutes  relative 
to  railroads.  Western,  etc.  Ry.  v.  Buf- 
falo, etc.  Ry.,  193  Pa.  St.  127  (1899).  In 
a  suit  by  a  bridge  company  against  a 
street  railway  for  tolls,  in  accordance 
with  a  contract,  the  street  railway  can- 
not set  up  that  all  the  stock  of  the 
bridge  company  has  been  purchased  by 
the  city  and  that  the  purchase  was 
ultra  vires.  Monongahela,  etc.  Co.  v. 
Pittsburg,  etc.  Co.,  196  Pa.  St.  25  (1900). 

South  Carolina:  A  building  associa- 
tion which  has  obtained  a  subscription 
on  an  ultra  vires  agreement  as  to  re-  ^ 
payment  is  liable  in  a  suit  at  law  for 
the  money  so  paid  to  it.  Williamson 
V.  Eastern,  etc.  Assoc,  54  S.  C.  582 
(1899). 

Tennessee:  A  manufacturing  com- 
pany is  liable  for  goods  purchased  by  a 
store  owned  by  it.  Searight  v.  Payne, 
6  Lea  (Tenn.),  283  (1880),  where  an  iron 
furnace  company  ran  a  store.  Where 
an  insurance  company  has  issued  a  pol- 
icy which  is  not  authorized  by  its  char- 
t<^r,  the  policy  cannot  be  enforced  by 
the  party  who  is  insured.    The  court 


1605 


§  csi.] 


ULTRA    VIKKS    ACTS    AND    CoNTKArrS. 


[CIT.   XL. 


vored  by  the  courts.  So,  also,  an  action  by  the  corporation  itself, 
or  by  the  party  contracted  with,  to  repudiate  an  vltra  vires  act  is 
not  favored  by  the  courts.  Such  an  action  is  an  attempt  by  a  party 
to  evade  the  contract  by  means  of  principles  of  hiw  which  both  par- 


said  in  a  dictum  that  his  remedy  is  a 
suit  in  (lisaflirtnance  and  for  an  ac- 
countinnj.  Miller  v.  Insurance  Co.,  93 
Tenn.  167  (1893).  Even  though  an  ice 
company  purchases,  without  power  so 
to  do,  beer  from  a  brewin'^  company, 
and  even  tliough  it  passes  into  a  re- 
ceiver's hands,  yet  the  latter  may  iile  a 
petition  asking  in  the  alternative  to  be 
allowed  tlie  price,  or,  if  the  contract  is 
disaflirmed,  the  vaUie  thereof.  Tennes- 
see Ice  Co.  V.  Raine,  64  S.  W.  Rep.  29 
(Tenn.  1901).  In  this  case  the  court 
said  that  all  the  authorities  hold  that 
a  corporation  obtaining  tlie  benefits  of 
an  ultra  vires  contract  is  estopped  from 
defending  against  the  contract  on  the 
ground  that  it  is  ultra  vires,  but  that 
while  in  many  of  the  states  the  coriio- 
ration  cannot  prevent  recovery  on  the 
contract  according  to  its  terms,  yet 
that  in  other  states  the  recovery  is  on 
a  quantum  meruit  or  on  a  quantum 
valebat. 

Texas:  The  maker  of  a  note  cannot 
set  up  that  the  payee  corporation  dis- 
counted it  ultra  vires.  Logan  v.  Texas, 
etc.  Assoc,  8  Tex.  Civ.  App.  490  (1894). 
Where  a  corporation  has  taken  a  lease 
of  a  wharf  from  a  city,  it  cannot  avoid 
the  payment  of  rental,  after  using  the 
premises,  on  the  ground  of  xdtra  vires. 
Corpus  Christi  v.  Central,  eta  Co.,  8 
Tex.  Civ.  App.  94  (1894).  Where  a  bank 
has  agreed  to  see  that  a  vendor  of  feed  is 
paid,  the  vendee  being  a  depositor  in  the 
bank,  and  an  arrangement  having  been 
made  between  him  and  the  bank  for 
such  payment,  the  bank  cannot  avoid 
payment  on  the  ground  that  its  agree- 
ment was  ultra  vires.  First  Nat.  Bank 
V.  Greenville,  etc.  Co.,  60  S.  W.  Rep.  8.38 
(Tex.  1901).  In  Texas  it  is  held  that 
where  a  corporate  contract  is  executed, 
and  the  corporation  has  received  the 


benefits  of  it,  the  corporation  cannot 
invoke  its  want  of  power  as  a  defense 
to  the  contract.  Continental,  etc. 
As.soc.  V.  Masonic,  etc.  Co.,  (Vi  S.  W. 
Re\\  9:50  (Tex.  1901). 

Vrrmovt:  A  manufactHring  com- 
pany is  lial)le  for  goods  [)urchaseil  by  a 
store  owned  by  it.  Dauchy  v.  Brown, 
24  Vt.  197  (1832).  As  regards  the  cliar- 
ter  or  corporate  power  to  confer  a  de- 
gree, see  Townshend  r.  Gray.  62  Vt. 
373  <  1890). 

]\'aKliington:  A  lumber  coni|  any 
may  become  surety  on  a  builduig  con- 
tractor's bond  where  it  is  cuM'omary 
for  such  companies  so  to  do  in  order  to 
obtain  business.  Wheeler,  etc.  '_'o.  t'. 
Everett  Land  Co..  14  Wash.  G30  ds90.. 
Wliere  a  corporation  dealing  in  oth<)r 
goods  buys  clothing  and  uses  the  same 
to  fill  certain  orders,  it  cannot  then 
recover  back  the  purchase  price.  Gra 
ton,  etc.  Co.  v.  Redelsheimer,  68  Pac. 
Rep.  879  (Wash.  1902). 

Wiscfmsiii:  Where  a  river  packet 
company  purchases  grain  and  pays 
partly  therefor,  it  may  recover  back 
the  money  paid,  but  not  damages 
for  refusal  of  vendor  to  deliver. 
Nortiiwestern,  etc.  Co.  v.  Shaw,  37 
Wis.  655  (1875)l  A  corporation  formed 
to  make  and  .sell  beer  may  guarantee 
the  rent  of  a  customer.  Wint«^rfield 
V.  Cream  City  B.  Co.,  96  Wis.  239  (1897). 
•'The  doctrine  of  ultra  vires  cannot 
be  invoked  by  a  corporation  for  the 
purpose  of  escaping  a  burden  result- 
ing from  a  contract  so  far  executed 
that  the  corporation  has  received  th« 
benefit  thereof.  Tiiat  most  whole- 
pome  doctrine  is  well  established."  Bul- 
Icn  v.  Milwaukee,  etc.  Co.,  109  Wis.  41 
(1901).  Forfeiture  of  a  water-works* 
grant  from  the  city  will  not  be  de- 
creed except  in  a  clear  case  and  wher^ 


1606 


CH.  XL.] 


ULTRA   VIRES    ACTS    AND    CONTRACTS. 


[§  681. 


The  court  is  not  swift 


ties  have  violated  or  waived  the  benefit  of. 
to  grant  relief  in  such  cases. 

Third,  if  a  contract  or  act  is  ultra  vires,  and  has  not  yet  been  per- 
formed, either  the  corporation  or  the  party  contracted  with  may 
refuse  to  complete  the  contract.  No  damages  can  be  collected  for 
such  refusal.  So,  also,  if  the  contract  has  been  partly  performed, 
and  the  unperformed  part  is  separable  from  the  rest,  either  party 
may  refuse  to  complete.  But  where  one  party  has  completely  per- 
formed and  carried  out  its  part  of  the  contract,  the  other  party  can- 
not refuse  to  perform,  while  at  the  same  time  retaining  the  bene- 
fits of  performance  by  the  first  named  party.^ 


no  other  punishment  will   adequately 
remedy  the  mischief.     City  of  Ashland 
V.  Asliland,  etc.  Co.,  110  Wis.  94  (1901). 
England:    A  suit  by  a  copper  trad- 
ing company  for  damages  against  a 
person  who  had  refused  to  accept  iron 
which  he  had  agreed  to  purcliase  of  the 
plaintiff   fails.     Copper   Miners  v.  Fox, 
16    Q.    B.   229  (1851).      In  Simpson   u 
Westminster,  etc.  Co.,  8  H.  L.  Cas.  712 
(1860),  a  lease  by  a  hotel  company  of 
part  of  its   building   during  its  com- 
pletion was   held  valid.      A  company 
formed  to  work  a  patent  may  purchase 
it     Leifchild's  Case,  L.   R,   1  Eq.  231 
(1865).     Brokers  employed  by  directors 
to  sell  property  of  the  corporation  can- 
not recover  damages  from  the  directors 
for  a  failure   of  sale  due  to  the  vendee 
alleging    tliat    the    directors    had    no 
power  to  sell,  it  being  proved    by  the 
directors    that    they    did    have    such 
power.    Wilson  v.  Miers,  10  C.  B.  (N.  S.) 
348  (1861).      Where  a   stockholder  in- 
stitutes a  suit  to  remedy  a  wrong  to 
the  corporation,  and  while  it  is  pend- 
ing new  directors  are  elected  and  they 


corporation  may  agree  to  surrender  a 
part  of  such  stock  in  order  to  enable 
the  latter  company  'to  proceed  with  its 
business,  and  such  surrender  is  not  ultra 
vires.  Thompson  r.  Trustees,  etc.  Corp., 
[1895]  2  Ch.  454.  Where  a  company  has 
to  give  a  bond,  and  the  bond  is  given 
by  a  director,  the  company  is  liable  to 
him.  Southern  Counties  Dep.  Bank  v. 
Boaler,  73  L.  T.  Rep.  155  (1895).  A 
corporation  is  a  "person,"  within  the 
meaning  of  a  statute  rendering  persons 
liable  for  misrepresenting  the  responsi- 
bility of  another  party.  Hirst  v.  West, 
etc.  Co.,  [1901]  2KB.  560. 

Canada:  A  company  receiving  a 
deposit  idtra  vires  is  nevertheless  bound 
to  repay  it.  Walmsley  v.  Rent  Guaran- 
tee Co.,  29  Grant  Ch.  (Can.)  484  (1881). 
1  Speaking  of  idtra  vires  acts,  the 
New  York  court  of  appeals  said:  "As 
artificial  creations,  they  have  no  pow- 
ers or  faculties  except  those  with  which 
they  were  endowed  when  created;  and 
when,  as  is  frequently  the  case,  they 
act  in  excess  of  their  powers,  the  ques- 
tion will  be,  Is  the  act  prohibited  as 


proceed  to  carry  on   the  suit  at  the    prejudicial  to  some  public  interest,  or 


corporate  expense,  any  dissenting  stock 
holder  may  enjoin  such  use  of  the  cor- 
porate funds.  To  allow  it  would  be  to 
prejudice  the  suit.  Kernaghan  v.  Will- 
iams, L.  R,  6  Eq.  228  (1868).  The 
organization  of  a  company  to  carry  on 
the  lottery  business  in  foreign  countries 
was  held  legal  in  Macnee  v.  Persian 
Corp.,  L.  R.  44  Ch.  D.  306  (1890).  A  cor- 
poration which  holds  stock  in  another 


is  it  an  act  not  unlawful  in  that  sense, 
but  prejudicial  to  the  stockholders? 
The  rule,  however,  is  well  settled  that 
the  plea  of  idtra  vires  should  not  pre- 
vail when  it  would  not  advance  justice, 
but  on  the  contrary  would  accomplish 
legal  wrong."  Leslie  n  Lorillard,  110 
N.  Y.  519  (1888).  See  also  discussion  in 
Camden,  etc.  R.  R.  v.  May's  Landing, 
etc.  R.  R,,  48  N.  J.  L.  530  (1886);  Mar- 


1607 


§  csi.] 


TJLTKA    VlUIiS    ACrS    AND    C<  )NH:  ACTS. 


[cm.  XU 


The  courts  clifTor  widely  in  their  derisions  on  the  enforceability 
of  ultra  vires  contracts.  The  Kew  York  court  of  appeals,  in  a 
series  of  consistent  and  ablv-reasoned  decisions,  has  established  the 
rule  in  that  state  that  an  tdtra  vires  contract  is  enforceable  if  thoro 
has  been  part  performance  and  the  stockholders  have  not  objected 
and  the  creditors  have  not  been  injured.'  The  New  York  court  says 
that "  that  kind  of  pluntler  which  hoKls  on  to  the  property,  but  pleads 
the  doctrine  of  ^dtra  vires  against  the  obligation  to  pay  for  it,  has 
no  recognition  or  support  in  the  law  of  this  state." - 

Practically  the  same  conclusion  has  been  reached  in  ^fassachu- 
setts'  and  Wisconsin.* 

In  the  federal  courts,  on  the  contrary,  the  old  rule  against  ultra 
vires  contracts  is  upheld  in  all  its  rigor  and  applied  with  all  its 
severity.  The  tendency  of  niotlern  juri.sprudencc  to  relax  on  that 
subject  linds  no  favor  in  the  federal  courts.* 


tin  V.  Niagara,  etc.  Co.,  122  N.  Y.  IGo 
(1890). 

1  Wliitney  Arms  Co.  r.  Barlow.  63  N. 
Y.  62  (187."));  Martin  v.  Niai^'ara,  etc. 
Co.,  122  N.  Y.  165  (1890);  Bath  Gas 
Liglit  Co.  V.  ClafTy.  151  N.  Y.  24.  29-34, 
87  (1896),  per  Andrews,  Ch.  J.,  review- 
ing many  cases,  discussing  tlie  subject 
in  an  able  and  exliaustive  manner,  and 
holding  that  past-due  rent  may  be  re- 
covered on  an  xiltra  vires  lease. 

2  Seymour  v.  Spring  Forest  Cem. 
Assoc,  144  N.  Y.  333,  341  (1895);  s.  C, 
157  N.  Y.  697. 

"Chief  Justice  Bigelow.  in  Brown  v. 
Winnisimmet  Co.,  93  Mass.  326.  334 
(1865),  said:  "We  know  of  no  rule  or 
principle  by  which  an  act  creating  a 
corporation  for  certain  specific  objects, 
or  to  carry  on  a  particular  trade  or 
business,  is  to  be  strictly  construed  as 
prohibitoiy  of  all  other  dealings  or 
transactions  not  coming  within  the 
exact  scope  of  those  designated."  In 
Nims  V.  Mount  Hermon  Boys'  School, 
160  Mass.  177  (1893).  the  court  said  that 
an  ultra  vires  contract  not  yet  executed 
will  not  be  enforced  by  the  courts;  but, 
"on  the  other  hand,  courts  have  fre- 
quently held  that  while  such  contracts, 
considered  merely  as  contracts,  are  in- 
valid, they  involve  no  such  element  of 
moral  or  legal  wrong  as  to  forbid  their 


enforcement,  if  there  has  been  such  ac- 
tion under  them  as  to  work  injustice  if 
they  are  set  aside.  Courts  have  been 
astute  to  discover  something  in  the 
nature  of  an  equitable  estoppel  against 
one  who,  after  entering  into  such  a  con- 
tract, and  inducing  a  change  of  condi- 
tion by  another  party,  attempts  to  avoid 
the  contract  by  a  plea  of  ttllra  vires. 
It  is  said  that  such  a  plea  will  not  avail 
when  to  allow  it  would  work  injustice 
and  accomplish  legal  wrongi"  The 
court,  however,  declined  to  pass  upon 
this  principle  of  law. 

*  The  old  rule  of  ulti'a  vires  has  been 
changed  so  that  now  only  the  state  or 
a  party  interested  in  the  corporation 
can  complain.  Farwell  Co.  v.  Wolf,  90 
Wis.  10  (1897). 

*"Tiie  doctrine  of  vlira  vii-es,  by 
which  a  contract  made  by  a  corporation 
beyond  the  scope  of  its  corporate  pow- 
ers is  unlawful  and  void,  and  will  not 
support  an  action,  rests,  as  this  court 
has  often  recognized  and  aflfirmed,  upon 
three  distinct  grounds:  the  obligation 
of  any  one  contracting  with  a  corpora- 
tion to  take  notice  of  the  legal  limits  of 
its  powers;  the  interest  of  the  stock- 
holders not  to  be  subject  to  risks  which 
they  have  never  undertaken ;  and,  above 
all,  the  interest  of  the  public  that  the 
corporation   shall    not    transcend   the 


1608 


■CH.  XL.] 


ULTRA   VIRES    ACTS    AND    CONTRACTS. 


[§  682. 


§  682.  Personal  lidhility  of  the  directors  and  officers  for  ultra 
vires  acts. —  There  can  be  no  doubt  that,  if  the  directors  or  officers 
of  a  company  do  acts  clear!}"  beyond  their  power,  whereby  loss  en- 
sues to  the  company,  or  dispose  of  its  property  or  pay  away  its 
money  without  authority,  they  may  be  required  to  make  good  the 
loss  out  of  their  private  estates.^  Directors  and  officers  have  been 
held  personally  liable  for  libel  prohibited  by  the  company;^  for 
infringement  of  trade-mark;*  for  loaning  money  in  violation  of 

powers  conferred  upon  it  by  law."    Mc-    Central  Transp.  Co.  v.  Pullman's  Palace 


Cormick  v.  Market  Bank,  165  U.  S.  538 
649  (1897).    See  also  the  cases  in  the 
notes  siipra.     ''  A  railroad  corporation, 
unless  authorized  by  its  act  of  incorpo- 
ration or  by  other  statutes  so  to  do,  has 
no  power  to  guarantee  the  bonds  of  an- 
other corporation ;  and  such  a  guaranty, 
or  any  contract  to  give  one,  if  not  au- 
thorized by  statute,  is  beyond  the  scope 
of  the  powers  of  the  corporation,  and 
strictly  ultra  vires,  unlawful  and  void, 
and  incapable  of  being  made  good  by 
ratification    or    estoppel."     Louisville, 
etc.  Ry.  V.  Louisville  Trust  Co.,  174  U.  S. 
552,  567  (1899).     In   Salt  Lake  City  v. 
Hollister,  118  U.  S.  263  (1886),  the  court 
said  that  in  cases  of  ultra  vires  con- 
tracts, upon  which  corporations  could 
not  be  sued,  "  the  courts  have  gone  a 
long  way  to   enable  parties  who  had 
parted  with  money  and  property  on  the 
faith  of  such  a  contract  to  obtain  justice 
by  recovery  of  the  property  or  the  money 
specifically,  or  as  money  had  and  re- 
ceived to  the  plaintiff's  use."  In  a  dictum 
in  Jacksonville,  etc.  Nav.  Co.  v.  Hooper, 
160  U.  S.  514.  524  (1896),  the  court  em- 
phasized the  statement  that  no  estoppel 
or  part  performance  can  sustain  a  con- 
tract that  is  forbidden  by  a  charter  or 
is  contrary  to  public  policj\    See  also 
Oregon  Ry.  etc  Co.  v.  Oregonian  Ry., 
130  U.  S.  1  (1889);  Pennsylvania  R.  R. 
V.  Keokuk,  etc.  Co.,  131  U.  S.  371,  384, 
S89   (1889).      "Every    public   grant    of 
property,  or  of  privileges  or  franchises, 
if  ambiguous,  is  to  be  construed  against 
the  grantee  and  in  favor  of  the  public," 
and  especially  so  as  regards  corpora- 
tions organized   under   general    laws. 


Car  Co.,  139  U.  S.  24, 49  (1891).  The  rule 
that  the  charter  of  a  corporation  is  to 
be  construed  strictly  against  the  grantee 
does  not  apply  to  a  case  where  the  coi> 
poration  seeks  to  repudiate  contracts 
whereof  it  has  enjoyed  the  benefits,  or 
where  such  contracts  are  attacked  by 
creditors  after  the  corporation  becomes 
insolvent.  Tod  v.  Kentucky  Union 
Land  Co.,  57  Fed.  Rep.  47  (1893). 

1  North  Hudson,  etc.  Assoc,  v.  Childs, 
82  Wia  460  (1892),  citing  Thompson, 
Liab.  Off.  375,  §  16;  Joint  Stock  Dis- 
count Co.  V.  Brown,  L.  R.  8  Eq.  381 
(1869);  Re  Exchange  Banking  Co.,  L,  R, 
21  Ch.  D.  519  (1882);  Franklin  F.  Ins. 
Co.  V.  Jenkins,  3  Wend.  130  (1829).  See 
also  the  cases  in  ^5  702,  infra. 

2  See  g  156,  supra. 

3  A  director  who  votes  in  favor  of  a 
resolution  that  the  agents  of  a  company 
manufacture  and  sell  an  infringing 
article  is  liable  personally  for  such  in- 
fringement, even  though  he  acted  in 
good  faith  and  did  not  know  that  an 
infringement  would  be  the  result.  Na- 
tional, etc  Co.  V.  Leland,  94  Fed.  Rep. 
502  (1899).  An  officer  is  not  personally 
liable  for  an  infringement  by  the  cor- 
poration, unless  it  is  insolvent  or  it  is  a 
mere  dummy  to  protect  others.  South- 
ern, etc.  Assoc.  V.  Carey,  117  Fed.  Rep. 
325  (1902).  The  directors  of  a  corpora- 
tion may  be  included  as  parties  defend- 
ant in  a  bill  against  the  corporation 
for  infringement  of  a  trade-mark.  They 
may  be  held  liable  so  far  as  they  took 
part  in  the  infringement.  Armstrong 
V.  Savannah  Soap  Works,  53  Fed.  Rep. 
124  (1892);  St   Louis  Stamping  Ca  u 


1609 


§  C.^2  ] 


ULTRA    VIRES    ACTS    AND    COMIC  ACTS. 


[Cll.  XL. 


tlio  charter;'    for  cxactinf^    illegal  rebates  from  a  railroad;'    for 
false  representations;'  for  borrowing  in  excess  of  the  company's 


Quinby.  5  Ban.  &  Ard.  275  (1880);  Good-  merits  made  by  other  parties,  the  active 
yearv.  Plielps,3  Bhitchf.  9I(lSr>:});  a  C.,  agents  of  such  corporation  receiving 
10  Fed.  Cas.  711;  Smith  r.  Stamiard,  etc.  such  moneys  may  be  held  personally 
Co.,  19  Fed.  Rep.  8-'(5  (188:J);  Nichols  r.  liahle  to  otlier  .shippers  for  8U<li  money. 
Pearce.7  Blatchf.  5  (1809);  s.  a,  18  Fed.  The  court  said  that  ina.smuch  as  the 
Cas.  201.  The  directors  and  oflicers  of  a  company  "was  organized  by  the  pro- 
corporation  wliich  has  infringed  upon  moters,  the  deffndant.s,  simply  for  the 
a  patent  cannot  be  hold  personally  pur|)ose  of  consummating  the  illegal 
lial)le  for  the  profits  of  such  infringe-  agreement,  and  shielding  themselves 
ment  Mergenthaler,  etc.  Ca  v.  Ridder.  from  the  consetiuences  of  receiving  the 
65  Fed.  Rep.  8')-i  (1895),  reviewing  the  illegal  exactions  made  under  it,  the 
cases.  A  general  agent  of  an  infring-  act  of  incorporating  can  he  of  no  avail 
ing  company  is  personally  liable,  to  theni  as  a  defense."  r.nindrud  t\ 
Cramer  v.  Fry.  68  Fed.  Rep.  'JOl  (1895).  Rice.  49  Ohio  St.  640  (1892). 
A  judgment  against  a  corporation  as  'See  chs.  IX  and  XX,  tniprn.  Indi- 
te the  infringement  of  a  patent  is  not  viduals  who  own  several  railroads  and 
binding  on  the  stockholders  in  subse-  consolidate  them  and  issue  bonds 
quent  suits  against  them,  even  though  thereon,  with  a  false  and  fraudulent 
they  were  present  at  the  trial  and  testi-  statement  that  the  bonds  cover  certain 
fled.  Wilgus  V.  Germain,  72  Fed.  Rep.  timber  lands,  are  liable  personally  to 
773.(1896).  The  ollicers,  stockholders,  the  bondholders.  O'Beirne  r.  Bullis, 
and  agents  of  a  corporation  may  be  158  N.  Y.  400  (1899).  A  person  who 
enjoined  from  infringing  a  patent,  even  buys  stock  in  a  national  bank  relying 
though  the  corporation  itself  is  not  on  a  rejxjrt  of  the  condition  of  the  bank 
within  the  jurisdii-tion  of  the  court,  signed  by  directors,  in  acconliinre  with 
Edison,  etc.  Co.  f.  Packard  Elec.  Co..  61  the  acts  of  congress,  may  hold  the  di- 
Fed.  Rep.  1003  (1893),  holding  also  that  rectors  so  signing  the  rejort  personally 
they  are  liable  jiersonally.  liable  in  damages  if  it  transpire  that 

1  See  §  6'JO,  i«/ra.  A  national  bank  the  report  was  absolutely  false  and 
may  hold  its  oflicers  liable  for  making  that  the  stock  was  worth:ess,  but  he 
loans  to  an  individual  in  excess  of  ten  cannot  hold  liable  the  directors  who 
percent,  of  the  capital  stock  and  also  did  not  sign  the  report.  Gerner  v. 
for  making  other  loans  in  violation  of  Mosher,  58  Neb.  135  (1899).  See  also 
the  statutes,  and  such  suit  may  be  in  Stuart  r.  Bank  of  Stai)lel)urst.  57  Neb. 
equity  where  the  transactions  are  com-  509(1899).  Where  the  president  of  a 
plicated.  The  statute  of  limitations  does  bank  has  been  held  liable  in  damages 
not  begin  to  run  until  such  officers  have  for  deceit  in  inducing  a  person  to  pur- 
gone  out  of  office.  National  Bank,  etc.  r.  chase  stock  froiu  the  bank,  he  cannot 
Wade,  84  Fed.  Rep.  10  (1897).  A  stock-  compel  the  bank  to  reimburse  him,  on 
holder  in  a  bank  may  sue  to  compel  the  the  ground  that  the  bank  had  obtained 
president  to  restore  $45,000  which  he  the  benefit  of  the  act.  Trimble  v.  Ex- 
caused  thebanktoloanwithoutsecurity,  change  Bank,  62  S.  W.  Rep.  1027  (Ky. 
the  money  being  used  to  pay  a  debt  due  1901).  A  stockholder  may  hold  the 
to  the  president  himself.  Wickersliara  directors  liable  for  false  representations 
V.  Crittenden,  93  Cal,  17  (1893).  inducing  him  to  loan  money  to  the  com- 

2  Where  a  corporation  secures  a  rebate  pany  where  they  told  him  that  the  com- 
from  a  railroad  company,  not  only  on  ])any  was  solvent,  when  in  fact  it  was 
shipments   made    by  it,   but  on   shi|)-  insolvent,  and  they  knew  it  so  to  be. 

1610 


CH.  XL.] 


ULTRA    VIRES    ACTS    AND    CONTRACTS. 


[§  682. 


power; '  for  accepting  bills  without  authority;  -  or  contracting  for 
the  corporation  when  he  had  no  authority  so  to  do.*  They  may  be 
liable  for  maintain  ng  a  nuisance.*  In  an  early  and  important 
case  Chancellor  Walworth  sustained  a  stockholder's  action  to  hold 
the  corporate  directors  liable  for  corporate  funds  lost  by  specula- 
tion in  the  stocks  of  other  corporations.^  The  directors  may  be 
liable  for  causing  the  railroad  company  to  purchase  the  stock  of 
another  railroad  company,  but  the  six  years'  statute  of  limitations 
is  a  bar  to  a  stockholder's  suit  to  hold  them  liable,  no  fraud  beins: 
alleged.®  The  din  ctors  are  personally  liable  where  they  advance 
corporate  funds  to  the  vendee  of  stock  of  the  company  in  order  to 
enable  him  to  purchase  the  stock,' 


Kinkier  v.  Junica,  84  Tex.  116  (1892).  A 
director  may  buy  stock  from  a  stock- 
holder at  less  than  its  real  value,  and 
there  is  no  fraud  in  the  fact  that  the 
director  knew  the  real  value  while  the 
stockholder  did  not.  Crowell  v.  Jack- 
son. 53  N.  J.  L.  656  (1891).  See  also  §  320, 
supra.  A  stockholder  cannot  hold  a 
director  liable  for  the  stock  becoming 
worthless  by  reason  of  the  fact  that  the 
director  and  others  sold  their  stock, 
amounting  to  three- fourths  of  the 
stock,  to  the  Cotton  Seed  Oil  Trust,  and 
that  t  he  trust  then  dissolved  the  corpora- 
tion by  a  three-fourths  vote  as  allowed 
by  statute,  although  the  director  as 
such  voted  for  the  dissolution.  Tris- 
coni  V.  Winship,  43  ha.  Ann.  45  (1891). 
For  a  complaint  seeking  to  hold  na- 
tional bank  directors  liable  for  the  loss 
of  money  deposited,  the  deposit  being 
imluced  by  erroneous  and  fraudulent 
advertisements  and  reports  as  to  the 
condition  of  the  bank,  see  Prescott  v. 
Haughey,  65  Fed.  Rep.  653  (1895).  A 
depositor,  suing  the  directors  of  a  bank 
for  false  statements  inducing  him  to 
deposit  in  the  bank,  must  allege  that 
but  for  such  statements  he  would  have 
withdrawn  his  deposit  before  the 
failure.  Brady  v.  Evans,  78  Fed.  Rep. 
558  (1897).  Where  a  stockholder  re- 
ceives an  offer  for  his  stock  and  is  per- 
suaded not  to  sell  by  fraudulent  repre- 
sentations of  a  director,  he  may  hold 
the  latter  liable  in  damages.  Roth- 
miller  V.  Stein,  143  N.  Y.  581  (1894). 

161 


1  See  ch.  XLVI,  infra. 

2  See  ch.  XLVI,  infra. 

3  An  officer  who  signs  the  corporate 
name  to  a  contract  to  bear  part  of  the 
expense  of  a  suit  is  personally  liable 
therefor  if  he  had  no  authority  so  to 
do.  Solomon  v.  Penoyar,  89  Mich.  11 
(1891).  Officers  incur  no  personal  lia- 
bility when  avowedly  contracting  on 
behalf  of  the  company.  Beeson  v.  Lang, 
85  Pa.  St.  197  (1877). 

*  See  ii  15&,  supra.  The  directors  of 
a  corporation  organized  to  deal  in 
hardware,  merchandise,  and  powder 
are  personally  liable  for  damages  due 
to  an  explosion  of  powder  Illegally 
stored  in  its  warehouse,  even  though 
the  directors  did  not  know  of  the  same, 
it  being  shown  that  if  they  had  exer- 
cised ordinary  diligence  they  would 
have  known  of  it.  Cameron  v.  Kenyon- 
Connell.  etc.  Co.,  22  Mont.  312  (1899). 

5  Robinson  v.  Smith,  3  Paige,  Ch.  223 
(1832).  See  also  Combination  Trust  Co. 
V.  Weed,  2  Fed.  Rep.  24  (1880);  Harden 
r.  Newton,  14  Blatchf.  376  (1878);  S.  C, 
11  Fed.  Cas.  500:  Smith  v.  Rathbun,  23 
Hun,  150  (1880);  Land  Credit  Co.  v. 
Ferraoy,  17  W.  R  562  (1869),  where  the 
directors  used  corporate  funds  to  "  rig 
the  market,"  i.  e.,  to  purchase  and 
thereby  sustain  the  market  price  of  the 
stock.    See  88  L.  T.  Rep.  194. 

«  Whitwam  v.  Watkin,  78  L.  T.  Rep. 
188  (1898'. 

7  Green  v.  Hedenberg,  159  111.  489 
(1896).  Where  the  treasurer  uses  the 
1 


V 


§  CS2.] 


UI.TKA    VIRES    ACTS    AND    CONTRACTS. 


[cir.  XU 


Directors  who  knowingly  authorize  the  issue  of  watered  stock  are 
liable  therefor  to  the  company.'  Directors  are  not  personally  liable 
for  (hunages  due  to  negligence  on  the  part  of  the  corporation,-  A 
director  is  not  liable  for  failure  to  institute  legal  proceedings  to  set 
aside  the  ultra  vires  acts  of  other  directors.'  The  directors  of  a 
national  bank  may  be  liable  for  money  sj)ont  by  the  bank  in  opcr- 
atinir  a  mill  in  which  the  bank  had  an  interest.*  Where  the  din-ct- 
ors,  ujion  an  increase  of  the  capital  stock,  issue  a  part  of  the  stock 
for  worthless  notes,  the  directors,  upon  the  bank  becoming  insolv- 
ent, are  liable  to  the  receiver  for  the  par  value  of  such  stock,  unless 
they  can  show  the  stock  could  not  have  been  otherwise  issued  or  sold.* 
Where  the  directors  of  a  business  corporation  accept  paper  in  its 


funds  of  tho  corporation  to  pay  for 
Btock  in  the  corporation  itself,  vvliich 
he  and  other  stockholders  have  pur- 
ciiased,  he  may  be  compelled,  upon  cor- 
porate insolvency,  torefuud  t!ie  money, 
even  though  he  took  the  funds  from 
the  treasury  with  the  consent  of  all 
the  stockholders.  Re  Brockway  Mfg. 
Co.,  89  Me.  121  (1890). 

1  London  Trust  Co.  r.  Mackenzie,  68 
L.  T.  Rep.  380  (1893),  the  court  saying, 
however,  "If,  acting  fairly,  honestly, 
and  reasonably,  directors  mistake  the 
legal  powers  of  tiie  company,  they  may 
not  be  made  answerable;  but  if  they  in 
fact  know,  or  with  due  care  ought  to 
have  known,  that  tlie  acts  done  are  be- 
yond the  powers  of  the  compan}',  then, 
if  they  do  tjiose  acts  even  in  the  honest 
belief  of  necessity  in  the  interests  of 
the  company,  they  take  the  risk  of  the 
consequences."  Where  the  directors 
issue  stock  to  a  mining  expert  at  ninety 
cents  on«the  dollar  in  consideration  of 
an  examination  and  report  by  him, 
they  are  liable  to  the  company  for  the 
remaining  ten  cents  on  the  dollar,  but 
not  for  surplus  value  which  the  stock 
afterwards  acquired.  Hirsche  v.  Sims, 
[1894]  A.  C.  654.  Directors  may  be  per- 
sonally liable  for  illegally  issuing  stock 
and  afterwards  paying  to  the  stock- 
holders a  portion  of  the  price  received 
by  the  corporation  for  bonds  and  stock, 
the  stock  being  contributed  by  the 
stockholders,  but  they  are  not  liable 
jointly  for  money  so  paid  to  each  of 


them  separately  as  stockliolder&  Great 
Western,  etc  Ca  r.  Harris'  Estate,  111 
Fed.  Rep.  38  (1901).  See  also  ch.  Ill, 
Hupra. 

-Demarest  v.  Flack,  12S  N.  Y.  205 
(1891).  A  director  is  not  personally  lia. 
ble  for  the  negligence  of  the  corpora- 
tion in  the  construction  of  a  building 
where  he  did  not  personally  take  part, 
even  though  it  is  alleged  that  an  in- 
competent man  was  put  in  cliarge. 
Henry  v.  lirackenridge  Lumber  Ca,  48 
La.  Ann.  950  (1890).  See  al-so  §  724, 
infra.  The  directors  of  an  amusement 
company  are  not  personally  liable,  al- 
though they  are  a  committee  having 
charge  of  the  construction  of  a  general 
stand  that  falls  and  injures  a  person. 
Van  Antwerp  v.  Linton,  89  Hun,  417 
(1895);  aff'd,  157  N.  Y.  716.  The  direct- 
ors are  not  personally  liable  for  dam- 
ages due  to  the  negligence  of  a  person 
employed  by  them  to  give  a  fireworks 
exhibition  for  the  corporation.  Bianki 
V.  Greater,  etc  Co.,  92  N.  W.  Rep.  615 
(Neb.  1902). 

^Re  Lands  Allotment  Co.,  [1894]  1 
Ch.  616. 

4  Cockriil  V.  Abeles,  86  Fed.  Rep.  505 
(189S). 

5  Cockriil  V.  Abeles,  80  Fed.  Rep.  505 
(1898).  Even'  though  the  stockholders 
of  a  bank  assent  to  notes  being  ac- 
cepted in  payment  of  subscriptions,  yet 
a  receiver  may  hold  the  directors  liable 
therefor.  Coddington  v.  Canaday,  61 
N.  E.  Rep.  567  (Ind.  1901). 


1613 


CH.  XL.]  ULTRA    VIRES    ACTS    AND    CONTRACTS.  [§  082. 

name  for  accommodation,  they  are  personally  liable  for  payments 
made  or  liabilities  incurred  on  such  paper.'  Where  an  officer  causes 
a  manufacturing  company  to  indorse,  for  accommodation,  the  note 
of  a  party,  all  of  whose  goods  it  purchases,  he  is  not  personally 
liable  to  the  former  company  unless  it  is  proved  that  the  directors 
and  stockholders  were  ignorant  thereof  and  hence  did  not  acquiesce 
therein.2  The  directors  are  not  personally  liable  for  errors  of  judg- 
ment.' But  the  stockholders  may  sue  the  directors  for  gross  mis-' 
management  and  for  damages  where  fraudulent  mortgages  have 
been  placed  by  them  on  the  corporate  property/  The  president 
executing  an  ordinary  guaranty  in  the  name  of  the  corporation  w^ith- 
out  authority  is  personally  liable  thereon.*  But  where  a  bank  has 
no  power  to  make  a  guaranty,  the  officer  signing  the  bank's 
name  to  such  guaranty  is  not  personally  liable  thereon.®  A  cor-  . 
porate  agent  who  signs  the  corporate  name  to  a  note  without  au-  / 
thority  is  liable  personally  thereon.'  An  officer  making  a  corpora-  ' 
tion  note  without  authority  is  personally  liable  thereon.^  The 
directors  are  not  personally  liable  for  attorney  fees  for  services 
rendered  in  a  voluntary  dissolution  of  the  company.^  A  director 
is  not  personally  liable  in  damages  to  a  property  owner  over  whose 
premises  the  company's  road  runs  without  warrant.'" 

Various  instances  of  the  liability  of  directors  and  stockholders 
are  given  in  the  notes  below.'' 

1  Hutchinson  v.  Sutton  Mfg.  Co.,  57  ment  of  his  debt.    Where  he  does  so 

Fed.  Rep.  998  (1893).  through  legal  proceedings  fraudulently 

2Willard  v.   Holmes,  143  N.  Y.  493  and  by  conspiracy,  the  property  may 

(1S94).  be  reached.   Angle  v.  Chicago,  etc.  Ry., 

3Symmes  v.  Union  Trust  Co.,  60  Fed.  151  U.  S.  1  (1894).    Where  the  statute 

Rep.  830  (1894).  provides  for  raising  funds  for  a  mutual 

*  Landis  v.  Sea  Isle,  etc.  Co.,  53  N.  J.  insurance  company  by  assessments,  the 

Eq.  654(1895).  bond  of  the  directors  to  advance  $100,000 

8  Nelligan  v.  Campbell,  20  N.  Y.  Supp.  to  the  company  as  needed  is  ultra  vires 

234  (1892).  and  unenforceable.     Goss  v.  Peters,  98 

«Thilmanyv.  Iowa,  etc.  Co.,108  lovra,  Mich.  112  (1893).    In  Beach  v.  Cooper, 

357  (1899).  72  Cal.  99  (1887),  in  a  stockholder's  suit 

TFrankland  v.  Johnson,  147  111.   520  to  hold  officers  liable  for  paying  $315,000 

/1893),  for  a  few  months'  loan  of  $140,000,  the 

8  Miller  v.  Reynolds,  93  Hun,  400  (1895).  court  held  that  the  act  was  not  a  fraud 

9  Drew  V.  Longwell,  81  Hun,  144  (1894).  per  se,  and  that  it  was  possible  that  the 
10  Lamming  v.  Galusha,  81  Hun,  247  directors  might  explain  it.     See  §  738, 

(1894);  aff'd,  151  N.  Y.  648,  where  it  was  infra.  A  consignor  of  goods  to  a  cor- 
also  claimed  that  the  incorporation  had  poration  to  sell  cannot  hold  the  direct- 
been  insufficient  ors  of  the  corporation  personally  liable 
11 A  stockholder  cannot  secure  a  trans-  for  conversion  where  the  consignor 
fer  from  the  corporation  to  himself  of  knew  that  the  corporation  had  disposed 
the  property  of  the  corporation  so  as  to  of  the  property  and  he  had  acquiesced 
deprive  a  corporate  creditor  of  the  pay-  in    such    sale.      Birdsell,    etc    Co.    v. 

1613 


§  682.] 


ULTRA    VIRES    ACTS    AND    CONTRACTS. 


[cn.  XL. 


But  directors  are  not  liable  for  honest  mistakes  as  to  the  legal  ex- 
tent of  their  authority; '  nor  are  they  liable  to  the  company  lor  an 


OKlevee,  58  N.  E.  Rep.  231  (III.  1900).    A 
statutory  liability   of   stockholders   in 
corporations,  except  manufacturing  cor- 
porations, does  not  apply  to  a  manu- 
facturing corporation,  even  tliou<^li  it 
lias  engaged  in  a   non-manufacturing 
business    without   authority   from   its 
charter.   Senour,  etc.  Ca  i".  Church,  etc. 
Co..  81  Minn.  294  (lOOOi.     Where  the  di- 
rectors of  a   corporation    sell   out    its 
assets  in  consideration  of  a  person  pay- 
ing tile  debts,  and  the  latter  organizes  a 
new  corporation  and  gives  to  the  old 
directors  stock  in  the  new  corporation 
equal  to  tlieir  stock  in  the  old,  but  does 
not  give  anything  to  the  other  stock- 
holders of  the  old  corporation,  the  di- 
rectors and  tiie  person  so  purchasing 
the  assets  are  liable  to  the  old  corpora- 
tion for  the  value  of  the  stock  so  given 
to  the  directors.   A  pledgee  of  the  stock 
of  the  old  corporation  may  bring  suit 
for  that  purposa     Smith  v.  Smith,  etc. 
Co.,  123  Mich.  234  (1900j.     Even  though 
the  statute  requiring  banks  loaning  on 
real  estate  to  loan  not  above  fifty  per 
cent,  of  their  value,  yet  the  directors 
are  not   personally  liable   because  on 
foreclosure  sale  less  tiian  fifty  per  cent* 
is  realized.    The  value   may  have  de- 
preciated.    Colorado  Savings  Bank  v. 
Evans,  12  Colo.  App.   Div.   334   (1S98). 
Where  all  the  assets  of  a  corporation  are 
transferred  for  stock  of  another  cor- 
poration and  such  stock  is  sold  by  trus- 
tees of  the  former  to  pay  its  debts,  the 
fact  that  one  of  the  trustees  subse- 
quently buys  a  portion  of  the  stock 
does  not  render  him  liable   for  such 
debts.     Wing  v.  Charleroi,  etc.  Co.,  112 
Fed.  Rep.  817  (1902).   An  officer  of  a  cor- 
poration may  be  personally  liable  for 
funds    of    a    trust   estate   which    are 
received   by  him   for  the  corporation 
after  he  knows  that  the  corporation  is 
insolvent.     Anderson  v.  Daley,  38  N.  Y. 


App.  Div.  r)0.j(1890).  As  to  a  suit  against 
the  company  and  also  an  employee  for 
negligence,  see  Burch  t'.  Caden  Stone 
Ca.  93  Fed.  Rep.  181  (1899).  A  suit  by 
a  stockholder  against  the  directors  to 
hold  them  liable  for  violating  the  na- 
tional bank  act  must  be  fur  the  benefit 
of  the  corporation.  Zinn  v.  Baxter,  65 
Ohio  St  341  (1901).  Directors  are  not 
liable  to  creditors  for  mismanagement 
unless  actual  fraud  is  shown.  Wilson 
V.  Stevens,  129  Ala.  C30  (1901).  The 
power  of  a  private  corporation  to  ac- 
quire land  cannot  be  questioned  by  the 
grantor  of  land  to  the  corporation,  and 
moreover,  even  if  the  rule  were  other- 
wise, an  agent  who  bought  for  the  cor- 
poration as  agent  would  not  be  person- 
ally liable.  Ray  v.  Foster,  33  S.  W.  Rep. 
54  (Te.\.  1899).  In  Louisiana  it  is  held 
that  where  a  corporation  organized  to 
build  railroads  and  carry  on  a  planta- 
tion business  carries  on  a  store  to  sup- 
ply its  employees  with  merchandise,  its 
stockholders  are  personally  liable  as  to 
the  merchandise  bu.siness  —  that  being 
ultra  vires.  Lehman  v.  Knapp.  48  La. 
Ann.  1148  (1896).  In  Powell  v.  Murray, 
3  N.  Y.  App.  Div.  273  il896);  afl'd.  157 
N.  Y.  717,  where  a  company,  formed  to 
manufacture  electric  appliances  and 
plant,  issued  stock  in  payment  for  a 
license  to  sell  the  product  of  a  foreign 
corporation,  it  was  held  that  the  parties 
so  receiving  the  stock  were  ■  liable 
thereon,  under  the  New  York  statute, 
as  not  being  paid-up  stock,  such  con- 
tract being  ultra  vires.  An  officer  of  a 
construction  company  who  induces  a 
party  to  buy  stock  owned  by  the  com- 
pany is  not  personally  liable  on  the 
contract  of  the  company  to  allow  inter- 
est on  instalments  paid  on  such  stock 
in  advance.  Hetfield  v.  Addicks,  154 
Pa.  St.  1  (1893).  Directors  are  person- 
ally liable  for  losses  of  a  corporation  on 


1  Beattie  v.  Ebury,  L.   R.  7   Ch.  777  (1872),  and  L.  R.  7  H.  L.  102.    See  also 
§  702,  infra. 

1614 


CH.  XL.] 


ULTRA    VIRES    ACTS    AND    CONTRACTS. 


[§  682. 


ultra  vires  act  which   the  company  has  ratified.^     They  may  be 
liable  where  the  corporation  is  but  a  "  dummy,"  organized  for  a 


account  of  unreasonable  credit  ex- 
tended to  another  corporation  in  which 
the  directors  are  interested.  Stahn  v. 
Catawba  Mills,  53  S.  C.  519  (1898).  Where 
a  mining  conijany  is  practically  re- 
organized by  selling  out  to  a  new  and 
larger  conopany  having  the  same  di- 
rectors,-and  the  stock  is  sold  to  the 
public,  if  the  pro'^pectus  discloses  all 
the  facts  excepting  the  amount  of  prop- 
erty, which  one  of  the  directors  made 
as  a  stockholder  in  the  former  company, 
he  is  not  liable  to  the  new  company  for 
such  property  as  a  promoter  thereof, 
although  it  might  have  been  ground 
for  rescinding  the  contract  of  purchase. 
Re  Lady  Forrest,  etc.,  [1901]  1  Ch.  582. 
In  Minnesota  by  statute  directors  who 
partici|)ate  in  an  ultra  vires  act  are 
liable  for  all  debts  thereafter  con- 
tracted, even  though  they  go  out  of 
office.  Citizens'  State  Bank  v.  Story, 
etc.  Co.,  87  N.  W.  Rep.  1016  (Minn.  1901). 
A  suit  in  a  state  court  against  the  of- 
ficers of  a  national  bank  on  the  ground 
that  they  had  violated  the  national 
bank  act  is  removable  to  the  United 
States  court.  Bailey  v.  Mosher,  95  Fed. 
Rep.  223  (1899).  In  a  suit  by  creditors 
to  hold  directors  personally  liable  for 
violating  the  statutes  in  the  conduct  of 
the  corporate  business,  the  creditors 
must  clearly  set  forth  the  character 
and  existence  of  the  amount  they  claim. 
Boston,  etc.  R.  R  v.  Parr,  104  Fed.  Rep. 
6'.J5  (1900  .  Where  the  lease  of  a  street 
railway  has  been  made,  in  accordance 
with  the  vote  of  the  stockholders  and 
directors,  a  stockholder  cannot  hold 
the  directors  personally  liable  for  not 
infoirming  the  stockholders  of  an  offer 
to  purchase  the  property,  it  not  being 
shown  that  the  offer  was  from  a  re- 
sponsible party  or  that  it  would  have 
made  any  difference  in  the  stockholders' 
action.  Strunk  v.  Owen,  199  Pa.  St.  73 
(1901).     Where  the  statute  renders  the 


officers  and  stockholders  of  a  foreign 


corporation  liable  for  doing  business  in 
the  state  without  filing  a  certificate, 
this  does  not  prevent  the  company  from 
suing  on  contracts.  The  courts  will  not 
extend  the  penalty.  Kindel  v.  Beck, 
etc.  Co.,  19  Colo.  310  (1893),  stating  also 
that  a  statute  which  should  restrict  the 
right  of  a  foreign  corporation  to  deliver 
in  the  state  goods  manufactured  by  the 
company  out  of  the  state  would  be  un- 
constitutional. Where  an  insolvent  cor- 
poration turns  over  all  its  property  to  a 
new  corporation  formed  for  that  pur- 
pose, and  the  new  corporation  turns 
over  a  portion  of  its  assets  to  one  of  the 
directors  of  the  old  corporation  without 
consideration,  a  creditor  of  the  old  cor- 
poration may  hold  the  directors  person- 
ally liable.  South  Bend,  etc.  Co.  v. 
George,  etc  Co.,  97  Wis.  230  (1897).  For 
various  other  instances  of  the  liability 
of  directors,  see  j?  243,  supra. 

1 "  When  the  directors  and  officers  of 
a  corporation  engage  in  ultra  vires 
transactions,  and  thus  cause  damage  to 
the  corporation,  they  may  be  jointly 
and  severally  liable  for  such  damage; 
and  when  sued  for  such  damage, a  sub- 
ordinate officer  cannot  establish  an  ab- 
solute defense  by  showing  that  his 
transactions  were  assented  to  or  even 
directed  by  the  directors.  Directors 
and  officers  of  corporations  are  agents 
of  the  corporation  for  which  they  act, 
and  for  their  unauthorized  transactions 
they  may  be  liable  to  their  principal 
just  as  the  agent  of  an  individual  may 
be  liable  for  the  damage  caused  to  his 
principal  by  his  unauthorized  acts. 
But  .  .  .  when  the  officers  of  a  corpora- 
tion engage  in  an  ultra  vires  business 
for  the  benefit  of  a  corporation,  and 
the  corporation  has  the  actual  benefit 
thereof,  and  when  the  business  is  so 
carried  on  with  the  acquiescence  of 
the  stockholders  that  it  actually, 
though  illegally,  becomes  the  business 
of  the  corporation,  it  cannot  maintain 


1615 


§  C82.] 


ULTliA    VIEES    ACTS    AND    OONTIiACTS. 


[CH.  XL. 


fraudulent  purpose.*  But  one  director  is  not  liable  for  the 
otlicrs.- 

A  receiver  may  hold  liable  a  director,  where  upon  the  consolida- 
tion of  two  companies  large  sums  are  used  out  of  the  corporate 
funds  to  effect  the  consolidation,  and  the  company  becomes  insolv- 
ent.^ Where  the  oflicers  and  directors,  in  conspiracy,  resign  their 
oflices  and  substitute  other  officers  who  are  irresponsible  and  un- 
trustworthy, in  consideration  of  unhawful  payments  made  to  the 
former  directors,  and  the  assets  of  the  corporation  are  thereby  lost, 
the  first  named  directors  are  personally  responsible  for  their  action, 
and  a  receiver  of  the  corporation  may  hold  them  liable.* 

"When  a  contract  is  made  for  the  corporation,  and  this  fact  ap- 
pears in  the  contract,  but  the  officer  or  agent  signs  the  contract, 
not  in  the  corporate  name,  but  in  his  own  name,  he  is  generally  not 
liable  on  such  contract;  but  in  some  instances  he  has  been  held 
liable.*  "Where  an  officer  or  agent  of  a  corporation  has  been  in- 
strumental in  ci\using  the  corporation  to  commit  trespass  or  any 

an  action  apjainst  such  officers  for  any  loT  (1847):  Bramah  r.  Roberts,  3  Binp:. 
damages  it  has  sulTereil  iu  such  busi-  N,  Cas.  963  (1837);  Londesboroup;ir» 
ness.      In  other    words,  a  corporation     Case,  4  De  G.,  M.  &  G.  411  (1854);  Walk- 


engaged  in  an  ultra  vires  business  can- 
not sue,  for  damages  suffered  therein, 
tlie  agents  it  employs  to  carry  on  the 
business.  The  agent  of  the  corporation 
in  such  a  case  would  be  protected  just 
as  the  agent  of  a  copartnersiiip  would 
be  protected  wlio  did  business  with  tlie 
express  or  implied  consent  of  the  co- 


er's  Case,  8  De  G.,  M.  &  G.  607  (1856). 
See  also  Weir  v.  Barnett,  U  R  3  Exch. 
D.  32  (1877);  Weir  r.  Bell,  L.  R.  3  Exch. 
238  (1878);  Cargill  v.  Bower,  I^  R  10  Ch. 
D.  503  (1878).  As  to  contribution,  see 
^  749.  infra. 

»Pierson  v.  Cronk,  13  N.  Y.  Supp.  845 
(1890).     Where  an  insolvent  insurance 


partners,  which  was  not  authorized  by     company  buys  out  a  solvent  company. 


the  articles  of  copartnership."  Holmes 
V.  Willard,  125  N.  Y.  75,  79,  81  (1890). 

1  See  §§  663,  664,  sripra. 

2  Although  the  directors  of  a  com- 
pany are  the  agents  of  the  company, 
and  although,  as  a  member  of  the  cora- 
panj-,  each  of  the  directors  is  liable  for 
the  acts  of  its  agents  on  the  same  ground 
as  other  members,  still,  unless  a  director 
has  done  something  to  make  his  co- 
directors  his  agents  in  some  other  sense 
than  this,  he  is  no  more  liable  for  their 
acts  than  any  other  stockholder.     In 


and  certain  individuals  guarantee  that 
the  obligations  of  the  latter  company 
will  be  fulfilled,  and  the  latter  company 
is  "  wrecked,"  the  guarantors  are  liable. 
Mason  v.  Cronk,  125  N.  Y.  496  (1891). 

<Bosworth  V.  Allen,  168  N.  Y.  157 
(1901).  Directors  of  an  insurance  com- 
pany who  use  its  money  to  procure  the 
resignations  of  the  directors  of  another 
insurance  company  and  a  substitution 
of  new  directors  are  personally  liable 
for  money  so  expended,  and  the  fact 
that  parties  receiving  the  money  had 


this  respect  directors  are  like  promo-  repaid  a  portion  of  it  by  way  of  com- 

ters,  each  being  answerable  for  his  own  promise  is  no  bar  to  such  suit  for  the 

acts,  and  for  the  acts  of  the  others  so  balance.     A   release   by    the   board   of 

far  as  he  has  made  them  his  agents,  but  directors  is  no  defense.  Gilbert  v.  Finch^ 

no  further.     Brown  v.  Byers,  16  M.  &  72  N.  Y.  App.  Div.  38  (1902). 

W.  252  (1847);  Heraud  v.  Leaf,  5  G  B.  5  See  ch,  XLIII,  §  724,  infra. 

1616 


CH.  XL.]  ULTEA    TIRES    ACTS    AND    CONTRACTS.  [§  6S2. 

Other  tort,  then  such  director  or  officer  is  personally  liable  therefor.J 
The  president  of  an  insurance  company  which  has  not  complied 
with  the  law  authorizing  its  organization  is  liable  to  policy-holders 
for  false  representations  to  them  by  the  insurance  agents  that  the 
company  had  so  complied.^  The  president  of  a  corporation  obtain- 
ing credit  for  the  corporation  by  false  representations  is  liable  per- 
sonally therefor,  and  is  liable  to  arrest.^  A  stockholder  who  is  also 
o-eneral  manager  of  a  newspaper  corporation  is  not  liable  criminally 
for  its  criminal  advertisement  of  an  illegal  lottery,  unless  he  had 
actual  knowledge  or  notice  thereof.*  An  officer  is  liable  who  directs 
a  negro  to  be  excluded  from  the  company's  omnibus;^  or  who  takes 
part  in  an  assault; «  or  who  carries  on  a  malicious  prosecution."' 

Directors  are  not  liable  for  commencing  business  before  the  cap- 
ital stock  is  subscribed  for.«  And  even  though  the  directors  certity 
that  one-half  of  the  capital  stock  has  been  paid  in  in  cash,  when  in 
fact  it  has  not  been,  yet  the  assignee  of  the  corporation  for  the 
benefit  of  its  creditors  cannot  hold  them  liable  for  the  part  not  so 
paid  in.»    A  director  is  not  liable  for  the  acts  of  the  corporation  m 
cuttino-  timber  on  land  not  owned  by  the  corporation  where  the 
director  took  no  part  in  the  same.'»    Where  the  board  of  directors 
allow  an  illegal  preference  to  one  director  they  are  personally  liable 
to  other  creditors  to  the  extent  of  such  preference,  and  even  though 
one  of  them  resigns,  the  liability  continues  for  the  benefit  of  past 
as  well  as  future  creditors."     Directors  and  officers  of  a  national 
bank  are  personally  liable  for  the  funds  of  the  bank  used  by  them 
to  develop  a  mining  property  owned  by  the  bank,  even  though  the 
bank  originally  acquired  the  mining  property  legally.  The  statute 

1  This  subject  belongs  more  properly        7  Hussey  v.  Norfolk  Southern  R.  R,  93 
to  treatises  on   agency  and  on  torts.     N.  C.  34  (1887). 

An  a-ent  is  liable  for  aiding  the  corpo-  8  See  J^  243.  mpra.  Where  the  directors 

ration  in  perpetrating  a  breach  of  trust,  commence  business  before  ten  per  cent. 

Attorney-General  v.  Leicester,  7  Beav.  of  the  capital  is  paid  in,  as  required  by 

176(1844).  statute,   the  directors    are    personally 

2  Belding  v  Floyd,  17  Hun,  208  (1879).  liable  as  agents  transacting  business 

3  Phillips  V.  Wortendyke,  31  Hun,  192    ^vithout  authority  from  the  principal. 
.^gg3^      ^  Trust  Co.  r.  Floyd,  47  Ohio  St.  525  (1890). 

♦People    V.    England,    27    Hun.    139  Cf .%  m,  supra.    In  Illinois  by  statute 

(ISS"^)     See  also  Green's  Brice's  Ultra  the  directors  are  personally  liable  for 

Vires  p  765.  debts  incurred  before  all  "  Stock  named 

6  Peck  V.  Cooper,  112  III.  192  (1884);  54  in  the  articles  of  incorporation  shall  be 

Am  Rep  ''SI  subscribed    in    good    faith."    Kent  v. 

6  Brokaw  v.  New  Jersey  R.  R.  &  T.  Co.,  Clark,  181  III.  237  (1899). 

32  N.  J.  L.  328  (1867);  Hewett  v.  Swift,  SHequembourg  v.  Edwards,  15o  Mo. 

85  Mass.  420  (1862);  Moore  v.  Fitchburg  514  (1900).                            „,^,,,  ,,Qno^ 

R  R.,  70  Mass.  465  (1855).  iODavenporti-.Newton,71Vt.  11(1898). 

*^      '  11  Nix  V.  Miller,  26  Colo.  203  (1899). 
(103)                                             1617 


§  682.] 


ULTKA    VIRES    ACTS    AND    CONTEAOTS. 


[cn.  XL. 


of  limitations  may, however,  be  a  bar  to  such  a  suit.'  "Where  a  na- 
tional bank  and  two  of  the  directors  are  secretly  interested  in  tho 
ptotit  made  by  selling  property  to  a  corporation  for  stock,  the  cor- 
poration may  hold  tliem  liable  for  such  prolit.  The  defense  oi  ultra 
vires  on  the  part  of  the  l)ank  is  not  good.^  Where  an  insolvent  per- 
son forms  a  corporation  for  the  purpose  of  conveying  all  his  prop- 
erty to  it  for  stock,  an  incorporator  and  director  who  takes  jiart  in 
the  fraud  is  personally  liable  therefor,  but  not  a  director  who  had 
merely  constructive  notice  of  the  fraud.'  A  director  in  a  bank  is 
personally  liable  to  persons  who  deposit  their  money  in  the  bank 
altt^r  he  knows  that  it  is  hopelessly  insolvent,  where  be  fails  to 
initiate  measures  to  close  the  business  of  the  bank.* 

Where  the  corporation  has  power  to  do  a  certain  act,  but  does 
not  authorize  a  person  or  ollicer  to  do  that  act,  then  tho  person  or 
olliccr  doing  such  act  is  liable  personally  therefor,  lie  is  liable  as 
an  unauthorized  agent.* 

If  the  corporation  had  no  charter  power  to  do  the  act  in  question, 
a  more  difficult  question  arises.  In  England  it  seems  that  the  officer 


1  Cooper  V.  Hill,  94  Fed.  Rep.  583 
(18519).     Cf.  33  a  Rep.  800. 

2  Zinc,  etc.  Co.  v.  First,  etc  Bank,  103 
Wia  125(1899). 

'  Benton  v.  Minneapolis,  etc.  Co.,  73 
Minn.  498  (1898).  An  unsecured  creditor 
of  a  solvent  corporation  that  has  trans- 
f^>^red  all  its  projiertj'  to  another  corpo- 
ration for  stock  of  the  latter,  and  such 
stock  is  then  sold  to  pay  a  mortgage 
debt,  cannot  hold  the  agents  of  the  cor- 
pontion  carrying  out  the  transaction 
p  Tsonally  liable  for  misapplication  of 
funds,  the  transaction  having  been  au- 
thorized and  directed  by  the  board  of 
direi'tors  of  the  selling  corporation. 
Wingv.  Charleroi,  etc.  Co.,  112  Fed.  Rep. 
817  (1900).  Even  though  an  insolvent 
person  sells  all  his  property  to  a  corpo- 
ration and  the  corporation  proceeds 
with  the  business,  yet  the  directors  are 
not  personally  liable  on  the  transfer 
being  set  aside,  where  they  acted  in 
good  faith.  Re  Ely,  82  L.  T.  Rep.  501 
(1900). 

4  It  is  his  duty  to  call  a  meeting  of 
the  directors,  or  report  the  condition  of 
things  to  the  state  authorities,  or  in- 
struct the  cashier  to  stop   taking   de- 


posits, or  to  warn  individual  depositors, 
or,  if  necessary,  make  pul)lir-  announce- 
ment of  the  contlition  of  tilings.  Cas- 
sidy  V.  Uhlmann,  170  N.  Y.  nOS  (1902). 

*  If  two  directors  without  autliority 
order  a  bank  to  honor  the  checks  of 
the  manager  of  their  corporation  and 
lie  overdraws,  they  are  personally  liable 
for  tlie  overdrafts.  Cherry  v.  Colonial 
Bank.  L.  R.  3  P.  a  24  (1869).  But  see 
Beattie  v.  Ebury,  L.  R.  7  H.  L.  102  (1874), 
aff'g  L.  R  7  Ch.  App.  777,  and  rev'g  L. 
R.  7  C:h.  App.  788,  n.  When  the  presi- 
dent of  the  bank,  without  authority 
from  the  directors,  sells  $0,000  of  the 
bank's  paper  for  $5,500.  he  is  liable  to 
the  bank  for  $500  —  the  real  loss.  First 
Nat.  Bank  v.  Lucas,  21  Neb.  280  (1887). 
But  a  corporate  agent  executing  a  se- 
curity in  the  corporate  name  without 
authority  is  not  guilty  of  for(;ery  under 
the  New  York  statuta  Mann  v.  People, 
15  Hun,  155(1878);  aff'd.  People  i;  Mann, 
75  N.  Y.  484.  He  is  liable,  however,  in 
a  civil  action.  See  also  Underhill  v, 
Gibson,  2  N.  H.  352  (1821);  Weare  v. 
Gove.  44  N.  H.  196  (1862).  As  to  the 
liability  of  officers  for  trespass,  etc.,  see 
Thompson,  Liab.  Officers,  p.  489. 


1618 


OH.  XL.] 


ULTRA   VIRES    ACTS    AND   CONTRACTS. 


[§  682. 


or  acrent  is  not  liable  to  the  third  person.^  In  America  he  is  liable 
to  the  company  for  money  so  lost.^  Although  the  certificate  of  in- 
corporation fixes  the  amount  of  debts  which  the  corporation  may 
incur  yet  the  directors  are  not  liable  for  an  excess  of  that  amount. 

The  court  may  authorize  a  receiver  to  sell  all  the  assets  to  a  new 
company  and  release  the  directors  of  the  old  company  from  per- 
sonal liability  to  the  stockholders  where  such  contract  is  a  fair  one, 
even  though  some  of  the  stockholders  dissent.^     A  statute  shorten- 
in-  the  statute  of  limitations  applicable  to  the  common-law  liability 
of  ■'directors  is  unconstitutional  as  to  existing  liabilities  if  the  short- 
ened period  does  not  give  a  reasonable  time  after  it  takes  effect  tor 
the  commencement  of  suits  on  existing  causes  of  action^^  Stockhold- 
ers are  not  personally  liable  for  ultra  vires  acts.«     Directors  who 
have  been  obliged  to  repay  money  which  they  and  others  received 
for  turning  over  the  assets  of  the  company  to  another  conipany 
they  havino-  no  interest  which  could  legally  be  the  subject  of  such 
sale,cannot"recover  back  from  such  other  persons  the  amount  paid  by 
the  latter.     There  can  be  no  contribution  among  joint  tortteasors. 

1  Eaglesfield  v.  Londonderry,  L.  R.  4    are  postponed  until  the  other  debts  are 


Ch.  D.  693  (1876).    But  see  West,  etc. 
Bank  V.  Kitson.  L.  R.  13  Q.  R  D.  360 
(18S4),  where  a  note  was  issued;  Nich- 
oUs  V.   Diamond,  9   Exch.   154  (1853), 
where  an  acceptance  was  made.    The 
secretary  is  not  liable  for  a  representa- 
tion as  to  the  power  of  the  company  to 
issue  debentures  which  had  been  issued. 
Rashdall  v.  Ford,  L.  R.  2  Eq.  750  (1866). 
Directors  issuing  debentures  in  excess 
of  the  amount  allowed  by  statute  are 
personally  liable    thereon.     Weeks    v. 
Propert,  L.  R  8  C.  P.  427  (1873).     As  to 
liability  of  directors  to  the  company 
for  losses  due  to  their  xiltra  vires  acts, 
see  Re  Faure,  etc.  Co.,  L.  R.  40  Ch.  D. 
141    (1888).     A    director    is    liable   for 
money  used,  ultra  virei^,  to  buy  land. 
Grimes  v.  Harrison,  26  Beav.  435  (1859). 
-•  Austin  V.  Daniels,  4  Denio,  299  (1847), 
where  stock    was    purchased    by  the 
company.   See  also  Franklin  F.  Ins.  Co. 
V.  Jenkins,  3  Wend.  130  (1829),  and  cases 
in  chs.   XXXIX,   XL,  supra,  and  ch. 
XLIl,  infra. 

3  Frost  Mfg.  Co.  V.  Foster,  76  Iowa, 
535(1889).  C/.  §760.  Where  the  direct- 
ors incur  debts  in  excess  of  the  amount 
allowed  by  the  charter,  debts  due  them 


paid,  and  the  directoraare  legally  guilty 
of  fraud  as  to  creditors  who  did  not 
know  of  the  excessive  indebtedness, 
and  hence  are  personally  liable  to  such 
creditors.  Guenther  v.  Baskett,  etc 
Co.,  52  S.  W.  Rep.  931  (Ky.  1899). 

4  People  V.  Anglo-American,  etc 
Assoc.  66  N.  Y.  App.  Div.  9  (1901);  S.  c, 
169  N.  Y.  606. 

5  Gilbert  v.  Ackerman,  159  N.  Y.  118 

(1899). 

6  Tennessee,  etc  Co.  v.  Massey,  56  S.  W. 
Rep.  35  (Tenn.  1899).  A  stockholder  is 
not  personally  liable  for  a  tort  of  the 
corporation  in  diverting  water.  Foley 
V.  Lacert,  35  Or.  166  (1899).  Where  a 
guaranty  by  a  loan  and  trust  company 
is  ultra  vires,  the  statutory  liability  of 
stockholders  cannot  be  enforced  to  pay 
such  guaranty,  even  though  the  courts 
of  the  state  where  the  corporation  ex- 
isted have  held  that  ultra  vires  is  no 
defense  where  the  benefit  of  the  guar- 
anty has  been  received.  Ward  v.  Jos- 
lin,  105  Fed.  Rep.  224  (1900);  aff'd,  186 
U.  a  142  (1902).  See  also  §  243,  supra, 
as  to  the  liability  of  stockholders. 

-!  Gilbert  v.  Finch,  173  N.  Y.  455(1903> 


1619 


CHAPTER  XLI. 

INTRA  VIRES  ACTS  AND  CONTRACTS  — IN  OTHER  WORDS.  ACTS  AND 
CONTRACTS  WHICH  ARE  WITHIN  THE  CHARTER  POWERS  OF 
THE  CORPORATIONS,  DIRECTORS,  OR  STOCKHOLDERS 


§  6S3.  Intra  vires  acts  asdistinguislied 
from  ultra  i'ircs  acts. 
684.  Tlie  discretion  of  tlie  directors  or 
the  majority  of  tlie  stockiiold- 
ers  as  to  acts  intra  vires  can- 
not be  (luestioneil  by  sinj^le 
stockholders  unless  fraud  is 
involved. 
685-689.  Borrowing  money,  issuing 
bills,  notes,  and  acceptances, 
coupon  l)()nds,  debentures,  and 
niort^'a^^es. 

690.  Loans  general ly  cannot  be  made 

by  corporations  —  Statutes  — 
Mortgages —  Usury. 

691.  Preferences  and  assignments  by 

insolvent  cor|)orations  —  As- 
signments by  corporations  for 
the  beneht  of  creditors  —  Pref- 
erences in  such  assignments — 
Preferences  by  way  of  mort- 
gages, etc. 


§  692.  Preferences  and  assignments  by 
insolvent  corporations  to  di- 
rectors. ofVicers.  or  storrk  hold- 
ers—  Loans  by  directors  to  the 
corporation  —  Mortgages  by 
corjioratioDs  to  direftor-*. 

093.  Preferences  in  favor  of  cornorate 

debts  upon  which  the  direct- 
ors are  liable  as  indursers  or 
otherwise. 

094.  Land  may  be  purchased  by  a  do- 

nit'stic  corporation. 

695.  Land  may  be  purchased,  held, 
and  sold  by  a  foreign  as  dis- 
tinguished from  an  alien  cor- 
poration, if  there  is  nostatute 
f)f  the  state  to  the  contrary. 

696-700.  Foreign  corporations — Their 
right  to  do  business  in  the 
various  states  —  Restrictions 
thereon. 


§  683.  Intra  vires  acts  as  (Usiiiu/uislwd  from  ultra  vires  acts. — 
An  ultra  vires  act,  as  already  explained,  is  an  act  beyond  the  ex- 
press and  implied  powers  of  the  corporation.  An  intra  vires  act, 
on  the  contrary,  is  one  which  is  within  the  express  or  implied  pow- 
ers either  of  the  board  of  directors  or  of  the  majority  of  the  stock- 
holders in  meeting  assembled.  Intra  vires  acts  are  frequently 
spoken  of  as  matters  concerning  the  "  internal  management  "  of  the 
corporation.  Much  confusion  has  arisen  concerning  these  acts,  owing 
to  a  failure  to  recognize  clearly  the  fact  that  an  act  isint?'a  vires  of 
a  corporation  if  it  can  be  legally  carried  out  eit/ier  by  the  directors 
or  by  the  majority  of  the  stockholders.  Thus,  a  stockholder  fre- 
quently brings  suit  to  enjoin  or  set  aside  an  act  which  the  majority 
of  the  stockholders  have  power  to  do,  but  which  the  directors  have 
done  without  power.  It  is  clear  that  a  dissenting  stockholder  has 
no  right  to  carry  such  a  matter  into  the  courts  unless  the  majority 
are  also  opposed  to  the  act,  since,  if  the  majority  approve  of  the 
directors'  acts,  this  amounts  to  a  ratification  of  the  same. 

In  short,  there  are  three  classes  of  corporate  acts  herein.  First, 
the  stockholder  may  bring  suit  to  remedy  an  act  which  is  ultra 
vires,  or  beyond  the  powers  of  both  the  majority  of  the  stockholders 

1620 


CH.  XLI.] 


INTRA    VIRES    ACTS    AND    CONTRACTS. 


[§  684. 


and  of  the  directors.^  Second,  as  to  acts  within  the  power  of  the 
majority  of  the  stockholders,  but  beyond  the  power  of  the  directors, 
a  stockholder  may  sue  to  enjoin  or  set  them  aside  when  the  direct- 
ors have  performed  them,  and  the  majority  of  the  stockholders  re- 
fuse to  confirm  their  action.^  As  to  such  acts  the  stockholder  cannot 
sue  if  the  majority  confirm  the  directors  in  their  performance. 
Third,  as  to  acts  within  the  powers  of  the  directors  and  performed 
by  them,  or  within  the  powers  of  the  majority  of  the  stockholders 
and  performed  by  the  majority,  the  stockholders  cannot  complain 
that  they  are  ultra  vires.  The  second  and  third  classes  of  acts  are 
intra  vires  of  the  corporation.  They  are  matters  of  internal  arrange- 
ment or  management,  and  cannot  be  controlled  or  objected  to  by  a 
minority  stockholder,  except  as  stated  above.^  The  question  of 
what  intra  vires  acts  are  to  be  performed  by  the  directors,  and  what 
ones  can  be  exercised  only  by  the  majority  of  the  stockholders  in 
meeting  assembled,  is  considered  elsewhere.* 

§  ij^-^.  The  discretion  of  the  directors  or  a  majority  of  the  stock- 
holders as  to  acts  intra  vires  cannot  he  questioned  hy  single  stock- 
holders unless  fraud  is  involved^—  This  proposition  of  law  is  clearly, 
firmly,  and  very  properly  established  beyond  any  question.     Were 


1  Cliapter  XL,   supra,  treats  of  this 
subject.     See  also  §  740,  infra. 

2  Exeter,  etc.  Ry.   v.  Buller,  11  Jur., 
Part  I,  537,  533  (1847),  holding  also  that 
where  such  an  action  has  been  insti- 
tuted it  will  not  be  defeated  by  the  fact 
that  subsequently  the  directors  obtain 
control  of  a  majority  of  the  votes.     But 
there  must  be  clear  proof  that  the  ma- 
jority refuse  to  confirm.     Thus,  in  Bag- 
shaw  V.  Eastern  Union  Ry.,  7  Hare,  114 
(1849),  the  court  says  that  Foss  r.  Har- 
bottle,  3  Hare,  461  (1843),  decides  "that 
if  the  act,  though  it  be  the  act  of  the 
directors  only,  be  one  which  a  general 
meetingof  the  company  could  sanction, 
a  bill  by  some  of  the  shareholders,  on 
behalf  of  themselves  and  others,  to  im- 
peach that  act,  cannot  be  sustained,  be- 
cause a  general   meeting  of  the  com- 
pany might  immediately  confirm  and 
give  validity   to  the  act  of  which  the 
bill  complains."    See  also  MacDougall 
V.  Gardiner,  L.  R  1  Ch.  D.  13  (1875),  and 
§  663,  supra.     Acts  intra  vires  may  be 
ratified    by  a   majority  of  the  stock- 
holders and  the  minority  cannot  com- 


plain.   Bassett    v.   Fairchild,  133  CaL 
637  (1901). 

3  See  note  5  below. 

4  See  ch.  XLHI,  infra. 

6  Quoted  and  approved  in  McMullen 
V.  Ritchie,  64  Fed.  Rep.  253  (1894).  "A 
stockholder  cannot  enjoin  the  execu- 
tion of  a  contract  intra  vires  unless 
fraud  is  shown."  Burden  v.  Burden, 
159  N.  Y.  287.  307  (1899).  "Ques- 
tions of  policy  of  management,  of  ex- 
pediency of  contracts  or  action,  of  ade- 
quacy of  consideration  not  grossly  dis- 
proportionate, of  lawful  appropriation 
of  corporate  funds  to  advance  corporate 
interests,  are  left  solely  to  the  honest 
decision  of  the  directors,  if  their  pow- 
ers are  without  limitation  and  free  from 
restraint.  To  hold  otherwise  would  be 
to  substitute  the  judgment  and  dis- 
cretion of  others  in  the  place  of  those 
determined  on  by  the  scheme  of  incor- 
poration." Ellerman  v.  Chicago  Juno 
tion,  etc.  Co.,  49  N.  J.  Eq.  217  (1891> 
Thus,  in  Bloxam  v.  Metropolitan  Ry.,  L. 
R.  3  Ch.  App.  337  (1868),  the  court  said: 
"  The  matters  of  internal  arrangement 


1631 


§  684.] 


INTRA    VIRES    ACTS    AND    CoNTUACTS. 


[cu.  XU. 


tho  rule  otherwise  there  would  be  no  safety  or  possibility  of  carry- 
ing on  business  tiirough  corporations.  There  would  be  suits  insti- 
tuted by  dissatisfied  stockholders  on  slight  provocation,  and  some- 
times for  the  very  purpose  of  embarrassing  the  transaction  of  busi- 


whicli  are  beyond  the  province  of  the 
court  were  properly  admitted  to  be 
such  as  are  within  the  scope  of  the 
company's  powers."  And  in  Gambles  f. 
Philadelphia,  eta  R.  R,  4  Brewst.  503. 
5'Jl  (1873):  s.  C,  4  Fed.  Caa  1089.  the 
court  said:  "  So  long  as  those  who  man- 
age tiie  corporation  keep  within  the 
limits  of  its  cliarter,  and  commit  or 
propose  to  commit  no  breach  of  their 
trust,  he  has  no  right  to  complain."  In 
Beoher  v.  Wells,  etc  Co..  1  Fed.  Repi  270 
(1880),  it  was  said:  "A  court  of  equity 
will  not  interfere  with  the  internal  pol- 
icy of  a  corporation  unless  it  is  mani- 
fest that  tlie  proposed  act  is  ultra  vires." 
In  Bach  v.  Pacific  MailS.  S.  Co.,  12  Abb. 
Pr.  (N.  S.)  373  (1872),  the  court  said: 
"No  ca.se  can  be  found  where  the  gen- 
eral management  of  corporate  property 
has  been  subject  to  the  restrictions  of 
judicial  power,  unless,  indeed,  in  tlie 
case  of  a  clear  violation  of  exi)ress  law, 
or  a  wide  departure  from  chartered 
powers."  In  this  case  the  stockholder 
objected  to  the  securities  in  wiiich  the 
corporate  funds  were  being  invested. 
In  Walker  r.  Mad  River,  etc.  R.  R,  8 
Ohio,  38  (1837),  it  was  said  by  the  court: 
"  When  acts  requiring  judgment, 
science,  and  professional  skill  are  con- 
fided to  the  discretion  of  the  officers  of 
a  corporation,  the  exercise  of  that  dis- 
cretion will  not  be  lightly  disturbed." 
See  also  Tuscaloosa  Mfg.  Ca  v.  Cox,  08 
Ala.  71  (1880).  In  Ramsey  v.  Erie  Ry.,  7 
Abb.  Pr.  (N.  S.)  156  (1860),  it  is  said: 
•'When  directors  are  only  unwise,  or 
merely  extravagant  or  inprovident,  or 
slightly  negligent,  or  merely  misjudge 
in  the  performance  of  their  duties,  the 
remedy  of  stockholders  is  to  elect  other 
persons  directors  in  their  places."  In 
Bailey  v.  Birkenhead,  etc.  Ry.,  12  Beav. 
433  (1850),  where  a  stockholder  sought 
to  restrain  a  call  as  being  unnecessary, 

10 


the  court  refu.sed  to  entertain  the  suit, 
and  said  that  it  was  not  for  the  court 
"to  take  upon  itself  to  determine  a 
question  which  might  well  and  ought 
to  be  determined  by  the  sliareholders 
themselves  at  general  meeting.s."  See 
also  Edwards  v.  Shrewsbury,  etc.  Ry..  2 
De  G.  &  Sm.  537  (1849);  also  §  750,  infra. 
A  minority  stockholder  cannot  liave  a 
receiver  aj)pointed  on  the  ground  tliat 
the  corporation,  the  property  of  wliich 
consists  of  land,  is  about  to  sell  a  large 
tract  of  land  at  a  low  price,  such  price 
being  satisfactory  to  the  majority  and 
no  fraud  being  alleged.  Not  even  the 
statute  in  Louisiana  authorizing  a  re- 
ceiver for  gross  mismanagement  is  suf- 
ficient. North  American,  etc.  Co.  t'. 
Watkins,  109  Fed.  Rej).  101  (1901).  Even 
though  a  corporation  in  eomi)eting 
with  another  concern  is  selling  its  prod- 
uct below  cost,  yet  a  stockholder  can- 
not enjoin  such  sales,  there  being  no 
bad  faith  or  palpably  bad  judgment 
shown.  Trimble  r.  American,  etc.  Co., 
61  N.  J.  Eq.  340  (1901);  Matter  of  Pier- 
son,  44  N.  Y.  App.  Div.  215  (1899).  A 
mining  corporation  may  lease  its  prop- 
erty for  rental  payable  in  a  certain  por- 
tion of  tiie  product  of  the  mine.  A  stock- 
holder cannot  complain,  even  though 
the  contract  be  an  error  of  judgment. 
Hennessy  v.  Muhleman,  40  N.  Y.  App. 
Div.  175  (1899);  122  Fed.  Rep.  147. 

Where  a  corporation  has  cliarter  au- 
thority to  retire  its  preferred  stock  and 
issue  mortgage  bonds  in  lieu  thereof,  on 
a  vote  of  the  directors  and  stockholders, 
a  minority  stockholder  cannot  enjoin 
such  action  on  the  ground  that  it 
would  be  disastrous  in  its  effect  on  tlie 
corporation.  Berger  v.  United  States 
Steel  Corp.,  53  Atl.  Rep.  68  (N.  J.  1902). 
See  also  Hodge  v.  United  States  Steel 
Corp.,  54  At).  Rep.  1  (N.  J.  1903).  Where 
by  its  charter  a  corporation  has  a  right 


9.9. 


CH.  XLI.]  INTRA    VIRES    ACTS    AND    CONTRACTS.  [§  684. 

ness.  A  partner  in  a  copartnership  may  prevent  action  which  he 
disapproves,  but  corporations  are  formed  very  largely  to  avoid  that 
very  danger  and  disadvantage.  The  corporate  directors,  so  long 
as  they  act  within  their  powers,  may  use  their  own  discretion  as  to 
what  ought  to  be  done.  Such  also  is  the  rule  with  the  majority  of 
the  stockholders  in  meeting  assembled.  An  act  intra  vires  and 
without  fraud  is  an  act  of  internal  management,  and  a  minority  of 
the  stockholders  are  powerless  to  prevent,  control,  change,  or  ques- 
tion that  act.^  Thus,  a  stockholder  has  no  remedy  for  the  mere  inef- 
ficiency of  a  director,  except  to  turn  him  out  at  the  next  election  of 
the  corporation.  Having  once  been  elected,  a  director  is  entitled 
to  retain  his  position,  even  though  he  is  grossly  inelficient.  He 
cannot  be  removed  from  his  position.^  But  where  there  are  vio- 
lent internal  dissensions  in  a  corporation,  and  two  sets  of  officers 
are  attempting  to  act,  and  the  corporate  property  is  endangered, 
a  court  of  equity  will  interfere  to  the  extent  of  preserving  the  cor- 
porate property  by  a  temporary  receiver.^  A  court  of  equity  can- 
not, however,  restrain  the  corporation  from  proceeding  with  busi- 
ness and  using  its  funds  for  that  purpose,  even  though  a  minority 
of  the  stockholders  show  that  sound  business  discretion  and  judg- 
ment would  dictate  a  different  policy.^  The  question  of  whether  a 
suit  by  a  corporation  shall  be  brought  or  not  is  entirely  within  the 
discretion  of  the  directors,  in  the  absence  of  fraud.*  Thus,  even 
thouo:h  a  railroad  is  giving  a  lower  rate  to  one  customer  than  to 
another,  yet  a  stockholder  cannot  maintain  a  suit  of  injunction  to 
compel  the  party  to  pay  what  he  should  have  paid.     While  the  act 

to  purchase  stock  in  other  corporations,  that  it  is  impossible  to  carry  on  the 

the  corporation  may  subscribe  for  stock  business  with  advantage  to  the  parties 

in  anotlier  corporation  to  be  formed  to  interested.     In  such  a  case  the  court 

carry  on  a  similar  business,  and  the  will  interfere,  but  only  for  a  limited 

court   will   not,  at  the  instance  of  a  time,  and  to  as  small  an  extent  as  possi- 

stockholder,  review  the   discretion   of  ble."    See  also  Lawrence  v.  Greenwich 

the  directors  in   making  such  invest-  F.  Ins.  Co.,  1  Paige,  587(1829);  and  §746, 

ment.     Rubino  v.  Pressed,  etc.  Co.,  53  infra. 

Atl.  Rep.  1050  (N.  J.  1903).  *  Fountain  Ferry,  etc.  Co.  v.  Jewell.  8 
1  Quoted  and  approved  in  Symmes  v.  B.  Mon.  (Ky.)  140  (1848),  the  court  say- 
Union  Trust  Co.,  60  Fed.  Rep.  830  (1894).  ing:  "The  question  of  expediency,  of 
2See  §  711,  in/ra.                       •  practicability,  of  extravagance,  or  of 
3  Trade  Auxiliary  Co.  uVickers,  L.R  prudent  economy,  must  be  left  to  be 
16  Eq.  303(1573);  Featherstone  r.  Cooke,  decided  by  the  managers  and  the  cor- 
L.  R  16  Eq.  398,  303  (1873).  the  court  porators."     A  stockholder  may  object 
saying:  "The  court  will  not  interfere  to  corporate  acts  and  contracts  which 
with  the  internal  affairs  of  joint-stock  are  fraudulent  or  ultra  vires  or  malain 
companies  unless  they  are  in  a  condi-  se.     But  all  other  acts  he  can  correct 
tion  in  which  there  is  no  properly  con-  only  by  the  election  of  new  directors, 
stituted  governing  body,  or  there  are  Leslie  v.  Lorillard,  110  N.  Y.  519  (1888). 
such  dissensions  in  the  governing  body  ^gee  §  750,  infra, 

1623 


§§  685-690.] 


INTRA    VIRES    ACTS    AND    CONTRACTS. 


[Cll.   A  I.I. 


is  illegal,  it  is  not  ultra  vires,  and  as  to  the  illegal  act  it  is  for  the 
corporation  to  decide  whether  or  not  it  will  sue.' 

§§  685-689.  Borrowing  money,  issuing  hills,  notes,  and  acceptances^ 
coupon  "bonds,  debentures^  and  mortgages. —  These  subjects  are  fully 
considered  elsewhere.'' 

§  G90.  Loans  by  a  corporation,  and  statutes  forbidding  loans  or 
forbidding  the  taking  of  notes  or  mortgages —  Usury. —  A  corpora- 
tion cannot  make  loans  of  money  unless  its  regular  business  ordi- 
narily involves  loaning.  In  most  cases  the  business  of  a  corpora- 
tion is  to  invest  and  use  its  capital,  and  not  to  loan  it  out.  Accord- 
ingly, it  is  well  settled  that  only  where  the  business  of  the  corpo- 
ration is  such  as  usually  involves  loaning  does  the  corporation  have 
the  right  to  loan  its  funds.'  If  not  prohibited  by  statute,  a  corpo- 
ration may  receive  and  sell  notes  or  acceptances,  if  this  is  naturally 
connected  with  its  business.*     But  unless  specially  authorized  they 


>  Anderson  r.  Midland  Ry.,  85  L.  T. 
Rep.  408  (1901). 
2  See  chs.  XLVI  and  XLVII,  infrcu 
s  1  Daniel,  Neg.  Inst,  i?  ^84.  It  is  legal, 
however,  for  a  loan  and  trust  company 
to  loan  money  and  take  a  mortgage  as 
security.  Farmers'  L.  &  T.  Co.  v.  Perry, 
3  Sandf.  Cii.  339  (1846):  Farmers'  L.  & 
T.  Co.  V.  Clowes,  3  N.  Y.  470  (ISrjO).  A 
plank-road  company  may  loan  its  funds 
to  a  contractor  who  is  constructing  the 
road.  Dictum  in  Madison,  etc.  Co.  v. 
Watertown,  etc.  Co.,  5  Wis.  173  (18.10). 
A  benevolent  association  may  loan  its 
funds.  Western  Boatmen's  Benev. 
Assoc.  V.  Kribben,  48  Mo.  37  (1871).  A 
national  bank  may  purchase  notes  as 
well  as  discount  them.  National  Pem- 
berton  Bank  v.  Porter,  125  Mass.  333 
(1878);  Attleborough  Nat.  Bank  v.  Rog- 
ers, 125  Mass.  339  (1878).  The  discount- 
ing of  a  note  by  a  cement  corporation 
contrary  to  law,  done  through  the 
president,  is  presumed  to  have  been  his 
act  and  not  that  of  the  corporation. 
Lawrenceville  Cement  Co.  v.  Parker,  10 
N.  Y.  Supp.  831  (1890).  The  fact  that  a 
manufacturing  company  extended  its 
business  so  as  to  include  iron  pipe  as 
well  as  brass,  and  loaned  money,  which 
loans,  however,  the  president  was  will- 
ing to  take  up,  and  had  owned  govern- 
ment bonds,  is  not  sufficient  to  entitle 


a  stockholder  who  has  acquiesced 
therein  to  demand  that  all  profits  be 
l)aiil  out  in  dividends.  McNab  v.  Mc- 
Nab,  etc.  Co..  62  llun.  18  (1891);  alT'd, 
133  N.  Y.  687.  A  deposit  by  a  bank 
in  a  bank  renders  tiie  latter  liable 
therefor,  thougli  the  deposit  is  made  to 
enable  the  jiresident  of  the  latter  to  use 
it.  Eastern  Townships  Bank  v.  Ver- 
mont Nat.  Bank.  22  Fed.  Rep.  186  (1884). 
A  bank  may  loan  money  to  its  cashier 
with  the  consent  of  tlie  board  of  direct- 
ors. Barth  v.  Koetting,  99  Wia  242 
(1898). 

*  White's  Bank  r.  Toledo  F.  &  M.  Ins. 
Co.,  12  Ohio  St.  601  (1801);  Western  Cot- 
tage Organ  Co.  v.  Reddish,  51  Iowa,  55 
(1879);  Pratt  r.  Short,  79  N.  Y.  437  (1880); 
Clark  V.  Titcomb,  42  Barb.  122  (1864); 
Buckley  v.  Briggs,  30  Mo.  452  (I860), 
where  it  was  held  that  a  corporation, 
though  prohibited  from  dealing  in  com- 
mercial paper,  could  receive  and  sell 
notes  given  for  the  sale  of  its  lands; 
Mclntire  v.  Preston,  10  IlL  48  (1848). 
And  a  note  received  by  a  corporation 
will  be  presumed  to  have  been  taken  in 
the  course  of  business.  Lucas  r.  Pit- 
ney, 27  N.  J.  L.  221  (1858);  Hardy  v. 
Merri weather,  14  Ind.  203  (1860);  Frye 
V.  Tucker,  24  IlL  180  (1860):  Potter  v. 
Bank  of  Ithaca,  5  Hill,  490.  7  Hill,  530, 
(1844);  Suydam  v.  Morris  Canal,  etc.  Co., 


1624 


CH.  XLI.] 


INTKA   VIRES    ACTS    AND    CONTRACTS. 


[§  690. 


cannot  make  a  business  of  discounting,^  nor  engage  in  a  banking 
business.'^ 

A  person  who  borrows  money  from  a  corporation  cannot  defeat 
an  action  for  the  money  by  alleging  that  the  corporation  had  no 
authority  to  make  the  loan,  fie  must  pay  back  the  money  bor- 
rowed.^ 

Although  a  statute  or  charter  forbids  a  corporation  from  loaning 
more  than  a  certain  amount  of  money,  and  it  actually  has  loaned 
more  than  that  amount,  yet  the  borrower  cannot  avoid  payment  of 
any  part  of  the  loan.'*     Although  a  statute  requires  a  bank  to  loaa 


6  Hill,  217  (1843);  Talman  v.  Rochester 
City  Bank,  18  Barb.  123  (1854);  Gee  v. 
Alabama,  etc.  Co.,  13  Ala.   (N.  S.)  579 
(1848);  Bates  v.  Bank  of  State,  3  Ala,  (N. 
S.)  451  (1841);  Smith  v.  Mississippi,  etc 
R.  R.,  14  Miss.  179  (184G);  Portland  Bank 
V.  Storer,  7  Mass.  433  (1811);  Northamp- 
ton Bank  u  Allen,  10  Mass.  284  (1813); 
Fleckner  v.  Bank  of  U.  S.,  8  Wheat.  338 
<1823);  Rees  v.  Conococheague  Bank,  5 
Rand.  (Va.)  326  (1827);  Payne  v.  Bald- 
win,  11  Miss.  661  (1844);  rev'd,  Baldwin 
V.   Payne.   6  How.  332  (1848);   Akin  v. 
Blanchard,  33  Barb.  527  (1860).     An  in- 
surance  company  cannot   purchase   a 
note  for  purposes  of  a  set-off.     Set-off 
defeated.     Straus  v.  Eagle  Ins.  Ca,  5 
Ohio  St.  59  (1855). 

1  New  York  F.  Ins.  Co.  v.  Sturges,  3 
Cow.  604  (1824).  In  Mitchell  v.  Rome 
R.  R,  17  Ga.  574  (1855),  it  was  held  that 
where  power  is  given  to  "  make  con- 
tracts," a  note  taken  by  a  corporation 
is  prima  facie  evidence  of  an  authorized 
contract. 

2  State  V.  Granville,  etc.  Soc,  11  Ohio, 
1  (1841);  State  V.  Washington  Social  Lib. 
Co.,  11  Ohio,  96  (1841);  Re  Ohio  Life,  etc 
Co.,  9  Ohio,  291  (1839);  Blair  v.  Perpet- 
ual Ins.  Co.,  10  Mo.  559  (1847);  Sumner 
V.  Marcy,  3  Woodb.  &  M.  105  (1847);  s.  c., 
23  Fed.  Cas.  384.  See  also  Central  R  R 
V.  Collins,  40  Ga.  583  (1869),  and  Duncan 
r.  Maryland  Sav.  Inst.,  10  Gill  &  J.  (Md.) 
299  (1838> 

s  Quoted  and  approved  in  Johnson  r. 
Mason  Lodge,  etc.,  106  Ky.  838, 846  (1899) ; 
Gorrell  v.  Home  Life  Ins.  Co.,  63  Fed. 
Rep.  371  (1894);  Head  v.  Cleburne,  etc 


Assoc,  35  S.  W.  Rep.  810  (Tex.  1893); 
Steam  Nav.  Co.  v.  Weed,  17  Barb.  378, 
382,  384  (1853);  Union  Water  Co.  v.  Mur- 
phy's  Flat  Pluming   Co.,   23  Cal.   620 
(1863);  Mott  v.  U.  S.  Trust  Co.,  19  Barb. 
568  (1855);    Poock  v.   Lafayette  Bldg. 
Assoc,  71  Ind:  357  (1880),  the  court  say- 
ing: "The law  may  have  its  reproaches, 
but  this  is  not  one  of  them."    A  person 
making  a  note  to  a  corporation  cannot 
defeat  it  by  the  defense  that  the  com- 
pany had   no  power  to  loan   money. 
Bond  V.  Terrell,  etc  Co.,  82  Tex.  309 
(1891).  In  Alabama  the  borrower  of  the 
money  from  the  corporation  may  es- 
cape payment.    Alabama  Grand  Lodge 
V.  Waddill,  36  Ala.  313  (1860);  Cham- 
bers V.  Falkner,  65  Ala.  448  (1880),  where 
Masonic  lodges  had  loaned  money.    See 
also  dictum  in  Beach  v.  Fulton  Bank.  8 
Wend.  573  (1829),  where  an  insurance 
company  made  a  loan;  also  the  decision 
in  Life  &  F.  Ins.  Co.  v.  Mechanic  F.  Ins. 
Co.,  7  Wend.  31  (1831),  denying  the  right 
of  an  insurance  company  to  recover  an 
unsecured  loan  where  its  charter  au- 
thorized loans  on  bond  and  mortgage. 
See  also  New  York  Firemen  Ins.  Co.  v. 
Ely,  5  Conn.  560  (1825),  where,  however, 
the  loan  was  expressly  prohibited.    In 
Waddill  V.  Alabama,  etc.  R  R,  35  Ala. 
323  (1859),  an  unauthorized  loan  by  a  rail- 
road was  enforced  on  the  ground  that 
the  railroad  president  made  the  loan 
without  authority  from  the  directors. 
*  Gold  Min.   Co.  v.  National  Bank,  96 
U.  S.  640  (1877).     See  also  Silver  Lake 
Bank  v.  North,  4  Johns.  Ch.  370  (1820); 
National  Bank  v.  Matthews,  98  U.  S.  621 


1625 


§  690.] 


INTRA    VIRES    ACTS    AND    CONTKAOTS. 


[CH.  XLI. 


on  bond  and  mortgage,  yet  it  may  recover  loans  made  on  drafts  or 
notes.'  Where  directors  loan  money  in  violation  of  the  statute,  they 
are  liable  personally  therefor.^ 

A  statute  which  prohibits  corporations  from  discounting  notes  or 
bills  unless  expressly  authorized  so  to  do  prevents  the  corporation 
from  collecting  a  note  taken  in  violation  thereof;'  but  this  does  not 


(1878);  BIy  v.  Second  Nat.  Bank,  79  Piu 
St.  45;J  (1S75);  Allen  v.  First  Nat.  Bank, 
23  Ohio  St.  97  (1872);  Stewart  r.  National 
Union  Bank,  2  Abb.  (U.  S.)  424  (1S69); 
S.  C,  23  Fed.  Gas.  68.  holding  that  though 
the  loan  may  be  recovered  the  fran- 
chise of  the  bank  may  be  forfeitetl.  To 
same  effect,  Shoemaker  v.  National  Me- 
chanics' Bank,  2  Abb.  (U.  S.)  41G  (1809); 
S.  C,  21  Fed.  Cas.  1331;  and  Union,  etc, 
Co.  V.  Rocky  Mountain  Nat.  Bank,  1 
Colo.  531  (1872);  Elder  v.  First  Nat 
Bank,  12  Kan.  238  (1873),  holding  that  a 
borrower  cannot  restrain  a  national 
bank  from  negotiating  such  securities 
nor  compel  their  return;  O'Hare  v.  Sec- 
ond Nat.  Bank.  77  Pa.  St.  96  (1874),  hold- 
ing that  an  accidental  excess  does  not 
make  the  loan  void.  Although  the  stat- 
ute forbids  loans  to  directors,  yet  a  loan 
so  made  is  collectible,  and  securities 
pledged  by  the  director  are  subject  to 
the  loan,  though  they  were  fraudulently 
obtained  by  him  from  others.  Bowditch 
V.  New  England,  etc.  Ins.  Co.,  141  Mass. 
292  (1886).  Where  the  president  causes 
the  corporation  to  loan  him  money,  in 
direct  violation  of  the  statute,  he  may 
be  sued  for  the  conversion  thereof,  al- 
though his  collateral  security  has  been 
sold  and  the  whole  transaction  ratified 
by  the  directors.  Nellis  Co.  i'.  Nellis,  62 
Hun,  63  (1891).  A  statute  giving  a  bank 
a  lien  on  its  stock  for  debts  due  to  the 
bank  from  the  stockholder  is  not  nulli- 
fied by  another  statutory  provision  pro- 
hibiting the  bank  from  loaning  money 
on  its  stock.  Battey  v.  Eureka  Bank, 
63  Pac.  Rep.  437  (Kan.  1901). 

1  Allen  V.  Freedman's  Sav.  etc.  Co,  14 
Fla.  418  (1874);  Mott  v.  U.  S.  Trust  Co., 
19  Barb.  568  (1855);  Little  v.  O'Brien,  9 
Mass.  423  (1812);  Mutual  Life  Ins.  Co.  v. 


Wilcox.  8  Biss.  203  (1878):  s.  C,  17  Fed. 
Cas.  1081;  Davis  S.  M.  Co.  v.  Best,  30 
Hun,  638  (1883).  A  loan  for  two  yeai-s, 
instead  of  one  as  allowed  by  statute,  is 
nevertheless  enforceable.  Herman  town, 
etc.  Ins.  Co.  v.  Dhein,  43  Wis.  420(1877). 
A  loan  is  collectible  though  for  a  longer 
time  than  allowed,  and  without  the  re- 
quired security,  and  in  excess  of  the 
amount  allowed  by  statuta  Bond  t'. 
Central  Bank,  2  Ga.  92  (1847). 

^Thompson  v.  Greeley,  107  Ma  577 
(1891);  Dudd  v.  Wilkinson.  42  N.  J.  Eq. 
647  (1887):  Williams  v.  McDonald,  42  N. 
J.  Eq.  392  (1886).  The  treasurer  and 
manager,  turning  in  to  the  corporation 
a  mortgage  not  worth  double  the  debt 
owed  by  him  to  the  corporation,  is 
liable  for  any  loss.  Williams  v.  Riley, 
34  N.  J.  Eq.  398  (1881 ».  The  ca.se  of 
Williams r.  McKay,  46  N.  J.  Eq.  25(1889), 
is  very  full,  explicit,  and  clear  in  its 
adjudication  and  distribution  of  lo8.ses 
on  the  president,  treasurer,  manager, 
officers,  finance  committee,  secretary, 
and  directors  of  a  savings  bank,  where 
those  officers,  etc.,  had  made  instru- 
ments contrary  to  the  by-laws,  charter, 
and  statutes.     See  also  ^^  682.  supra. 

3  New  York,  etc.  Co.  v.  Heimer,  77  N. 
Y.  64  (1879),  applying  the  New  York  act 
against  unauthorized  banking;  Tracy 
V.  Talmage,  14  N.  Y.  162  (1856);  Tal- 
magen  Pell,  7  N."Y.  328  (1852);  Weed 
V.  Snow,  3  McLean,  265  (1843);  S.  C.  29 
Fed.  Cas.  572;  Leavittu.  Palmer,  3  N.  Y. 
19  (1849)  (a  certificate  of  deposit),  and 
Hayden  v.  Davis,  3  McLean,  276  (1843); 
s.  C,  11  Fed.  Cas.  898  (an  acceptance); 
Swift  V.  Beers,  3  Denio.  70  (1846);  Tylee 
V.  Yates,  3  Barb.  222  (1848),  holding  also 
that  an  assignment  of  securities  for 
their  payment  is  also  void,  and  trans- 


1626 


CH.  XLI.] 


INTKA    VIRES    ACTS    AND    CONTRACTS. 


[§  690. 


prevent  the  corporation  from  collecting  the  amount  due.     It  may 
disregard  the  note  and  sue  on  the  loan  itself.^ 


fers  no  title  to  the  assignees;  White  v. 
Franklin  Bank,  39  Mass.  181  (1839),  hold- 
ing that,  while  a  time  deposit  is  within 
the  prolubition.  the  money  may  be  re- 
covered in  an  action  brought  before  the 
time   has  expired.     See  also   Slark  u 
Eighgate  Archway  Co.,  5  Taunt.  792 
(1814);  Wigan  v.  Fowler,  1  Starkie.  4.59 
CISIQ,;  Broughton  v.   Manchester,   etc. 
Water-works.  3   B.    &   Aid.    1    (1819); 
Dockery  r.  Miller,  9  Humph.  (Tenn.)  731 
(1849 1 ;  Oiiio  Life,  etc.  Co.  v.  Merchants', 
Ins.  etc.  Co.,  11  Humph.  (Tenn.)  1  (18o0); 
Root  r.  Wallace,  4  McLean,  8  (1845);  S.C., 
20Fed.  Cas.  1167,   holding  that  an   in- 
dorsee may  recover  from  the  indorser 
of  a  note  void  for  this  illegality  the 
consideration  paid  for  it;  State  v.  Ur- 
baua,  etc  Co.,  14  Ohio,  6  (1846),  holding 
that  receiving  a  deposit  of  money  is  not 
a  violation  of  a  charter  restriction  upon 
the  exercise  of  banking  powers;  New 
York  Firemen  Ins.  Co.  v.  Ely,  5  Conn. 
560  (1825),  where  a  corporation  was  not 
allowed  to  recover  upon  a  note  because 
its  charter  prohibited  it  from  doing  a 
banking  business;  Farmers'  L.  &  T.  Co. 
V.  Perry,  3  Sandf.  Ch.  339  (1846),  and 
Green   v.   Seymour,   3  Sandf.   Ch.  285 
(1846 1,  where  the  same  principle  was 
applied  to  mortgages  issued  in  viola- 
tion of  statutory  prohibition;  Saflford 
V.  WyckofT,  4  Hill,  442  (1842),  holdmg 
also  that  if  the  form  and  appearance  of 
the  notes  indicate  that  they  were  in- 
tended to  be  circulated  as  monej',  one 
who  takes  them,   being  thereby    put 
upon  his  inquiry,  is  not  a  bona  fide 
holder  and  cannot  recover  upon  them. 
To   same   effect,   Attorney-General  v. 
Life,  etc.  Ins.  Co.,  9  Paige,  470  (1842); 
Mumford  v.  American,  etc.  Co.,  4  N.  Y. 
463  (1851),  holding  that  a  certificate  of 
deposit  is  not  included  in  such  a  pro- 
hibition; Leavitt  r.  Yates,  4  Edw.  Ch. 
134  (1843),  holding  also  that  a  trust  deed 
given  to  secure  such  notes  was  also  void ; 
Hazleton    Coal  Co.  v.  Megargel,  4  Pa. 


St.  324  (1846),  holding  that  the  statute 
cannot  be  avoided  by  issuing  a  document 
which  is  in  effect,  though  not  in   form, 
a  note:    Barry  v.  Merchants'  Exchange 
Co.,  1  Sandf.  Ch.  280  (1844);  Utica   Ins. 
Co.  n  Scott,  19  Johns.   1  (18il);  Mont- 
gomery Branch  Bank  u  Crocheroii.  5 
Ala.  (N.  S.)  250  (1843),  holdmg  tiuit  the 
bills  of  a  corporation  which  is   luohib- 
ited  from  issuing  them  cannot  be  ren- 
dered legal  by  being  issued  by  a  bank 
under  a  contract  with  the  corporation: 
Sackett's  Harbor  Bank  v.  (-oJ.I,  18  N. 
Y.  240  (1858),  holding  that  a  statute  pro- 
hibiting the  circulation  of  foreign  bank 
notes  does  not  prevent  their  sale  and 
delivery  for  any  other  purpose.     Pay- 
ment of  a  debt  by  a  draft  wliich  is  pr.)- 
hibited  by  statute  is  not  payment,  the 
draft  not  having  been  paid.     Davis  v. 
RiverRaisinBank,  4  McLean,  387  (1848); 
S.  C,  7  Fed.  Cas.  111.     A  charter  provis- 
ion that  no  director  or  officer  slioud 
borrow  from  the  bank  does  not  apply 
to  loans  to  a  firm  of  which  the  director 
is  a  member.     Fisher  v.    MunlocU,    13 
Hun,  485  (1878).     A  deposit  made  with 
a  cori)Oration  which  is  prohibited  by 
statute  from  domg  a  banking  business 
is  presumed  to  have  been  a  loan,  and 
in  any  case  is  recoverable  back  in  an 
action   for  money  had   and  received. 
Chapman    v.   Comstock,  58    Hun,   325 
(1890);aff'd,  134  N.  Y.  509. 

1  Oneida  Bank  v.  Ontario  Bank,  21 
N.  Y.  490  (1860);  Pratt  v.  Short,  79  N.  Y. 
437  (1880),  reviewing  New  York  cases; 
Davis  S.  M.  Co.  v.  Best,  30  Hun.  638 
(1883);  Mills  v.  Western  Bank,  64  Mass. 
22  (1852);  Webb  v.  Heme  Bay  Com'rs, 
L.  R.  5  Q.  B.  642  (1870).  Compare 
Faneuil  Hall  Bank  r.  Bank  of  Brighton, 
82  Mass.  534  (1860),  and  Western  Bank 
V.  Mills,  61  Mass.  539  (1851):  Qtica  Ins. 
Co.  V.  Kip.  8  Cow.  20  (1827);  Utica  Ins. 
Co.  V.  Cadwell,  3  Wend.  296  (1829),  and 
Utica  Ins.  Co.  v.  Bloodgood,  4  Wend. 
652  (1830);    Planters'  Bank    v.   Union 


1627 


§  C90.] 


INTRA    VIRKS    ACTS    AND    CONTRACTS. 


[cii.  XI.I. 


Tkit  where  tlic  statute  prohibits  not  only  tlie  enforcement  of  the 
note,  but  also  the  enforcement  of  any  contract,  express  or  implied, 
growini^  out  of  the  transaction,  then  the  corporation  loses  the 
money  loaned.^  Any  corporation,  unless  expressly  prohibited,  has 
power  to  take  a  mortgage  as  security  for  a  debt  contracted  in  the 
course  of  its  business.' 


Bunk,  10  Wall.  4S3  (1872),  holding  that, 
wlieii  an  ille;;al  contract  has  been  fully 
executetl,  the  money  constituting  the 
price  for  it  may  be  looked  upon  as  a 
le;^al  consideration  for  an  express  or 
implied  promisa  To  same  etfect,  Cook 
V.  Slieiinan.  20  Fed.  Rep.  1G7  (1882); 
WorkinRmen's  Banking  Co.  v.  Rauten- 
berg.  103  III.  460  (1882).  holding  that  a 
note  given  by  a  director  for  a  loan  in 
excess  of  the  amount  limited  by  char- 
ter is  void  so  far  as  to  release  a  guar- 
antor upon  it:  Farmington  Sav.  Bank 
V.  Fall,  71  Ma  49  (1S80).  holding  that  a 
j>rohibition  against  lending  money  on 
the  security  of  names  only  is  merely 
directory,  and  a  note  so  secured  may 
be  collected.  To  same  efTect,  National 
Pemberton  Bank  v.  Porter,  12o  Mass. 
333  (1878);  U.  S.  Trust  Co.  v.  Brady.  20 
Barb.  119  (1855);  Vanatta  r.  State  Bank, 
9  Ohio  St.  27  (1858);  Union,  eta  Ins.  Ca 
V.  Keyser,  32  N.  H.  313  (1855),  where  a 
note  given  for  insurance  upon  property 
in  one  class,  when  by  law  it  was  insur- 
able only  in  another  class,  was  held 
valid;  McFarlan  v.  Triton  In&  Co.,  4 
Denio.  392  (1847),  where  a  bond  owned 
by  an  insurance  company  was  held  to 
have  been  taken  as  an  investment  in 
default  of  proof  of  consideration;  Mar- 
ion Sav.  Bank  v.  Dunkin,  54  Ala.  471 
(1875).  holding  that  an  accommodation 
drawer  of  a  bill,  who  did  not  at  the 
time  know  it  was  discounted  by  a  bank 
in  violation  of  law,  may  defend  by 
showing  that  the  bank  was  not  prop- 
erly organized;  Brown  v.  Killian,  11 
Ind.  449  (1858),  holding  that  notes  in 
similitude  of  bank-notes  are  void,  even 
the  issuers  not  being  liable  upon  them, 
but  any  consideration  paid  for  them 
may  be  recovered  back;  White  v.  Frank- 


lin Dank,  89  Mass.  181  (1839),  holding 
tliat  money  deposited  in  a  savings  bank 
in  violation  of  a  statute  may  be  recov- 
ered; Lester  v.  Howard  Bank,  83  Md. 
558  (1870),  wiiere  a  director  who  bor- 
rowed money  from  a  liank  in  violation 
of  its  charter  was  held  liable  for  the 
money;  Philadelphia  Loan  Co.  i'. 
Towner.  18  Conn.  249  (1839),  where  the 
original  debt  was  validly  incurred,  but 
a  subsecjuent  note  by  the  cor|)oration 
was  illegal;  Pratt  v.  Eaton,  79  N.  Y. 
449  (1880),  where  notes  secured  by  a 
mortgage  were  held  void,  but  the  mort- 
gage valid;  People  v.  Brewster,  4  Wend. 
498  (1S30).  holding  that  prohibiting  the 
carrying  on  of  a  banking  business  does 
not  prevent  lending  money  upon  notes, 
if  it  is  not  done  as  a  business;  Otis  v, 
Harrison,  30  Barb.  210  (1862);  Barton  v. 
Port  Jackson,  etc.  Ca,  17  Barb.  397 
(1854). 

1  New  Hope,  eta  Co.  v.  Poughkeepsie 
Silk  Ca.  25  AVend.  048  (1841). 

2  State  V.  Rice,  65  Ala.  83  (1880);  Na- 
tional Bank  v.  Insurance  Co.,  41  Ohio 
St.  1  (1884);  Baird  r.  Bank  of  Washing- 
ton, 11  Serg.  &  R.  (Pa.)  411  (1824),  hold- 
ing that  a  power  to  take  mortgages  in 
the  course  of  business  confers  the 
power  to  commute  debts  really  due  for 
land;  Bank  of  Michigan  v.  Niles,  1 
Doug.  (Mich.)  401  (1844),  holding  that 
power  to  hold  lands  and  take  mortgages 
for  business  purposes  does  not  confer 
the  right  to  deal  in  lands;  National 
Trust  Ca  v.  Murphy,  30  N.  J.  Eq.  408 
(1879),  holding  that  a  corporation  not 
authorized  to  take  land  as  original 
investment  may  take  a  mortgage  on 
land  in  a  foreign  state  as  additional  se- 
curity; Clark  u  Farrington,  11  Wis.  306 
(1860).     Sections  5135  and  5137  of  ihe 


1628 


CH,  XLI.] 


INTRA    VIRES    ACTS    AND    CONTRACTS. 


[§  690. 


Although  a  corporation  is  prohibited  by  its  charter  from  taking 
a  real-estate  mortgage  as  security  for  a  debt,  nevertheless  the  mort- 
gage, after  it  has  been  taken,  may  be  enforced  by  the  corporation. 
The  penalty  is  that  the  state  may  forfeit  the  corporate  charter  for 
misuser.^  The  laws  concerning  usury  are  enforced  against  corpora- 
tions as  fully  as  against  individuals,'^  and  where  their  charter  for- 


United  States  Revised  Statutes  do  not 
prevent  a  national  bank  from  enforcing 
the  collection  of  a  note   secured  by  a 
mortgage  of  land  by  a  foreclosure  of  the 
mortgage.    National  Bankv,  Matthews, 
98  U.  S.  621  (1878);  Palmer  r.  Lawrence, 
3  Sandf.  Super.  161  (1849);  Lathrop  v. 
Scioto  Comm.  Bank,  8  Dana  (Ky.),  114 
(1839);  Mapesu.  Scott.  94  111.  379  (1880), 
holding  that  national  banks  may  take 
conveyances  of  land  in  payment  of  pre- 
existing debts.     A  national  bank  may 
enforce  a  mortgage    securing    future 
indebtedness.     National  .Bank  v.  Whit- 
ney,  103  U.   S.    99    (1880);    Simons  v 
First  Nat.  Bank,  93  N.  Y.   269  (1883). 
The  case  of  U.  S.  Mortgage  Co.  v.  Gross, 
93  111.  483  (1879),  to  the  effect  that  for- 
eign corporations  for  loaning  on  mort- 
gages could  not  take  mortgages  in  Illi- 
nois, inasmuch  as  no  domestic  corpora- 
tion could  be  organized  for  that  purpose, 
was  overruled  by  Stevens  v.  Pratt,  101 
111.  20(3  (1882),  and  Commercial,  etc.  Co. 
V.  Scammon,  103  111.  46  (1882).     A  for- 
eign corporation  may  foreclose  a  mort- 
gage.    American,  etc.  Ins.  Co.  v.  Owen, 
81  Mass.  491  (1860). 

1  National  Bank  v.  Whitney,  103  U. 
S.  99  (1880),  reversing  Crocker  v.  Whit- 
ney, 71  N.  Y.  161  (1877),  holding  that, 
where  a  national  bank  takes  a  mort- 
gage to  secure  future  advances,  it  can 
be  objected  to  only  by  the  government; 
National  Bank  v.  Matthews.  98  U.  S. 
621  (1878),  reversing  Matthews  v.  Skin- 
ker,  62  Mo.  329  (1876),  holding  that  a 
bank  holding  a  deed  of  trust  upon  real 
estate  as  security  for  a  note,  contrary 
to  the  act,  may  sell  the  land  in  order 
to  collect  the  note;' followed  in  Winton 
u  Little,  94  Pa.  St.  64  (1880);  Thornton 
r.  National  Exch.  Bank,  71  Mo.  221  (1879). 


holding  that  the  only  penalty  for  viola- 
tions of  that  act  is  forfeiture  of  charter, 
to  be  invoked  only  by  the  United 
States.  A  mortgagor  of  land  to  a 
national  bank  cannot  defend  against  it 
on  the  ground  that  the  bank  had  no 
power  to  take  the  mortgage.  Camp  v. 
Land,  122  Cal.  167  (1898).  To  same 
effect,  Graham  v.  National  Bank,  32  N. 
J,  Eq.  804  (1880);  Oldham  v.  Bank,  85  N. 
C.  240  (1881),  and  Grand  Gulf  Bank  v. 
Archer,  16  Miss.  151  (1847).  For  a  con- 
trary decision,  see  Green  v.  Seymour,  3- 
Sandf.  Ch.  285  (1846);  Bard  v.  Chamber- 
lain, 3  Sandf.  Ch.  31  (1845). 

2  McLean  v.   Lafayette  Bank,  3  Mc- 
Lean, 587  (1846);  s.  C,  16  Fed.  Cas.  264; 
New  York  F.  Ins.  Co.  v.  Sturges,  2  Cow. 
664  (1824);  Grand  Gulf  Bank  v.  Archer, 
16  Miss.  151  (1847);  Perkins  r.  Watson, 
2  Baxt.  (Tenn.)  173  (1872),  holding  that 
a  bank  may  discount  on  the  same  terms 
as  an  individual,  and  should  suffer  the 
same  forfeit  for  usury;  Tyng  v.  Com- 
mercial Warehouse  Co.,  58  N.  Y.   308 
(1874),  holding  that  general  usury  laws 
apply  to  corporations.     Charter  privi- 
leges to  a  building  association  to  take 
larger  interest  than  is  allowed  to  others 
under  the  usury  law  are  unconstitu- 
tional  in  Kentucky.     Gordon  v.  Win- 
chester, etc.  Assoc,  12  Bush  (Ky.),  110 
(1876).     A  note  of  a  third  party  given 
by  a  debtor  to  a  bank  in  good  faith  for 
an  existing  debt  is  not  usurious;  Dunkle 
V.  Renick,  6  Ohio  St.  527  (1856);  Morse, 
Banking  (3d  ed.),  §  72,  etc.     A  corpora- 
tion limited  to   "legal   interest"  may 
take  legal   interest  as  allowed  by  the 
laws  of  the  state  where  the  money  is 
loaned.     It  is  not  confined  to  the  rate 
prescribed  by  the  laws  of  the  state   in, 
which  it  is  incorporated.     U.  S.  Mort- 


1629 


§  6U1.J 


INTRA    VIRES    ACTS    AND    CONTRACTS. 


[cn.   XLI. 


bid  them  from  exactinf^  more  than  a  specified  rate  of  interest  they 
are  bound  by  the  restriction.*  National  banks  are  limited  to  the 
same  rate  of  interest  as  the  banks  of  the  state  wherein  they  aro 
located  are  allowed  to  take,  and  to  seven  per  cent,  if  there  is  no 
restriction  in  tiiat  state;  -  but  for  any  infraction  of  this  statute  the 
bank  forfeits  the  interest,  or,  if  alread}^  paid,  is  liable  for  twice  such 
interest,  but  is  not  subject  to  the  state  statutes  relative  to  usury.* 

§  691.  Preferences  and  aaaiynmcnts  by  insolvent  corporations  — 
Assiynmcnts  Vy  corporations  for  the  hem  fit  of  creditors  —  Prefer- 
ences in  such  assiynments  —  Preferences  hy  wayofmortyayes,  etc. — 
(Corporations,  unless  restricted  by  their  charters,  or  by  general  stat- 
utes, may  make  assignments  for  the  benefit  of  creditors  to  the  same 
extent  that  individuals  ma}'. 

In  making  the  assignment  the  corporation  may  make  preferences 
to  one  or  more  creditors  over  others,  or  to  one  class  of  creditors 
over  other  classes.* 


gage  Co.  V.  Sperry,  138  U.  S.  313  (18911 
In  some  states  the  excess  of  intorost  is 
forteite'l;  in  otiier  states  the  whole  in- 
terest is  forfeited;  and  in  still  other 
states  the  whole  debt  is  forfeited.  See 
Stimsoii,  Am.  Stat  Law,  §  4832.  As 
to  usury  as  a  defense  to  a  suit  against 
a  cor|)oration,  see  ^  TC65,  infra. 


was  made  in  repard  to  charging  for 
exchange;  Morse,  Baiikinp:  (:Jd  ed.),  ^  52. 
A  national  bank  cannot  take  usurious 
interest  under  the  cover  of  a  "commis- 
sion," the  latter  to  be  paid  in  case  the 
borrower  does  not  keep  a  balance  in  the 
bank  of  a  specified  amount.  Although 
a  corporation  is  forbidden  by  statute  to 


•  Bank  of  U.  S.  v.  Owens,  2  Pet  527^  set  up  usury,  yet  a  national  bank  can- 


(l!S29),  where  notes  given  for  more  than 
the  rate  fixed  b}'  the  charter  of  a  bank 
were  declared  void;  Planters'  Bank  v. 
Sharp,  12  Miss.  75  (1844).  But  here  it 
was  held  that  taking  a  greater  amount 
of  interest  than  that  allowed  by  the 
charter  rendered  the  corporation  liable 
under  the  general  usury  laws,  and  that 
the  contract  was  not  void.  On  this 
point  see  Rock  River  Bank  v.  Sherwood, 
10  Wis.  174  (ISGO);  Commercial  Bank  v. 
Nolan,  8  Miss.  508  (1843):  Grand  Gulf 
Bank  v.  Archer,  16  Miss.  451  (1847); 
Bank  of  Chillicothe  v.  Swayne,  8  Ohio, 
257  (1838),  where  a  contract  for  more 
than  the  specified  rate  was  held  void. 
To  same  effect.  Creed  v.  Commercial 
Bank,  11  Ohio,  489  (1842);  Spalding  v. 
Bank  of  Muskingum,  12  Ohio,  544  (1841), 
holding  also  that  taking  a  commission 
is  only  a  method  of  avoiding  the  stat- 
ute, and  Miami  Exporting  Co.  v.  Clark, 


not  collect  usurious  interest  from  a 
railroad  corporation  borrowing  money 
of  the  bank.  Union  Nat.  Bank  ti.  Louis- 
ville, etc.  Ry.,  145  111.  208  (1893). 

2  U.  S.  Rev.  Stata,  §  5197. 

»  U.  S.  Rev.  Stats.,  §  5198;  Barnet  v. 
National  Bank,  98  U.  S  555  (1878). 

<  Federal  Courts:  That  an  assignment 
for  the  benefit  of  creditors  may  be 
made,  see  Graham  v.  Railroad  Co.,  102 
U.  S.  148  (1880).  Compare  on  this  sub- 
ject the  dictum  in  Consolidated,  etc. 
Co.  r.  Kansas  City,  etc.  Co.,  45  Fed. 
Rep.  7  (1891).  That  preferences  may  be 
given,  see  Smith,  etc.  Co.  v.  McGroarty, 
136 U.  S.  237(1890);  Allis  v.  Jones.  45  Fed. 
Rep.  148  (1891);  Atlanta,  etc.  R  R.  u 
Western  Ry.,  50  Fed.  Rep.  790  (1892); 
Consolidated,  etc.  Co.  v.  Kansas  City, 
etc.  Co.,  45  Fed.  Rep.  7  (1891);  Graham 
V.  Railroad  Co.,  102  U.  S.  148  (1880); 
Gould  V.  Little  Rock,  etc,  Ry.,  52  Fed. 


13  Ohio,  1  (1844),  where  the  same  ruling    Rep.  680  (1892).  Even  though  a  creditor 

1630 


CH.  XLI.] 


INTRA    VIRES    ACTS    AND    CONTRACTS. 


[§  691. 


There  have  been  a  few   decisions  to  the  contrary.     There  has 
also  been  considerable  discussion  in  legal  periodicals,  decisions,  and 


of  a  corporation  arranges  with  it  so 
that  in  case  of  its  insolvency  he  shall 
obtain  a  preference,  and  even  though 
such  arrangement  is  void,  yet  his  claim 
will  not  be  postponed  to  other  claims, 
but  all  claims  will  share  ratably  as 
tliough  the  agreement  had  never  been 
made.  United  States  Rubber  CJo.  v. 
American,  etc.  Co.,  181  U.  S.  434  (1901), 
rev'g  96  Fed.  Rep.  891.  An  insolvent 
corporation  may  execute  a  mortgage  to 
secure  an  existing  debt  and  further  ad- 
vances. Coler  V.  Allen,  114  Fed.  Rep. 
609  (1903).  When  a  foreclosure  sale  is 
subject  to  chattel  mortgages  and  the 
sale  is  confirmed,  the  purchaser  cannot 
attack  such  chattel  mortgages  on  the 
ground  that  the  mortgagor  was  in- 
solvent at  the  time.  Richards  v.  Halli- 
day,  112  Fed.  Rep.  80  (1901),  holding  also 
that  an  insolvent  New  Jersey  corpora- 
tion may  give  a  chattel  mortgage. 

Where  a  corporation  makes  an  as- 
signment for  tli^  benefit  of  its  creditors 
it  commits  an  act  of  bankruptcy.  Clark 
V.  American,  etc.  Co.,  101  Fed.  Rep.  963 
(1900).  Even  though  the  bankruptcy 
court  may  have  jurisdiction  over  an  in- 
solvent corporation  that  is  being  wound 
up  in  a  state  court,  yet  the  bankruptcy 
court  maj"-  refuse  to  take  jurisdiction  if 
it  is  clearly  showa  that  the  creditors 
will  be  benefited  most  by  the  state  pro- 
ceeding. In  re  Harper  &  Bros.,  100  Fed. 
Rep.  266  (1900).  The  bankruptcy  act  does 
not  apply  to  a  water-works  company,  a 
quasi-public  corporation.  In  re  New 
York,  etc.  Co,  98  Fed.  Rep.  711  (1900). 
Even  though  a  Connecticut  corporation 
which  owus  a  railroad  in  Kentucky  is 
being  wound  up,  in  accordance  with  the 
statutes  of  Connecticut,  and  even 
though  the  company  has  assigned  to  the 
statutory  receiver  in  Connecticut  all  its 
property,  yet  such  an  assignment  is  not 
an  assignment  for  the  benefit  of  cred- 
itors, and  hence  a  creditor  of  the  rail- 
road may  attach  in  Kentucky  assets  in 


that  state.  Huntington  v.  Cheaspeake, 
etc.  Ry.,  98  Fed.  Rep.  459  (1899).  As  to 
what  constitutes  an  act  of  bankruptcy 
on  the  part  of  a  corporation,  s^e  In  re 
Baker-Ricketson  Co.,  97  Fed.  Rep.  489 
(1899).  A  board  of  directors  has  power 
to  make  an  assignment  for  the  benefit 
of  creditors.  In  re  Bates  Machine  Co., 
91  Fed.  Rep.  625  (1899),  Preferences  are 
legal.  National  Bank  of  Commerce  v. 
Allen.  90  Fed.  Rep.  545  (1898).  An  insolv- 
ent corporation  may  give  a  chattel 
mortgage  to  secure  a  part  of  its  debts. 
Such  a  mortgage  is  legal,  notwithstand- 
ing a  statute  against  assignments  with 
preferences.  Brown  v.  Grand  Rapids, 
etc.,  Ca  58  Fed.  Rep.  286  (1893),  a  case 
arising  in  Michigan.  A  creditor  who  be- 
comes such  after  a  mortgage  is  exe- 
cuted cannot  object  to  the  mortgage 
on  the  ground  that  it  was  an  unlawful 
preference.  Central  Trust  Co.  r.  Bridges, 
57  Fed.  Rep.  753  (1893).  A  statutory  pro- 
hibition against  preferences  by  an  in- 
solvent corporation  does  not  prevent 
the  giving  of  collateral  for  a  debt  when 
contracted.  Armstrong  v.  Chemical 
Nat.  Bank,  41  Fed.  Rep.  234  (1890),  Acer- 
porate  creditor  may  take  a  mortgage  on 
the  corporate  property,  although  he 
knows  that  the  corporation  is  insolv- 
ent. Doe  V.  Northwestern,  etc.  Co.,  78 
Fed.  Rep.  62  (1896).  Judgment  notes  for 
past  and  future  advances  are  illegal 
where  the  board  of  directors  is  at  once 
turned  over  to  the  dummies  of  the 
holders  of  the  judgment  notes,  and  the 
company  continues  to  do  business  as 
though  said  judgment  notes  had  not 
been  given,  the  intent  being  to  insure 
a  preference  not  only  at  once,  but  in 
the  future.  Such  preferences  as  to  the 
future  must  be  evidenced  by  a  mort- 
gage or  some  other  instrument  upon  the 
public  record.s.  American,  etc.  Co.  v. 
Fargo,  77  Fed.  Rep.  671  (1896). 

A  statute  prohibiting  preferences  by 
any  insolvent    debtor    during    ninety 


1631 


§  C91.J 


INTUA    VIRES    ACTS    AND    CONTRAai'S. 


[cn.  XL.U 


elsewhere  to  the  effect  that  at  common  law  an  insolvent  corpora- 
tion could  not  prefer  one  creditor  as  against  another.     The  almost 


days  prior  to  an  assignment  does  not 
apply  to  a  niortKage  given  to  take  tiie 
place  of  a  prior  mortgage,  and  of  ob- 
taining,a  larger  loan,  the  creditor  hav- 
ing no  ri^asonable  cause  to  suppose  the 
del)tor  was  insolvent.  Mooro  v.  Ameri- 
can L,  &  T.  Co.,  80  Fed.  Rep.  49  (189G). 
A  remittance  to  a  correspondent  by  a 
national  bank  is  legal,  altliough  tt>e 
bank  is  insolvent  at  the  time.  Ilayden 
V.  Chemical  Nat.  Bank,  80  Fed.  Rep.  SS? 
(1897).  Where  the  controlling  directors 
of  two  corporations  are  the  same  persons 
and  one  com|)any  becomes  liable  on 
paper  for  tiie  accommodation  of  tl»e 
other,  and  thereby  renders  the  direct- 
ors of  the  former  personally  li.ab'e  for 
breach  of  trust,  a  mortgage  given  by 
the  latter  to  the  former  as  security  for 
such  paper  is  invalid,  because  it 
amounts  to  a  preference  to  such  ofli- 
cers.  Hutchinson  v.  Sutton  Mfg.  Co.,  57 
Fed.  Rep.  998  (1893).  a  case  arising  in 
Indian;!.  An  attaching  creditor  cannot 
attack  a  corporate  conveyance  which 
operates  as  a  preference,  the  corpora- 
tion itself  being  insolvent,  inasmuch  as 
the  reason  against  preferences  by  an 
insolvent  corporation  applies  as  much 
to  attaching  creditors  as  to  parties  tak- 
ing by  conveyance.  Walker  v.  Miller,  59 
Fed.  Rep.  809  (189-1).  A  statutory  as- 
signment by  a  Minnesota  corporation 
to  another  Minnesota  corporation  does 
not  prevent  a  subsequent  attaciiment 
in  Massachusetts  by  a  citizen  of  New 
York  who  is  a  creditor  of  the  insolvent 
Minnesota  corporation  to  reach  assets 
of  the  latter  in  Massachusetts,  even 
though  the  New  York  creditor  had  no- 
tice of  the  assignment,  but  had  not 
proven  his  claim  nor  filed  a  release 
therein.  Security  T.  Co.  v.  Dodd,  Mead 
&  Co.,  173  U.  S.  024  (1899).  In  this  case 
the  court  stated  that  common-law  as- 
signments were  different  and  would  be 
respected,  except  so  far  as  they  con- 
flicted with  the  rights   of  local  cred- 


itors or  with  the  laws  and   policy  of  a 
stata 

Section  5242  of  the  Revised  Statutes 
of  the  United  States  prohibits  a  national 
bank  from  transferring  any  notes, 
bonds,  bills  ©f  exchange,  or  other  evi- 
dences of  debt  or  mortgages  or  judg- 
ments or  deposits  either  after  an  act  of 
insolvency  or  in  contemplation  thereof 
with  a  view  to  a  preference.  The  fol- 
lowing decisions  are  on  this  statute: 
National  Security  Bank  r.  Butler,  12& 
U.  S.  223  (1889),  afl'g  23  Fed.  Rep.  697, 
where  a  bank  hohling  a  certificate  of 
deposit  of  an  insolvent  bank  took  as- 
sets of  the  latter  on  the  day  of  its  fail- 
ure, and  gave  a  certificate  of  deposit 
therefor,  and  then  sought  to  ofTset 
the  one  against  the  other.  Tiie  court 
held  that  it  was  immaterial  that  the 
creditor  of  the  insolvent  bank  was  not 
aware  of  the  insolvency.  Roberts  v. 
Hill.  24  Fed.  Rep.  571  (1885),  rev'g  s.  C, 
23  Fed.  Re\\  311,  where  a  bank  trans- 
ferred to  one  of  its  depositors  a  note 
which  the  bank  held,  the  transfer  be- 
ing made  when  the  bank  was  insolvent. 
Although  the  bank  kept  open  for  about 
three  months  thereafter,  and  even 
though  the  note  was  given  to  the  de- 
positor as  collateral  security,  and  was 
tiie  only  way  of  preventing  him  from 
drawing  out  his  money,  the  court  held 
tliat  the  act  was  in  contemplation  of 
insolvency,  inasmuch  as  the  officers 
could  reasonably  see  that  the  bank 
would  presently  be  unable  to  meet  ita 
obligation,  and  would  be  obliged  to 
suspend  operations.  Case  u  Citizens* 
Bank,  2  Woods,  23  (1873);  &  C,  5  Fe<l. 
Cas.  251,  in  wiiich  an  insolvent  bank 
transferred  various  bills  and  notes  to 
another  bank,  to  which  the  former 
bank  had,  while  solvent,  transferred 
bills  of  exchange  which  were  not  there- 
after honored.  The  court  held  the  act 
to  be  illegal.  Armstrong  v.  Chemical 
Nat    Bank,  41    Fed.    Rep.    234    (1890),. 


1633 


CH.  XLI.] 


INTRA    VIKES    ACTS    AND    CONTKACTS. 


[§  691. 


unanimous  conclusion,  however,  is  that  preferences  maybe  given 
by  an  insolvent  corporation  the  same  as  by  an  insolvent  individual. 


wherein  it  was  held  that  an  insolvent 
bank  might  transfer  assets  to  secure  a 
loan  made  contemporaneously  with 
such  transfer.  Irons  v.  Manufactur- 
ers' Nat.  Bank,  6  Biss.  301  (1875);  s.  C, 

13  Fed.  Cas.  100,  where  the  phrase  "  act 
of  insolvency  "  was  held  to  mean  any 
act  which  would  be  an  act  of  insolv- 
ency by  an  individual  banker.  See 
also  National  Bank  v.  Colby,  31  Wall. 
609  (1874).  In  Casey  v.  Society  de 
Credit  Mobilier,  3  Woods,  77  (1874);  s.  C, 
5  Fed.  Cas.  363,  it  was  held  that  the 
preference  intended  by  the  act  is  such 
as  is  given  to  secure  or  pay  a  pre-exist- 
ing debt,  and  does  not  prevent  the  box'- 
rowing  of  money  upon  security.  Ve- 
nango Nat.  Bank   v.  Taylor,  56  Pa.  St. 

14  (1S67),  holding  that  the  act  relates 
to  legal  as  well  as  voluntary  transfers 
of  property  by  banks.  See  also  Na- 
tional, etc.  Bank  v.  Meclianics',  etc. 
Bank.  89  N.  Y.  467  (1883);  Robinson  y. 
Newberne  Nat.  Bank,  81  N.Y.  385  (1880), 
holding  that  the  act  applies  only  to 
such  banks  as  are  insolvent  or  are 
about  to  become  so.  A  state  statute 
giving  savings  banks  a  preference  in 
payment  from  the  assets  of  an  insolvent 
bank  does  not  apply  to  national  banks 
which  become  insolvent.  Davis  v.  El- 
mira  Sav.  Bank,  161  U.  S.  375  (1896), 
rev'g  Elmira  Sav.  Bank  v.  Davis,  143 
N.  Y.  590,  and  73  Hun,  357.  Remit- 
tances by  an  insolvent  national  bank 
to  its  correspondent  bank  are  legal 
where  the  formfer  bank  has  not  actually 
stopped  business  and  the  transactions 
were  in  good  faith.  Hayden  v.  Chem- 
ical Nat.  Bank,  84  Fed.  Rep.  874  (1898). 

Alabama:  That  an  assigment  may 
be  made,  see  Chamberlain  v.  Brom- 
berg,  83  Ala.  576  (1888);  Pope  v.  Bran- 
don, 3  Ala.  (O.  S.)  401  (1830),  holding 
also  that  it  was  not  necessary  that  the 
creditors  should  sign  the  assignment; 
nor  was  the  deed  void  because  the 
trustee  was  the  president  of  the  assign- 


ing bank,  who  in  that  capacity  ex- 
ecuted the  deed  as  grantor;  Allen  v. 
Montgomery  R.  R.,  11  Ala.  437,  451 
(1847).  The  president  cannot  make  an 
assignment  by  the  company  for  the 
benefit  of  creditors.  A  ratification  by 
the  directors  is  not  good  as  against  an  , 
attachment  in  the  meantime.  Norton 
V.  Alabama  Nat.  Bank,  103  Ala.  430 
(1894).  A  bill  to  compel  an  assignee  for 
the  benefit  of  creditors  of  an  insolvent 
corporation  to  account,  and  to  hold 
stockholders  liable  on  stock  issued  for 
property,  and  to  reach  corporate  assets 
in  the  hands  of  third  parties,  is  multi- 
farious. The  theory  that  the  capital 
stock  is  a  trust  fund  is  unfounded. 
O'Bear  Jewelry  Co.  v.  Volfer,  106  Ala. 
305  (1895). 

A  preference,  however,  is  not  allowed 
in  this  state.  Yet  even  though  under  the 
decisions  of  Alabama  an  insolvent  cor- 
poration cannot  give  a  preference,  nev- 
ertheless so  long  as  the  corporation  is  a 
going  concern  it  may  pay  a  party  whO' 
is  not  aware  of  the  insolvency.  Mary 
Lee,  etc.  Ry.  v.  Knox,  110  Ala.  633  (1895). 
A  corporation  in  financial  difficulties 
cannot  execute  a  mortgage  to  secure 
bonds,  and  deliver  these  bonds  to  a  bank 
as  security  for  past  and  future  ad- 
vances, where  two  of  the  directors  of 
the  company  are  also  directors  of  the 
bank.  Such  a  mortgage  delays  other 
creditors.  Only  bona  fide  holders  of 
such  bonds  are  protected.  Age-Herald 
Co.  V.  Potter,  109  Ala.  675  (1895).  A 
mortgage  deed  of  trust  to  secure  bonds 
executed  by  an  insolvent  corporation  is 
presumed  to  be  a  conveyance  of  cor- 
porate property  to  delay  and  defraud 
creditors;  but  a  bill  attacking  such  a 
mortgage  must  allege  that  parties  re- 
ceiving bonds  to  secure  their  debts  did 
not  advance  money  at  the  time  of  re- 
ceiving bonds,  but  were  antecedent 
creditors.  Coal  City,  etc.  Co.  v.  Hazard 
Powder  Co.,  108  Ala.  318  (1896).     Even 


(103) 


1633 


§  r/ji.j 


INTKA    VIRES    AOTS    AND    CONTliACTS. 


[CU.  XLI. 


And  yet  it  must  be  conceded  that  great  abuses  have  arisen  there- 
from.    The  directors  and  stockholders  of  a  corporation  are  numer- 


though  a  corporation  has  allowed  judg- 
ment to  be  taken  against  it,  yet  a  gen- 
eral creditor  cannot  have  a  receiver 
appointed  on  the  ground  that  such 
judgment  constitutes  an  illegal  prefer- 
ence. Builders',  etc.  Ca  v.  Lucas,  119 
Ala.  202  (1898). 

Arkansas:  Preferences  are  upheld  in 
this  state.  Ringo  v.  Bisco,  13  Ark.  563 
(1853);  Ex  imrte  Conway,  4  Ark.  302, 
852  (1842).  The  statutes  of  Arkansas 
prohibit  preferences  among  creditors  of 
insolvent  corporations.  Sand.  &  H.  Di- 
gest, sees.  1425,  1427. 

California:  At  common  law  a  pref- 
erence is  legal.  Merced  Bank  v.  Ivett, 
127  Cal.  134  (1899). 

Canada:  The  directors  may  make  an 
assignment  of  the  corporate  assets  for 
the  benefit  of  creditors.  Wliiting  v. 
Hovey,  13  Ont  App.  Cas.  7  (188G). 

Colorado:  An  insolvent  corporation 
may  give  a  preference  and  convey  to 
one  creditor  all  its  property.  John,  etc. 
Co.  V.  Sweetzer,  10  Colo.  App.  421  (1897). 

Connecticut:  Preferences  are  upheld. 
Savings  Bank  v.  Bates,  8  Conn.  505 
(1831);  Smith  v.  Skeary,  47  Conn.  47 
(1879).  The  following  case  bears  upon 
this  principle  of  law,  but  does  not  con- 
flict with  it:  Catlin  v.  Eagle  Bank,  6 
Conn.  233  (1826).  A  deed  in  trust  by  a 
corporation  of  all  its  property,  made 
•with  consent  of  nearly  all  its  creditors, 
to  trustees  to  continue  the  business,  is 
void  as  to  non-consenting  creditors. 
Waterman  v.  Sprague  Mfg.  Co.,  55 
Conn.  554  (1888);  De  Wolf  v.  Sprague 
Mfg.  Co.,  49  Conn.  282  (1881).  Under 
the  Connecticut  statutes  an  insolvent 
corporation  is  placed  in  a  receiver's 
hands  for  the  benefit  of  all  creditors, 
and  a  person  holding  security  must 
stand  on  his  security  or  else  come  in 
only  for  the  excess  of  his  claim  above 
tlie  value  of  the  security.  Re  Waddell- 
Entz  Co.,  67  Conn.  324  (1896).  Where  a 
mortgagee  at  the  request  of  the  mort- 


gagor corporation  withholds  the  mort- 
gage from  tlio  record  to  deceive  the 
public  until  the  mortgagor  becomes  in- 
solvent, the  mortgage  may  be  set  aside 
for  fraud.  Curtis  v.  Lewis,  50  AtL  Rep. 
878  (Conn.  1902). 

Georgia:  An  assignment  for  the 
benefit  of  creditors  is  legal  McCallie 
V,  Walton,  37  Ga.  611  (1868).  And  pref- 
erences may  be  given.  The  following 
case  bears  upon  this  principle  of  law. 
but  does  not  conflict  with  it:  High- 
tower  r.  Mustian,  8  Ga.  506  (1850). 

Illinois:  As-sigimients  by  insolvent 
corporations  with  preferences  are  legal. 
Blair  r.  Illinois  Steel  Ca.  159  111.  350 
(1890),  quoting  and  approving  the  text 
above;  Illinois  Steel  Ca  v.  O'Donnell. 
156  111.  624  (1895);  Chicago,  etc.  Ca  r. 
Smith,  158  111.  417  (1895X  The  prefer- 
ence may  be  by  way  of  mortgage.  Reed 
V.  Bradley.  17  III  321  (1856).  A  prefer- 
ence by  an  in-^iolvent  corporation  is 
legal.  State  Nat.  Bank  v.  Union  Nat. 
Bank,  168  111.  519  (1897).  It  is  legal  in 
Illinois  for  an  insolvent  corporation  to 
give  judgment  notes,  even  though  judg- 
ment is  immediately  entered  tliereon 
and  all  its  assets  sold  out,  the  creditor 
not  being  a  director  or  stockholder. 
Peterson  v.  Brabrook,  etc.  Ca,  150  IlL 
200  (1894).  Although  a  New  York  in- 
solvent corporation  is  prohibited  by 
statute  from  preferring  a  creditor,  yet 
where  it  turns  over  in  Ohio  property  to 
a  creditor,  the  Illinois  courts  will  sus- 
tain the  preference  in  accordance  with 
Illinois  decisions.  Warren  v.  First  Nat. 
Bank,  149  IlL  9  (1893).  A  corporation 
that  is  unable  to  pay  its  debts  as  they 
become  due  in  the  usual  course  of  busi- 
ness is  insolvent.  Atwateru.  American, 
etc.  Bank,  152  IlL  605  (1894). 

Indiana:  The  assignment  may  be 
made  by  a  meeting  of  the  board  of  di- 
rectors, as  in  any  other  corporate  busi- 
ness. De  Camp  v.  A 1  ward,  52  Ind.  468 
(1876).  Preferences  are  legal.  First  Nat. 


1634 


CH.  XLI.] 


INTEA    VIRES    ACTS    AND    CONTRACTS. 


[§  691. 


ous,  and  each  generally  Tvishes  some  particular  creditor  to  be  pre- 
ferred.    Moreover  an  insolvent  corporation  never  hopes  to  resume 


Bank  t\  Dovetail,  etc.  Co.,  143  Ind.  550 
(1895):  Smith  u  Wells,  etc.  Co.,  148  Ind. 
333  (1897).  A  mortgage  given  by  an  in- 
solvent Ohio  corporation  to  certain  of 
its  creditors  residing  in  Ohio  is  valid  in 
Indiana,  such  mortgage  being  upon  real 
estate  in  Indiana,  even  though  the  Ohio 
courts  have  declared  such  a  mortgage 
to  be  invalid.  Nathan  v.  Lee,  152  Ind. 
232  (1899).  A  mortgage  securing  bonds 
is  not  fraudulent  by  reason  of  the  fact 
that  it  was  agreed  that  it  should  not  be 
recorded  in  order  that  the  credit  of  the 
company  might  not  be  impaired.  Am. 
Trust  &  Savings  Bank,  etc.  v.  MoGetti- 
gan,  152  Ind.  582  (1899). 

Iowa:  Preferences  are  legal.    Rollins 
V.  Shaver,  etc.  Co.,  80  Iowa,  380  (1890). 
The  following  case  bears  upon  this  prin- 
ciple of  law,  but  does  not  conflict  with 
it:  Buell  v.  Buckingham,  16  Iowa,  284 
(1864).     A  director  and  stockholder  who 
acquiesces  in  the  giving  of  a  mortgage 
to  a  certain  creditor  cannot  afterwards 
complain  of  the  same.     Gillette  v.  Mere- 
dith, 103  Iowa,  155  (1897).    An  insolvent 
corporation  may  prefer  one  of  its  cred- 
itors.    First  Nat.  Bank  v.  Garretson,  107 
Iowa,  190(1899).  An  insolvent  individual 
who  owes  a  bank  may  convey  land  to 
the  bank  for  the  benefit  of  its  deposit- 
ors, and  the  doctrine  that  individual 
assets  must  be  applied   to  individual 
debts  before  being  applied  to  partner- 
ship debts  does  not  apply,  even  though 
he  owns  one-half  of  the  stock  of  the 
bank.    Steinke  v.  Yetzer,  108  Iowa,  513 
(1899).     The    validity    of   a    mortgage 
given  by  an  insolvent  Ohio  corporation 
upon  land  owned  by  it  in  Iowa  is  deter- 
mined by  the  laws  of  Iowa.    Such  a 
mortgage  given  two  months  before  a 
general  assignment  by  the  corporation 
is  valid,  even  though    the  corporation 
was  insolvent  during  the  whole  time, 
the  mortgagee  not  knowing  thereof. 


Manton  v. 
(1899> 


Seiberling,   107    Iowa,   534 


Kansas:  An  insolvent  corporation 
may  give  preferences.  Grand,  etc.  Ca 
V.  Rude,  etc.  Co.,  60  Kan.  145  (1899). 

Kentucky:  A  creditor  of  an  insolvent 
corporation  may,  by  attachment,  ob- 
tain a  preference  over  other  creditors, 
and  if  an  insolvent  corporation  makes 
a  fraudulent  assignment  for  the  benefit 
of  creditors,  any  creditor  may  levy  such 
an  attachment.  A  secret  unrecorded 
mortgage,  held  until  the  company  be- 
comes insolvent,  is  fraudulent  as  to 
other  creditors.  Louisville,  etc.  Co.  v. 
Etheridge,  etc.  Co.,  43  S.  W.  Rep.  169 
(Ky.  1897). 

Louisiana:  The  Louisiana  statute  al- 
lowing insolvent  individuals  to  apply 
to  the  court  and  obtain  an  extension  of 
time  on  their  debts  does  not  apply  to 
corporations.  Isabella  Lumber  Co.  v. 
Creditors,  48  La.  Ann.  269  (1896). 

Maine:  An  insolvent  corporation  in 
Maine  may  be  declared  an  insolvent 
debtor  under  the  statute,  but  cannot 
obtain  a  discharge  in  insolvency.  A 
creditor  may  obtain  a  judgment  at 
law  and  levy  on  property  which  the  in- 
solvent illegally  transferred  away.  Mil- 
ler V.  Waldoborough  Packing  Co.,  88 
Me.  605  (1896).  Although  an  Illinois  cor- 
poration has  passed  through  insolvency 
proceedings  in  Maine,  yet  a  non-resi- 
dent creditor  who  was  not  a  party  to 
such  proceedings  may  thereafter  sue 
such  corporation  in  Maine.  Hammond, 
etc.  Co.  V.  Best,  91  Me.  431  (1898). 

Maryland:  Assignments  are  legaL 
State  V.  Bank  of  Maryland,  6  Gill  &  J. 
205,  219  (1834).  A  vendor  of  goods  to 
an  insolvent  corporation  may  rescind 
and  replevy  the  goods  if  the  corporate 
ofiicers  at  the  time  had  no  reasonable 
expectation  of  making  payment  when 
the  bill  becomes  dua  Edelhoff  v.  Hor- 
ner, etc.  Co.,  86  Md.  595  (1898).  An  as- 
signment for  the  benefit  of  creditors, 
executed  by  the  president  and  secre- 
tary without  authority  from  the  board 
1635 


§  G'Jl.] 


INTRA    VIi:i:s    ACTS    AND    CONTKACTS. 


[CII.    XLI. 


business  a<^ain,  and  is  more  ruthless  an(!  unconscionable  in  its  pref- 
erences, because  no  moral  obligation  to  do  equity  rests  on  any  one 


of  director?,  may  be  valid  if  not 
promptly  repudiated  by  the  board  of 
directors.  Miller  v.  Mattbews,  87  Md. 
464  (1898). 

Massachusetts:  Assipjnments  are  le- 
gal. Sargent  v.  Webster,  54  Muss.  497 
(1847),  holding  also  that  the  assignment 
may  be  to  a  stockholder  to  pay  a  debt 
of  the  corporation  to  him.  and  the  re- 
mainder to  go  to  the  corporate  treas- 
urer for  the  benefit  of  other  credit- 
ors. As  to  the  Massachusetts  statute 
providing  for  insolvency  proceedings 
against  a  corporation  which  makes  an 
assignment  for  tiie  benefit  of  creditors, 
see  Steel,  etc.  Co.  v.  ^lanchester  Sav. 
Bank,  163  Mass.  252  (1895).  As  to  theevi- 
dence  necessary  to  prove  that  an  insolv- 
ent corporation  had  i)referred  a  cred- 
itor in  paying  a  debt  in  violation  of  the 
statute  in  Massachusetts,  see  Clarke  v. 
Second  Nat  Bank,  177  Mass.  257  (1901). 

Michigan:  An  insolvent  corporation 
may  make  an  assignment  for  the  bene- 
fit of  creditors,  and  the  board  of  di- 
rectors may  make  it  without  the  as- 
sent of  the  stockholders.  Boynton  v. 
Roe,  114  Mich.  401  (1897).  The  Michigan 
statute  against  preferences  in  assign- 
ments does  not  prevent  the  giving  of  a 
mortgage  to  a  trustee  to  secure  certain 
debts  due  from  the  insolvent  corpora- 
tion mortgagor.  Austin  v.  First  Nat. 
Bank.  100  Mich.  613  (1894).  At  common 
law  in  Michigan  an  insolvent  corpora- 
tion might  assign.  Bank  of  Montreal  v. 
Potts,  etc.  Co.,  90  Mich.  345(1892);  Ken- 
dall V.  Bishop,  76  Mich.  634  (1889).  The 
president  who  makes  an  assignment  of 
the  company's  assets  for  the  benefit  of 
creditors  under  a  resolution  of  the 
board  of  directors  cannot  afterwards 
attack  it.  Re  George,  etc.  Co.,  86  Mich. 
149  (1891);  Covert  v.  Rogers,  38  Mich. 
363  (1878),  holding  that  the  assignee 
may  be  one  of  the  stockholders.  In 
this  case  he  was  a  former  treasurer, 
who  had  resigned.    Stockholders  can- 


not prevent  directors  making  an  as- 
signment for  the  benefit  of  corporate 
creditors,  though  their  term  of  ofiice 
expires  in  four  days,  the  corporation 
being  insolvent.  A  mortgage  by  an  in- 
solvent corporation  given  in  pursuance 
of  a  prior  agreement  is  legal  where  the 
mortgagee  did  not  know  the  corpora- 
tion was  insolvent.  Franklin,  etc.  Co. 
t'.  Amazon,  etc.  Co.,  87  N.  W.  Rep.  211 
(Mich.  1901). 

Mimu'sota:  The  board  of  directors  of 
an  insolvent  corporation  may  order  an 
assignment  for  the  l^nefit  of  creililors. 
Tripp  V.  Northwestern  Nat  Bank,  41 
Minn.  -100  (1889),  45  Minn.  383(1891).  In 
Minnesota,  by  statute,  an  insolvent  cor- 
poration cannot  give  preferences.  Ya- 
nish  V.  Pioneer  Fuel  Co.,  04  Minn.  175 
(1890). 

Mi.ssissijipi:  Preferences  are  legal. 
Sells  V.  Rosedale,  etc.  Co.,  72  Miss.  590 
(1895);  Arthur  t".  Commercial,  etc  Bank, 
17  Miss.  394  (1848);  Palmer  n  George  W. 
Hutchison  Grocery  Co.,  11  S.  Rep.  789 
(Mis.s.  1892).  The  following  case  bears 
upon  this  principle  of  law,  but  does  not 
conflict  with  it:  Robins  v.  Embry,  1 
Sm.  &  M.  Ch.  (Mi.ss.)  207,  258  (1843).  An 
assignment  by  a  railroad  assigns  its  in- 
come only.  Arthurs.  Commercial,  etc. 
Bank,  17  Miss.  394,  430  (1848).  See  also 
State  V.  Commercial  Bank,  21  Miss. 
569  (1850).  An  insolvent  corporation 
may  give  preferences.  Fargason  v.  Ox- 
ford, etc.  Co.,  78  Miss.  65  (1900). 

Missouri:  Assignments  are  legal. 
Hutchinson  v.  Green,  91  Mo.  367  (1886); 
Shockley  v.  Fisher,  75  Mo.  498  (1882), 
construing  a  statute  authorizing  an  as- 
signment "  by  a  debtor  to  any  person  in 
trust  for  his  creditors"  to  include  cor- 
porations, and  holding  that  the  right 
exists  at  common  law,  citing  2  Kent, 
Com.  398,  and  note.  Preferences  may 
be  given.  Meyer  v.  American,  etc.  Co., 
130  Mo.  188  (1895);  Slavens  v.  Cook  Drug 
Co.,  128  Mo.  341  (1895).     A  creditor  of 


1636 


CH.  XLI.] 


INTRA    VIRES    ACTS    AND    CONTRACTS. 


[§  691. 


director  or  stockholder.     In  all  this  an  insolvent  corporation  dif- 
fers from  an  insolvent  individual.     As  a  result,  the  abuses  from 


an  insolvent  corporation  may  obtain  a 
preference  by  an  attachment,  and  it  is 
legal,  even  though  a  director  of  the  cor- 
poration advised   him   to   attach.     La 
Grange,  etc.  Co.  v.  National  Bank,  123 
Mo.  154  (1894).  the  court  refusing  to 
follow  the  Tennessee  rule.     An  embar- 
rassed corporation   may   take  title  to 
land  in  a  director's  name  and  have  him 
give  a  mortgage  thereon  to  raise  money 
for  the  corporation.     Donham  v.  Hahn, 
127  Mo.  439  (1895).     An  insolvent  corpo- 
ration may  turn  over  to  a  bank  book- 
accounts,  merchandise,  and  fixtures  as 
security  for  a  debt,  even  though  the 
corporation  thereafter,  on  the  same  day, 
assigns   for   the    benefit    of    creditors. 
Alberger  v.  National  Bank,  123  Mo.  313 
(1894),  calling  attention  also  to  the  fact 
that   contrary   decisions  in   Ohio  and 
Texas  were  based  on  statutes.     A  cred- 
itor who  has  not  yet  reduced  his  claim 
to  a  judgment  cannot  file  a  bill  to  set 
aside  an  alleged  illegal  transfer  of  prop- 
erty.    Atlas  Nat.  Bank  v.  Moran,  etc. 
Co.,  138  Mo.  59  (1897).     An  assignment 
for  the  benefit  of  creditors,  authorized 
by  the  directors  acting  separately  and 
net  as  a   board,  is   invalid.     Calumet 
Paper  Co.  r.  Haskell,  etc  Co.,  144  Mo. 
331  (1897). 

Montana:  An  insolvent  corporation 
may  give  a  preference  by  a  mortgage. 
Teitig  V.  Boesman,  12  Mont.  404  (1892). 
Preferences  are  legal.  Ames,  etc.  Co. 
V.  Heslet,  19  Mont.  188  (1897).  After 
foreclosure  of  a  mortgage  other  credit- 
ors cannot  attack  a  mortgage  on  the 
ground  that  the  mortgagee  had  not 
complied  with  the  state  statutes.  Miller 
V.  Gates.  22  Mont.  305  (1899). 

Nebraska:  An  insolvent  corporation 
may,  in  the  absence  of  actual  fraud, 
prefer  one  or  more  of  the  creditors,  to 
the  exclusion  of  others.  Wallachs  v. 
Robinson,  etc  Co.,  50  Neb.  469  (1897); 
Shaw  r.  Robmson,  etc.  Co.,  50  Neb.  403 
(1897).     A  mortgage  given  by  way  of 


preference  by  an  insolvent  corporation 
is  valid  unless  it  is  given  to  a  director 
or  officer.  M.  A.  Seeds,  etc  Co.  v.  Heyn, 
etc  Co.,  57  Neb.  214  (1898). 

New  Hampshire:  Assignments  may 
be  made.  Flint  v.  Clinton  Co.,  12  N.  H. 
430,  435  (1841).  As  to  preferences,  the 
following  case  bears  upon  this  principle 
of  law:  Richards  v.  New  Hampshire 
Ins.  Co.,  43  N.  H.  263  (1861).  As  to  pro- 
ceedings against  a  corporation  under 
the  insolvent  debtor's  act,  see  Kennett 
V.  Woodworth-M.  Co.,  68  N.  H.  433 
(1896). 

New  Jersey:  Section  64  of  the  Laws 
of   1896   now   forbids  any  assignment 
whatsoever  of  any  of  the  assets  of  an 
insolvent  corporation.     The  statute  of 
1895,  prohibiting  insolvent  corporations 
from  making  assignments,  did  not  apply 
to    companies    organized    before    the 
passage  of  the  statute.    Such  a  statute 
did  not  invalidate  an  assignment  for 
the  benefit  of  creditors  given  by  an  in- 
solvent   New    Jersey    corporation    in 
Pennsylvania,     Borton  v.  Brines-Chase 
Co.,  175  Pa.  St.  209  (1896).     A  mortgage 
given  by  an  insolvent  corporation  to  a 
creditor  for  a  pre-existing  debt  is  in- 
valid under  the  New  Jersey  statutes. 
Frost  V.  Barnert,  56  N.  J.  Eq.  290  (1897). 
The  proper  way  to  attack  a  preference 
given  by  an  insolvent  corporation  is  in 
the  distribution  proceedings  in  a  suit 
to  have  the  company  declared  insolv- 
ent, and  a  receiver  appointed,  and  its 
assets  distributed.    A  warrant  of  at- 
torney to  confess  judgment  given   in 
September  and  used  in  February  is  evi- 
dence of  an  intent  to  give  a  preference 
if  existing  notes  are  taken  up  and  new 
notes  given  at  the  time  of  entry  of 
judgment.     Consolidated   Coal  Co.   v. 
National  St.    Bank,   55  N.  J.   Eq.   800 
(1897).     At  common  law  insolvent  cor- 
porations may  assign  for  the  benefit  of 
creditors.   Wilkinson  v.  Bauerle,  41  N.  J. 
Eq.  635  (1886).     And  preferences  may 


1637 


§  G91.] 


INTRA    VIRES    ACTS    AND    CONTRACTS. 


[cii. 


XLI. 


allowini^  an  insolvent  corporation  to  make  preferences  are  so  great 
that  the  various  states  are  enacting  prohibitory  statutes  on  this 


be  given.  Vail  v.  Jameson,  41  N.  J.  Eq. 
648  (1886);  Wilkinson  v.  Bavierle.  41  N.  J. 
Eq.  635  (1886).  A  chattel  mortgage  made 
in  contempt  of  court  and  in  violation 
of  the  statutes  against  preferences  by 
a  corporation  is  void,  Bissell  v.  Besson, 
47  N.  J.  Eq.  580  (1890).  See  also  Bergen 
V.  Porpoise  Fishing  Co.,  42  N.  J.  Eq.  397 
(188G).  Under  the  old  New  Jersey  stat- 
ute the  directors  of  a  corporation  might 
mortgage  the  property  and  issue  bonds 
to  tliemselves  as  security  for  previous 
advancements,  even  though  the  com- 
pany was  insol  vent.  Whittaker  v.  Am- 
well  Nat.  Bank,  53  N.  J.  Eq.  400  (1S94). 
It  is  a  disposal  of  property  for  the  pur- 
pose of  hindering  and  delaying  credit- 
ors, within  the  meaning  of  the  second 
section  of  the  statute  of  frauds,  for  an 
insolvent  firm  to  mortgage  all  their 
jiroperty  to  a  trustee  and  take  the  bonds 
secured  by  that  mortgage,  even  though 
they  take  the  bonds  to  turn  over  to 
their  creditors  But  the  act  is  voidable 
only  as  to  those  creditors  who  object 
and  contest  the  matter.  National  Bank 
V.  Sprague,  21  N.  J.  Eq.  530  (1870).  Al- 
though  New  York  corporations  are  for- 
bidden by  the  statutes  of  New  York  to 
execute  mortgages  or  give  preferences 
in  contemplation  of  insolvency,  yet  a 
mortgage  given  by  a  New  York  corpo- 
ration on  chattels  and  real  estate  in 
New  Jersey  was  upheld  in  New  Jersey, 
although  made  in  contemplation  of  in- 
solvency. The  New  Jersey  courts  did 
not  apply  the  New  York  law,  but  will 
apply  that  of  New  Jersey.  The  debt 
secured  by  the  mortgage  in  this  case 
was  payable  in  New  Jersey,  hovvever, 
and  most  of  the  creditors  resided  there. 
Boehme  r.  Rail,  51  N.  J.  Eq.  541  (1893). 
A  levy  of  execution  prior  to  the  ap- 
pointment of  a  receiver  has  a  prior 
claim  on  the  assets  levied  upon.  Van 
Steenberg  v.  Parsil,  etc.  Co.,  34  Atl.  Rep. 
135  (N.  J.  1896).  An  insolvent  New 
Jersey  corporation   cannot  as  against 


some  of  its  creditors  issue  mortgage 
bonds  to  other  creditors  Skirm  v. 
Eastern,  etc.  Co.,  57  N.  J.  Eq.  179  (1898). 
A  mortgage  made  by  the  president 
without  authority  is  not  binding  on  the 
company  and  cannot  be  validated  after 
the  company  has  become  insolvent 
where  the  statute  prohibits  assignments 
after  insolvency.  Howell  tt  Keen,  43 
Atl.  Rep.  1070  (N.  J.  1899). 

New  York:  In  New  York,  from  1825 
to  1892,  the  statutes  jirohibited  corpo- 
rations from  making  any  transfers  or 
assignments  in  contemplation  of  in- 
solvency, and  declared  any  such  trans- 
fers and  assignments  utterly  void.  (1 
R,  S.  603.  g  4.)  By  this  statute  all  as- 
signments by  New  York  corporations 
for  the  benefit  of  creditors  were  held  to 
be  void.  Sibell  v.  Remsen,  33  N.  Y.  95 
(1865):  National, etc.  Bank  r.  Mechanics' 
Nat  Bank,  89  N.  Y.  467  (1882);  Harris  v. 
Thompson,  15  Barb.  62  (1853);  Atkinson 
V.  Rochester  Printing  Co.,  114  N.  Y.  168 
(1889). 

The  following  decisions  were  as  to 
what  was  meant  by  "in  contemplation 
of  insolvency: "'  In  Robinson  v.  Bank  of 
Attica,  21  N.  Y.  406  (18G0),  where  a  state 
bank,  three  days  before  its  failure,  in- 
duced a  party  to  give  it  accommodation 
checks,  and  on  the  following  day  turned 
out  securities  to  secure  such  checks,  the 
court  held  that  the  securities  could  be 
recovered  back  by  the  receiver.  In 
Marine  Bank  v.  Clements,  31  N.  Y.  33 
(1865),  where  an  insolvent  corporation 
assigned  a  note  to  a  party,  and  that 
party  brought  suit  upon  the  note,  the 
court  held  that  the  maker  of  the  note 
could  not  set  up  the  insolvency  as  a  de- 
fense, there  being  no  proof  that  the  in- 
dorsee did  not  give  value  at  the  time  he 
took  the  note  from  the  insolvent  corpo- 
ration. In  Dutcher  v.  Importers',  etc. 
Nat.  Bank,  59  N.  Y.  5  (1874),  the  court 
held  that  where  the  bank  paid  a  check 
to  a  depositor  who  had  no  knowledge  of 


1638 


CH.  XLl.] 


INTKA   VIRES    ACTS    AND    CONTRACTS. 


[§  691. 


subject.     Although  a  state  cannot  give  a  preference  to  its  own  cit- 
izens as  against  citizens  of  another  state  in  the  distribution  of  the 


the  insolvency  of  the  bank,  this  was  not 
such  a  preference  as  was  prohibited  by 
the  statute.     In  Paulding  v.  Chrome 
Steel  Co.,  94  N.  Y.  334  (1884),  although  a 
chattel  mortgage  had  been  given  five 
years  before  the  company  became  in- 
solvent, and  had  not  been  recorded,  and 
was  renewed  and  recorded  at  the  time 
wlien  the   corporation  was  insolvent, 
yet  the  court  held  that  the  mortgage 
was  valid.    Under  the  New  York  act  a 
director  cannot  obtain  a  preference  by 
attachment,  nor  by  a  judgment  taken 
by  default.     Throop  v.  Hatch  Lithog. 
Co.,  135  N.  Y.  530  (1891).     In  1893  the 
above  statute  was  changed  so  that  as- 
signments by  insolvent  corporations  are 
now  legal,  provided  no  preferences  are 
given.     (Stock  Corporation  Law,  §  48.) 
■  Preferences     given    to    any  creditor, 
whether  a  corporate  officer,  or  stock- 
holder, or  outsider,  are  void.     A  chattel 
mortgage  given  by  an  insolvent  Michi- 
gan corporation  to  a  trustee  for  the 
benefit  of  all  creditors  who  should  ac- 
cept its  terms  and  extend  their  debts, 
the  trustee  being  given  power  to  con- 
tinue the  business,  is  not  valid  as  to 
personal  property  in  New  York  state, 
even  though  recorded  as  a  chattel  mor^ 
gage  in  New  York  state.      Dearing  v. 
McKinnon,  etc.  Co.,  165  N.  Y.  78  (1900). 
An  assignment  of  personal  property  by 
an  insolvent  corporation  for  the  benefit 
of  such  of  its  creditors  as  accept  the 
same,  one  of  the  provisions  being  that 
they  should  extend  the  time  of  pay- 
ment of  their  claims,  is  illegal  under 
the  statute  of  frauds  in  New  York,  in 
that  it  delays  and  hinders  the  creditors 
in  obliging  them  to  extend  the  time 
of  payment  and  in  that  the  assignee 
was  authorized  to  sell  on  credit.     The 
fact  that  such  an  instrument  was  legal 
in  Michigan,  where  the  corporation  ex- 
isted, did  not  legalize  the  instrument  as 
to  personal  property  in  New  York  state. 
Dearing  v.  McKinnon,  etc.  Co.,  33  N.  Y. 


App.  Div.  31   (1898).     The  New  York 
statute  does  not  render  invalid  a  judg- 
ment obtained  by  a  corporate  creditor 
by  default  for  failure  to  answer.    Lopez 
V.  Campbell,  163  N.  Y.  340  (1900).  Where 
an  insolvent  corporation  has  illegally 
transferred  its  property,  a  permanent 
receiver  may  bring  a  suit  at  law  for 
conversion  instead  of  suing  in  a  court 
of  equity.    McQueen  v.  New,  45  N.  Y. 
App.  Div.  579  (1899).     A  judgment  ob- 
tained by  collusion  with  the  president 
may  be  an  illegal  preference.     Rossman 
V.  Seaver,  41  N.  Y.  App.  Div.  603  (1899). 
Where  a  corporation  is  formed  to  make 
advances  to  an  insolvent  copartnership, 
taking  a  lien  on  the  property  of  the 
latter,  and    the   latter  continues  the 
business  in  its  own    name  and  turns 
over  the  proceeds  of  the  sales  to  the 
former,  the  scheme  is  illegal  as  giving 
the  firm  a  false  credit  and  as  being  in- 
consistent with  the  nature  of  a  chattel 
mortgage.    Mathews  v.  Hardt,  37  N.  E. 
Misc.  Rep.  653  (1903).    In  Baker  v.  Em- 
erson, 4  N.  Y.  App.  Div.  348  (1896),  where 
a  manufacturing  company,  being  insolv- 
ent, paid  a    note    for  $3,000,   leaving 
$17,000  of  debts  unpaid,  payment  being 
made  May  39,  1893,  and  the  company 
suspended  business  June  5,  1893,  the 
court  held  that  the  payment  was  ille- 
gal, although  the  company  expected  at 
the  time  of  the  payment  to. raise  suffi- 
cient money  to  go  on  with  its  business; 
citing  to  this  effect,  Vennard  v.  McCon- 
nell,  93  Mass.  555,  563  (1866);  also  Forbes 
u  Howe,  103  Mass.  437,  436  (1869).     A 
preference  to   a  partnership  of  which 
a  stockholder  is  a  member  is  illegal. 
Jones  V.  Blun,  145  N.  Y.  333  (1895).     An 
assignment  for  the  benefit  of  creditors 
is  authorized  by  the  directors  and  not 
the  stockholders.      A  resolution  of  the 
board  of  directors  that  the  company 
execute  an  assignment  for  the  benefit 
of  creditors  may  be  carried  out  by  the 
|. resident  without    further  authority; 


1639 


§  601.] 


INTRA    VIRES    ACTS    AND    CONTRACTS. 


[on.   XLL 


assets  of  an  insolvent  corporation,  yet  as  against  corporations  of 
other  states  such  preference  may  be  given.' 


but  he  should  not  select  himself  as  as- 
signee. Rogers  t'.  Pell,  154  N.  Y.  518 
(1898).  In  New  York  an  insolvent  cor- 
poration may  make  an  assignment  for 
the  benefit  of  creditors,  but  there  must 
not  be  any  preferences.  Croll  v.  Em- 
pire, etc.  Co.,  17  N.  Y.  App.  Div.  282 
(1897).  Where  a  private  corporation, 
with  the  consent  of  all  its  stockholders 
of  record,  agrees  with  its  creditors  that 
the  property  shall  l)e  taken  cliarge  of 
by  an  individual  and  managed  for  the 
purpose  of  paying  the  debts  and  then 
returning  the  property  to  the  corpora- 
tion, and  one  of  the  stockholders  at  that 
time  secretly  transfers  some  of  the  cer- 
tificates of  stock  to  his  wife  and  she 
holds  the  stock  for  three  years  and  then 
transfers  it  without  consideration  to  a 
jiarty  who  brings  suit  to  set  aside  the 
transaction,  the  court  will  not  give  such 
relief.  Marbury  v.  Stone,  17  N.  Y.  App. 
Div.  332  (1897);  aff'd,  160  N.  Y.  701.  The 
fact  tliat  the  company  is  unable  to 
meet  its  obligations,  and  that  judg- 
ments are  being  entered  against  it. 
shows  insolvency.  Nealisr.  American, 
etc.  Co.,  76  Hun.  220  (1894);  aff'd,  150  N. 
Y.  42.  Even  in  New  York,  where  a  con- 
veyance in  view  of  insolvency  is  void, 
an  embarrassed  corporation  may  mort- 


the  statute,  it  seems  that  it  is  no  de- 
fense that  an  execution  sixle  by  a  tliird 
party  had  taken  all  the  equity  of  tlie 
company  in  the  property.  Stonebridge 
r.  Perkins,  141  N.  Y.  1  (1894).  Formerly 
a  foreign  corporation  might  make,  in 
New  York,  an  assignment  for  tiie  ben- 
efit of  its  creditors,  wlipro  such  assign- 
ment would  be  valiil  if  made  in  the 
state  where  the  company  was  incor- 
porated; in  this  case  in  New  Jersey. 
The  New  York  statute  against  such  as- 
signments applied  only  to  a  domestic 
corporation.  At  common  law  any  cor- 
poration might  make  such  an  assign- 
ment, and  the  president  and  secretary, 
under  authority  of  the  board  of  direct- 
ors, might  execute  an  assignment  for 
the  benefit  of  creditors  made  by  the 
corporation.  Vantlerpoel  v.  Gorman, 
140  N.  Y.  563  (1894).  An  insolvent  Mas- 
sachusetts corporation,  having  (ijoods  in 
New  York,  might  transfer  the  same  to 
a  creditor,  and  the  transfer  takes  pre- 
cedence of  an  attaclunent  subsequently 
levied  in  New  York  by  another  cred- 
itor. The  New  York  act  against  as- 
signments by  insolvent  corporations 
formerly  applied  only  to  domestic  cor- 
porations. Lane  v.  Wheelwright,  69 
Hun,  180  (1893i;  aff'd,  143  N.  Y.  634.    A 


gage  all  its  property  to  secure  bonds  creditor  of  a  foreign  corporation  could 
which  are  given  to  creditors  for  their  obtain  a  preference  in  New  York  upon 
debts,  where  the  creditor  who  refuses*  assets  in  New  York.     Logan  v.  McCall 


to  take  the  bonds  waits  over  three 
years  before  attacking  the  mortgage. 
New  Britain  Nat.  Bank  v.  A.  B.  Cleve- 
land Co..  91  Hun.  447  (1895);  aff'd,  158  N. 
Y.  722  (1899).  An  insolvent  corporation 
may  give  a  mortgage  to  secure  bonds 
given  at  that  time,  if  the  issue  is  a  fair 
business  transaction  and  for  the  pur- 


Pub.  Co..  140  N.  Y.  447  (1893);  Coats  v. 
Donnell,  94  N.  Y.  168  (1883),  holding  that 
a  statute  prohibiting  preferences  by 
corporations  did  not  apply  to  foreign 
corporations.  In  the  case  of  Stand- 
ard, etc.  Bank  v.  Garfield,  etc.  Bank, 
56  N.  Y.  App.  Div.  43  (1900),  it  is  held 
that  the  New  York  statute  against  as- 


pose   of  saving  the  company  and    its  signments  by  an  insolvent  corporation 

property.    Cochran  v.  Anglo-American,  does  not  apply  to  a  foreign  corporation, 

etc.  Co.,  69  Hun.  168  (1893).     In  an  ac-  and  that  a  statute    of   another  state 

tion  by  a  receiver  to  set  aside  a  trans-  against  such  assignments  does  not  ap- 

fer  of  property  made  in  violation  of  ply  in  New  York  state.     A  foreign  cor- 

1  Blake  v.  McClung,  172  U.  S.  239  (l»yS). 
IGiO 


■CH.   XLI.] 


INTRA    VIRES    ACTS    AND    CONTRACTS. 


[§  692. 


The  rights  of  the  creditors  of  an  insolvent  corporation  or  indi- 
vidual who  mortgages  property  to  secure  bonds  and  then  disposes 
of  the  bonds  or  offers  them  to  the  creditors  is  considered  elsewhere.^ 

§  692.  Freferences  and  assigiwients  ly  insolvent  corporations  to 
directors,  officers,  or  stocl^liolders  — Loans  dy  directors  to  the  cor- 
poration—Mortgages hy  corporations  to  directors.— Tuvn'mg  now 
from  preferences  given  to  the  ordinary  creditor  of  a  corporation  to 


poration    not   doing  business   in  New 
York  state  is  presumed  to  have  power 
to  make  an  assignment  for  the  benefit 
of  creditors  with  preferences.     Matter 
of  Hulbert  Bros,  etc.,  38  N.  Y.  App.  Div. 
523  (1899).     As  to  foreign   corporations 
now  in  New  York,  see  L.  1897,  ch.  384. 
North  Carolina:   Preferences  are  up- 
held.    Blalock  V.  Kernersville  Mfg.  Co., 
110  N.  C.  99  (1892).     An  insolvent  cor- 
poration may  prefer  creditors  in  North 
•Carolina  subject  to  a  sixty-day  statu- 
tory restriction.    Merchants'  Nat.  Bank 
V.  Newton   Cotton  Mills,  115  N.  C.  507 
(1894).     A  corporation  is  not  insolvent 
so  long  as  its  property,  at  market  prices, 
is  equal  in   value  to  its  debts.     Silver, 
etc.  Co.  V.  North,  etc.  Co.,  119  N.  C.  417 
(1896).     Cf.  S.  C  122  N.  G  542  (1898). 

Ohio:  Preferences  are  illegal  Dam- 
arin  v.  Huron  Iron  Co.,  47  Ohio  St.  581 
(1890);.Sayler  v.  Simpson,  46  Ohio  St. 
510  (1890);  Rouse  v.  Merchants'  Nat 
Bank.  46  Ohio  St.  493  (1889);  followed 
in  Smith,  etc.  Co.  v.  McGroarty,  136  U. 
S.  237  (1890),  in  an  Ohio  case. 

Oregon:  A  failing  corporation  may 
give  a  mortgage  if  .in  good  faith.  Cur- 
rie  V.  Bowman,  25  Oreg.  364  (1894);  Sabin 
V.  Columbia  Fuel  Co.,  25  Oreg.  15  (1894). 
A  judgment  creditor  who  has  levied  an 
execution  may  file  a  bill  to  set  aside  an 
illegal  assignment,  but  cannot  claim  a 
preference  on  that  fund.  Kerslake  v. 
Brower,  etc.  Co.,  40  Oreg.  44  (1901X 

Pennsylvania:  Assignments  may  be 
made.  Ardesco  Oil  Co.  v.  North  Amer- 
ican, etc.  Co.,  66  Pa.  St.  375  (1870).  A 
New  York  corporation  may  execute  a 
judgment  note  which  is  good  in  Penn- 
sylvania,    notwithstanding    the    New 


York  statute  against  preferences.  East 
Side  Bank  v.   Columbus  Tanning  Co., 
170  Pa.  St.  1  (1895).    A  New  Jersey  cor- 
poration, although  forbidden  by  New 
Jersey  statutes  from  giving  a  prefer- 
ence by  way  of  confession  of  judgment, 
yet  may  do  so  in  Pennsylvania,  where 
such  a  preference  is  legal,  the  New  Jer- 
sey laws  allowing  preference  by  any 
other   means  than  a  confessed   judg- 
ment.   Pairpoint  Mfg.  Co.  v.  Philadel- 
phia, etc,  Co.,  161  Pa.  St.  17  (1894).     See 
also  Borton  v.  Brines-Chase  Co.,  175  Pa. 
St.  209  (1896).     A  preference  given  by  a 
meeting  of  the  board  of  directors  at 
which  a  quorum  is  present,  notice  of 
which  was  not  given  to  the  other  di- 
rectors,  may  be  valid  if  no  officer  or 
stockholder  thereafter  objected  to  the 
same.     Moller  v.  Keystone,  etc  Co.,  187 
Pa.  St.  553(1898). 

BJiode  Island:  A  New  York  corpora- 
tion owning  property  in  Rhode  Island 
cannot  make  in  the  latter  state  an  as- 
signment which  the  New  York  statutes 
prohibit.  Pierce  v.  Crompton,  13  R.  L 
313  (1881).  Where  a  corporation  con- 
veys away  its  property  in  order  to  en- 
force a  settlement  with  its  creditors  it 
cannot  compel  a  reconveyance  of  such 
property.  Apponaug,  etc.  Ca  v.  Raw- 
son,  22  R.  I.  133  (1900). 

South  Dakota:  An  assignment  for 
the  benefit  of  creditors  may  be  made 
by  a  corporation.  A  foreign  corpora- 
tion may  make  such  an  assignment. 
It  is  legal,  although  the  foreign  corpo- 
ration has  not  complied  with  the  law 
relative  to  filing  a  copy  of  its  charter 
and  appointing  a  resident  agent.  The 
assignment  is  properly  made  by  the  di- 


1  See  gg  672,  674,  supra^ 
1641 


§  C02.] 


INTRA    VIRES    AC3T8    AND    CONTKACIS. 


[CII.  XLl. 


preferences  given  to  a  director  of  the  corporation,  it  is  found  that 
entirely  diflen'nt  rules  prevail.     Xo  statute  is  necessary  to  prevent 


rectors,  and  not  by  a  meeting  of  the 
stockholders.  Wliere  the  assignment 
is  made  to  a  director  and  tliere  are  in- 
dications of  fraud,  it  is  for  the  jury  to 
say  whether  tliere  was  fraijd.  Wright 
V.  Lee,  2S.  D.  590  (1892). 

Tennessee:  It  lias  been  held  tliat  pref- 
erences are  illegal.  Tradesman  Puh. 
Co.  V.  Car  WIieelCo..95Tenn.  0:31(1895). 
Cf.  Hopkins  n  Gallatin,  etc.  Ca,  4 
Humph.  403  (1843).  But  a  diligent  cred- 
itor may  obtain  a  preference  by  a  judg- 
ment although  the  corjjoration  is  in- 
solvent, it  being  a  going  concern.  Bu- 
chanan V.  Barnes,  34  S.  W.  Rep.  425 
(Tenn.  1890).  An  assignment  by  a  cor- 
poration for  the  benefit  of  creditors 
does  not  displace  existing  attachments. 
First  Nat.  Bank  v.  Lumber,  etc  Ca,  91 
Tenn.  12  (1891).  An  insolvent  corpora- 
tion cannot  turn  over  practically  all  its 
assets  to  one  creditor  by  way  of  prefer- 
ence. Smith  V.  Bradt  Printing  Ca,  97 
Tenn.  351  (1890).  After  a  corporation 
has  been  declared  insolvent  by  the 
board  of  directors  and  directions  given 
to  file  a  bill  to  wind  up  its  affairs,  a 
creditor  cannot  obtain  a  preference  by 
levy  of  execution  before  the  bill  is  act- 
ually filed.  Memphis  B.  etc.  Co.  v. 
Ward,  99  Tenn.  172  (1897).  The  Ten- 
nessee statute  giving  its  citizens  pref- 
erence as  to  assets  of  an  insolvent  for- 
eign corporation  within  the  state  is  un- 
constitutional as  to  non-resident  per- 
sons, but  is  constitutional  as  to  foreign 
corporations  which  are  creditors  of  the 
insolvent  corporation.  McClung  v. 
Embreeville,  etc.  Ry.,  103  Tenn.  399 
(1899),  following  Blake  v.  McClung,  173 
U.  S.  239,  259  (1898).  Wliere  an  insolv- 
ent corporation  has  assigned  for  the 
benefit  of  its  creditors,  and  then  one  of 
the  creditors  files  a  bill  to  wind  up  the 
company  and  for  distribution,  bis  at- 
torneys will  not  be  given  an  allowance, 
inasmuch  as  no  new  assets  were  dis- 
closed and  no  beneficial  effect  shown. 


Parkhurst,  etc.  Ca  t'.  Wilkinson  Co.,  54 
S.  AV.  Rep.  58  (Tenn.  1899).  A  stock- 
holder cannot  bring  suit  against  an  as- 
signee for  the  benefit  of  creditors  to 
hold  him  liable  for  maladministration, 
inasmuch  as  any  surplus,  after  paying 
the  debts,  would  belong  to  the  corpora- 
tion. A  request  to  the  directors  to 
bring  suit  is  first  necessary.  State  v. 
Mitchell.  104  Tenn.  336  (1898). 

Texas:  In  Texas  the  statutes  as  con- 
strued by  the  courts  make  the  corpo- 
rate property  upon  insolvency  a  trust 
fund  to  be  distributed  equally  among 
all  creditors.  The  corporation  may  turn 
the  property  over  to  its  directors  for 
that  purpose.  Wright  f.  Euless.  12  Tex. 
Civ.  Ap|i.  136(1890).  An  insolvent  cor- 
])oration  cannot  prefer  its  creditors  by 
giving  a  mortgage  Judgment  credit- 
ors may  cause  it  to  be  set  aside  and  an 
accounting  had.  Lyons,  etc.  Co.  v. 
Perry,  etc.  Ca,  88  Tex.  468  (1894).  An 
insolvent  corporation  cannot  prefer  cer- 
tain creditors,  and  equity  will  prevent 
unjust  preferences.  Langr.  Daugherty, 
74  Tex.  220  (Tex.  1889).  In  Texas,  how- 
ever, any  creditor  may  obtain  a  prefer- 
ence by  legal  proceedings.  Moon,  eta 
Co.  V.  Waxaliachie,  etc.  Ca,  13  Tex.  Civ. 
App.  103  (1896);  aff'd,  89  Tex.  511  (1890); 
Florsheira,  eta  Ca  v.  Wettermark,  10 
Tex.  Civ.  App.  102  (1895);  Harrigan 
V.  Quay,  27  a  W.  Rep.  897  (Tex. 
1894).  But  not  by  assignment  Orr, 
eta  Ca  r.  Thompson,  36  S.  W.  Rep. 
1129  (Tex.  1890);  aflf'd,  89  Tex.  501  (1890); 
Fowler  r.  Bell,  90  Tex.  150  (1890);Specht 
V.  Bookhout  14  Tex.  Civ.  App.  443  (1890), 
the  court  holding  also  that  a  debtor  of 
the  corporation  who  pays  such  pre- 
ferred creditor,  to  whom  the  claim  has 
been  assigned,  does  so  at  his  peril.  It 
has  been  held  that  no  preference  is  sus- 
tained, even  by  attachment  against  an 
insolvent  corporation,  in  Texas.  Farm- 
ers', etc.  Bank  i'.  Waco,  etc.  Co.,  30  S.  W. 
Rep.  131  (Tex.  1890).     Attachment  liea 


1642 


CH.  XLI.] 


INTRA    VIKES    ACTS    AND    CONTRACTS. 


[§  692. 


preferences  to  a  director  of  an  insolvent  corporation.  It  is  un- 
doubtedly true  that  the  law  allows  a  director  to  loan  money  to  a 
corporation,  and  allows  the  corporation,  while  it  is  solvent,  to  give 

against  a  corporation,  although  it  is  in-    sell  its  property  to  one  of  its  creditors, 


solvent  but  is  still  doing  business.  Amer- 
ican Nat.  Bank  v.  Dallas,  etc.  Co.,  15 
Tex.  Civ.  App.  631  (1897).    The  direct- 
ors of  an  insolvent  corporation  may  au- 
thorize an  assignment  for  the  benefit  of 
creditors.  Birmingham,  etc.  Co.  u  Free- 
man, 15  Tex.  Civ.  App.  451  (1897).     A 
purchaser  of  the  assets  of  an  insolvent 
corporation,  under  an  order  of  court  in 
fi  suit  instituted  by  a  creditor,  may  con- 
test the  validity  of  a  mortgage  given  by 
the  insolvent  corporation   by  way  of 
preference,  the  validity  thereof  not  hav- 
ing been  passed  upon  in  such  suit,  and 
may  also  contest  the  validity  of  a  trans- 
fer by  the  insolvent  corporation  of  its 
assets  by  vi-ay  of  preference.    Rogers  v. 
Southern,  etc.  Co.,  21  Tex.  Civ.  App.  48 
il899).     An  attachment  against  a  cor- 
poration carrying  on  its  business  in  the 
usual  way  is  good,  even  though  the  cor- 
poration is  insolvent.     Mallette  v.  Ft. 
Worth,  etc.  Co.,  21  Tex.  Civ.  App.  267 

(1899). 

Utah:  Preferences  are  legal.  Weyeth, 
etc.  Co.  V.  James,  etc.  Co.,  15  Otah,  110 
(1897).  A  mortgage  by  an  insolvent  cor- 
poration may  be  legal.  Singer  v.  Salt 
Lake  City.  etc.  Co.,  17  Utah,  143  (1898). 
Only  the  board  of  directors  of  a  bank 
may  make  an  assignment  for  the  bene- 
fit of  creditors.  Cupit  v.  Park  City 
Bank,  58  Pac.  Rep.  839  (Utah,  1899). 

Vermont:  Preferences  are  legal.  War- 
ner V.  Mower,  11  Vt.  385.  390  (1839). 


Klosterman  v.  Mason,  etc.  R.  R.,  8  Wash. 
281  (1894);  Holbrook  v.  Peters,  etc  Co., 
8  Wash.  344  (1894).     A  mortgage  by  an 
embarrassed  corporation  is  valid,  if  in 
good  faith,  even  though  the  company 
soon  after  fails.  Vincent  v.  Snoqualmie 
Mill  Co..  7  Wasli.  566  (1894).  Even  though 
a  corporation  has  made  an  assignment 
for  tlie  benefit  of  creditors,  yet  a  court 
of  equity  may  appoint  a  receiver  of  the 
assets  so  assigned  under  the  Washing- 
ton  statutes.   Oleson  v.  Bank  of  Tacoma, 
15  Wash.  148  (1896).    Preferences  are 
illegal.     Compton  v.  Schwabacher,  etc. 
Co.,  15  Wash.  306  (1896).    An  insolvent 
corporation  cannot  make  a  voluntary 
preference  by  way  of  mortgage.  Biddle, 
etc.  Co.  V.  Port  Townsend,  etc.  Co.,  16 
Wash.  681  (1897).     A  mortgage  by  an 
insolvent  corporation  to  one  of  its  cred- 
itors as  a  preference  is  illegal.     Cook  v. 
Moody,  18  Wash.  114  (1897).    Where  a 
preference  by  an  insolvent  corporation 
is  invalid  the  agreement  of  all  creditors 
that  an   insolvent  bank  may   borrow 
money  and  pledge  its  securities  as  col- 
lateral is  not  valid  and  such  ^pledge  is 
illegal.  Burrell  v.  Bennett,  56  Pac.  Rep. 
375  (Wash.  1899).    But  such  pledge  is 
legal    as    against   creditors   assenting 
thereto.     Bank  of  California  v.  Puget 
Sound,  etc.  Co.,  20  Wash.  636  (1899).   An 
attachment  by  a  creditor  prior  to  a  re- 
ceiver being  appointed  in   insolvency 
proceedings  will  be  set  aside  on  the 


Virginia:  Assignments  may  be  made,     theory  that  the  assets  are  a  trust  fund 


Lewis' r.  Glenn,  84  Va.  947  (1888).  And 
preferences  given.  Planters'  Bank  v. 
Whittle,  78  Va.  737  (1884). 

Washington:  A  corporation  may  as- 
sign for  the  benefit  of  creditors.  Nyman 
V.  Berry,  3  Wash.  St.  734  (1892).  But 
preferences  are  illegal.  Conover  v.  Hull, 
10  Wash.  St.  673  (1895):  Thompson  v. 
Huron  Lumber  Co.,  4  Wash.  St.  600 
(1892).     An  insolvent  corporation  may 


for  creditors.    Washington,  etc.  Co.  v. 
Alladio  Cafe  Co.,  68  Pac.  Rep.  444  (Wash, 

1902). 

West  Virginia:  Assignments  formerly 
were  legal.  Lamb  v.  Cecil,  25  W.  Va. 
288  (1884);  Lamb  v.  Pannell,  25  W.  Va. 
298  (1884).  And  preferences  also.  Pyles 
V.  Furniture  Co.,  30  W.  Va.  123  (1887). 
A  mining  company  having  assets  ol 
S25,000  and  debts  of  $20,000  is  solvent, 


1643 


§  692.] 


INTRA    VIRES    ACTS    AND    CONTRACTS. 


[CH.  XLI. 


a  mortgage  to  the  director  to  secure  the  money  so  loaned.  The  giv- 
ing of  the  mortgage  is  viewed  with  suspicion,  but  it  is  legal  when 
it  is  perfectly  free  from  actual  fraud.' 


and  may  execute  a  mortgaRa  Coal- 
dale  Min.  etc.  Co.  v.  Clark,  4a  W.  Va.  84 
(18!)7).  Preferences  by  insolvent  corpo- 
rations are  now  prohibited  by  statute. 
In  West  Virginia  the  board  of  directors 
have  no  power  to  make  an  assignment 
for  the  benefit  of  creditors,  and  in  a 
stockholders'  suit  to  set  aside  such  as- 
signment the  corporation  is  not  a  nec- 
essary party  if  all  stockholders,  officers, 
and  directors  are  made  jiarties  to  the 
suit.  Kyle  v.  Wagner,  45  W.  Va.  o49 
(1898).  Even  though  an  as.«ignment  by 
an  insolvent  corporation  may  be  only 
by  vote  of  the  stockholders,  yet  if  made 
on  a  vote  of  the  directors,  and  the  stock- 
holders acquiesce  for  a  considerable 
time,  it  is  legal.  Youngn  Improvement, 
etc.  Assoc,  38  S.  R  Rep.  G70  (W.  Va. 
1000). 

\]lsconsin:  At  coiuukmi  law  a  corpo- 
ration may  make  an  assignment  for  tlie 
benefit  of  creditors.  Garden  City,  etc. 
Co.  V.  Geilfuss,  86  Wis.  013  (1893).  In 
Wisconsin  it  is  held  that  a  trust  deed 
executed  by  an  insolvent  corporation, 
giving  the  trustee  power  to  take  charge 
of  the  business  and  carry  it  on,  is  void, 
as  intended  t*  defeat  and  delay  corpo- 
rate creditors.  First  Nat.  Bank  v.  Mc- 
Donald Mfg.  Co.,  67  Wis.  873  (1886).  In 
Wisconsm  an  insolvent  corporation  can- 
not prefer  creditors.  Ford  v.  Plankin- 
ton  Bank,  87  Wis.  363  (1894).  The  mere 
insolvency  of  a  corporation  does  not 
convert  its  property  into  a  trust  fund, 
so  as  to  prevent  preferences.  Ford  v. 
Hill.  92  Wis.  188  (1896).  A  creditor  of 
an  insolvent  corporation  may  levy  an 
attachment  on  its  proper  cy,  and  thereby 
obtain  a  preference.  Ball  in  v.  Mer- 
chants' Exch.  Bank,  89  Wis.  278  (1895). 
An  insolvent  corporation  may  give  a 
preference,  and  such  preference  may 
be  to  creditors  who  by  contract  have 
named  two  of  the  five  directors.  South 
Bend,  etc.  Co.  v.  George,  etc.  Co.,  97  Wis. 


230  (1897).  A  corporation  may  make  an 
a.ssignment  for  the  benefit  of  creditors. 
Goetz  V.  Knie,  103  Wis.  366  (1899).  A 
corporation  is  not  insolvent  merely  be- 
cause It  has  not  enough  assets  to  pay  its 
debts  and  still  have  its  capital  stock 
intact.  Hamilton  i'.  Menominee,  etc. 
Co.,  106  Wis.  352  (1900).  A  corporation 
may  assign  for  the  benefit  of  creditors. 
Binder  r.  McDonald,  106  Wis.  .3.32(1900). 

]\'i/(inihir):  Preferences  arc  legal.  Con- 
way V.  Smith,  etc.  Co.,  6  Wyo.  468  (1896). 

»Twin  Lick  Oil  Co.  v.  Marbury,  91  U. 
S.  587  (1875);  Duncomb  i*.  N.  Y.  etc.  R 
R,  88  N.  Y.  1  (1882),  84  N.  Y.  190;  Hotel 
Co.  V.  Wade,  97  U.  S.  13  (1877).  A  di- 
rector in  a  solvent  corporation  may 
take  a  mortgage  from  it  as  security  for 
money  advanced.  In  re  Estate,  etc.. 
52  Atl.  Rep.  58  (Pa.  1902).  Directors 
may  execute  judgment  bonds  to  them- 
selves at  a  time  when  the  company  is 
solvent,  arid  may  enforce  them  after  it 
becomes  insolvent.  Neal's  Appeal,  129 
Pa.  St.  64  (1889).  A  corporation,  at  the 
time  of  borrowing  money  from  its 
treasurer  personally,  who  is  also  a  di- 
rector, may  give  him  a  judgment  bill 
to  enter  judgment.  Cowan  v.  Pennsyl- 
vania, etc.  Co.,  184  Pa,  St.  1  (1898>.  A 
mortgage  is  not  void  on  the  ground 
that  it  was  to  a  director,  where  the  di- 
rector was  absent  when  elected,  did 
not  serve,  was  not  eligible,  and  soon 
sent  in  a  resignation.  Augusta,  etc. 
R  R.  r.  Kittel,  52  Fed.  Rep.  63  (1892). 
A  solvent  corporation  may  make  a 
mortgage  to  one  of  its  officers  and  stock- 
holders to  secure  a  loan  made  by  him. 
MuUanphy  Sav,  Bank  r.  Schott,  135  111. 
655  (1891).  The  fairness  of  a  debt  al- 
leged to  be  due  from  the  corporation  to 
directors  and  audited  by  them  will  be 
closely  scrutinized  and  a  note  and 
mortgage  therefor  set  aside  if  not 
found  entirely  in  good  faith  and  the 
whole  amount  justly  due.     Graves  v. 


1644 


CH.  XLI.] 


INTKA    VIRES    ACTS    A>'D    CONTRACTS. 


[§  692. 


The  supreme  court  of  the  United  States,  speaking  of  loans  made 
by  an  officer  and  stockholder  to  a  corporation,  said:  "Undoubtedly 
his  relation  as  a  director  and  officer,  or  as  a  stockholder  of  the  com- 
pany, does  not  preclude  him  from  entering  into  contracts  with  it, 


Mono  Lake,  etc.  Co.,  81  Cal.  303  (1889). 
A  director  may  loan  money  to  a  cor- 
poration and   take  a  mortgage  to  se- 
cure the  same,  and  foreclose  and  buy 
in  the  property.    Preston  v.  Loughran, 
58  Hun,  210  (1890).     A  mortgage  may 
be  given  by  a   corporation   to  secure 
directors  who  at  the  time  of  the  giving 
of  the    mortgage    guarantee     certain 
debts  of  the  company.     Re  Pyle  Works, 
[1891]    1   Ch.    173.     A    mortgage   by  a 
company  to  its  directors  to  secure  them 
as  loaners  of  money  to  the  company  is 
valid,  and  may  be  enforced  where  the 
transaction  was  in  good  faith  and  Jaene- 
ficial  to  the  company,  and   sanctioned 
by   the  stockholders,  and   no  offer  is 
made  to  restore  the  consideration.    Gor- 
der  V.  Plattsmouth  Canning  Co.,  36  Neb. 
548  (1893);  Hope  v.  Valley  City  Salt  Co., 
2.j  W.  Ya,  789  (1885);  Warfield  v.  Mar- 
shall, etc.  Co.,  72  Iowa,  666  (1887).    And 
see  the  principles  and  cases  in  §  653, 
suprcu    See  also  Harpending  v.  Munson, 
91  N.  Y.  650  (1883);  Hallamr.  Indianola 
Hotel   Co.,   56  Iowa,  178  (1881),  where, 
however,  the  purchase  of  the  property 
by  the  director  at  the  foreclosure  sale 
for  a  small  price  was  set  aside;  Claflin 
V.  South  Carolina  R  R,  8  Fed.  Rep.  118 
(1880).     Cf.  Wilbur  v.  Lynde.  49  Cal.  290 
(1832),   invalidating  a  note  given  to  a 
director.     In    the    important    case    of 
Koehler  r.  Black  River,  etc.  Co.,  2  Black, 
715  (1862),  the  court  held  void  a  mort- 
gage given   by  the  directors  to  them- 
selves,  where  there    were    other    un- 
secured claims  and  where  the  giving 
of  the  mortgage  was  inequitable.     In 
Cumberland,  etc.  Co.  v.  Parish,  42  Md. 
598  (1875),  a  mortgage  to  a  director  was 
defeated,   there   being   no  clear  proof 
that  the  debt  was  actually   incurred. 
Directors  who   guarantee  a  corporate 
debt   may  take  a  mortgage  from  the 
company  as  security,  and  may  foreclose 


it.     Hopson  V.  ^tna,  etc.  Co.,  50  Conn. 
597  (1883).     A  company  indebted  to  its 
president  may,   to  secure  such   debt, 
give  a  mortgage  to  secure  a  debt  due 
from   him  to  a   third   party.     Bank  r. 
Flour  Co..  41  Ohio  St.  552  (1885).    Direct- 
ors  may  loan  money   to  the  corpora- 
tion and  have  it  repaid.    Ulster  Ry.  v. 
Ban  bridge,  etc.  Ry.,  Ir.  L.  R  2  Eq.  190 
(1868);  Borland  v.  Haven,  37  Fed.  Rep. 
394  (1888).     A  person  may  enforce  a. 
note  against  a  corporation,  although  he 
was  a  promotpr  thereof,  and  is  a  di- 
rector, stockholder,  and  manager  of  the 
corporation.      Fitzgerald,   etc.     Co.    v. 
Fitzgerald,    137   U.   S.    98,    110   (1890). 
Where  two  directors  borrow  money  for 
the   corporation    and   give  their    own 
notes  therefor,  the  company,  being  still 
solvent,  may  give  them  security.     First 
Nat.  Bank  v.  Dovetail,  etc.  Co.,  143  Ind. 
534  (1896).     Cf.  Cahill  v.  People's,  etc. 
Co.,  47  La.  Ann.  1483  (1895).     A  pledgee 
of  bonds  from  the  corporation  cannot 
attack  another  pledge  of  bonds  to  the 
president  to  secure  a  debt  due  the  presi- 
dent, especially  where  the  former  took 
the  bonds  in  pledge  with  knowledge  of 
the  pledge  to  the  president.     Hook  v. 
Ayers,  63  Fed.  Rep.  347  (1894).     A  cor- 
poration may  make  a  mortgage  to  one 
of  its  directors.     St.  Joe,  etc.  Co.  v.  First 
Nat.  Bank.  10  Colo.  App.  339  (1897).     A 
director  may  take  a  mortgage  from  the 
company  for  money  loaned  at  the  time 
of  the  mortgage,  and  may  buy  in  the 
property  at  the  foreclosure  sale  thereof. 
Jones  V.  Hale,  32  Greg.  465  (1898).     A 
mortgage  given  by  a  solvent  corpora- 
tion to  a  director,  which,   in  order  to 
preserve  the  credit  of  the  corporation, 
is  not  recorded,  is  invalid.    Montgomery 
V.  Phillips,  53  N.  J.  Eq.  203  (1895),  hold- 
ing also  that  a  mortgage  by  an  insolv- 
ent corporation  to  a  director  is  illegal. 
An  officer  advancing  money  to  a  cor- 


1645 


§  C92.J 


INTRA  VIKP:S  acts  AND  CONTRACTS. 


[cu. 


XM. 


making  loans  to  it,  and  taking  its  bonds  as  collateral  security;  but 
courts  of  equity  regard  such  personal  transactions  of  a  party  in 
either  of  these  positions,  not  perhaps  with  distrust,  but  with  a  large 
measure  of  watchful  care;  and  unless  satisfied  by  the  proof  that  the 
transaction  was  entered  into  in  good  faith,  with  a  view  to  the  bene- 
fit of  the  company  as  well  as  of  its  creditors,  and  not  solely  with  a 
view  to  his  own  benefit,  they  refuse  to  lend  their  aid  to  its  enforce- 
ment."' 

]3ut  where  the  corporation  is  insolvent  an  entirely  different  ques- 
tion arises.     There  has  been  a  diU'erence  of  opinion  in  the  courts, 


poration  may  repay  tlie  money  to  him- 
self from  the  treasury  when  its  condi- 
tion will  permit,  Stolces  v.  Stokes,  91 
Hun,  C05  (18'J5).  The  pn-sident  may 
own  receivers' certificates.  McKittrick 
V.  Arkansas  Central  Ky.,  X'ri  U.  S.  473 
(1894).  A  loan  by  the  jiresident  of  a 
bank  to  himself  is  legal,  if  the  directors 
acquiesce  therein.  Reynolds  v.  Bank  of 
Mt.  Vernon,  6  N.  Y.  App.  Div.  62  (189G); 
afi'd,  158  N.  Y.  740  (1899).  A  corpora- 
tion may  pledge  treasury  stock  to  a 
director.  Where  treasury  stock,  instead 
of  being  given  to  tlie  corporation,  is 
placed  in  the  hands  of  trustees  under  a 
trust  agreement,  such  agreement  may 
be  modified  by  a  new  agreement  and 
the  stock  turned  over  to  the  corpora- 
tion. Kinsman  v.  Fisk,  83  Hun,  494 
(1895).  It  is  legal  for  a  solvent  corpora- 
tion to  give  a  mortgage  to  the  presi- 
dent to  secure  a  debt  due  to  him.  Strohl 
V.  Seattle,  etc.  Bank,  25  Wash.  28  a901). 
Two  years'  delay  on  the  part  of  a  stock- 
holder in  complaining  of  a  mortgage 
given  by  the  corporation  to  raise  money 
to  pay  a  debt  due  to  the  president  is 
fatal,  even  though  the  president  had 
originally  agreed  to  require  payment 
only  out  of  sales  of  property  by  the  cor- 
poration. Wills  V.  Porter,  132  Cal.  516 
(1901).  A  foreclosure  is  not  invalid, 
even  though  some  of  the  bonds  are  held 
by  the  directors.  Rawlins  v.  New 
Memphis.etc.  Co.,  60S.W.Rep.206(Tenn. 
1900),  holding  also  that  a  director  who 
owns  bonds  may  purchase  the  prop- 
erty at  foreclosure  sale.  Stockhold- 
ers   and    directors    may   loan    money 

1646 


to  the  corporation  and  participate 
ratably  as  creditors  upon  its  insolv- 
ency, and  in  insolvency  jirooeedings 
the  legal  existence  of  the  cor|)oration 
cannot  be  questioned.  Hooven,  etc.  Co., 
V.  Evans,  etc.  Co..  193  Pa.  St.  28  (1899). 
A  bank  director  may  foreclose  a  mort- 
gage given  by  the  bank  for  money 
loaned,  even  though  the  bank  becomes 
insolvent  after  the  loan  was  made. 
Millsaps  r.  Chapman,  76  Miss.  912  (1899). 
The  Ohio  statute  prohibiting  a  director 
being  interested  in  the  purchase  of 
bonds  from  his  corporation  at  less  than 
par  does  not  apply  to  an  issue  of  bonds 
to  an  outsider  who  subsequently  admits 
a  director  as  a  partner  in  tlie  trans- 
action. Toledo,  etc.  R  R.  u  Continental 
Trust  Co.,  95  Fed.  Rep.  497  (1899). 
Where  the  trustee  of  a  mortgage  makes 
a  loan  to  the  mortgagor  on  the  bonds 
secured  by  the  mortgage  and  then  sells 
out  the  collateral  and  buys  it  in  him- 
self, lie  can  upon  foreclosure  enforce 
the  bonds  only  to  the  extent  of  the 
amount  loaned  and  interest.  Knicker- 
bocker Trust  Co.  V.  Penacook  Mfg.  Co.. 
100  Fed.  Rep.  814  (1900). 

1  Hence  where  an  officer,  for  a  loan  of 
$100,000  to  the  company,  takes  its 
notes  therefor  and  four  hundred  bonds 
as  collateral,  and  twelve  hundred  and 
fifty  shares  of  paid-up  stock  as  a 
"  bonus,"  the  court  characterized  the 
transaction  as  a  fraud,  and  held  that 
the  pledge  of  the  bonds  would  be  dis- 
regarded and  declared  void.  Richard- 
son V.  Green,  133  U.  S,  30  (1890). 


CH.  XLI.] 


INTRA    VIRES    ACTS    AND    CONTRACTS. 


[§  092. 


but  the  weight  of  authority  clearly  and  wisely  holds  that  an  insolv- 
ent corporation  cannot  pay  or  secure  a  debt  due  to  a  director  in 
preference  to  debts  due  others,  either  by  transferring  property  or 
cash  to  him  or  by  giving  him  a  mortgage  on  corporate  assets.^ 


1  Hays  V.  Citizens'  Bank,  51  Kan.  535 
(1893);  Chicago,  etc.  Bridge  Co.  v. 
Fowler,  55  Kan.  17  (1895);  Ingwerson  v. 
Edgecombe,  42  Neb.  740  (1894).  In  the 
case  of  Harding  u  Hart,  113  Fed.  Rep. 
304(1902),  where  an  insolvent  insurance 
company  turned  over  to  its  president 
and  director  as  a  preference  $100,000 
worth  of  securities,  the  court,  after 
twenty-five  years  of  litigation,  com- 
pelled him,  at  the  instance  of  general 
creditors,  to  return  the  amount.  In 
another  decision  involving  the  same 
transaction,  Hart  v.  Globe  Ins.  Co.,  113 
Fed.  Rep.  307  (1882),  the  court  held  that 
a  decision  in  the  state  court  upholding 
the  transaction,  but  not  bringing  in  all 
the  parties,  was  not  a  bar. 

A  transfer  of  property  by  an  insolvent 
corporation  to  its  directors  in  part  pay- 
ment of  their  claims  is  illegal.  Hill  v. 
Standard,  etc.  Co.,  198  Pa.  St.  446  (1901). 
A  director  cannot  obtain  a  preference, 
but  the  invalidity  of  his  preference 
does  not  invalidate  preferences  to 
others  in  the  same  transaction.  Moller 
V.  Keystone,  etc.  Co.,  187  Pa.  St.  553 
(1898).  Where  the  board  of  directors 
allow  an  illegal  preference  to  one  di- 
rector they  are  personally  liable  to 
other  creditors  to  the  extent  of  such 
preference,  and,  even  though  one  of 
them  resigns,  the  liability  continues  for 
the  benefit  of  past  as  well  as  future 
creditors.  Nix  v.  Miller,  26  Colo.  203 
(1899).  An  insolvent  corporation  can- 
not prefer  one  of  its  directors.  Syraonds 
V.  Lewis,  94  Me.  501  (1901).  A  receiver 
may  bring  suit  to  set  aside  a  preference 
given  by  an  insolvent  corporation  to 
the  directors.  Taylor  v.  Mitchell,  80 
Minn.  492  (1900).  An  insolvent  corpo- 
ration's mortgage  to  secure  debts  due 
to  a  majority  of  its  directors  and 
debts  for  which  they  are  sureties  is 
illegal.    Nappanee,  etc.  Co.  v.  Reid,  etc. 

164 


Co.,  60  N.  E.  Rep.  1068  (Ind.  1901).  A 
receiver  may  recover  back  property 
delivered  by  an  insolvent  corporation 
to  its  directors  as  a  preference;  but 
where  the  directors  in  order  to  relieve 
corporate  property  from  attachment  in 
another  state  take  an  assignment  of 
the  claims,  their  preference  in  that 
state  out  of  assets  in  that  state  may  be 
allowed.  Gray  v.  Taylor,  44  Atl.  Rep. 
668  (N,  J.  1899).  A  corporate  mortgage 
by  an  officer  to  his  wife  to  secure  a 
debt  due  to  himself  from  the  corpora- 
tion is  illegal  Rowe'v.  Leuthold,  101 
Wis.  242  (1898).  Although  a  director 
cannot  obtain  a  preference,  yet  this 
does  not  prevent  his  estate  obtaining  a 
preference.  Nebraska  Nat  Bank,  etc. 
V.  Clark,  58  Neb.  183  (1899).  In  a  stock- 
liolders'  suit  to  set  aside  an  execution 
sale  of  all  the  property  for  a  debt  due  to 
the  directors  and  a  purchase  at  the  sale 
by  the  directors,  it  is  not  necessary  for 
the  court  to  order  an  accounting,  but 
the  court  may  hear  the  entire  case  and 
decide  it.  Davis  v.  Hofer,  38  Greg.  150 
(1900).  A  preference  by  an  insolvent 
corporation  to  the  treasurer  is  illegal. 
King  u  Wooldridge,  78  Miss.  179(1900). 
A  preference  to  a  director  is  illegal, 
even  though  such  preference  was 
agreed  to  when  the  money  was  loaned. 
Monroe,  etc.  Co.  v.  Arnold,  108  Ga.  449 
(1899).  An  insolvent  corporation  can- 
not give  a  preference  to  a  director  by 
offsetting  against  his  subscription  a 
debt  due  to  him.  Wyman  v.  Williams, 
53  Neb.  670  (1898);  Hulings  v.  Hulings 
Lumber  Co.,  38  W.  Va.  351  (1893).  A 
sale  of  property  by  an  insolvent  com- 
pany to  a  director  in  order  to  prefer 
his  debt  is  illegal.  Beach  v.  Miller,  130 
111.  162  (1889).  Where  a  corporation 
has  $15,000  assets,  owes  $160,000,  and 
confesses  judgment  for  $40,000  to  its 
largest  stockholder  for  an  old  indebted- 


§  002.] 


IN'IKA    VIIvKS    ACTS    AND    CONTUACTS. 


[CII.   XLI. 


But  a  corporation  acting  in  f^ood  faith  and  without  any  purpose 
of  defrauding  its  creditors,  but  with  the  sole  object  of  continuinga 
business  which  promises  to  be  successful,  may  give  a  mortgage  to 


ness  due  him,  a  court  of  equity  will 
restrain  a  sale  under  that  judgment 
until  the  rights  of  all  creditors  are 
determined.  Krause  v.  Malaga,  etc. 
Co.,  18  Atl.  Rep.  307  (N.  J.  1889).  Where 
the  board  of  directors  borrow  money  on 
the  statement  that  the  loan  is  from  an 
outsider,  and  it  afterwards  transpires 
that  the  loan  was  by  the  president  and 
another  director,  a  commission  of 
twenty  per  cent,  paid  for  the  loan  can 
be  recovered  back  by  the  corporation. 
Bensiek  v.  Thomas,  60  Fed.  Rep.  104 
(1893).  Where  a  corporate  creditor 
offers  to  take  payment,  but  is  induced 
to  let  the  debt  stand  in  order  tliat  tiio 
president  personally  may  use  tiie 
money,  the  corporation  is  no  longer 
liable.  Edwards  v.  Carson  Water  Co., 
:21  Nev.  409  (1893).  Corporate  creditors 
may  enjoin  the  collection  of  judg- 
ments fraudulently  confesseil  by  an 
insolvent  corporation  to  itsollicers  and 
stockholders.  Mimocks  v.  Cape  Fear 
Shingle  Co.,  110  N.  C.  230  (1892).  A 
preference  by  an  insolvent  corporation 
to  one  of  its  directors  is  invalid.  It  is 
insolvent  when  early  suspension  of 
business  and  a  failure  are  inevitable. 
Corey  v.  Wadsworth,  99  Ala.  68  (1892). 
A  director  of  an  insolvent  corporation 
cannot  obtain  a  preference  for  his  debt. 
Gibson  v,  Trowbridge  Furnace  Co.,  96 
Ala.  357  (1892).  Where  an  act  by  the 
directors  amounts  to  a  preference  to 
them,  the  corporation  being  insolvent, 
the  act  cannot  be  validated  by  a  vote 
of  the  stockholders,  the  directors  them- 
selves voting  a  majority  of  the  stock. 
Farmers'  L.  &  T.  Co.  v.  San  Diego,  etc. 
Co.,  45  Fed.  Rep.  518  (1891).  Although 
creditors  may  complain  of  a  mortgage 
given  to  directors  by  the  corporation 
when  largely  in  debt,  yet  the  president, 
vs^ho  is  also  a  large  stockholder,  and 
who  signs  the  mortgage,  cannot  do  so. 
Perry    v.  Pearson,   135  111.   218  (1890). 


Where  a  corporation  purcha.ses  a  firm's 
business,  it  cannot  legally  pay  a  debt 
iluo  by  the  firm  to  a  director  in  the 
corporation,  if  such  payment  is  induced 
by  such  director  and  the  corporation 
is  insolvent  Rudd  v.  Robinson,  54 
Hun,  339  (1889),  reversed  on  another 
point  in  126  N.  Y.  113.  If  a  director  as  a 
creditor  takes  all  the  corporate  assets 
in  payment  of  his  debt,  he  is  liable  to 
other  creditors  for  the  difference  be- 
tween the  actual  value  of  the  property 
and  the  price  at  which  he  took  it. 
Wilkin.son  v.  Bauerle,  41  N.  J.  E»i.  635 
(IbbO).  The  president  of  an  insolvent 
corporation  cannot  provide  for  the 
payment  of  a  debt  to  his  wife,  thereby 
giving  her  a  preferenca  West  v.  West, 
etc.  Co..  9  N.  Y.  St.  Rep.  255  (1887).  Di- 
rectors knowing  that  the  company  is 
insolvent  cannot  assign  its  proi»erty  in 
trust  to  pay  debts  due  to  them.selves. 
Gaslight  Imp.  Ca  v.  Terrell,  L.  R  10 
Eq.  108  (1870);  Haywood  v.  Lincoln 
Lumber  Co.,  04  Wis.  639  (1885).  A  pref- 
erence to  a  director  by  an  insolvent 
corporation  is  unlawful,  and  the  direct- 
ors who  cause  the  preference  are  per- 
sonally liable  for  property  so  applied. 
A  director  who  took  no  part  is  not  lia- 
ble. Adams  v.  Kehlor  Milling  Co.,  36 
Fed.  Rep.  212  (1888).  The  law  "  prohib- 
its directors,  when  a  corporation  is  in- 
solvent and  about  to  go  into  liquida- 
tion, from  preferring  debts  due  to 
themselves  from  the  corporation,  or 
from  preferring  debts  in  the  payment 
of  which  they  have  a  personal  interest." 
So  held  in  a  case  where  a  deceased  di- 
rector was  preferred  by  the  other 
directors,  his  brothers,  and  agents. 
Adams  v.  Kehlor  Milling  Co.,  35  Fed. 
Rep.  433  (1888).  A  director  of  an  in- 
solvent  corporation  cannot  have  his 
own  debt  due  from  the  corporation 
paid  to  the  exclusion  of  other  creditors. 
Adams  u  Cross,  etc.  Ca,  5  Ry.  &  Corp. 


1648 


CH.  XLI.] 


INTEA    VIEES    ACTS    AND   CONTEACTS. 


[§  692. 


directors  who  have  lent  their  credit  to  it,  in  order  to  induce  a  con- 
tinuance of  that  credit,  and  in  order  to  obtain  renewals  of  maturing 
paper  at  a  time  when  the  corporation,  although  it  may  not  be  then 

L.  J.  18  (111.  1888),  holding  void  a  mort-    chased  by  two  of  the  directors  and  the 

property  purchased   by   them    at   the 
foreclosure    sale.     Loftus    v.    Farmers' 
Shipping    Assoc,   8    S.    D.    201    (1896). 
Under  the  Michigan  decisions  (prior  to 
the  statute)  and  of  the  federal  court 
sitting  in  Michigan,  the  president  of  an 
insolvent  corporation    could  secure  a 
preference  for    debts   due    him,   even 
though  the  corporation  was  insolvent 
and  the  debts  were  old  debts.     Childs 
V.  Carlstein  Co..  76  Fed.  Rep.  86  (1896). 
Where  the  board  of  directors  of  a  fail- 
ing corporation  voted  all  the  assets  to  a 
few  of  their  number  in  payment  of  an 
antecedent    debt,    the    transaction    is 
fraudulent  and  will  be  set  aside,  even 
in  Michigan,  the  directors  so  preferred 
being  three-fourths  of  the  board.    Rick- 
erson,  etc.   Co.  v.  Farrell,  etc.   Co.,  75 
Fed.  Rep.   554  (1896).     Although  a  di- 
rector's mortgage  is  illegal,  yet  where, 
after    its    foreclosure,    another    prior 
mortgage  is  foreclosed,  lie  is  not  liable 
to  stockholders  as  having  wrecked  the 
corporation.     Keeney   v.   Converse,   99 
Mich.  316  (1894).     In  Doyle  v.  Leitelt, 
97  Mich.  298  (1893),  the  court  refused  to 
compel  a  director  to  refund  moneys  ap- 
plied on  his  claim  against  the  corpora- 
tion, although  he  had  caused  all  the- 
corporate  property  to  be  sold,  it  appear- 
ing that  substantial  justice  had  been 
done  and  that  complainant  had  no  real 
grievance.     A  resolution  of  the  board 
of  directors  that  the  company  execute 
an  assignment  for  the  benefit  of  credit- 
ors may  be  carried  out  by  the  president 
without     further    authority,    but    he 
should  not  select  himself  as  assignee. 
Rogers  v.  Pell,   154  N.   Y.    518   (1898).. 
At  common  law  a  mortgage  may  be 
made  by  a  corporation  to  a  director  as 
trustee  for  creditors.     Savage  v.  Miller, 
56  N.  J.  Eq.  432  (1898).     The  corporation 
itself  cannot  defend  against  a  suit  by  a 
director  on  a  note  on  the  ground  that 


gage  upon  which  this  suit  for  foreclos- 
ure was  brought,  it  having  been  given 
by  an  insolvent  corporation  to  its  di- 
rectors to  secure  debts  due  from  it  to 
them.  A  confession  of  judgment  by  an 
insolvent  corporation  to  one  of  its  di- 
rectors is  a  fraudulent  preference,  and 
the  preference  will  be  cut  off.  The  di- 
rector will  be  allowed  to  come  in  the 
same  as  other  creditors.  Stratton  v. 
Allen,  16  N.  J.  Eq.  229  (1863).  A  mort- 
gage by  an  insolvent  corporation  pre- 
ferring its  president  and  director  was 
canceled  in  Lippincott  v.  Shaw  Car- 
riage Co.,  25  Fed.  Rep.  577  (1885). 

In  Bradley  v.  Farwell,  Holmes,  433 
(1874);  s.  C,  3  Fed.  Cas.  1146,  a  transfer 
by  an  insolvent  corporation  of  all  its 
assets  to  a  partnership  in  payment  of  a 
debt  was  set  aside,  where  one  member 
of  the  partnership  was  also  a  director 
in  the  corporation.     The  fact  that  nine 
months  elapsed  before  tlie  corporation 
passed  into  a  receiver's  hands  was  im- 
material.    A  sale  of  corporate  property 
to  a  director  in  payment  of  debts  due 
him  from  the  insolvent  company  can- 
not be  objected  to  in  a  suit  at  law  by 
him  for  the  conversion  of  the  property. 
The  objection  must  be  made  by  bill  in 
'  equitj'.     Little  Rock,  etc.  Ry.  v.  Page, 
35  Ark.  304  (1880).     In  New  Jersey,  by 
statute,  a  receiver  is  invested  with  all 
the  rights  of  creditors.     After  his  ap- 
pointment a  creditor  cannot  sue  to  set 
aside  illegal  conveyances  to  the  oflBcers, 
not  even  in  the  federal  court.    Werner 
V.  Murphy,  60  Fed.  Rep.  769  (1894).     A 
preference    to  a    president  is   illegal. 
Mallory  v.  Kirkpatrick,  54  N.  J.  Eq.  59 
(1895).     A  stockholder  may  cause  to  be 
set  aside  a  lease  of  a  warehouse  and  a 
sale  of  the  wheat  therein  to  two  of  the 
directors,  and  a  foreclosure  by  them  of 
a  chattel  mortgage  on  the  buildings, 
which  chattel  mortgage  bad  been  pur- 


C104J 


1649 


§  692.] 


INTRA    VIRES    ACTS    AND    CONTKACTS. 


[cn.   XLI. 


in  fact  possessed  of  assets  equal  at  cash  prrces  to  its  indebtedness, 
is  in  fact  a  going  concern,  and  is  intending  and  is  expecting  to  con- 
tinue in  business.'  Even  though  a  corporation  is  insolvent,  yet,  if 
the  directors  believe  it  is  solvent,  although  in  financial  distress,  they 
may  loan  money  to  the  corporation  and  take  securities  as  collateral 
thereto,  and  they  are  not  bound  to  know  that  the  corporation  is  in- 
solvent.- But  where  a  director  cannot  legally  oi)tain  a  preference 
directly,  he  cannot  do  so  indirectly  by  attachment,  or  by  obtain- 
ing judgment  and  causing  execution  to  be  levied.'     A  director  can- 


tbe  judgment  will  be  an  illefial  prefer- 
ence.    Welling  V.  Tvoroyd  Mfg.  Co..  15 
N.  Y.  A  pp.  Div.  110  (1S97);  affd.  163  N.  Y. 
599;  Bangs  v.  National  Macaroni  Co.,  15 
N.  Y.   Api).  Div.  523  (1897).     The  New 
York  statute  does  not  prevent  an  officer 
assigning  his  claim  again.st  the  corpo- 
ration to  his  assignee  for  the  benefit  of 
creditors,  and  such  assignee  may  obtain 
judgment  ami  thereby  obtain  a  prefer- 
ence.    Jefferson,  etc.  Bank  v.  Townley, 
159  N.   Y.   490   (1899).     In   New   York 
a  director  may  be  assignee.    Linderman 
V.  Hastings,  etc.  Co..  38  N.  Y.  Ai)p.  Div. 
488  (1899).    For  a  detailed  review  of  the 
authorities  on  this  subject,  see  Lamb  v. 
Laughlin.  25  W.  Yii.  'MO  (1884).     Direct- 
ors may  be  compelled  to  pay  back  sala- 
ries which  they  pay  to  themselves  when 
the  company  is  insolvent.  Smith  v.  Put- 
nam. Gl  N.  H.  632  (1S82).     An  insolvent 
bank  cannot  legally  transfer  its  real  es- 
tate to  a  director  in  exchange  for  his 
stock.    Roan  v.  Winn,  93  Mo.  503  (1887). 
Where  the  president  causes  the  com- 
pany illegally  to  buy  its  own  stock  from 
his  wife,  a  preference  to  her  for  the 
debt  will  be  set  aside.     Butler  Paper 
Co.  V.  Robbins,  151  111.  588  (1894).    Pref- 
erences to  directors  are  illegal.     Noble, 
etc.  Co.  V.  Mt  Pleasant,  etc.  Inst.,  12 
Utah,  213  (1895).     Where,  three  months 
prior  to  a  petition  for  winding  up  a 
company,  the  directors,  who  owe  on 
their  stock,  offset  the  same  by  applying 
the  amount  on  their  unpaid  salaries, 
they  jointly  and  severally  will  be  com- 
pelled, under  the  English  statute,  to  re- 
fund  the   money   with    interest.     The 
transaction  is  fraudulent.     Re  Wash- 


ington, etc.  Co..  [1893]  3  Ch.  9.5,  rev'g 
the  court  below.  Where  an  eml)arrassed 
corporation  had  many  secured  credit- 
ors, but  only  four  unsecured  creditors, 
and  three  of  the  latter,  with  full  notice 
to  the  former,  took  charge  of  the  com- 
pany by  a  change  of  its  directors  and 
advanced  funds  to  keep  the  company 
"going,  and  for  two  and  a  half  years  en- 
deavored to  extricate  it  from  trouble, 
they  may  then  legally  take  a  mortgage 
upon  the  coritorate  property  for  the 
money  so  advanced  and  al.so  for  their 
old  unsecured  debts,  and  the  fourth 
creditor  cannot  complain.  American, 
etc.  Bank  v.  Ward,  111  Fed.  Rep.  782 
(1901).  A  sale  of  property  by  an  in- 
.solvent  corporation  to  one  of  its  direct- 
ors is  valid  as  against  its  creditors  where 
a  full  consideration  was  paid  therefor. 
Webb  V.  Rockefeller,  71  Pac.  Rep.  283 
(Kan.  1903).  Cf.  §  652,  suprcu  Even 
though  a  mortgage  is  void  as  to  a  part 
by  reason  of  being  an  illegal  preference, 
it  may  be  valid  as  to  the  remainder. 
Reed  v.  Helois,  etc  Co.,  53  Atl.  Rep. 
1057  (N.  J.  1903);  72  S.  W.  Rep.  669. 

•Sanford  Fork,  etc.  Co.  v.  Howe,  etc. 
Co.,  157  U.  S.  312  (1895). 

2  Converse  v.  Sharpe,  161  N.  Y.  571 
(1900). 

•  Atwater  v.  American,  etc.  Bank,  152 
111.  605  (1894).  Under  the  Pennsylvania 
statute,  directors  cannot  obtain  a  pref- 
erence by  taking  judgment  by  default 
and  issuing  execution.  Hopkins's  Ap- 
peal, 90  Pa.  St.  69  (1879).  So  also  iu 
New  York.  Throop  v.  Hatch  Lithog. 
Co.,  125  N.  Y.  530  (1891).  The  remedy  iu 
such  a  case  is  in  equity  and  not  at  law. 


1650 


•CH.  XLI.] 


INTRA    VIKES    ACTS    AND    CONTRACTS. 


[§  692. 


not  legally  vote  on  a  renewal  of  a  note  to  himself.*  The  court  will 
set  aside  a  sale  by  an  insolvent  corporation  of  all  its  assets  to  its 
secretary  and  treasurer,  who  was  the  chief  creditor,  the  sale  being 
in  payment  of  his  debt;  and  the  court  will  hold  him  liable  for  such 
of  the  assets  as  he  has  disposed  of.'  A  preference,  also,  to  a  large 
stockholder  ha;s  been  condemned  by  the  courts  where,  under  the 
facts  of  the  case,  the  transaction  amounted  to  an  actual  fraud,  as 
distinguished  from  an  implied  fraud.'  It  has  been  held  thatamort- 


Braem  v.  Merchants'  Nat.  Bank,  127  N. 
Y.  oOS  (1891).  A  statute  against  prefer- 
■ence  by  an  insolvent  corporation  is  vio- 
lated by  an  offer  of  judgment  by  tlie 
corporation  and  the  appointment  of  a 
receiver  under  it.  National  Broadway 
Bank  v.  Wessell  Metal  Co.,  59  Hun,  470 
(1891),  holding  also  that  a  director  can- 
not obtain  a  preference  by  causing  a 
receiver  to  be  appointed  on  his  judg- 
ment and  then  purchasing  the  property 
at  an  inadequate  price.  A  judgment 
obtained  by  a  director  against  an  in- 
solvent corporation  by  confession  is 
illegal  and  may  be  set  aside.  Hill  v- 
Pioneer  Lumber  Co.,  113  N.  G  173  (1893). 
Where  a  director  of  an  insolvent  cor- 
poration obtains  judgment  against  it 
and  sells  out  its  property,  another  cor- 
l)orate  creditor  may  compel  him  to  ac- 
count for  a  proportionate  share  of  the 
actual  value  of  the  property.  Kittel  v. 
Augusta,  etc.  R  R,  84  Fed.  Rep.  386 
.  (1898).  A  judgment  lien  which  is  in- 
directly  for  the  benefit  of  the  directors, 
the  corporation  being  insolvent,  may  be 
set  aside  at  the  instance  of  the  receiver. 
Taylor  v.  Fanning,  91  N.  W.  Rep.  269 
(Minn.  1902);  54  Atl  Rep.  504. 

1  Smith  V.  Los  Angeles,  etc.  Assoc,  78 
Cal.  289  (1889). 

-  Brown  i\  Morristown,  etc.  Ca,  42  S. 
W.  Rep.  161  (Tenn.  1897). 

3  A  stockholder  cannot  secure  a  trans- 
fer from  the  corporation  to  himself  of 
the  property  of  the  corporation  so  as 
to  deprive  a  corporate  creditor  of  the 
payment  of  his  debt.  Where  he  does 
so  through  legal  proceedings  fraudu- 
lently and  by  conspiracy,  the  property 
may  be  reached.  Angle  v.  Chicago,  etc. 


Ry.,  151  U.  a  1  (1894).  Where  a  stock- 
holder who  is  also  a  creditor  of  an  in- 
solvent corporation  obtains  for  him- 
self, just  before  the  cessation  of  busi- 
ness, an  assignment  of  practically  all 
the  assets  of  the  corporation,  it  is  a 
question  for  the  jury  as  to  whether  such 
assignment  is  not  fraudulent.  Worten- 
dyke  v.  Salladin,  45  Neb.  755  (1895).  A 
corporation  may  mortgage  its  property 
to  a  stockholder,  even  though  he  con- 
trols a  large  majority  of  the  stock. 
Hanchett  v.  Blair,  100  Fed.  Rep.  817 
(1900).  It  is  legal  for  a  corporation  to 
pay  one  of  its  Creditors  who  is  also  a 
stockholder  before  the  debt  is  due, 
especially  where  the  stockholder  guar- 
antees the  loan  which  the  corporation 
makes  in  order  to  make  such  payment. 
Wills  V.  Porter,  132  Cal.  516  (1900). 
Where  the  chief  promoter  of  a  pro- 
posed manufacturing  corporation  ob- 
tains donations  from  property  owners 
to  the  proposed  corporation  on  his 
agreement  that  $75,000  of  stock  should 
be  subscribed  for  within  a  certain  time, 
and  then  proceeds  to  organize  the  com- 
pany, he  himself  subscribing  for  $25,000 
of  the  stock,  and  the  corporation  then 
purchases  certain  worthless  patents 
and  agency  contracts  and  issues  there- 
for $63,250  of  full-paid  stock,  including 
the  $25,000  subscribed  for  by  him,  and 
afterwards  the  corporation  collects 
$4,000  of  such  donations  and  borrows 
money  from  such  promoter  and  gives 
him  a  mortgage  therefor,  his  mort- 
gage is  not  good  as  against  the  parties 
■who  donated  the  $4,000.  Moore  v.  Uni- 
versal, etc.  Co..  122  Mich.  48  (1899;. 
Even  though  the  purchasers  of  au 
1651 


§  C92.] 


INTKA    VIRES    ACTS    AND    CONTRACTS. 


[ce.  XLI. 


gage  by  an  insolvent  corporation  to  a  creditor  corporation,  the  two 
corporations  having  a  majority  of  their  directors  in  common,  is  iUe- 
A  purchaser  of  the  equity  of  redemption  from  the  corporation 


gal.» 


equity  in  land  sell  it  to  a  corporation 
which    they    form,   at  a  price    which 
pays  them  back  their  money,  and  more, 
and  the  cor|)oration  becomes  insolvent 
and  they  purchase  the  land  at  execu- 
tion sale,  yet  a  stockholder  cannot  have 
the  sale  set  aside  unless  he  repays  to 
them  the  amounts  actually  disbursed 
by  them.     Fleckenstein   v.  Waters,    61 
S.  W.  Rep.  015  (^^lo.  liiOU  A  preference 
to  a  director  or  stockholder  is  illefial. 
Reynolds  u.  Smith,  GO  Neb.   197(1900). 
A  mortgage  given  to  repay  to  preferred 
stockholders  the  amount  they  have  in- 
vested in  their  stock  eis  well  as  to  se- 
cure  regular  creditors  of  the  company 
is  invalid  altogether.     Reagan  v.  First 
Nat  Bank,  G2  N.  E.  Rep.  701  (Ind.  1902). 
A  stockholder  as  a  creditor  has   the 
same    standing    that    other    creditors 
have.     Standard,  etc.  Co.  v.  Excelsior, 
etc.  Co.,  32  S.  Rep.  221  (La.   1902).     A 
stockholder  cannot  obtain  a  preference. 
Lambr.Russel,  32  S.  Rep.  916 (Miss.  1902). 
A  mortgage    to    secure   debts   due  to 
stockholders  was  upheld  in  Crossette  v. 
Jordan,  92  N.  W.  Rep.  782  (^lich.  1902). 
In  the  case  of  Hodge  v.  United  States 
Steel  Corp.,  54  Atl.  Rep.  1  (X.  J.  1903). 
the  court  said:  "Like  other  stockhold- 
ers, they  had  a  right  to  be  influenced 
by  what  they  conceived  to  be  for  their 
own  interest,  and  they  cannot  lawfully 
be  denied  that  right,  nor  can  it  be  lim- 
ited or  circumscribed  by  the  fact  that 
they  occupied  the  position  of  directors 
in  the  company."    In  Texas  the  court 
held    that    an     insolvent    corporation 
could  not,  by  way  of  mortgage,  prefer 
creditors      who      were     stockholders. 
Lyons,  etc.  Co.  v.  Perry,  etc.  Co.,  86  Tex. 
143  (1893).     See  also  Cochran  r.  Ocean 
Dry  Dock,  30  La.  Ann.  1365  (1878),  hold- 
ing that  stockholders  cannot  appropri- 
ate assets  to  pay  their  salaries  as  offi- 
cers, or  to  pay  money   due  them  on 
other  accounts,  until  all  creditors  who 


are  not  stockholders  have  been  paid; 
Svvej)son  v.  Exchange,  etc.  Rank,  9  Lea 
(Tenn.),  713  (1882).  holding  that  a  con- 
veyance of  land  by  the  president  of  a 
bank  to  its  sole  stockholder,  after  its 
insolvency,  would  be  set  aside  at  the 
suit  of  a  judgment  creditor  of  the  l);ink 
who  had  levied  upon  and  sold  it.  Where 
all  the  corporate  property  is  pledged  to 
a  creditor  who  owns  all  the  stock,  other 
creditors  may  object.  Stewart  r.  Gould. 
8  Wash.  367  (1894).  Corporate  creditors 
cannot  object  to  a  sale  of  all  the  corpo- 
rate property  to  one  of  the  creditors  in 
payment  of  her  debt,  even  though  she 
be  the  wife  of  the  president  and  chief 
stockholder.      Ragland  r.    McFall,  137 
111.   81   (1891).     See  also  Reichwald   r. 
Commercial  Hotel  Ca,  106  111.  439(1883). 
In  Massachusetts  it  has  been   held  that 
a  preference  given   to  a   large   stock- 
holder is  legal.     Sargent  v.  Webster,  54 
Mass.  497  (1847).     An  insolvent  corpo- 
ration may  give  a  preference  to  a  stock- 
holder.   Moreover,  a  corporate  creditor, 
who  became  such  after  such  preference, 
cannot  complain.     Burchinell   t'.  Ben- 
nett, 10  Colo.  A  pp.  502  (1898).     See  also 
Krause  v.  Malaga,  etc.  Co.,  18  Atl.  Rep. 
367  (N.  J.  1889). 

1  Sutton  Mfg.  Co.  V.  Hutchinson,  63 
Fed.  Rep.  496  (1894).  See  also  §  658, 
supra.  An  insolvent  corporation  whose 
president  is  president  also  of  another 
corporation,  the  latter  corporation 
being  a  creditor  of  the  former  corpora- 
tion, cannot  cause  a  preference  to  be 
given  to  such  latter  corporation,  but  if 
the  former  corporation  is  not  actually 
insolvent  at  the  time  of  the  preference 
it  is  legal  Finch,  etc.  Co.  v.  Stirling 
Co.,  187  Pa.  St.  596  (1898).  Where  an  in- 
solvent savings  bank  is  really  con- 
trolled by  a  national  bank,  although 
they  have  not  the  same  directors,  yet 
the  former  cannot  prefer  the  latter. 
It  is  an  illegal  preference  in  behalf  of 


1653 


CH.  XLI.] 


INTEA    VIRES    ACTS    AND   CONTRACTS. 


[§  692. 


cannot  claim  that  the  mortgage  was  to  a  director  and  hence  invalid.^ 
A  creditor  who  becomes  such  after  a  mortgage  is  executed  cannot 
object  to  the  mortgage  on  the  ground  that  it  was  an  unlawful  pref- 
erence.2 

An  officer  of  an  insolvent  corporation  cannot  acquire  a  preference 
over  its  unsecured  creditors  by  accepting  its  bonds  on  account  of 
his  claims  against  it,  even  though  the  officer  did  not  actually  know 
of  the  insolvency.^ 

If  a  majority  of  the  directors  of  an  insolvent  corporation,  know- 
ing it  to  be  insolvent,  vote  and  cause  the  treasurer  to  execute  to 
themselves  the  corporation's  judgment  note,  and  then  enter  judg- 
ment on  it  at  once,  the  judgment  is  fraudulent  as  to  other  creditors, 
though  the  debt  was  legal.* 

A  mortgage  by  an  insolvent  corporation  to  a  director  may  be 
upheld  to  the  extent  that  the  director,  at  the  time  of  the  mortgage, 


the  directors.  Slack  v.  Northwestern, 
«tc.  Bank,  103  Wia  57  (1899).  The  fact 
that  an  ofiBcer  of  a  bank  is  a  director 
in  a  manufacturing  company  does  not 
prevent  the  latter,  thougli  insolvent, 
giving  a  preference  to  the  former.  Nat. 
Bank  of  Commerce  n  Allen.  90  Fed. 
Rep.  545  (1898).  Mortgage  bonds  issued 
by  a  corporation  as  security  to  two 
banks  will  be  valid,  even  though  the 
corporation  turns  out  to  have  been  in- 
solvent, but  was  supposed  to  be  solvent, 
and  even  though  the  directors  and 
stockholders  of  the  corporation  are 
stockholders  in  the  banks.  Chick  v. 
Fuller,  114  Fed.  Rep.  22  (1902).  Even 
though  directors  are  interested  in  the 
construction  company  which  takes  the 
bonds,  and  the  property  is  foreclosed 
and  is  bought  in  by  the  directors,  yet 
the  railroad  company  cannot  set  aside 
the  transaction  unless  it  offers  to  pay 
to  tlie  directors  what  they  have  ex- 
pended, or  offers  to  take  the  property 
subject  to  such  mortgage  bonds.  San 
Antonio,  etc.  Ry.  v.  San  Antonio,  etc 
R.  R.  60  S.  W.  Rep.  338  (Tex.  1900). 
An  insolvent  corporation  may  give  a 
preference  to  a  creditor,  another  cor- 
poration, having  stockholders  and  di- 
rectors in  common  with  it.  Sells  v. 
Rosedale,  etc.  Co.,  72  Miss.  590  (1895). 
A  preference  by  an  insolvent  corpora- 


tion is  legal,  although  one  of  the  direct- 
ors is  interested  in  the  corporation 
that  is  preferred.  Colorado,  etc.  Co.  v. 
Western  Hardware  Co.,  16  Utah,  4  (1897). 
Where  the  president  and  a  director, 
without  authority  from  the  board  of 
directors  of  an  insolvent  corporation, 
turn  over  the  assets  to  another  corpora- 
tion in  payment  of  a  debt,  such  presi- 
dent and  director  being  interested  in 
the  latter  corporation,  the  transaction  is 
illegal.  German  Nat.  Bank  v.  First  Nat. 
Bank,  55  Neb.  86  (1898). 

J  Greenstreet  v.  Paris,  21  Grant,  Ch. 
(Can.)  229  (1874). 

2  Central  Trust  Co.  v.  Bridges,  57  Fed. 
Rep.  753  (1893).  A  conveyance  to  a  di- 
rector in  settlement  of  a  claim  made 
two  months  prior  to  the  insolvency  of 
the  corporation  is  legal  so  far  as  subse- 
quent creditors  are  concerned.  Ten- 
nant  v.  Appleby,  41  AtL  Rep.  110  (N.  J. 
1898).  A  preference  by  a  mortgage  to 
directors  is  invalid;  but  where  the  prop- 
erty is  sold  by  a  receiver  subject  to  the 
mortgage  and  the  purchaser  is  also  a 
director  he  cannot  attack  the  mortgage. 
Richards  v.  Haliday,  92  Fed.  Rep.  798 
(1899).    See  also  §  46,  supra. 

3  Sicardi  v.  Keystone  Oil  Co.,  149  Pa, 
St.  14S  (1892). 

*  Roseboom  v.  Whittaker,  132  IlL  81 
(1890). 


1653 


§  G92.] 


INTEA    VIBES    ACTS    AND    CONTRACTS. 


[CH.  XLI. 


advanced  funds  to  pay  its  debts,  but  not  as  to  antecedent  debts  due 
the  director.' 

There  arc  cases  wliich  uphold  mort;^ages  given  by  insolvent  cor- 
porations to  their  directors,  but  these  cases  are  wrong  in  principle 
and  law." 


1  Corbet t  v.  Woodward,  5  Sawyer.  403 
(1879);  s.  a,  6  Fed.  Caa  5:jl.  See  also 
Williams  v.  Patrons  of  Husbandry,  23 
Mo.  App.  133  (1886j;  White,  etc  Ca 
0.  Pettes,  etc.  Co.,  30  Fed.  Rep.  864 
(1887);  Lippincott  v.  Shaw  Carriage 
Co..  25  Fed.  Rep.  577  (1885);  Stout  r. 
Yaeger  Milling  Co.,  13  Fed.  Rep.  803 
il883). 

2  Planters'  Bank  u  Whittle,  78  Va 
737  (1884),  dictum,  that  directors  may 
make  preferences  in  favor  of  them- 
selves if  they  are  creditors;  but  in  so 
doing  they  must  act  in  perfect  good 
faith.  At  common  law  a  corporation 
may  give  a  preference  to  a  director. 
Wilson  V.  Stevens,  129  Ala,  630  (1901). 
In  the  case  of  Corey  v.  Wadsworth,  118 
Ala.  488  (1899),  the  court  held  that  a 
preference  to  a  director  might  be  legal, 
but  that  under  the  circumstances  of 
that  case  it  was  illegal  In  Te.xas  a  di- 
rector in  an  insolvent  corporation  may 
obtain  a  preference  by  attachment. 
Frank  Co.  v.  Rerwind,  47  S.  W.  Rep. 
681  (Tex.  1898).  A  mortgage  given 
by  an  insolvent  corporation  is  valid, 
although  given  to  secure  debts  due  to 
the  wife  of  a  director,  the  administra- 
tor of  another  deceased  director,  and 
the  payee  of  a  note  indorsed  by  still 
another  director.  Garrett  v.  Burling- 
ton Plow  Co.,  70  Iowa.  697  (1886).  A 
sale  of  all  the  property  of  an  insolvent 
corporation  to  a  director,  who  is  also 
present,  in  payment  of  his  debt,  cannot 
be  set  aside  by  other  corporate  cred- 
itors. Buell  V.  Buckingham,  16  Iowa, 
284  (1864).  A  preference  is  legal,  al- 
though given  by  directors  who  are  rela- 
tives of  the  creditor.  Rollins  v.  Shaver, 
etc.  Co.,  80  Iowa,  380  (1890).  Corporate 
creditors  cannot  object  to  a  sale  of  all 
the  corporate  property  to  one  of  the 
creditors  in  payment  of  her  debt,  even 


though  she  be  the  wife  of  the  president 
and  chief  stockholder.  Itiigland  r.  Me 
Fall.  137  III  81  (1891).  An  insolvent 
corporation,  under  the  Arkan.sa8  decis- 
ions, may  give  a  mortgage  to  one  of  its 
directors  to  secure  a  present  or  preced- 
ent debt,  and  ><uch  mortgage  is  valid. 
Gould  V.  Little  Rock,  etc.  Ry..  52  Fed. 
Rep.  6S0  (1892),  reviewing  the  author- 
ities. An  insolvent  corporation  may 
mortgage  its  property  to  any  one  of  its 
creditors.  Such  a  mortgage  is  not  for 
the  benefit  of  all  creditors,  even  though 
it  is  given  to  secure  several.  The  mort- 
gage may  be  given  to  a  director  or 
stockholder.  Bank  of  Montreal  v.  Potts, 
etc.  Co.,  90  Mich.  345  (1892).  The  fol- 
lowing cases  are  exceptions  to  and  not 
contradictory  of  the  general  rule: 
Where  a  part  of  the  trustees  are  the 
only  creditors,  and  the  business  is  a 
losing  one,  they  may  take  a  mortgage 
to  secure  moneys  loaned  by  them  to 
the  company,  and  may  foreclose  such 
mortgage.  Skinner  i\  Smith,  134  N.  Y. 
240  (1892);  Whitwell  v.  Warner,  20  Vt. 
425  (1848',  holding  that  stockholders 
who  avail  themselves  of  their  superior 
advantages  to  obtain  security  from 
the  corporation  for  debts  due  them, 
wliether  by  attachment  or  assignment, 
are  not  guilty  of  fraud  so  as  to  render 
themselves  personally  liable  for  corpo- 
rate debts  Where  a  corporation  owes 
money  to  the  directors,  and  to  pay  the 
same  borrows  money  and  gives  a  mort- 
gage, and  subsequently  the  property  is 
sold  for  less  than  the  mortgage,  a  cred- 
itor whose  debt  was  not  due  when  the 
mortgage  was  given  cannot  complain. 
Holt  V.  Bennett,  146  Mass.  437  (1888). 
But  see  St.  Louis  v.  Alexander,  23  Mo. 
483,  528,  531  (1856),  where  it  was  at- 
tempted to  overturn  a  deed  of  trust  on 
the  ground  that  it  was  executed  by  a. 


1654 


CH.  XLI.] 


INTRA    VIRES    ACTS    AND    CONTRACTS. 


[§  693. 


§  693.  Preferences  in  favor  of  corporate  debts  upon  which  the  di- 
rectors are  liaMe  as  indorsers  or  otherwise. — Where  a  director  is 
merely  the  indorser,  surety,  or  guarantor  of  a  corporate  debt  or 
note,  to  which  a  preference  is  given  by  an  insolvent  corporation,  a 
much  more  difficult  question  arises  than  where  such  debt  or  note 
is  held  by  the  director  himself.  The  decisions  are  in  conflict  on  this 
subject.  The  great  weight  of  authority  undoubtedly  is  that  such  a 
preference  is  illegal.^     This  is  so  held  because,  first,  such  a  prefer- 


bare  quorum  of  the  directors  and  one 
or  more  of  them  were  legally  incapaci- 
tated by  being  directly  interested.  The 
language  of  the  court  was:  "I  can  see 
no  reason  why  a  member  of  the  board 
of  directors  might  not  sit  in  the  board, 
and,  without  fraud,  in  conjunction 
with  others,  consent  to  an  order  for  se- 
curing a  debt  actually  due  to  him  from 
the  corporation."  A  preference  given 
by  an  insolvent  corporation  to  direct- 
ors may  be  legal.  The  remedy  of  cor- 
porate creditors  against  an  illegal  pref- 
erence is  by  creditors'  bill  and  not  by 
an  execution  sala  Butler  v.  Harrison, 
etc.  Co.,  139  Ma  467  (1897).  In  Missouri 
it  is  held  that  the  directors  in  an  in- 
solvent corporation  may  prefer  their 
own  debts,  but  a  degree  of  good  faith 
is  required  which  practically  nullifies 
such  preference.  State  v.  Manhattan, 
etc.  Co.,  149  Mo.  181  (1899).  Where  an 
insolvent  corporation  sells  property  to 
one  of  its  directors  in  payment  of  a 
debt,  he  must  prove  that  he  did  not 
influence  the  directors  to  vote  for  the 
transaction.  Pitman  v.  Chicago,  etc. 
Co.,  67  S.  W.  Rep.  946  (Mo.  1902).  A 
stockholder  cannot  have  a  receiver  ap- 
pointed and  mortgages  set  aside  where 
all  the  stock  is  "  water."  even  though 
the  controlling  party  had  made  the 
mortgages  to  himself  and  is  about  to 
sell  the  assets  of  the  company  to  an- 
other company  controlled  by  himself, 
and  has  levied  an  assessment  on  the 
stock  of  the  old  company  in  order  to 
sell  out  the  stock.  Robinson  v.  Dolores, 
etc.  Co.,  2  Colo.  App.  17  (1892).  In  Illi- 
nois it  is  held  that  an  insolvent  corpo- 


ration may  prefer  a  creditor  who  is  the 
father  of  a  majority  of  the  directors. 
It  is  also  held  that  a  preference  may  be 
given  to  directors  for  a  debt  contracted 
while  the  comf)any  was  insolvent.  Illi- 
nois Steel  Co.  V.  0"Donnell,  156  111.  624 
(1895).  In  Missouri  an  insolvent  corpo- 
ration may  prefer  a  director,  Schu- 
feldt  V.  Smith,  131  Mo.  280  (1895).  Cf. 
National  Tube  Works  Co.  v.  Ring,  etc. 
Co..  118  Mo.  365  (1893).  Under  the  old 
New  Jersey  statute  the  directors  of  a 
corporation  could  mortgage  the  prop- 
erty and  issue  bonds  to  themselves  as 
security  for  previous  advancements, 
even  though  the  company  was  insolv- 
ent. Whittaker  v.  Amwell  Nat.  Bank, 
52  N.  J.  Eq.  400  (1894).  In  Connecticut 
it  has  been  held  that  a  corporation  may 
turn  over  property  to  a  director  in  pay- 
ment of  a  debt,  even  though  the  cor- 
poration is  insolvent,  it  being  shown 
that  all  parties  supposed  at  the  time 
that  all  debts  could  be  paid.  Smith  v. 
Skeary,  47  Conn.  47  (1879).  A  mort- 
gage by  a  solvent  corporation  to  se- 
cure its  directors  as  creditors  is  legal. 
Hinz  V.  Van  Dusen,  95  Wis.  503  (1897). 
1  The  president's  transfer  of  corporate 
property  to  himself  and  wife  as  secu- 
rity for  indorsements  on  notes  is  not 
legal.  Hill  v.  Marston,  178  Mass.  285 
(1901).  A  preference  by  an  insolvent 
corporation  to  a  debt  for  which  the  di- 
rectors are  sureties  is  illegal.  National, 
etc.  Co.  V.  Columbia  Nat.  Bank,  88  N. 
W.  Rep.  481  (Neb.  1901);  Merchants' Nat. 
Bank  v.  McDonald,  88  N.  W.  Rep.  492  (Neb. 
1901);  Williams  v.  Turner,  88  N.  W.  Rep. 
668  (Neb.  1902).  A  mortgage  given  by  an 


1655 


§  693.] 


INTKA.    VIEE3    ACTS    AND    CONTRACTS. 


[CH.  XLI. 


ence  is  practically  the  sarao  as  a  preference  to  the  director  himself, 
inasmuch  as  he  would  have  had  to  take  up  the  debt  as  indorser  if 
no  preference  had  been  given;  and  second,  because  to  sustain  such 
a  preference  would  tempt  a  director  holding  a  corporate  obligation 


insolvent  corporation  to  secure  debts  on 
which  three  directors  are  liable  is  not 
legal  where  the  vote  of  those  three  di- 
rectors was  necessary  to  authorize  such 
mortgage.  Swift  &  Co.  v.  Dyer-Veatch 
Co.,  28  Ind.  App.  1  (1901).  A  mortgage 
given  by  an  insolvent  corporation  as  se- 
curity for  a  debt  for  which  the  directors 
were  personally  liable  as  indorsers  is  not 
valid  as  against  other  creditors,  unless 
the  debt  was  incurred  at  that  time  or 
an  agreement  to  give  the  mortgage  was 
made  when  the  debt  was  incurred. 
Atlas,  etc.  Co.  v.  Exchange  Bank,  etc., 
Ill  Ga.  703  (1900).  A  sale  of  all  the 
property  of  an  insolvent  corporation  to 
one  of  its  directors,  payment  being  by 
indorsement  by  credit  on  notes  on 
which  such  director  is  indorser.  is  ille- 
gal, and  other  creditors  are  entitled  to 
share  pro  ra fa.  Dozieru.  Arkadelphia, 
etc  Ca.  67  Ark.  11  (1899). 

Where  a  director  is  guarantor  of  a 
debt,  a  preference  obtained  by  a  judg- 
ment creditor's  action  is  illegal.  Wis- 
consin, etc.  Bank  v.  Lehigh,  etc.  Co.,  64 
Fed.  Rep.  497  (1894).  A  draft  drawn  by 
an  insolvent  corporation  to  pay  a  debt 
for  which  a  director  is  surety  is  illegal. 
Bosworth  V.  Jacksonville  Nat.  Bank,  64 
Fed.  Rep.  615  (1894).  Where  two  out 
of  four  directors  of  an  insolvent  corpo- 
ration are  liable  as  indorsers  on  a  cor- 
porate debt,  a  mortgage  given  to  secure 
that  debt  will  be  set  aside  as  an  illegal 
preference,  even  though  the  mortgage 
has  been  foreclosed.  Lippincott  v. 
Shaw  Carriage  Co.,  34  Fed.  Rep.  570 
(1888).  Where  a  corporation  is  practi- 
cally insolvent,  and  has  assigned  its 
property  by  deed  of  trust  to  pay  cer- 
tain debts  for  which  the  directors  are 
sureties,  a  court  of  equity  in  Missouri 
will  enjoin  proceeding  under  the  deed 
of  trust,  and  will  appoint  a  receiver. 
Consolidated,  etc.  Co.  v.  Kansas  City, 


etc.  Co..  4.3  Fed.  Rep.  204  (1.^90):  s.  C.  45 
Fed.  Rep.  7  (1891).  An  in.solvent  cor- 
poration may  give  a  preference  by  con- 
fession of  judgment,  but  not  to  a  cred- 
itor whose  claims  was  assigned  to  him 
by  directors.  (Jottlieb  r.  Miller.  154111. 
44  (1895).  The  directors  of  an  insolvent 
corporation  are  trustees  for  the  credit- 
ors. They  cannot,  after  it  becomes  in- 
solvent, take  mortgages  to  themselves 
on  its  property  to  secure  advances  and 
indorsements  made  by  them  for  it.  01- 
ney  v.  Conanicut  Land  Co.,  16  R  L  597 
(1889).  Directors  of  an  insolvent  cor- 
poration connot  apply  corporate  funds 
exclusively  to  corporate  debts  for 
which  they  are  suretiea  All  debts  will 
be  allowed  to  participate  ratably.  Rich- 
ards I'.  New  IIanij)shire  Ins.  Co.,  43  N. 
H.  263(1861).  An  insolvent  corporation 
cannot  give  a  preference  to  creditors 
for  whose  debts  the  directors  are  sure- 
ties. Tillson  V.  Downing,  45  Neb.  549 
(1895).  A  mortgage  to  secure  a  debt 
upon  which  one  of  the  directors  is  lia- 
ble is  illegal.  Stough  v.  Ponca  Mill  Co., 
54  Neb.  500  (1898).  A  corporation  sup- 
posed to  be  solvent  may  give  a  mort- 
gage to  secure  a  debt  guaranteed  by  its 
directors.  Sabin  v.  Columbia  Fuel  Co., 
25  Oreg.  15  (1893).  An  insolvent  corpo- 
ration cannot  transfer  all  its  property 
to  pay  a  note  of  which  a  director  is  an 
indorser,  joint  maker,  or  guarantor. 
Goodyear  Rubber  Co.  v.  Scott  Co.,  96 
Ala.  439  (1892).  A  mortgage  given  by 
an  insolvent  corporation  to  secure  debts 
for  which  the  directors  are  sureties  is 
illegal.  It  is  not  legal,  even  though  it 
is  given  for  the  benefit  of  co-sureties 
who  are  not  directors.  The  directors 
are  bound  to  know  whether  the  com- 
pany is  solvent  or  insolvent.  Lowry 
Banking  Ca  v.  Empire  Lumber  Co.,  91 
Ga.  624  (1893).  Where  the  controlling 
directors  of  two  corporations  are   the 


1656 


€H.  XLI.] 


INTKA    VIRES    ACTS    AND    CONTEACTS. 


[§  693. 


to  sell  the  same  with  his  guaranty  or  indorsement,  and  then,  induce 
the  board  of  directors  to  prefer  that  obligation. 

Notwithstanding  these  decisions  and  reasons,  there  are  circum- 
stances under  which  such  a  preference  will  be  sustained.  A  cor- 
porate creditor  is  not  to  be  punished  simply  because  the  directors 
have  guaranteed  his  claim.  The  supreme  court  of  the  United 
States  has  strongly  intimated  that  such  is  the  law;^  and  indeed  it 


same  persons,  and  one  company  be- 
comes liable  on  paper  for  the  accommo- 
dation of  the  other,  and  thereby  ren- 
ders the  directors  of  the  former  person- 
ally liable  for  breach  of  trust,  a  mort- 
gage given  by  the  latter  to  the  former 
as  security  for  such  paper  is  invalid,  be- 
cause it  amounts  to  a  preference  to  such 
officers.  Hutchinson  v.  Sutton  Mfg.  Co., 
57  Fed.  Rep.  998  (1893).  A  preference 
by  an  insolvent  corporation  to  credit- 
ors whose  notes  are  secured  by  the  in- 
dorsements of  directors  cannot  be  given 
by  tlie  corporation  by  the  vote  of  such 
directors.  Love  Mfg.  Co.  i*.  Queen  City 
Mfg.  Co.,  74  Miss.  290  (1896).  Even 
'though  an  insolvent  corporation  ille- 
gally, but  in  good  faith,  gives  a  mort- 
gage by  way  of  preference  to  its  presi- 
dent, this  does  not  sustain  an  attach- 
ment by  another  creditor  on  the  ground 
that  the  corporation  is  disposing  of  its 
property  with  intent  to  defraud  the 
creditors.  Trebilcock  v.  Big,  etc.  Co.,  9 
S.  Dak.  206  (1896).  An  insolvent  cor- 
poration cannot  give  a  preference  to  a 
debt  for  which  its  directors  are  sureties. 
Gray  v.  Taylor,  38  Atl.  Rep.  951  (N.  J. 
1897).  But  a  corporate  creditor  who 
.advised  the  directors  to  take  a  mort- 
gage from  the  corporation  to  s6cure 
tliem  in  their  indorsement  of  corporate 
paper  cannot  afterwards  object  to  such 
mortgage.  Ee  Bloomfield,  etc.  Mills, 
101  Iowa,  181  (1897).  A  corporation  in 
financial  difficulties  cannot  execute  a 
mortgage  to  secure  bonds,  and  deliver 
■these  bonds  to  a  bank  as  security  for 
past  and  future  advances,  where  two 
-of  the  directors  of  the  company  are 
also  directors  of  the  bank.  Such  a 
mortgage  delays  other  creditors.     Only 


bona  fide  holders  of  such  bonds  are  pro- 
tected. Age-Herald  Co.  v.  Potter,  109 
Ala.  675  (1895).  A  director  cannot  le- 
gally pay  from  moneys  belonging  to  an 
insolvent  corporation  a  debt  on  which 
he  is  a  surety.  Graham  r.  Carr,  41  S. 
E.  Rep.  379  (N.  C.  1903).  Directors  who 
are  guarantors  of  corporate  notes  may 
assume  the  payment  thereof  in  con- 
sideration of  property  transferred  to 
them  by  the  corporation.  Swentzel  v. 
Fi-anklin,  etc.  Co.,  67  S.  W.  Rep.  596 
(Mo.  1902).  A  mortgage  given  by  an  in- 
solvent corporation  to  secure  debts  on 
which  three  directors  are  liable  is  not 
legal  where  the  vote  of  those  three  di- 
rectors was  necessary  to  authorize  such 
mortgage.  Swift  &  Co.  v.  Dyer-Veatch 
Co.,  28  Ind.  App.  1  (1901).  Even  though 
the  president  has  personally  given  se- 
curity for  a  loan  to  a  corporation,  the 
lender  may  obtain  a  judgment  against 
the  corporation,  and  even  though  by 
agreement  the  security  is  sold  and  the 
money  deposited  as  security  for  the 
judgment,  this  does  not  constitute  pay- 
ment so  far  as  the  statutory  liability  of 
stockholders  is  concerned.  Lancaster 
V.  Knight,  74  App.  Div.  255  (1902). 

1  In  Sanford,  etc.  Co.  v.  Howe,  etc. 
Co.,  157  U.  S.  312,  318  (1895),  rev'g 
Howe,  etc.  Co.  v.  Sanford,  etc.  Co.,  44 
Fed.  Rep.  231,  Mr.  Justice  Brewer  said, 
with  much  force:  "Are  creditors  who 
are  neither  stockholders  nor  directors, 
but  strangers  to  a  corporation,  disabled 
from  taking  security  from  the  corpora- 
tion by  reason  of  the  fact  that  upon  the 
paper  they  hold  there  is  also  the  indorse- 
ment of  certain  of  the  directors  or  stock- 
holders ?  Must,  as  a  matter  of  law,  such 
creditors  be  content  to  share  equally 


165^ 


§  693.] 


INTRA    VIRES    ACTS    AND   CONTRACTS. 


[CH.  XLI. 


is  difficult  to  see  how  a  court  of  equity  can  refuse  to  uphold,  in 
behalf  of  the  corporate  creiiitor  himself,  a  preference  which  has 
been  given  to  such  creditor, even  though  a  director  is  surety  there- 
for, where  the  corporate  creditor  acquired  his  chiini  cither  from 


with  tlie  other  creditors  of  the  corpo- 
ration, because.  I'orsooth,  they  have  also 
the  guaranty  of  some  of  the  directors 
or  stockholders  whose  guaranty  may 
or  may  not  be  wortli  anytliing?"  A 
preference  may  be  given  by  an  insolv- 
ent corporation  on  a  debt  that  was  in- 
curred before  insolvency,  even  though 
a  director  is  guarantor  of  such  debt. 
Rockford,  etc.  Groa  Co.  v.  Standard, 
etc.  Co.,  173  111.  89  (1898).  An  insolv- 
ent  corporation  may  give  a  mortgage 
to  secure  notes  on  which  its  directors 
are  sureties.  Swift  &  Co.  v.  Dyer-Veatch 
Co.,  1)0  N.  E.  Rep.  169  (Ind.  1901).  Where 
a  director  becomes  surety  for  a  bank  in 
receiving  city  deposits  the  bank  may 
legally  transfer  notes  held  by  the  bank 
to  such  director  as  security.  Klein  v. 
Funk, 82  Minn.  S  (1900).  A  corporation 
may  give  security  to  a  director  at  the 
same  time  that  he  indorses  its  note. 
Anglo-American,  etc.  Co.  v.  Davis,  etc. 
Co.,  112  Fed.  Rep.  574  (1902).  An  in- 
solvent corporation  in  North  Carolina 
may  confess  judgment  to  a  creditor  for 
whose  debt  the  president  is  surety. 
Howard  v.  Central,  etc.  Co.,  123  N.  C. 
90  (1898).  In  Georgia  it  is  held  that 
where  the  directors  are  guarantors  of 
a  note  secured  by  mortgage  and  the 
note  is  not  paid,  they  may  take  an  as- 
signment of  the  note  and  mortgage  and 
enforce  the  mortgage,  even  though  the 
corporation  might  possibly  pay  thq 
debt  if  time  were  given.  Rylander  v. 
Sheffield,  108  Ga.  Ill  (1899).  An  in- 
solvent corporation  may  give  a  prefer- 
ence to  a  note  which  is  indorsed  by  a  di- 
rector where  the  company  received  the 
money  for  the  note  and  the  indorsement 
was  for  accommodation.  Nat  Bank, 
etc.  V.  George,  etc.  Co.,  18  Utah,  400 
(1898).  The  payment  and  securing  of 
a  corporate  debt  are  not  fraudulent, 
merely  because  some  of  the  directors 

16 


had  guaranteed  the  debt  Taylor 
County  Court  v.  Baltimore,  etc.  R  R., 
35  Fed.  Rep  161  (1888).  A  chattel  mort- 
gage securing  a  part  of  the  creditors 
of  an  insolvent  corporation  may  be 
valid  although  some  of  the  directors 
and  stockholders  wlio  voted  for  the 
mortgage  are  guarantors  and  indorsers 
of  the  debts  so  secured.  Brown  v.  Grand 
Rivpids,  eta  Co..  38  Fed.  Rep.  280  (1893), 
following  tiie  Michigan  decisions,  and 
stating  that  the  supreme  court  of  the 
United  States  has  not  decided  that  a 
corporation  may  not  prefer  one  of  its 
directors.  A  creditor  may  be  preferred 
by  the  giving  of  security  by  an  insolvent 
corporation,  even  though  his  claim  is 
secured  by  the  directors  and  stockhold- 
ers, he  not  knowing  of  the  insolvency  at 
the  time  of  the  giving  of  the  security. 
Henderson  v.  Indiana  Trust  Ca,  143  Ind. 
561  (1895).  An  insolvent  corporation 
may  give  a  mortgage  to  a  creditor,  by- 
way of  preference,  even  though  a  di- 
rector is  surety  on  the  debt.  Waggoner, 
etc.  Cow  V.  Ziegler.  eta  Co.,  128  Mo.  473 
(1895).  A  mortgage  to  a  creditor  on 
part  of  the  property  of  an  insolvent  cor- 
poration is  legal,  although  some  of  the 
stockholders  and  directors  are  indorsers 
of  the  debt.  Weihl  v.  Atlanta,  etc.  Co., 
89  Ga.  297  (1892).  In  Arkansas  it  is  held 
that  an  insolvent  corporation  may  pre- 
fer certain  creditors,  even  though  their 
claim  is  secured  by  the  indorsements  of 
the  directors.  W^orthen  v.  Griffith,  59 
Ark.  562  (1894).  In  Milledgeville  Bank- 
ing Co.  V.  Mclntyre  Alliance  Store,  98 
Ga,  503  (1896),  the  court  very  properly 
held  that  a  mortgage  given  by  an  insolv- 
ent corporation  to  an  outside  creditor 
was  valid,  although  the  directors  had 
given  their  personal  note  as  additional 
security  for  the  debt,  such  note  being 
purely  an  accommodation  note.  The 
court  distinguished  Lowry,  etc.  Co.  v.. 
5S 


CH.  XLI.]  INTRA    VIKES    ACTS    AND    CONTEACTS.  [§  694:, 

the  director  or  from  the  corporation  itself  at  a  time  when  the  cor- 
poration was  solvent;  or  where  the  corporate  creditor  did  not  know 
that  the  corporation  was  insolvent  when  he  acquired  his  claim  from 
the  director  or  from  the  corporation  itself;  or  where  the  corporate 
creditor  loaned  money  to  a  corporation  itself  when  it  was  insolvent, 
and  at  the  same  time  received  a  mortgage  by  way  of  preference, 
and  also  obtained  the  indorsements  of  the  directors  on  his  paper; 
or  where  the  directors  were  merelv  indorsers  for  the  accommoda- 
tion  of  the  corporation.  It  is  true  that  the  above  rules  would 
enable  a  corporation  to  give  preference  to  a  corporate  creditor  in 
most  cases  where  a  director  is  indorser  or  guarantor  of  the  claim. 
But,  on  the  other  hand,  it  is  now  a  general  custom  in  banking  circles 
not  to  loan  to  a  business  corporation  unless  the  directors  guarantee 
the  debt.  If  the  law  puts  such  a  debt  at  a  disadvantage  as  com- 
pared with  other  corporate  debts,  the  credit  of  business  corpora- 
tions will  be  greatly  curtailed,  thereby  rendering  insolvect  many 
corporations  which  otherwise  would  be  able  to  extricate  them- 
selves from  their  troubles.  In  Xew  Jersey  the  ingenious  rule  has 
been  sustained  that  where  a  preference  has  been  given  by  an 
insolvent  corporation  to  debts  guaranteed  by  the  directors,  the 
amount  realized  from  such  preference,  over  and  above  what  would 
have  been  realized  if  there  had  been  no  preference,  may  be  recov- 
ered bv  the  other  creditors  from  the  directors.* 

§  694.  Land  may  he  purchased  ly  a  domestic  corporation} — The 
English  statutes  of  mortmain  are  not  in   force   in   this  country 

Empire,  etc.  Co.,  91  Ga.  624.  A  director  (1897).  Where  the  debts  equal  only 
who  votes  for  a  preference  on  debts  for  one-third  of  the  market  value  of  the  cor- 
which  other  directors  are  liable  cannot  porate  propertj',  and  certain  creditors 
complain.  Lucas  v.  Friant,  111  Mich,  liolding  notes  on  which  the  directors 
436  (1897;.  Although  a  mortgage  is  in-  are  indorsers  demand  security  or  else 
valid  as  to  the  debts  in  which  the  di-  threaten  to  sue  the  corporation,  the  di- 
rectors are  interested,  it  may  be  valid  as  rectors  may  authorize  confession  of 
to  tlie  remaining  debts  secured  by  it.  judgment  in  their  favor.  Mueller  v. 
Savage  v.  Miller,  5G  N.  J.  Eq.  432  (1898).  Monongahela,  etc.  Co.,  183  Pa.  St.  450 
A  preferen(;e  is  legal  although  some  of  (1898).  A  preference  may  be  given  to 
the  directors  voting  therefor  were  sure-  debts  for  which  the  directors  are  sure- 
ties on  the  paper  to  which  such  prefer-  ties.  Nappanee,  etc.  Co.  v.  Reid,  etc. 
ence  is  given,  their  votes  not  being  Co.,  64  N.  E.  Rep.  870  (Ind.  1902). 
necessary.  Levering  v.  Bimel,  146  Ind.  i  Savage  v.  Miller,  56  N.  J.  Eq.  433 
545  (1897).    "Where  a  mortgage  is  given  (1898). 

by  an  insolvent  corporation  to  secure        2  Richardson   v.   Massachusetts,   etc. 

an  antecedent  debt  for  which  a  director  Assoc,  131  Mass.  174  (1881);  Lancaster 

is  surety,  the  mortgage  is  not  neces-  v.   Amsterdam  Imp.  Co.,  140  N.  Y.  576 

sarily  illegal;  but  if  the  transaction  is  (1894);  Kelly  v.  People's  Transp.  Co.,  3 

actually  a  scheme  to  give  the  director  Oreg.  189(1870);  Page  v.  Heineberg,  40 

a  preference,  it  is  illegal.     Atlas  Tack  Vt  81  (1868);  Central  Gold  Min.  Co.  v. 

Co.  V.  Macon  Hardware  Co.,  101  Ga.  391  Piatt,  3  Daly,  263  (1870),  to  the  effect 

1659 


§  694.] 


INTRA    VIRES    ACTS    AND    CONTRACTS. 


[cn.   XLI. 


except  in  Pennsylvania.  The  only  limitation  upon  the  right  of 
corporations  to  hold  real  jiroperty  is  that  the  purchase  must  be  a 
natural  incident  of  the  business  specilied  in  the  charter.'     A.  differ- 


that  the  holding  may  be  upon  special 
trust;  Nicoll  v.  New  York,  etc.  R.  R.  12 
N.  Y.  121.  127  (1854);  Barry  v.  Mer- 
chants' Exchange  Ca.  1  Sandf.  Ch.  280 
(1844);  Sherwood  v.  American  Bible 
Soc,  1  Key es, 561  (1864);  Steamboat  Ca 
V.  McCutcheon,  13  Pa.  St.  13(1850);  Riley 
V.  Rochester.  0  N.  Y.  ()4  11853);  Down- 
ing V.  Marshall.  23  N.  Y.  366  (1861); 
State  V.  Mansfield.  23  N.  J.  L.  510  (1852); 
State  i\  Newark,  25  N.  J.  L.  315  (18.55); 
First  Parish  v.  Cole.  20  IMass.  232  (1825); 
Old  Colony  R.  R.  v.  Evans,  72  Mass.  25 


and  a  note  given  in  connection  there- 
with is  not  valid  except  in  hoyia  fide 
hands.  Thompson  v.  West.  59  Neb.  677 
(1900>.  Although  a  statute  prescribes 
that  a  corporation  shall  not  hold  real 
estate  if  more  than  twenty  per  cent,  of 
its  stock  is  owned  by  aliens,  it  is  pre- 
sumed that  not  more  than  twenty  per 
cent,  is  so  held  by  aliens  until  the  con- 
trary is  proved.  Northwestern,  etc.  Ca 
V.  Chicago,  eta  Ry..  76  Minn.  334  (1899). 
A  statute  prohibiting  a  corporation,  a 
majority  of   whose    stock    is   held   by 


(1856),  where  the  company  purchased  a    aliens,   from  acquiring  land,  does  not 


gravel  pit  to  transport  and  sell  the 
gravel.  And  see  Smith  r.  Sheeley.  12 
Wall.  358  (1870).  A  corporation  is  pre- 
sumed, in  the  absence  of  any  showing 
to  tiie  contrary,  to  have  the  right  to 
purchase  and  hold  land.  Stockton  Sav. 
Bank  i-.  Staples.  98  Cal.  189  (1893).     In 


prohibit  it  from  acquiring  fisiiiiig  lands. 
Hastings  i\  Anacortes,  etc.  Co.,  09  Pac. 
Rep.  776  (Wa.sh.  1902).  Where  a  corpo- 
ration buys  land  in  the  name  of  its 
agent  as  trustee  it  is  liable  for  the  price 
thereof.  Hurst  v.  Am.  Assoc,  49  S.  W. 
Rep.  800  (Ky.  1899).     Although   a  deed 


a  suit  by  a  railroad  to  quiet  title  to  its    of  a  corporation  provides  that  in  a  cer- 


land,  the  defendants  cannot  question 
the  power  of  a  railroad  to  hold  laud. 
Russell  V.  Texas,  etc.  Ry.,  68  Tex.  646 
(1887).  In  a  bill  to  quiet  title,  a  cohpo- 
ration  need  not  allege  that  it  has  power 
to  hold  land.  Torrent  F.  Eng.  Co.  v. 
Mobile.  101  Ala.  559(1894).  A  publish- 
ing company  may  take  a  lease  of  a 
building  and  may  sublet  such  parts  of 
it  as  it  does  not  use.  Oswald  v.  St. 
Paul,  etc.  Pub.  Ca,  60  Minn.  82  (1895). 
A  bank  may  accept  a  deed  of  real  estate 
from  a  stockholder  and  director  to 
make  good  an  impairment  of  the  capi- 
tal stock,  it  being  agreed  that  compen- 
sation therefor  should  be  paid  from 
future  profits.  Brown  v.  Bradford,  103 
Iowa,  378  (1897).  Where  a  bank  has 
legally  acquired  a  part  interest  in  real 
estate,  it  may  purchase  the  remaining 
interest  for  the  purpose  of  handling  the 
property.  Cockrill  v.  Abeles,  86  Fed. 
Rep.  505  (1898).  The  contract  of  a  relig- 
ious corporation  to  purchase  land  for 
speculative  purposes  is  not  enforcible. 


tain  contingency  the  land  "should 
revert  to  the  stockholders,  their  heirs 
and  assigns,"  yet  such  reversion  is  to 
the  corporation  and  not  to  the  stock- 
holders. Pettit  r.  Stuttgart,  etc.  Insti- 
tute, 07  Ark.  430  (1900). 

•2  Kent,  Com.  *282;  i\Ioore  v.  Moore, 
4  Dana  (Ky.),  354  (1836);  Lathrop  v. 
Scioto  Comm.  Bank,  8  Dana  (Ky.),  114, 
121  (1839);  Potter  v.  Thornton,  7  R.  I. 
252  (1862);  Perin  v.  Carey,  24  How.  465 
(1860);  McCartee  v.  Orphan  Asylum 
Soc,  9  Cow.  437,  451  (1827);  Page  v. 
Heineberg,  40  Vt  81  (1868).  •  See  also 
Odell  V.  Odell,  92  Mass.  1  (1865);  Down- 
ing V.  Marshall,  23  N.  Y.  366,  392  (1861); 
First  Parish  v.  Cole,  20  Mass.  232,  239 
(1825);  Richardson  v.  Massachusetts, 
etc  Assoc,  131  Mass.  174  (1881).  One 
who  agrees  to  sell  land  to  a  corpora- 
tion is  not  bound  to  see  that  it  is  re- 
quired for  the  purposes  of  the  corpora- 
tion, and  if  acting  in  good  faith,  and 
without  knowledge  of  an  intention  to 
misapply  the  corporate  funds,  he  may 


1660 


CH.  XLI.] 


INTRA   VIRES    ACTS    AXD    CONTRACTS. 


[§  694. 


ent  rule  prevails  in  Pennsylvania.'  In  that  state  the  mortmain 
laws  are  held  to  still  exist,  and  the  state  itself  has  enacted  a  statute 
restricting  the  right. 

In  the  other  states,  however,  the  rule  is  firmly  established  that, 
the  right  of  a  domestic  corporation  to  purchase  and  hold  land  can 
be  questioned  only  by  a  stockholder  or  by  the  state  in  a  direct  pro- 


enforce   specific    performance    of  the 
contract.      Eastern    Counties    Ry.     v. 
Hawkes.  5  a  L.  Cas.  331  (1855).     Fre- 
quently the  charter  places  some  limita- 
tions or  grants  some  privileges  herein. 
A  charter  power  to  hold  land  for  busi- 
ness purposes  and  to  secure  debts  does 
not  authorize  the  purchase  of  land  for 
the  purpose  of  selling  it  again.     Bank 
of  Michigan  v.  Niles,  Walk.  (Mich.)  99 
(1842);  Pacific  R  R.  v.  Seely,  45  Mo.  212 
(1870),  where    a  railroad  was  held  to 
have  no  power  to  acquire  land  for  spec- 
ulation; Land  v.  Coffman,  50  Mo.  243 
(1872);  Rensselaer,  etc.  R.  R  v.  Davis, 
43  N.  Y.  137  (1870).     Under  such  an  ex- 
press power    the    corporation    cannot 
purchase  merely  for  the  convenience  of 
the     corporation,    nor     for     purposes 
foreign  to  its  objects.     State  v.  Mans- 
field, 23  N.  J.  L.  510  (1852);   State  v. 
Newark,  35  N.  J.  L.  315  (1855).     But  the 
purchase  is  presumed  to  be  for  purposes 
mentioned  in  the  charter.   Chautauque 
County  Bank  r.  Risley,  19  N.  Y.  369 
(1859);  Ex  parte  Peru  Iron  Co.,  7  Cow. 
540   (1827);    Moss  v.  Rossie  Lead  Min. 
Co.,    5    Hill,    137     (1843);    Alward    v. 
Holmes.  10  Abb.  N.  Cas.  96  (1880),  where 
a  foreign  bank  had  purchased.     A  rail- 
road, instead  of  condemning  a  right  of 
way,  may  purchase  the  fee.     NicoU  v. 
New   York,  etc.   R-  R,   13   N.  Y.  131 
(1854). 

1  This  arose  from  the  fact  that  the 
judges  of  the  supreme  court,  appointed 
to  examine  and  report  to  the  legisla- 
ture such  of  the  English  statutes  as 
were  in  force  in  that  state,  reported 
that  the  statutes  of  mortmain  were  "  so 
far  in  force  that  all  conveyances  .  .  . 
made  to  a  body  corporate,  or  for  the 
use  of  a  body  corporate,  are  void,  un- 


less sanctioned  by  charter  or  act    of 
assembly."    The  report  may  be  found 
in  3  Binney  (Pa.),  595,  626  (1808).     See 
also  Methodist  Church  v.  Remington.  1 
Watts  (Pa.),  218  (1832);  Miller  v.  Porter, 
53  Pa.  St.   292  (1866).     The  statute  of 
April    6.  1833,  made    all  purchases  of 
land  by  or  for  corporations,  without  the 
license  of  the  commonwealth,  subject 
to  forfeiture.     Under    this  act  it  has  • 
been  held   that  a  foreign   corporation 
may  purchase  and  hold  real  estate  in 
Pennsylvania,  subject  to  being  divested 
by  the  direct  action  of  the  state.    Run- 
yan  v.    Coster,   14  Pet.  122  (1840).     To 
same    effect,   Leazure    v.   Hillegas,    7 
Serg.  &  R,  (Pa.)  313  (1821).     A  similar 
statute,  passed  April  26.  1855,  was  con- 
strued to  the  same  effect  in  Hickory 
Farm  Oil  Co.  v.  Buffalo,  etc.  R.  R.,  33 
Fed.  Rep.  22  (1887),  after  having  been 
declared  a  mortmain  act  in  American 
Slate  Co.  V.  Phillipsburg,  etc.  Bank,  8 
W.  N.  Cas.  430  (1880).     A  person  sued  in 
Pennsylvania  on  a  debt  to  a  foreign 
corporation  cannot  set  up  that  the  cor- 
poration is  illegally  holding  land  in  the 
state.     Grant  v.  Henry  Clay  Coal  Co., 
80  Pa.  St.  208  (1876).     Where  a  foreign 
corporation  cannot  directly  own  land 
in  a  state,  it  cannot   own   land  indi- 
rectly by   owning  a   majority  of  the 
stock  of  a  domestic  corporation  which 
owns  the  land.     The  state  may  escheat 
the  land.  Commonwealth  v.  New  York, 
etc.  R.  R.,  114  Pa.  St.  340  (1886).     But 
under  the  statutes  of  Pennsylvania  it 
is  legal  for  a  railroad  company  to  own 
all  the  stock    of  a   mining   company 
which  owns  land,  and  such  land  does 
not  escheat.     Commonwealth  v.  New 
York,  etc.  R.  R.,  139  Pa.  St.  457  (1891). 
See  also  §  695,  infra. 


1661 


§  604.] 


INTRA    VIRES    ACTS    AND    CONTRACTS. 


[cn. 


xr.r. 


ceeding  for  that  purpose.  The  ol>j«'Ction  cannot  be  made  by  others.' 
It  is  legal  for  a  corporation  to  hold  property  in  excess  of  the  amount 


1  Only  the  state  can  raise  the  question 
that  the  corporation  was  not  entitled  to 
acquire  real  estate.  Cooney  v.  Booth. 
etc.  Co.,  169  111.  370  (181)7);  Land  v.  Coflf- 
inan,  50  Mo.  24;i  (1872),  holding  also  that 
a  deed  voluntarily  made  to  the  corpo- 
ration of  real  proiierty  in  excess  of  the 
amount  .allowed  by  its  charter  will  pass 
a  good  title;  Natoma  Water,  etc  Co.  v. 
Clarkin.  14  Cal.  544,  553  (1860),  Field, 
C.  J.,  saying:  "It  would  lead  to  infinite 
inconveniences  and  embarrassments  if, 
in  suits  by  corporations  to  recover  the 
possession  of  their  property,  inquiries 
were  permitted  as  to  the  necessity  of 
such  property  for  the  purposes  of  their 
incorporation,  and  the  title  made  to 
rest  upon  the  existence  of  that  neces- 
sity." Even  though  a  safe  deposit  com- 
pany is  authorized  to  possess  real  es- 
tate necessary  for  the  transaction  of  its 
business,  and  it  erects  a  large  ofiice 
building  fourteen  stories  high  and  rents 
nearly  all  of  it,  yet  a  tenant  cannot 
avoid  payment  of  rent  on  the  ground 
that  it  holds  too  much  real  estate.  Rec- 
tor V.  Hartford  Deposit  Co.,  190  111.  380 
(1901).  A  person  claiming  land  by  ad- 
verse possession  as  against  a  corpora- 
tion cannot  set  up  that  the  corporation 
had  no  power  to  acquire  the  land.  Only 
the  state  can  raise  this  question.  Chi- 
cago, etc.  R  R  V.  Keegan,  56  N.  E.  Rep. 
1088(111. 1900).  The  right  of  a  beneficial 
association  to  purchase  land  as  an  in- 
vestment cannot  be  questioned  by  any 
one  but  the  state.  Hagerstovvn,  etc.  Co. 
V,  Keedy,  91  Md.  430  (1900).  A  vendor 
of  land  to  a  corporation  cannot  after- 
wards claim  that  the  corporation  had 
no  power  to  purchase.  Miller  v.  Flem- 
ingsburg,  etc.  Co.,  59  S.  W.  Rep.  513  (Ky. 
1900).  A  party  who  has  made  an  exec- 
utory contract  to  sell  real  estate  to  a 
corporation  cannot  refuse  to  transfer  on 
the  ground  that  the  company  had  no 
power  to  buy.  the  company  having 
anade    improvements.     Coleridge,    etc. 


Co.  r.  Jenkins,  93  N.  W.  Rep.  123  (Neb. 
1902).  The  power  of  a  jirivate  corpora- 
tion to  ac()uire  land  cannot  be  (lues- 
tioned  hj'  the  gnintorof  land  to  the  cor- 
poration, and  moreover,  even  if  the  rule 
were  otherwise,  an  agent  who  bought 
for  the  corporation  as  agent  w(juld  not 
bi.'  personally  liabla  Ray  v.  Foster,  53 
S.  W.  Rep.  54  (Tex.  1899).  A  grantor  of 
property  to  a  railroad  company  for 
picnic  purposes  cannot  avoid  his  deed 
and  its  obligations  by  claiming  that  the 
purchase  by  the  company  was  ultra 
vires.  Shelby  v.  Chicago,  etc.  K.  H.,  143 
III.  385  (1893).  The  corporation  cannot 
defend  against  a  mortgage  on  the 
ground  that  it  had  no  i)Ower  to  pur- 
chase the  property.  Butterworth,  etc. 
V.  Kritzer,  eta  Co.,  115  Mich.  1  (1897). 
There  are  many  other  cases  in  which  it 
is  held  that  the  state  alone  can  raise 
this  objection.  National  Bank  v.  Mat- 
thews, 98  U.  S.  631,  638  (1878),  and  cases 
cited;  Cowell  v.  Springs  Co.,  100  U.  S. 
55  (1879);  Myers  v.  Croft,  13  Wall.  291 
(1871);  Southern  Pac  R,  R.  v.  Orton,  0 
Sawy,  157.  181  (1879),  and  cases  cited; 
s.  a,  33  Fed.  Rep.  457,  470;  Shewalterr. 
Pirner,  55  Mo.  218  (1874);  Chambers  v. 
St.  Loui.s,  39  Mo.  543.  576  (1800 1;  Mcln- 
doe  V.  St.  Louis,  10  Mo.  576  (1847);  People 
V.  Mauran,  5  Denio,  389  (1848);  Silver 
Lake  Bank  v.  North,  4  Johns.  Ch.  370 
(1820);  Leazure  v.  Hillegas,  7  Serg.  &  R, 
(Pa.)  313  (1821);  Goundie  v.  Northamp- 
ton Water  Co.,7  Pa.  St.  233  (1847);  Steam- 
boat Ca  r.  McCutcheon,  13  Pa.  St  13 
(1850);  Kelly  r.  People's  Transp.  Co.,  3 
Oreg.  189  (1870);  Morgan  v.  Donovan,  58 
Ala.  241  (1877).  But  m  this  case  it  was 
said  that  in  a  suit  to  enforce  a  contract 
of  purchase  which  remained  executor}', 
or  to  recover  for  its  breach,  the  question 
of  ulti'a  vires  would  be  material.  Banks 
V.  Poitiaux,  3  Rand.  (Va.)  136, 146  (1835); 
Barrow  v.  Nashville,  etc.  Co.,  9  Humph. 
(Tenn.)  304  (1848),  holding  that  the  fact 
that  a  corporation  uses  real  estate  for 
662 


€H.  XLI.] 


INTRA    TIRES    ACTS    AND    CONTRACTS. 


[§  694. 


of  its  capital  stock.'  A  statute  to  the  effect  that  a  corporation 
must  sell  its  unnecessary  real  estate  within  five  years  does  not  give 
the  state  title  to  such  real  estate  if  not  so  sold.^  A  stockholder  has 


purposes  beyond  its  powers  furnishes 
no  ground  to  the  vendor  for  a  rescission 
of  the  contract  of  sale;  Runyan  r.  Coster, 
14  Pet.  123,  129  (1840);  Chicago,  etc. 
R.  R  V.  Lewis,  53  Iowa,  101  (1880);  Mapes 
V.  Scott,  94  111.  379  (1880),  in  which  the 
rule  was  applied  to  national  banks; 
Alexander  v.  Tolleston  Club,  110  111.  6.=> 
(1884);  Smith  v.  Sheeley,  12  Wall.  358 
(1870);  De  Camp  n  Dobbins,  29  N.  J.  Eq. 
36  (1878),  which  case  was  affirmed  in  31 
N.  J.  Eq.  671  (1879),  where  it  was,  how- 
ever, held  that  an  heir-at-law  may  ob- 
ject that  a  corporation  cannot  hold 
land  in  trust  in  excess  of  its  statutory 
powers.  See  this  report  for  a  well-con- 
sidered opinion,  citing  cases,  and  notes 
by  the  reporter.  Bone  v.  Delaware,  etc. 
Co.,  5  Atl.  Rep.  751  (Pa.  1886);  Chicago, 
etc.  R.  R  V.  Lewis,  53  Iowa,  101  (1880); 
Missouri,  etc.  Co.  u  Bushnell,  11  Neb. 
192  (1881);  Jones  v,  Habersham,  107 
U.  S.  174  (1882);  Barnes  v.  Suddard,  117 
111.  237  (1886),  in  which  the  rule  was  ap- 
plied to  a  foreign  corporation;  Hickory 
Farm  Oil  Co.  v.  BuflFalo,  eta  R  R,  32 
Fed.  Rep.  22  (1887),  to  the  same  effect; 
Spsar  V.  Crawford,  14  Wend.  20  (1835), 
where  a  stockholder  was  held  liable  on 
his  statutory  liability  to  a  corporate 
creditor  who  had  sold  land  to  the  cor- 
poration.    66  N.  E.  Rep.  850. 

If  a  corporation  buys  land  and  then 
finds  it  is  ultra  vires,  and  sells  its  con- 
tract to  a  third  person,  it  may  collect 
from  the  latter  moneys  paid  on  the  pur- 
chase. Crutcher  v.  Nashville  Bridge 
Co.,  8  Humph.  (Tenn.)  403  (1847).  A 
railroad  company  cannot  refuse  to  com- 
plete a  purchase  of  lands  which,  prima 
facie,  it  could  use  for  railroad  purposes. 
It  cannot  claim  that  the  purchase  was 
ultra  vires.  Eastern  Counties  Ry.  v. 
Hawkes,  5  H.  L.  Cas.  331  (1855).  A  turn- 
pike company  may  take  a  lease  of  land 
for  storing  purposes.  Crawford  v.  Long- 
street,  43  N.  J.  L.  325  (1881).     An  agree- 


ment of  a  company  to  buy  land  if  a 
certain  bill  passes  is  legal  and  binding. 
Taylor  v.  Chichester,  etc.  Ry.,  L.  R.  4 
H.  L.  628  (1870),  reversing  s.  c,  L.  R  2 
Exch.  356  (1867).  Coleman  v.  San 
Rafael  Turnp.  Co.,  49  Cal  517  (1875), 
holds  that,  in  an  action  to  quiet  title,  a 
bond  to  convey  to  a  corporation  for  pur- 
poses beyond  its  requirements  is  void. 
Thweatt  v.  Bank  of  Hopkinsville,  81 
Ky.  1  (1883),  where  an  execution  sale  to 
a  bank  was  held  to  be  void  at  the  suit 
of  the  execution  debtor;  Riley  v.  Roches- 
ter, 9  N.  Y.  64  (1853),  holding,  in  an  ac- 
tion of  trespass,  that  a  conveyance  to  a 
municipal  corporation  of  land  beyond 
its  limits  for  the  purpases  of  a  street  is 
void.  Although  a  corporation  purchases 
land  in  excess  of  the  amount  limited  by 
its  charter,  yet  only  the  state  can  object, 
and  its  remedy  is  forfeiture  of  the 
charter.  Fayette  Land  Co.  v,  Louis- 
ville, etc.  R  R,  93  Va.  274  (1896).  The 
power  of  a  trust  company  to  buy  a  tax 
title  cannot  be  attacked  by  a  mortgagee 
foreclosing  a  mortgage  on  the  land. 
Watts  V.  Gantt,  42  JTeb.  869  (1894).  In  a 
suit  by  a  corporation  to  quiet  title,  a 
grantee  of  its  grantees  cannot  set  up  that 
the  corporation  had  no  power  to  acquire 
or  hold  title.  Butte  Hardware  Co.  v.  Cob- 
ban, 13  Mont.  351  (1893).  For  a  careful 
review  of  the  authorities,  and  an  argu- 
ment that  the  corporation  or  its  stock- 
holders are  in  all  cases  protected  as  to 
real  estate  purchased  ultra  vires,  see 
8  Harvard  L.  Rev.  15  (1894). 

1  Barry  v.  Merchants'  Exchange  Co., 
1  Sandf.  Ch.  280.(1844).  Where  a  cor- 
poration owns  property  in  excess  of  an 
amount  specified  and  limited  by  the 
charter,  an  exemption  from  taxation 
does  not  apply  to  such  excess.  Seasliore 
House,  etc.  v.  City  of  Atlantic  City,  48 
Atl.  Rep.  242  (N.  J.  1900). 

-  People  V.  Stockton,  etc.  Sou,  133  CaL 
611  (1901). 


1663 


§  t;94.] 


INTICA    VIKES    ACTS    AND    CONTRACTS. 


[ 


cn.  XLi. 


the  same  riglit  to  object  to  an  ultra  vires  purchase  of  land  as  he  has 
to  object  to  any  other  ultra  vires  act;'  but  he  must  be  prompt  in 
his  objection,-  and  must  bring  suit  in  behalf  of  all  the  stockholders 
to  set  the  purchase  aside.'  Under  a  statute  authorizing  the  court 
to  dissolve  any  corporation  on  good  cause  shown,  a  minority  stock- 
holder may  tile  a  bill  to  have  the  corporation  dissolved  for  pur- 
chasmg  unnecessary  real  estate.*  Whenever  a  corporation  may 
take  tho  legal  title  to  land  it  may  take  the  beneficial  interest  in  it, 
but  if  it  cannot  hold  a  legal  title  it  cannot  hold  as  cestui  que  truH.'' 
A  corporation  taking  out  patents  to  land  in  the  names  of  its  em- 
ployees, and  then  taking  a  conveyance  from  them,  holds  the  land 
subject  to  forfeiture  by  the  government.®     The  state  may  by  <juo 

1  Re  Kent  Benefit  Bldg.  Soc  1   Dr.  amount  of  placer-mining  ground  that 

&  Sm.  417  (1861);  Grimes  v.  Harrison,  a  single  person  may  locate,  agree  that 

26  l3eav.  435  (1859).  where  the  directors  '•  dummies"  shall  be  used  as  locators, 

were  compelled  to  make  good  tlie  funds  and  the  "dummies"  shall  transfer  the 

of  the  corporation  used  ultra  vires  to  land  to  one  person,  whoshall  iiold  it  fur 


purchase  laud. 

2  See  eh.  XLIV,  infra. 

3  See  eh.  XLV,  itifra. 

*  Bi-xler  v.  Summerfield,  63  N.  K  Rep. 
849  ail.  1902). 
5  Coleman  r.  San  Rafael  Tump.  Co., 


all  of  the  principal  parties,  and  all  thi^ 
is  done,  the  person  thus  obtaining  title 
cannot  be  compelled  by  the  others  to 
di%ide.  The  contract  is  illegal  and  the 
court  will  not  aid  any  party.  Mitchell 
V.  Cline,  S4Cal.  409  (1890).   See  also  Case 


49  Cal.  517,  522  (1875).     In  this  case  a    r.  Kelly.  133  U.  S.  21  (1890).   Where  land 


bond  to  an  individual  to  convey  land  in 
trust  for  the  stockholders  of  a  corpora- 
tion, with  power  to  sell  under  direction 
of  its  board  of  trustees,  was  held  to  con- 
stitute the  corporation  a  cestuis  que 
trust.    Yidal  v.  Girard,  2  How.  127, 1S7 


is  entered  in  the  names  of  individuals 
in  order  to  evade  a  statute  against  cor- 
porations, and  then  they  deed  to  the 
corporations,  the  state  may  set  aside  tho 
grants.  Wichita,  etc.  Co.  v.  State,  80 
Tex.  084  (1891).     A  corporation  which 


(1844).  holding  also  that,  if  the  trust  be  engages  in  the  business  of  buying  and 

repugnant  to  or  inconsistent  with  the  selling  real   estate   through  a  trustee 

purposes  of  the  corporation,  a  new  trus-  does  not  forfeit  its  title  to  land  acquired 

tee  may  be  substituted,  but  no  ground  is  by  such  trustee,  although  contrary  to  2 

furnished  to  declare  the  trust  void.    See  Utah  Com  p.  L.  18b8,  4;  2272.  which  pro- 

also  De  Camp  u.  Dobbins,  29  N.J.  Eq.  36  vides   that  a  corporation   "shall    not 

(1878);  affirmed,  31  N.  J.  Eq.  671  (1879);  have  power  to  enter  into,  as  a  business, 

Clemens  v.  Clemens,  37  N.  Y.  59  (1867);  the  buying  and  selling  of  real  estate," 

Chamberlain  v.  Chamberlain,  43  N.  Y.  but  affixed  no  penalty  for  its  violation. 

424  (1871);    Harris  i\  American   Bible  Fisk  r.  Patton,  7  Utah,  399  (1891).    E%'en 

Soc,  2  Abb.  App.  D^c.  316  (1867),  but  a  domestic  corporation  cannot  obtain 

here  the  corporation  had  express  power  a  patent  to  a  mining  claim  under  the 

to  hold  intrust:  Downing^.  Marsball,23  federal  statutes,  unless  all  of  its  stock- 

N.  Y.  366  (1861X  holders  are  citizens  of  the  United  States. 

6  United  States  r.  Trinidad  Coal,  etc.  and  are  severally  and  individually  quali- 

Co.,137  U.S.  160  (1890).    Where  several  fied  and  competent  to  make  the  loca- 

persons,  in  order  to  evade  section  2331  tion.     Thomas  v.  Chisholm,  13  Colo.  105 

of  the  United  States  Revised  Statutes,  (1889).     A  foreign  corporation  not  au- 

which     limits    to    twenty  acres    the  thorized  to  own  and  register  ships  in 

1664 


CII.  XLI. 


irTRA    VIRES    ACTS    AND    CONTRACTS. 


[§  694. 


warranto  proceedings  forfeit  the  charter  of  a  corporation  which  has 
acquired  land  not  reasonably  needed  for  the  purposes  of  the  busi- 
ness specified  in  its  charter.^ 

Although  the  officers  of  a  railroad  company  take  in  their  own 
names  the  title  to  lands  which  are  donated  to  the  railroad,  yet  the 
railroad  cannot  compel  them  to  give  up  the  lands,  if  the  railroad 
company  had  no  power  to  acquire  such  lands.-  The  contract  by 
which  a  party  turns  in  land  in  exchange  for  stock  may  be  such  as 
to  o-ive  him  a  vendor's  lien  on  such  land  in  case  the  scheme  is  not 
carried  out.' 

Quo  loarranto  does  not  lie  to  oust  a  corporation  from  the  posses- 
sion of  land.  Quo  warranto  lies  only  to  oust  a  company  from  the 
franchises  it  claims,  and  not  to  divest  it  of  property.* 

It  is  well  settled  that  corporations  may,  without  special  author- 
ity, dispose  of  land  as  they  may  deem  expedient,^  and  may  mort- 

America  canrtot  evade  the  law  by  tak-    on  its  cars,  and  may  sell  surplus  steam 

power.  The  state  may  bring  quo  war- 
ranto proceedings  to  forfeit  the  charter. 
It  is  no  defense  that  the  usurpations  had 
continued  for  many  years  to  the  knowl- 
edge of  the  state,  or  that  a  legislative 
committee  had  reported  that  the  real 
estate  was  properly  taxed.  People  v. 
Pullman's  Palace  Car  Co..  175  111.  125 
(1898).  A  religious  corporation  has  no 
implied  power  to  use  its  real  estate  for 
business  purposes.  First  M.  E.  Church, 
etc.  V.  Dixon,  178  III  260  (1899). 

2  Case  V.  Kelly,  133  U.  S.  21  (1890). 

3  Slide,   etc.   Mines  u   Seymour,   ISS' 
U.  S.  509,  520  (1894). 

*  State  V.  Pittsburgh,  etc.  R  R.,  50 " 
Ohio  St.  239  (1893). 

5  White  Water,  etc.  Co.  v.  Vallette,  21 
How.  414,  424  (1858):  Barry  r.  Mer- 
chants' Exchange  Co.,  1  Sandf.  Ch.  280 
(1844);  Dupee  v.  Boston  Water  Power 
Co.,  114  Mass.  37  (1873);  Burton's  Ap- 
peal, 57  Pa.  St.  213  (1868);  Miners' Ditch 
Co.  V.  Zellerbach,  37  CaL  543  (1869); 
Reynolds  v.  Stark  County,  5  Ohio,  204 
(1831);  Newark  v.  Elliott,  5  Ohio  St. 
113  (1855);  De  Ruyter  v.  St.  Peter's 
Church,  3  Barb.  Ch.  119  (1848);  aff'd,  a 
N.  Y.  238;  Buell  v.  Buckingham,  1(> 
Iowa,  284  (1864),  holding  also  that  the 
sale  may  be  by  directors  having  gen- 
eral powers  to  make  contracts.  Aurora, 
1665 


ing  title  in  the  names  of  trustees  who 
are  residents  of  America.  Ogden  v. 
Murray,  39  N.  Y.  202  (1868).—  a  dictum. 
Under  a  constitutional  provision  that 
conveyances  to  a  corporation,  a  ma- 
jority of  the  stock  of  which  is  held  by 
aliens,  shall  be  void,  the  attorney-gen- 
eral may  commence  suit  to  have  cer- 
tain conveyances  declared  void,  even 
though  a  majority  of  the  stock  was 
owned  by  citizens  at  the  time  of  the 
conveyance,  such  majority  having 
since  that  time  passed  into  alien  hands. 
State  V.  Hudson  Land  Co.,  19  Wash.  85 
(1898). 

1  A  corporation  organized  to  manu- 
facture railway  cars  has  no  power  to 
lay  out  a  town  around  its  works  and 
build  twenty-two   hundred   homes    to 
lease  to  its  employees,  to  build  and  run 
a  hotel  and  saloon,  and  also  a  theater,  a 
gas  plant,  a  system  of  water- works  and 
a  brick  plant,  and  to  own  and  run  a 
farm  for  supplies  to  sell  and  for  its  em- 
ployees, and  to  own  stock  in  other  cor- 
porations manufacturing  and    selling 
bar  iron  and  railroad  spikes;  but  may 
erect    an    office    building    containing 
more  space  than  it  requires  at  the  time, 
and   may    purchase   more   real   estate 
than  it  actually  requires  at  the  time, 
and  may  supply  liquor  to  passengers 
(105) 


§  09i.] 


INTEA    VIEES    ACTS    AND    CONTRACTS. 


[CH.   XLI. 


gage  lands  in  the  course  of  legitimate  business.*  A  statute  author- 
izing a  sale  of  corporate  property  in  whole  or  in  part  upon  a  vote 
of  the  stockholders  does  not  require  such  vote  upon  an  ordinary 
sale  of  real  estate.^ 

Under  the  English  statute  of  wills  a  devise  of  land  to  certain 
bodies  corporate  is  unlawful.  Similar  statutes  have  been  enacted 
quite  generally  in  America.' 

etc.  Soc.  V.  Paddock,  80  111.  263  (1875).  or  otherwise  "  is  an  express  authority 
And  see  Binney's  Case,  2  Bland,  Ch.  90.  within  the  meaning  of  the  statute  of 
142  (1829);  Railroad  Co.  v.  Howard,  7  wills.  See  also  Kerr  v.  Dougherty,  79 
Wall.  392  (186«).  in  which  a  sale  by  a  N.  Y.  327(1880),  overthrowing  a  bequest 
corporation  without  authority,  but  with  by  a  resident  of  another  state  to  a  New 
the  consent  of  all  the  parties  inter-  York  corporation  which  was  forbidden 
ested  in  the  sul)ject-raatter  of  it,  was  to  take  by  beciuest;  State  v.  Bates,  2 
lield  valid;  Edward  v.  Fairbanks,  27  Harr.  (Del.)  18  (1835),  where  a  devise  of 
La.  Ann.  449  (1879);  Rutland,  etc.  R,  R.  money  arising  from  the  sale  of  land 
tj.  Proctor,  29  Vt.  93  (185G).  holding  also  was  held  to  be  in  efTect  a  devise  of 
that  a  purchaser  from  a  cori>oration  land;  but  the  contrary  view  of  such  a 
cannot  defeat  an  action  for  the  pur-  devise  was  taken  in  American  Bible 
chase-money  by  the  defense  that  the  Soc.  v.  Noble.  11  Rich.  Eq.  (S.  C.)  156 
corporation  had  no  power  to  acquire  (1859).  The  statutes  of  New  York 
the  property.  A  corporation  may  au-  against  bequests  to  certain  corpora- 
thorize  an  agent  to  deed  land  belong-  tions  made  within  a  certain  time  be- 
ing to  the  corporation.  Barcellou  Hap-  fore  the  testator's  death  do  not  apply 
good.  118  N.  C.  712  (1896).  to  a  bequest  by  a  foreigner  made  in  a 

1  See  5^  779,  etc.,  infra.  foreign  land  to  a  corporation  to  be  or- 

2  Marvin  v.  Anderson,  111  Wis.  387  ganized  under  the  laws  of  New  York, 
(1901).  A  statute  requiring  leases  by  the  bequest  being  valid  at  the  domicile 
corporations  to  be  first  approved  by  of  the  testator.  Dammert  v.  Osborn, 
the  stockholders  applies  only  to  leases  140  N.  Y.  30  (1893).  In  Massachusetts  it 
of  property  essential  to  the  existence  has  been  held  that  a  town  or  a  parish 
of  the  corporation  for  the  carrying  on  may  take  and  hold  a  devise  for  the  use 
of  its  business,  and  does  not  apply  to  of  schools.  First  Parish  v.  Cole,  20 
leases  of  a  small  portion  of  a  corporate  Mass.  232  (1825).  As  to  the  rule  govern- 
property.  Such  statute  does  not  apply  ing  bequests  to  charitable  corporations 
to  purely  private  corporations  at  all.  in  New  York,  see  Wetmore  r.  Parker,  52 
Coal,  eta  Co.  v.  Tennessee,  etc.  R.  R.,  62  N.  Y.  450  (1873).  If  the  objects  of  the 
S.  W.  Rep.  162  (Tenn.  1901).  The  Mich-  trust  are  uncertain  or  vague  a  devise 
igan  statute  preventing  mining  com-  to  a  charitable  corporation  will  be  void, 
panics  from  selling  their  land  except  Pratt  v.  Trustees,  etc.,  88  Md.  610  (1898). 
by  vote  of  the  stockholders  does  not  A  foreign  charitable  corporation  can- 
apply  to  a  sale  of  standing  timber.  Bag-  not  take  New  York  land  by  devise  un- 
galey  v.  Pittsburg,  etc.  Co.,  90  Fed.  less  the  New  York  statute  permits. 
Rep.  636  (1898).  White  v.  Howard,  46  N.  Y.  144  (1871). 

SMcCartee  v.  Orphan  Asylum  Soc,  C/'.Whitef.  Howard.  38  Conn.  342  (1871). 
9  Cow.  437(1827);  Downing  r.  Marshall,  And  concerning  the  common-law  re- 
23  N.  Y.  366,384(1861),  but  holding  that  strictions  on  the  power  of  charitable 
a  charter  provision  enabling  a  corpora-  corporations  to  sell  land,  see  Madison 
tion  to  take  land  "by  direct  purchase     Ave.  Bapt  Ch.  v.  Oliver  St.  Bapt  Ch,, 

1666 


-CH.  XLI.] 


INTRA    VIRES    ACTS    AND    CONTRACTS. 


[§  694. 


An  educational  corporation  authorized  to  accept  property  to  a 
certain  amount  cannot  take  a  devise  or  bequest  of  property  after  it 
already  has  property  equal  to  the  amount  limited  by  its  charter.^ 

A  devise  or  bequest  to  a  corporation  to  be  hereafter  created  is 
valid. '^  A  deed  made  before  incorporation,  to  be  delivered  to  the 
corporation  after  incorporation,  is  good.*  A  corporation  may  take 
the  title  to  land  in  fee  although  the  duration  of  the  corporation  it- 
self is  limited.*     "Where  a  deed  is  made  by  or  to  a  de  facto  corpora- 


46  N.  Y.  131  (1871).  See  also  §  695,  tn/^a, 
as  to  foreign  corporations. 

1  Cornell  University  u  Fiske.  136  U. 
S.  152  (1890);  McGraw  n  Cornell  Uni- 
versity. 45  Hun,  354  (1887);  Re  McGraw, 
111   N.   Y.    66   (1888).      Where  land   is 
willed  to  a  corporation,  the  heirs  can- 
not defeat  the  devise  by  claiming  that 
the  corporation  already  has  ail  the  land 
that  the  statutes  allow.     Only  the  state 
can  raise  that  question.     Hamsher  v. 
Hamsher,   132  111.  273  (1890).     In  Jones 
V.  Habersham,  107  U.  S.  174  (1882),  where 
the    limit    was    on    the    income    and 
tlie  gift  increased  it  beyond  the  limit, 
the  court  held  that  only  the  state  could 
object.     Where  the  limitation  upon  the 
capacity  of  a  corporation  to  hold  land 
is  based  upon  a  yearly  value,  the  yearly 
value  at  the  time  it  is  acquired  is  in- 
tended, and  the  title  is  not  affected  by 
a  subsequent  increase  in  its  value  above 
the  amount  limited.     Bogardus  v.  Trin- 
ity Church,  4Sandf.  Ch.  633  (1847);  Hum- 
bert V.  Trinity  Church,  24  Wend.  587, 
629  (1840).     And  see  Harvard  College  v. 
Boston,  104  Mass.  470  (1870);  Church  of 
Redemption  v.  Grace  Church,  68  N.  Y. 
570  (1877);  Bogardus  v.  Trinity  Church, 
4  Sandf.  Ch.   633  (1847).     Cf.  Rainey  v. 
Laing,  58  Barb.  453  (1871).     Although  a 
corporation  is  limited  by  its  charter  as 
to  the  amount  of  property  it  may  take, 
yet  a  devise  to  it  of  property  greater  in 
value  than  that  amount  is  not  void,  in- 
asmuch as  only  the  state  can  complain. 
Farington  v.  Putnam,  90  Me.  405  (1897). 
^Russell  V.  Allen,  107  U.  S.  163  (1882); 
Burrill  r.  Boardman,  43  N.  Y.  254  (1871); 
Webster  v.  Wiggin,  19  R.  I.  73  (1895).    A 
bequest  to  a  company  to  be  incorporated 


within  the  time  allowed  by  statute  is 
valid.  People  v.  Simonson,  126  N.  Y. 
299  (1891).  "That  a  valid  devise  or  be- 
quest may  be  limited  to  a  corporation 
to  be  created  after  the  death  of  the  tes- 
tator, provided  it  is  called  into  being 
within  the  time  allowed  for  the  vesting 
of  future  estates,  is  not  denied."  Tilden 
V.  Green,  130  N.  Y.  29,  47  (1891),  the 
court  holding,  however,  that  the  devise 
should  be  to  the  corporation  to  be  formed 
and  should  not  be  in  trust  to  the  exec- 
utors to  convey  to  such  corporation 
when  formed  if  the  executors  think 
best.  See  also  Burrill  v.  Boardman,  43 
N.  Y.  254  (1871);  Inglis  v.  Trustees  of 
Sailors'  Snug  Harbor,  3  Pet.  99  (1830); 
Dammert  v.  Osborn,  140  N.  Y.  30  (1893). 
3  Spring,  etc.  Bank  v.  Hurlings,  etc. 
Co.,  32  W.  Va.  357  (1889).  Where  the 
promoters  pay  for  land  and  take  a  deed 
in  the  name  of  the  proposed  corporation, 
the  vendor  cannot  claim  that  the  deed 
was  void,  even  though  the  corporation 
was  not  actually  organized  until  three 
years  after  such  deed  was  given.  White 
Oak,  etc.  v.  Murray,  145  Mo.  622  (1898). 
A  lease  to  a  corporation  not  yet  organ- 
ized is  void.  Utah.  etc.  Co.  u  Keith,  18 
Utah,  464  (1899).  A  deed  to  certain  per- 
sons "as  incorporators"  of  a  company 
not  yet  incorporated  does  not  vest  title 
in  the  company  when  incorporated.  Mo- 
Candless  v.  Inland,  etc.  Co.,  112  Ga.  291 
(1900).    See  also  §§  504,  637,  supra. 

*  Nicoll  V.  New  York,  etc.  R  R.,  13 
N.  Y.  121  (1854);  Rives  v.  Dudley,  3 
Jones,  Eq.  (N.  C.)  126  (1856);  Asheville 
Division  v.  Aston,  92  N.  C.  578  (1885); 
Delhi  School  Dist.  v.  Everett,  52  Mich. 
314  (1883).  A  deed  of  property  to  a  rail- 
1667 


§  C95.] 


INTKA    VlliLS    ACTS    AND    CONTRACTS. 


[CH.  XLI. 


tion,  the  corporate  existence  cannot  be  questioned  by  any  of  the 
parties.'  A  devise  of  real  estate  to  an  unincorporated  association 
does  not  fail.  The  title  descends  to  the  heir  at  law,  who  holds  the 
same  as  trustee  for  the  use  and  benefit  of  the  association.-  The 
land  owned  by  such  an  association  is  generally  vested  in  trustees 
for  its  benefit.' 

§  005.  Land  may  he  purchased,  lichi,  and  sold  hi/  a  forrh/n  as  dis- 
tbujuishvd  from  ati  alien  corporation,  if  there  is  no  statute  of  the 
state  to  the  contrari/. —  A  foreign  corporation,  other  than  an  alien 
corporation,  having  power  to  buy  and  sell  land,  may  at  common 
law  buy  and  sell  land  in  other  states,  as  well  as  that  in  which  it 
was  incorporated.* 

In  the  exercise  of  comity  between  the  states,  corporations  created 
in  one  of  them  may  acquire,  hold,  and  transfer  lanil  in  another,  the 
same  as  individuals.* 


road  for  fifty  years,  or  so  long  as  its 
charter  continued,  which  by  charter  is 
fifty  years,  passes  the  land  to  a  corpora- 
tion which  by  legislative  enactment 
succeeds  to  the  rights  of  the  first  cor- 
poration. Davis  V.  Memphis,  etc.  R  R., 
87  Ahu  G;i3  (1888).  A  dissolution  of  a 
corporation  after  it  has  conveyed  real 
estate  does  not  impair  the  title  of  the 
grantees.  People  r.  !Mauran,  5  Denio, 
389  (1848).    See  also  §  641,  supra. 

1  See  §  637.  supra.  Where  the  owner 
of  real  estate  deeds  it  to  a  supposed  cor- 
poration, and  many  years  afterwards 
makes  another  deed  to  another  corpo- 
ration, the  latter  cannot  claim  that  the 
first  corporation  was  illegally  organ- 
ized. It  is  for  the  state  alone  to  make 
such  claim.  Los  Angeles,  etc.  r.  Spires, 
126  Cal.  541  (1899).  A  person  who  has 
contracted  to  purchase  land  from  a  sup- 
posed corporation  cannot  avoid  the  con- 
tract by  the  defense  that  the  charter  of 
the  company  had  expired.  West  Mis- 
souri, etc.  Co.  V.  Kansas  City,  etc.  Ry., 
161  Mo.  595  (1901).  Under  the  Mon- 
tana statutes,  even  though  no  organi- 
zation meetings  of  the  stockholders 
and  directors  are  held,  yet  a  deed  of 
property  to  the  corporation  may  be 
valid.  Morrison  v.  Clark,  24  Mont  515 
(1900). 

2  American  Bible  Soc.  v.  American 


Tract  Soc.  62  N.  J.  Eq.  219  (1901),  the 
court  refusing  to  follow  the  New  York 
decisions  to  the  contrary.  See  also 
§  504,  stiprcL 

'  See  ):;  504,  stij^ra, 

*  Lancaster  v.  Amsterdam  Imp.  Co., 
140  N.  Y.  .576,  .584  (1894).  wherein  the 
court  said:  "As  a  corporation  de  facto, 
possessing  some  capacity  to  acquire  and 
convey  real  property,  its  conveyance  is 
unimpeachable  upon  any  ground  of  an 
excess  or  of  an  abuse  of  powers  con- 
ferred; and  unless  in  the  laws  of  this 
state  we  are  able  to  find  a  prohibition, 
expressed  herein,  or  to  be  implied  there- 
from, which  disabled  this  corporation 
from  acquiring  the  land  and  from  con- 
veying it,  the  plaintiff  would  obtain  a 
valid  title  to  the  premises  conveyed." 

sCowell  r.  Springs  Co.,  100  U.  S.  55 
(1879);  Runyan  v.  Coster,  14  Pet  122, 
130  (1840);  Christian  Union  v.  Yount 
101  U.  S.  352  (1879);  Barnes  v.  Suddard, 
117  111.  237  (1886);  New  Hampshire  Land 
Co.  r.  Tilton,  19  Fed.  Rep.  73  (1884); 
Lathrop  v.  Commercial  Bank,  8  Dana 
(Ky.),  114  (1839);  American  Bible  Soc. 
r.  Marshall,  15  Ohio  St  537  (1864);  State 
V.  Boston,  etc.  R.  R.,  25  Vt  433  (1853); 
Claremont  Bridge  v.  Royce,  42  Vt.  730, 
736  (1870);  Lumbard  v.  Aldrich,  8  N.  H. 
31  (183.5);  Cincinnati,  etc.  R.  R  r. 
Pearce,  28  Ind.  502  (1867) ;  Silver  Lake 


1668 


CH.  XLI.] 


INTRA   VIRES    ACTS    AND    CONTRACTS. 


[§  G95. 


This  right  of  foreign  corporations  to  acquire  and  hold  real  es- 
tate is,  however,  subject  to  the  statutory  laws  of  the  state  wherein 


Bank  v.  North,  4  Johns.  Ch.  370  (1820), 
holding  that  a  corporation  of  another 
state  may  file  a  bill  for  the  foreclosure 
of  a  mortgage  on  land  in  New  York; 
Columbus  Buggy  Co.  v.  Graves,  108  IlL 
459    (1884);    Black    v.    Delaware,   etc. 
Canal  Co.,  22  N.  J.  Eq.  130,  422  (1871), 
the  chancellor  saying  "  that  a  foreign 
corporation  may  own  property  in  this 
state  and  transact  business,  and  make 
contracts  in  it  to  be  performed  here,  is 
too  well  settled  to  discuss;"  Northern 
Transp.  Co.  v.  Chicago,  7  Biss.  45.  52 
(1874);  s.  C,  18  Fed.  Cas.  362,  365;  Leb- 
anon   Sav.    Bank    v.    Hollenbeck,    29 
Minn.  322  (1882);  New  York  Dry  Dock 
V.  Hicks.  5  McLean,  HI  (1850):  s.  C,  18 
Fed.  Cas.  151;  Whitman  Gold,  etc.  Co, 
V.  Baker.  3  Nev.  886  (1867):  Metropoli- 
tan Bank  v.  Godfrey,  23  111.  579  (1860), 
holding  also  that  foreign  corporations 
can  only  acquire  and  hold  lands  upon 
the  terms  and  conditions  and  in  the 
way   authorized  by  the   law  of  their 
creation.     They    may  loan  money  on 
real-estate  mortgages.  See  §  690,  supra. 
Cf.  Northwestern,  etc.  Ins.  Co.  v.  Over- 
holt,  4  Dill.  287  (1878);  s.  a,  18  Fed.  Cas. 
403;  Morris  Canal,  etc.  Co.  v.  Townsend, 
24   Barb.    658   (1857),   where   a  statute 
authorizing  a  foreign   corporation    to 
appropriate  land  on  payment  of  a  just 
compensation   to  its  owners  was  held 
valid  (affirmed  as  to  this  point.  Re  Town- 
send.  39  N.  Y.  171  —  1868);  Stewart  v, 
Lehigh  Valley  R  R,  38  N.  J.  L  505 
(1875);  National  Trust  Co.  v.  Murphy, 
30  N.  J.  Eq.  408    (1879);    Sherwood  v. 
American    Bible    Soc,   1    Keyes,    561 
(1864);    Elston   v.   Piggott,   94  Ind.    14 
(1883),  to  the  effect  that  it  may  hold 
land  purchased  at  a  judicial  sale  under 
a  decre&in  its  favor.     An  alien  corpo- 
ration may  purchase  and  hold  laud  in 
Missouri.     Missouri,    etc.  Ca  v.  Rein- 
hard,  114  Mo.  218  (1893).    The  Connec- 
ticut Land  Company  was  organized  in 
Connecticut  in  1795  and  owned  the  en- 


tire Connecticut  ''Western   Reserve." 
This  land  was  held  in  the  names  of 
trustees  for  the  benefit  of  the  stock- 
holders   of  the    company   until   1809, 
when  the  company  partitioned  the  land 
among  its  stockholders  and  divided  its 
assets  and  was  dissolved.     Holmes  v, 
Cleveland  R.  R.,  93  Fed.  Rep.  100  (1861), 
where  the  court  held  that  a  small  par- 
cel   of  land    which   accidentally  was 
omitted  in  making  such  division  of  the 
assets  could  not  be  claimed  by  the  heirs 
of  the  stockholders  fifty  years  after  the 
division  was  made.     Although  an  alien 
cannot  own  real  estate,  yet  he   may 
own  stock  in  a  corporation  which  owns 
real  estate.   Princeton  Min.  Ca  v.  First 
Nat.  Bank,  7  Mont.  530  (1888).     As  to 
foreign  corporations  holding  land,  see 
35  Cent.  L.  J.  166.  As  to  the  act  of  con- 
gress prohibiting  foreign  corporations 
from  owning  land  in  the  territories,  see 
Potter  V.  Rio  Arriba,  etc  Co.,  4  N.  M. 
322  (1888).    Where  a  Colorado  corpora- 
tion has  power,  among  other  things,  to 
deal  in  real   estate,  its   purchases   of 
land  in  Texas  cannot  be  questioned  by 
any  one  except  the  state,  even  though 
Texas  does  not  allow  incorporation  for 
that   purpose.     Galveston,  eta  Co.  v. 
Perkins,  26  S..  W.  Rep.  256  (Tex.  1894). 
Where  a  banker  sells  stock  to  a  lawyer, 
and  informs  the  latter  that  the  com- 
pany, the  owner  of  land  in  Mexico,  had 
a  right,  though  an  alien  to  Mexico,  to 
own  land  therein,  as  the  banker  had 
been  informed  by  his  attorney,  a  note 
of  the  vendee  in  payment  of  the  stock 
cannot  be  defeated  on  the  ground  that 
such  corporation  could  not  legally  hold 
the  land.     Daly  v.  Brennan,  87  Wis.  36 
(1894).     A  foreign  corporation  may  buy 
and  sell  land  if  authorized'  so  to  do  by 
its  charter.     Barcello  v.  Hapgood,  118 
N.  C.  712  (1896).     A  foreign  corporation 
may  own  land  in  Mississippi.    Taylor 
V.   Alliance    Trust    Co.,  71    Miss.    694 
(1894>;  120  Fed.  Rep.  893. 


1669 


§  095.] 


INTRA    VIRES    ACTS    AND    CONTRACTS. 


[cn.  XLI. 


the  land  is  situated,  and  also  to  its  public  policy  and  the  general 
policy  of  its  statutes  relating  to  domestic  corporations.' 


'  Christian  Union  v.  Yount,  101  U.  S. 
3r»2  (1879);  Carroll  v.  East  St  Louis,  67  III 
568  (1873),  where  a  cor[)oration  chartered 
by  Connecticut  for  tlie  sole  purpose  of 
buying  and  selling  laud  was  held  not 
competent  to  acquire  land  in  Illinois, 
because  such  business  was  contrary  to 
the    general  policy   of    the   state  and 
tended    to    create   perpetuities:  U.    S. 
Trust  Ca  v.   Lee,  73  III.  142  (1874),  in 
which  the  court  denied  the  right  of  a 
foreign  cor{)oration  to  hold  real  estate 
in  Illinois  beyond  what  is  necessary  to 
the  transaction  of  its    business  or  the 
collection  of  its  debts,  either  for  its  own 
benefit  or  in  trust  for  others;  U.  S.  Mort- 
gage Co.  V.  Gross.  7  Cent.  L.  J.  226  (1878), 
in  which  the  Illinois  rule  was  explained 
so  as  not  to  exclude  foreign  corpora- 
tions empowered  to  loan  money  on  real- 
estate  securities;  Thompson  v.  Waters, 
25  Mich.  214  (1872);  Ilolbert  v.  St.  Louis, 
etc.  Ry.,  45  Iowa,  23  (187G},  holding  that 
statutes  authorizing  railroads  to  take 
land  for  their  right  of  way  do  not  apply 
to  foreign  corporations:  Fanners'  L.  & 
T.  Co.  V.  McKinney,  0  McLean,  1  (1853); 
S.  C  8  Fed.  Cas.  1048;  Farmers'  L.  &  T. 
Co.  V.  Harmony  F.  &  M.  Ins.  Co.,  51  Barb. 
33  (1868);  White  r.  Howard,  46  N.  Y. 
144  (1871);  Hollis  v.  Drew  Theol.  Semi- 
nary, 95  N.  Y.  166  (1884),  holding  that 
foreign  corporations  are  subject  to  the 
New  York  statute  which  declares  in- 
valid a  devise  or  bequest  in  a  will  exe- 
cuted less  than  two  months  befoi-e  the 
death  of  the  testator.      In  Re  Prime's 
Estate,   136  N.   Y.  347,  362  (1893),  the 
court  said:  "  A  general  law  of  the  state 
prohibiting  corporations  from   exercis- 
ing particular  powers  \.  ill  operate  upon 
foreign  corporations,   not  because  the 
act  binds  such  corporations  ex  propria 
vigore,  but   for  the  reason    that   their 
exercise    of  such  powers  here   would 
violate  the  public  policy  of  the  state, 
indicated  by  the  general  restraint  im- 
posed  upon    our    own    corporations. " 


For  the  decisions  in  Pennsylvania  on 
its  statutes  and  policy  excluding  foreign 
corporations  from  holding  land,  see 
g  695,  supra.  Whereland  is  claimed  by  a 
foreign  corporation,  the  courts  of  the 
state  in  which  the  land  is  situated  will 
construe  its  charter  and  determine 
whether  it  authorizes  the  corporation 
to  hold  the  real  estate.  Boyce  v.  St. 
Louis,  29  Barb.  650(1859);  White  r.  How- 
ard, 38  Conn.  342  (1871).  And  in  con- 
struing such  foreign  charters  the  court 
will  consider  the  decisions  of  the  courts 
of  the  state  granting  them,  chough  it 
will  not  be  bound  thereby.  Thompson 
r.  Waters,  25  Mich.  214  (1872);  Boyce  r. 
St.  Louis,  29  Barb.  650  (1859).  The 
right  of  a  corporation  to  hold  realty  is 
determined  not  alone  by  its  charter, 
but  by  the  statutes  of  the  state  where 
the  land  ia  A  corporate  deed  in  a 
chain  of  title  is  presumed  good.  Tar- 
pey  V.  Deseret  Salt  Co.,  5  Utah.  494 
(1888).  If  a  foreign  corporation  is  not 
authorized  to  hold  real  estate,  it  cannot 
take  land  in  another  state  by  devise. 
Boyce  v.  St  Louis,  29  Barb.  650  (1859); 
Starkweather  v.  American  Bible  Soc, 
72  111.  50  (1874). 

On  the  other  hand,  if  by  its  charter, 
either  expressly  or  impliedly,  a  corpora- 
tion may  take  lands  by  devise,  an  in- 
dependent provision  of  law  in  its  own 
state  prohibiting  corporations  from 
taking  by  devise,  unless  expressly  au- 
thorized to  do  so,  will  not  prevent  its 
taking  by  devise  in  another  state.  Amer 
ican  Bible  Soc.  v.  Marshall,  15  OhiOr 
St  537  (1864);  Thompson  v.  Swoope,  24 
Pa.  St  474  (1855);  Chamberlain  r.  Cham- 
berlain, 43  N.  Y.  424  (1871),  but  here  the 
bequest  was  of  personal  property.  To 
same  eflfect,  Sherwood  v.  American 
Bible  Soc,  4  Abb.  App.  Dea  227  (1864;. 
A  devise  of  land  to  a  foreign  corpora- 
tion is  void  unless  authorized  by  the 
law  of  the  state  where  it  lies,  even 
though    such    foreign   corporation    is 


1670 


CH. 


XLI.] 


INTRA   VIRES    ACTS   AND    CONTRACTS.  [§§  690-700. 


Only  the  state  or  a  dissenting  stockholder  can  question  the  power 
of  a  foreign  corporation  to  hold  land.*  And  only  the  state  can  ob- 
ject to  a  foreign  corporation  holding  more  land  than  the  statutes 
permit.^  A  deed  of  land  to  a  foreign  corporation  in  Colorado  is 
valid,  although  the  corporation  has  not  filed  a  copy  of  its  charter 
as  required  by  the  statutes.     The  grantor  cannot  complain.^ 

A  state  may  restrict  the  right  of  foreign  corporations  to  take  and 
hold  real  property  within  its  borders.* 

§§  696-700.  Foreign  ooiyorations  —  Tlieir  right  to  do  hiisiness  in 
the  various  states  —  Restrictions  thereon. —  The  corporations  of  one 
state  may  exercise  any  or  all  of  their  powers  in  another  state,  un- 
less the  latter  state,  by  its  statutes,  decisions,  or  policy,  forbids.^ 
This  right  of  a  corporation  to  act  and  contract  in  any  state  is  due 
to  the  spirit  of  comity  between  the  states.*^    It  is  constitutional, 


duly  authorized  by  its  charter  to  take 
it.  White  V.  Howard,  46  N.  Y.  144 
(1871),  followed  in  United  States  v.  Fox, 
94  U.  S.  315  (1876),  declaring  void  a  de- 
vise of  land  in  New  York  to  the  gov- 
ernment of  the  United  States. 

'  Seymour  v.  Slide,  etc.  iMines,  153  U. 
S.  523  (1894).  The  state  alone  can  ob- 
ject to  a  foreign  corporation  holding 
more  than  five  thousand  acres  of  land 
in  the  state  as  prescribed  by  the  stat- 
utes. American  Mortgage  Co.  v.  Ten- 
nille,  87  Ga.  28  (1891).  Where  a  Con- 
necticut company  owning  land  in  South 
Dakota  sells  it  to  a  Minnesota  corpora- 
tion organized  to  speculate  in  land,  a 
subsequent  deed  by  the  former  com- 
pany to  an  individual  is  not  good.  Only 
the  state  can  question  the  power  of  the 
Minnesota  corporation  to  take  title. 
The  constitutional  provision  of  South 
Dakota  relative  to  land  does  not  change 
this  rule.  Gilbert  v.  Hole,  2  S.  D.  164 
(1891).  Only  the  state  can  claim  that 
a  foreign  corporation  has  no  power  to 
own  land  in  the  state.  McKinley,  etc. 
Co.  V.  Gordon,  113  Iowa,  481  (1901). 
Even  though  a  foreign  corporation  is 
prohibited  by  statute  from  ownmg  land 
in  the  state,  and  it  purchases  land  in 
the  name  of  an  agent,  and  the  agent 
transfers  it  without  consideration,  such 
foreign  corporation  may  bring  suit  to 
recover  the  title  to  the  land.     Only  the 

1G7 


state  can  object  to  its  owning  the  land. 
Omnium,  etc.  Co.  v.  North  American 
T.  Co.,  68  Pac.  Rep.  1089  (Kan.  1902). 

'  Reorganized  Church,  etc.  v.  Church 
of  Christ,  60  Fed.  Rep.  937  (1894). 

SFritts  V.  Palmer,  132  U.  S.  282  (1889). 

<  Runyan  v.  Coster,  14  Pet.  132  (1840); 
Thompsons  Waters,  25  Mich.  214(1872); 
United  States  v.  Fox,  94  U.  S.  315 
(1876). 

5  Quoted  and  approved  in  Tootle  v. 
Singer,  88  N.  W.  Rep.  446  (Iowa,  1901). 

•J  As  to  the  power  of  a  foreign  corpo- 
ration to  do  business  in  New  York,  the 
court,  in  Lancaster  v.  Amsterdam  Imp. 
Co.,  140  N.  Y.  576,  591  (1894),  said:  "It 
seems  to  me  to  be  very  clear,  upon  ex- 
amination of  our  laws  and  by  reference 
to  such  judicial  opinions,  that  there 
never  was  a  time  in  the  history  of  the 
state  when  a  foreign  corporation  was 
prevented  from  entering  its  bounda- 
ries to  transact  any  lawful  business 
which  a  non-resident  natural  person 
might  have  transacted  here."  In  .Peo- 
ple V.  Fidelity,  etc.  Co.,  153  111.  25  (1894), 
it  was  held  that,  in  the  absence  of  an 
express  prohibitory  statute,  a  corpora- 
tion legally  organized  under  the  laws 
of  another  state  to  do  a  multiform  in- 
surance business  may  do  such  business 
in  Illinois,  although  such  a  corporation 
could  not  be  organized  under  the  laws 
of  Illinois. 
1 


§§  G9G-700.] 


INTEA    VIRES    ACTS    AND    CONTRACTS, 


[CH.   XI.I. 


however,  for  a  state  to  refuse  to  allow  that  privilege,'  except  as 
against  corporations  engaged  in  interstate  commerce. 

A  state  may  require  a  foreign  corporation  to  pay  a  license  fee 
before  doing  business  within  its  borders.*  A  statute  of  a  state  pro- 
hibiting a  foreign  corporation  from  doing  business  in  the  state,  if 
such  corporation  is  connected  with  a  trust,  is  constitutional.' 

Foreign  corporations  must  exercise  their  powers  and  franchises 
in  accordance  with  the  laws  of  the  state  where  they  do  business, 
and  in  consonance  with  the  principles  of  its  general  policy.*     In 


'  Bank  of  Augusta  v.  Earle.  13  Pet. 
519  (1839);  Western  Union  Tel.  Co.  v. 
Mayer,  28  Oliio  St  521  (1876);  Newburg 
Petroleum  Co.  v.  Weare.  27  Ohio  St  343 
(1875);  Paul  v.  Virginia,  8  Wall.  168 
(1868);  affirmed  in  Ducat  v.  Chicago, 
etc.,  10  Wall.  410  (1870);  Matthews  v. 
Theological  Seminary,  2  Brewst  (P;i.) 
541  (1868);  Lantl  Grant  etc.  Co.  v.  Cof- 
fey County,  6  Kan.  245  (1870);  Ducat  r. 
Chicago,  48  IIU  172  (1868);  Williams  r. 
Cresvvell.  51  Miss.  817  (1876);  Hadley  v. 
Freedmen's,  etc.  Co.,  2  Tenn.  Ch.  122 
(1874);  Liverpool  Ins.  Co.  v.  Massachu- 
setts, 10  Wall.  566  (1870);  s.  C  sub  nom. 
Oliver  v.  Liverpool,  eta  Ins.  Co..  100 
Mass.  531;  Kennebec  Co.  v.  Augusta 
Ins.  etc.  Co.,  72  Mass.  204  (18.j6);  Day  v. 
Ogdensburgh,  etc,  R  R.,  107  N.  Y.  129 
(1887),  where  a  domestic  company 
leased  a  railroad  in  another  state; 
Kerchner  v.  Gettys,  18  S.  C.  521  (1882); 
Mutual,  etc.  Ins.  Co.  v.  Davis,  12  N.  Y. 
569  (18.55);  Slaughter  r.  Commonwealth, 
13  Gratt  (Va.)  767  (1856);  Doyle  v.  Con- 
tinental Ins.  Co.,  94  U.  S.  535  (1876); 
Fire  Department  v.  Noble,  3  E,  D.  Smith, 
440  (1854);  People  v.  Philadelphia  Fire 
Assoc,  92  N.  Y.  311  (1883);  Atterbury 
V.  Knox,  4  B.  Mon.  (Ky.)  90  (1843),  where 
foreign  corporations  were  forbidden  to 
do  banking.  See  also  Cooley,  Const 
Law,  p.  183;  Wharton,  Conf.  L.,  §  48a. 
In  Diamond  Match  Co.  v.  Powers,  51 
Mich.  145  (1883),  the  court  refused  to 
mandamus  the  defendant,  a  register  of 
deeds,  to  allow  the  plaintiff,  a  foreign 
corporation,  to  make  abstracts  of  all  the 
land  in  the  county,  there  being  no  evi- 
dence of  the  corporate  powers  of  the 

16' 


plaintiff.  A  foreign  cori^oration  may 
make  a  loan  in  Missouri.  Ferguson  v. 
Soden.  Ill  Mo.  208  (1892).  An  English 
corporation  is  of  course  an  alien  corpo- 
ration. Eureka,  etc.  Co.  r.  Richmond, 
etc.  Ca,  2  Fed.  Rep.  829  (1880).  A  state 
may  exclude  a  foreign  corporation  from 
doing  l)usiness  in  the  state  unless  en- 
gaged in  interstate  business.  Huffman 
V.  Western,  etc.  Ca,  13  Tex.  Civ.  App. 
169  (1896). 

•-'Walker  v.  Springfield,  94  111.  364 
(1880);  Pembina,  etc.  Ca  v.  Pennsylva- 
nia, 125  U.  S.  181  (1888X  A  stockholder  in 
a  corporation  cannot  maintain  a  bill  to 
enjoin  the  payment  by  the  corporation 
of  the  tax  impo.sed  by  act  of  congress 
upon  such  corporation  for  doing  busi- 
ness in  Alaska.  Corbus  v.  Alaska,  etc. 
Ca,  187  U.  S.  455  (1903). 

'  Waters-Pierce,  etc.  Co.  v.  Texas,  177 
U.  S.  28  (1900).  The  Tennessee  statute 
prohibiting  foreign  corporations  froffi 
doing  business  in  the  state  wiiere  they 
have  combined  to  lessen  competition 
and  influence  prices  is  legal,  and  the 
state  may  file  a  bill  to  restrain  foreign 
corporations  from  doing  business  in  the 
state  where  they  have  violated  such 
statute.  State  v.  Schlitz,  etc.  Co.,  59 
S.  W.  Rep.  1033  (Tenn.  1900). 

*Runyan  u  Coster,  14  Pet  122  (1840); 
Re  Comstock,  3  Sawyer,  218  (1874);  s.  C, 
6  Fed.  Cas.  244;  Phoenix  Ins.  Ca  v.  Com- 
monwealth, 5  Bush  (Ky.  i,  68  (1868 1;  Gill 
V.  Kentucky,  etc.  Co.,  7  Bush  (Ky.),  635 
(1870);  Martin  v.  Mobile,  etc.  R.  R,  7 
Bush  (Ky.),  116  (1870);  Milnor  v.  New 
York,  etc.  R.  R,  53  K  Y.  363  (1873); 
Frazier  v.   Willcox,  4    Rob.   (La.)  517 


•CH.  XLI.] 


INTRA    VIRES    ACTS    AND    CONTRACTS.  [§§  690-700. 


Missouri  it  is  held  that  a  foreign  corporation  admitted  to  do  busi- 
ness in  the  state,  either  by  comity  or  by  express  statutory  provisions, 
<5an  transact  only  the  business  which  a  domestic  corporation  of  like 
character  is  authorized  to  transact,  and  hence  that  a  foreign  rail- 
road company  having  power  to  build  telegraph  lines  as  well  as  a 
railroad  cannot  build  a  telegraph  line  in  Missouri.' 

The  validity  and  enforceability  of  a  contract  by  a  foreign  cor- 
poration are  determined,  not  by  its  charter,  but  by  the  law  prevail- 
ing where  the  contract  is  made.- 


.(1843);  Bard  v.  Poole,  12  N.  Y.  495  (1855); 
Diamond  Match  Co.  v.  Powers,  51  Mich. 
145  (1883);  Pierce  v.  Crompton,  13  R.  I. 
312  (1881);  Stevens  v.  Pratt.  101  III.  206 
(1882),  holding  that  the  general  policy 
of  a  state  restricting  foreign  corpora- 
tions must  be  expressed  in  some  affirm- 
ative way;  Blair  v.  Perpetual  Ins.  Co., 
10  Mo.  559,  564  (1847):  2  Kent.  Com.  284, 
285.  The  general  incorporating  law  of 
Massachusetts,  which  does  not  allow 
incorporation  for  manufacturing  liquor, 
does  not  prevent  incorporation  for  sell- 
ing liquor,  and  hence  a  foreign  corpora- 
tion may  sell  liquor  in  that  state.  Enter- 
prise, etc.  Co.  V.  Grimes,  173  Mass.  252 
( 1899).  A  foreign  corporation  may  trans- 
act business  within  the  state  provided 
a  similar  domestic  corporation  may 
transact  such  business  within  the  state. 
Ployd  V.  National,  etc.  Co.,  49  W.  Va. 
1327  (1901).  Where  the  statutes  of  a 
state  provide  that  a  mortgage  shall  not 
be  given  by  a  domestic  mining  corpora- 
tion on  its  mines,  except  by  the  consent 
•of  two-thirds  of  the  capital  stock,  and 
the  statutes  also  provide  that  foreign 
corporations  shall  not  be  allowed  to  do 
business  within  the  state  on  more  favor- 
able terms  than  domestic  corporations, 
a  mortgage  by  a  foreign  corporation  on 
a  mine  within  the  state,  without  the 
consent  of  the  stockholders,  is  void. 
Williams  v.  Gold  Hill,  etc.  Co.,  96  Fed. 
Rep.  454  (1899);  aff'd,  186  U.  S.  157  (1902). 
Cf.  Saltmarsh  v.  Spaulding,  147  Mass. 
224.  The  legislature  may  require  for- 
eign coal  mining  corporations  to  weigh 
the  coal  before  it  is  screened.  Woodson 
-y.  State,  65  S.  W.  Rep.  465  (Ark.  1900). 


1  State  V.  Cook,  71  S.  W.  Rep.  829  (Mo. 
,19031. 

2  A  charter  provision  prohibiting  the 
corporation  from  selling  its  bonds  below 
par  does  not  invalidate  the  bonds  wlien 
sold  to  a  bona  fide  purchaser  in  another 
state.  Elsworth  v.  St.  Louis,  etc.  R.  R., 
33  Hun,  7;  aflf'd,  98  N.  Y.  553  (1885). 
See  also  Philadelphia  Loan  Co.  v. 
Towner,  13  Conn.  249  (1839);  Nichols  v. 
Mase,  94  N.  Y.  160  (1883),  holding  that 
the  holder  of  bonds  issued  by  a  foreign 
corporation,  valid  upon  their  face,  is 
not  bound  to  show  that  the  provisions 
of  the  statute  which  authorize  their 
issue  have  been  complied  with;  Bard  v. 
Poole,  12  N.  Y.  495  (1855),  holding  that 
a  corporation  prohibited  by  its  charter 
from  contracting  for  interest  over  a 
certain  rate  may,  however,  contract  for 
a  greater  rate  in  another  state  under 
whose  laws  it  is  legal.  To  same  effect, 
Knox  V.  Bank  of  U.  S.,  26  Miss.  655 
(1854),  and  Bank  of  U.  S.  v.  Owens,  2  Pet. 
527  (1829);  American  Life  Ins.  Co.  v. 
Dobbin,  Hill  &  D.  (Lalor's  Supp.)  252 
(1843),  where,  construing  the  New  York 
restraining  act,  it  was  held  that  a  for- 
eign corporation  could  purchase  and 
sell  promissory  notes,  but  not  bills  of 
exchange;  Bank  of  Chillicothe  v.  Dodge, 
8  Barb.  233  (1850),  holding  that  money 
paid  by  a  foreign  corporation  in  viola- 
tion of  a  local  law  is  recoverable  by  it. 
For  cases  under  a  statute  of  Missouri, 
see  Bank  of  Louisville  v.  Young,  37  Mo. 
398  (1866);  Connecticut  Mut.  L.  Ins.  Co. 
V.  Albert,  39  Mo.  181  (1866);  Long  v. 
Long,  79  Mo.  644  (1883).  But  corporate 
creditors  and  stockholders  are  subject 


167? 


gg  C9G-700.] 


INTR.V    VIKES    ACTS    AND    CONTRACTS. 


[CH.   XLI. 


A  state  legislature  may  impose  such  terms,  conditions,  and  re- 
strictions upon  foreign  corporations,  other  than  corporations  en- 
gaged in  interstate  commerce,  as  it  may  see  fit.'  Quo  warranto  lies 
against  foreign  corporations  doing  business  in  a  state  contrary  to 
its  statutes.- 


to  provisions  and  regulations  contained 
in  the  ciiarter.  Canada  Southern  Ky. 
V.  Gebhard.  109  U.  S.  527,  5;i6  (188^), 
where  a  statutory  recapitalization  was 
lieM  to  be  valid;  Hitchcock  v.  U.  S. 
Bank,  7  Ala.  (N.  S.)  380.  43.-.  (181.-)).  Iiold- 
in^  that  the  corporation  can  exercise 
only  the  powers  piven  to  it  by  its  char- 
ter. A  foreif^n  corporation  may  take 
any  interest  allowed  by  the  place  of  the 
contract,  though  such  interest  is  usuri- 
ous by  its  charter.  Hitchcock  v.  U.  S. 
Bank,  7  Ala  (N.  &)  386  (ISl.J). 

»  Paul  V.  Virginia.  8  Wall.  1G8  (1868); 
Ducat  V.  Chirago,  10  Wall.  410  (1870); 
Doyle  V.  Continental  Ins.  Co.,  94  U.  S. 
535(1876);  Lafayette  Ins.  Co.  U.French, 
18  How.  404  (18")0).  holding  that  a  cor- 
poration doing  business  in  such  state  is 
presumed  to  assent  to  its  rules;  State  f. 
Lathrop,  10  La.  Ann.  398  (18.55);  State 
V.  Fosdick,  21  La.  Ann.  434  (1869);  Indi- 
ana r.  American  Exp.  Co.,  7  Bis&  227 
(1876);  a  a,  13  Fed.  Cas.  24;  Fire  De- 
partment V.  Noble,  3  K  D.  Smith,  440 
(1854);  Smith  v.  Alford,  63  Barb.  41.j 
(1866);  Merrick  v.  Van  Santvoord.  34  N. 
y.  208  (1866);  Lamb  v.  Lamb,  13  Bankr. 
Reg.  17  (1875);  s.  a,  14  Fed.  Cas.  1016; 
Farmers',  etc  Ins.  Co.  r.  Harrah,  47  lud. 
236  (1874);  Cincinnati  Mat.  etc.  Co.  v. 
Rosenthal,  55  111.  85  (1870),  holding  that 
a  charter  power  to  transact  business  in 
other  states  does  not  exempt  them  from 
local  restrictions;  People  v.  Howard,  50 
Mich.  239  (1883);  People  v.  Philadelpliia 
Fire  Assoc,  92  N.  Y.  311  (1883):  Gold- 
smith V.  Home  Ins.  Co.,  62  Ga.  379  (1879), 
where  a  statute  imposing  upon  foreign 
corporations  the  same  license  taxes  as 
their  own  states  impose  was  held  con- 
stitutional ;  Home  Ins.  Co.  v.  Davis,  29 
Mich.  238  (1874);  Slaughter  u  Common- 
wealth, 13  Graft  (Va.)  767  (18.56);  Ameri- 
can Union  Tel.  Co.  v.  Western  Union 

16 


Tel.  Cc.  67  Ala.  26  (1880);  Matthews  r. 
Theological  Seminary,  2  Brewst  (Pa.) 
541  U86S);  Commonwealth  r.  Milton,  12 
B.  Mon.  (Ky.)  212  (1851);  Tioga  R.  R  v. 
Blossburg.  etc  R  R.,  20  Wall.  137  (1873), 
proliibiting  foreign  corporations  from 
setting  up  the  statute  of  limitations. 
Foreign  corporations  doing  business  in 
a  state  which  pre.scribes  statutory  pro- 
visions for  that  business  cannot  in  con- 
tracts do  away  with  the  application  to 
it  of  these  provisions.  Fletcher  t'.  New 
York  Life  Ins.  Co.,  13  Fed.  Rep.  52ft 
(18>?2).  The  sjime  rule  applies  to  an  in- 
surance corporation  chartered  by  con- 
gress. It  must  conform  to  state  restric 
tions.  Daly  v.  National  Life  Ins.  Co., 
64  Ind.  1  (1878).  A  railroad  company, 
by  going  into  another  state  and  liaving 
and  operating  a  road  there,  subjects  it- 
self to  the  legislation  of  that  state. 
Stone  V.  Illinois  Central  R  R.,  116  U.  S. 
347  (1885).  Foreign  corporations  may 
be  compelled  to  pay  a  license  fee  before 
doing  business.  Pembina,  etc  Co.  r. 
Pennsylvania,  125  U.  S.  181  (1888). 

2  Stater.  Fidelity,  etc.  Co.,  39  Minn. 
538  (1888).  Mandamus  does  not  lie  at 
the  instance  of  the  state  to  compel  a 
foreign  corporation  te  qualify  to  do 
business  in  the  state.  Secretary  of  State 
V.  National,  etc  Co.,  86  N.  W.  Rep.  124 
(Mich.  1901).  Underthe  Nebraska  stat- 
ute, in  a  suit  instituted  by  the  state  to 
enjoin  a  foreign  corporation  from  doing 
business  in  the  state  on  the  ground  that 
it  is  violating  an  anti-trust  statute,  the 
court  may  order  the  defendant  to  allow 
the  plaintilT  to  examine  the  defendant's 
books  and  records  for  the  purpose  of 
obtaining  evidence  in  the  case.  State 
V.  Standard  Oil  Co.,  61  Neb.  28  (1900). 
Where  a  foreign  corporation  has  not 
complied  with  reasonable  regulations 
by  the  state  as  a  condition  of  its  doing 
74 


CII.   XLI.] 


INTEA   VIKES    ACTS    AND    CONTKACTS.  [§§  696-700,. 


Restrictions  by  a  state  on  foreign  corporations  must  not  conflict 
with  provisions  of  the  federal  constitution.  Thus,  the  restriction 
must  not  interfere  with  interstate  commerce,^  or  with  the  jurisdic- 
tion of  the  federal  courts,^  or  with  the  removal  of  causes  from  state 
to  United  States  courts.'     Corporations  are  not  "citizens''  entitled 


business  in  the  state,  quo  warranto  lies 
to  oust  it  of  its  claim  of  right  to  do  busi- 
ness in  the  state.  State  v.  American, 
etc.  Co.,  69  Pac.  Rep.  563  (Kan.  1902). 

1  Pensacola  Tel.  Co.  v.  Western  Union 
Tel.  Co.,  96  U.  S.  1  (1877);  Telegraph 
Co.  V.  Texas,  105  U.  S.  480  (1881);  Rae 
V.  Grand  Trunk  Ry.,  14  Fed.  Rep.  401 
(1882).  A  foreign  corporation  engaged 
in  interstate  commerce  may  sue  in  a 
state  court  without  showing  that  it  has 
complied  with  the  laws  of  the  state  en- 
titling it  to  do  business  there.  Zion, 
etc.  Assoc.  V.  Mayo,  22  Mont.  100  (1899). 
A  foreign  corporation  may  sue  a  rail- 
road company  in  Texas  for  breach  of  a 
contract  in  regard  to  transportation  of 
cattle  from  Texas  to  another  state, 
even  though  such  foreign  corporation 
has  not  filed  its  charter  with  the  secre- 
tary of  state,  and  hence  could  not  main- 
tain an  J'  other  suit.  A  state  cannot  pro- 
hibit a  foreign  corporation  from  institut- 
ing suit  on  a  contract  involving  inter- 
state commerce.  Texas, etc.  Ry.  v.  Davis, 
93  Tex,  378  (1900);  Pasteur,  etc.  Co.  v. 
Burkey,  22  Tex.  Civ.  App.  232  (1899). 
Where  an  Indiana  corporation  ships 
goods  to  Texas,  it  may  sue  in  Texas  for 
the  price  thereof,  although  it  has  not 
filed  its  articles  of  incorporation  in 
Texas  as  required  by  statuta  The  busi- 
ness is  interstate  business.  A  foreign 
corporation  not  having  an  office  in  the 
state  may  sell  machinery  to  persons  in 
Tennessee  without  filing  its  papers,  etc. 
Milan,  etc.  Co.  v.  Gorten,  93  Tenn.  590 
(1894).  The  Arkansas  provision  requir- 
ing foreign  corporations  to  file  certifi- 
cates, etc.,  and  rendering  void  con- 
tracts made  by  a  foreign  corporation 
not  complying  therewith,  does  not 
apply  to  a  sale  of  a  sewing-machine 
made  in  Ohio  and  shipped  to  Arkansas, 

Gunn 


this  being  interstate  commerce. 


V.  White  S.  M.  Co.,  57  Ark.  24  (1892). 
As  against  a  milling  company  that  so- 
licits business  and  sells  goods  through 
commercial  agents,  the  statute  of  Texas 
prohibiting  a  foreign  corporation  from 
transacting  business  in  the  state  with- 
out filing  its  articles  of  incorporation 
with  the  secretary  of  state  is  void  as 
being  an  interference  with  interstate 
commerce.  Bateman  v.  Western,  etc. 
Co.,  1  Tex.  Civ.  App.  90  (1892).  See  also 
cases  in  note,  p.  1676,  restricting  the 
application  of  these  statutes  where 
sales  are  made  through  agents,  etc. 

2  Baltimore,  etc.  R.  R.  v.  Cary,  280hio 
St.  208  (1876);  Moore  v.  Chicago,  etc. 
Ry.,  21  Fed.  Rei).  817  (1884). 

3  Southern  Pac.  Co.  v.  Denton,  146 
U.  S.  202  (1892);  Barron  v.  Burnside,  121 
U.  S.  186  (1887);  Doyle  v.  Continental 
Life  Ins.  Co.,  94  U.  S.  535  (1876);  Insur- 
ance Co.  V.  Morse,  20  Wall.  445  (1874); 
Shelby  v.  Hoffman,  7  Ohio  St  450(1857); 
Hartford  F.  Ins.  Co.  v.  Doyle,  6  Biss. 
461  (1875):  &  c,  11  Fed.  Cas.  702.  A 
statute  requiring  foreign  corporations 
to  agree  not  to  remove  suits  to  the  fed- 
eral courts  is  void.  Rece  v.  Newport 
News,  etc,  Co.,  32  W,  Va.  164  (1889); 
Commonwealth  v.  East  Tennessee  Coal 
Co.,  97  Ky.  238  (1895).  Under  the  stat- 
ute of  North  Carolina  requiring  foreign 
telephone  companies  to  file  copies  of 
their  charter  and  by-laws  and  thereby 
become  domestic  corporations  before 
doing  business  in  the  state,  a  foreign 
telephone  company  that  has  complied 
with  this  cannot  remove  a  case  to  the 
federal  court  on  the  ground  of  diverse 
citizenship.  Debnam  v.  Southern,  etc. 
Co.,  36  S.  E.  Rep.  269  (N.  C.  1900).  A 
contrary  conclusion  was  reached  in 
South  Carolina  as  to  a  foreign  railroad 
corporation.  Wilson  r.  Southern  Ry., 
36  S.  E.  Rep.  701  (S.  C.  1900).     A  statute 


1675 


^§  690-700.1 


IXTRA    VIRES    ACTS    AND    CONTRACTS. 


[cn.   XLI. 


to  the  privileges  and  immunities  of  citizens  in  the  several  states 
within  the  meaning  of  article  4,  section  2,  of  the  constitution  of  the 
United  States.'  A  state  cannot  prohibit  agents  of  foreign  corpo- 
rations entering  the  state  and  selling  gooils.-  A  statute  requiring 
corporations,  foreign  and  domestic,  to  pay  their  employees  once  a 
month  and  giving  the  latter  a  lien  prior  to  all  liens,  excepting  re- 
corded mortgages,  is  unconstitutional  as  being  a  grant  of  special 
privileges,  and  as  denying  the  corporation  the  equal  protection  of 
the  laws,  and  as  dejiriving  tiiem  of  their  property  without  due 
process  of  law  in  that  such  statute  interferes  with  the  freedom  to 
make  contracts.'  Where  a  foreign  railroad  company  has  extended 
its  lines  into  a  state  under  a  statute,  the  legislature  of  the  latter  state 
cannot  afterwards  require  it  to  become  a  domestic  corporatioti. 
Such  a  statute  impairs  the  obligation  of  the  contract.*  AVhere  the 
statutes  provide  that  no  foreign  corporation  shall  transact  business 
which  a  domestic  corpoptition  cannot  transact,  and  domestic  corpo- 
rations are  not  allowed  to  act  as  executors,  a  foreign  corporation 
cannot  act  as  such  in  the  state.'^ 

A  statute  making  voiti  all  contracts  made  in  the  state  by  foreign 
corporations  unless  a  certain  fee  is  paid  to  the  state  is  unconstitu- 
tional as  to  sales  made  by  traveling  salesmen  of  foreign  corpora- 
tions.® 


requiring  foreign  corporations  to  file  a 
stipulation  and  obtain  a  permit,  which  is 
forfeiteJ  in  case  the  corporation  removes 
any  case  to  the  federal  courts,  is  void. 
And  even  if  valid  the  corporation  can- 
not be  forbidden  to  litigate  past  rights 
or  I'ecover  property  already  acquired. 
Texas,  etc.  Co.  v.  Worsham,  76  Tex.  556 
(1890).  See  also  Allen  v.  Texas,  etc.  Ry., 
25  Fed.  Rep.  518  (1885),  where  a  consoli- 
dation of  a  United  States  corporation 
with  domestic  corporations  had  been 
made  and  state  statutes  prohibited  the 
removal 

1  Paul  V.  Virginia.  8  Wall.  ICS  (1868), 
ho! ding  that  a  statute  requiring  foreign 
insurance  companies  to  obtain  a  license 
before  doing  business  is  not  in  conflict 
with  that  clause;  Western  Union  Tel. 
Co.  V.  Mayer,  28  Ohio  St.  521  (1S76); 
Tatem  v.  Wright,  33  N.  J.  L.  429,  444 
(1853);  Warren  Mfg.  Co.  v.  JEtna,  Ins. 
Co.,  2  Paine,  501  (a  1837);  &  C,  29  Fed. 
Cas.  294;  Fire  Department  r.  Noble,  3 
E.  D.  Smith,  440  (1854);  Ducat  v.  Chi- 

16 


cago,  48  111.  172  (1868 1;  Cincinnati,  etc. 
Co.  r.  Rosenthal,  55  111.  85  (1870);  Pierce 
V.  Crompton.  13  R  I.  312  (1881).  Cf.  Mc- 
Kinley  v.  Wheeler,  130  U.  S.  630  (1889); 
Thomas  v.  Chisholm.  13  Colo.  105  (1889). 

2  Davis,  etc.  Co.  v.  Dix,  64  Fed.  Rep. 
40G  (1894). 

5  Johnson  v.  Goodyear.etc.  Ca,  59  Pac. 
Rep.  304  (Cal.  1899).  To  same  effect. 
State  V.  Haun,  59  Pac.  Rep.  340  (Kan. 
1890). 

*  Commonwealth  r.  Mobile,  etc.  R.  R., 
64  S.  W.  Rep.  451  (Ky.  1901).  Under 
the  Kentucky  statutes  prohibiting  for- 
eign corporations  from  owning  or  op- 
erating railroads  in  the  state  until  they 
have  become  domestic  corporations, and 
prescribing  the  method  of  becoming 
such,  they  do  become  domestic  corpo- 
rations if  they  comply  therewith.  Davis, 
Adm'r,  r.  Chesapeake,  etc.  Ry.,70  S.  W. 
Rep.  857  (Ky.  1902). 

5  Farmers',  etc.  Ca  v.  Smith,  51  Atl. 
Rep.  609  (Conn.  1902). 

*>  Aultman,  etc.  Co.  v.  Holder,  68  Fed. 
76 


CH.  XLI.] 


INTRA    VIRES    ACTS    AND    CONTRACTS.  [§§  69G-700, 


"Where  a  state  statute  provides  that  contracts  made  by  foreign 
corporations  shall  not  be  enforced  in  the  courts  of  the  state  before 
compliance  with  certain  requirements  of  the  statute,  the  prohi- 
bition will  not  be  extended  to  suits  brouoht  in  the  federal  courts, 
the  contracts  not  being  void.^  Even  though  a  foreign  corporation 
is  engaged  in  a  state  in  manufacturing  products  and  sending  them 
beyond  the  limits  of  the  state,  yet  a  state  statute  forbidding  foreign 
corporations  to  transact  business  in  the  state  until  they  have  filed 
a  copy  of  their  charter  with  the  secretary  of  state  is  legal,  and  the 
penalty  that  the  contracts  of  such  a  corporation  in  the  state  are 
void  as  regards  the  corporation,  but  are  enforceable  against  the  cor- 
poration, applies,  and  such  statute  may  apply  to  a  contract  made 
after  the  statute  was  enacted  but  before  it  went  into  effect.^ 

A  requirement  that  a  foreign  corporation  shall  duly  execute 
a  power  of  attorney  appointing  an  agent  upon  whom  service  of 
process  may  be  made,  or  obtain  a  certificate  from  a  state  officer,  is 
valid.  The  corporation  is  usually  forbidden  to  contract  or  sue  in 
the  state  before  complying  with  it.  It  was  formerl}^  held  that  con- 
tracts made  before  complying  with  the  requirement  were  void;" 


Rep.  467  (1895).  It  has  been  held  that 
a  license  fee  required  of  foreign  corpo- 
rations before  doing  business  in  the 
state  is  unconstitutional  as  an  inter- 
ference with  interstate  commerce.  Coit 
V.  Sutton.  102  Mich.  32-t  1 1894).  But  see 
Moline  Plow  Co.  v.  Wilkinson,  105 
Mich.  57  (1895).  A  statute  by  which 
Pennsylvania  requires  a  New  York 
railroad  corporation  doing  business  in 
Pennsylvania  to  pay  to  the  latter  a 
part  of  coupons  due  to  residents  of 
Pennsylvania,  such  coupons  being  by 
their  terms  payable  in  New  York,  is 
void.  New  York,  Lake  Erie,  etc.  R.  R. 
V.  Pennsylvania,  153  U.  S.  628  (1894). 

1  Sullivan  v.  Beck,  79  Fed.  Rep.  200 
(1897).  A  statute  that  no  suit  shall  be 
brought  by  a  foreign  corporation  which 
shall  not  have  filed  a  statement  con- 
cerning its  business  does  not  prevent 
the  federal  courts  from  exercising  juris- 
diction. Barling  v.  Bank  of  British  N. 
A.,  50  Fed.  Rep.  260  (1893).  See  120  id.  893. 

2  Diamond,  etc.  Co.  v.  United  States, 
etc  Co.,  187  U.  S.  611  (1908) ;  the  court  hold- 
ing also  that  the  corporation  is  doing 
business  in  the  state  when  it  takes  the 
management  of  a  factory  and  helps  to 


operate  it  and  supplies  it  with  a  super- 
intendent. The  supreme  court  of  the 
United  States  will  not  review  a  de- 
cision of  the  highest  court  of  a  state  to 
the  effect  that  a  foreign  corporation 
that  has  not  complied  with  the  statute 
of  the  state  relative  to  filing  a  copy  of 
its  charter,  etc.,  cannot  have  the  benefit 
of  the  laws  of  the  state.  Telluride,  etc. 
Co.  V.  Rio  Grande,  etc.  Co.,  187  U.  S.  569 
(1903);  23  S.  C.  630  (1902). 

^Ee  Comstock,  3  Sawyer.  218  (1874); 
S.  C,  6  Fed.  Cas.  244;  Bank  of  British 
Columbia  v.  Page,  6  Oreg.  431  (1877); 
Semple  v.  Bank  of  British  Columbia,  5- 
Sawyer,  88 (1878);  s.  C,  21  Fed.  Cas.  1063; 
Oregon,  etc.  Inv.  Co.  v.  Rathbun,  5  Saw- 
yer, 32  (1877);  s.  C,  18  Fed.  Cas.  764;  but 
here  a  note  made  in  Oregon,  but  payable 
in  Scotland,  was  treated  as  if  made  in 
Scotland;  American  Button,  etc.  Co.  v. 
Moore,  2  Dak.  280  (1880),  holding  under 
a  similar  statute  that  the  foreign  cor- 
poration could  sue  in  the  courts  of  the 
state,  but  could  not  transact  business. 
To  same  effect,  Utley  v.  Clark-Gardner, 
etc.  Co.,  4  Colo.  369  (1878);  Columbus 
Ins.  Co.  V.  Walsh,  18  Mo.  229  (1853); 
Union,  etc  Co.  v.  Thomas,  46  Ind.  44 


1677 


-§§  (;:)».;-7()u.] 


IMI.A     \  1U1;S    ACTS    AND    CONTKACTS. 


[cn.   XI. I. 


i)Utthe  later  doctrine  is  that  they  are  not  void,  tiioui^di  not  inforce- 
aljlo  until  compliance,'  and  that  the  corporation  cannot  tlefeat  its 
oblifcations  b}'  such  a  defense.-'  Some  states  have  n;one  much  far- 
ther than  this,  and  have  declared  void  and  unenforceable  the  con- 
tracts of  foreign  corporations  which  have  not  complied  with  the 
state  laws  in  reference  to  filing  certificates,  ap|iointin;,^a  local  agent, 
and  keeping  an  oflice  in  the  state.  The  courts  endeavor  to  alleviate 
the  harshness  of  such  statutes  as  much  as  possible,  but  do  not  always 


(1874);  Farmers',  etc  Ins.  Co.  r.  Ilamh, 
47Iiul.  2;iG(1874);  Smith  v.  Little.  GT  Ind. 
549  (1879),  holding  that  the  statute  re- 
ferred only  to  actions  upon  c-ontrart 
and  not  to  suits  in  replevin;  Beard  r. 
Union,  etc.  Pub.  Co..  71  Ala.  00  (ISSl), 
lioldiiig  that  soliciting  subscriptions 
for  a  foreign  newspaper  is  not  "doing 
business"  within  the  meaning  of  such 
a  statute;  New  England  F.  &  M.  In>-.  Co. 
V.  Hobin.son,  2')  Inil.  'I'oQ  (I80r>).  holtling. 
however,  that  a  contract  is  not  void  as 
to  a  citizen;  Morgan  r.  Wiiite,  101  Ind. 
413  (18841,  holding  that  requiring  an 
agent  to  file  his  authority  to  act  does 
not  apply  to  a  general  agent  appointing 
local  agents;  American  In&  Ca  r.  But- 
ler, 70  Ind.  1  (1880),  holding  that  a  failure 
of  the  state  oflRcer  to  furnish  the  proper 
certificate  after  thecorporation  ha.s  sub- 
stantially complied  with  the  statute 
does  not  affect  its  contracts;  .^^tna  Ina. 
Co.  I.  Harvey,  11  Wis.  394  (I860).  A  stat- 
ute to  the  effect  that  foreign  corpora- 
tions doing  business  in  the  state  shall 
file  an  appointment  of  an  agent  in  the 
state  does  not  prohibit  the  doing  of  such 
business  without  the  appointment  of  an 
agent,  but  merely  provides  for  a  con- 
venient means  of  obtaining  jurisdic- 
tion. Tolerton,etc.  Co.  v.  Barck,  84  Minn. 
497  (1901).  In  Minnesota  the  statute 
prohibiting  foreign  corporations  from 
maintaining  suits  in  the  state  where 
they  have  not  complied  with  the  law 
relative  to  filing  papers  with  the  secre- 
tary of  the  state  is  construed  as  pro- 
hibiting suit,  even  though  such  papers 
were  filed  after  the  commencement  of 
the  suit;  and  the  court  intimated  that 
even   a   compliance  with   the  statute 

16 


after  the  contract  was  made  would  be 
insuflicient  Ileilman,  etc.  Ca  v.  r«'i- 
meisl,  85  Minn.  121  (1901). 

>  Walter  A.  Wood,  etc.  Ca  r.  Caldwell, 
r)4  Ind.  270  (1876);  Singer  Mfg.  Ca  v. 
Brown.  04  Ind.  MS  (1878);  EUton  v.  Pig- 
gott.  94  Ind.  14  (1883),  lioldmg  that  ad- 
vantage of  the  failure  to  coniply  can 
only  be  taken  by  answer  in  aViatement, 
and  that  a  foreclosure  and  titli>  under 
.sale  cannot  be  questioned  on  that 
ground;  American  Ins.  Co.  r.  Butler.  70 
Ind.  1  (1880);  Behler  r.  German  Mut  F. 
Ins.  Ca,  68  Ind.  3J7  (1879.;  National 
Mut.  F.  Ins.  Ca  r.  Pursoll.  92  Mass.  231 
(186'));  Hagerman  i\  Empire  Slate  Co., 
97  Pa.  St  534  (1881),  holding  that  a  for- 
eign cor|X)ration  cannot  take  advan- 
tage of  its  own  negU'ct  to  file  the  power 
of  attorney;  and  that  service  ujKjn  an 
acting  agent  will  suflfice  in  such  case; 
American  Ins.  Co.  i".  Well  man,  69  Ind. 
413  (1879);  American,  etc.  Co.  r.  East, 
etc.  R  I?..  37  Fed.  Rep.  242  (1889).  Stock- 
holders dealing  with  their  corporation 
cannot  defeat  their  contracts  by  alleg- 
ing that  it  was  a  foreign  corporation 
and  had  not  complied  with  the  state 
laws.  Kilgore  v.  Smith,  122  Pa.  St.  48 
(1888);  54  Atl.  Rep.  15:3. 

2  Swan  r.  Watertown  F.  Ins.  Co.,  96 
Pa.  St  37  (1880),  holding  that  a  foreign 
corporation  doing  business  in  the  state 
cannot  setup  its  failure  to  comply  with 
the  provisions  of  the  statute  relating  to 
such  companies  to  defeat  an  action  on 
contract.  A  corporation  cannot  repu- 
diate its  obligations  on  the  ground  that 
it  was  not  authorized  to  do  business  in 
the  state.  Williams  v.  Bank  of  Com- 
merce, 71  Miss.  858  (1894). 
78 


cri.  XLi.] 


INTRA    VIRES    ACTS    AND    CONTRACTS.  [§§  696-700. 


succeed.  Various  decisions  on  different  statutes  are  given  in  the 
notes  below.i  The  supreme  court  of  the  United  States  has  held 
that,  where  a  contract  made  by  a  foreign  corporation  is  not  to  be 
valid  until  approved  in  its  home  office  in  another  state,  the  con- 


1  Under  the  New  York  act  providing 
that  foreign  corporations  shall  not  sue 
on  contracts  where  they  have  not  taken 
out  a  license  from  the  state,  a  foreign 
corporation  may,  subsequently  to  the 
breach  of  contract,  take  out  a  license 
and  then  sue.  Neuchatel,  etc.  Co.  v. 
Mayor,  etc..  155  N.  Y.  373  (1898).  A  fail- 
ure to  file  the  certificate  is  a  question 
that  cannot  be  raised  for  the  first  time 
in  the  higher  court.  Dahl  v.  Montana 
Copper  Co.,  132  U.  S.  264  (1889);  North- 
western, etc.  Ins.  Co.  w.  Overholt,  4  Dill. 
287  (1878);  s.  G,  18  Fed.  Cas.  403,  where, 
the  requirement  not  being  made  a  con- 
dition precedent  to  doing  business,  a 
foreign  corporation  which  had  not  com- 
plied with  it  was  held  to  have  power  to 
take  a  mortgage  upon  real  estate.  A 
statute  compelling  a  foreign  corpora- 
tion to  file  its  charter  before  doing  busi- 
ness in  the  state  may  have  tlie  effect 
of  making  it  a  domestic  corporation. 
James  v.  St.  Louis,  etc.  Ry.,  46  Fed.  Rep. 
47  (1891).  A  corporate  agent  wiio  em- 
ploys labor  and  buys  goods  in  the  state 
for  a  foreign  corporation  which  has  not 
complied  with  the  law  prohibiting  such 
corporations  to  do  business  in  the  state 
until  a  resident  office  and  agent  have 
been  named  is  personally  liable  for  such 
labor  and  goods.  Lasher  u.  Stimson,  145 
Pa.  St  30  (1892).  The  objection  that 
the  foreign  corporation  has  not  filed  the 
statement  as  required  by  statute  must 
be  clearly  raised  in  order  to  be  avail- 
abla  Campbell,  etc.  Co.  v.  Hering,  139 
Pa.  St.  473  (1891).  Although  the  statute 
requires  foreign  corporations  doing 
business  in  the  state  to  file  a  power  of 
attorney  authorizing  the  commissioner 
of  corporations  to  accept  service  for 
them,  yet  a  corporation  not  doing  so 
may  sue  on  one  of  the  contracts.  Rog- 
ers, etc.  Co.  V.  Simmons,  155  Mass.  259 

16 


(1892).  A  foreign  corporation  for  min- 
ing and  various  other  purposes  cannot 
file  its  certificate  under  the  Michigan 
statute  authorizing  foreign  corporations 
for  mining  purposes  to  file  such  certifi- 
cate and  have  all  the  rights  of  domestic 
corporations.  Isle  Royale  Land  Corp.  r. 
Osmun,  76  Mich.  162  (1889).  Where  the 
statute  requires  foreign  corporations  to 
file  a  statement  of  their  condition  be- 
fore doing  business,  a  foreign  corpora- 
tion cannot  enforce  a  contract  until  it 
does  so.  Walter  A.  Wood,  etc.  Co.  v. 
Caldwell,  54  Ind.  271  (1876).  But  it  may 
recover  from  an  agent  money  paid  to 
him  for  it.  U.  S.  Express  Co.  v.  Lucas, 
36  Ind.  361  (1871).  Although  the  stat- 
utes require  a  foreign  corporation,  be- 
fore doing  any  business  in  the  state,  to 
file  certain  papers,  and  make  it  a  mis- 
demeanor not  to  do  so,  yet  this  does 
not  render  contracts  void,  although  such 
statute  is  not  complied  with.  Dearborn 
Foundry  Co.  v.  Augustine,  5  Wash,  St. 
67  (1892). 

Parties  who  have  contracted  with  a 
foreign  corporation  and  received  the 
benefits  of  the  contract  cannot,  when 
sued  upon  the  contract,  set  up  that  the 
company  has  not  complied  with  the 
statutory  requisites  in  regard  to  doing 
business  in  the  state.  Washburn  Mill 
Co.  r.  Bartlett,  3  N.  D.  138  (1893).  A 
foreign  corporation  may  sue  on  con- 
tracts made  out  of  the  state,  although 
it  has  not  complied  with  the  law  as  to 
contracts  made  in  the  state.  White 
River  Lumber  Co.  v.  Southwestern  Imp. 
Assoc,  55  Ark.  625  (1892).  A  foreign  cor- 
poration purchasing  a  piece  of  machin- 
ery in  the  state  may  be  held  liable 
therefor,  although  it  has  not  filed  the 
certificate.  Colorado  Iron  Works  r. 
Sierra  Grande  Min.  Co.,  15  Colo.  499 
(1890).  A  bondsman  for  a  corporate 
79 


§§  COG-TUO.]  INTUA    VIKES    ACTS    AND    CONTKACTS. 


[CU.  XLI. 


tract  is  not  made  witliin  the  former  state,  witliin  the  meanin;,'  of 
the  Michigan  statute  dcchirin^'  all  contracts  void  when  made  by 
foreign  corporations  in  the  state  without  having  filed  their  articles 
of  association  in  that  state,'  and  the  tentiency  of  the  courts  is  to 
restrict  these  statutes,  as  regards  occasional  transactions  or  sales 


BRent  cannot  escape  liability  by  alleg-  notehokl  by  a  bona  ftde  pun-haser  from 
ing  that  the  corporation  has  not  com-  a  foreign  cor|)<)ration.  Lauter  r.  Jarvis, 
plie<l  with  the  law  rehvtive  to   foroii^n     etc,  Co..  f*.")  ?>,1.  Rep.  Wl   (iS'.Cl     The 


corporations.  Singer  Mfg.  Co.  r.  Har- 
dee, 4  N.  M.  175  (1888);  American,  etc. 
Co.  V.  Bateman.  22  a  W.  Rep.  771  (Tex. 
189:{).  Under  the  California  statute  for- 
bidding foreign  corporations  to  main- 


defense  that  ft  corporation  has  not  filed 
itsftrticles  in  thecounty  where  pro|>erty 
is  to  be  foreclosed  must  be  set  up  by 
j)lea  in  abatement  Ontario  State  Mank 
r.  Tihhits,  80  Cal.  08  (18'J0i.     An   alien 


tain  suits  until  a  certain  statement  has     corporation  may  sue  to   recover   back 
been  published,  the  publication  may  be     taxes    paid  under  prote.st,  although  it 


prior  to  the  time. specified  in  the  statute. 
Bank  of  British  N.  A.  v.  Ma.lison,  90 
Cal.  12")  (18'.):?),  passing  upon  the  requi- 
sites of  the  statute,  and  what  consti- 
tutes compliance  therewith.  In  Wright 
r.  Lee.  4  S.  Dak.  237  (1893).  the  court 


has  not  filed  its  charter  as  required  by 
st.itute.  Powder  River  Cattle  Ca  i'. 
Custer  Coimty.  9  Mont  14r,  (1889).  A 
foreign^  railroad  comjmny  cannot  avoid 
its  contracts  in  the  state  by  reason  of 
a    subsequent    statute    prohibiting    it 


passed  upon  the  statute  which  requires     from  doing  busine.ss  m  the  state  unless 


foreign  corporations  to  file  a  copy  of 
their articlesof  incorporation,  etc.,  with 
the  secretary  of  state,  and  prohibiting 
the  doing  of  business  by  such  corpora- 
tions until  such  certificates  are  tiiod. 
The  court  held  that  the  failure  to  file 
such  a  certificate  did  not  invalidate 
contracts  of  the  corporation.     As  to  tlie 


it  first  becomes  ft  domestic  corporation. 
Newport,  etc.  Co.  r.  McDonald,  etc.. 
Assignee,  59  S.  W.  Hep.  332  (Ky.  1900). 
Under  the  Utah  statute  a  foreign  cor- 
poration cannot  defend  against  con- 
demnation if  it  has  not  complied  with 
the  Utah  statute  relative  to  foreign 
corporations.     Rio  Grande,  etc.   Ry.  v. 


Mississippi   statute  relative  to  foreign     Teiluride,   etc.   Co.,   63   Pac.    Rep. 


corporations  doing  business  in  the  state, 
see  Hart  v.  Livermore,  etc.  Co.,  72  Miss. 
809  (1895).  A  statute  that  a  foreign 
corporation,  upon  filing  its  charter, 
shall  become  a  domestic  corporation  is 


995 
(Utah.  1900).  The  Wisconsin  statute 
that  a  foreign  corporation  doing  busi- 
ness within  the  state  without  comply- 
ing with  the  statute  cannot  enforce  a 
contract,  but  such  contract  shall  be 
constitutional  as  to  the  right  to  con-  void,  was  upheld  in  City  of  Ashland  v. 
struct  a  railroad.  State  v.  Southern  Whitcomb,  89  N.  W.  Rep.  886  (Wis. 
Ry.,48  S.  C.  49  (1896).  A  foreign  cor-  1902).  See  53  Atl.  Rep.  533. 
poration  is  doing  business  in  a  state,  ^  Holder  v.  Aultman.  169  U.  S.  81 
within  the  meaning  of  a  statute,  where  (1898).  An  agreement  of  a  foreign  cor- 
a  mortgage  deed  of  trust  is  made  to  a  poration  to  sell  all  its  property  cannot 
resident  for  the  benefit  of  such  foreign  be  enforced  by  the  corporation  in  Mich- 
corporation.  Myers,  etc.  Co.  v.  Wetzel,  igan.  where  such  corporation  has  not 
35  S.  W.  Rep.  896  (Tenn,  1896).  The  complied  with  the  Michigan  statute 
Tennessee  statute  prohibiting  foreign  relative  to  doing  business  within  the 
corporations  doing  business  in  the  state  state.  Rough  r.  Breitung,  117  Mich.  48 
without  first  complying  with  certain  (1898). 
requisites   does  not  render    invalid   a 

1680 


CH.  XLI.] 


INTRA    VIKES    ACTS    AND    CONTRACTS. 


[§§  696-700. 


by  agents.^     Moreover  such  transactions  are  practically  interstate 
commerce.^ 

In  Alabama  there  has  been  a  large  number  of  decisions  on  this 
subject  of  foreign  corporations  transacting  business  in  the  state.^ 


1  Where  a  Maine  corporation  has  no 
office  in  New  York,  but  merely  receives 
orders  from  New  York  and  fills  them 
b}'  shipments  to  New  York,  it  is  not  do- 
ing business  in  the  latter  state  within 
the  meaning  of  the  statute  requiring 
foreign  corporations  to  obtain  a  certifi- 
cate allowing  it  to  do  business  in  the 
state.  Vaughn,  etc.  Co.  v.  Lighthouse, 
64  N.  Y.  App.  Div.  138  (1901).  A  foreign 
corporation  that  makes  a  single  sale 
and  takes  a  guarantee  of  payment  in 
New  Jersey  is  not  doing  business  within 
that  state  within  the  meaning  of  the 
statute  applicable  to  such  corporations. 
Delaware,  etc.  Co.  v.  Mahlenbrock,  63 
N.  J.  L.  281  (1899).  A  loan  by  a  New 
York  building  association  in  Pennsyl- 
vania, secured  by  mortgage  in  the  lat- 
ter state,  but  the  debt  being  payable  in 
New  York,  is  not  within  the  Pennsyl- 
vania statute  prohibiting  foreign  cor- 
porations doing  business  within  the 
state  without  complying  with  certain 
requirements.  People's,  etc.  Assoc,  v. 
Berlin,  50  Atl.  Rep.  308  (Pa.  1901).  A 
foreign  corporation  which  has  sold  a 
bill  of  goods  to  an  Illinois  corporation 
in  that  state  may  sue  for  the  price,  al- 
though it  has  no  office  in  the  state. 
John  Spry,  etc.  Co.  v.  Chappell.  18-4  111. 
539  (1900).  A  foreign  corporation's  pur- 
chase of  property  located  in  the  state, 
the  purchase  being  made  out  of  the 
state,  is  not  doing  business  in  the 
state.  Lakeview,  etc.  Co.  v.  San  Anto- 
nio, etc.  Co.,  66  S.  W.  Rep.  766  (Tex. 
1902).  A  foreign  corporation  is  not  do- 
ing business  in  the  state,  within  the 
meaning  of  the  Ohio  law,  where  the 
corporation  merely  sells  through  travel- 
ing agents  and  delivers  goods  manu- 
factured outside  of  the  state.  Toledo, 
etc.  Co.  V.  Glen,  etc.  Co.,  55  Ohio  St.  217 
(1896).  The  Montana  statute  requiring 
foreign  corporations  to  file  their  charter 
CIOGJ 


in  the  state  before  doing  business  there 
does  not  apply  to  a  foreign  trust  com- 
pany which  purchases  bonds  of  a  domes- 
tic corporation  and  takes  a  mortgage  to 
secure  them.  Gilchrist  v.  Helena,  etc. 
R  R.,  47  Fed.  Rep.  593  (1891).  The  stat- 
ute relative  to  foreign  corporations  do- 
ing business  in  the  state  is  not  applica- 
ble to  loans  made  out  of  the  state,  and 
the  securities  delivered  and  money  paid 
out  of  the  stata  Scruggs  v.  Scottish 
Mortgage  Co.,  54  Ark.  566  (1891);  Cooper 
Mfg.  Co.  V.  Ferguson,  113  U.  S.  727 
(1885),  holding  that  a  single  act,  with- 
out the  purpose  of  doing  others,  in  a 
state  does  not  bring  a  foreign  corpora- 
tion within  the  statute  of  the  state  for- 
bidding it  to  transact  business  there 
without  complying  with  certain  re- 
quirements. A  single  transaction  by 
which  a  foreign  corporation  builds  a 
sugar  factory  in  the  state  and  warrants 
its  efficiency  is  not  "carrying  on"  busi- 
ness in  the  state  within  the  meaning  of 
the  Michigan  statute  rendering  con- 
tracts of  foreign  corporations  void  un- 
less they  have  first  paid  a  tax  to  the 
state,  such  statute,  however,  not  being 
applicable  to  corporations  engaged  eu-^ 
tirely  in  interstate  commerce.  Oak- 
land, etc.  Co.  V.  Fred  W.  Wolf  Co.,  118 
Fed.  Rep.  239  (1902).  Even  though  a  for- 
eign corporation  purchases  land  in  the 
state,  yet  if  the  purchase  was  made 
outside  of  the  state,  this  is  not  doings 
business  in  the  stata  Goldberry  v.  Car- 
ter, 41  S.  K  Rep.  858  (Va,  1902). 

'  See  note  1,  p.  1675,  suprcu 

3  In  the  case  of  Dundee,  etc.  Co.  v^ 
Nixon,  95  Ala.  318  (1891),  an  alien  cor- 
poration failed  in  its  suit  on  a  note  be- 
cause it  had  no  known  place  of  business 
or  authorized  agent  in  Alabama,  as  re- 
quired by  the  constitution  and  statutes 
of  the  state.  The  note  was  dated  in 
that  state.  A  purchase  of  brick  in  an- 
1681 


§§  cof:-700.] 


INTItA    VIRES    ACTS    AND    CONTKACTS. 


[cn. 


XI.I. 


Tiestric'tions  upon  foreign  insurance  companies  are  found  in  all 
the  states  and  are  strictly  enforced.' 

The  Tennessee  statute  giving  its  citizens  preference  as  to  assets 

9 

other  state,  to  be  delivered  in  the  state,  by  statute  cannot  recover.     Dudley  r. 

is  an  acfof  interstate  commerce,  and  a  Collier,  87  Ala.  431  (18SS).     For  a  valu- 

I'oreign   corporation    making   the   sale  able  discussion  a.s  to  what  constitutes 

need  not  comply   with  the  state  laws,  the  doing  of  business  in  the  ^tate,  see 

A  foreign  corporation   may  bring  suit  Sullivan  r.    Sullivan    Timber    Co    103 

in  the  state  without   complying  with  Aiiu  371  (1894). 

the   state    law   in    regard  to  bavin;:  a  •  If  an  insurance  comj>any  does  busi- 

plare  of  business  and  an  agent  in  tlie  ness    in    the  state  without   complying 

stata     Cook  v.  Rome  Brick  Co.,  98  Ala.  with  the  statutory  conditions  it  cannot 


409  (1893).  Where  a  foreign  cor|>oratioii 
not  complying  with  the  statute  sells 
chattels,  the  sale  is  void  and  the  cor- 
poration   ma-y     reclaim     its    property. 


collect  a  premium  note.  Reliance  Mut. 
Ins.  Co.  V.  Sawyer.  H»  Mass.  413  (1994i; 
Cincinnati  Mut.  etc;.  Co.  r.  Rosenthal, 
."i."»  111.  N")  (1870),  holding  that  a  pn>mium 


Boulden  i\  Estey  Organ  Co.,  92  Ala.  182  note  given  to  a  foreign  company  wliich 
(1890).  The  statute  against  foreign  cor-  had  not  obtained  a  certificate  from  the 
porations  doing   business  in   the  state     state  auditor  as  required   was  void   in 


unless  they  conform  to  certain  requi- 
sites does  notapj)Iy  to  interstate  trafhc, 
such  as  selling  goods  to  be  shipped  in, 
having  been  sold  out  of,  the  state.  "Ware 
r.  Hamilton,  etc.  Co..  92  Ala.  14.".  (1890). 


its  hand.s.  To  same  effect,  Hoffman  r. 
Banks,  41  Ind.  1  (1872),  and  Roche  r. 
L;idd,  83  Mass.  430  (1861):  ^tna  Ins.  Co. 
V.  Harvey,  11  Wis.  394  (1800),  where  fil- 
ing a  statement  of  the  condition  with 


The  objection  as  to  the  failure  to  file  the  secn-tary  of  state  was  reijuired;  Ly- 
the  certificate  cannot  be  raised  for  the  coming  F.  Ins.  Co.  v.  Wright,  55  Vt.  520 
first  time  on  appeal.  Ginn  v.  New  Eng-  (1883);  Charter  Oak  L.  Ins.  Co.  r.  Saw- 
land,  etc.  Co..  92  Ala.  135  (1890).  A  yer.  44  Wis.  387  (1878),  but  holding  that 
mortgagor  to  a  foreign  insurance  com-  they  may  sue  for  or  secure  debts  due 
pany  cannot  demur  to  a  bill  for  fore-  from  residents  without  complying  with 
closure  on  the  ground  that  the  taking  such  statutes;  Williams  v.  Cheney,  69 
of  the  mortgage  was  w//ra  rtres  and  no  Masa  215  (1855).  but  holding  that  a 
certificate  was  filed.  Boulware  v.  Da-  jiremium  note  void  for  this  reason  is 
vis,  90  Ala.  207  (1890).  A  mortgage  valid  in  the  hands  of  a  bowa^it/e  holder 
taken  by  a  foreign  corporation  in  Ala-  for  value  without  notice;  Jones  v. 
bama  which  has  no  known  place  of  Smith,  09  Mass.  500  (1855),  holding  that 
business  or  authorized  agent  in  the  the  payee  of  a  premium  note  must 
state,  as  required  by  the  constitution  of  prove  compliance  by  the  insurance 
the  state,  is  void  and  not  enforceable,  "company  with  the  statute:  Ehrman  v. 
Farrior  r.  New  England,  etc.  Co.,  88  Teutonia  Ins.  Co.,  1  Fed.  Rep.  471  (1880), 
Ala,  275  (1889).  A  foreign  corporation  holding  that  if  the  statute  merely  im- 
suing  in  Alabama  tc  enforce  a  mort-  poses  penalties  for  non-compliance  with 
gage  made  in  that  state  must  allege  such  requirements,  the  contracts  of  a 
that  it  has  a  known  place  of  business  foreign  corporation  not  complying  are 
and  an  authorized  agent  in  the  state,  not  void.  To  same  effect  is  King  v.  Na- 
Christian  ^'.  American,  etc.  Co.,  89  Ala.  tional  M.  &  E.  Co.,  4  Mont  1  (1881); 
198(1889).  An  agent  suing  a  person  for  Clark  v.  Middleton,  19  Mo.  53  (1853), 
a  commission  on  a  loan  made  by  the  holding  that  the  failure  of  an  agency  to 
latter  with  a  foreign  corporation  which  file  a  statement  was  not  to  make  void 
has  not  filed  its  certificate  as  required  a  promise  to  pay  premium  notes  given 

1682 


«H.  XLI.] 


INTRA    VIEES    ACTS    AND    OONTEACTS. 


,[§§  696-700. 


of  an  insolvent  foreign  corporation  within  the  state  is  unconstitu- 
tional as  to  non-resident  persons,  but  is  constitutional  as  to  foreign 
corporations,  which  are  creditors  of  the  insolvent  corporation.^ 

A  foreign  corporation  may  sue  or  be  sued  in  the  courts  of  a  state 
provided  jurisdiction  is  properly  obtained.^ 


to  the  foreign  insurance  company; 
Brooklyn  Life  Ins.  Co.  v.  Bledsoe,  52  Ala. 
538  (1875),  holding  that  a  foreign  corpo- 
ration cannot  avail  itself  of  its  own 
failure  to  comply ;  Union,  etc.  Ins.  Co.  v. 
McMillen,  24  Ohio  St.  67  (1873),  holding  " 
that  neglect  to  comply  does  not  make 
void  a  policy  issued  by  a  foreign  com- 
pany nor  excuse  the  holder  from  pay- 
ing premiums;  Eureka  Ins.  Co.  v.  Parks, 
1  Cin.  Super.  Ct.  (Ohio).  574(1871),  hold- 
ing that  a  company  which  issues  a  policy 
on  property  in  another  state  from  its 
home  office  is  not  subject  to  the  restrict- 
ing statute  of  that  state,  though  it  has 
paid  a  commission  for  obtaining  the  in- 
surance to  a  resident  thereof:  Mutual, 
etc.  Ins.  Co.  v.  Bales,  92  Pa.  St.  352  (1879), 
holding  that  it  cannot  recover  from 
sureties  upon  an  agent's  bond  unless  it 
has  complied  with  a  statute  requiring 
the  agents  to  be  commissioned.  To 
same  ettect,  Thorne  v.  Travelers'  Ins. 
Co.,  60  Pa.  St  15(1875);  but  in  U.  S.  Life 


Ins.  Ca  V.  Adams,  7  Biss.  30  (1873);  s.  C, 
28  Fed.  Cas.  816,  it  was  held  that  com- 
pliance with  a  restraining  act  is  not 
essential  to  the  validity  of  an  agent's 
bond;  Lambi\  Bowser,  7  Biss.  315  (1876); 
8.  C,  14  Fed.  Cas.  980,  holding  that  a 
policy  of  insurance  is  not  void  because 
tlie  company  has  not  complied  with  the 
statute.  Cf.  Isle  Royale  Land  Corp.  i'. 
Osmun.  76  Mich.  162  (1889).  As  a  de- 
fense to  a  note,  see  Dudley  v.  Collier,  87 
Ala.  431  (1880).  See  also  §  696,  notes, 
supra;  Charter  Oak,  etc.  Ins.  Co.  v.  Saw- 
yer, 44  Wis.  387  (1878),  holding  that  it 
may  sue  or  take  security  for  a  debt 
without  complying  with  the  local  act. 
To  same  effect,  Columbus  Ins.  Co.  v. 
Walsh,  18  Mo.  229  (1853).  See  also 
People  u.  Howard,  50  Mich.  239  (18s;:i,. 

1  MeClung  v.  Embreeville.  etc.  liy.. 
103  Tenn.  399  (1899).  following  Blake  r. 
McClung,  172  U.  S.  239,  259  (1898). 

-This  question  is  fully  iliscussed  in 
?;■§  757,  758,  infra:  54  Atl.  Rep.  247. 


1683 


CnAPTER  XI.II. 


STOCKnOLDER'S  ACTIONS  TO  HOLD  THK  DHiFATORS  LIABLE  FOR 
NEGLIGENCE  IN  THE  DISCHARGE  OF  THEIR  DUTlEa 


§  70L  Reineily     of    tlie    stuckliolder 
herein. 
702.  Instances  of  neRlif^ence  of  di- 
rectors in  the   performance 
of  their  duties. 


^  70A  Directors  must  use  oniinarj* 
care  and  ddi^fiice  in  the 
mannpement  of  the  corpora- 
tion and  the  transaction  ot 
its  business. 


§  701.  Bcmrdtj  of  the  stochholdcr  hrnin. —  "WIktc,  by  reason  of 
the  negligence  of  the  directors  or  other  officers,  the  corporate  funds, 
property,  or  rii,dits  have  been  lost,  the  injury  is  practically  and  ulti- 
mately an  injury  to  the  stockholders.  l>ut,  in  the  eye  of  the  law,  the 
injury  is  to  the  corporation  itself.  The  loss  has  depleted  its  treas- 
ury. ^Moreover,  the  negligent  act  was  in  reference  to  the  affairs  of  the 
corporation.  Accordingly,  it  is  for  the  corporation  to  call  tlie  direct- 
ors to  an  account  for  their  negligence.  The  action  is  not  one  which 
the  stockholder  is  to  bring.  The  negligence  atTects  him,  not  directly, 
but  indirectly.  Hence,  the  law  is  well  settled  that  a  stockholder  can- 
not bring  the  ordinary  action  at  law  for  damages  against  the  corpo- 
rate directors  for  their  negligence  in  the  management  of  the  corpo- 
rate affairs.'  It  is  clear  also  that  the  stockholder  cannot  hold  the  cor- 
poration itself  liable  for  the  negligence  herein  of  its  directors.  To 
allow  such  an  action  would  be  to  make  part  of  the  stockholders  liable 
to  other  stockholders  for  the  loss,  when  all  are  equally  injured, 
equally  innocent,  and  equally  in  position  to  complain.'-  The  usual  and 
proper  remedy  is  for  the  corporation  itself  to  institute  a  suit  at  law 
against  the  guilty  directors.^  If,  however,  the  corporation  is  under 
the  control  of  the  guilty  parties,  or  if  it  refuses  to  sue  when  requested 
by  stockholders  to  do  so,  then  the  stockholder  himself  may  bring 
a  suit  in  equity  in  his  own  behalf,  and  in  behalf  of  all  other  stock- 
holders who  may  wish  to  come  in,  making  the  corporation  and  the 
guilty  parties  the  defendants,  and  compel  them  to  make  good  to 
the  corporation  the  corporate  money  or  property  lost  by  their  neg- 
ligence.^    The  money  or  property  recovered  in  such  an  action  be- 


1  See  §  734,  infra. 

2  Oliphant  v.  Woodburn,  etc.  Co.,  63 
Iowa.  333  (1884). 

3  Empire  State  Sav.  Bank  v.  Beard, 
151  N.  Y.  638  (1896),  reversing  81  Hun, 
184.     In  Wisconsin  it  is  held  that  the 


remedy  of  the  corporation  may  be  in 
equity.  North  Hudson,  etc.  Assoc,  v. 
Childs,  83  Wis.  460  (1893).  See  also 
Horn,  etc.  Co.  v.  Ryan,  42  Minn.  196 
(1889),  and  §  734,  infra. 
*  See  §§  734,  740,  infra. 


1684 


CH.  XLII.] 


NEGLIGENCE    OF    DIRECTORS. 


[^^  TOl. 


longs  to  the  corporation,  and  not  to  the  stockholder  who  brings  the 
suit.'  In  a  stockholder's  suit  to  hold  the  directors  liable  for  negli- 
gence, the  acts  of  negligence  need  not  be  set  out  with  great  particu- 
larity. The  suit  is  in  a  court  of  equity,  and  the  court  decides  the 
questions  of  fact,  since  the  suit  is  in  the  nature  of  an  accounting.^  A 
general  allegation,  however,  that  the  board  of  directors  were  neg- 
ligent does  not  render  a  particular  director  liable.^  It  has  been  held 
that  a  suit  by  the  corporation  against  the  directors  for  negligence 
may  be  in  equity;*  but  the  prevailing  rule  is  that  its  remedy  is  at 
law  alone.*    A  receiver  may  institute  the  suit.®     An  action  by  the 


1  Evans  v.  Brandon.  53  Tex.  56  (1880); 
Dewing  v.  Perdicaries,  96  U.  S.  193,  198 
(1877);  Smith  r.  Poor,  40  Me.  415  (1855); 
Carter  v.  Ford,  etc  Co..  85  Ind.  180 
a882).     See  also  §  734,  infra. 

2Halsey  v.  Ackernian,  38  N.  J.  Eq.  501 
(1884),  atf' g  Ackerman  v.  Halsey,  37  N. 
J.  Eq.  356.  Til  is  case  holds  also  that 
the  stockholder's  action  lies  even  after 
the  corporation  has  become  insolvent. 
See  also  Smith  v.  Poor,  3  Ware,  148 
(1858);  S.  a,  23  Fed.  Cas.  627;  Gardiner 
V.  Pollard,  lOBosw.  674(1863);  and  i^  734, 
infra.  Where  a  stockholder  brings  a 
suit  at  law  against  a  board  of  directors 
for  negligence  in  allowing  the  cashier 
to  wreck  the  bank,  the  directors  having 
been  such  for  different  periods  of  time, 
there  is  a  misjoinder  of  causes  of  action. 
Sayles  v.  White,  18  N.  Y.  App.  Div.  590 
(1897).  Where  the  stock  which  a  per- 
son holds  in  a  national  bank  has  been 
sold  for  non-payment  of  an  assessment, 
rendered  necessary  by  negligence  of 
the  directors,  he  may  file  a  bill  in 
equity  to  hold  them  personally  liable 
for  his  loss.  Hanna  v.  People's,  etc. 
Bank.  35  N.  Y.  Misc.  Kep.  517  (1901). 

3  Fisher  v.  Graves,  80  Fed.  Rep.  590 
(1897). 

*  Horn,  etc.  Co.  r.  Ryan,  42  Minn.  196 
(1889).  A  national  bank  may  hold  its 
officers  liable  for  making  loans  to  an 
individual  in  excess  of  ten  per  cent,  of 
the  capital  stock,  and  also  for  making 
other  loans  in  violation  of  the  statutes, 
and  such  suit  may  be  in  equity  where 
the  transactions  are  complicated.  The 
statute  of  limitations  does  not  begin  to 


run  until  such  officers  have  gone  out  of 
office.    National  Bank,  etc.  v.  Wade,  84 
Fed.  Rep.  10  (1897).    The  remedy  of  a 
corporation    against    its   manager  for 
mismanagement,    fraud,  neglect,  and 
wrongful  acts  may  be  in  equity  on  the 
ground  of  an  accounting,  even  though 
an   action   at  law  for  tort  would   lie. 
Empire  State  Tel.   Co.  r.  Bickford,  72 
Hun,   580  (1893),  reversed  on  another 
point  in  142  N.  Y.  224;  120  Fed.  Rep.  440. 
5  Empire  State  Sav.  Bank  v.  Beard,  151 
N.  Y.  638  (1896),  reversing  81  Hun,  184 
(1894),  holding  also  that  all  the  guilty 
parties  should  be  joined  as  defendants. 
«  Robinson  v.  Hall,  59  Fed.  Rep.  648 
(1894);  O'Brien  v.  Fitzgerald,  143  N.  Y. 
377  (1894).     A  suit  against  directors  to 
hold  them   liable  for  negligence  and 
mismanagement  may  be  in  equity  and 
may  be  filed  by  the  receiver.    Fisher  v. 
Parr,  92  Md.  245  (1901).     A  receiver  of 
a  national  bank  may  sue  the  directors 
for  negligence  and  fraud  on.  their  part. 
Cockrill  u   Abeles,   86  Fed.   Rep.   505 
(1898).     A  receiver  may  sue  them  for 
negligence,  as  the  corporation   might 
have  done.    Movius  v.  Lee.  30  Fed.  Rep. 
298  (1887).     As  to  the  right  of  corporate 
creditors  to  sue  for  negligence,  and  an 
action  by  a  receiver  or  assignee  in  be- 
half of  them,  see  Warner  v.  Hopkins, 
111  Pa,  St.  328  (1886).   Where  a  receiver 
sues  directors    for  negligence,  stock- 
holders are  not  proper  parties.  Kimball 
V.  Ives,  30  Hun,  568  (1883).   Where  a  re- 
ceiver has  been  appointed  it  is  for  him 
and  not  for  a  stockholder  to  hold  the 
directors  responsible  for  mismanage- 


1685 


§  TOl.] 


NEGLIGENCE    OF    DIKECT0R8. 


[Cll.  XLII. 


receiver  against  directors  for  negligence  sliouUl  be  at  law,  and  there 
must  be  a  separate  suit  against  each  director.'  An  action  by  tho 
receiver  to  hold  a  director  liable  for  negligence  does  not  abate  by 
the  death  of  such  director.-  The  court  may  authorize  the  receiver 
to  compromise  claims  against  directors  for  negligence.'    In  a  stock- 


ment  of  a  bank.  Howe  v,  Barney,  45 
Fed.  Re{>.  66«  (1H91).  A  stockholder  or 
oroditur  may  hold  a  director  liable  for 
negligence  where  a  receiver  cannot. 
Brigga  v.  Spaulding.  141  U.  a  132,  150 
(1801 1.  A  rec-eivor  of  a  natif)n:il  bank 
may  hold  the  directors  personally  liable 
for   losses  where  they  left  the  entire 


holder  in  a  national  bank  who  has  l)een 
subjected  to  a  statutory  liability  may 
sue  the  directors,  in  behalf  of  the  corpo- 
ration, to  render  them  liable  for  their 
gross  negligence,  tho  receiver  having 
neglected  to  sue.  Nelson  r.  Burrow.s,  9 
Abb.  N.  Cas.  280  (18S1>.  giving  the  com- 
plaint  in   full.     After  a  receiver    has 


management  in  the  hands  of  the  officers     been  ap{)ointed  the  remedy  of  the  stock- 


and  made  no  imiuiries.  The  court  held 
them  liable  from  the  time  when,  divi- 
dends having  ceased,  they  were  bound 
to  investigate.  Gibbons  v.  Anderson,  80 
Fed.  Rep.  345  (1897).  A  creditor  of  an 
insolvent  bank  niav  hold  the  directors 


holder  to  hold  the  directors  liable  for 
negligence  is  by  petition  to  the  receiver 
to  institute  a  suit.  Cunningham  v. 
Wechselberg.  105  Wis.  359  (1900).  In  a 
stockholder's  suit  to  hold  directors  in  a 
national  bank   liable  for  negligence,  a 


liable  for  allowing  the  president  to  bor-  request  to  the  receiver  to  bring  the  suit 

rowan  unreasonably  large  sum  without  is  unnecessary  where  the  receiver  was 

good  security,  and  for  allowing  him  to  one  of  the  directors.     Flynn  r.  Thirl 

purchase  stock  of  the  bank  with  bank  Nat  Bank. 81  N.  W.  Rep.  572  (Mich.  I'JOO). 

funds.    Such  suit  must  be  for  the  bene-  '  O'Brien  r.  Fitxgerald,  143  N.  Y.  377 

fit  of  all  creditors,  and  the  results  of  (1894);  8.  C,  150  N.  Y.  572;  Higgins  v. 

the  suit  will  be  administered  by  the  TefTt.  4  N.  Y.  App.  Div.  62  (15^90):  Dyk- 

court.    Gores  v.  Day,  99  Wis.  276  (1898).  man  v.  Keeney.  154  N.  Y.  483  (1897).     In 


A  receiver  of  an  insolvent  bank  may 
sue  the  directors  for  damages  for  their 
negligence,  and  it  is  not  necessary  to 
join  as  defendants  all  the  directors. 
Coddington  v.  Canaday,  61  N.  E.  Rep. 
5G7  (Ind.  1901),  holding  also  that  even 


Stearns  v.  Lawrence,  83  Fed,  Rep.  738 
(1897),  the  receiver  held  the  president 
liable  fornegligence  in  the  management 
of  a  bank  by  a  suit  in  equity.  A  court  of 
equity  is  the  pro[)er  forum  for  a  receiver 
to  bring  suit  against  directors  for  negli- 


tbough  the  stockholders  of  a  bank  as-  gence  and  loss.     Bui.st  v.  Melchers  41 

sent  to  the  notes  being  accepted  in  pay-  S.  C.  46  (1895).     If  the  receiver  refuses 

ment  of  subscriptions,  yet  a  receiver  to  sue,   a  stockholder  may  sue.     See 

may  hold  the  directors  liable  therefor.  §  740,  infra.     A  suit  against  directors 

A  receiver  of  an  insolvent  bank  may,  to  hold  them  liable  for  negligence  and 

in  behalf  of  creditors,  hold  the  direct-  mismanagement  may  be  in  equity  and 

ors    personally    liable    for    negligence  may  be  filed  by  the  receiver.     Fisher  v. 

leading  to  a  defalcation  by  the  cashier.  Parr.92ild.  245  (1901);  81  N.  Y.  App.  10. 

Campbell  v.  Watson,  50  Atl.  Rep.   120  -'O'Brien  v.  Blaut,  17  N.  Y.  App.  Div. 

(N.  J.  1901).  Under  the  statutes  of  Wis-  288  (1897). 

consin  the  affairs  of  an  insolvent  corpo-  3  The  court  may  authorize  the  receiver 

ration  may  be  wound  up  and  the  direct-  to  sell  all  the  assets  to  a  new  company 

ors  held  liable  for  fraud  or  negligence  and  release  the  directors  of  theoldcoui- 

and  stockholders  held  liable  under  statu-  pany   from    personal    liability  to    the 

tory  liability,  all  in  one  suit     Gager  v.  stockholders  where  such  contract  is  a 

Marsden,  101  Wis.  598  (1899).     A  stock-  fair  one,  even  though  some  of  the  stock- 

1686 


CH.  XLII.]  NEGLIGENCE    OF    DIRECTOES.  [§  702. 


holder's  suit  against  the  executive  committee  of  a  bank  for  negli- 
gence in  managing  the  business  of  the  company,  a  settlement  with 
one  of  the  defendants  and  a  release  to  him  releases  the  others.^ 

§  702.  Instances  of  negligence  of  directors  in  the  performance  0/ 
tlieir  duties.— It  is  diflRcult  to  lay  down  any  rules  as  to  what  acts 
will  constitute  negligence  on  the  part  of  corporate  officers.  Each 
case  is  to  be  determined  largely  on  its  own  facts.  Thus,  where  the 
directors  kept  no  accounts,  paid  no  calls,  and  collected  no  subscrip- 
tions, they  were  quite  properly  held  guilty  of  negligence  and  were 
made  liable  therefor.^  So  also  the  directors  of  a  national  bank  are 
liable  when  they  loan  money  to  irresponsible  persons,  allow  over- 
drafts, employ  dishonest,  unfaithful,  and  incompetent  clerks,  and 
neglect  to  take  security  from  the  cashier,  president,  and  other  offi- 
cers for  good  conduct  and  the  performance  of  duties.^  Directors 
are  not  personally  liable  for  error  of  judgment  in  declaring  divi- 
dends unless  they  were  culpably  or  grossly  negligent  in  the  matter.* 
Where  the  president  of  a  corporation  sells  large  quantities  of  coal 
to  a  firm  which  his  sons  control,  and  allows  the  debt  to  increase 
when  he  could  easily  have  collected  it,  and  ultimately  the  debt  is 
lost,  he  is  liable  for  negligence  and  must  make  good  the  loss.^  The 
president  of  a  bank  may  be  held  personally  liable  to  the  bank  for  neg- 
lif-ence  in  permitting  the  cashier  to  loan  bank  funds  on  inadequate 
security  and  concealing  the  facts  from  the  board  of  directors.^     The 

holders  dissent.  People  v.  Anglo-Amer-  took  no  part  in  drawing  the  report  or 
ican,  etc.  Assoc,  66  N.  Y.  App.  Div.  9  in  recommending  the  dividends  based 
(1901).  In  the  case  of  Woerz  v.  Schu-  thereon.  Re  National  Bank  of  Wales 
macher,  37  N.  Y.  App.  Div.  374  (1899),  a  (1899),  2  Ch.  629,  rev'g  79  L.  T.  Rep.  667. 
suit  by  a  receiver  of  an  insolvent  bank  Directors  are  not  liable  to  corporate 
against  the  directors  was  compromised  creditors  either  at  common  law  or  under 
by  the  directors  paying  thirty-five  per  a  statute  for  paying  dividends  when 
cent,  of  the  liabilities  of  the  bank  and  they  supposed,  and  the  books  showed, 
taking  all  the  assets  and  agreeing  to  that  the  company  was  prosperous  and 
pay  to  the  receiver  anything  realized  had  profits  for  distribution,  but  it  sub- 
by  them  over  and  above  such  thirty-  sequently  turned  out  that  the  president 
five  per  cent  had  embezzled  the  funds  and  substi- 

1  Chetwood  v.  California  Nat.  Bank,  tuted  fictitious  notes  of  customers  and 
113  Cal.  414,  649  (1896).  had   falsified    the   books    in    omitting 

2  Neall  V.  Hill,  16  Cal.  145  (1860).  debts  for  material,  there  being  no  proof 

3  Brinckerhoff  v.  Bostwick,  88  N.  Y.  that  the  directors  even  in  the  exercise 
52  (1882).  See  also  Smith  v.  Rathbun,  of  ordinary  diligence  would  have  dis- 
22  Hun,  150  (1880).  As  to  the  liability  covered  that  the  company  was  insolv- 
of  a  cashier,  see  Commercial  Bank  v.  ent.  Chick  v.  Fuller,  114  Fed.  Rep.  23 
Ten  Eyck,  48  N.  Y.  305  (1872).  (1902). 

4  Even  though  a  director  knew  his  5  Doe  u  Northwestern,  etc.  Co.,  78  Fed. 
name  was  signed  to  a  report  to  the  Rep.  62  (1896). 

stockholders  after  he  resigned,  yet  he        « Commercial  Bank  v.  Chatfield,  127 
is  not  liable  for  negligence  where  he    Mich.  407   (1901).    The  president  of  a 

1687 


§  702. J  NEGLIGENCE    OF    DIRECTORS.  [cO.  XLII. 

business  usages  of  the  community  enter  into  the  question  of  whether 
a  director  was  negligent  in  making  loans.  The  directors  may  com- 
mit the  business  to  the  officers,  but  must  give  reasonable  super- 
vision and  not  be  guilty  of  gross  inattention.  Thus,  the  loan  of 
one-third  of  the  capital  stock  to  one  person  is  not  necessarily  negli- 
gent.' Where  for  three  years  the  directors  turn  the  management 
over  to  the  cashier,  of  no  responsibility,  and  know  of  illegal  loans 
and  neglect  to  record  mortgages,  thoy  are  liable  for  losses  incurred 
thereby.'-  Directors  in  a  national  bank  arc  not  liable  for  the  mis- 
conduct of  the  cashier  in  making  excessive  loans  to  a  particular 
corporation  where  such  directors  have  no  reason  to  suspect  such 
loans;  but  an  examining  committee  of  directors  whose  duty  it  is  to 
examine  the  securities  are  liable,  where  such  committee  knew  of  such 
loan.^  Where  the  president  of  a  bank  cancels  a  debt  of  the  bank 
against  one  of  his  relatives  in  exchange  for  securities  which  ulti- 
mately become  worthless,  he  is  liable  for  the  loss.*  It  is  negligence 
for  directors  to  build  a  hotel  before  they  have  provided  funds 
therefor  and  before  they  have  the  title  to  the  land.'*  Directors  of 
a  bank  are  not  liable  in  an  action  for  deceit  brouirht  by  a  purchaser 
of  stock,  although  they  signed  the  cashier's  annual  statement  which 
was  false,  there  being  proof  that  they  believed  it  to  be  true.**  A 
director  is  not  liable  for  a  deposit  made  in  a  bank  after  it  was  in- 
solvent, where  there  was  no  fraud  on  his  part  inducing  the  deposit.^ 
But  a  director  in  a  bank  is  personally  liable  to  persons  who  deposit 
their  money  in  the  bank  after  he  knows  that  it  is  hopelessly  in- 
solvent, where  he  fails  to  initiate  measures  to  close  the  business  of 
the  bank.  It  is  his  duty  to  call  a  meeting  of  the  directors,  or  re- 
bank  is  personally  liable  to  the  bank  if  cient  security,  after  the  bank  exam- 
he  permits  the  cashier  to  borrow  a  large  iner  had  called  their  attention  tothem; 
sum  on  inadequate  security.  He  is  and  it  is  no  defense  that  the  directors 
bound  to  exercise  that  degree  of  care  did  not  know  that  the  accounts  were 
that  a  careful  man  would  exercise  in  incorrect  and  relied  upon  tiie  reports 
his  own  affairs  of  like  importance.  A  of  the  oflficers  and  the  examinations  of 
director,  however,  who  takes  no  part  in  the  state  officials.  Campbell  v.  Wat- 
the  transaction  is  not  liable  for  the  neg-  son,  50  Atl.  Rep.  120  (N.  J.  1901). 
ligence  of  other  directors.  Commercial  3  Warner  v.  Penoyer,  91  Fed.  Rep.  587 
Bank  v.  Chatfield.  121  Mich.  641  (1899).     (1899). 

iWheelerr.  Aiken  County,  etc.  Bank,        <  Lawrence  v.  Stearns,  79  Fed.  Rep. 
75  Fed.  Rep.  781  (1896).  878  (1897). 

2  Robinson  v.  Hall,  63  Fed.  Rep.  223        ^Landis  v.  Sea  Isle,  etc.  Co.,  53  N.  J. 
(1894).   rev'g  59  Fed.  Rep.  648.     Bank     Eq.  654  (1895). 

directors  are  liable  for  defalcations  of        ''Foster  v.  Gibson,  38  S.  W.  Rep.  144 
the  cashier  where  the  by-laws  requir-     (Ky.  1896). 

ing  them   to    examine    the    accounts        "  Minton  v.  Stahlman,  96  Tenn.   98 
were  not  complied  with  by  them,  and    (1896). 
overdrafts  were  continued  on  insuflS- 

1688 


CH.  XLII.]  NEGLIGENCE    OF    DIRECTORS.  [§  702. 

port  the  condition  of  things  to  the  state  authorities,  or  instruct  the 
cashier  to  stop  taking  deposits,  or  to  warn  individual  depositors, 
or,  if  necessary,  make  public  announcement  of  the  condition  of 
things.^     A  depositor  in  a  bank  may  sue  the  directors  for  gross 
negligence  leading  to  the  loss  of  his  money,  and  may  join  also  a. 
cause  of  action  against  them  for  false  statements  as  to  the  condi- 
tion of  the  bank.-     The  president  is  negligent  and  is  liable  if  be 
does  not  require  the  secretary  to  give  a  bond  for  his  good  conduct, 
as  required  by  the  by-laws  of  the  corporation.^     But  it  has  been 
held  that  the  directors  are  not  liable  for  a  failure  to  have  the  sec- 
retary's bond  renewed,  they  supposing  that  it  did  not  expire  at  the 
«nd  of  the  year.'*     The  law  is  well  established  that  the  corporate 
officers  are  not  liable  on  the  ground  of  negligence  for  ultra  vires 
acts  which  they  have  done  or  sanctioned,  but  in  good  faith  and 
without  knowledge  of  their  ultra  vires  character.     The  act  itself 
may  be  impeached  and  set  aside,  and  property  transferred  there- 
under may  be  recovered  back;  but  if  the  directors  have  made  an 
•honest  mistake,  and  it  was  a  mistake  which  a  man  of  usual  intelli- 
gence might  make,  they  are  not  personally  liable  therefor.     The 
law  does  not  require  them  to  be  learned  in  the  law,^     Bank  direct- 
ors who  meet  but  once  or  twice  during  the  year,  and  do  not  exam- 
ine the  books,  and  have   no  knowledge  of  affairs,  are  liable  for 
losses  resulting  from  long-continued  overdrafts  by  insolvent  par- 
ties.^    A  bank  has  no  power  to  accept  notes  in  payment  of  a  sub- 
scription to  its  stock,  and  the  directors  are  personally  liable  for  so 
doing,  unless  the  notes  were  good  or  the  directors  had  reasonable 
■cause  to  believe  they  were  good.''     Managers  of  a  building-loan 
•corporation  are  liable  for  loans  made  to  a  firm  in  excess  of  the 
amount  allowed  by  a  by-law;  but  are  not  liable  for  a  mistaken 
■estimate  of  value  of  the  security  taken,  nor  for  a  defect  in  the  ac- 
knowledgment of  the  security  —  a  mortgage.^    A  director  has  been 
held  not  liable  for  negligence  in  failing  to  sue  for  a  debt  due  to  the 
corporation.^     Directors  are  not  liable  for  money  lost  by  an  over- 

1  Cassidy  v.  Uhlmann,  170  N.  Y.  505  Donald,  37  N.  J.  Eq.  409  (1883).  Cf.  S.  a, 

(1902).  42  N.  J.  Eq.  392  (1886);  Joint  Stock  Dis- 

■2  Solomon    v.   Bates,   118    N.   C.    311  count  Co.  r.  Brown,  L.  R.  3  Eq.  139;  s.a, 

(1896).    Such  a  suit  is  in  tort.    Tate  v.  L.  R.  8  Eq.  381  (1869).    See  also  §  682, 

Bates,  118  N.  C.  287  (1896).  supra. 

'i  Pontchartrain  R.  R  t\  Paulding,  11  <*  Marshall  v.  Farmers',  etc.  Bank,  85 

.La.  41  (1837).  Va.  676  (1889). 

♦Vance  v.   Phoenix  Ins.  Co.,  4  Lea  "  Coddington    v.  Canaday,  61   N.  E. 

(Tenn.),  385  (1880).  Rep.  567  (Ind.  1901). 

•^  Watts's  Appeal,  78  Pa.  St.  370  (1875);  »  Citizens'  BIdg.  etc.  Assoc,  v.  Coriell, 

Hodges  V.  New   England  Screw  Co.,  1  34  N.  J.  Eq.  383  (1881). 

R.  I.  312,  348  (1850);    Spering's  Appeal,  ^  Re  Forest,  etc.  Min.  Co.,  L.  R.  10  Ch. 

-ni  Pa.  St.  11,  24  (1872);  Williams  v.  Mc-  D.  450  (1878). 

1689 


§  702.] 


NEiiLIGEXCE    OF    DlUECroR8. 


[cii. 


XLII. 


drawn  ticcount.'  A  director  of  a  loanin''  tHJinpanv  is  not  liahle  for 
an  unsecured  loan  merely  because  it  appeared  on  the  books  and 
turns  out  to  be  uncollectible.  Proof  is  necessar}'  that  he  knew  of 
the  loan.-  Dank  directors  are  not  liable  for  ne;,digenco  merely  be- 
cause the  cashier  has  for  vears  been  embezziin*:  the  funds  and  mak- 
ing  false  entries.'  A  treasurer  is  not  lial)le  for  depositin*;. funds  in 
his  name  as  treasurer  of  the  corporation,  in  a  private  bank,  which 
is  reasonabl}'  considered  solvent,  even  though  it  turns  out  to  have 
been  insolvent.*  The  directors,  however,  are  liable  for  allowing 
the  treasurer  to  use  corporate  funds  for  lobbying  purposes;*  but 
not  for  allowing  one  of  their  number  to  manage  the  business, 
though  he  appropriate  its  property  to  himself.*  They  are  liable  for 
making   investments  contrary  to  the  charter.'     liut  they  are  not 


iTuiquand  v.  Marshall,  L.  R.  4  Ch. 
App.  ;i7G  (1«69). 

'^  Couper  V.  Whitsou,  9  Ct,  of  Sesa  Cas. 
(4th  ser.)  1115  (1882). 

3  Louisville  Sav.  Bank  v.  Caperton,  8 
S.  \V.  Rep.  883  (Ky.  1888).  The  direct- 
ors of  a  bank  are  not  bound  to  know  of 
the  cashier's  mismanagement  and  ate 
not  liable  therefor.  Clews  v.  Bardon, 
36  Fed.  Rep.  017  (1888).  For  an  English 
case  holiling  the  truatees  and  mana- 
gers of  a  savings  bank  liable  for  a  de- 
falcation of  the  actuary,  see  Re  Cardiff 
Sav.  Bank,  L.  R.  45  Ch.  D.  537  (1890). 
Where  the  president  of  a  bank  pur- 
chases a  note  which  contains  a  guaran- 
tee on  the  part  of  tlie  payee,  which 
guarantee    subsequently   reduces    the 


V.  Roland.  198  Pa.  St.  643  (1901*.  Tlie 
treasurer  is  not  liable  for  losses  by  de- 
posits made  by  him,  where  the  corpora- 
tion acquiesced  in  the  deposita  New 
York.  etc.  R.  R.  v.  Di.xon,  114  N.  Y.  80 
(1SS9).  A  treasurer  of  an  association 
who  receives  no  compensation  is  a  gra 
tuitous  bailee,  and  is  only  liable  for 
gross  negligence  in  paying  out  funds. 
Hibernia  Bldg.  Assoc,  v.  McGrath,  154 
Piu  St.  206  (1893). 

»Shea  V.  Mabry,  1  Lea  (Tenn.).  310 
(1878). 

*>  A  director  is  not  liable  to  a  creditor 
of  the  bank  for  negligence  in  allowing 
the  president  to  gradually  embezzle  all 
its  assets,  where  such  director  received 
no  pay.  and  once  or  twice  a  week  he 


amount  of  the  note,  the  president  may     attended   to   the   discounts,   saw   how 


be  guilty  of  negligence  in  purchasing 
the  note.  Stearns  v.  Lawrence,  83  Fed. 
Rep.  738  (1897). 

■•Booth  V.  Dexter,  etc.  Co.,  118  Ala. 
369  (1898).  A  treasurer  is  not  liable  for 
loss  of  funds  by  the  failure  of  a  bank, 
where  he  deposited  such  funds  ifi  the 


much  money  was  on  hand,  and  once  a 
year  counted  the  cash  and  securities. 
Swentzel  v.  Penn  Bank,  147  Pa.  St.  140 
(1892),  holding  also  that  the  plaintiff 
was  not  entitled  to  costs,  having  failed 
to  prove  his  casa  Contra  in  New  Jer- 
sey.   The  corporation  should  be  a  party 


bank  as  treasurer  and  with  the  consent  defendant    Creditors  also  may  be  made 

of  the  company,  nor  is  ka  liable  for  m-  parties  defendant.     Camp  v.  Taylor,  19 

terest  on  money  which  he  keeps  in  the  AtL  Rep.  968  (N.  J.  1890). 
bank  by  order  of  the  court,  unless  it  is        "  The  case  of  Williams  v.  McKay,  46 

shown  that  he  received  a  profit  there-  N.  J.  Eq.  25  (1889),  is  very  full,  explicit, 

from.     Laurel  Springs  Land  Co.  f.  Fou-  and  clear  in  its  adjudication  and  dis- 


geray,  57  N.  J.  Eq.  318  (1898).  The  treas- 
urer may  be  liable  for  a  deficit,  even 
though  the  cause  of  the  deficit  cannot 
be  ascertained.    Equitable,  etc.  Assoc. 


tribution  of  losses  on  the  president, 
treasurer,  manager,  officers,  finance 
committee,  secretary,  and  directors  of 
a  savings  bank,  where  those  officers. 


1690 


en.  XLii.] 


NEGLIGENCE    OF    DIRECTORS. 


[§ 


702. 


liable  for  errors  of  themselves  or  the  cashier  in  making  loans.^  In- 
asmuch as  directors  serve  in  nearly  all  cases  without  pay,  the  law 
is  not  exacting  in  its  requirements  of  them.  But  a  director  may 
be  liable  even  though  he  served  without  pay.^  Even  though  a  cor- 
poration in  competing  with  another  concern  is  selling  its  product 
below  cost,  yet  a  stockholder  cannot  enjoin  such  sales,  there  being 
no  bad  faith  or  palpably  bad  judgment  shown. ^ 

It  is  not  actionable  negligence  in  directors  to  proceed  to  business 
where  only  a  small  part  of  the  capital  is  subscribed.''  They  are 
not  liable  for  special  deposits  where  there  was  no  negligence  on 
their  part.' 

Directors  are  not  bound  to  make  a  thorough  examination  of  the 
books  and  papers  of  a  bank.'' 

A  director  who  is  absent  on  leave  of  absence  is  not  liable  for 
losses  occurring  during  that  time,'  nor  for  losses  occurring  shortly 
after  he  becomes  a  director.^ 

The  measure  of  damages  for  negligence  cannot  be  the  entire 


etc.,  had  made  investments  contrary  to 
the  by-laws,  charter,  and  statutes. 

iThe  directors  of  a  building  corpora- 
tion may  not  be  liable  for  investing  in 
second  mortgages,  although  it  was  ultra 
vires.  Sheffield,  etc.  Soc.  v.  Aizlewood, 
L.  R.  44  Ch.  D.  412  (1889).  Directors  are 
not  liable  for  a  negligent  or  ultra  vires 
act  in  lending  the  funds  without  tak- 
ing proper  security,  unless  it  is  shown 
that  they  failed  to  really  exercise  in 
good  faith  their  discretion  and  judg- 
ment as  directors.  Re  New  Mashona- 
land,  etc.  Co.,  [1892]  3  Ch.  577.  Negli- 
gence is  not  proved  by  the  facts  that 
the  bank's  capital  is  gone;  that  large 
dividends  were  declared  based  on  large 
amounts  of  assets  that  turned  out  to  be 
worthless:  that  real  estate  taken  for 
debts  depreciated  in  value;  that  real 
estate  was  bought  in  on  foreclosure 
sales  by  the  bank;  that  the  directors 
did  not  closely  watch  the  cashier,  there 
being  no  proof  of  lack  of  reasonable 
skill,  etc.,  on  his  part;  that  they  in- 
trusted the  management  to  the  cashier, 
a  man  of  experience  and  ability;  that 
overdrafts  were  allowed  to  responsible 
parties;  and  that  there  was  delay  in 
suing  on  notes.      Wallace   v.   Lincoln 


acts  of  mismanagement  were  consid- 
ered in  Re  Liverpool,  etc.  Assoc,  62  L, 
T.  Rep.  873  (1890). 

2Michleson  v.  Pierce,  107  Wis.  85 
(1900). 

3  Trimble  v.  American,  etc.  Co.,  61  N. 
J.  Eq.  340  (1901). 

*  Re  Liverpool,  etc.  Assoc,  62  L.  T. 
Rep.  873  (1890).  ' 

5  An  officer  of  a  corporation  is  not  lia- 
ble for  the  loss  of  corporate  securities 
without  negligence  on  his  part,  though 
intrusted  with  their  care.  Mowbray  v. 
Antrim,  123  Ind.  24  (1890). 

« Briggs  V.  Spaulding,  141  U.  S.  132 
(1891).  Although  the  directors  trust 
the  management  of  the  bank  entirely 
to  the  cashier,  and  do  not  examine  the 
books,  they  are  not  liable  to  the  credit- 
ors of  the  bank,  even  though  the  cash- 
ier, by  dishonesty  and  reckless  manage- 
ment, wrecks  the  bank.  Warner  v. 
Penoyer,  82  Fed.  Rep.  181  (1897). 

7  Briggs  V.  Spaulding,  141  U.  S.  132 
(1891). 

8  A  bank  director  is  not  liable  for 
negligence  where  the  bank  becomes  in- 
solvent within  a  short  time  after  he 
became  a  director.  Briggs  v.  Spaulding, 
141  U.  S.  132  (1891). 


Sav.  Bank,  89  Tenn.  630  (1891).  Various 

1691 


§  703.] 


NEGLIGENCK    OF    DIRKCTORS. 


[cH.  xi.rr. 


capital  stock  which  was  paid  in  in  cash,  and  also  the  dohts  which 
the  stockholders  may  have  to  pay.'  Various  instances  relative  to 
the  liability  of  directors  are  given  in  the  notes  below.' 

§  703.  Directors  mit.st  usr  ordinanj  care  and  (JU'ujencr  in  the 
management  of  the  corporation  and  the  transaction  of  its  business. — 
The  directors  of  a  corporation  are  not  guarantors  that  no  mistakes 
will  be  made  in  the  management  of  the  corporate  business,  nor  do 
thoy  insure  the  corporation  against  loss  from  the  frauds  or  cmbozzle- 
mcnt  of  subordinate  ollicers  and  agents.  They  are  required  to  ex- 
ercise reasonable  care  and  sound  business  judgment,  but  nothing 
further  than  this.  They  generally  serve  without  pay,  and  usually 
by  reason  of  their  own  interest  in  the  stock  of  the  company  are  di- 
rectly interested  in  the  welfare  of  the  corporation.  Jkit,  though 
this  is  the  case,  they  must  use  onlinarv  diligence  in  ascertaining:  the 
condition  of  things,  and  onlinarv  intelligence  in  their  action  as  di- 
rectors.'     They  are  liable  for  losses  if  they  pay  no  attention  to  busi- 


i  Bloom  1'.  National,  etc  Loan  Co.,  153 
N.  Y.  114(1897). 

2  A  director  of  an  insolvent  corpora- 
tion who  stantls  by  and  allows  the  treas- 
urer to  draw  checks  payable  to  the 
president  to  be  used  by  him  for  his  per- 
sonal debts  is  personally  liable  to  cor- 
porate creditors  to  the  amount  of  such 
checks.  Bird  v.  Magowan,  i']  Atl.  Rep. 
278  (N.  J.  1898).  Directors  are  not  per- 
sonally liable  because  tliey  make  a  mis- 
take in  the  price  paid  for  property,  even 
though  they  knew  all  about  the  prop- 
erty, nor  are  they  liable  because  they 
pay  the  purchase  price  after  discover- 
ing defects  in  the  property,  time  being 
given  to  the  vendors  to  remedy  the  de- 
fects. Lagunas,  etc.  Co.  Ltd.  r.  Lagunas 
Syndicate,  Ltd.,  [1899]  2  Ch.  392.  A  com- 
mittee to  which  the  board  refers,  as 
auditors,  the  reports  of  the  secretary, 
are  not  liable  for  embezzlement  of  the 
secretary  not  discovered  by  them,  it 
appearing  that  such  committee  were 
not  directors  or  officers  and  that  the 
items    appearing    in    the    statements 


leading  to  emliezzlement  on  the  pa^t  of 
the  bookkeeper.  Where  the  board  of 
directors  allow  an  illegal  preference  to 
one  director  they  are  personally  liable 
to  other  creditors  to  the  extent  of  such 
preference,  and,  even  though  one  of 
them  resigns,  the  liabilitj-  continues  for 
the  benefit  of  past  as  well  as  future 
creditors.  Nix  v.  Miller.  26  Colo.  203 
(1899).  Where  a  lease  of  a  street  rail- 
way has  been  made,  in  accordance  with 
the  vote  of  the  stockholders  and  direct- 
ors, a  stockholder  cannot  hold  the  di- 
rectors personally  liable  for  not  inform- 
ing the  stockholders  of  an  offer  to 
purchase  the  property,  it  not  being 
shown  that  the  offer  was  from  a  re- 
sponsible party  or  that  it  would  have 
made  any  difference  in  the  stockholders' 
action.  Strunk  v.  Owen,  199  Pa.  St  78 
(1901). 

3 The  leading  case  on  the  liability  of 
directors  for  negligence  is  Charitable 
Corp.  V.  Sutton.  2  Atk.  400  (1742).  The 
most  important,  recent,  and  fully  con- 
sidered   case,    however,    is    Briggs    v. 


corresponded  with  the  items  upon  the  Spaulding,  141  U.  S.  132  (1891),  where 

books  of  the  company.     Alpena,  etc.  the  supreme  court  of  the  United  States 

Assoc.  V.  Denison,  121  Mich.  159  (1899).  laid  down  rules  (pp.  147, 151, 152)  which 

In  the  case  of  San  Pedro,  etc.  Co.  v.  very  largely  exempt   directors  in   na- 

Reyiiolds,  121  Cal.  74  (1898),  a  general  tional  banks  from  any  liability  whatso- 

manager  was  held  liable  for  negligence  ever.     In  North  Hudson,  etc  Assoc,  v. 

1693 


CH.  XLII.] 


NEGLIGENCE    OF   DIRECTOKS. 


[§70 


ness  at  meetings  of  the  directors,  or  if  they  regularly  fail  to  attend 
such  meetings.  They  must  exercise  a  reasonable  amount  of  dili- 
gence and  care. 

The  directors  are  not  bound  to  examine  the  books  of  the  com- 
pany, nor  to  investigate  the  mode  of  living  of  their  employees.   But 


Childs,  82  Wis.  460.  476,  477  (1892),  the    ment  of  debts  in  his  care  that  he  does 


court  said  that  an  officer  is  "  responsible 
only  for  a  failure  to  bring  to  the  dis- 
charge of  his  duties  such  degree  of  at- 
tention, care,  skill,  and  judgment  as  are 
ordinarily  used  and  practiced   in   the 
discharge  of  such   duties  or    employ- 
ments; the  degree  of  care,  skill,  and 
judgment  depending  upon  the  subject 
to  which  it  is  to  be  applied,  the  partic- 
ular circumstances  of  the  case,  and  the 
usages  of  the  business."    The  court  also 
said:  "Where  they  have  not   profited 
personally  by  their  bad  management, 
or  appropriated  any  of  the  property  of 
the  corporation  to  their  own  use,  courts 
of  equity  treat  them  with  indulgence. 
Were  a  more  rigid  rule  to  be  applied,  it 
would  be  diflScult  to  get  men  of  char- 
acter and  pecuniary  responsibility  to 
fill  such  positions."    In   Percy  v.  Mil- 
laudon,  8  Mart  (La.)  68  (1829),  the  court 
said:  "If   nothing   has  come  to  their 
knowledge  to  awaken  suspicion  of  the 
fidelity  of  the  president  and  cashier, 
ordinary  attention  to  the  affairs  of  the 
institution  is  sufficient.     If  tliey  become 
acquainted  with  any  fact  calculated  to 
put  prudent  men  on  their  guard,  a  de- 
gree of  care   commensurate  with  the 
evil  to  be  avoided  is  required,  and  a 
want  of  that  care  certainly  makes  them 
responsible."    This  case  also  holds  that 
directors  are  not  liable   for  errors  of 
judgment     unless    they    are    grossly 
wrong.     United  Society,  etc.  v.  Under- 
wood, 9  Bush  (Ky.).  609  (1873),  holding 
that   the   director    must  use  ordinary 
diligence;  Williams  r.  Gregg,  2  Strobh. 
Eq.  (S.  C.)   297  (1848).     In  Eichards  v. 
New  Hampshire  Ins.  Co.,  43  N.  H.  263 
(1861),  the  court  said:     "The  rule  is  a 
just  one  that  an  agent  is    bound    to 
apply  the  same  diligence  to  obtain  pay- 


to  recover  his  own."  In  Land  Credit 
Co.  V.  Fermoy,  L.  R  5  Ch.  App.  763 
(1870),  an  attempt  was  made  to  hold 
liable,  for  negligence,  directors  who  in- 
nocently approved  of  a  loan  which  in 
reality  had  not  been  made,  but  the 
money  had  been  used  by  other  directors 
for  speculative  purposes.  See  also  Re 
Railway  Imp.  Co.,  42  L.  T.  Rep.  206 
(1880);  Scholefield's  Case,  17  W.  N.  23 
(1882);  British,  eta  Ass.  Co.,  L.  R.  14 
Ch.  D.  385  (1880).  In  Dunn  v.  Kyle,  14 
Bush  (Ky.),  134  (1878),  where  a  cashier 
had  embezzled  the  funds  of  the  bank, 
the  court  said:  "Bad  faith  or  gross 
negligence  is  certainly  necessary  to 
render  the  director  liable  to  a  stock- 
holder in  a  case  like  this."  The  court 
alsoapproved  of  the  rule  given  in  Morse 
on  Banking,  p.  117,  to  the  effect  that, 
"  for  excusable  mistakes  concerning 
the  law,  and  for  many  errors  strictly 
of  discretion,  they  are  not  liable. 
Though  in  cases  in  which  their  action 
has  been  so  grossly  ill-advised  as  to 
warrant  the  imputation  of  fraud,  or  to 
sho%vawant  of  the  knowledge  absolutely 
necessary  for  the  performance  of  their 
duties,  so  great  that  they  were  not  justi- 
fied in  assuming  the  office,  they  may  be 
held  responsible."  The  mere  fact  that 
loans  by  a  bank  turn  out  to  have  been 
unwise  and  hazardous  does  not  render 
the  director  liable  therefor.  Witters  v. 
Sowles,  31  Fed.  Rep.  1  (1887).  Bank  di- 
rectors cannot  be  held  liable  for  negli- 
gence in  loans,  etc.,  at  the  suit  of  a 
stockholder,  where  they  have  used 
ordinary  care  and  acted  in  good  faith. 
Jones  V.  Johnson,  86  Ky.  531  (1888).  In 
order  to  render  bank  directors  liable,  in 
an  action  of  deceit,  for  a  false  state- 
ment as  to  the  condition  of  the  bank, 


1693 


§  703.] 


NKuLlOKNCE    OF    DIKECToRS. 


[CU.   XLII. 


thev  are  required  to  attend  the  directors'  meetings  witli  reasonable 
regularity;  to  have  statements  of  the  business  made  to  them;  to 
object  to* the  transaction  of  important  business  without  the  knowl- 
edn-e  and  consent  of  the  board  of  directors;  to  examine  with  rea- 


tlierebj-  iniliu-in}?  deposits,  it  must  be 
shown  thiit  they  knew  the  statement 
to  be  false  and  not  merfely  that  they 
should  have  known  it.  Pieratt  v.  Young, 
4<J  S.  W.  Hop.  9G 1  ( Ky.  1899).    In  a  suit  by 


pired  in  ISSfitliat  the  deceased  actuary 
of  the  bank  had  defrauded  it  of  apreat 
deal  of  money.  The  court  held  that 
tin-  marquis  was  not  liable.  The  duty 
of  an  auditor  is  to  examine  the  books. 


a  receiver  to  hold   officers  liable   for    ascertain  their  correctness,  and  prejwire 
negliRence  it   is  no  defense  that  the 


directors  knew  of  the  mode  in  wliicli 
the  business  was  transacted.  New 
Haven  T,  Co.  v.  Doherty.  50  All.  Rep. 
887  (Conn.  1902).  Under  the  Indiana 
statute  directors  in  a  bank  are  liable 
for  gross  inattention  to  business.  Cod- 
dington  r.  Canaday.  157  Ind.  '^43  (1901). 
The  fact  that  aby-lawof  a  bankTequir- 
ing  the  directors  to  examine  the  bank 
every  three  months  has  been  long  dis- 
regarded does  not  raise  a  presumption 
of  repeal  and  does  not  release  the  di- 
rectors from  liability  for  negligence 
leading  to  a  defalcation.  Campbell  r. 
Wiitson.  50  Atl.  Rep.  lOO  (N.  J.  1901). 
For  the  mere  failure  of  bank  directors 


a  balance  sheet  showing  the  company's 
financial  position  at  the  time  lie  is  ajv 
jiointed,  but  he  is  bound  to  use  only  a 
reasonable  amount  of  care  and  skill, 
varying  according  to  the  case.  Re 
Kingston  Cotton  Mill  Co.,  [18%]  2  Ch. 
279.  A  director  who  is  habitually  al> 
.'^ent  from  meetings  of  the  board  may 
be  liable  for  the  acts  of  the  board. 
Schout  V.  Conkey,  etc.  As«oc..  87  Hun. 
508  (1895);  afT'd,  156  N.  Y.  608. 

The  law  on  this  subject  is  ably  and 
clearly  set  forth  by  Mr.  Justice  Earl,  in 
Hun  r.  Cary,  82  N.  Y.  65  (1880.  Cf. 
Van  Dyck  v.  McQuade.  86  N.  Y.  38 
(1881).  See  also  Scott  v.  Depeyster,  1 
Edw.  Ch.  513  (1832);  Litchfield  r.  White. 


to  exercise  ordinary  diligence  in  the  3  Sandf.  Super.  545  (1850);  Liquidators, 

management  of  the  bank  they  cannot  etc.  r.  Douglas,  32  Scot  Jur  212  (1860); 

be    held     liable    by   general  creditors.  Spering's  Apjieal,  71  Pa.  St   11  (1872), 

Union  Nat  Bank,  etc.  v.  Hill,  148  Mo.  an   important  case,  and  one  which  is 

880  (1899).      Directors  in  a  bank   are  frequently  spoken  of  as   the    leading 

liable  for  losses  due  to  the  carelessness  case  lierein.      A   director    who  trusts 


And  mismanagement  of  the  executive 
officers  to  whom  the  directors  turned 
over  the  management,  without  exer- 
cising ordinary  care  and  prudence  in 
supervising  their  action.      Warren  v. 


everything  to  the  other  directors,  or 
who  performs  all  acts  as  a  mere  man  of 
straw,  is  liable.  Joint-Stock  Discount 
Co.  r.  Brown,  L.  R.  8  Eq.  404,  405  (1869). 
See  also  Williams  r.  McKay,  40  N.  J. 


Robison,  19  Utah,  289  (1899).     The  case  Eq.  189  (1885);  Ackerman  v.  Halsey.  37 

of  iJe  Cardiff  Sav.  Bank,  [1892]  2  Ch.  100,  N.  J.  Eq.  356  (1883);    afif'd.   Halsey   v. 

isanexampleof  one  mode  of  doing  busi-  Ackerman,  38  N.  J.  Eq.  501;  Mutual, 

ness.    The  Marquis  of  Bute  was  made  etc.  Bank  v.  Bosseiux,  3  Fed.  Rep.  817 


president  of  a  savings  bank  at  the  age 
of  six  months.  He  continued  to  be 
president  from  1848  until  1886.  Dur- 
ing this  time  he  attended  one  meeting 
in  1869.     His  name,   however,  always 


(1880).  That  directors  are  not  liable  for 
the  fraud  or  misconduct  of  co-directors, 
see  Movius  v.  Lee,  30  Fed.  Rep.  298 
(1887).  Directors  are  not  liable  for 
gross  negligence  in  buying  out  a  busi- 


appeared  in  the  pass-books,  annual  re-  ness  where  the  corporation  was  organ- 
ports,  and  circulars.  He  paid  no  atten-  ized  for  the  express  purpose  of  buying 
tion  whatsoever  to  the  bank.     It  trans-    out  that  business.     Overend,  etc.  Ca  v. 

1694 


OH.  XLII.] 


NEGLIGENCE    OF    DIKECTORS. 


[§  T03. 


sonable  care  the  reports  and  matters  of  business  brought  before 
them;  and  not  to  shut  their  eyes  to  obvious  objections  to  the  busi- 
ness transactions  and  general  condition  of  the  corporation,  or  to 
the  character  and  well-known  reputation  of  the  employees.  More- 
over, when  a  director  has  knowledge  that  an  unauthorized  act  is 
being  done,  he  cannot  escape  liability,  however  innocent  he  may 
be,  unless  he  prevents  the  act  by  his  protest,  or  files  a  bill  in  equity 
to  remedy  the  wrong.^ 


Gibb,  L.  R  5  H.  L.  480  (1872).  Where 
loans  without  securities  are  improperly 
made,  and  the  guilty  directors  are  liable 
therefor,  a  director  who  did  not  partic- 
ipate is  nevertheless  liable,  if  he  does 
not  take  steps  to  remedy  the  matter  as 
soon  as  he  learns  of  it.  Jackson  v. 
Munster  Bank,  15  L.  R.  Ir.  356  (1885). 
After  a  director  sends  in  a  letter  of 
resignation  he  is  not  liable  for  the 
wrongful  acts  of  the  directors,  even 
though  no  attention  is  paid  to  his  letter. 
Perry's  Case.  34  L.  T.  Rep.  716  (1876).  In 
the  case  of  Movius  v.  Lee,  80  Fed.  Rep. 
298,  307  (1887),  the  court  held,  review- 
ing the  cases,  that  "there  is  no  case 
which  lias  been  cited  or  observed  in 
wliich  it  has  been  decided  that  a 
director  of  a  corporation  was  liable  to 
make  good  a  loss  occasioned  by  the 
fraud  or  misconduct  of  a  co-director,  in 
which  he  had  no  part,  and  which  was 
perpetrated  without  his  connivance  or 
knowledge.  ...  It  is  nowhere  ad- 
judged that  all  must  always  act,  or 
that  they  must  not  trust  one  another 
to  act,  or  that  they  are  liable  for  the 
mere  omission  to  watch  and  restrain 
the  others,  without  wrong  intention  on 
their  own  part,  or  actual  knowledge  of 
the  wrong  on  the  part  of  the  others." 
Directors  are  required  to  use  such  care 
and  diligence  as  a  prudent  man  exer- 
cises in  his  own  affairs.  If  he  utterly 
neglects  his  duties  he  is  liable.  Horn, 
etc.  Co.  V.  Ryan,  42  Minn.  196  (1889). 
Misfeasance  is  such  non-feasance  as  is 


negligence  amounting  to  a  breach  of 
trust.  Liability  for  negligence  cannot 
be  imputed  to  directors  unless  it  is 
gross  negligence  resulting  in  loss.  To 
constitute  gross  negligence  there  must 
be,  first,  a  plain  duty  to  do  or  abstain 
from  a  particular  thing;  secondly,  such 
abstention  or  such  action  as  the  court 
would  be  justified  in  holding  to  be  mis- 
chievous or  reckless.  When  a  duty  in- 
cumbent on  the  directors  has  not  been 
l)erformed,  the  burden  of  proving  gross 
negligence  is  on  those  who  allege  that 
conclusion;  but  where  the  facts  estab- 
lish gross  negligence,  but  at  the  same 
time  show  that  it  is  possible  or  likely 
that  a  satisfactory  explanation  ought 
to  be  forthcoming,  the  burden  of  proof 
is  shifted.  Ee  Liverpool,  etc.  Assoc, 
62  L.  T.  Rep.  873  (1890). 

1  Cassidy  v.  Uhlmann,  170  N.  Y.  505 
(1902);  Joint  Stock  Discount  Co.  v. 
Brown,  L.  R.  8  Eq.  381,  402  (1869);  Ash- 
hurst  V.  Mason,  L.  R.  20  Eq.  225  (1875). 
That  a  director  is  not  in  general  liable 
for  misdeeds  of  subordinate  corporate 
agents,  see  Bath  v.  Caton,  37  Mich.  199 
(1877);  Bacheller  i".  Pinkham,  68  Me.  253 
(1878);  Nicholson  v.  Mounsey,  15  East, 
384  (1812):  Stone  v.  Cartwright,  6  T.  R, 
411  (1795);  Hewett  v.  Swift,  85  Mass.  420 
(1862).  Cf.  Weir  v.  Barnett,  L.  R.  3 
Exch.  D.  32,  238  (1878).  But  knowledge 
obtained  by  the  director  previous  to  be- 
coming such  does  not  compel  him  to 
act.  Re  Forest,  etc.  Ca,  L.  R.  10  Ch.  D. 
450  (1878). 


1695 


CHAPTER  XLITT. 


THE  POWER  OF  VARIOUS  OFFICERS  AND  AOENTS  TO  CONTRACT 
FOR  A  CORPORATION.  AND  THE  MODE  OF  DRAWING  AND  EXE- 
CUTING CORPORATE  CONTRACTS- ADMISSIONS  AND  NOTICE. 


§ 


704.  Under  what  circumstanoes  is  a 
corporiition  bound  by  a  con- 
tract made  in  its  nama 


POWER  OF  PROMOTKRS,  STOCKHOLD- 
ERS. MRKCTOICS.  EXICCUTIVE  OOM- 
MITTEK,  PRESIDENT.  SECRETARY, 
TREASURER,  CASHIER,  GENERAL 
MANAGER,  AND  MISCELLANEOUS 
AGENTS  TO  CONTRACT  FOR  A  COR- 
PORATION. 

705-707.  Promoters  — Their  liability 
;md  the  liability  of  the  corpo- 
ration and  subscribers. 
708-711.  Stockholders  — Their  power 
to  make  by  laws  ami  contracts, 
expel  members,  and  remove 
directors. 
71S-714.  Directors: 

Their  power  to  contract 
RatiHcation  by  directors. 
Dc  facto  directors. 
Directors'  meetings,  call  quo- 
rum. 
Their  minute-book  as  evi- 
dence. 
Executive  committee. 
Presiilent. 

Secretary  and  treasurer. 
Cashier. 

General   manager  and   superin- 
tendent. 
Subordinate  agents. 


§  721 


722 


724. 


715. 
716. 
717. 
718. 
719. 

720. 


a  THE  FORM  OP  CORPORATE  CON- 
TRACTS- COKPORATE  SEAL — DRAFT- 
ING. SIGNING,  AND  SKALING  —  LIA- 
BILITY OF  OFFK'KRS  ON  CONTRACTS 
IRREGULARLY  EXECUTED. 

Ordinary  corjiorate  contracts,  by 
the  modern  rule,  need  not  be 
under  seal. 

Method  of  drafting,  signing, 
sealing,  and  acknowledging  a 
corjx)rate  contract  —  Proof  of 
seal  and  authority  to  attach  it. 

Corf)oration  may  V)e  liable  on 
irregularly-executed  instru- 
ments. 

Liability  of  officers  on  irregu- 
larly-executed instruments. 

725.  Charter  and  by-law  reijuire- 
mentsasto  manner  of  execut- 
ing corporate  con  tracts— Right 
of  party,  contracting  with  cor- 
poration, to  rely  on  proper  cor- 
porate action  having  been 
taken. 

ADMISSIONS  OF  OFFICERS  AND  NOTICE 
TO  OFFICERS. 

726.  When  is  the  corporation  bound 
by  its  officers'  or  agents'  ad- 
missions. 

727.  Notice  to  the  corporation  by 
notice  to  Ihe  officers  —  Corpo- 
rate books  as  evidence  against 
directors  and  stockholders  — 
Notice  of  fraud  perpetrated  on 
the  corporation. 


704. 


Under  what  circumstances  is  a  corporation  hound  hy  a 
contract  made  in  its  name—  The  three  tests  for  determining  whether 
a  contract  may  he  enforced  against  a  corporation. —  In  determining 
whether  a  contract  may  be  enforced  against  a  corporation,  three 
things  are  to  be  considered.  First,  did  the  corporation  have  the 
power  to  enter  into  such  a  contract?  Second,  was  the  contract 
entered  into  by  a  duly -authorized  agent  of  the  corporation?  Third, 
was  the  contract  drawn,  signed,  and  sealed  in  a  form  which  binds 
the  corporation? 

The  first  of  these  questions  has  been  already  treated  in  the  pre- 
ceding chapters  of  this  book.^ 

1  See  particularly  chs.  XL  and  XLI,  supra. 

1696 


CH.  XLIII.]  HOW    CORPORATE    CONTRACTS    ARE   MADE.  [§  705. 

There  is  an  infinite  variety  of  contracts  which  the  corporation 
may  enter  into,  and  the  great  mass  of  law  on  this  subject  is  con- 
stantly being  increased  by  new  decisions.  A  corporation  may  enter 
into  any  contract  which  is  within  its  express  or  implied  powers. 
And  ev^en  a  contract  which  is  not  within  the  express  or  implied 
powers  of  the  corporation  is  sometimes  enforced  against  it  or  in  its 
behalf  when  one  party  to  the  contract  has  already  performed,  or 
when  the  parties  cannot  be  restored  to  their  original  positions.^ 

The  second  and  third  tests  of  whether  a  contract  is  enforceable 
against  a  corporation  are  considered  in  this  chapter. 

A.  POWER  OF  PROMOTERS,  STOCKHOLDERS,  DIRECTORS,  EXECUTIVE  COM- 
MITTEE, PRESIDENT,  SECRETARY,  TREASURER,  CASHIER,  GENERAL 
MANAGER,  AND  MISCELLANEOUS  AGENTS  TO  CONTRACT  FOR  A  COR- 
PORATION, AND  CONTRACTS  BINDING  ON  THE  CORPORATION  BY  RATI- 
FICATION, 

§  705.  Promoter's  —  Licihility  to  strangers,  to  the  corporationy 
and  to  siihscrihers  for  stock  —  LiaMUty  to  siihscribers  herein  — Con- 
trihution  —  Liability  of  the  corporation  herein  to  strangers  and  to 
yromoters. —  A  promoter  is  a  person  who  brings  about  the  incor- 
poration and  organization  of  a  corporation.  He  brings  together 
the  persons  who  become  interested  in  the  enterprise,  aids  in  pro- 
curing subscriptions,  and  sets  in  motion  the  machinery  which  leads 
to  the  formation  of  the  corporation  itself.-  The  "  flotation  "  of  a 
property  means  a  sale  thereof  at  a  profit  to  a  substantial  company.* 

1  See  ch.  XL,  supra.  First,  etc.  Co.   v.  Hildebrand,  103  Wis» 

2  Quoted  and  approved  in  Dickerraan  530  (1899).  A  trust  company  receiving; 
V.  Northern  T.  Co.,  176  U.  S.  181,  203  subscriptions  to  the  stock  of  a  corpora- 
(1900).  An  interesting  description  of  tion  and  issuing  receipts  therefor,  to- 
the  "promoter  "  is  given  by  Judge  Lur-  the  effect  that  upon  payment  the  party 
ton,  in  McMuUen  v.  Ritchie,  64  Fed.  should  receive  from  the  trust  company 
Rep.  253,  260  (1894),  as  follows:  "He  a  certificate  for  the  stock  in  the  pro- 
was  a  man  of  great  abilit3^  enormous  posed  corporation,  may  be  liable  for 
energy,  and  a  towering  ambition  for  misstatements  in  the  prospectus  which 
great  enterprises.  As  a  promoter  or  had  been  issued  by  the  promoters, 
♦boomer'  he  seems  to  be  unrivaled;  a  McClure  v.  Central  Trust  Co.,  165  N.  Y. 
man  of  large  general  information  and  108  (1900).  In  England  the  word  "  pro- 
robust  constitution,  extraordinarily  meters  "  is  often  used  in  special  acts  of 
sanguine,  desperately  pugnacious,  gen-  incorporation  in  place  of  the  word  "in- 
erous  as  a  prince,  and  possessing  no  de-  corporators."  Marshall  v.  South  Staf- 
gree  of  caution  whatever.  His  ambi-  fordshire  Tramways  Co.,  [1895]  2  Ch. 
tion  was  to  make  millions."  Pro-  36.  For  definitions  of  a  promoter,  ia 
meters  are  "  the  persons  who  under-  reference  to  his  liability  to  the  corpora- 
take  to  form  and  set  going  a  company  tion  itself,  see  §  651,  supra.  It  has  re- 
•with   reference   to  a  given    project"  cently  been  well  said:     "The  business 

3  Torva,  etc.  Syndicate  v.  Kelly,  [1900]  A.  C.  612. 
(107)  1697 


§  Tu:..J 


now 


COKl'ORATE   CONTRACTS    ARE    MADE.  [ciI.  XLIII. 


There  has  been  great  difRculty  in  determining  who  is  to  be 
considered  a  promoter  and  who  is  not.  As  regards  the  liability  to 
strangers,  however,  it  seems  that  every  one  is  liable  herein  as  a 
promoter  who  induces  such  stranger  to  act  in  exi)ectation  of  pay- 
ment from  the  prospective  corporation.  Having  induced  the  party 
to  act,  th(3  promoter  must  see  that  he  is  paiil. 

In  America  the  (juestion  of  the  liability  of  promoters  to  persons 
who  have  perlormetl  services  or  entered  into  contracts  relative  to 
a  prospective  corporation  has  rarely  arisen.  But  in  England  this 
question  has  frequently  been  passed  upon.  In  general  the  promoter 
of  a  prospective  corporation  is  liable  for  services  rendered  by  oth- 
ers who  are  employed  as  clerks,  engineers,  or  in  a  similar  capacity 
in  the  work  of  })romoting  the  enterprise.' 


promoter  seems  temporarily  to  have 
fallen  into  disreputa  He  is  regarded 
with  the  same  sutTerance  and  suspicion 
as  was  tlio  financier  in  the  fifteentli  cen- 
tury. There  may  be  some  ground  for  this 
suspicion.  In  itself,  however,  the  task 
of  a  promoter  is  not  only  essential  for 
industrial  progress,  but  it  demands  for 
its  successful  exercise  a  high  grade  of 
intelligence  and  judgment.  It  is  he 
who  seeks  out  new  opportunities  for 
investment,  who  formulates  plans  fur 
working  those  opportunities,  and  who 
so  organizes  the  conditions  and  forces 
at  his  disposal  as  to  give  market  value 
to  an  enterprise  which  first  existed  as 
an  idea  in  his  mind." 

1  The   promoters   may   be  liable   for 
royalties  according  to  contract,  even 
though  they  organized  a  corporation 
which  did  all  the  business.     American 
Paper  Bag  Co.  v.  Van  Nortvvick,  52  Fed. 
Rep.  752  (1892).    Promoters  are  liable 
for  goods  ordered  and  delivered  for  a 
corporation  that  is  never    organized. 
Hub  Pub.  Co.  r.  Richardson,  13  N.  Y. 
Supp.  665  (1891).     Where  the  individ- 
uals who  intend  to  incorporate  a  com- 
pany employ  an  attorney  and  author- 
ize him  to  contract  for  printing,  they 
are  personally  liable  for  the  printing 
bill.     Hersey  v.  Tully,  8  Colo.  A  pp.  110 
(1896).     Promoters  may  be  liable  on  a 
contract  to  pay  a  commission  to  a  per- 
son obtaining  subscriptions  to  the  stock 
of  the  company.     Pratt  v.  Finkle,  99 


Ga.  610  (1896).     A  promoter  is  liable  for 
preliminary  debts  incurred.    Sandusky 
Coal  Ca  r.  Walker,  27  Out.  (Can.)  677 
(1896>.     Where  the  promoters  after  in- 
curring   debts    abandoned   the    enter- 
pri.se,  each  one  of  tliem  is  liable  for  at 
Ifast   his   proportionate   part    of   such 
debts.     Roberts  Mfg.  Co.  v.  Wright.  02 
Minn.  337  (1895X    The  secretary  of  a 
prospective  company  ordering  adver- 
tisements is  liable  for  the  same,  though 
he  orders  as  "  secretary  pro  teuu"'   Hop- 
croft  r.  Parker,  16  L.  T.  Rep.  561  (1867). 
An  architect  employed  by  one  of  the 
promoters  may  hold  the  promoters  lia- 
ble, the  .scheme  having  been  abandoned, 
and  he  may  file  a  lis  poidens  on  land 
which  the  promoter  intended  to  turn 
into  the  corporation  for  stock.     Fried- 
man V.  Janssen,  66  S.  W.  Rep.  752  (Ky. 
19021.     A    committee  appointed   at   a 
public  meeting  of  mechanics  to  carry 
out  certain  things  are  personally  liable 
for  the  wages  of  workmen  employed 
by    them.     McCartee    v.   Chambers,  6 
Wend.  649  (1831).     The  chairman  of  the 
promoters  who  signs   the    prospectus 
may  by  the  jury  be  held  to  have  author- 
ized the  expense  of  printing,  and  is  lia- 
ble  personally.     Riley  v.   Packington» 
L.  R.  2  C.  P.  536  (1867).    In  Collingwood 
V.  Berkeley,  15  C.  R  (N.  S.)  145  (1863),  a 
director  who  allowed  his  name  to  be 
used  as  such  for  a  proposed  company 
was  held  liable  for  a  passage  ticket 
which  was  purchased  on  a  representa- 


1698 


CH.  XLIII.]  HOW    CORPOKATE    CONTRACTS    ARE   MADE. 


[§  T05. 


Where,  however,  the  owner  of  land,  with  knowledge  that  several 
parties  contemplate  forming  a  corporation,  makes  a  lease  to  one  of 
such  promoters,  the  intent  being  that  the  lease  shall  be  assumed  by 


tion  of  the  secretary  that  the  company- 
would    be  organized.     That  the  inter- 
ested parties  may  be  liable  to  the  at- 
torney of  the  provisional  committee  of 
a  company  which  is  abandoned  before . 
incorporation,  see  Parsons  v.  Si^ooner,  5 
Hare,  103  (1846).     A  promoter  who  em- 
ploys a  person  in  behalf  of  a  proposed 
company  is  liable.     Bell  v.  Francis,  9 
Car.  &  P.  66  (1839).     A  local  committee 
to  form  a  company  are  liable  to  their 
secretary.     They  are  not  allowed  to  say 
that  he  must  look  to  the  corporation 
for  {)ay,     Kerridge  v.  Hesse,  9  Car.  & 
P.  200  (1839).     A  promoter  is  liable  per- 
.sonally  on  contracts  made  by  him  in 
belialf  of  the  company  with  third  per- 
sons, and  his  liability  is  not  released  by 
the  subsequent  adoption  of  the  contract 
by  the  company.  Kilner  r.  Baxter,  L.  R. 
2   C.  P.  174  (1860);   Scott   v.  Embury, 
L.  R.  2  a  P.  255  (1867).    The  question  of 
whether  a  surveyor  employed  by  pro- 
moters can  look  to  them  for  compensa- 
tion,   the    company   not    having    been 
formed,  is  for  the  jury,  considering  all 
tlie  facts  of  the  employment.     Higgins 
V.  Hopkins.  3  Exch.  163  (1848).     If  he 
was  present   when   the   promoters  re- 
solved that  they  should  not  be  liable  he 
cannot  recover  from  them.     Laudman 
V.  Entwistle,  7  Exch.  632  (1852).    In  Lake 
V.  Argyle,  6  Q.  B.  477  (1844),  it  was  left 
to  the  jury  to  decide  whether  the  presi- 
dent of  a  proposed  corporation  thereby 
lield  himself  out  as  liable  on  a  contract 
made  by  an  agent  of  the  proposed  com- 
pany.    It  is  a  question    for  the  jury 
wiiether  the  president  of  a  proposed 
corporation  is  liable.     Wood  v.  Argyle, 
6  M.  &  Gr.  928  (1844).     Allowing  one's 
name  to  be  used  as  a  director  and  sug- 
gesting that  advertising  be  done  does 
not  render  a  person  liable  for  the  ad- 
vertising.    Burbridge  v.  Morris,  3  H.  & 
C.  664  (1865).     A  promoter  is  not  liable 
on  a  contract  made  before  he  joined  in 


the  enterprise,  though  the  contract  is 
performed  afterwards.  Newton  v. 
Belcher,  12  Q.  B.  921  (1848).  A  promoter  • 
is  not  liable  on  contracts  made  in  writ- 
ing before  he  became  such.  Beale  v. 
Mouls,  5  Ry.  &  Can.  Cas.  105  (1847). 

A  person  contracting  with  a  partner- 
ship may  hold  the  partners  liable,  al- 
though he  knew  that  their  articles 
provided  for  incorporation  and  they 
afterwards  did  incorporate.  Witmer  v. 
Schlatter,  2  Rawle  (Pa.),  359  (1830).  But 
the  rule  is  otherwise  where  the  party 
allows  the  account  to  be  transferred  to 
the  corporation  and  then  carries  on  a 
long  running  account.  Whitwell  v. 
Warner,  20  Vt.  425  (1848).  Or  where 
the  party  knew  that  he  was  contract- 
ing with  the  other  as  an  agent  of  an 
unincorporated  association.  Abbott  v. 
Cobb,  17  Vt.  593  (1845).  As  to  this  sub- 
ject of  liability,  see  also  gS  245,  503c, 
supra,  on  the  liability  of  trustees;  §508, 
supra,  on  the  liability  of  officers  of  un- 
incorporated associations;  §  888,  infra, 
on  the  liability  of  committee-men,  and 
§  724,  infra,  on  the  liability  of  persons 
who  sign  their  names  and  add  an  offi- 
cial title.  In  England  a  provisional 
committee  is  generally  appointed  by 
the  subscribers.  This  committee  is  gen- 
erally held  not  liable.  But  a  committee 
of  management  is  usually  appointed 
subsequently,  and  this  committee  is 
generally  held  liable.  That  a  provis- 
ional committee  is  not  liable,  see  Nev- 
ins  V.  Henderson,  5  Railw,  &  Can.  Cas. 
684  (1848);  Dawson  v.  Morrison,  5  Railw. 
&  Can.  Cas.  62  (1847);  Ex  parte  Roberts, 

2  Macn.  &  G.  193  (1850);  Carmichael's 
Case,  17  Sim.  163  (1850);  Ex  parte  Clarke, 
20  L.  J.  (Ch.)  14  (1851);  Maitland's  Case, 

3  GiflE.  28  (1861);  Hall's  Case,  3  De  G.  & 
S.  214  (1850);  Ex  parte  Stocks,  22  L.  J. 
(Ch.)  218  (1853);  Tanner's  Case,  5  De  G. 
&  S.  183  (1852);  Forrester  v.  Bill,  10  Ir. 
L.  Rep.  555  (1847);  Ex  parte  Osborne,  15 


1699 


§  TO.->.J 


now  CORPORATE  CONTKACTS  AKF-:  MADE 


[CH.  XLIII. 


the   corporation,  he  cannot  hold  the  individual  takin;?  the  lease 
personally  liable,  the  lease  having  been  assigned  by  such  individual 


Jur.  72  (1851):  Burnside  r.  Dayrell.  3 
Exch.  224(1H49);  McEwanv.  Campbell. 
2  Macq.  499  (1857).  Contra.  Lefroy  v. 
Gore.  1  Ja  &  Lat  571  (1844).  It  is  for 
the  jury  to  say  whether  a  i)rovislonal 
director  is  liable  for  advertisements 
which  he  authorized  tiie  secretary  to 
publish  at  the  secretary's  expensa 
Maddick  v.  :Marshall.  17  C.  B.  829  (1864), 
affirmini?  10  C.  B.  387.  As  to  a  provis- 
ional committe(>-man,  see  also  Williams 
V.  Pigott,  3  Exch.  201  (1848).  Merely 
allowing  one's  name  to  be  used  as  a 
member  of  a  provisional  committee  does 
not  render  a  person  liable  on  contracts 
made.  Barker  v.  Stead,  3  C.  B.  916 
(1847):  Patrick  ?•.  Reynolds,  1  C.  B.  (N.  S.) 
727  (1857).  Nor  is  he  liable  to  an  engi- 
neer, although  the  former  took  part  in 
meetings.  Rennie  v.  Wynn,  4  Excii.  691 
(1849).  Moreover,  the  person  sued  may 
show  that  no  personal  liability  was  to 
be  incurred  and  that  the  plaintifT  knew 
it  Rennie  v.  Clarke,  5  Exch.  292  (1850). 
It  is  a  question  for  the  jury  whether 
the  provisional  committee  authorized 
and  became  liable  on  contracts  made 
by  the  managing  committee.  "Will- 
iams V.  Pigott.  5  Ry.  &  Can.  Cas.  544 
(1848).  For  a  case  wiiere  the  provisional 
committee  were  held  not  to  have  so 
authorized,  see  Dawson  i\  Morrison.  5 
Ry.  &  Can.  Cas.  62  (1847).  But  Barrett 
V.  Blunt,  2  Car.  &  K.  271  (1846),  made  it 
a  question  for  the  jury.  Barker  i*.  Lyn- 
don, 2  Car.  &  K.  651  (1847),  held  the 
committee  not  liable.  So  also  Giles  v. 
Cornfoot,  2  Car.  &  K.  653  (1847);  Griffin 
V.  Beverley.  2  Car.  &  K.  648  (1847).  In 
Bailey  u  McCauley,  13  Q.  B.  815  (1849), 
the  coui't  said  that  it  was  a  question 
for  the  jury  whether  a  committee-man, 
i,  €.,  a  promoter,  allowed  himself  to  be 
held  out  as  liable,  and  that  if  the  debt 
incurred  was  a  necessary  and  usual  one 
he  is  liable.  In  Ex  parte  Cottle.  2  Macn. 
&  G.  185  (1850),  affirmed  sub  noin.  Nor- 
ris  V.  Cottle,  2  H.  L.  Ca&  647  (1850).  it 

17 


was  held  that  the  mere  fact  of  allowing 
one's  name  to  appear  a.s  a  member  of 
the  provisional  committee  does  not  ren- 
der a  person  liable  at  law  for  the  debts. 
To  same  effect.  Ex  j^fftc  Roberts,  2 
Macn.  &  G.  192  (1850). 

A  person  who  consents  to  the  use  of 
his  name  as  a  provisional  committee  to 
promote  and  organize  a  company  is  lia- 
ble, as  a  partner,  for  the  debt  of  the 
committee  for  stationery.  Barnett  i'. 
Lambert.  15  M.  &  W.  489  (1846).  But 
not  where  a  board  of  managers  after- 
wards takes  charge  and  incurs  the 
expense  Bright  i\  Ilutton,  3  11.  L. 
Cas.  341  (1852),  rev'g  1  Sim.  (N.  S.)  602, 
and  substantially  overruling  Hutton 
V.  Uptill.  2  H.  L.  Cas.  674  (1850).  To 
same  effect.  Reynell  v.  Lewis.  15  M.  «S: 
W.  517  (1846).  As  to  the  matters  to  be 
proved  in  rendering  a  promoter  liable, 
see  Carrick's  Case,  1  Sim.  (N.  S.)  505 
(1851).  Lindley.  Partn.  (see  Thompson. 
Liability  of  Officers,  p.  202),  .says  of 
Bright  V.  Ilutton,  3  H.  L  Cas.  341  (1852\ 
that  it  overruled  directly  or  indirectly 
the  following  cases:  "Upfill's  Case,  2 
H.  L.  Cas,  674  (1850);  Ex  parte  Besley, 
2  Macn.  &  G.  176  (1850).  This  case  oc- 
curs three  times  in  the  books.  It  was 
first  decided  by  Vice -Chancellor 
Knight-Bruce  (3  De  G.  &  S.  224),  who 
held  that  Besley  was  not  a  contrib- 
utory. This  decision  was  appealed 
against  and  reversed  by  Lord  Cotten- 
ham  (2  Macn.  &  G.  176).  But  the  appeal 
was  reheard  by  Lord  Truro,  who  af- 
firmed the  decision  of  the  vice-chancel- 
lor (3  Macn.  &  G.  287).  The  case  as  re- 
ported in  3  De  G.  &  S.  224,  and  3  Macn. 
&  G.  287,  is  still  law.  Bright's  Case,  1 
Sim.  (N.  S.)  602  (1851).  This  was  reversed 
on  appeal  (3  H.  L  Cas.  341).  Ex  parte 
Brittain.  1  Sim.  (N.  S.)  281  (1851),  decided 
reluctantly  on  the  authority  of  Upfill's 
Case.  Hole's  Case,  3  De  G.  &  S.  241 
(1850),  decided  on  the  authority  of  Ex 
parte  Besley,  2  Macn.  &  G.  176  (1850). 
00 


CH.  XLIII.]  HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§  705. 


to  such  corporation  after  it  was  formed.^  But  a  promoter,  who 
makes  a  contract  to  purchase,  and  gives  a  mortgage  in  his  own 
name,  is  personally  liable  thereon,  even  though  he  was  acting  as 
agent  for  a  corporation,  the  stockholders  of  the  vendor  and  mort- 
gagee not  knowing  that  he  was  acting  as  agent.^  Even  though  a 
national  bank  transacts  business  before  it  is  authorized  to  do  so  by 
the  comptroller,  the  officers  and  stockholders  are  not  liable  there- 
for as  partners,  but  the  officers  may  be  liable  on  an  implied  war- 
ranty of  their  authority  to  act  for  the  corporation.' 


Markwell's  Case,  5  De  G,  &  S.  528  (1852), 
decided  on   the  authority  of  UpfiUs 
Case,  but  after  the  decision  of  Bright 
V.  Button.     It  cannot,  however,  be  con- 
sidered law.    See  Ex  parte  Capper,  1 
Sim.   (N.  S.)   178  (1851),  and  Carrick's 
Case,  1  Sim.  (N.  S.)  505  (1851).  Ex  parte 
]\Iorrison,  15  Jur.  346,  and  20  L.  J.  (Ch.) 
yoe  (1851),  decided  on  the  authority  of 
UpfiU's  Case,  and  in  effect  overruled  by 
Sharp  and  James's  Case,  1  De  G.,  M.  & 
G.  565  (1852).     Nicholay's  Case,  15  Jur. 
420  (1851),  decided  on  the  authority  of 
UpfiU's  Case.    Ex  parte  Sichell,  1  Sim. 
(N.  S.)  187   (1851),  decided   reluctantly 
on  the  authority  of  UpfiU's  Case.     Ex 
parte  Studley,  14  Jur.  539  (1850).     This 
case   is  very   briefly   reported,   but  it 
seems  inconsistent  with  such  cases  as 
Hall's  (3  De  G.  &  S.  214  —  1850),  Stocks's 
(22  L.  J.  (Ch.)  218  — 1852),  and  Carrick's 
(ISim.  (N.  S.)  .505—1851)." 

A  member  of  the  managing  commit- 
tee is  liable  where  he  attended  a  nieet- 
ing  and  knew  of  the  employment.  Nor- 
bury's  Case,  5  De  G.  &  S.  423  (1852); 
Pearson's  Case,  3  De  G.,  M.  &  G.  241 
(1852).     Cf.  Sharp  &  James's  Case,   1 
De  G.,  M.  &  G.  565  (1852).     But  not  if 
he  is  unaware  of  his  being  on  the  com- 
mittee.    Ex  parte  Haight,  1  Drew.  484 
(1853).  For  a  case  where  promoters  were 
held  liable  on  a  contract  that  the  com- 
pany would  pay  certain  damages  to  a 
land-owner,  see    Bland  v.    Crowley,   6 
Exch.  522  (1851).     In  Webb  v.  London, 
etc.  Ry.,  1  De  G.,  M.  &  G.  521  (1852),  re- 
versing 9  Hare.  129,  the  company  was 
held  not  liable  on  such  a  contract.     A 
promoter  who  promises  that  an  existing 
railway  company  will  pay  the  parlia- 


mentary expense  of  a  contemplated  new 
railway  is  not  liable  on  such  promise, 
the  same  being  illegal  and  contrary  to 
public  policy.  MacGregor  v.  Dover,  etc. 
Ry.,  18  Q.  B.  618  (1852).  Where  no  stock 
is  subscribed  for,  but  an  organization 
meeting  is  held  and  oflficers  elected  and 
debts  incurred,  the  officers  are  liable 
for  such  debts.  Whetstone  v.  Crane, 
etc.  Co.,  1  Kan.  App.  320  (1895),  the 
ground  of  the  decision  being  that  such 
officers  are  merely  promoters.  In  Nova 
Scotia,  where  a  subscriber  sues  a  pro- 
moter for  damages  for  fraud  in  obtain- 
ing for  himself  stock  and  bonds  ille- 
gally, the  suit  must  be  by  the  corpora- 
tion, or  by  the  stockholder  if  the  cor- 
poration refuses  to  sue.  Weatherbe  v. 
Whitney.  30  Nova  Scotia  Rep.  49(1897). 
Such  claim  cannot  be  joined  with  a 
personal  claim  for  services  rendered, 
etc.  Weatherbe  v.  Wliitney,  30  Nova 
Scotia  Rep.  104  (1897). 

1  Re  Heckman's  Estate,  172  Pa.  St. 
185  (1896).  An  agreement  of  subscrib- 
ers with  promoters  cannot  be  enforced 
by  the  promoters  after  the  promoters 
have  accepted  a  substitute  agreement 
from  the  corporation.  Mildenberg  v. 
James,  31  N.  Y.  Misc.  Rep.  607  (1900). 
The  promoters  of  and  subscribers  to  a 
corporation  are  not  personally  liable  on 
a  land  contract  made  before  incorpora- 
tion by  an  agent,  but  the  corporation 
itself  is  liable  if  it  has  taken  an  assign- 
ment of  the  contract.  Esper  v.  Miller, 
91  N.  W.  Rep.  613  (Mich.  1902). 
2Lewisi7.  Weidenfeld,  114  Mich.  581 

(1897). 

3  Seeberger  v.  McCormick,  178  III.  404 
(1899).     See  94  N.  W.  Rep.  1045. 


1701 


§  705.] 


UoW    COKrORATE   CONTRACTS    ARE    MADE.  [CU.  XLIII. 


The  subject  of  the  liability  of  persons  who  sell  a  business  to  a  cor- 
poration for  stocks,  bonds,  or  cash  is  considered  elsewhere.' 

AVhere  a  promoter  has  been  held  liable  to  strangers  he  jnay  have 
contribution  from  his  fellow-promoters.^  Where  the  secretary  was 
the  original  promoter  and  persuaded  the  others  to  go  in,  he  cannot 
recover  from  them  for  his  services.'  They  arc  not  liable  to  each 
other  for  services.*  A  person  may  collect  on  a  surveying  contract 
from  co-promoters,  though  he  was  also  a  promoter.*  But  not  for 
services  as  secretary." 

Another  difficult  question  connected  with  this  subject  is  the  lia- 
bility of  one  promoter  to  another  for  breach  of  the  contract  of 
promotion.  The  general  rule  is  that  where  the  contract  is  definite 
and  the  obligations  are  clear,  an  action  at  law  will  lie  by  one 
promoter  against  another  for  a  breach  thereof.^     Where  the  owner 


1  See  chs.  Ill  and  XLVL 

2  Boulter  v.  Peplow,  9  C.  B.  493  (1850); 
Batanl  r.  Hawes.  2  El.  &  B.  287  (1853); 
Edgar  v.  Knapp.  7  Jur.  583  (1843);  Spot- 
tiswoode's  Case.  G  De  G.,  M.  &  G..  345 
(1855);  Lefroy  v.  Gore,  1  Jo.  &  Lat  571 


good,  150  Mass.  248  (1889).  Where  a  per- 
son owning  certain  property  agrees 
with  others  that  a  corporation  shall  be 
formed  and  lie  shall  receive  pay  for  the 
property  in  cash  and  stock  on  a  certain 
basis,  and  he  turns  over  his  property  to 


(1844).     A  promoter  who  has  advanced    the  others  for  that  purpose  and  they 


money  may  have  contribution.  Hamil- 
ton r.  Smitli,  5  Jur.  (N.  S.)  32  (1859).  An 
action  at  law  lies  for  contribution  be- 
tween promoters.  Batard  v.  Ilawes.  2 
El.  «fc  B.  287  (1853). 

3  Parkin  v.  Fry.  2  Car.  &  P.  311  (1826). 
The  promoters  are  not  partners  Lind- 
ley.  Companies,  p.  143. 

*  Holmes  v.  Higgins,  1  R  &  C.  74 
(1822). 

5  Lucas  V.  Beach,  1  Man.  &  Or.  417 
(1840). 

«  Wilson  V.  Curzon,  15  M.  &  W.  532 
(1847). 

^  Where  parties  intending  to  incor- 
porate a  company  contract  in  behalf 
of  that  company  to  purchase  certain 


fail  to  form  the  corporation,  he  may. 
hold  them  liable  in  damages.  Mosier 
V.  Parry.  60  Ohio  St  388  (1^99).  Where 
several  owners  of  riparian  rights  and 
lands  agree  to  organize  a  company  and 
transfer  their  property  to  it  for  stock, 
and  a  few  of  them  make  such  transfer 
and  the  others  refuse  to  do  so.  the 
former  may  have  the  transfers  made 
by  them  canceled.  Mack  v.  Consoli- 
dated, etc.  Co..  101  Fed.  Rep.  869  (1900). 
A  party  who  has  invested  $15,000  in 
obtaining  a  bridge  franchise  and  for 
plans  and  specifications,  and  transfers 
the  same  to  another  party  on  the  agree- 
ment of  the  latter  to  organize  a  corpo- 
ration to  build  the  bridge  and  to  give 


property,  and  the  parties  selling  refuse    to  the  former  $15,000  out  of  $<^0,000  pre- 


to  fulfill,  the  parties  purchasing  may 
sue  in  their  own  names  for  breach  of 
contract.  They  may  recover  damages, 
not  as  members  of  the  company,  but 
"  which  they  suffered,  if  any,  by  rea- 
son of  the  defendants  preventing  them 
from  successfully  establishing  and  fit- 


f erred  stock,  the  common  stock  to  be 
such  sum  as  the  latter  may  desire,  may 
object  to  the  latter  causing  the  corpora- 
tion to  issue  $95,000  in  bonds.  $80,000  in 
preferred  stock,  and  $60,000  in  common 
stock  for  building  the  bridge  at  a  cost 
of  .$71,000;   but  if  the  former  takes  his 


ting  out  a  business  to  be  conducted  by    $15,000  preferred  stock  and  keeps  it  for 
them  as  a "  company.     Abbott  u  Hap-     six   years,  he  cannot  then   complain. 

1702 


CH.  XLIII.]  HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§  705. 


of  a  patent  and  another  person  agree  that  the  patent  shall  be  as- 
signed to  the  latter  to  hold  in  trust,  and  that  the  latter  shall  assign 
it  to  a  corporation  to  be  organized  whenever  the  parties  deem  it 
advisable,  the  latter  person  agreeing  also  to  furnish  the  capital 

Jutte  V.  Hutchinson,   189  Pa.   St.   218    acts  of  the  other  parties..    If  he  alleges 


(1899).     A  contract  between  the  owner 
of  property  and  a  promoter  by  which 
the  former  agrees  to  sell  his  property 
to  a  corporation  to  be  formed  by  the 
latter,  with  a  specified  capital  stock, 
cannot,  a   year  after  the  transaction 
has  been  carried  out,  be  made  the  basis 
of  a  suit  in  equity  to  compel  the  pro- 
moter to  cancel  excessive  stock  which 
was  issued  to  the  promoter,  there  being 
no  allegation  that  the  promoter  still 
had  the   stock.     Tiie  remedy    of  the 
vendor  is  at  law.    Even  though  several 
vendors  to  the  corporation  had  a  simi- 
lar claim,  yet  one  of  them  cannot  file 
such  a  bill  in  equity  in  behalf  of  him- 
self and  others.      Brehm  v.  Sperry,  92 
Md.  378  (1901).   An  agreement  between 
promoters  that  one  of  them  should  buy 
certain  real  estate  and  turn  it  over  to 
the  corporation  must  be  in  writing  to 
satisfy  the  statute  of  frauds.     McLen- 
nan V.  Boutell,  117  Mich.  544  (1898).  An 
agreement    of  several   parties  to  sell 
their  property  to  a  corporation  in  ex- 
change for  stock    of  the    latter,   the 
amount  of  stock  going  to  each  to  be 
determined  by  arbitrators,  will  not  be 
specifically  enforced  where  the   arbi- 
trators have  fixed  the  value  in  an  ille- 
gal way.      Any  party  may  withdraw 
from  such  a  contract  prior  to  the  time 
when  it  has  been  signed  by  all.     Con- 
solidated, etc.  Co.  V.  Nash,  109  Wis.  490 
(1901).      Where  a  promoter    contracts 
with  the  owners  of  patent  rights    to 
form  a  corporation  and  issue  a  certain 
part  of  its  stock  for  the  patents,  and  to 
sell  the  remainder  at  a  certain  price, 
the  money  to  be  divided  in  a  certain 
way,  and  they  refuse  to  proceed,  and 
he  sues  for  damages,  he  must    prove 
complete  performance  on  his  part,  or 
that  he  was  ready  and  able  to  perform 
and  did  not  do  so  on  account  of  the 


full  performance  he  must  prove  it,  and 
a  charter  with  $500  capital,  with  the 
right  to  increase  to  §300,000,  may  not 
be  such  performance.    Stern  v.  McKee, 
70  N,  Y.  App.  Div.  142  (1902).  The  state- 
ment of  certain  parties  to  a  promoter 
that  in  case  they  organized  a  company 
proposed  by   him   he  would  be  made 
general  agent,  does  not  sustain  a  suit 
by  him  on  a  quantum  meruit.    Fla- 
herty V.  Murray,  60  N.  Y.  App.  Div.  93 
(4901).     A  contract  between  promoters, 
by  which  one  of  them  is  to  be  employed 
by  a  proposed  insurance  company  on  a 
salary  and  a  percentage  of  premiums, 
is  too  indefinite  to  be  enforced,  even 
though  some  .  of   the    promoters   pro- 
ceeded to  form  the  company.    It  seems 
also  that  such  a  contract  is  contrary  to 
public  policy.     Flaherty  v.  Cary.  62  N. 
Y.  App.  Div.  116  (1901).    Where  a  per- 
son has  turned  in  securities  under  a 
plan  of  consolidation,  which  states  the 
aggregate  capacity  of  properties  which 
it  is  proposed  to  acquire,  or  so  many  of 
them  as  the  organizers  may  deem  best, 
the  party  cannot  withdraw,  where  the 
plan  has  been  carried  out,  even  though 
less  than  half  of  the  properties  have 
been    actually    acquired.      And  even 
though  the  preliminary  contract  pro- 
vided for  the  acquisition  of  a  certain 
company,  yet,  if  the  consolidated  com- 
pany acquires  practically  all  the  stock 
and  bonds  of  that  company,  the  party 
turning  in  securities  cannot  withdraw, 
and  especially  cannot  reclaim  the  se- 
curities as  against  a  transferee  in  good 
faith  who  had  no  notice   of  personal 
representations.      Jewell  v.  Mclntyre, 
62  N.  Y.  App.  Div.  396  (1901).     Where 
the  purchaser  of  a   plant  and  stock  is 
sued  for  the  price  and  judgment  is  re- 
covered, he  may  afterwards  bring  suit 
for   the  stock  and  for  dividends  paid 


1703 


§  T05.] 


now    CORPORATE    CONTRACTS    ARE    MADE.  [CH.   XLIII. 


needed,  and  for  all  this  he  was  to  have  a  half  interest  in  the  enter- 
prise, the  patentee,  after  making  the  assignment,  cannot  revoke  it, 
unless  the  other  party  has  delayed  an  unreasonable  time  in  pro- 
ceeding after  being  requested  so  to  do.*  A  suit  by  a  promoter  to 
compel  the  delivery  of  stock  to  him  on  the  ground  that  withcjut 
his  consent  and  knowledge  an  incorporation  made  in  accordance 
with  his  contract  had  been  al)andoned  and  a  new  one  adopted 
from  which  ho  had  been  excluded,  is  not  for  fraud,  and  hence  the 
statute  of  limitations  applicable  to  the  latter  is  not  a  bar.* 


after  the  time  when  he  would  have 
been  entitled  to  the  stock,  if  he  had 
fully  roniplied  with  his  contract  Beaty 
V.  Johnson,  66  Ark.  529  (1899).  Where 
promoters  agree  to  construct  a  railroad 
and  to  give  a  part  of  the  stock  to  par- 
ties who  furnish  valuable  privileges, 
right  of  way,  grants,  etc.,  but  instead 
of  doing  so  sell  out  the  affair  to  a  com- 
peting railroad  comi)any,  which  buys 
with  notice  and  does  not  go  on  with  the 
enterprise,  the  parties  wlio  are  injured 
may  sue  the  purchasing  railroad  com- 
pany for  an  accounting,  etc.  The  pro- 
moters are  not  necessary  parties  de- 
fendant Hamilton  i\  Savannah,  etc. 
Ry.,  49  Fed.  Rep.  413  (1892).  A  pro- 
moter who  has  brought  about  the  sale 
of  a  large  plant  to  new  parties,  wlio 
have  agreed  to  organize  a  new  corpora- 
tion and  give  the  promoter  a  certain 
amount  of  stock  therein,  cannot,  upon 
the  ground  that  he  is  being  defrauded 
of  his  commissions,  enjoin  the  parties 
from  closing  the  transaction  irrespect- 
ive of  the  promoter,  nor  can  he  get 
specific  performance  of  the  contract  to 
incorporate  a  company  and  deliver  the 
stock.  There  is  no  fiduciary  relation 
between  the  parties.  The  value  of  the 
stock  can  be  estimated  in  damages. 
There  was  no  allegation  of  defendant's 
insolvency.  The  promoter  has  ample 
remedy  at  law  for  damages.  Avery  v. 
Ryan,  74  Wis.  591  (1889).  Specific  per- 
formance of  a  contract  to  form  a  cor- 
poration will  not  be  granted.  Avery 
V.  Ryan,  74  Wis.  591  (1889).  As  to  the 
remedy  at  law,  see  Crow  v.  Green,  111 
Pa.  St  637  (1886);  Hudson  v.  Spaulding, 


C  N.  Y.  Supp.  877  (1889).  For  the  meas- 
ure of  damages  for  the  breach  of  a  con- 
tract of  defendants  to  organize  a  rom- 
jiany  and  pay  to  plaintitT  for  his  patents 
certain  stock  and  cash,  nee  Kirsch- 
mann  n  Lediard.  61  Barb.  573  (1872). 
As  to  the  measure  of  damages  in  a 
suit  by  a  vendor  of  projierty  to  the  cor- 
poration for  damages  against  it  and  its 
promoters  for  breach  of  the  contract 
to  employ  him  as  manager,  see  Marston 
V.  Singapore  IJattan  Co.,  103  Ma.ss.  296 
fl895).  Although  two  partners  desire 
to  incorporate,  and  each  to  liave  the 
same  interest,  and  a  third  |»arty  to  have 
a  smAller  interest,  thereby  holding  the 
balance  of  power,  and  such  arrange- 
ment is  carried  out,  and  the  third  party 
is  reallyadummj-of  oneof  the  partners, 
and  thereby  gives  the  control  of  the 
corporation  to  that  partner,  yet  the 
other  partner  has  no  legal  cause  of 
complaint,  notwithstanding  the  gen- 
eral understanding  as  to  the  division 
of  control.  Baumgarten  v.  Nichols,  69 
Hun,  216  (1893). 

iNiles  V.  Graham,  62  N.  E.  Rep.  986 
(Mass.  1902).  Where  a  vendor  contracts 
with  a  person  to  transfer  his  patents  to 
a  corporation  for  stock  and  cash,  and 
such  person  agrees  to  furnish  the  money 
to  carry  on  the  business,  but  fails  to  do 
so,  in  a  suit  by  the  vendor,  if  he  asks 
for  rescission  and  also  for  damages,  he 
should  separately  state  these  two 
causes  of  action.  De  Lery  v.  Rogers, 
71  N.  Y.  App.  Div.  99  (1902). 

2  Farris  v.  Wirt,  63  Pac.  Rep.  946  (Colo. 
1901).  Where  a  broker  has  a  contract 
with  the  owner  of  a  mine  for  the  sale 


1704 


•CH.  XLIII.]  HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§  T05. 


Where  a  promoter  agrees  to  pay  a  certain  compensation  to  a 
person  for  services  to  be  performed  by  the  latter  in  connection 
with  a  reorganization,  the  promoter  must  pay  such  compensation, 
even  though  he  changes  his  reorganization  agreement  and  carries 
out  the  reorganization  with  other  parties  than  those  originally 
contemplated.^  But  an  agreement  of  various  stockholders  in  sev- 
eral street  railway  companies  to  form  a  new  corporation  and  trans- 
fer their  interest  thereto  and  divide  the  new  stock  in  a  certain  pro- 
portion does  not  constitute  such  a  partnership  as  to  entitle  one  to 
sue  the  others  for  an  accounting  of  profits  where  the  others  had 
formed  such  a  corporation  with  other  parties,  leaving  out  the  first- 
named  party.^ 


thereof  or  the  organization  of  a  com- 
pany, and  the  broker  introduces  a  party 
'with  whom  the  promoter  subsequently 
-organizes  the  company,  it  may  be  a 
question  for  the  jury  as  to  whether 
such  organization  was  substantially 
within  the  meaning  of  the  contract. 
West  V.  Demme,  128  Mich.  11  (1901). 
Where  two  promoters  agree  to  purchase 
certain  property  and  organize  a  corpo- 
ration to  take  it  over,  and  one  of  them 
purchases  it  himself  and  organizes  the 
company  and  takes  ail  the  stock,  the 
otlier  promoter  may  hold  both  him  and 
tiie  corporation  liable  for  that  portion 
of  the  stock  which  he  was  to  have,  it 
being  shown  that  the  corporation  knew 
of  the  contract.  Sun,  etc.  Co.  v.  Frost, 
64  Pac.  Rep.  435  (Ariz.  1901). 

1  Babbitt  r.  Gibbs,  150  N.  Y.  281  (1896). 

2Schantz  f.  Oakman,  163  N.  Y.  148 
(1900).  A  contract  between  a  stock- 
holder and  a  third  person  by  which  the 
third  person  is  to  be  made  a  director,  and 
agrees  to  devote  his  time  and  attention 
to  the  business,  and  develop  the  pi-op- 
erty,  and  procure  the  construction  of  a 
railroad,  and  cause  various  lots  of  land 
owned  by  the  corporation  to  be  sold, 
will  not  sustain  an  action  at  law  for 
damages  by  the  stockholder  for  breach 
of  the  contract.  An  action  in  such  a 
case  may  be  maintained  only  by  the 
corporation  or  by  the  stockholder  in  its 
behalf.  So  far  as  the  contract  intended 
to  control  the  action  of  the  board  of  di- 
a-ectors,  it  was  illegal     Kountze  v.  Flan- 

17 


nagan,  19  N.  Y.  Supp.  33  (1892).  Where 
a  promoter  buys  property  for  the  cor- 
poration before  it  is  formed,  and  the 
seller  supposes  he  is  selling  to  a  corpo- 
ration, but  the  latter  is  never  formed, 
the  seller  may  recover  back  the  prop- 
erty, even  from  one  who  bought  the 
property  from  the  promoter  in  good 
faith.  'Wyckoff  v.  Vicary,  75  Hun.  409 
(1894).  In  Angle  v.  Chicago,  etc.  Ry., 
151  U.  S.  1  (1894),  a  contractor  was  har- 
assed and  prevented  from  completing 
his  contract  by  the  company  which  had 
passed  under  the  control  of  another 
company  that  was  seeking  to  get  a  land 
grant  that  had  been  given  conditionally 
to  the  former  company.  The  contractor 
was  ruined,  the  road  not  completed, 
and  the  second  company  got  the  land 
grant  by  a  subsequent  legislative  act. 
The  contractor  got  judgment  against 
the  first  company,  and  then  filed  a  bill 
against  the  second  company  to  reach 
the  land,  charging  conspiracy,  bribery, 
and  fraud.  The  court,  overruling  the 
decision  below,  held  that  a  demurrer  to 
the  bill  was  not  good.  Where  the  ven- 
dor of  a  majority  of  the  stock  of  a  cor- 
poration agrees  that  the  company  owes 
no  debts  except  certain  specific  ones, 
the  vendee  may  recover  back  any  ex- 
cess of  debts  over  those  specified. 
Where  the  debts  of  one  class  were  not 
to  exceed  a  certain  sum,  but  did  exceed 
that  sum,  the  vendee  may  recover  the 
difference,  even  though  the  debts  of 
another  class  were  less  than  a  sum  speci- 
05 


§  ""^-J 


HOW    CoKrOUATE    CONTKACTS    ARE    MADE.  [cil.  XLIII. 


AVhere  a  party  agrees  with  a  promoter  and  constructor  of  water- 
works that  he,  the  former,  will  take  a  certain  amount  of  »vater  from 
the  corporation  for  ten  years,  and  he  fails  to  do  so,  the  form('r  may 
hold  him  liable.  It  is  immaterial  that  no  formal  contract  was 
made  with  the  company.  The  contractor,  ownint,'  practically  all 
the  stock  of  the  company,  may  sue  and  collect  for  himself  the  price 
of  the  water  less  the  cost."  A  promise  and  contract  of  promoters 
to  subscribers  to  certain  bonds  may  give  the  latter  an  equitable 
lien  on  the  bonds  enforceable  in  equity.' 

On  the  other  hand,  even  though  an  inventor  is  persuaded  to  turn 
in  his  inventions  to  a  corporation  for  stock  on  an  oral  assurance 
that  plenty  of  money  would  be  forthcoming  to  take  the  stock  of  the 
company  and  make  the  business  successful,  and  even  though  tho 
parties  making  such  representations  do  not  advance  the  money,  but 
allow  the  company  to  become  insolvent,  and  buy  in  the  assets,  in- 
cluding the  patents,  yet  the  inventor  cannot  maintain  an  action  for 
fraud  in  failing  to  furnish  money  according  to  promise.'  A  pro- 
moter who  has  taken  a  contract  to  purchase  a  property  at  a  certain, 
price,  based  upon  reports  and  representations  that  the  business  had 
not  decreased  since  the  reports,  may,  upon  discovering  that  the 
business  has  largely  decreased,  refuse  to  carry  out  the  contract,  and 


fied  in  the  contract  of  sale.  Chicago, 
etc.  Ry.  V.  Hoyt,  89  Wis.  314  (ISOo;.  A 
promoter  who  does  not  complete  the 
transaction  or  consummate  an  enforce- 
able contract  cannot  recover  commis- 
sions. Hammond  v.  Crawford,  GO  Fed. 
Rep.425(l895).  Where  one  of  the  promot- 
ers agrees  with  others  that  he  will  pur- 
chase property  and  turn  it  in  to  the  com* 
pany.  the  price  to  apply  on  his  subscrip- 
tion for  stock,  and  lie  does  purchase, 
and  the  company  takes  possession  of 
the  property  and  builds  thereon,  he  will 
be  compelled  to  transfer  title  to  the 
company.  Nester  v.  Gross,  6G  Minn. 
371  (1896).  Sometimes,  where  the  cor- 
poration cannot  enforce  the  contract, 
the  promoters  may.  Carmody  r.  Pow- 
ers. GO  Mich.  26  (18S6).  Where  one  pro- 
moter sues  another  for  failure  to  form 
the  corporation,  and  obtains  a  verdict 
for  the  par  value  of  the  stock  which 
plaintiff  was  to  receive,  there  bsing  no 
proof  as  to  what  the  value  would  have 
been  if  issued,  nor  whether  the  com- 
pany would  be  successful,  the  verdict 

1 


will  be  set  aside  as  excessive.  Pitt  i'. 
Kellogg.  11  N.  Y.  Supp.  526  (1890 ■.  A 
contract  between  promoters  by  which 
one  agrees  to  assist  in  the  building  of  a 
road  is  too  definite  to  sustain  an  action 
for  breach  thereof.  Porter  v.  Blair,  85 
Fed.  Rep.  104(1897).  Where  competing 
applicants  for  a  street-railway  franchise 
agree  to  act  together,  whereby  one  is  to 
withdraw  and  the  other  is  to  obtain 
the  grant,  and  the  benefits  are  to  be  de- 
vided  equally,  which  is  done  with  the 
full  knowledge  of  the  municipal  au- 
thorities, and  then  the  one  who  secured 
the  grant  refuses  to  divide  with  the 
other,  the  remedy  of  the  latter  is  at  law, 
and  not  in  equity,  even  if  the  agree- 
ment should  be  held  to  be  valid.  Hyer 
r.  Richmond  Traction  Co..  168  U.  S.  471 
(1897),  modifying  80  Fed.  Rep.  839. 

1  Drummond  v.  Crane,  159  Mass.  577 
(1893). 

2  Badgerow  r.  Manhattan  Trust  Co., 
64  Fed.  Rep.  931  (1894). 

3  Smith  I'.  Parker,  148  Ind.  127  (1897). 


706 


CH    XLIII.]  HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§  705. 


may  hold  the  party  liable  for  his  disbursements,  but  not  for  profits 
which  he  would  have  made  if  his  plans  had  been  carried  out.^ 

Another  class  of  cases  arises  where  the  enterprise  is  carried  to  a 
successful  conclusion,  but  one  promoter  refuses  to  divide  the  profits 
in  accordance  with  the  contract.  In  such  cases  the  courts  may  com- 
pel an  accounting  and  distribution  according  to  the  contract.- 

A  court  may  grant  specific  performance  of  a  promoter's  contract 
by  which  some  of  them  were  to  pay  to  the  corporation  a  certain 
sum  of  money  and  were  to  receive  certain  stock  of  the  corporation 
therefor,  the  stock  not  having  been  issued  and  the  money  not  hav- 


1  Loewer  n  Harris,  57  Fed.  Rep,  368 
(1893). 

-  Where  a  party  to  a  contract  rela- 
tive to  an  incorporation  and  division 
of  the  stock  sues  to  recover  his  inter- 
est according  to  the  contract,  the  court 
will  decree  a  proper  division  of  the 
stock,  all  parties  being  allowed  the 
amounts  invested  by  them  in  forward- 
ing the  enterprise.  Bates  v.  Wilson,  14 
Colo.  140  H 1890).  One  of  the  promoters 
suing  for  his  interest  according  to  the 
contract  cannot  hold  any  of  them  liable 
where  he  has  released  some.  Burgess 
V.  Sherman,  147  Pa.  St.  254(1892).  Sev- 
eral persons  defrauded  as  to  their  con- 
tract, whereby  they  were  to  receive 
stock,  cannot  sue  jointly.  Each  must 
sue  separately.  Summerlin  v.  Fron- 
teriza,  etc.  Co.,  41  Fed.  Rep.  249  (1890). 
As  to  promoters'  suits  to  enforce  their 
right  to  stock,  see  also  §  334,  supra. 
For  an  agreement  to  take  effect  when 
a  certain  corporation  should  be  formed, 
see  Childs  v.  Smith,  46  N.  Y.  34  (1871). 
Where  for  $1,300  a  person  was  to  have 
a  ten  per  cent,  commission  on  the  price 
for  which  a  mine  is  sold,  and  is  to  have 
all  stock  received  over  and  above  the 
sum  of  $225,000  net  to  the  vendor,  and 
the  mine  is  sold  by  the  vendor,  a  com- 
plaint by  the  holder  of  the  contract  is 
subject  to  demurrer  where  the  nego- 
tiations and  agreements  are  not  fully 
set  forth.  Sipes  v.  Seymour,  44  Fed. 
Rep.  326  (1890).  Where  a  promoter  con- 
veys property  to  a  different  corporation 
from  the  one  agreed  upon  by  him  with 
a  co-promoter,   the  latter  may   make 

17 


the  promoter  account  for  the  consider- 
ation on  the  basis  of  the  contract  Sims 
V.  Tyrer,  26  S.  E.  Rep.  508  (Va.  1897>. 
A  promoter's  contract  that  he  should 
receive  a  certain  percentage  of  all  stock 
received  by  the  interested  parties  was 
enforced  in  the  case  of  Hix  v.  Edison, 
etc.  Co.,  10  N.  Y.  App.  Div.  75  (1896), 
and  27  N.  Y.  App.  Div.  248;  aff'd,  163  N. 
Y.  573.  Where  two  persons,  each  being 
interested  in  different  street  railways, 
make  a  contract  to  form  a  new  corpo- 
ration to  which  such  street  railways  are 
to  be  transferred,  and  one  of  the  parties 
afterwards  turns  his  street  railways  over 
to  a  different  corporation,  the  other 
party  cannot  hold  him  liable  in  an  ac- 
tion for  an  accounting  for  profits.  A 
breach  of  contract  must  be  set  up. 
Schantz  v.  Oakman,  10  N.  Y.  App.  Div. 
151  (1896).  Where  the  statute  author- 
izes incorporation  for  producing  and 
selling  electricity,  and  the  certificate  of 
incorporation  includes  this  as  well  as 
manufacturing  and  selling  electrical 
appliances,  apparatus,  and  supplies,  the 
corporation  is  not  a  dejure  corporation, 
and  hence  insufficient  to  support  an  ac- 
tion by  one  promoter  against  another 
on  a  contract  of  the  latter  to  convey 
land  to  a  corporation  to  be  formed  and 
to  take  stock  in  payment,  especially 
where  the  full  capital  stock  of  such  cor- 
poration had  not  been  subscribed  for. 
Burk  V.  Mead,  64  N.  E.  Rep.  880  (Ind. 
190^).  A  person  who  pays  for  stock  by 
transferring  worthless  mining  stock  is 
not  a  bona  fide  purchaser.  Sewell  v. 
Nelson,  67  S.  W.  Rep.  985  (Ky.  1902). 
07 


.§  TOG.] 


UOW    CoRPoIIATK    CONTKACT8    ARE    MADE. 


[CU.  XLIII. 


int^  boon  piiid  in  full.'  An  agreement  between  a  promoter  and 
patentee  by  which  the  promoter  is  to  have  one-third  of  cash,  stock, 
or  other  profits  obtained  from  the  patent  rights  may  create  a  trust 
relationship  entitling  the  promoter  to  lile  a  bill  in  etjuity  to  obtain 
his  one-third.-  Where  a  person  contracts  to  give  to  another  per- 
son a  fourth  interest  in  any  mines  which  the  former  may  buy,  the 
former  must  give  the  latter  a  fourth  of  stock  which  the  former  pur- 
chases in  a  mining  company.''  And  where  the  promoters,  who  are 
also  stockholders,  agree  that  the  profits  are  to  be  divided  in  a  cer- 
tain way  under  a  construction  contract,  and  a  part  of  them  make  a 
secret  ))njfit,  the  others  may  compel  a  complete  tlivision.* 

The  liabilit}'  of  promoters  to  persons  who  have  been  induced  by 
fraudulent  prospectuses  to  subscribe  for  stock,*  and  the  liability  of 
promoters  to  the  corporation  itself  to  account  for  fraudulent  prof- 
its which  the  promoter  has  secretly  made  out  of  contracts  which 
he  caused  the  corporation  to  enter  into,*  have  already  been  consid- 
ered. 

§  700.  Tbe  question  sometimes  arises  whether  a  subscriber  for 
stock  in  a  projected  corporation  is  liable  to  its  creditors  in  case  the 
enterprise  is  abandoned  before  incorporation;  and  also  whether  the 
promoters  of  the  abortive  corporation  are  liable  to  the  subscribers 
for  deposits  made  V)}'^  the  latter.  The  former  question  is  decided  in 
the  negative.  "The  subscribers  to  the  stock  or  articles  of  associa- 
tion are  not  partners  with  those  who  assume  the  risk  of  acting  for 


1  Macklem  v.  Fales,  89  N.  W.  Rep.  581 
(Mich.  iyO~).  Where  a  promoter's  con- 
tract is  personally  carried  out  by  the 
parties  and  the  corporation  becomes 
insolvent,  the  court  has  power  to  com- 
pel complete  performance  in  a  suit  by 
one  promoter  against  the  other.  Hunt 
i\  Davis,  135  Cal.  31  (1901). 

2  Harvey  v.  Sellers.  115  Fed.  Rep.  757 
(190"2).  A  bill  in  equity  for  an  account- 
ing does  not  lie,  at  the  instance  of  a 
party,  who  claims  that  in  consideration 
of  newspaper  work  the  defendants 
agreed  to  carry  five  hundred  shares  of 
stock  for  him  in  connection  with  a  pool 
which  had  been  formed.  Black  r.  Van- 
derbilt,  70  N.  Y.  App.  Div.  16  (1902).  A 
promoter  cannot  maintain  a  suit  in 
equity  to  collect  from  an  inventor  one- 
half  of  what  the  latter  received  in  stock 
-and  cash,  even  though  tiie  contract  be- 
tween the  two  gave  the  formersuch  one- 
half.  His  remedy  is  at  law.  Everett  v.  De 

17 


Fontaine.  78  N.  Y.  Appi  Div.  219  (1903). 
A  contract  whereby  a  party  wiio  is 
about  to  sell  his  business  to  a  corpora- 
tion to  be  organized  agrees  secretlj'  to 
give  $5,000  of  stock  to  a  party  who 
agrees  to  subscribe  openly  for  $5,000  of 
the  stock  is  not  enforcible,  it  appear- 
ing that  the  party  who  was  thus  to  get 
the  e.xtra  stock  objected  to  the  amount 
of  stock  to  be  issued  to  the  vendor,  and 
withdrew  his  objection  only  upon  this 
agreement,  and  it  appearing  also  that 
he  afterwards  became  a  director  and 
voted  to  purchase  the  property  at  the 
price  demanded  by  the  vendor.  Koster 
V.  Pain,  41  N.  Y.  App.  Div.  443  (1899). 

3  Dennison  v.  Chapman,  105  Cal.  447 
(1895). 

*  Krohn  v.  Williamson,  62  Fed.  Rep. 
869  (1894);  affirmed  in  Williamson  v. 
Krohn,  66  Fed.  Rep.  655  (1895). 

5  See  chs.  IX  and  XX,  supra. 

•*  See  §  651,  suprcu 
OS 


CH.   XLIII.]  now    CORPOKATE    CONTRACTS    ARE    MADE. 


[§  706.. 


a  corporation  not  yet  legally  established."^  As  to  the  latter  ques- 
tion the  rule  has  become  well  established  in  England  that  a  sub- 
scriber for  stock  in  a  corporation  that  never  comes  into  existence, 
who  has  paid  a  part  of  his  subscription,  may  recover  back  from  the 
promoters  of  the  enterprise  the  amount  so  paid,  and  is  not  liable 
even  for  the  preliminary  expenses.-     His  remedy  may  be  by  bill 


1  Wardu  Brigham,  137  Mass.  24  (1879), 
the  court    saying    also:    "Those   who 
acted  as  agents  for  the  inchoate  corpo- 
ration acted  without  a  principal  behind 
them,  because  there  was  no  body  cor- 
porate capable    of  appointing  agents, 
and  so  became  principals  in  tlie  trans- 
action."   See  also  Duke  v.  Andrews,  2 
Exch.  290  (1848);  Hutton  v.  Thompson, 
3  H.  L.  Cas.  161  (1857);  Duke  v.  Diver, 
1  Exch.  36  (1847),  where  the  stockholder 
iiad  promised  to  pay  on  a  certain  day, 
and  was  held  to  his  promise.     To  same 
effect,   Duke    v.   Forbes,   1   Exch.   356 
(1847);  Aldham  v.   Brown,    7  El.  &  Bl. 
164  (1857);  2  El.  &    El.  398.  on  appeal; 
Woolmer  v.  Toby,   10  Q.  B.  091  (1847). 
However,  in  the  case  of  Lake  v.  Duke 
of  Argyle,  6  Q.  B.  477  (1844),  the  court 
held  that  attendance  at  a  meeting,  an- 
nouncement of  intention  of  being  presi- 
dent and  of  taking  stock,  and  concur- 
rence  in   measures   for  incorporation, 
may     be    strong    evidence    that    de- 
fendant  "held  himself  out  as  a  pay- 
master to  all  who  executed  the  orders." 
The  question,   then,   is  for    the  jury. 
Where  a  proposed  corporation,  never 
incorporated,  contracts  to  purchase  cer- 
tain property  of  a  subscriber,  he  can- 
not bring  suit  at  law  against  other  sub- 
scribers for  damage  caused  by  non-ful- 
fillment of  contract.      Crow  v.  Green, 
111  Pa.  St.  637  (1886).     Subscribers  are 
not  liable.     Bourne  v.  Freeth,  9  B.  &  C. 
632  (1829).  Unless  they  allow  themselves 
to  be  held  out  as  partners  in  the  enter- 
prise.    Fox  V.  Clifton,  9  Bing.  115  (1832), 
rev'g  6  Bing.  776.     Cf.  Heraud  v.  Leaf, 
5  C.  &  B.  157  (1847);  Dickinson  v.  Valpy, 
10  B.  &  C.  128  (1829).      Ex  parte  Hir- 
bchel,  15  Jur.  924  (1851),  held  that  a  sub- 
scriber for  stock  in  an  abortive  com- 
pany was  not  liable  for  debts  incurred. 


The  vice-chancellor  said:  "Where 
courts  have  been  contradicting  each 
other  for  years,  this  court  can,  do  no 
otherwise  than  follow  the  last  decision." 
A  note  given  to  pay  for  stock  in  a  cor- 
poration to  be  organized  cannot  be  en- 
forced by  the  payee  where  the  corpora- 
tion has  not  been  formed.  Northwest- 
ern, etc.  Co.  V.  Lanning,  83  Minn.  19- 
(1901). 

-  Ashpitel  V.  Sercombe,  5  Exch.  147 
(1850),  where  the  court  said:  "There 
seems  to  be  no  doubt  that  the  plaintiff, 
having  paid  his 'money  for  shares  in 
the  concern  which  never  came  into  ex- 
istence, or  a  scheme  which  was  aban- 
doned before  it  was  carried  into  execu- 
tion, has  paid  it  on  a  consideration 
which  has  failed,  and  may  recover  it 
back  as  money  had  and  received  to  its 
use,  unless  he  can  be  shown  to  have 
consented  to  or  acquiesced  in  the  ap- 
plication of  the  money  which  the  direct- 
ors have  made."  See  also  Thompson, 
Liabilities  of  Officers,  210:  Nockels  v. 
Crosby,  3  B.  &  C.  814  (1825),  the  leading 
case;  1  Lindley,  Companies,  p.  31,  citing 
Waistab  v.  Spottiswoode,  15  M.  &  W. 
501  (1846);  Moore  v.  Garwood,  4  Exch. 

681  (1849);  Coupland  v.  Challis,  2  Exch. 

682  (1848);  Owen  v.  Challis,  5  C.  B. 
115  (1848);  Ward  v.  Londesborough,  13 
C.  B.  253  (1852);  Mowatt  v.  Londesbor- 
ough, 3  EL  &  Bl.  307  (1854),  and  4  El.  & 
Bl.  1.  See  also  Vollans  v.  Fletcher,  1 
Exch.  20  (1847);  Chaplin  v.  Clarke,  4 
Exch.  402  (1849).  Where  a  contract  is 
made  in  the  corporate  name  after  the 
articles  have  been  filed,  but  before  any 
subscriptions  have  been  obtamed,  and 
before  an  organization  meeting  has 
been  held  or  officers  elected,  the  incor- 
porators are  liable  on  the  contract  as 
partners.     McVicker  v.  Cone,  21  Oreg. 

70J 


§  707.] 


Il(«\\     L'OKI'OKATE    CONTRACTS    ARE    MADE. 


[cn. 


XL!  II 


in  equity.'  Tf,  however,  the  subscriber  expressly  or  by  implica 
tion  authorizes  expenditures,  he  cannot  recover  back  his  deposit." 
The  subscriber  need  not  submit  to  the  deduction  of  any  part  of 
his  subscriptions  to  be  applied  to  the  payment  of  the  expenses  in 
curred  by  the  promoters  in  attemptini;  the  incorporation.'  An 
ajj^reemont  to  deliver  stock  in  a  company  to  be  formed,  nothing; 
beings  said  as  to  any  preferred  stock,  is  not  fulfilled  by  delivering 
common  stock,  where  there  is  |)referred  stock  issued  also.* 

§  707.  Great  ditliculty  has  arisen  in  determinint,'  whether  a  cor- 
poration is  liable  on  contracts  made  in  its  behalf  by  its  promoters 
before  the  incorporation  took  place.  The  decided  weight  of  au- 
thority holds  that  the  corporation  is  not  bound  thereby.* 

353  (1891).     A  subscription  agreement     Willitinis  v.   Page,  24  Beav.  C54  (1857), 
prior    to   incorporation,  in  which  the    uiid  "The  Bubble  Act,"0  Gea  I,  ch.  18 


parties  state  the  number  of  shares 
taken,  and  in  wliich  they  agree  to  pay 
.the  contractors,  who  are  parties  to  the 
contract,  a  specified  sum.  is  a  joint 
Undertaking  on  tlie  subscribers'  part. 
Tiie  contractors  may  hold  them  liable 
as  partners,  the  agreement  not  limiting 


-  1  Lindley,  Companies,  p.  33,  citing 
Baird  v.  Ros.s,  2  Macq.  01,  OS  (1850);  Gar- 
wood  V.  Ede,  1  Exch.  264  (1847);  Watts 
r.  Salter,  10  C.  B.  477  (1850):  Vane  r. 
Cobbold,  1  Exch.  798  (1848);  Atkinson 
r.  Porock.  1  Exch.  796  (1848);  Willey  v. 
Parratt.  3  Exch.  211  (1848):    Clements 


their  liability  to  the  number  of  shares  v.   Todd,   1   E.xch.  268  (1847);  Jones  r. 

taken  by  each.     An  immaterial  altera-  Harrison,  2  Exch.  52  (1848);  Aldham  r. 

•tion  after  a  part  have  signed  does  not  Brown,  7  El.  &  B.  164  (1857);  S.  a,  2  El. 

release  any  one.  .The  agreement  of  the  &  El.  398  (1859);  Burnside  v.  Dayrell,  3 

contractors  to  hold  each  subscriber  lia-  Exch.  224  (1849). 

ble  only  on  his  subscription,  if  he  would  'Nockels   v.  Crosby,  3    B.  «fe    C.   814 

pay  that,  is  without  consideration  and  (1825).     Contra,  Williams  i'.  Salmond, 

void.     Any  subscriber  could  expressly  2  Kay  &  J.  463  (18.jGi. 

limit  his  liability  to  his  subscription.  *  Mcllquham  v.  Taylor,  [1895]  1  Ch.  53. 

Davis  r.  Shafer,  50  Fed.  Rep.  764  (1892),  ^Munson  v.  Syracuse,  etc.  R.  R,  103 

See  also  §  76,  supra.  X.  Y.  58,  75  (1886).     The  agreement  of 

12  Lindley,  Companies,  p.  568.     "A  tiie  promoters  of  a  bank  that  a  person 

bill   in  equity    lies    to    recover    back  will  be  paid  for  obtaining  subscriptions 

money  paid  in  a  bubble."  Colt  t".  Wool-  to  its  stock  does  not  bind  the  bank  itself. 

laston,   2    P.  Wms.   154   (1723),  where  Tift  v.  Quaker  City  Nat  Bank,  141  Pa. 

there  was  fraud;    Green   v.  Barrett,  1  St.  550  (1891).    The  contract  of  the  di- 

Sim.  45  (1826);  Blain  v.  Agar,  1  Sim.  37  rectors  of  a  mutual  life  insurance  a.sso- 

(1820);  s.  &,  2  Sim.  289  (1828);  Cridland  ciation  that  it  will  locate  the  chief  of- 

V.  De  Mauley,  1  De  G.  &  S.  459  (1847),  fice  in  a  certain  city,  if  the  city  will  pay 

before  the  Judicature  Acts:  and  Cooper  certain  expenses,  is  not  binding  on  the 

V.  Webb,  15  Sim.  454  (1846);  Wilson  v.  society  after  incorporation  unless  rati- 

Stanhope,  2  Coll.  627  (1S46):  Apperly  r.  fied    by  it.     Park    v.   Modern,   etc.  of 

Page,  1  Phillips,  775  (1847);  Clements  v.  America,  181  111.  214  (1899).     A  corpora- 

Bowes,  17  Sim.  167  (1852);  Sheppard  i'.  tion  is  not  liable  on  a  contract  of  its  pro- 

Oxenford,  1  K  &  J.  491  (1855);  Butt  meters  to  pay  for  drawings,  plans,  etc. 

V.  Monteaux,  1  K.  &  J.  98  (1854),  since  Hence,  although  by  statute  stockhold- 

•such  acts.     In  these  latter  cases  the  ers  are  personally  liable  on  corporate 

•demurrers  were  overruled.      See  also  contracts,  if  the  corporation  commences 

1710 


CJH.  XLIII.]  HOW    CORPORATE    CONTRACTS    ARE   MADE. 


[§  'TOT. 


Any  other  rule  would  be  dangerous  in  the  extreme,  inasmuch  as 
promoters  are  proverbially  profuse  in  their  promises,  and,  if  the 
corporation  were  to  be  bound  by  them,  it  would  be   subject  to 


business  before  one-half  of  its  capital  is 
subscribed  and  twenty  per  cent,  paid  in, 
they  are  not  liable  on  such  a  contract 
made  before    incorporation.      Buffing- 
ton  V.  Bardon,  80  Wis.  635  (1891).     The 
company  is  not  bound  to  issue  stock  in 
payment  for  services  of  a  claim  which 
the  promoters  agreed  should  be  paid  for 
by  the  company.     Carey  v.  Des  Moines, 
etc.  Co.,  81  Iowa,  674  (1891).     The  corpo- 
ration is  not  liable  for  the  breach  of  an 
agreement  among  its  organizers  as  to 
the  distribution  of  stock.    Summerlin 
V.  Fronteriza,  eta  Co.,  41  Fed.  Rep.  249 
(1890).     A  corporation  is  not  bound  by 
the  contracts  of  its  promoters,  where  it 
has  not  ratified  the  same  nor  accepted 
the  benefit  of  the  same.     Moore,  etc.  Co. 
r.  Towers   Hardware   Co.,  87   Ala.  206 
<1889).    The  correspondence  of  one  who 
afterwards  becomes  president  of  a  cor- 
poration which  is  afterwards  incorpo- 
rated does  not  bind  such  corporation. 
First  Nat.  Bank  v.  Armstrong,  42  Fed. 
Rep.  193  (1890).     A  promoter's  contract 
is  not  binding  on  the   company,  even 
t'liough  it  obtains  the  benefits  thereof. 
Wilbur  V.  New  York,  etc.  Co.,  58  N.  Y. 
Super.  Ct.  539(1891).  The  parliamentary 
agent  was  held  bound  to  look  to  the  pro- 
moters for  his  pay,  and  not  to  the  com- 
pany, in  Re  Skegness,  etc.  Co.,  L.  R,  41 
Ch.  D.  215  (1888).     Promoters  have  no 
power  to  bind   the  corporation,  even 
though   they  afterwards  become  trus- 
tees.    Berridge  v.  Abernethy,  24  N.  Y. 
Week.  Dig.  513  (1886).     An  agreement 
among  the  officers  to  reduce  their  sal- 
aries cannot  be  insisted  upon  by  the  cor- 
poration.    It  was    not  a   party  to  the 
agreement.     Thompson   Co.    v.  Brook, 
14  N.  Y.  Supp.  370  1 1891).     A  contract 
of  promoters  to  sell  to  a  corporation  to 
be   formed  cannot  be    enforced    by  a 
stockholder  suing  in  behalf  of  himself 
and  other  stockholders,  when  the  com- 
pany has  not  performed  or  endeavored 


to  perform  its  part  of  the  agreement. 
Negley  v.  McWood,  N.  Y.  L.  J.,  May  2, 
1890.      An   assignment  of  patents   by 
one  of  several  parties  to  a  corporation 
formed  to   unite  various  patents  in  a 
certain  business  is  absolute  and  cannot 
be  revoked,  even  though  the  party  was 
by  agreement  to  have  a  salary  of  $6,000 
per  year,  and  this  salary  has  not  been 
paid.     Bracher  v.  Hat  Sweat  Mfg.  Co., 
49  Fed.  Rep.  921  (1892).     The  company 
is  not  liable  for  goods  ordered  and  re- 
ceived before  it  was  incorporated,  even 
though  it  used   them.      Bradley    Fer- 
tilizer Co.  V.  South  Pub.  Co.,  17  N.  Y. 
Supp.   587   (1892).     An    agreement    of 
promoters  that  a  corporation  should  be 
formed  to  pay  $5,000  to  a  factory  does 
not  bind  such  corporation.     Davis,  etc. 
Co.  r.  Hillsboro  Creamery  Co.,  10  Ind. 
A  pp.  42  (1894).      A   corporation  is  not 
bound  by  a  contract  made  in  its  name 
before  it  was  organized.     Winters   v. 
Hub  Min.  Co.,  57  Fed.  Rep.  287  (1893). 
An  agreement  by  promoters  that  cer- 
tain stock  need  not  be  paid  for  is  not 
binding  on  the  corporation,  and  it  may 
collect     York,  etc.  Assoc,  v.  Barnes  39 
Neb.  834  (1894).    The  corporation  is  not 
liable  for  moneys  expended  by  its  pro- 
moters  in    developing   or    purchasing 
property,  nor  is  it  liable  on  their  con- 
tracts.    Bash  V.  Culver  Gold  Min.  Co.,  7 
Wash.  122  (1893).  A  corporation  may  be 
liable  on  a  contract  made  before  incor- 
poration by  a  party  who  afterwards  be- 
comes a  director  and  president,  even 
though  the  contract  was  to  perform 
services  after  incorporation.    Oaks  v. 
Cattaraugus  Water  Co.,  143  N.  Y.  430 
(1894).    The   corporation    is   not  liable 
for  the  services  and  expenses  of  its  pro- 
moters.     Security  Co.    v.  Bennington, 
etc.  Assoc,  70  Vt.  201  (1897).  The  agree- 
ment of  the  promoters  of  a  corporation 
that  a  certain  claim  of  a  person  would 
be  paid,  provided  he  gave  to  the  corpo- 

•11 


§  7U7.] 


now    CuKruKATE    CONTRACTS    ARE    MADE. 


[CII.  XLIII. 


many  unknown,  unjust,  and  heavy  obligations.     The  only  protec- 
tion of   the  stockholders  and   of  subsequent  corporate   creditors 

ration  certain  business,  may  be  binding  An   agreement  of  promoters  that  a 

upon  the  corporation.  Durgin  r.  Smith,  certain    j.erson    shall    have   a    certain 

ll'iMieh.  2:jfJ  (1897).    An  insurance  com-  part  of  the  stock  upon  incorporation, 

pany  may  refuse  to  pay  a  loss  incurred  upon  his  paying  therefor,  does  not  bind 

after  its  incorjKjration,  but  growing  out  the  corporation.     Morrison  r.  Gold,  etc. 

of  a  policy  taken  by  its  promoters  be-  Co.,  .J2  Cal.  306  (1877).     An  agreement 


fore  incorporation.  Gent  v.  Manufac- 
turers', etc.  Ins.  Co.,  107  III.  652  (1883): 
S.  C.  106  111.  2")2.  The  corporation  is 
not  liable  for  the  debts  of  an  old  part- 
nership, and  not  even  the  parol  promise 


with  a  vendor  before  formation  of  the 
company  provided  that  he  should  not 
be  removed  from  the  directorate  until 
a  certam  date.  The  memorandum  and 
articles  provided  that  this  agreement 


of  its  president  makes  it  liable.  Georgia  should  be  adopted,  and  the  articles 
Co.  r.  Castleberry,  43 Ga.  187(1871).  An  "  confirmed"  and  incorix)rated  it.  The 
agreement  among  the  donors  to  an  agreement  was  acted  on.  but  no  con- 
academy  that  the  money  should  be  re-  tract  was  made  between  the  vendor 
paid  does  not  bind  the  academy  after  and  the  company.  Ilchl,  the  articles 
incorporatio'n.  Bluohill  Academy  v.  did  not  form  a  contract  between  them. 
Witham.  13  Me.  403  (1836).  An  agree-  and  the  ven<lor  could  be  removed.  Eley 
uient  of  promoters  to  pay  a  person  for  v.  Positive,  etc.  Co,  L.  R  1  E.xch.  D.  88 
obtaining  subscriptions  is  not  binding  (1876),  followed;  Browne  v.  La  Trini- 
on  the  corporation.  New  York,  etc.  dad.  L.  R.  37  Ch.  D.  1  (1886).  See  Lind- 
R.  R.  V.  Ketchum.  27  Conn.  169  (1858),  ley.  Companies,  p.  146.  etc.;  Chadwyck, 
the  court  saying:  "'Can  a  few  persons  Ilealey,  36.  Where  the  bondholders,  in 
combine  for  their  own  interest  to  get  order  to  procure  a  government  land 
up  a  railroad  —  agree  with  one  of  their  grant,  contracted  with  plaintiff  to com- 
number  to  give  him  a  large  commission  i)lete  the  road,  and  subsequently  the 
or  bonus  for  every  stockholder  he  can  bondholders  foreclosed  and  reorgan- 
allure  into  the  company  — and  pri-  ized,  the  court  held  that  the  new  com- 
vately  make  this  commission  or  bonus  pany  was  not  liable  on  such  contract 
a  charge  on  the  corporation  when  merely  from,  having  accepted  the  corn- 
formed?  This  would  be  a  breach  of  plete  road.  The  court  said:  "From  all 
faith  towards  the  honest  and  unsiis-  the  authorities  it  seems  clear  that,  in 
pecting  stockholders  who  pay  the  char-  order  to  recover  in  an  action  at  law,  the 
ter  price  for  their  stock,  and  expect  to  plaintiff  must  show  either  an  express 
take  it  clear  of  all  incumbranca"    In  promise  of  the  new  company,  or  that 


Illinois  the  rule  is  favored  that  the  cor- 
poration is  never  liable  on  contracts 
made  by  its  promoters,  unless  it  ex- 
pressly agreed  to  perforin.  So  held  as 
regards  preliminary  surveys.  Rock- 
ford,  etc  R.  R.  V.  Sage.  65  111.  328  (1872); 
and  book-keeping  for  one  of  the  promot- 


the  conti'act  was  made  with  persons 
then  engaged  in  its  formation  and  tak- 
ing preliminary  steps  thereto,  and  that 
the  contract  was  made  on  behalf  of  the 
new  company,  in  the  expectation  on 
the  part  of  the  plaintiff  and  with  the 
assurance  on  the  part  of  the  projectors 


ers.  Safety,  etc.  Co.  v.  Smith,  65  III.  309  that  it  would  become  a  corporate  debt, 

(1872);  and  the  liability  of  a  new  com-  and  that  the  company  afterwards  en- 

pany  for  the  services  of  the  superinten-  tered  upon  and  enjoyed  the  benefit  of 

dent  of  an  abortive   company  by  the  the  contract,  and  by  no  other  title  than 

same  parties.  Western,  etc.  Co.  v.  Cous-  that  derived  through  it."     Little  Rock, 

ley,  72  III  531  (1874).  etc  R.  R,  u.  Perry,  37    Ark.    164,  191 

1712 


CH.  XLIII.]  HOW    CORPORATE    CONTRACTS    ARE   MADE. 


[§  T07. 


against  such  a  result  lies  in  the  rule   that  the  corporation  is  not 
bound  by  the  contracts  of  its  promoters.     The  rule  is  just  and 


(1881);  aflf'd  in  Perry  v.  Little  Rock, 
etc.  R.  R,  44  Ark.  383  (1884).  See  also 
Re  Empress,  etc.  Co.,  L.  R  16  Ch.  D.  125 
(1881),  where  the  agreement  of  the  pro- 
moters on  behalf  of  the  company,  that 
it  would  pay  the  costs  and  charges  of 
the  solicitors,  for  services  and  disburse- 
ments in  perfecting  the  organization 
thereof,  was  dismissed,  but  without 
prejudice  to  any  equitable  claim  on  a 
quantum  meruit;  Sully's  Case,  L.  R.  33 
Ch.  D.  16  (1886),  holding  that,  in  the 
absence  of  a  new  contract  made  by  a 
company  after  its  incorporation,  a  con- 
tract made  before  its  incorporation  by 
a  person  purporting  to  contract  as 
trustee  for  the  company  is  not  binding 
on  the  company,  though  the  parties 
afterwards  carry  out  some  of  the  terms 
of  the  contract  and  act  on  the  supposi- 
tion that  it  is  binding  on  the  company. 
A  provision  in  the  by-laws,  which  in 
England  are  filed,  that  a  certain  person 
shall  be  the  attorney  for  the  company, 
is  not  binding  on  the  company.  Eley 
V.  Positive,  etc.  Co.,  L.  R.  1  Exch.  D.  20, 
88  (1876).  See  also  Re  Skegness,  etc 
Co.,  L.  R  41  Ch.  D.  215  (1888).  holding 
that  a  parliamentary  agent  or  lobbyist 
could  not  hold  the  company  liable.  An 
agreement  of  promoters  with  a  turn- 
pike company  that  the  proposed  rail- 
way company  will  make  a  certain 
grade  crossing  with  the  former  is 
not  binding  on  the  railway  company. 
Aldred  v.  North  Midland  Ry.,  1  Ry. 
Cas.  404  (1839).  An  attorney  cannot 
collect  his  fees  from  the  corporation 
for  services  previous  to  incorporation, 
even  though  the  by-laws  provided  for 
payment,  and  the  directors  in  meeting 
assembled  said  that  he  would  be  paid. 
Re  Rotherham,  etc.  Co.,  L.  R  25  Ch.  D. 
103  (1883).  The  corporation  is  not  liable 
for  services  in  obtaining  street  permits 
xand  franchises  prior  to  its  incorpora- 
tion. Hutchinson  v.  Surrey,  etc.  Assoc, 
11  C.  B.  689  (1851).  A  railway  company 
(108)  1 


is  not  bound  by  the  agreement  of  its  pro- 
moters that  it  will  purchase  the  canal 
of  a  canal  company  if  the  latter  will 
not  oppose  the  grant  of  its  charter. 
Leominster,  etc  Co.  v.  Shrewsbury,  etc. 
Ry.,  3  K  &  J.  654  (1857).  A  railway 
company  is  not  bound  by  the  contract 
of  its  promoters  for  it  with  a  town  that 
the  company  would  build  certain 
wharves,  etc  "If  such  secret  or  un- 
expected terms  are  to  be  held  binding 
on  those  who  take  shares,  the  result 
may  be  ruinous  to  those  who  act  on  the 
faith  of  what  appears  on  the  face  of  the 
legislative  incorporation."  Caledonian, 
etc.  Ry.  V.  Magistrates,  etc,  2  Macq.  391 
(1855),  questioning  Edwards  v.  Grand 
Junction  Ry.,  1  Myl.  &  C.  650  (1836); 
Stanley  v.  Chester,  etc  Ry.,  1  Ry.  Cas. 
58;  s.  C,  9  Sim.  264:  aflf'd  in  "■  Myl.  &  C. 
773  (1838),  and  Petre  v.  Eastern,  etc  Ry., 
1  Ry.  Cas.  462  (1838).  Where,  by  the 
articles  of  incorporation,  the  subscrib- 
ers are  not  to  be  bound  until  a  certain 
amount  of  the  stock  is  subscribed,  the 
corporation  is  not  liable  for  the  salary 
of  an  engineer  employed  before  such 
full  subscription.  Pierce  v.  Jersey,  etc 
Co.,  L.  R.  5  Exch.  209  (1870). 

A  corporation  is  not  liable  on  the 
contracts  of  its  promoters  to  employ 
plaintiflf  as  a  broker,  nor  does  an  ex- 
press ratification  of  the  contract  bind 
it  unless  a  consideration  is  alleged. 
Payne  v.  New  South,  etc.  Co.,  10  Exch. 
283  (1854).  An  agreement  of  promoters 
that  the  company  shall  pay  an  attorney 
a  certain  sum  for  services  is  not  bind- 
ing on  the  company  —  not  even  by  rat- 
ification and  agreement  between  the 
company  and  the  promoters.  Re  Em- 
press, etc.  Co.,  L.  R  16  Ch.  D.  125  (1880). 
It  has  been  held  that  equity  will  en- 
force an  agreement  of  the  promoters- 
that,  if  opposition  to  the  grant  of  its 
charter  is  withdrawn,  the  company 
will  contract  to  do  certain  things  which 
the  opposition  desired  to  put  into  the 
713 


§  707.J 


HOW    CORPORATE    CONTRACTS    ARE    MADE.  [OU.   XLIII. 


should  not  be  weakened.'  Thus,  even  though  a  corj»oration  trans- 
fers all  its  propert}"  to  another  corporation  on  a  contract  made 
prior  to  incorporation  of  the  latter,  yet  the  latter  is  not  liable  un- 
less it  accepted  the  property  with  knowledge  of  the  contract  and 
upon  an  express  or  implied  undertaking  to  carry  it  out'  And  a 
license  granted  to  a  person  with  the  right  to  him  to  assign  it  to  a 
corporation  does  not  create  any  contract  between  the  licensor  an<l 
the  corporation,  no  assignment  having  been  made,  even  though  the 
corporation  has  acted  ui>on  it.'  It  is  entirely  legal,  however,  for 
the  corporation  to  ratify,  confirm,  or  adopt  the  contracts  of  its  pro- 
moters. A  promoter's  contract  may  be  adopted  by  the  corporation 
in  anv  way  in  which  a  contract  may  be  made  by  the  corporation.* 
A  corporation  accepting  the  benefits  of  the  contract  of  its  incor- 
porators must  accept  the  burden,  and  a  promoter's  contract  which 
has  been  ratified  or  adopted  by  the  corporation,  or  the  benefits  of 


charter.     Edwards  r.  Grand,  etc.  Ry.. 
1  Myl.  &  Cr.  Or,0  (1836),  aff'g  7  Sim.  3:37; 
questioned   in   Caledonian,  etc.  Ry.  v. 
Helensbur;^.  etc.  2  Marq.  391  (18r)5),  and 
held  overruled  in  Earl  of  Shrewsbury 
r.  North,  etc  Ry..  L.  R  1  Eq.  o93  (18G5). 
An  agreement  to  pay  a  large  price  for 
land  owned  by  the  opposition  party  is 
not  so  enforceable.     Preston  r.  Liver- 
pool, etc  Ry..  5  H.  L.  Cas.  GOo  (18"")G). 
aff'g  17  Beav.  114;  s.  C,   before  amend- 
ment of  the  bill.  1  Sim.  (N.  S.)  586  (1851). 
Cf.  Stanley  v.  Chester,  etc  Ry.,  3  Myl. 
&  C.  773  (1838);  and  Eastern,  etc  Ry., 
V.  Hawkes,  5  H.  L.  Cas.  331  (1855);  Earl 
of  Lindsey  v.  Great  Northern   Ry.,  10 
Hare.  664  (1853),  in  an   inferior  court. 
This  doctrine   is  sustained   in  Earl   of 
Shrewsbury  v.  North,  etc.  Ry.,  L.  R  1 
Eq.  593  (1865),  disapproving  Edwards  v. 
Grand,  etc  Ry.,  1  Myl.  &  Cr.  650  (1836), 
and  Petre  u  Eastern,  etc  Co.,  1  Ry.  Cas. 
463  (1838),    and    is    sustained  also  in 
Gooday  v.  Colchester,  etc.  Ry.,  17  Beav. 
135  (1852).    Tlie  articles  of  association 


company  shall  be  liable,  see  Re  Bramp- 
ton, etc  Ry.,  L.  R.  10  Ch.  App.  177  (1875). 
where  an  attorney  was  allowed  to  col- 
lect, although  he  had  assured  subscrib- 
ers that  they  would  not  be  lialile;  dis- 
tinguishing Savin  r.  Hoylake  Ry.,  h.  R. 
1  Exch.  9  (186.5).  Where  the  articles  of 
incorporation  expressly  provide  for  the 
payment  of  a  specified  amount  to  a 
person  who  had  contracted  with  the 
promoters  to  sell  the  comp>any  certain 
facilities  for  business,  the  company  is 
liable.  Touche  r.  Metropolitan,  etc.  Co., 
L.  R,  6  Ch.  671  (1871),  rev'g  4  De  G.,  M. 
&G.  465.  A  judgment  against  the  com- 
pany, entered  by  consent  on  a  claim  of 
a  land-owner  that  the  promoters  agreed 
that  the  company  would  take  his  land 
at  a  certain  price,  is  binding.  "Williams 
V.  St.  George,  etc  Co.,  3  De  G.  &  J.  547 
(1858). 

1  Quoted  and  approved  in  Park  v. 
Modern,  etc  of  America,  181  111.  214 
(1899). 

2  Holyoke,  etc  Co.  v.  United  States, 


may  provide  for  the  payment  of  pro-    etc  Co.,  65  N.  K  Rep.  54  (Mass.  1902). 


moters'  contracts.  Terrell  v.  Hutton, 
4  H.  L.  Cas.  1091  (1854).  Cf.  Gunn  v. 
London,  etc  Ins.  Co.,  12  C.  B.  (N.  S.)  694 
<1862).  Contra,  Mulhado  v.  Porto,  etc 
Ry.,  L.  R.  9  C.  P.  503  (1874);  Re  Empress, 
etc  Ca,  L.  R  16  Ch.  D.  125  (1880). 
Under  a  charter    provision    that  the 


3  Bagot,  etc.  Co.  v.  Clipper,  etc  Co., 
[1902]  1  Ch.  146. 

*  McArthur  v.  Times  Printing  Co.,  48 
Minn.  319  (1892),  the  court  holding  also 
that  the  contract  begins  only  from  its 
adoption,  and  on  that  basis  the  statute 
of  frauds  is  applicable 


1714 


•CH.  XLIII.]  HOW   CORPORATE    CONTRACTS    ARE    MADE. 


[§  T07. 


which  have  been  accepted  by  the  corporation  with  knowledge  of 
such  contract,  may  be  enforced  against  it.^ 


1  Seymour  v.  Spring  Forest  Cem. 
Assoc,  144  N.  Y.  333  (1895):  S.  C,  157  N. 
Y.  697;  Rogers  u  New  York,  etc.  Land 
Co.,  134  N.  Y.  197,  211  (1892),  the  court 
saying:  "While  it  could  have  refused, 
when  it  came  into  existence,  to  accept 
the  one  or  to  be  bound  by  the  other,  it 
could  not  accept  the  advantages  and 
then  refuse  to  assume  the  obligations." 
In  Oakes  v.  Cattaraugus  Water  Co.,  143 
N.  Y.  430  (1894),  prior  to  incorporation 
a  written  agreement  was  made  in  the 
name  of  the  company  with  a  party 
who  agreed  to  secure  the  right  of  way, 
hydrant  rental,  and  to  place  invest- 
ments, etc.,  and  was  to  receive  pay 
from  the  corporation.  He  was  also  te 
abandon  a  rival  water-works  scheme 
and  to  aid  generally.  The  president 
and  general  manager  of  the  corporation 
after  the  incorporation  acknowledged 
the  debt  and  contract,  and  promised 
payment.  The  court  held  that  the  fact 
that  the  president  called  upon  the 
party  for  performance  constituted 
ratification.  The  whole  question  was 
for  the  jury.  Although  the  promoters 
have  no  authority  to  bind  the  company 
by  their  agreements  as  to  the  construc- 
tion contract,  yet  where  the  company 
receives  a  benefit  from  such  agreement, 
and  in  its  records  and  minutes  recog- 
nizes it.  the  company  will  be  liable  in 
damages  for  letting  the  contract  to 
others.  Wilson  v.  King's,  etc  R  R., 
114N.Y.  487(1889). 

"  A  corporation  has  power,  when 
fully  organized,  to  ratify  a  contract 
made  by  the  promoters  when  it  is  one 
within  the  purposes  for  which  the  cor- 
poration was  organized  and  appears  to 
be  a  reasonable  means  for  the  carrying 
out  of  those  purposes."  Stanton  v.  New 
York,  etc  R  R.,  59  Conn.  272  (1891). 
The  corporation  may  accept  and  ratjfy 
a  contract  of  its  promoters.  Davis  r. 
Montgomery,  etc  Co.,  101  Ala,  127(1890). 
Where  promoters  agree  to  employ  a 


person,  and  the  company  actually  does 
employ  him  afterwards,  the  company 
thereby  ratifies  the  contract.      Pitts- 
burg, etc  Co.  V.  Quintrell,  91  Tenn.  693 
(1892).     Bonds  and  mortgages  executed 
by    corporate    oflfioers    in    pursuance 
of  a  resolution    made    by  promoters, 
previous    to    incorporation,    are   valid 
where  the  directors  ordered  the  issue 
of    the    bonds  after   their    execution. 
Wood  V.  Whelen,  93  111.  153  (1879).    A 
bank,  after  incorporation,  may  ratify 
and  become  liable  on  the  contract  of 
its  promoters  to  the  effect  that   the 
bank  would  give  stock  and  a  certain 
sum  of  money  to  a  person  for  his  serv- 
ices.    McDonough  v.  Bank,  34  Tex.  309 
(1870).    Where  a  corporation  is  organ- 
ized before  its  articles  are  filed  and  a 
contract  of  purchase  is  made,  the  con- 
tract price  is  collectible,  the  company 
having  received  the  property  after  in- 
corporation.    Paxton,  etc.  Co.  v.  First 
Nat,  Bank,  21  Neb.  621  (1887).     A  cor- 
poration is  liable  for  machinery  which 
is  accepted  by  it  on  a  contract  made  by 
its  organizers  for  it  before  incorpora- 
tion.    Whitney  v.  Wyman,  101  U.  S. 
392  (1879).     An  agreement  by  corporate 
organizers   that  the  corporation    will 
pay  royalties  on  a  patent  is  enforceable 
against  the  corporation   when   it  has 
acted  on  the  contract  and  for  a  time 
paid  the  royalties.     Bommer  v.  Ameri- 
can, etc  Co.,  81  N.  Y.  468  (1880).    See 
also  Lorillard  v.  Clyde,.  86  N.  Y.  384 
(1881).     A  preliminary  agreement  that 
a  person  may  turn  in  property  for  stock 
is  valid  where  the  corporation  has  after- 
wards accepted  the  property  and  is- 
sued the  stock  therefor.    Reichwald  v. 
Commercial  Hotel  Ca,  106  III  439  (1883). 
A  contract  made  by  the  president,  as 
such,  after  the  certificate  of  incorpora- 
tion was  signed,  but  before  it  was  filed, 
binds  the    corporation   where    it    has 
adopted   the  contract   by  carrying   it 
out.    Grape,  etc  Co.  v.  Small,  40  Md. 
715 


§  707.] 


UOW    CORi'OUAIE    CONTKACTS    ARE    MADE. 


[CH. 


XLIII. 


The  corporation  alone  is  liable  where  its  note  is  f,nven  in  fulfill- 
ment of  a  contract  enteretl  into  in  its  name,  although  such  contract 
was  prior  to  its  incorporation.' 


395  (1874).  A  corporation  is  not  bound 
by  the  contracts  of  its  promoters,  but 
it  may  adopt  them  after  incorporation. 
Adoption  may  be  in  any  way  in  which 
it  mi^lit  make  tlie  contract  de  novo. 
Battello  V.  Northwestern,  etc  Ca,  37 
Minn.  «9  (1887),  and  note.  The  company 
may  of  course  employ  and  be  liable  to 
a  superintendent  whom  the  promoters 
agreed  should  be  employed.  Browning 
u  Great,  etc.  Co..  5  II.  &  N.  8.j6  (18G0). 
A  grant  of  a  license  to  use  a  patent 
made  to  an  individual  with  the  privi- 
lege to  aasign  to  a  contemplated  cor- 
poration may,  as  to  royalties,  be  en- 
forced against  the  corporation  when 
the  corporation  expressly  adopted  the 
contract  and  acted  on  it  Spiller  v. 
Paris,  etc.  Co..  L.  R.  7  Ch.  D.  3G8  (1878), 
distinguishing  Melhado  i".  Porto  Alegre, 
etc.  Ry.,  L.  R.  9  C.  P.  503  (1874),  as  being 
a  case  at  law.  Money  i)aid  by  a  town 
after  its  incorporation  to  a  person  for 
bribing  the  legislature  to  grant  the 
charter  may  be  recovered  back  by  a 
bill  in  equity.  Frost  v.  Inhabitants, 
etc.,  88  Mass.  152  (18G3).  Where  persons 
who  give  their  notes  in  payment  for 
property  deed  the  property  to  a  cor- 
poration, the  latter  is  not  bound  to  re- 
imburse them  for  amounts  paid  by 
them  on  the  notes.  Ruby,  etc.  Co.  v. 
Gurley,  17  Colo.  199  (1892).  The  offer 
of  a  party  to  take  such  stock  as  may 
not  be  taken  by  the  public  when  offered 
to  the  public  maj-  be  accepted  after  the 
public  subscriptions  are  closed.  Espe- 
cially is  this  the  case  where  the  under- 
writer afterwards  practically  accepted 
the  stock.  Re  Hemp,  etc.  Co.,  [1896]  3 
Ch.  121.  Where  promoters  are  entitled 
to  certain  stock  from  the  corporation, 
but  such  obligation  is  canceled  by 
mutual  agreement,  one  of  them  cannot 
afterwards  revive  the  obligation  on  the 


ground  that  the  other  promoter,  who 
dominated  the  corporation,  had  agreed 
that  it  would  all  be  made  right.  Dillon 
V.  Commercial  Cable  Ca.  87  Hun,  444 
(1895).  Where  a  promoter  agrees  to 
pay  a  commission  for  obtaining  a  bonus 
for  a  coriwration,  the  corporation  is 
liable  for  the  commission  if  it  accepts 
the  bonus  with  knowledge  of  the  con- 
tract. Weatherford.  etc.  R  R.  r.  Gran- 
ger, 80  Tex.  3.50  (1H94).  Promoters  are 
liable  on  a  contract  made  before  incor- 
poration, but  are  not  liable  on  the  con- 
tract if  it  was  made  for  the  company 
and  the  company  adopts  it  Ennis.  etc. 
Co.  V.  Burks,  39  S.  W.  Rep.  9G6  (Tex. 
1897). 

A  corporation  may  be  liable  on  a 
contract  entered  into  by  its  promoters 
where  such  contract  was  accepted  and 
carried  out  by  the  corporation.  Chi- 
cago, etc.  Co.  V.  Talbotton,  etc  Co.,  100 
Ga.  84  (1898).  A  promoter's  contract  for 
the  benefit  of  the  company  is  an  open 
offer  to  be  accepted  or  rejected  by  the 
company  when  organized,  and  if  the 
company  accepts  and  retains  the  bene- 
fit thereof  it  is  bound  by  the  contract, 
and  hence  a  corporation  which  accepts 
land  and  mining  claims  on  a  director's 
contract  which  called  for  certain  pay- 
meqts  to  them  in  stock  and  cash  is 
bound  to  make  such  payments,  even 
though  no  formal  action  is  taken  by 
the  board  of  directors.  Wall  v.  Niagara, 
etc  Co.,  20  Utah,  474  (1899).  An  agree- 
ment between  two  promoters  that  cer- 
tain stock  should  be  assigned  to  them 
jointly  for  the  general  promotion  of 
the,  interests  of  the  company,  and  if 
not  disposed  of  within  three  months  to 
be  divided  between  them  in  a  certain 
way,  does  not  establish  a  trust  in  favor 
of  the  corporation  and  does  not  make 
the  stock  treasui'v  stock  for  the  benefit 


1  Case  Mfg.  Co.  v.  Soxman,  138  U.  S.  431  (1891);  Shie;ds  v.  Clifton,  etc  Co.,  94 

Tenn.  123  (1894> 

1716 


CH.  XLIII.]  HOW    COEPOKATE    CONTRACTS    ARE    MADE. 


[§  707. 


"Where  property  is  to  be  turned  in  to  a  corporation  for  stock,  but 
work  is  to  be  done  by  the  owners  on  the  property  before  it  is  so 
turned  in,  the  corporation  is  not  liable  to  third  persons  for  such  work, 
the  deeds  never  having  been  made  to  it.^ 

A  consolidation  agreement  between  individuals,  whereby  the  con- 
solidated company  is  to  assume  a  lease  owned  by  another  company, 
cannot  be  enforced  by  such  other  corapan3^  It  is  not  a  party  to 
the  agreement.-     A  contract  by  which  a  party  turns  in  land  in  ex- 


of  the  corporation.  Brennan  v.  Vogler, 
174  Mass.  273  (1899).  Misrepresentations 
made  to  promoters  in  the  purchase  of 
property  by  them,  which  property  they 
sell  to  the  corporation,  do  not  give  a 
cause  of  action  to  the  corporation 
against  the  parties  selling  to  the  pro- 
moters. Lebanon,  etc.  v.  Dyckman,  57 
S.  W.  Rep.  227  (Ky.  1900 1.  A  corporation 
which  with  knowledge  uses  machinery 
purchased  for  it  by  its  promoters  is 
liable  for  the  price  of  the  same.  Lan- 
caster, etc.  Co.  V.  Murray,  etc.  Co.,  19 
Tex.  Civ.  App.  110  (1898).  In  the  case  of 
Mesinger  v.  Mesinger,  etc.  Co.,  44  N.  Y. 
App.  Div.  26  (1899),  the  court  held  that 
a  promoter's  contract  that  the  corpora- 
tion would  employ  a  person  at  a  cer- 
tain salary  was  ratified  by  the  corpora- 
tion where  such  promoter  became  its 
president  and  did  not  as  president  dis- 
avow the  contract.  It  may  be  for  the 
jury  to  decide  whether  the  corpora- 
tion by  accepting  the  benefit  of  a  pro- 
moter's contract  is  bound  by  it.  Mc- 
Kenzie  v.  Poorman,  etc.,  88  Fed.  Rep. 
Ill  (1S98).  Where  a  corporation  accepts 
lumber  purchased  for  it  before  incor- 
poration it  must  pay  therefor.  Kaep- 
pler  V.  Redfield,  etc.  Co.,  81  N.  W.  Rep. 
907  (S.  Dak.  1900).  A  promoter's  con- 
tract that  the  corporation  will  pay 
certain  back  rent  for  premises  to  be 
occupied  by  it  binds  the  corporation  if 
the  corporation  has  occupied  the  prem- 
ises knowing  of  such  agreement  The 
president's  knowledge  is  notice  to  the 
corporation,  even  though  he  was  the 
promoter.  Chase  v.  Redfield,  etc.  Co., 
81  .N.  W.  Rep.  951  (S.  Dak.  1900). 
"Where  one  of  the  organizers  of  the  cor- 


poration, who  is  also  its  president,  sells 
goods  to  it  for  stock,  the  corporation  is 
protected  in  its  title,  even  though  it 
turns  out  that  he  held  part  of  the  goods 
to  sell  on  commission,  but  if  he  retains 
the  stock  and  the  company  is  dissolved, 
it  is  bound  to  respect  the  rights  of  the 
owner  of  the  goods  in  distributing  its 
assets.  Wyeth  v.  Renz-Bowles  Co.,  66 
S.  W.  Rep.  825  (Ky.  1902).  A  subscriber 
for  stock  who  has  given  his  note  in  pay- 
ment may  file  a  bill  in  equity  to  com- 
pel the  corporation  to  recognize  him 
as  a  stockholder,  where  the  corpora- 
tion denies  that  he  is  a  stockholder 
and  has  issued  all  the  stock  to  other 
parties  who  took  with  notice.  It  is  un- 
necessary to  bring  into  the  suit  the 
other  parties  who  actually  have  the 
stock,  the  stock  having  been  held  by 
the  company  as  collateral  security. 
Morey  v.  Fish,  etc.  Co..  108  Wis.  520 
(1901).  See  also  §  58,  supra.  If  the  cor- 
poration accepts  the  benefits  of  the 
pi'omoters'  contracts  in  its  behalf  made 
before  organization  it  must  pay  there- 
for. Pitts  V.  Steele,  etc.  Co.,  75  Mo. 
App.  221  (1898).  See  §  712,  infra.  A 
deed  dated  before  incorporation,  but  act- 
ually delivered  after  incorporation,  is 
good.  San  Diego,  etc.  Co.  v.  Frame,  70 
Pac.  Rep.  295  (Cal.  1902). 

1  Rathbun  v.  Snow,  123  N.  Y.  343 
(1890). 

2Lorillard  v.  Clyde,  122  N.  Y.  498 
(1890).  A  personal  agreement  between 
the  incorporators,  promoters,  and  pro- 
posed subscribers  to  the  stock  of  a  pro- 
posed corporation,  by  which  agreement 
the  corporation  is  to  have  the  first  right 
to  buy  the  stock  of  any  one  who  wishes 


1717 


§  707.] 


HOW    CORPORATE    CONTRACfS    ARE    MADE. 


[oh.  XLIII, 


change  for  stock  may  be  sucli  as  to  give  liim  a  vendor's  lien  on  such 
land  in  case  the  scheme  is  not  carried  out.' 

Not  only  may  a  ratified  contract  be  enforced  against  a  corpora- 
tion, but  it  may  be  enforced  by  such  a  corporation.- 

In  Missouri  and  Massachusetts,  however,  it  is  held  that  a  corpora- 
tion is  not  bound  by  its  ratification  of  a  promoter's  contract,'  but  that 
a  new  contract  to  the  same  efifect  may  be  made  by  the  corporation. 
In  England  the  Privy  Council  has  held  that  even  though  the  board 
of  directors  adopt  and  confirm  a  contract  made  before  incorpora- 
tion by  persons  purporting  to  act  for  the  company,  yet  this  doea  ' 
not  create  any  contractual  relation  between  the  company  and  the 
other  party  to  the  contract,  or  impose  any  obligation  on  the  com- 
pany towards  that  party.* 

The  corporation  is  not  liable  to  the  promoters  for  their  expenses 
and  labor  in  effecting  the  incorporation.'^     Uut  a  contract  by  which 


to  sell,  does  not  prevent  a  sale  by  a 
stockholder  without  offering  the  stock 
to  the  cx)rporation.  Hence,  the  corpora- 
tion cannot  refuse  to  transfer  the  stock. 
Ireland  v.  Globe,  etc  Co.,  20  R  I.  190 
(1897);  s.  c.,21  R  1.9(1898). 

1  Slide,  etc.  Mines  v.  Seymour,  153  U. 
S.  509.  520  (1894). 

-  An  agreement  of  land-owners  with 
a  promoter  that  they  will  sell  to  the 
contemplated  railway  a  right  of  way  at 
a  specifled  price  may  be  enforced  by 
the  railway.  Bedford,  etc.  Ry.  v.  Stan- 
ley, 3  J.  &  H.  74G  (18G2).  But  the  com- 
pany cannot  enforce  it  where  n9  formal 
ratification  has  been  made.  Penn 
Match  Co.  V.  Hapgood,  141  Mass,  145 
(1886).  A  corporation  cannot  ratify  a 
contract  made  for  it  before  it  was  in- 
corporated, but  it  may  adopt  the  con- 
tract expressly.  See  3  Ry.  &  Corp.  L, 
J.  482  (English  cases).  The  mortgagor 
to  a  corporation  cannot  set  up  usury  on 
the  ground  that  the  promoters  required 
him  to  subscribe  for  stock  in  order  to 
obtain  the  loan.  Central,  etc.  In&  Co. 
V.  Callaghan,  41  Barb,  448  (1864).  And 
see  many  cases  in  ch,  IV,  supra,  hold- 
ing that  a  corporation  may  enforce 
subscriptions  taken  before  its  incorpora- 
tion. Where  a  contract  with  an  indi- 
vidual is  fulfilled  by  a  corporation,  the 
latter  cannot  collect  on  the  contract 


unless  the  other  party  to  the  contract 
knew  or  had  reason  to  know  that  the 
corporation  was  fulfilling,  or  unless 
the  consideration  has  been  assigned  to 
the  corporation.  Holmes,  etc.  Co.  v. 
United,  etc.  Co..  33  N.  Y.  A  pp.  Div.  63 
(1898). 

'There  is  no  such  thing  as  a  "ratifica- 
tion "  of  a  promoter's  contract.  It  is 
the  making  of  an  original  contract  by 
the  corporation  and  does  not  release  the 
promoters.  Queen  City,  etc.  Co.  v. 
Crawford.  137  Mo.  356  (1895)l  "If  a  con- 
tract is  made  in  the  name  and  for  the 
benefit  of  a  projected  corporation,  the 
corporation,  after  its  organization,  can- 
not become  a  party  to  the  contract, 
even  by  adoption  or  ratification  of  it." 
Abbott  V.  Hapgood,  150  Mass.  248  (1889), 
citing  cases. 

♦North,  etc.  Ca  u  Higgins,  [1899] 
A,  G  26a  In  England  the  law  "is  set- 
tled by  a  series  of  decisions  that  it  is 
impossible  for  a  company  to  ratify  any- 
thing that  is  done  or  any  contract  that 
is  made  before  it  comes  into  existence," 
Hence,  a  contract  as  to  the  secretary's 
salary  is  unenforceabla  He  can  recover 
only  on  a  quantum  meruit.  Re  Dale,  61 
L,  T.  Rep.  206  (1889). 

*  Where,  prior  to  the  incorporation, 
property  is  conveyed  to  a  trustee  to  be 
conveyed  by  him  to  the  corporation,  he 


1718 


CH.  XLIII.]  HOW    COKPORATE    CONTRACTS    ARE    MADE. 


[§  T07. 


a  person  who  has  promoted  the  organization  of  a  company  is  to 
have  a  certain  percentage  of  the  capital  stock  and  five  per  cent,  of 
any  increase  of  the  capital  stock,  such  contract  being  with  the  cor- 
poration itself,  is  legal  and  may  be  enforced  as  to  such  increase.^  A 


cannot    claim    from    the    corporation 
compensation  for  his  services,  although 
the  promoters  agreed  that  he  should 
have  pay.    The  corporation  can  compel 
a  conveyance  of  the  property  without 
paying  the  compensation.     Hecla,  etc. 
Min.  Co.  V.  O'Neill,  19  N.  Y.  Supp.  592 
(1892).    A  person  suing  for  services  ren- 
dered in  procuring  a  construction  con- 
tract cannot  collect  if  he  was  not  in- 
strumental in  obtaining  the  contract, 
or  if  he  gave  a  secret  commission  to  the 
agent  of  the  party  who  was  to  pay  the 
whole  commission,  unless  the  principal 
ratified  the  contract  with  knowledge  of 
such  commission  to  the  agent.     Smith 
V.  Seattle,  etc.  Ry.,  72  Hun,  202  (1893). 
"Where  two  street  railways  are  consoli- 
dated, and  the  stockholders  in  one  are  to 
receive  share  for  share,  and  the  stock- 
holders in  the  other  company  are  to  re- 
ceive  fourteen  shares  of  consolidated 
stock  for  one  share  of  the  old  stock,  the 
stockholders  so  turning  in  their  stock 
for  new  stock  cannot  also  claim  from  the 
consolidated   company  the  amount  of 
money  which  they  expended  in  buying 
the  stock  of  one  of  the  constituent  com- 
panies.    Wilson  V.  Trenton,  etc.  R.  R.,  56 
N.  J.  Eq.  783  (1898).     A  person  who,  at 
the  request  of  a  minority  of  the  pro- 
moters, attends  meetings  of  the  pro- 
moters, lobbies  for  the  charter,  makes 
a  preliminary  survey,  and  pays  some 
expenses,  cannot  recover  from  the  sub- 
sequently incorporated  company.     The 
court  said  that  in  all  the  cases  to  the 
contrary  "  the  services  were  either  per- 
formed after  the  charter  had  been  ob- 
tained, and  there  was  therefore  an  in- 
choate  corporation,   or  there  was  an 
informal  organization   preparatory  to 
obtaining  a  charter,  and  the  employ- 
ment was  authorized  by  the  organiza- 
tion as  such,  and  was  not  the  mere  em- 
ployment   by  individuals    having    no 


authority,  express  or  implied,  to  con- 
tract for  any  one."  Bell's,  etc.  R.  R.  v. 
Christy,  79  Pa.  St.  54  (1875).  For  a  case 
where  one  of  the  promoters  of  a  consol- 
idation used  his  stock  to  bring  it  about, 
but  failed  to  hold  the  consolidated 
company  liable  therefor,  see  Eldred  v. 
Bell  Tel.  Co.,  119  U.  S.  513  (1886).  The 
company  on  winding  up  is  not  liable 
for  the  promoters'  expenses.  Terrell's 
Case,  2  Sim.  (N.  S.)  126  (1851);  Ex  parte 
Lloyd,  1  Sim.  (N.  S.)  248  (1851).  A  pro- 
moter cannot  recover  from  the  corpora- 
tion money  which  he  expended  before 
its  incorporation  in  bribing  the  legisla- 
ture to  grant  the  charter.  Marchand  v. 
Loan,  etc.  Assoc,  26  La.  Ann.  389  (1874). 
The  statute  may  provide  that  the  cor- 
poration shall  pay  the  promoters'  ex- 
pense of  obtaining  the  charter.  Hitchins 
V.  Kilkenny  Ry.,  9  C.  B.  536  (1850). 
Where  a  corporation  was  not  to  exist 
until  a  certain  amount  of  stock  was 
subscribed,  the  secretary  cannot  re- 
cover from  the  corporation  any  com- 
pensation for  his  services  prior  to  the 
obtaining  of  that  amount  of  subscrip- 
tions. Franklin,  etc.  Ins.  Co.  v.  Hart, 
31  Md.  59  (1869). 

1  Hix  V.  Edison  El.  L.  Co.,  10  N.  Y.  App. 
Div.  75  (1896),  and  27  N.  Y.  App.  Div. 
248;  afif'd,  168  N.  Y.  573.  A  corporation 
may  legally  agree  to  pay  to  a  person  a 
commission  of  ten  per  cent  in  stock  on 
all  subscriptions  to  stock  which  he  ob- 
tains. Zabel  V.  New  State,  etc.  Co.,  127 
Mich.  402  (1901).  A  corporation  may 
give  a  note  in  payment  for  services 
rendered  in  incorporating  the  company 
even  though  such  note  is  given  to  the 
president,  who  is  also  a  director.  Smith 
V.  New  Hartford  Waterworks,  73  Conn. 
626  (1901).  Expenses  and  debts  incurred 
by  the  promoters  for  and  in  behalf  of 
a  corporation  may  be  collected  from 
the  corporation  after  it  is  organized,  if 
"19 


§  T08.] 


HOW    CORPORATE    CONTRAOTB    ARE    MADE. 


[CH.  XLIII. 


corporation  is  liable  for  the  fees  and  disbursements  of  the  attorney 
who  drew  the  articles  of  incorporation  and  organized  it.*  One  pro- 
moter is  not  entitled  to  compensation  for  services  as  against  the 
other,  unh'ss  there  was  an  agreement  to  that  effect.^ 

The  question  whether  a  person  who  has  contracted  with  a  cor- 
poration as  an  existing  corporation  ma}'  repudiate  his  contract  on 
the  ground  that  it  was  never  incorporated  is  discussed  elsewhere.' 

§  708.  Acts  which  must  he  aulhori:v/f  hy  stoclhohJrrs'  ma'tuKjn 
instead  of  hy  directors'  meetinys  —  Stockholders  male  the  hy-lairs. — 
The  functions  of  stockholders  are  exceedingly  limited.  The  theory 
of  a  corporation  is  that  stockholders  shall  have  all  the  profits,  but 
shall  turn  over  the  complete  management  of  the  ent(>rj)rise  to  their 
representatives  and  agents,  called  directors.  Accordingly  there  is 
little  for  the  stockholders  to  do  beyond  electing  directors,  making 


tlie  corporation  assumes  such  debts. 
Schreyer  v.  Turner  Flouring  Co.,  2t) 
Oreg.  1  (189G).  Compare  Weatherfonl. 
etc.  Ry.  V.  Granger.  HQ  Tox.  3J0  (ISIM). 
Where  a  promoter  contracts  to  obtain 
subscriptions  and  take  his  pay  in  stock, 
and  the  company,  when  organized, 
adopts  the  contract,  and  he  obtains  the 
subscription,  but  the  company  is  un- 
able to  get  legislative  authority  to  cross 
a  river,  and  so  abandons  the  enterprise, 
he  may  collect  damages.  Stanton  v. 
New  York,  etc.  R.  R.  59  Conn.  273 
(1891\  A  corporation  is  liable  for  the 
expenses  of  its  promoters  in  procuring 
a  subscription,  where,  after  its  organi- 
zation, it  accepts  the  subscription  with 
the  knowledge  of  such  expenses. 
Weatherford,  etc.  R,  R  v.  Granger,  22 
S.  W.  Rep.  70  (Tex.  1893).  In  Low  v. 
Connecticut,  etc  R  R,  45  N.  H.  370 
(1864\  a  suit  at  law  by  a  promoter 
against  the  company  for  services  ren- 
dered in  procuring  subscriptions  was 
sustained  on  the  ground  that  "a  corpo- 
ration is  liable  at  law,  upon  an  implied 
assumpsit,  for  services  rendered  before 
it  came  in  esse,  but  which  were  neces- 
sary to  perfect  its  organization,  and 
which,  after  such  organization  was 
perfected,  it  accepted,  and  the  benefits 
of  which  it  enjoyed."  Affirmed,  46  N. 
H.  284  (1865).  To  same  etfect.  Hall  v. 
Vermont,   etc.   Co.,   28  Vt   401  (1856). 

1 


Where  work  has  been  carried  on  by  the 
presiilent  for  liis  company,  he  is  allowed 
in  his  acroimting  credit  for  work  done, 
mati-rials  furnished,  and  money  ad- 
vanced before  as  well  as  after  the  full 
incorporation.  Grand  River  Bridge  Ca 
V.  Rollins,  13  Colo.  4  (1889). 

'  Freeman,  eta  Co.  v.  Osborn,  14  Cola 
App.  488  (1900).  An  attorney  may  re- 
cover from  the  corporation  his  fees  for 
incorporating  the  company.  Taussig  i*. 
St.  Louis,  etc.  Ry.,  166  Mo.  28  (1901).  In 
the  case  of  Merchants',  etc.  Bank  v.  Eck- 
els, 191  Pa.  St.  372  (1899),  where  a  lawyer 
sued  a  corporation  for  his  .services  in 
organizing  the  same,  the  court  held  that 
it  was  a  case  for'the  jury.  A  promoter 
who  obtains  all  the  subscriptions,  lets 
the  contracts,  superintends  the  con- 
struction of  the  building,  and  draws  the 
articles  of  incorporation,  is  entitled  to 
pay  from  the  corporation  after  it  is 
formed,  and  in  this  case  was  allowed 
$350.  Farmers'  Bank,  etc  v.  Smith,  49 
S.  W.  Rep.  810  (Ky.  1899).  A  lawyer 
may  recover  for  his  services  to  a  corpo- 
ration, even  though  he  is  president  and 
a  director  thereof.  Kenner  v.  White- 
lock,  152  Ind.  635  (1899).  See  also  §  657, 
siqyra. 

2Baily  v.  Burgess,  48  N.  J.  Eq.  411 
(1891). 

'  See  §  637,  supra. 


720 


^H.  XLIII.]  HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§  T09. 


by-laws,  increasing  or  decreasing  the  capital  stock,  authorizing 
amendments  to  the  charter,  and  dissolving  the  corporation.^  Of  the 
functions  of  the  stockholders  the  most  important,  perhaps,  is  that 
•of  making  by-laws.  The  law  is  clear  that  stockholders  in  meeting 
assembled  have  the  power  to  make  the  by-laws  of  the  corporation. - 
The  stockholders  also  have  the  power  to  accept  resignations  of 
directors  and  fill  vacancies  in  the  board.^ 

§  709.  Stockholders  cannot  carry  on  the  husiness  or  enter  into  con- 
tracts/or the  co7'2}o ration — These  are  the  functions  of  the  direct- 
ors—  One  i)erson  oivning  all  the  stock — ^^  Dummy ''^  corporations. — 
The  stockholders  cannot  enter  into  contracts  with  third  persons. 
Contracts  between  the  corporation  and  third  persons  must  be  entered 
into  by  the  directors  and  not  by  the  stockholders.  The  corporation, 
in  such  matters,  is  represented  bj^the  former  and  not  by  the  latter. 
Such  is  one  of  the  main  objects  of  corporate  existence.  To  the  di- 
rectors are  given  the  management  and  formation  of  corporate  con- 
tracts. The  stockholders  cannot,  in  meeting  assembled,  bind  the 
corporation  by  their  contracts  in  its  behalf.*  The  ratification  by 
the  stockholders  of  an  invalid  mortgage  made  by  the  directors  does 


iSee  Eidman  v.  Bowman,  58  111.  444 
(1871);  Metropolitan,  etc.  Ry.  v.  Man- 
hattan, etc.  Ry..  11  Daly  (N.  Y.),  377 
(1884).  As  to  increasing  or  reducing  the 
capital  stock,  see  >;  285,  supra;  amend- 
ing charter,  ch.  XXVIII,  supra;  dissolu- 
tion, ch.  XXXVIII,  supra. 

-For  a  full  discussion  of  the  subject 
of  by-laws,  see  §  4a,  supra. 

3  See  g§  603,  624,  supra. 

^Quoted  and  approved  in  Sellers  v. 
Greer.  172  III.  549  (1898),  rev'g  Greer  v. 
■Sellers,  64  111.  App.  505,  and  holding 
that  the  court  will  not  grant  specific 
performance  of  a  contract  of  one  of  the 
stockholders  to  sell  all  the  property  of 
the  corporation  to  another  stockholder, 
even  though  these  two  stockholders 
owned  nine  hundred  and  ninety-eight 
shares  of  the  one  thousand  shares  of 
the  capital  stock,  and  even  though  the 
holders  of  the  remaining  two  shares  of 
stock  were  merely  nominal  holders 
ithereof.  "When  a  charter  invests  a 
board  with  the  power  to  manage  the 
concerns  of  a  corporation  the  power  is 
exclusive  in  its  character.  The  corpora- 
tors have  no  right  to  interfere  with  it, 
And  courts  will  not,  even  on  a  petition 

17 


of  a  majority,  compel  the  board  to  do 
an  act  contrary  to  its  judgment.  The 
stockholders  as  such  in  their  collective 
capacity  could  do  no  corporate  act. 
The  directors  were  their  representatives 
and  alone  authorized  to  act."  McCul- 
lough  V.  Moss,  5  Denio,  567,  575  (1846). 
The  stockholders  do  not  make  the  con- 
tracts. Solomon  Co.  v.  Barber,  58  Kan. 
419  (1897).  Stockholders  cannot  make 
contracts  for  a  corporation,  except,  pos- 
sibly, in  meetings  at  which  every  stock- 
holder is  present.  Colorado,  etc.  Co.  v, 
American,  etc.  Co.,  97  Fed.  Rep.  843 
(1899).  Where  a  corporation  is  author- 
ized to  issue  preferred  stock  it  may  at- 
tach such  conditions  thereto  as  it  deems 
best.  One  of  the  conditions  may  be 
that  the  corporation  may  retire  the 
stock  at  par  within  a  certain  time.  In 
retiring  such  preferred  stock  tiie  cor- 
poration may  issue  additional  common 
stock  to  the  holders  of  the  old  common 
stock  without  giving  any  rights  to  the 
holders  of  preferred  stock.  Such  stock 
may  be  retired  by  a  vote  of  the  direct- 
ors without  a  vote  of  the  stockholders. 
Hackett  v.  Northern,  etc.  R  R.,  36  N.  Y. 
Misc.  Rep.  583  (1901).  In  Conro  v.  Port 
.'1 


§  T09.] 


now    COKPORATE    CONTIiACTS    AKE    MADE.  [CU.  XUII. 


not  validate  such  mortgage.'     The  stockholders  have  no  power  to 
elect  the  president.     Their  action  is  a  nullity.-     Stockholders  can- 
not elect  a  committee  and  compel  the  directors  to  act  with  that 
committee  in  corporate  matters.*     It  is  not  for  the  stockholders  to 
direct  how  money  received  on  the  issue  of  new  stock  shall  be  used.* 
A  resolution  of  the  stockholders  fixing  the  rates  of  mileage  to  bo 
paid  to  the  directors  is  not  binding  on  the  directors,  although  if 
enacted  into  a  by-law  it  wouUl  be  bimling.^   A  committee  appointed 
by  the  stockholders  to  arrange  to  meet  the  obligations  of  the  com- 
pany has  no  power  to  make  contracts.*^     An  assignment  for  the 
benefit  of  creditors  is  authorized  by  the  directors,  and  not  the  stock- 
holders.''    The  stockholders  have  no  power  to  sell  the  property  of 
the  corporation,  either  separately  or  collectively.*     It  is  legal  for 
the  directors  in  selling  property  of  the  company  to  make  it  a  con- 
dition of  the  sale  that  the  stockholders  shall  ratify  it.' 


Henry,  etc.  Co.,  12  Barb.  27  (1851),  a 
lease  of  iron  works  was  declared  void 
because  it  was  the  act  of  the  stock- 
holders and  not  of  the   directors.     In 
McCullough  n  Moss,  5  Denio,  567  (1846), 
a  promissory  note  signed  by  the  presi- 
dent and  secretary  of  the  corporation 
was   held   invalid   because  authorized 
only  by  the  stockholders  and  not  by 
the  directors;  Dana  r.  Bank  of  United 
States,  5  Watts  &  S.  (Pa.)  223,  245(1843); 
Union,  etc.  Co.  v.  Rocky  Mountain  Nut. 
Bank.  2  Colo.  565  (1S75),  holding  that  it 
is  for  the  directors  and  not  the  stock- 
holders to  repudiate  corporate  contracts 
made  by  an  authorized  agent;  Gash- 
wiler  V.  Willis.  33  Cal.  11  (1867),  holding 
that  the  stockholders  have  no  power  to 
authorize  a  sale  of  corporate  property. 
Such  authority  must  come  from   the 
directors.     The  stockholders  do  not  au- 
thorize contracts.    Alta  Silver  Min.  Co. 
V.  Alta  Placer  Min.    Co.,   78  Cal.   629 
(1889).'    Where  a  guaranty  authorized 
by  statute  is  to  be  by  the  company,  it 
may  be  by  the  directors  without  any 
action  of  the  stockholders.    Louisville 
Trust  Co.  r.  Louisville,  etc.  Ry.,  75  Fed. 
Rep.  433  (1896,.    The  stockholders  have 
no  power  to  authorize  a  mortgage.  Only 
the  board  of  directors  can  do  so.   Blood 
V.  La  Serena,  eta  Co.,  113  Cal.  221  (1896). 
See  also  §  808,  infra. 

17 


1  Curtin  r.  Salmon,  etc.  Co.,  130  Cal. 
345  (1900).  Resolutions  passed  at  which 
a  quorum  of  the  directors  is  not  present 
cannot  be  validated  by  action  of  the 
stock lioldera  Bassett  v.  Fairchild,  64 
Pac.  Rep.  1082  (Cal.  1901). 

2  Walsenberg  Water  Ca  u  Moore,  5 
Colo.  App.  144  (1894). 

»  Charlestown,  etc  Co.  v.  Dunsmore, 
00  N.  H.  85  (1880). 

*  Jones  V.  Concord,  etc.  R-  R,  67  N.  H. 
119  (1891);  S.  a,  67  N.  H.  234. 

5  Mutual  F.  Ins.  Co.  r.  Farquhar,  86 
Md.  668  (1898).  A  by-law  requiring  cer- 
tain corporate  instruments  to  be  ap- 
proved by  the  stockholders  before  being 
executed  does  not  apply  to  an  assign- 
ment for  the  benefit  of  creditors.  Goetz 
V.  Knie,  103  Wis.  366  ^899). 

6  Augsburg  Land,  etc  Co.  v.  Pepper, 
95  Va.  92  (1897). 

'  Rogers  r.  Pell,  154  N.  Y.  518  (1898). 

8  Rough  V.  Breitung,  117  Mich.  48 
(1898).  An  assignment  of  all  the  com- 
pany's property  would  not  be  within 
the  power  of  the  stockholders,  even 
though  all  signed  it,  without  formal  ac- 
tion at  a  meeting  held  for  that  pur- 
pose. De  La  Vergne,  etc  Co.  v.  Ger- 
man, etc.  Inst.,  175  U.  S.  40  (1899),  cit- 
ing the  above  section. 

^Kelsey  v.  New  England,  etc  Ry.,  60' 
N.  J.  Eq.  230  (1900). 


oo 


CH.  XLIII.]  HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§  T09. 


The  law  seems  to  be  clear  that  all  corporate  contracts  are  to  be 
made  by  the  directors.   This  includes  the  original  contracts  as  well 
as  modifications  of  them.     If  a  contract  is  within  the  express  or 
implied  powers  of  the  corporation,  then  the  directors  need  not  con- 
sult the  stockholders  nor  follow  their  wishes,  even  though  the  lat- 
ter constitute  a  majority  or  a  minority,  and  though  these  stock- 
holders object  in  meeting  assembled  or  individually  in  the  courts. 
Thus,  a  lease  of  the  corporate  property  is  authorized,  not  by  the 
stockholders,  but  by  the  directors.^     Even  though  a  statute  author- 
izing one  railroad  corporation  to  guarantee  the  bonds  of  another 
corporation  provides  that  such  guaranty  shall  be  made  only  upon 
a  petition  of  a  majority  in  interest  of  the  stockholders  of  the  former, 
yet  if  the  guaranty  is  actually  executed  by  order  of  the  board  of 
directors  without  any  such  petition,  a  bona  fide  purchaser  of  the 
bonds  may  enforce  such  guaranty,  although  a  purchaser  with  no- 
tice cannot  enforce  it.'     However,  if  the  contract  is  beyond  the 
express  and  implied  powers  of  the  corporation,  then  any  stock- 
holder may  have  the  contract  enjoined  or  set  aside.     He  can  do  so 
even  though  a  majority  of  the  stockholders  approve  the  act  and 
ratify  it  in  meeting  assembled.     He  may  resort  to  the  courts.^ 


iBeveridge  v.  New  York  Elev.  Ry., 
112  N.  Y.  1  (1889);  Flagg  v.  Manhattan, 
etc.  Ry.,  20  Blatchf.  143  (1881);  People 
V.  Metropolitan  Ry.,  26  Hun,  82  (1881); 
Nashua,  etc.  R.  R  v.  Boston,  etc.  R.  R.,  27 
Fed.  Rap.  821  (1886).     Contra,  Metropol- 
itan Ry.  V.  Manhattan  Ry.,  15  Am.  & 
Eng.  Ry.  Cas.  1  (1884).     Cf.  Harkness  v. 
Manhattan  Ry.,  54  N.  Y.  Super.  Ct.  174 
(1886);  Cass  v.  Manchester,   etc.  Co.,  9 
Fed.  Rep.  649  (1881);  also  §  712,  infra. 
Where  a  corporation  is  given  power  to 
lease  its  property  without  the  mode  of 
making  the  lease  being  prescribed,  it 
may  be  by  a  vote  of  the  majority  of  the 
stockholders.      Dickinson    v.    Consoli- 
dated, etc.  Co..  114 Fed.  Rep.  232  (1902); 
aff'd,  119  id.  871.     A  statute  requiring 
leases  by  corporations  to  be  first  ap- 
proved by  the  stockholders  applies  only 
to  leases  of  property  essential  to  the  ex- 
istence of  the  corporation  for  the  carry- 
ing on  of  its  business,  and  does  not  apply 
to  leases  of  a  small  portion  of  a  corporate 
property.  Such  statute  does  not  apply  to 
purely  private  corporations  at  all.   Coal, 
etc.  Co.  V.  Tennessee,  etc.  Co.,  106  Tenn. 
651  (1901).     Directors  are  never  obliged 


to  consult  the  stockholders  in  meeting 
assembled,  nor  as  a  majority,  as  regards 
corporate  contracts.  The  stockholders 
cannot,  by  suit  in  equity,  compel  the 
directors  to  enter  into  a  contract  of 
lease.  Ives  v.  Smith,  8  N.  Y.  Supp.  46 
(1889).  Stockholders  cannot  control  the 
direction  of  the  directors  when  the  lat- 
ter direct  an  assignment  to  be  made  for 
the  benefit  of  creditors.  So  held  though 
the  directors  were  to  go  out  of  oflSce  in 
four  days.  Hutchinson  v.  Green,  91  Mo. 
367  (1886).  An  extension  of  a  railway 
cannot  be  enjoined  merely  because  a 
majority  of  stockholders  oppose  it. 
Ultra  vires  must  be  alleged.  Moses  v. 
Tompkins,  84  Ala.  613  (1888). 

2  Louisville,  etc.  Ry.  v.  Louisville  Trust 
Co.,  174  U.  S.  553  (1899),  the  court  say- 
ing, "the  distinction  between  the  doing 
by  the  corporation  of  an  act  beyond  the 
scope  of  the  powers  granted  to  it  by 
law,  on  the  one  side,  and  an  irregularity 
in  the  exercise  of  the  granted  powers, 
on  the  other,  is  well  established,  and 
has  been  constantly  recognized  by  this 
court." 

3  See  ch.  XL,  supra,  and  ch.  XLIV, 


1723 


§  Tuy.j 


HOW    CORI'OliATK    CONTRACTS    ARE    MADE.  [cH.  XLIII. 


A  single  stockholder  cannot  make  a  contract  for  and  in  the  name 
of  the  corporation  which  shall  have  any  binding  force  or  validity, 
except  by  subsequent  ratification  or  adoption  by  the  corporation  in 
the  regular  manner.'  A  stockholder  may  of  course  be  appointed 
the  agent  of  the  corporation.'- 

A  company  is  not  lialjle  on  the  contracts  of  a  person  who  makes 
a  construction  contract  with  it,  even  though  that  person  is  the 
principal  stockholder  and  dominates  and  controls  tlie  action  of 
the  corporation.'     A  deed  of  corporate  property  by  a  person  who 


infra.  As  repjapls  the  relation  and 
ri-^htsof  stockholders  towards  suits  and 
compromises  of  suits  by  or  against  the 
corporation,  see  §  750,  infra. 

'  Morelock  v.  Westminster  Water  Co., 
4  Atl.  Rep.  404  (Md.  1880):  Mays  v.  Fos- 
ter, 13  Orej?.  214  (188G):  Rice  r.  Penin- 
Bular  Club.  52  .Alich.  87  (1883);  Berford 
V.  New  York  Iron  Mine.  4  N.  Y.  Supp. 
836  (1888).  See  also  §  625,  supra.  The 
misrepresentations  of  a  stockholder  in- 
ducing a  person  to  purchase  stock  of 
the  corporation  are  not  binding  on  the 
corporation.  Burnes  i".  Pennell,  2  H.  L. 
Cas.  497.  519  (1849).  The  circumstances 
that  a  person  is  a  member  of  an  incor- 
porated company  gives  him  no  author- 
ity to  release  a  debt  due  to  the  corpora- 
tion. Harris  v.  Muskingum,  etc.  Co.,  4 
Blackf.  (Ind).  267(1836).  A  stockholder 
cannot  bind  the  corporation.  Jones  v. 
"Williams,  139  Mo.  1  (1897).  Where  all 
the  individuals  composing  a  corpora- 
tion covenanted  in  behalf  of  such  cor- 
poration for  themselves  and  tlieir  heirs 
that  the  corporation  should  do  certain 
acts,  they  were  held  to  be  bound  per- 
sonally. Tileston  v.  Newell,  13  Mass. 
406  (1816).  In  a  suit  to  recover  damages 
of  a  corporation  for  flooding  the 
plaintiff's  land,  it  was  held  error  to  ask 
a  witness  whether  individual  members 
of  the  company  had  employed  him  to 
deprive  tlie  plaintiffs  of  their  claim. 
Shay  r.  Tuolumne,  etc.  Co.,  6  Cal.  74 
(18561  Where  the  plaintiff  claims  the 
amount  of  his  disbursements  for  work 
on  the  defendant  corporation's  road, 
but  the  evidence  does  not  prove  a  re- 
quest to  the  plaintiff  by  the  corpora- 

1 


tion,  its  directors,  or  authorized  agent, 
or  any  stipulation,  ex  pressed  or  implied, 
to  authorize  a  charge  against  tlie  cor- 
l)oration  for  such  disbursements,  no 
act  of  an  individual  member  can  be 
held  to  bind  the  corporation.  Hayden 
V.  Middlesex,  etc.  Corp,  10  Mass.  397 
(1813).  The  intention  of  a  corporation 
can  only  be  learned  by  tlie  language  of 
its  recorded  act«»;  and  neither  the  pri- 
vate views  nor  the  public  declarations 
of  individual  members  of  such  corpora- 
tion are  for  this  purpose  to  be  inquired 
after.  Thu.s.  a  plaintiff  resisting  a  tax 
may  not  establish  its  legality  by  evi- 
dence as  to  the  intent  of  those  voting 
the  levy.  Bartlett  v.  Kingslej',  15  Conn. 
327  (1843).  Stockholders'  contracts  do 
not  bind  the  corporation.  American 
Preservers'  Co.  v.  Norris,  43  Fed.  Rep. 
711  (1890);  Wright  v.  Lee,  2  S.  D.  .596 
(1892).  Damages  may  be  recovered  by 
a  corporation  for  a  fraud  practiced 
upon  it,  even  though  an  agent  of  the  cor- 
poration who  aided  in  the  perpetration 
of  the  fraud  was  a  stockholder  in  the  cor- 
poration. Grand  Rapids,  etc.  Co.  v.  Cin- 
cinnati, etc.  Co.,  45  Fed.  Rep  671  (1891). 

2  Stoddard  r.  Port  Tobacco  Parish,  2 
Gill  &  J.  (Md.)  227  (1830),  where  a  relig- 
ious corporation  employed  a  member 
of  its  vestry  to  make  sale  of  pews; 
Spear  v.  Ladd,  11  Mass.  94  (1814),  where 
the  president  of  a  bank  was  appointed 
its  agent  to  indorse  a  note;  Northamjv 
ton  Bank  v.  Pepoon,  11  Mass.  288  (1814): 
Bank  Commissioners  v.  Bank  of  Brest. 
Harr.  Cb.  (Mich.)  106  (1840>. 

3  Central  Trust  Co.  v.  Bridges,  57  Fed. 
Rep.  753  (1893). 

724 


CH.  XLIII.]  HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§  709. 


owns  all  the  stock  does  not  convey  good  title. ^     Although  one  per- 
son owns   a   majority  of  the  stock,-  or  all  of  it,^  or  all  but  two- 


1  Parker  v.  Bethel  Hotel  Co.,  96 Ten n. 
253  (1896).  In  this  case  some  of  the 
stock  had  been  pledged.  The  stock- 
holders, as  such,  cannot  convey  the  real 
estate  of  the  corporation,  though  they 
all  join  in  the  deed,  unless  the  execu- 
tion is  in  pursuance  of  some  vote  of  the 
corporation.  Isham  v.  Bennington  Iron 
Co.,  19  Vt  230  (1847);  Wheelock  v.  Moul- 
ton,  etc.,  15  Vt.  519  (1843).  Even  though 
a  person  owns  all  but  two  shares  of  the 
capital  stock,  yet  a  transfer  of  corporate 
property  by  him  is  ineffective  to  con- 
vey title.  Buffalo,  etc.  Co.  v.  Medina, 
etc.  Co..  162  N.  Y.  67  (1900).  Even  tliough 
the  president  and  a  director  own  all  the 
stock,  yet  they  cannot  execute  a  mort- 
gage in  behalf  of  the  corporation  where 
there  are  four  otlier  directors,  who  are 
nominal  stockholders.  Union,  etc. 
Bank  v.  State,  etc.  Bank,  155  Mo.  95 
(1900). 

2  Hopkins  v.  Roseclare  Lead  Co.,  72  111. 
373  (1874 >.  He  cannot  sell  the  corporate 
property.  The  person  owning  a  ma- 
jority of  the  stock  cannot  contract  for 
the  corporation,  and  a  contract  in  its 
name  made  by  him  is  not  binding  on  it. 
Allemong  v.  Simmons,  124  Ind.  199 
(1890).  Where  a  construction  contract 
is  signed  by  an  individual  in  his  own 
name,  the  corporation  is  not  liable  on  it, 
although  he  owned  nearly  all  the  stock 
and  the  work  was  for  its  benefit.  Donog- 
huev.Indiana.etc.Ry..  87  Mich.  13(1891). 
Where,  however,  a  part  of  the  stock- 
holders contract  to  sell  the  corporate 
property  to  a  third  person,  they  are  lia- 
ble in  damages  for  breach  of  the  con- 
tract. Curtis  V.  Watson,  64  Vt.  536 
(1892). 

^  • '  The  property  of  a  corporation  is  not 
subject  to  the  control  of  individual 
members,  whether  acting  separately  or 
jointly.  They  can  neither  incumber 
nor  transfer  that  property,  nor  author- 
ize others  to  do  so.  The  corporation  — 
the  artificial  being  created  —  holds  the 

r 


property,   and  alone  can  mortgage  or 
transfer  it;  and   the  corporation   acts 
only  through  its  officers,  subject  to  the 
conditions  prescribed  by  law."    Hum- 
phreys u.McKissock,  140  U.  S.  304  (1891). 
On  this  subject,  see  §§  663,  664,  supra. 
A    railroad   company  owning  all   the 
stock  and    bonds  of  another  company 
does  not  own  the  property  of  the  latter, 
and  cannot  sue  on  a  cause  of  action  be- 
longing to  the  latter.      Fitzgerald   v. 
Missouri   Pac.    Ry.,   45  Fed.    Rep.    813 
(1891).     Stockholders  who  transfer  the 
corporate  property  are  jointly  and  sev- 
erally   liable    to    corporate    creditors. 
Graham  v.  Hoy,  .38  N.  Y.  Super.  Ct.  506 
(1875).     The  fact  that  the  manager  of  a 
corporation  and  his  brothers  own   all 
the  capital  stock  does  not  make  their 
acts  the  acts  of  the  corporation.     Bank 
of  Monroe  v.  Gifford,  72  Iowa,  750  (1887). 
Stockholders  owning  all  the  stock  and 
bonds   of  a  road   cannot  destroy   the 
same  and  then  sell  the  road  to  another 
company.     Gulf,  etc.  Ry.  v.  Morris.  67 
Tex.  692  (1887).    See  also  Button  v.  Hoff- 
man, 61  Wis.  20  (1884),  where  it  is  held 
that  such  a  stockholder  is  not  the  cor- 
poration.     Contra,  Swift  v.  Smith.  65 
•Md.    428  (1886).     A   railroad    company 
owning  practically  all  of  the  stock  of 
another  company  may  lease  the  line  of 
the  latter  company  to  another  company. 
Chicago,  etc.  Ry.  v.  Union  Pac.  Ry.,  47 
Fed.  Rep.  15(1891).     A  bridge  owned  by 
a  bridge  corporation  is  not  to  be  taxed 
as   railroad   property,  even  though  its 
stock  is  owned  by  the  stockholders  in  a 
railroad  corporation,  and  the  stock  has 
been  pledged  to  such  railroad  corpora- 
tion,   and    the    bridge    itself    leased 
to  the  latter.     St.  Louis,  etc.   Ry.   v. 
Williams,  53  Ark.  58  (1890).     Where  a 
corporation  or  person  owns  all  the  stock 
and  bonds  of  another  corporation,  and 
causes  the  latter  to  lease  all  its  property, 
it  is  legal  to  have  the  rent  made  payable 
to  the  first-named  cor[X)ration  or  per- 

•9r, 


§  TOO.] 


now    CORI'iJltATE    CONTRACTS    AUK    MADE. 


[ou. 


XLIII. 


sliaros,'  he  does  not  in  consequence  thereof  acquire  the  right  to  act 
for  the  corporation,  or  as  the  corporation,  indepemlently  of  the 
directors.  One  person  may  own  all  the  stock,  and  yet  the  exist.- 
ence,  relations,  and  business  methods  of  the  corporation  continue.- 


son.      Union  Pac.  Ry.  v.  Clucago.  etc, 
Ky.,  51  Fed.  Rep.  309  (1892).    The  sole 
owner  of  the  entire  capital  stock  can- 
not collect  a  corporate  debt  by  a  suit 
in  his  own  name.     Randall  v.  Dudley, 
111   Mich.   437   (1897).     Tlie  corporate 
entity  is  distinct,  although  one   party 
owns  the  whole  stock.    Exchange  Bank 
V.  Macon  Constr.  Co..  97  Tenn.  1  (189",). 
Tike  fact  that  one  person  owns  all  the 
stock  does  not  dissolve  the  corporation. 
Harrington  v.  Connor.  51  Neb.  2U(1897). 
See  also  ^  631,  siiprcu    Specific  perform- 
ance of  a  contract  to  sell  stock  will 
be  decreed  where  the  property  of  the 
corporation  is  real  estate  —  a  brewery  — 
and  the  real  transaction  is  a  sale  of  the 
entire  property.     Megibben  v.  Perin,  49 
Fed.  Rep.  183  (1892). 

'  England  v.  Dearborn,  141  Mass,  590 
(1886),  holding  that  such  a  stockholder 
can  not  mortgage  the  corporate  property. 
2  Newton  Mfg.  Co.   v.  White,  43  Ga. 
148  (1871).     See  also  Sharp  v.  Dawes,  2 
Q.  B.D.  26(1876);  Button  v.  Hoffman, 
61  Wis."  20  (1884);  Swift  v.  Smith.  05 
Md.  428   (1886);  England  v.  Dearborn, 
141  Mass.  590  (1880);  Hopkins  v.  Rose- 
clare  Lead  Co.,  72  III.  383  (1874);  Bellona 
Co.'s  Case,  3  Bland  (Md.),  442.  446  (1831); 
Farmers',  etc.   T.  Co.   r.  Chicago,   etc. 
Ry.,  39  Fed.  Rep.  143  (1889).    The  rule 
is  the  same  where  two  persons  buy  all 
the  stock.    Russell  v.  McLellan,  31  Mass. 
63  (1833).    The  corporation  still  subsists, 
and  the  two  purchasers  do  not  become 
partners,  or  joint  tenants,  or  tenants  in 
common  of  the  corporate  property.     Cf. 
Commonwealth  v.  Cullen,   13   Pa,   St. 
133  (1850).     Although  one  person  owns 
all  or  nearly  all  the  stock  he   cannot 
act  as  though  he  was  the  corporation. 
Chase  v.  Michigan,  etc.  Co.,  121  Mich. 
631  (1899).    The  employment  of  a  per- 
son as  general  manager  is  not  proved 
by  proving  that  the  person  who  owned 


all  the  stock  of  the  corporation  so  em- 
ployed him.     Hammond  t'.  Hammond, 
etc.    Co.,  72  Conn.   130  (1899).      Even 
though   two  persons    own    the   entire 
capital  stuck  of  a   railroad   company, 
yet  if  they  use  a  part  of  its  assets  for 
their    own     individual    purposes    and 
make  false  entries  on  the  books,  some 
of  the  entries  showing  cash  on  hand, 
but    which   is  not  on    hand,  they  are 
liable  to  the  company  later  when  it  lias 
passed  into  other  handa     Saranac,  etc 
Co.  R  R.  r.  Arnold.  107  N.  Y.  308(1901). 
For  an   interesting   discussion   of  the 
question  as  to  why  an  artificial  exist- 
ence   of    the   corporation,    as    distin- 
guished   from   that     of    stockholders, 
should  be  ignored,  see  Cincinnati,  etc. 
Co.    V.   Hoffmeister.  62    Ohio    St   189 
(1900);  and  Andres  v.  Morgan.  62  Ohio 
St  236  (1900X    In  the  case  of  First  Na- 
tional Bank,  etc.  r.  Winchester,  119  Ala. 
108  (1898),  where  a  jirivate  corporation 
had  but  four  stockholders,  and  two  of 
them  bought  the  stock  of  the  other  two 
and  paid  therefor  by  notes  signed  by 
them  and  the  corporation  and  secured 
by  mortgage  on  the  corporate  property, 
the  court  held  that  the  notes  were  not 
enforceable  against  the  corporation  but 
held  that  the  mortgage   was  legal  as 
against  subsequent  creditors,  mortga- 
gees, and  purchasers  from  the  corpora- 
tion who  took  with  notice  of  the  facts. 
Approving  Swift  v.  Smith,   65  Md.  428 
(1886).     Ownership  of  all  the  stock  by 
one  person  does  not  dissolve  the  corpo- 
ration.    Louisville,  etc.  Ca  v.  Kaufman, 
105  Ky.  131    (1898).     Even  though  one 
man  owns  a  majority  of  the  stock  of 
two  corporations,  and  they  have  deal- 
ings with  each  other,  yet  upon  the  in- 
solvency of  the  one  a  claim  of  the  other 
is  to  be  allowed  the  same  as  the  debt  of 
any  other  creditor.     Lange  v.  Burke,  69 
Ark.  85  (1901).    A 


corporation  owning 


1726 


<3H.  XLIII.]  HOW    COKPORATE    CONTKACTS    AKE    MADE. 


[§  T09. 


Although  one  water-works  company  owns  all  the  stock  of  another 
water- works  company,  a  mortgage  given  by  the  former  company  on 
all  its  property  does  not  cover  the  property  of  the  latter  company 
as  against  bona  fide  purchasers  of  bonds  of  the  latter  company.^ 

A  railroad  company  owning  all  the  stock  and  bonds  of  another 
company  does  not  own  the  property  of  the  latter,  and  cannot  sue 
on  a  cause  of  action  belonging  to  the  latter  ;2  and  ordinarily  is  not 
liable  for  its  debts.^ 

There  are,  however,  two  exceptions  to  the  rules  given  above. 
The  first  is  that  corporate  action  may  arise  in  other  ways  than  by 
the  formal  action  of  its  board  of  directors  or  meeting  of  stockholders 
■or  of  its  agents.  It  may  arise  by  a  long  course  of  dealing  which 
€stops  the  corporation  from  denying  the  legality  of  that  mode  of 
dealing,*  or  by  the  corporation  acquiescing,  or  by  its  accepting  the 
benefits  of  the  transaction.*     It  may  arise  by  passively  allowing 


all  the  stock  of  another  corporation  is 
not  liable  for  the  rent  due   from  the 
latter   to  a    third     corporation,    even 
though  said  third  corporation  charges 
that  the  accounts  of  the  lessee  are  not 
properly  kept  by  such  owner  of  all  its 
stock.     East  St.  Louis,  etc.  Ry.  v.  Jar- 
vis,  92  Fed.  Rep.  735  (1899).     In  a  suit 
by  a  corporation  to  obtain  property,  in 
accordance  with  a  contract,  a  trustee 
who  is  holding  all  the  stock  for  the 
benefit  of  the    stockholders  is  not  a 
proper  party.     Havana,  etc.  Ry.  v,  Ce- 
ballos.  49   N.  Y.   App.    Div.   263   (1900). 
Even  though  one  person  owns  all  the 
«tock  except  two  shares,  in  a  suit  by 
the  corporation  such  stockholder  should 
not  be  joined.     Fox  v.  Robbins,  62  S.  W. 
Rep.  815  (Tex.  1901).     Even  though  a 
bank,  in  order  to  handle    real  estate 
which  it  acquires  on  foreclosure,  organ- 
izes a  corporation  and   owns    all    the 
stock  and  is  tlie  sole   creditor  of  such 
corporation,  yet   it  cannot  ignore  the 
corporate  existence  and  convey,  incum- 
ber, or  deal  with  the  property   as  its 
own.     Watson  v.  Bonflls,  116  Fed.  Rep. 
157  (1902).     The  fact  that  one  person 
owns  all  the  stock  of  a  corporation  does 
not  make  him  and  the  corporation  one 
and  the  same  person.     The  corporation 
-continues  to  exist.    State  v.  Morgan's, 
«tc.  Co.,  106  La.  513  (1901). 


1  National  Water-works  Co.  u  Kansas 
City.  78  Fed.  Rep.  428  (1896).  See  also 
g§  663,  664,  supra. 

2  Fitzgerald  v.  Missouri  Pac.  Ry.,  45 
Fed.  Rep.  812  (1891).  See  also  §§  663, 
664,  supra. 

3  Although  one  railroad  owns  or  con- 
trols all  the  stock  of  another  railroad, 
yet  the  former  is  not  personally  liable 
for  the  negligence,  debts,  etc.,  of  the 
latter.  Atchison,  etc.  R.  R.  v.  Coch- 
ran, 43  Kan.  225  (1890).  When  a  corpo- 
ration or  person  owns  all  the  stock  and 
bonds  of  another  corporation  and  causes 
the  latter  to  lease  all  its  property,  it  is 
legal  to  have  the  rent  made  payable  to 
the  first-named  corporation  or  person. 
Union  Pac.  Ry.  v.  Chicago,  etc.  Ry.,  51 
Fed.  Rep.  309  (1892). 

4  See  many  cases  in  the  succeeding 
sections  relative  to  the  authority  of 
various  officers.     80  N.  Y.  App.  Div.  85. 

*Even  though  an  assignment  by  an 
insolvent  corporation  may  be  only  by 
vote  of  the  stockholders,  yet  if  made 
on  a  vote  of  the  directors  and  the  stock- 
holders acquiesce  for  a  considerable 
time  it  is  legal.  Young  v.  Improvement 
etc.  Assoc,  48  W.  Va.  512  (1900).  A 
contract  between  two  street  railway 
companies,  whereby  one  is  given  the 
right  to  run  its  cars  over  the  tracks  of 
the  other,  is  valid,  even  though  it  has 


1727 


§  TOO.] 


now    CORl'OKATE    CuNTKACTS    ARE    MADE.  [CIJ.   XLIII. 


itself  to  be  used  as  an  instrument  of  wrong  or  illegal  acts.'  It  is  to 
be  borne  in  mind  also  that  by  unanimous  consent  a  corporation  may 
do  many  acts  which  ordinarily  would  be  ultra  vires  of  the  corpora- 
tion.'- It  is  also  a  principle  of  law  that  a  person  buying  the  securi- 
ties of  a  company  is  not  bound  always  to  inquire  whether  regular 
corporate  action  has  been  taken.  Tiie  supreme  court  of  the  United 
States  says:  "One  who  takes  from  a  railroad  or  business  corpora- 
tion, in  good  faith,  and  without  actual  notice  of  any  inherent  defect, 
a  negotiable  obligation  issued  by  order  of  the  board  of  directors, 
signed  by  the  president  and  secretary  in  the  name  and  under  the 
seal  of  the  corporation,  and  disclosing  upon  its  face  no  want  of 
authority,  has  the  right  to  assume  its  validity,  if  the  corporation 
could,  by  any  action  of  its  officers  or  stockholders,  or  of  both,  have 
authorized  the  execution  and  issue  of  theol)ligation."'  The  second 
exception  is  that,  where  a  corporation  is  merely  a  "dummy,"  the 
court  has  power  to  ignore  its  corporate  existence  and  to  hold  tiiat 
the  acts  of  the  stockholder  are  the  acts  of  the  corporation  itself.* 

Thus,  where  a  railroad  company  causes  a  telegraph    company 
to  be  incorporated,  and  subscribes  to  all  its  stock  and  ap))oints  all 

not  been   authorized  by  the  board  of  mission  of  his  employment,     Clarke  v. 

directors  or  a  meeting  of  the  stockhold-  Warwick,  etc,  Co.,  174  Mass.  434  (1899). 

ers,  it  being  shown,  however,  that  the  'People  v.  North  River  Ca,  121  N.  Y. 

oflScers  made  the  contract  and  that  it  oS2.  G19  (1890).     But  an  agreement  of 

was   approved   by  a   majority  of  the  tiie  stockholders  of  a  corporation  that 

stockholders,  and  was  reported  at  the  they  will  not  compete  with  a  "trust" 

next  meeting  of  the  stockholders  and  into  which  they  have  entered  will  not 

was  not    objected    to,   and    lias  been  bind   the  corporation   itself.      It   may 

carried  into  effect  and  payments  made  revive    its  business,  even    though   its 

and  operation  carried  on  in  accordance  stockholders  are  the  ones  who  entered 

therewith.     South,  etc.  Ry.  v.  Second  into  the  "trust."'  American  Preservers' 

Ave.  etc.  Ry.,  191  Pa.  St.  493  (1899).     A  Ca  r.  Norri.s  43  Fed.  Rep.  711  (1890). 

contract   made  by  a  majority   stock-  -  See  §  3,  supra. 

holder  is  binding  on  the  corporation  if  !* Louisville,    eta    Ry.    v.    Louisville 

the   corporation  with  full   knowledge  Trust  Co..  174  U.  S.  552,  573  (1899),  the 

ratifies  the  contract  by  accepting  the  court  saying  also  that  the  records  of 

benefits  of  it.     Dupignac  v.  Berustrom,  the  corporation  and  its  board  of  direct- 

37  N.  Y.  Misc.  Rep.  678  (1902;;  aflfd,  76  ors  are  private  records  which  a  person 

N.  Y.  App.  Div.  105.     Even  though  the  dealing   with    the   corporation   is  not 

directors  have  not  especiallj'  authorized  bound  to  inspect  as  he  would  be  bound 

a  mortgage,  yet,  if  the  parson  who  owns  in  case  of  a  public  record, 

practically  all  the  stock  takes  part  in  *  See  g§  663,  664,  supra.    Although  a 

the  transaction  and  the  corporation  re-  new  railroad   corporation   is  clearly  a 

ceive*  the  benefit  of  it,  the  mortgage  "dummy"  corporation,  its  incorpora- 

is  good.     Auten  v.  City,  etc.  Ry.,  104  tors  andofficers  being  oflScers  in  another 

Fed.   Rep.  395   (1900).     A  record  of  a  railroad  corporation,  and  its  expenses 

stockholders'  meeting  showing  accept-  being  paid  by  the  latter  company,  still 

ance  of  an  auditor's  report  is  an  ad-  it  is  a  legal  corporation.    Southern  Kan- 
sas, etc.  R.  R  V.  Towner,  41  Kan.  72  (1889). 
1728 


en.  XLiii.]  now  corpokate  contkacts  ake  made.      [§§  710,  711. 

its  officers,  and  holds  it  out  as  the  future  owner  of  a  telegraph  sys- 
tem which  the  railroad  owns,  and  then  sells  that  system  to  some 
one  else,  a  person  contracting  with  the  telegraph  company  on  the 
faith  of  the  scheme  being  carried  out  may  hold  the  railroad  com- 
pany liable  on  the  contract,  on  the  principle  of  law  that  a  principal 
is  liable  on  the  contracts  of  its  agents.^ 

Where  the  corporation  does  business  by  organizing  branch  cor- 
porations, and  the  stockholders  in  the  latter  are  disregarded,  and 
the  main  corporation  pays  up  the  stock  and  manages  it  without  re- 
gard to  its  corporate  character,  the  property  of  the  branch  corpora- 
tion is  subject  to  the  debts  of  the  parent  company .^ 

Sometimes  a  "dummy"  corporation  is  used  to  hold  land,  the 
stockholders  being  aliens  or  foreign  corporations.' 

§710.  The  expulsion  of  stockholders. —  The  law  forbids  the  di- 
rectors or  stockholders  of  a  corporation  having  a  capital  stock 
from  depriving  him  of  his  rights  as  a  stockholder.  He  certainly 
cannot  be  deprived  of  his  right  to  dividends  equally  with  other 
stockholders.*  He  cannot  be  deprived  of  his  right  to  vote.*  And 
it  is  clear  that  his  various  rights  as  a  stockholder  cannot  be  taken 
from  him  by  any  or  all  of  the  other  stockholders.  In  this  respect 
a  corporation  having  a  capital  stock  is  clearly  different  from  a  cor- 
poration formed  for  religious,  social,  charitable,  and  similar  pur- 
poses. The  former  is  for  purposes  of  gain,  and  the  property  which 
is  represented  by  stock  cannot  be  taken  from  a  stockholder  by  ex- 
pelling him  from  the  corporation.^  It  is  doubtful  whether  a  stock 
corporation  can  impose  a  fine  upon  the  stockholder  for  a  violation 
of  its  by-laws.' 

§  711.  Stockholders  cannot  change  the  directors  except  at  elec- 
tions-—  The  term  of  office  of  directors  is  usually  fixed  by  the  char- 
ter of  the  corporation  or  the  statutes  applying  to  it.  Such  being 
the  case,  a  director  having  been  elected  is  entitled  to  hold  his 
position  until  the  expiration  of  his  term  of  office.  He  cannot  be 
turned  out  either  by  the  stockholders,*  or  the  directors,  or  by  a 

1  Interstate  Tel.  Co.  1'.  Baltimore,  etc.  Concerning  expulsion  in  general,  see 
Tel.  Co.,  51  Fed.  Rep.  49  (1892).  §  504,  supra. 

2  Day  V,  Postal  TeL  Co.,  66  Md.  354  '  Monroe,  etc.  Assoc,  u  Webb,  40  N.  Y. 
(1887).  App.  Div.  49  (1899). 

3  See  5  694,  supra,  8  imperial,  etc.  Hotel  Co.  v.  Hamp- 
<See  §  540.  mpra.  son,  L.  R.  23  Ch.  D.  1  (1882);  Powers  v. 
5  See  §  623,  supra.  Blue,  etc.  Assoc,  86  Fed.  Rep.  705  (1898); 
«  The  right  to  forfeit  stock  for  non-    Nathan  v.  Tompkins,  82  Ala.  437  (1886), 

payment  of  calls  may  possibly  be  called  holding  also  that  an  election  is  wholly 
an  "  expulsion,"  but  is  a  misuse  of  that  void  where  part  of  those  elected  are  to 
term.  See  ch.  VIII,  supra.  Brokers'  fill  the  place  of  officers  illegally  re- 
associations  frequently  have  by-laws  moved,  there  bemg  no  particular  per- 
authorizing  the  expulsion  of  members,  sons  designated  to  fill  the  legal  vacan- 
(109)  1729 


§711.] 


now    COKPOKATE    CONTRACTS    ARE    MADE. 


[CU.  XLIII. 


court.'  Sometimes,  however,  the  charter,  statutes,  or  by-hiws  author- 
ize and  empower  the  stockholders  to  remove  directors  at  any  time.' 
And  where  the  stockholders  have  power  by  charter  or  statute  to 
remove  directors  for  cause,  the  exercise  of  their  discretion  therein 
will  not  be  reviewed  in  equity.'  So,  likcwi.sc,  where  such  a  power 
is  <^iven  to  the  stockhohlers,  a  court  of  chancery  will  not  enjoin  the 
holding  of  a  meeting  called  by  the  stockholders  to  consider,  among 
other  matters,  the  removal  of  the  directors.*  Tlie  president  of  the 
corporation,  duly  elected  by  the  board  of  directors,  does  not  hold 
his  position  at  the  pleasure  of  the  board.* 

The  stockholders  of  a  corporation  at  a  special  meeting  dul}; 
called  may  amend  the  by-laws  so  as  to  authorize  the  board  of  di- 
rectors to  remove  the  president  and  treasurer,  and  the  board  of 

cies.     See  also  Berry  u.  Cross,  3  Sandf.  from  oflice  simply  because  they  have 

Ch.  1  (1845);  Gorman  v.  Guardian  Sav.  sold  all  thecorporate  property  to  them- 

Bank,  4  Mo.  App.  180  (1877).     Cf.  dicta  selves.     The  proper  remedy  is  a  suit  to 

in   State   v.  Brice,  7   Ohio   (pt  2d),  82  set  aside  the  sale.     Stanley  v.  Luse,  30 

(1836);  Adamantine  Brick  Co.  v.  Wood-  Oreg.  2.5  (18'J9). 

ruff,  4  MacArthur,  318  (1880);  Burr  v.  -Such  is  the  law  in  Ohio,  West  Vir- 
McDonald,  3  Gratt.  (Va.)  215  (1840);  pinia,  and  many  other  states.  Such. 
Bay  1  ess  y.  Orme.  Freem.  Ch.  (Miss.)  101  also,  is  the  law  api)licabie  to  national 
(1841).  A  director,  however,  may  re-  banks.  See  U.  S.  Rev.  St,  §  5130;  also 
sign,  and  in  such  a  case  the  corporation  Taylor  v.  Iluttou,  43  Barb.  195  (1864). 
may  accept  the  resignation.  Cloutman  Where  by  statute  "two-thirds  of  the 
V.  Pike.  7  N.  H.  209  (1834),  a  municipal  stockholders"  may  remove  any  director 
corporation  case.  In  England  the  by-  from  olVice,  this  means  holders  of  two- 
laws  generally  give  the  stockholders  thirds  of  the  stock,  the  statute  further 
the  power   to  remove  directors.     See  providing  that  each  share  of  stock  shall 


Browne  v.  La  Trinidad,  L.  R.  37  Ch.  D. 
1  (1887);  Isle  of  Wight  Ry.r.  Tahourdin, 
L.  R.  25  Ch.  D.  320  (1883)..  Where  in  a 
corporation    the  state  itself   is    repre- 


have  one  vote.  State  v.  Horan.  22 
Wash.  197  (1900).  The  fact  that  a  sec- 
retary's salary  is  annual  does  not  pre- 
vent the    company   from   discharging 


sented  by  a  certain  number  of  director-s,     him   at  anytime,   where  the  by-laws 


the  state  may  remove  those  directors 
at  any  time,  and  appoint  others  in  their 
place.  Tucker  v.  Russell,  82  Fed-  Rep. 
263  (1897). 

1  Johnston  v.  Jones,  23  N.  J.  Eq.  210 
(1872).  See  also  j;  624,  supra,  and  §  740, 
infra.  In  the  case  of  State  v.  Boston,  etc. 
Ca,  22  Mont  220  (1899).  a  question  was 
raised,  but  not  decided,  as  to  the  right 
of  a  court  to  remove  directors.  A  di- 
rector cannot  be  excluded  from  his  du- 
ties as  such,  nor  can  his  election  be  de- 


provide  for  removal  atany  time.  Doug- 
lass v.  Merchants' Ins.  Co..  118  N.  Y.  484 
(1890).  The  president  may  remove  the 
teller.  Harrington  v.  First  Nat  Bank, 
Thompson's  N.  B.  Cas.  760  (1873). 

3  Inderwick  v.  Snell,  2  Macn.  &  G. 
216  (1850). 

4  Isle  of  Wight  Ry.  v.  Tahourdin,  L. 
R.  25  Ch.  D.  320  (1883). 

5  Archer  v.  People's  Sav.  Bank,  88 
Ala.  249  (1889).  Where  three  out  of 
five  directors  met  without  notice  to  the 


clared  invalid,  merely  because  of  what  other  two,  and  deposed  the  president 
he  may  contemplate  doing  as  a  director,  and  authorized  a  mortgage,  their  acts 
Ohio,  etc.  Co.  v.  State,  49  Ohio  St.  668  are  void.  Hatch  v,  Johnson  L.  &  T. 
(1892).      Directors     cannot    be    ousted     Ca,  79  Fed.  Rep.  82S  (1895). 

1730 


€H.  XLIII.]  HOW    COEPORATE    CONTRACTS    ARE   MADE.  [§  712. 

•directors  may  subsequently  make  such  removal  under  the  amended 
by-laws.^  A  voluntarj^  unincorporated  association  without  articles, 
constitution,  or  rules  may  remove  its  president  or  other  officer  at 
any  time  and  without  notice,  except  that  the  meeting  held  for  that 
purpose  must  be  duly  held,  and  such  meeting  cannot  expel  a  mem- 
ber without  notice.^ 

§  712.  Directors  —  Tlieirimiver  as  a  hoard  and  as  individuals  to 
contract  for  the  corporation  —  Batification  ly  the  directors. —  All 
contracts  of  a  corporation  are  to  be  made  by  or  under  the  direction 
of  its  board  of  directors.  The  board  of  directors  make  corporate 
contracts  by  a  regular  vote  of  the  board;  or  by  authorizing  an 
agent  to  make  them ;  or  by  allowing  an  agent  to  assume  and  ex- 
ercise that  power;  or  by  accepting  a  contract  or  its  benefits  after 
it  has  been  made  by  an  unauthorized  agent.  And  in  all  cases  the 
board  of  directors  and  not  the  stockholders,  nor  the  president,  sec- 
retary, treasurer,  or  other  agent,  is  the  original  and  supreme  power 
in  corporations  to  make  corporate  contracts.  The  stockholders, 
indeed,  have  very  few  functions.^  The  board  of  directors  have  the 
widest  of  powers.  All  of  the  various  acts  and  contracts  which  a  cor- 
poration may  enter  into  ^  are  entered  into  by  and  through  the  board 
of  directors.  The  board  of  directors  make  or  authorize  the  making 
of  the  notes,  bills,  mortgages,  sales,  deeds,  liens,  and  contracts  gen- 
erally of  the  corporation.  They  appoint  the  agents,  direct  the  busi- 
ness, and  govern  the  policy  and  plans  of  the  corporation.  The  di- 
rectors elect  the  ofiicers,  and  in  this  connection  it  may  be  added  that 
"at  common  law  there  is  no  limit  to  the  number  of  offices  which 
may  be  held  simultaneously  by  the  same  person,  provided  that 
neither  of  them  is  incompatible  with  any  other."  ^  They  institute, 
prosecute,  compromise,  or  appeal  suits  at  law  and  in  equity  which 
the  corporation  brings  or  has  brought  against  it.® 

But  there  are  limitations  on  their  powers.  If  the  board  of  di- 
rectors attempt  to  do  an  act  or  make  a  contract  which  the  corpo- 
rate charter  does  not  give  the  corporation  the  power  to  do  or  enter 

1  In  re  GriflSng  Iron  Co.,  63  N.  J.  L.  not  an  individual  right,  but  is  subject 
168  (1898):  aflf'd,  63  N.  J.  L.  357  (1899).  to  change  at  the  pleasure  of  the  asso- 
Where  a  directors'  by-law,  confirmed     ciation," 

by  the  stockholders!  fixes  their  term  of  ^gee  §§  708-711,  supra. 

office    at  one  year,   the    stockholders  *  See  ch.  XLI,  supra,  and  in  fact  most 

cannot,  by  amending  the  by-law,  turn  of  the  preceding  chapters  of  this  book, 

the    directors    out    during    the    year.  s  Throop  on  Public  Officers,  §30;  Peo- 

Stephenson  v.  Yokes,  27  Ont  (Can.)  691  pie  v.  Green,  58  N.  Y.  295  (1874).     Cf. 

(1896).  Atty.-Gen.   v.   Detroit,   112    Mich.   145 

2  0strom  V.   Greene,    161    N.  Y.    353  (1897). 

(1900),  the  court  saying:     "The  hold-        ^  See  %  750,  infra. 
ing  of  an  office  unprotected  by  rules  is 

1731 


§  T12.] 


HOW    CORPORATE    CONTRACTS    ARE    MADE.  [CU.  XLIII. 


into,  then  any  stockholder  may  enjoin  that  act  or  contract.'  ^fore- 
over,  the  directors  can  contract  and  act  only  as  a  board,  duly 
notified  and  assembled.  The  members  of  tho  board  cannot  agree 
separately  and  outside  of  the  meeting  and  thereby  bind  tlie  corpo- 
ration.2  -^qj.  ^an  a  minority  of  the  board  meet  and  bind  tho  board. 
A  majority  must  be  present,  and  then  a  majority  of  that  majority 
binds  the  corporation.' 

A  single  director  has  no  power  to  contract  for  the  corporation.* 
It  is  perfectly  legal,  however,  for  a  board  of  directors  to  delegate 
to  an  agent  the  power  to  make  a  contract,*  and  this  agent  may,  of 


'See  ch.  XL.  .wprn.  As  to  ratifica- 
tion of  such  acts  by  the  stockholders, 
see  ch.  XLIV,  infra, 

2  See  =■  713a,  infra, 

3  See  §  713a,  infra. 

*  Quoted  and  approved  in  Alabama, 
etc.  Bank    v.  O'Neil.  128    Ala.  192,  I'J", 
(1901).     See  the  cases  under  §  710,  infra. 
where  the  president  even,  who  is  nearly 
always  a  director,  was  held  not  to  have 
power  to  contract     A  director  has  no 
power  to  bind  the  corporation.  Gaynor 
V.  Williamsport,  etc  K.  R.,  1^9  Pa.  St.  5 
(1899).     A  watchman  employed  by  a  di- 
rector   without  authority   cannot  re- 
cover for  his  services.     Brown  v.  Val- 
ley,  etc.    Co.,   127   Cal.   630  (1900).     A 
director  has  no  power,  unless  specially 
authorized,  to  bind  the  company  by  a 
representation.     Milwaukee,  etc.  Co.  v. 
Schoknecht,  108  Wis.  457  (1901).     A  di- 
rector has  no  power  to  employ  a  phy- 
sician to  attend  an  employee  who  has 
been  injured.    Sias  v.  Consolidated,  etc. 
Co.,  73  Vt.  35  (1901).  Misrepresentations 
by  a  director  of  a  manufacturing  cor- 
poration   do    not    affect    claims    held 
against   it  by  a  bank  although   such 
director  is  cashier  of  the  bank.     Had- 
den  V.  Dooley,  92  Fed.  Rep.  274  (1899). 
A  director  has  no  authority  to  contract 
for  the   corporation.     Noblesville,  etc. 
Co.  V.  Loehr,  124  Ind.  79    (1890);  Alle- 
mong  r.  Simmons,  124  Ind.  199  (1890): 
Goodyear  Rubber  Co.  v.  Scott  Co.,  96 
Ala.  439  (1892);  New,  etc.  Co.  v.  Upton, 
67  N.  H.  469  (1893).    See  also  Chicago, 
etc,  R.  R.  V.  James,  22  Wis.  194  (1867); 
Trundy  v.   Hartford,  etc.   Co.,  6  Rob. 

1 


(N.  Y.)  812  (1SG8).  where  a  director  em- 
ployeil  a  broker;  New  Haven,  etc  Ca 
V.  Ilayden,  1U7  Mass.  52.j  ( 1^571  >,  where 
a  director,   stock iiolder.  and    overseer 
contracted    to    extend    the    business; 
Titus  V.  Cairo,  etc  R.  R..  37  N.  J.  L.  98 
(1874).   where   a   director   sold   bonds; 
Lockwood  r.  Thunder,  etc.  (  o..  42  Micii. 
536  (1880);  Bramah  v.  Roberts,  3  Bing. 
N.  Caa  963  (1837).  where  a  director  ac- 
cepted a  bill;  Rice  v.  Peninsular  Club, 
52  Mich.  87  (18M3),  where  a  director  said 
that  a  purchase  was  all  right.     But  in 
Bradstreet  v.  Bank  of  Rutland.  42  Vt. 
128  (1869),  it  was  held  tliat  an  employee 
who  was  employed  by  three  directors 
might  recover.     If  the   corporation   is 
only  an  intermediary  of  title,  such  as 
payee  and  indorser,  the  indorsee  may 
recover    against    the    maker    without 
making  strict  proof  as  to  tlie  authority 
of  the  directors  to  indorse.     Smith  v. 
Johnson,  3  H.  &  N.  222  (1858).     Where 
a  director  causes  work  to  be  done  on 
the   corporate   property  on   an   agree- 
ment that  he    will  pay  for  the  same, 
the  corporation  is  not  liable  therefor. 
Ayers  v.  Green,  etc.  Co.,  48  Pac  Rep. 
221  (Cal.  1897).     He  is  not  an  agent  to 
discount  paper.     Washington  Bank  v. 
Lewis,  39  Mass.  24  (1839).     Nor  to  agree 
to   give    extra   pay.     Stoystown,   etc. 
Turnp.  Co.   v.   Craver,  45   Pa.   St.   386 
(1863):     Lindley,     Companies,    p.    155. 
See  also  §  726,  infra, 

5  Spear  v.  Ladd,  11  Mass  94  (1814); 
Northampton  Bank  v.  Pepoon,  11  Mass. 
288  (1814),  where  a  director  was  author- 
ized to  indorse  a  note;  Bank  Commis- 


CH.  XLIII.]  HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§  712. 


course,  be  a  director  as  well  as  a  third  person.^  The  board  of  di- 
rectors and  the  corporation  are  bound  also  by  the  contracts  of  a 
director  or  other  person  who  has  assumed  to  contract  for  the  com- 
pany, and  for  some  time  has  been  allowed  by  the  board  to  so  act 
and  contract.^  So  also  the  board  of  directors  and  the  corporation 
are  bound  by  an  unauthorized  agent's  contract  when  the  contract 
is  acquiesced  in  or  the  benefits  of  that  contract  are  accepted;^  or 
when  the  corporation  expressly  ratifies  and  confirms  the  contract.* 
It  is  an  important  principle  of  law  that  a  corporation  may  be  lia- 
ble on  a  contract,  the  benefit  of  which  it  accepts,  even  though  such 
contract  was  not  authorized  by  the  board  of  directors.  Thus,  a  con- 
tract signed  in  the  corporate  name,  but  without  the  authority  of 
the  board  of  directors,  may  be  validated  by  the  corporation  acting 
under  it  for  a  year.*   Where  the  president  of  a  railroad  renders  serv- 


sioner  v.  Bank  of  Brest,  Harr.  Ch.  (Mich.) 
106  (1840);  Stevens  v.  Hill,  29  Me.  133 
(1848);  Lester  u  Webb,  83  Mass.  34  (1861); 
Abbot  V.  American  Hard  Rubber  Co., 
33  Barb.  578  (1861);  U.  S.  Bank  v.  Dana.  6 
Pet.  51  (1832);  Metropolis  Bank  v.  Jones, 
8  Pet  12, 16  (1834);  Percy  u  Millaudon,  3 
La.  568  (1833);  Pennsylvania  Bank  v. 
Reed,  1  Watts  &  S.  (Pa.)  101  ri841);  Ridg- 
way  V.  Farmers'  Bank,  12  Serg.  &  R. 
(Pa.)  256  (1825):  Leavitt  v.  Yates,  4  Edw. 
Ch.  134  (1843).  As  to  delegation  of  dis- 
cretionary powers,  see  §  715,  infra; 
Sheridan,  etc.  Co.  u  Chatham  Nat 
Bank,  52  Hun,  575  (1889). 

1  A  director  %vho  is  authorized  to  pur- 
chase and  pay  in  stock  cannot  agree  to 
pay  in  cash.  Hay  den  v.  Middlesex,  etc. 
Co..  10  Mass.  403  (1813).  Authority  to  a 
director  to  make  contract  for  the  sale 

■of  land  does  not  authorize  him  to  con- 
vey the  land.  Green  v.  Hugo,  81  Tex. 
452  (1891). 

2  See  many  cases  in  the  following 
sections.  Also  Beers  v.  Phoenix,  etc. 
Co..  14  Barb.  358  (1852).  where  a  di- 
rector and  secretary  borrowed  money 
as  he  was  accustomed  to  do.  But  unless 
the  custom  is  known  to  the  directors 
the  corporation  is  not  bound.  Law- 
rence V.  Gebhard,  41  Barb.  575  (1864). 
And  the  act  must  be  intra  vires. 
Women's,  etc  Union  v.  Taylor,  8  Colo. 
75  (1884). 


'See  many  cases  in  subsequent  sec- 
tions herein.  Also  New  Hope,  etc.  Co. 
V.  Phenix  Bank,  3  N.  Y.  156  (1849), 
where  loans  of  the  company's  money 
were  made  by  a  director.  Where  a  di- 
rector has  employed  an  attorney,  but 
such  employment  is  with  the  knowl- 
edge and  assent  of  the  board  of  di- 
rectors and  executive  committee,  the 
company  is  liable  for  his  fees.  Ger- 
mania,  etc.  Co.  v.  Hargis,  64  S.  W.  Rep. 
516  (Ky.  1901). 

*  See  §  707,  supra,  on  promoters'  con- 
tracts: also  §§  716-720,  infra.  The  rati- 
fication of  an  unauthorized  mortgage 
may  be  by  express  resolutions.  Purser 
V.  Eagle  Lake,  etc.  Co.,  Ill  Cal.  139 
(1896).  An  unauthorized  note  issued 
by  a  corporation  may  be  ratified  by  the 
board  of  directors.  Nebraska,  etc.  Co. 
V.  Bell,  58  Fed.  Rep.  326  (1893). 

5  Jourdan  v.  Long  Island  R.  R..  115 
N.  Y.  380  (1889).  Although  a  sale  of 
property  is  not  authorized  by  the  board 
of  directors,  yet  if  they  accept  the  pay 
the  sale  is  valid.  Beach  v.  Miller.  130 
111.  162  (1889).  Where  a  contractor  does 
extra  work  upon  the  assurance  of  a  di- 
rector that  the  company  will  pay  for  it, 
and  had  agreed  so  to  do  at  a  meeting, 
and  a  majority  of  the  directors  knew  of 
the  extra  work,  the  company  is  liable 
therefor.  Tryon  v.  White,  etc.  Co.,  62 
Conn.  161   (1892).    Ratification  in   the 


1733 


§  '12.] 


now    CORPOKATE    CONTRACTS    ARE    MADE.  [cH.   XLIII. 


ices  in  litigations  and  in  obtaining  loans  on  the  agreement  of  the 
board  of  directors  to  pay  hiin  therefor,  he  may  recover  payment 
for  the  same,  even  though  there  was  no  formal  resolution  of  the 
directors,  and  even  though  the  by-laws  were  silent  as  to  the  duties 


case  of  a  land  contract  may  have  to  be 
in  writing  to  satisfy  the  statute  of 
frauds.  Sal  field  v.  Sutter,  etc.  Co.,  94 
Cal.  546  (1802).  It  may  be  a  question  of 
fact  for  the  jury  as  to  whetlier  the  com- 
pany accepted  the  contract  or  not.  Cha- 
I)in  V.  Cambria,  etc.  Ca,  145  Pa.  St  478 
(1891).  Althouph  mortgapje  bonds  are 
issued  by  corporate  officers  without  au- 
thority, yet  if  for  several  years  they 
are  used  as  a  pledge  to  secure  corporate 
debts,  and  in  the  meantime  directors 
and  stockholders  know  of  their  issue, 
they  are  valid.  Stainback  v.  Junk,  etc. 
Ca,  98  Tenn.  306  (1897).  Even  though 
the  officers  in  executing  a  deed  in  be- 
lialf  of  the  corporation  omit  a  covenant 
that  the  grantee  assumes  a  mortgage 
on  the  property,  as  required  by  the  reso- 
lutions of  the  board  of  directors  author- 
izing such  deed,  yet  if  the  corporation 
accepts  a  consideration  for  the  deed 
other  corporate  directors  cannot  ob- 
ject thereto.  White  r.  Sheppard,  41 
N.  Y.  App.  Div.  113  (1899).  An  assess- 
ment by  the  directors  to  pay  a  mort- 
gage does  not  legalize  such  mortgage 
if  it  was  not  properly  authorized,  even 
though  signed  by  the  president,  secre- 
tary, and  two-thirds  of  the  stockholders. 
Alta  Silver  Min.  Co.  v.  Alta  Placer  Min. 
Co.,  78  Cal.  629  (1889).  An  unauthor- 
ized purchase  of  real  estate  and  a  mort- 
gage thereon  by  a  corporation  may  be 
ratified,  but  only  by  the  same  formali- 
ties as  if  original  authority  were  being 
given.  Blood  v.  La  Serena,  etc.  Co.,  113 
Cal.  221  (1896).  An  unauthorized  alter- 
ation in  a  mortgage  may  be  ratified 
by  the  subsequent  acts  of  the  parties. 
Woodbury  v.  Allegheny,  etc.  R  R,  72 
Fed.  Rep.  371  (1895).  Bonds  issued  by 
a  cemetery  corporation,  and  signed  and 
sealed  and  recognized  at  many  meet- 
ings of  the  directors,  are  legal.  Sey- 
mour V.  Spring  Forest  Cem.  Assoc,  144 


N.  Y.  333  (1895);  &  G,  157  N.  Y.  697. 
Where  the  corporation  has  occupied 
premises  under  an  unauthorized  lease, 
the  court  may  submit  to  the  jury  the 
question  of  whetlier  it  ratified  the  lease. 
Hayden  v.  Wheeler,  etc.  Co.,  20  N.  Y. 
Supp.  902  (1892).  The  regularity  or  au- 
thorization of  a  corporate  mortgage 
cannot  be  successfully  attacked  by  a 
stockholder  in  an  action  to  foreclose 
the  mortgage,  where  for  twelve  years 
the  interest  has  been  paid  upon  the 
bonds  with  the  knowledge  and  acqui- 
escence of  the  stockholder.  Warren  v. 
Bigelow  Blue  Stone  Co.,  74  Hun,  304 
(1893).  Where  all  the  directors  and  all 
the  stock  except  one  share  assent  to 
borrowing  money  and  giving  a  mort 
gage,  the  money  being  used  in  the  busi- 
ness, the  loan  and  mortgage  may  be  en- 
forced. Witter  V.  Grand  Rapids,  etc. 
Co.,  78  Wis.  543  (1891).  A  board  of  di- 
rectors may  ratify  and  therel)y  validate 
a  mortgage  which  may  have  been  exe- 
cuted without  authority.  Allis  t\  Jones, 
45  Fed.  Rep.  148  (1891).  A  corporation 
is  liable  for  work  done,  although  the  of- 
ficer employing  plaintiff  had  himself 
contracted  to  do  the  work  for  the  corpo- 
ration. Plaintiff  had  no  notice  of  this 
agreement  Salt  Lake.  etc.  Co.  v.  Mam- 
moth ^lin.  Co.,  6  Utah,  351  (1890).  If  the 
corporation  admits  in  its  pleading  that 
a  contract  was  entered  into,  a  judgment 
for  plaintiff  will  not  be  disturbed  al- 
though the  pleading  was  not  put  in  evi- 
dence. Teall  r.  Consolidated,  etc.  Co., 
119  N.  Y.  654  (1890).  A  reorganized  com- 
pany may,  by  accepting  the  benefits  of 
a  contract  and  liability  of  the  old  com- 
pany, become  liable  therefor,  although 
the  meeting  of  the  directors  authorizing 
the  contract  was  informal.  Baker  v. 
Harp.ster,  42  Kan.  511  (1S89).  That  the 
corporation  is  liable  if  the  work  was 
ordered  and  done  for  its  benefit,  see 


1734 


CH;  XLIII.]  HOW    CORPOEATE    CONTRACTS    ARE    MADE. 


[§  n2. 


of  the  president  and  as  to  his  salary .^  Where  a  corporation  bor- 
rows money  and  gives  its  note,  it  is  immaterial  that  one  director 
was  absent  from  the  meeting  authorizing  the  note,  where  the  di- 
rectors subsequently  knew  about  the  note  and  did  not  object.^ 
Even  though  an  original  note  was  not  authorized,  yet  if  the  renewal 
was  authorized  the  note  is  valid.^ 

A  purchase-money  mortgage  given  by  a  corporation  is  binding, 
even  though  not  authorized  by  the  board  of  directors,  where  the 
company  used  the  property  for  two  years.* 

A  corporation  may  be  liable  for  an  accident  on  a  ferry  operated 
in  its  name,  where  it  knew  of  the  operation  and  received  the  bene- 
fits of  the  same.*  Where  a  corporation  is  a  mere  "dummy,"  the 
courts  sometimes  hold  that  the  corporation  is  liable  for  the  acts 
and  on  the  contracts  of  its  stockholders.^  An  express  vote  of  the 
directors  authorizing  a  note  need  not  be  proved  where  the  corpo- 
ration whose  obligation  is  in  question  is  engaged  in  a  business  the 
nature  of  which  and  the  duties  in  relation  to  which  require  or  jus- 
tify the  givmg  of  negotiable  instruments  without  the  officers  being 
authorized  thereto  by  a  special  vote  to  that  effect.'  Where  a  mort- 
gage recites  that  it  was  duly  executed  by  authority  of  the  corpora- 


Grier  v.  Hazard,  13   N.  Y.    Supp.    583 
(1891).     A  party  accepting  the  benefit 
of  a  contract  for  a  long  time  cannot  re- 
pudiate it  on  the  ground  that  the  calls 
for  the  meetings  of  the  executive  com- 
mittee and  of  the  stockholders  which 
authorized  the   contract  were   insuffi- 
'cient;  nor  can  he  set  up  in  such  a  case 
that  the  directors  had  not  authorized 
the  contract.    Union  Pac.  Ry.  v.  Chi- 
cago, etc.  Ry.,  51  Fed.  Rep.  309  (1892). 
Although  a  mortgage  was  not  author- 
ized, yet  where  the  board  of  directors 
subsequently  provide  for  payment  of 
part  of  it,  and  do  pay  part  of  it,  they 
ratify  it.    Seal  v.  Puget  Sound,  etc.  Co., 
5  Wash.  St.  423  (1892).     It  is  a  ratifica- 
tion of  a  contract  for  the  corporation 
to  admit  its  execution  in  a  pleading. 
Tingley  V.  Bellingham,  etc.  Co.,  5  Wash. 
St.  644  (1893).    Ratification  by  a  com- 
pany of  an  agent's  contract  is  not  bind- 
ing on   the  other  party,  if  the  ratifi- 
cation rejected   one    provision  of  the 
contract.     Subsequent    ratification    of 
the  contract  in  toto  is  not  suflScient 
unless  the  other  party  assents.     Crab- 

1735 


tree  v.  St.  Paul!  etc.  Co.,  39  Fed.  Rep.  746 
(1889). 

iBagley  v.  Carthage,  etc.  R.  R.,  165 
N.  Y.  179  (1900). 

2  Mills  V.  Boyle,  etc.  Co.,  132  Cal.  95 
(1901). 

3  Smith    V.    New    Hartford    Water- 
works, 73  Conn.  626  (1901). 

4  Blood  V.  La  Serena,  etc.  Co.,  134  Cal. 
361  (1901).  An  irregular  meeting  of 
the  board  of  directors  authorizing  the 
borrowing  of  money  and  the  giving  of 
a  mortgage  may  be  made  legal  by  the 
company  subsequently  accepting  and 
using  the  money.  Murray  v.  Beal,  23 
Utah,  548  (1901).  Even  though  a  note 
is  signed  by  two  directors  as  individuals, 
yet  the  corporation  may  be  held  liable  if 
the  loan  was  to  the  corporation.  Mc- 
Garry  v.  Tanner,  etc.  Co.,  21  Utah,  16 
(1899). 

5  Nims  V.  Mount  Hermon  Boys'  School, 
160  Mass.  177  (1893). 

«  See  gg  663,  664,  supra, 
7  Martin  v.  Niagara,  etc.  Co.,  122  N.  Y. 
165  (1890). 


§  T13.] 


HOW    CORPORATE    CONTRACTS    ARE    MADE.  [CH.  XLIII. 


tion,  neither  the  corporation  nor  its  cretlitoi-s  can  claim  that  the 
board  of  directors  did  not  authorize  it  in  the  form  in  which  it  was 
executed.'  In  California  it  is  held  that  an  unauthorized  mortgage 
is  not  ratified  nor  is  it  made  valid  by  estoppel  in  pais  except  in  a 
manner  in  writing  suflicient  to  authorize  the  mortgage.'  Corporate 
creditors'  rights  by  attachments  which  are  obtained  between  the 
time  of  the  execution  of  an  illegal  mortgage  and  the  ratification 
of  the  same  may  have  priority  over  the  mortgage.' 

§  713.  De  facto  directors  and  officers  of  a  corporation  —  The  I'a- 
VuJity  of  their  contracts. —  K  de  facto  olficer  is  one  who  has  the 
reputation  and  position  of  the  ofHcer  he  assumes  to  be,  and  yet  is 
not  entitled  to  the  otHce  in  point  of  law.*  A  de  jure  oilicer  is  one 
who   has  the  lawful  right  to  tlie  ollicc,  but  who  has  either  been 


1  Sioux  City,  etc.  Co.  r.  Trust  Co.,  83 
Fed.  Reji.  124  (1897);  aflf'd,  173  U.  S. 
99  (1890);  Baggott  v.  Turner,  21  Wash. 
339  (1899).  See  also  §  TIX  infrn. 
Where  the  seal  of  the  company  has 
been  duly  affixed  to  a  mortgage  by 
the  secretary,  the  mortgagee  need  not 
inquire  whether  the  secretary  was  duly 
autliorized  to  affix  it,  or  whether  a 
quorum  of  the  directors  was  present  at 
the  meeting  and  authorized  the  mort- 
gage, the  court  upholding  the  mort- 
gage, although  a  quorum  was  not  pres- 
ent when  it  was  authorized.  County, 
eta  Bank  v.  Rudry  Merthyr,  etc  Co., 
[1895]  1  Ch.  629.  "  None  but  the  corpo- 
ration and  its  stockholders  or  creditors 
can  impeach  a  transfer  of  property  by 
the  corporation  for  the  want  of  the 
previous  action  of  the  board  of  direct- 
ors; and  then  only  by  a  direct  action 
brought  for  that  purpose."  Castle  v. 
Lewis.  78  N.  Y.  131  (1879) ;  Eno  v.  Crooke. 
10  N.  Y.  60  (1854). 

2  Blood  V.  La  Serena,  etc.  Co.,  113  Cal. 
221  (1896). 

3  State  Nat.  Bank  v.  Union  Nat  Bank, 
108  111.  519  (18971. 

*"To  constitute  an  officer  de  facto 
there  must  be  a  color  of  election  or  ap- 
pointment, or  an  exercise  of  the  func- 
tions of  the  office  under  such  circum- 
stances and  for  such  length  of  time, 
without  interference,  as  to  justify  the 
presumption  of  a  due  election  or  ap- 

1 


pointment  The  mere  exercise  of  the 
functions  of  the  office  is  in  itself  insuf- 
ficient." Moses  V.  Tompkins.  84  Ala. 
613  (1888X  See  also  Rex  v.  Bedford 
Level,  6  East.  356  (1805);  Mechanics', 
etc  Bank  v.  Burnett,  etc  Co.,  32  N.  J. 
Eq.  236  (1880);  Hamlin  f.  Kassafer.  15 
Oreg.  456  (1887).  Covtra,  Litchfield 
Iron  Co.  V.  Bennett.  7  Cow.  234  (1827); 
Clark  V.  Farmers'  Mfg.  Co.,  15  Wend. 
256  (1836);  Waiter.  MiningCo.,  36  Vt.  18 
(1863).  See  also  Wait,  Insolv.  Corp., 
{^  23.  Officers  are  still  de  facto  after 
judgment  of  ouster  is  rendered,  but 
before  its  entry,  even  though  they 
acted  with  knowledge  of  the  decision. 
Mining  Co.  v.  Anglo,  etc.  Bank.  104  U. 
S.  192  (1881).  Cf  Walker  v.  Flemming, 
70  N.  C.  483  (1874).  In  McCall  v.  Byram. 
etc  Co..  6  Conn.  428  (1827),  it  is  held 
that  a  secretary  is  de  facto  only  where 
there  is  at  least  a  pretended  election. 
See  Hamlin  v.  Kassafer,  15  Oreg.  456 
(1887).  A  demand  on  a  corporation  for 
certain  property  is  not  proved  by  show- 
ing a  demand  on  those  who  afterwards 
became  its  incorporators  and  officers. 
McCallum  r.  Purssell  Mfg.  Co.,  1  N.  Y. 
Supp.  428  (1888).  Directors  whose  title 
is  contested  are  not  de  facto  officers  as 
against  the  old  officers  holding  over. 
Ellsworth,  etc  Ca  v.  Faunce,  79  Ma  440 
(1887). 

The  following  definitions  have  been 
given  of  an  officer  de  facto:  "One  who 
736 


€H. 


XLIII.] 


HOW    COEPOEATE    CONTRACTS    AKE    MADE. 


[§  T 13. 


ousted  from  it  or  has  never  actually  taken  possession  of  it.  An  of- 
ficer is  de  facto  when  the  statute  under  which  he  holds  oflfice  is 
unconstitutional;'  or  when  he  was  elected  but  was  ineligible,^  or 
was  irregularly  or  illegally  elected.^  An  officer  who  holds  over  by 
reason  of  the  failure  of  the  corporation  to  elect  his  successor  is  not 
only  a  de  facto  but  a  de  jure  officer.*  A  director  as  a  de  facto  di- 
rector may  bind  the  company  by  his  acts,  if  allowed  to  continue  in 
his  position.'^  And,  in  general,  the  contracts  of  all  officers  defacto^ 
acting  within  the  sphere  of  their  office,  are  binding  upon  the  corpo- 
ration.^ 


has  the  reputation  of  being  the  oflBcer 
he  assumes  to  be,  and  yet  is  not  a  good 
officer  in  point  of  law."  Parker  v.  Kett, 
1  Ld.  Raym.  658;  Rex  v.  Bedford  Level, 
6  East,  368  (1805).     "  One  who  actually 
performs  the  duties  of  an  office,  with 
aiparent  right,  and  under  claim  and 
color  of  an  appointment  or  election." 
Brown  v.  Lunt,  37  Me.  428  (1854).  "  One 
who  lias  the  color  of  right  or  title  to 
the  office  he  exercises;  one  who  has  the 
apparent  title  of  an   officer  de  jure" 
Brown  t'.  O'Connell,  36  Conn.  451  (1870). 
"On  the  one  hand  he  is  distinguished 
from  a  mere  usurper  of  an  office,  and 
on  the  other  from  an  officer  de  Jure." 
Mallett  V.  Uncle  Sam.  etc.  Min.  Co.,  1 
Nev.  197  (1865);  Plymouth  v.  Painter, 
■  17  Conn.  588  (1846).     In  State  v.  Curtis, 
9  Nev.  325  (1874),  the  court  held  that  in 
order  to  make  a  person  an  officer  de 
facto  he  should  in  some  way  have  been 
put  into  the  office  and  have  secured 
such  a  holding  thereof  as  to  be  consid- 
ered in  peaceable  possession  and  actu- 
ally exercising  the  functions  of  an  offi- 
cer; an  intrusion  by  force  is  not  suffi- 
cient. 
1  Leach  v.  People,  122  IlL  420  (1887). 
■•i  Despatch  Line  v.  Bellamy  Mfg.  Co., 
12  N.  H.  205  (1841).      Cf.  ch.  XXXVII, 
supra. 

sBaird  v.  Bank  of  Washington,  11 
Serg.  &  R.  411  (1824),  where  a  minority 
of  the  directors  elected  him:  Delaware, 
etc.  Canal  Co.  v.  Pennsylvania  Coal  Co., 
21  Pa.  St.  131  (1853),  where  the  presi- 
dent was  not  a  resident  as  required  by 

-statute. 

1 


*  See  S  624,  mpra;  Thoringtonu  Gould, 
59  Ala.  461  (1877).  Contra,  Curling  u 
Chalklen,  3  M.  &  S.  496,  510  (1833); 
Peppin  r.  Cooper,  2  B.  &  Aid.  431 
(1819);  People  v.  Twaddell,  18  Hun,  427 
(1879). 

5  A  director  who  sells  his  stock  ceases 
to  be  a  dejure  director.  If  he  continues 
and  is  permitted  to  act  he  is  a  director 
de  facto.  Beardsley  v.  Johnson,  121  N. 
Y.  224  (1890). 

^St.   Luke's  Church  v.  Matthews,  4 
Dessaus.  (S.  C.)  578  (1815);  Vernon  Soc. 
V.  Hills,  6  Cow.  23  (1826);    All  Saints 
Churcli    V.  Lovett,  1  Hall,  191  (1828); 
Lovett  r.  German  Ref.  Church.  12  Barb. 
67  (1852);  Riddle  v.  Bedford,  7  Serg.  & 
R   (Pa.)   392  (1821);    York    County  v. 
Small,  1   Watts  &  S.  (Pa.)  315  (1841); 
Kmgsbury  v.  Ledyard,  2  Watts  &  S. 
(Pa.)  41   (1841);   Smith  v.   Erb,   4   Gill 
(Md.),   437   (1846);    Burr  v.   McDonald, 
3    Gratt.    (Va.)    215    (1846);    Granville 
Charitable  Assoc,  v.  Baldwin,  42  Mass. 
359   (1840);    Green   v.    Cady,    9   Wend. 
414    (1832);    Elizabeth    City   Acad.    v. 
Lindsey,  6  Ired.   L.  (N.    C.)  476  (1846;.; 
McCall  V.   Byram    Mfg.    Co..    6    Conn. 
428  (1827);   Lathrop  u  Scioto  Bank,  8 
Dana  (Ky.),  115  (1839);    Delaware,  etc. 
Canal  Co.  v,  Pennsylvania  Coal  Co.,  21 
Pa.  St.  131  (1853);  St.  Mary's  Bank  v. 
St.  John,  25  Ala.  566  (1854):  Baird  v. 
Washington  Bank,  11  Serg.  &  R.  411 
(1824);  Ex  parte  Rogers,  7  Cow.  530,  n. 
(1827);     Re    Mohawk,    etc.    R.    R.,    19 
Wend.  135  (1838);  Re  Chenango  Ins.  Co., 
19  Wend.  635  (1838);  Bland  ford  School 
District  r.  Gibbs.  56  Mass.  39   (1848); 


§  T13.] 


now    COKl'OKATE    CONTRACTS    AKK    MADK, 


[cii.  il:ii 


"  Where  persons  have  to  deal  for  the  first  time  with  an  estab- 
lished company,  and  with  those  who  have  been  and  are  acting 
opt-nlv  and  without  challenge  as  directors  of  that  company,  and 
whom  they  honestly  believe  to  be  directors,  they  certainly  are  not 


Sampson   v.  Bowdoinliam    Co.,  30  Me. 
78  (1853):   Penobscot  v.   Dunn,  39  Me. 
587  (1855);  FairQeld.  etc.  Ca  v.  Thorp, 
13   Conn.    173  (1839);    Rex  v.   Bedford 
Level.  6  East,  350,  368  (1805):    Parker 
V.  Kett.  1  Ld.  Raym.  058  (1701):  Wild  v. 
Passamaquoddy   Bank,   3    Mason,    505 
(1825);  s.  C,  29  Fed.  Cas.  1215;  BarrinR- 
ton  V.  Washington  Bank.  14  Ser^;.  &  R. 
(Pa.)  405    (1826);    Minor  v.  Mechanics' 
Bank.  1  Pet  46  (1828);  Cahill  v.  Kala- 
mazoo   Ina    Co..   2   Doug.  (Mich.)   124 
(1845);  M'Gargell  v.  Hazelton  Coal  Co., 
4  Watts  &  S.  (Pa.)  424  (1842).  an  action 
for  a  penalty,  in  which  evidence  was 
admitted  to  show  that  the  person  rep- 
resenting the  company  was  an  officer 
de facto;  Re  County,  etc.  Co..  L.   R,  5 
Ch.  288  (1870);  Malioney  v.  East.  etc.  Co., 
L.   R.  7  H.  L.  869  (1875):    Partridge  v. 
Badger,  25  Barb.  146  (1857),  where  the 
treasurer  was  only  de  facto;  Doremus 
V.  Dutch,  etc.  Co.,  3  N.  J.  Eq.  332  (1S35), 
where  seceding  trustees  made  a  mort- 
gage: Mechanics',  etc.  Bank  v.  Burnet, 
etc.  Co.,  32  N.  J.  Eq.  236  (1880),  and 
Charitable  Assoc,  v.  Baldwin,  42  Mass. 
359    (1840),    where  de  facto  directors 
brought    suits;    Clark    v.   Easton,   146 
Mass.  43  (1888);  Cooper  v.  Curtis,  30  Me. 
488  (1849),  holding  that  debtors  to  the 
corporation  cannot  set  this  up;  Susque- 
hanna, etc.  Ca  V.  General  Ins.   Co.,  3 
Md.  305  (1852),  holding  that  a  president 
who  executes    an   instrument  is  pre- 
sumed to  be  president;    Hackensack, 
etc.  Co.  V.  De   Kay,  36  N.  J.  Eq.  548 
(1883),  where  de  facto  directors  gave  a 
mortgage.     The  title  of  the  president 
to  his  office  cannot  be  questioned  in  a 
suit  brought    by  a   corporate  creditor 
against  the  corporation  on  a  contract 
made  by  him,  the  board  of  directors  hav- 
ing acquiesced  in  his  acting  as  president. 
Heinze  v.  South,  etc   Co.,   109  Wis.  99 
(1901).     A  lessee  of  a  corporation  who 

17 


knows  that  the   officers  executing  the 
lease  had  doubtful  title  to  their  office, 
and  that  their  title  was  in  litigation, can- 
not enforce  the  lease,  if  the  officers  are 
afterwards  ousted.    Groveland,  etc.  Ca 
V.  Farmers',  etc.  Ca,  25  Wash.  344  (1901). 
Directors  who  are  elected  at  a  stock- 
holders'  meeting    not   properly  called 
cannot  make  and  enforce  calls.     Haw- 
beach,  etc.  Cc.  V.  Teague,  5  H.  &  N.  151 
(1860).     A  board  of  directors  who  are 
ineligible  cannot  revoke  an  agreement 
to  arbitrate  a  suit.     Richards  v.  Attle- 
borough  Nat.  Bank.  148  Mass.  187  (1889). 
See  also  §  624,  sujjra.    An  exhibition 
corporation  is  liable  for  premiums,  al 
though  the  exhibition  was  conducted 
by  de  facto  officers,  whose  title  to  office 
was  held  to  be  bad  a  month  prior  to 
the  exhibition.      Richards  v.  Farmers' 
etc.   Inst,   154  Pa.  St  449  (1893).      Al- 
though a  director  is  not  qualified  ac- 
cording to  the    by-laws,  yet,  if  he  is 
elected  and  permitted  toact,hiselection 
is  valid  so  far  as  his  acts  as  director  af- 
fect third   persons.      Despatch  Line  v. 
Bellamy  Mfg.  Ca,   12  N.  H.  205  (1841). 
The  eligibility  of  a  director  who  has 
acted  with  the  consent  of  all  cannot  be 
questioned  on  an  application  to  have 
the  company  dissolved  under  the  stat- 
ute.    Re  Santa,  etc.  Ca,  4  N.  Y.  Supp. 
173  (1889).    The  qualifications  of  a  di- 
rector cannot  be  questioned  by  a  cred- 
itor who  is  seeking  to  enforce  a  statu- 
tory liability  of  officers.     Wallace  r. 
W'alsh,  125  N.  Y.  26  (1890).     The  princi- 
ple of  law  that  the  acts  of  an  ineligible 
but  de  facto  officer  may  bind  the  cor- 
poration arises  often  in  municipal  cor- 
poration cases.     State  v.  Farrier,  47  N. 
J.  L.  383  (1885);  aff'd,  48  N.  J.  L.  613. 
Although  the  directors  are  not  quali- 
fied, nevertheless  the  company  cannot? 
repudiate  stock  issued  to  a  contractor 
in  payment  for  work,  where  such  work 
38 


CH.  XLIII.]  HOW    CORPOkATE    CONTRACTS    ARE    MADE. 


[§  713. 


bound  to  inquire  into  the  qualifications  or  validity  of  appointment 
of  those  de facto  directors."  ^ 

It  is  no  defense  to  a  morto^af!:e  that  the  directors  authorizing:  it 
were  irregularly  elected,  the  stockholders  having  acquiesced.'-  The 
fact  that  some  of  the  directors  are  not  residents  of  the  state,  as  re- 
quired by  statute,  does  not  invalidate  a  mortgage  authorized  by 
them.^  And  although  the  statutes  require  the  directors  to  be  resi- 
dents of  the  state,  nevertheless,  even  though  the  directors  are  non- 
residents, the  incorporation  is  valid,  and  the  corporation  is  not  dis- 
solved, nor  are  the  stockholders  liable  as  partners.*    But  the  acts 


has  been  received,  such  contract  being 
authorized  by  the  disqualified  directors. 
The  company  cannot  accept  the  sub- 
scription, and  at  the  same  time  repudi- 
ate tlie  contract  mode  of  payment.  Re 
Staflfordshire  Gas,  etc.  Co.,  66  L.  T.  Rep. 
413  (1893).  See  also  on  the  general  prin- 
ciple that  where  a  corporation  allows 
persons  to  act  publicly  as  its  oflRcers,  it 
is  bound  by  their  contracts  made  in  its 
behalf  with  third  persons,  U.  S.  Bank, 
u  Dandridge,  12  Wheat.  64(1829);  Union 
Bank  u  Ridgely,  1  Har.  &  G.  (Md.)  393 
(1S"27);  Perkins  u.  Washington  Ins.  Co., 
4  Cow.  645  (1825);  Troy  Turnp.  Co.  v. 
M'Chesney,  21  Wend.  296  (1839);  Warren 
V.  Ocean  Ins.  Co.,  16  Me.  439  (1839); 
Badger  v.  Cumberland  Bank,  26  Me.  428 
(1846);  Davidson  v.  Bridgeport,  8  Conn. 
472  (1831);  Selma,  etc.  R.  R,  u  Tipton,  5 
Ala.  787  (1843);  Detroit  v.  Jackson,  1 
Doug.  (Mich.)  106  (1843);  Farmers' 
Bank  v.  Chester,  6  Humph.  (Tenn.)  458 
(lb46);  Hall  v.  Carey,  5  Ga.  259  (1848); 
Conover  v.  Albany  Ins.  Co.,  1  Comst. 
290  (1848);  Lohman  v.  New  York,  etc. 
R  R,  2  Sandf.  39  (1848);  Beers  v.  Phoe- 
nix Glass  Co.,  14  Barb.  358  (1852);  Ala- 
bama Bank  v.  Comegys,  12  Ala.  772 
(1848);  Mead  v.  Keeler,  24  Barb.  20 
(1857);  Fryeburg  Canal  v,  Frye,  5  Me. 
38  (1827);  Northern  Liberties  Bank  v. 
Cresson,  12  Serg.  &  R  (Pa,)  306  (1824). 
Directors  may  act  as  such  before  they 
acquire  qualification  shares.  Re  Inter- 
national Cable  Co.,  66  L.  T.  Rep.  253 
(1892). 

1  Webb  V.  Shropshire  Rys.,  [1893J  3  Ch. 
307;  also  holding  such  to  be  the  rule 

17 


where  a  quorum  was  not  present  when 
they  were  elected  or  where  the}'  were 
not  qualified.     See  also  §  725,  infra. 

2  Savage  v.  Miller,  56  N.  J.  Eq.  432 
(1898).  Although  the  statutes  require 
three  directors,  who  shall  be  stockhold- 
ers, and  one  assigns  his  stock,  and  the 
other  two  authorize  and  execute  a  cor- 
porate mortgage  at  a  meeting  held 
without  notice  to  the  other,  yet  the 
mortgagee  having  no  knowledge  of 
these  facts  is  protected,  Kuser  v. 
Wright,  52  N.  J.  Eq.  825  (1895),  reversing 
Wright  V.  First  Nat.  Bank,  52  N.  J.  Eq. 
392.  Where  the  statute  requires  direct- 
ors to  be  stockholders,  and  two  of  the 
directors  are  not  stockholders,  but  a 
directors'  meeting  is  regularly  called, 
a  mortgage  authorized  at  such  a  meet- 
ing is  legal,  even  though  one  of  the  di- 
rectors who  held  stock  and  was  qualified 
was  not  present,  especially  where  he 
had  agreed  to  the  mortgage  and  the 
mortgagee  took  possession  and  held  it 
for  thirteen  months  and  the  corporation 
did  not  object.  Silsby  v.  Strong,  38 
Greg.  36  (1900). 

3  Wheelwright  v.  St.  Louis,  etc. 
Transp.  Co.,  56  Fed.  Rep.  164  (1893).  The 
fact  that  a  contract  of  a  Pennsylvania 
company  is  made  by  its  president  and 
managers,  who  are  non-residents  and 
not  residents  as  required  by  statute, 
does  not  enable  the  other  party  to  the 
contract  to  raise  that  objection.  Dela- 
ware, etc.  Canal  Co.  v.  Pennsylvania 
Coal  Co.,  21  Pa.  St.  131  (1853). 

*Demarest  v.  Flack,   128  N.  Y.  205 
(1891). 
39 


§  713^.] 


HOW    CORPORATE    CONTRACTS    ARE    MADE.  [cU.   XLIII. 


of  de  facto  directors  cannot  be  invoked  in  behalf  of  theraselves  or 
stockholders.  Only  strangers  can  rely  thereon.'  The  (/d,/at'^<9  di- 
rector cannot  avoid  a  liability  by  setting  up  that  he  was  not  a 
de  jure  director;-  nor  collect  a  salary  as  a  de  facto  officer;'  nor 
make  a  note  to  himself  and  claim  that  his  office  gave  him  the  au- 
thority.* A  de  facto  officer  is  ousted  by  a  quo  warranto  proceeding,* 
and  not  by  a  suit  in  equity,"  nor  by  an  action  in  trespass,'  nor  a 
Nvrit  of  prohibition.* 

§  713«.  Meetings  of  directors — Place — Notice  —  Action  without 
meeting  —  Quorum. —  A  meeting  of  the  directors  of  a  corporation 
may  bo  held  outside  of  the  state  creating  the  corporation,  unless 
the  charter  or  a  statute  expressly  forbids  such  a  meeting.  The 
acts,  proceedings,  and  contracts  of  a  meeting  of  the  board  of  direct- 
ors held  outside  of  the  state  are  valid  and  enforceable.*     Under  the 


1  Shellenberger  v.  Patterson,  168  Pa. 
St.  30  (18951.  In  a  suit  brought  by  a 
stockholder  to  set  aside  a  sale  of  the 
stock  for  non-payment  of  an  assessment, 
the  court  may  investigate  the  legality 
of  the  title  of  the  directors  to  their 
office,  and  if  they  have  not  taken  an 
oath  as  required  by  statute  the  assess- 
ment made  by  them  is  illegal.  Schwab 
V.  Frisco,  etc.  Co.,  60  Pac.  Rep.  940 
(Utah,  1900). 

2Keyser  v.  McKissam,  2  Rawle  (Pa.), 
139  (1828),  involving  a  bond;  Bank  of 
St.  Mary's  v.  St.  John.  25  Ala.  566  (1854). 
In  a  suit  for  a  breach  of  trust  this  is  no 
defense.  West  Bank  of  Scotland  v. 
Baird  and  others,  11  Ct.  of  Sess.  Cas. 
(3d  series),  pp.  96-121  (1872);  Easterly  v. 
Barber,  65  N.  Y.  252  (1875).  Cf.  Craw 
V.  Easterly,  54  N.  Y.  679  (1873).  A  di- 
rector who  has  acted  as  such  cannot 
claim  that  the  election  was  irregular. 
Hall  V.  West,  etc.  Pub.  Co.,  180  Pa.  St. 
561  (1897).  A  de  facto  director  cannot 
defend  against  a  statutory  liability  of 
directors  on  the  ground  that  he  did  not 
hold  sufficient  stock  to  qualify  himself 
to  be  a  director.  Donnelly  v.  Pancoast, 
15  N.  Y.  App.  Div.  323  (1897).  One  who 
assumes  the  duties  of  a  director  can- 
not say  that  he  never  was  a  director. 
McDowall  V.  Sheehan,  129  N.  Y.  200 
(1891).  A  director  who  acts,  even 
though  not  qualified,  is  subject  to  the 


rule  (liscjualifying  him  from  selling 
profierty  to  the  company.  Stetson  v. 
Northern  Inv.  Co.,  104  Iowa.  893  (1898). 

'Riddle  r,  Bedford  County,  7  Serg.  & 
R  (Pa.)  386  (1821). 

*  Lebanon,  eta  Co.  v.  Adair,  85  Ind. 
244  (1SS2). 

*See  i;  617,  supra.  A  superintendent 
elected  by  de  facto  directors  may  be 
ousted.  State  v.  Curtis,  9  Nev,  325 
(1874).  After  the  courts  have  decided 
that  certain  persons  are  directors,  man- 
damus will  be  granted  that  the  defeated 
I>arties  turn  over  the  books  and  papers 
to  the  former.  Matter  of  Journal  Pub. 
Club,  30  N.  Y.  Misc.  Rep.  326  (1900). 

•>  See  §  618,  supra. 

'  Kingsbury  v.  Ledyard,  2  Watts  &  S. 
(Pa.)  37  (1842). 

^San  Jose.  etc.  Bank  v.  Sierra,  etc. 
Co..  63  Cal.  179  (1883)l 

^  The  first  or  organization  meeting  of 
the  directors  may  be  held  out  of  the 
state.  Glymont  Imp.  etc.  Co.  v.  Toler. 
80  Md.  278  (1894).  A  by-law  that  regular 
directors'  meetings  shall  be  held  in  the 
state  does  not  prevent  special  meetings 
outside  of  the  state.  Ashley  Wire  Co. 
V.  Illinois  Steel  Co.,  164  111.  149  (1896): 
Wright  V.  Bundy,  11  Ind.  398,  404  (1858), 
where  a  mortgage  of  a  railway  incorpo- 
rated by  Indiana  was  held  valid  though 
executed  in  Ohio;  Bassett  v.  Monte 
Christo,  etc.    Co.,    15    Nev.  293   (1880), 


1740 


CH.  XLIII.]  HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§  ll^a. 


Illinois  statute  a  mortgage  authorized  by  a  directors'  meeting  held 
outside  of  the  state  is  illegal,  unless  sucii  meeting  was  authorized 
or  its  acts  ratified  by  a  vote  of  two-thirds  of  the  directors  at  a 
regular  meetino^  in  the  state  in  accordance  with  the  statute.^ 

There  has  been  some  controversy  and  doubt  as  to  the  necessity 


where  power  to  issue  bonds  and  mort- 
gage real  property  in  Nevada  was  con- 
ferred at  a  meeting  of  directors  held  in 
New  York,  the  corporation  having  been 
chartered  by  Pennsylvania  —  but  here 
the  charter  authorized  the  corporation 
to  meet  and  act  at  any  place  in  the 
United  States;  Ohio,  etc.  R.  R.  v.  Mc- 
Pherson,  35  Mo.  13  (1864),  where  calls 
for  payment  of  subscriptions  to  stock 
made  by  a  board  of  directors  at  meet- 
ings held  outside  of  the  state  creating 
the  corporation  were  held  to  be  valid; 
Wood  Hydraulic,  etc.  v.  King,  45  Ga,  34 
(1872),  in  which  the  minutes  of  a  meet- 
ing of  directors  held  out  of  the  state 
chartering  their  company  were  held  to 
be  evidence  of  the  acts  of  the  board  in 
making  contracts  in  other  states.  A 
directors'  meeting  out  of  the  state  may 
authorize  a  mortgage  on  real  estate. 
Saltmarsh  v.  Spaulding,  147  Mass.  224 
(1888);  Reichwald  v.  Commercial  Hotel 
Co.,  106  111.  439  (1883);  Galveston,  etc. 
R  R.  V.  Cowdrey,  11  Wall.  459,  476 
(1870),  in  which  it  was  held  that  bona 
fide  holders  of  railroad  bonds  could  not 
be  prejudiced  by  the  fact  that  the 
mortgage  by  which  they  were  secured 
was  executed  by  virtue  of  a  resolution 
of  directors  at  a  meeting  held  out  of 
the  state  which  chartered  the  road; 
Bellows  V.  Todd,  39  Iowa,  209,  217  (1874), 
where  a  conveyance  of  real  estate  was 
authorized;  Arms  v.  Conant,  36  Vt. 
744  (1864);  McCall  v.  Byram  Mfg.  Co..  6 
Conn.  428  (1827);  Smith  v.  Alvord,  63 
Barb.  415  (1866);  Singer  v.  Salt  Lake 
City,  etc.  Co..  17  Utah,  143  (1898).  Cf. 
Ormsby  v.  Vermont,  etc.  Co!,  56  N.  Y. 
623  (1874);  Aspinwall  v.  Ohio,  etc.  R.  R., 
20  Ind.  492,  497  (1863).  Corporations  in- 
corporated in  New  Jersey  were  formerly 
required  by  statute  to  hold  their  di- 
rectors'   meetings    within    that  state. 


Hilles  V.  Parrish,  14  N.  J.  Eq.  380  (1862). 
The  president  may  call  a  meeting  of 
the  directors  at  a  place  other  than  the 
chief  place  of  business.  Corbett  v. 
Woodward,  5  Sawyer,  403  (1879);  S.  C,  6 
Fed.  Cas.  531.  A  person  who  participates 
in  a  directors'  meeting  held  out  of  the 
state  cannot  object  to  it  on  that  ground. 
Wood  V.  Boney,  21  Atl.  Rep.  574  (N.  J. 
1891).  The  directors  may  hold  their 
meetings  outside  of  the  state.  Missouri, 
etc.  Co.  V.  Reinhard,  114  Mo.  218  (1893). 
An  assignment  of  a  corporate  mortgage 
may  be  executed  in  another  state. 
Gray  v.  Waldron,  101  Mich.  612  (1894). 
In  Brockway  v.  Gadsden,  etc.  Co.,  102 
Ala.  020  (1894),  a  meeting  of  the  board 
of  directors  outside  of  the  state  was 
held  to  be  illegal  under  the  Alabama, 
statute  which  regulates  such  meetings. 
1  State  Nat.  Bank  v.  Union  Nat.  Bank, 
168  III.  519  (1897).  A  newly  elected 
president  may  file  a  petition  to  be  al- 
lowed to  file  an  information  in  the 
nature  of  a  quo  warranto  to  compel  a 
de  facto  president  to  surrender  the 
office  where  the  basis  of  the  petition  is 
that  the  meeting  of  the  board  of  di- 
rectors which  elected  the  de  facto 
president  was  held  out  of  the  state  in 
violation  of  the  statutes  of  Illinois. 
Place  V,  People,  192  III.  160  (1901 :  Un- 
der the  Illinois  statute  which  prohibits 
the  directors  from  holding  their  meet- 
ings outside  of  the  state,  unless  author- 
ized or  ratified  by  a  vote  of  two-thirds 
of  the  directors  at  a  regular  meeting,  a 
mortgage  on  land  in  Missouri  author- 
ized at  a  meeting  held  in  Missouri  is 
illegal,  and  a  subsequent  ratification 
thereof  at  a  meeting  regularly  held  in 
Illinois  does  not  validate  such  mortgage 
as  against  an  attachment  levied  before 
such  ratification.  Union,  etc.  Bank  v. 
State,  etc.  Bank,  155  Mo.  95  (1900). 


1741 


§  713«.] 


UOW    OOKl'OKATE    CONTRACTS    ARE    MADE.  [CU.  XLIII. 


of  C'ivinf'  notice  of  directors'  meetinfjs 

DO  O 


Many  cases  apply  to  direct- 
ors' meetings  the  same  rules  tiiat  apply  to  stockholders'  meetings. 
Other  cases  hold  that  less  formality  and  strictness  are  required  in 
calling  a  directors"  meeting.  The  decisions  are  quite  uniform,  how- 
ever, in  holding  that  as  to  all  special  meetings  of  the   board  of  di- 


rectors notice  must  be  given.' 

1  A  niortf^age  authorized  at  a  special 
meeting  of  directors,  nouoticeof  whicli 
had  been  given  to  two  directors  who 
were  not  present,  is  not  enforceable, 
the  minutes  not  having  been  approved 
at  any  subsequent  meeting.  Curtin  v. 
Salmon,  etc.  Co.,  130  Cal.  34.")  (11)00).  A 
mortgage  authorized  at  a  meeting  of 
the  board  of  directors  of  wliich  no 
notice  was  given  and  some  of  the  di- 
rectors   were  absent  is  not  valid,  and 


purpose  of  the  meeting."  Hence  an 
assignment  of  bank  accounts  by  a  cor- 
poration to  its  president,  as  collateral 
security,  is  not  valid  where  no  notice 
was  given  to  ail  the  directors  of  the 
meeting  authorizing  the  assignment 
Whitehead  r.  Hamilton  Rubber  Co., 
0'2  N.  J.  Eq.  78  (1893).  A  person  who  is 
elected  a  director  but  does  not  accept 
need  not  be  notitied  of  a  directors' 
meeting.     Whittaker  u    Amwell  Nat. 


the  declarations  of  a  jonit   mortgagor    Bank,  52  N.  J.  Eq.  400  (1894).     A  meet- 


tiiat  the  corporation  had  autliorized 
the  mortgage  are  inadmissibla  Kelley 
V.  Campbell,  134  CaL  175  (.1901).  A 
chattel  mortgage  authorized  at  a  di- 
rectors' meeting  at  which  only  half  the 
directors  were  present,  and  notice  of 
wiiich  had  not  been  given  to  directors 
who  were  not  present,  is  illegal.  Brough- 
ton  1-.  Jones,  120  Mich.  462  (1899).  A 
director  who  is  not  a  stockholder  can- 
not complain  tliat  a  meetmg  of  the  di- 
rectors was  held  without  notice  to  him. 
Anderson,  etc  Co.,  v.  Pungs,  127  Mich. 
543  (1901).  Notice  to  all  the  trustees  of 
a  religious  corporation  is  necessary. 
Thompson  v.  West,  82  N.  W.  Rep.  13 
(Neb.  1900).  "  That  all  tiie  directors  are 
entitled  to  notice,  either  express  or 
implied,  of  any  meeting  at  which  any 
business  is  transacted,  in  order  that  the 
business  may  be  binding  upon  all 
the  persons  concerned,  admits  of  no 
question.  ...  If  the  meetings  held  are 
regular  meetings, —  that  is,  such  as  are 
provided  for  by  charter  or  the  by-laws, 
fixing  time  and  place, —  then  notice 
thereof  is  implied.  Of  all  other  meet- 
ings,  especially  those   at   which    any 


iug  of  a  majority  of  the  directors  at  an- 
unusual  time  and  place  is  not  valid 
wliere  the  minority  had  no  notice. 
First  Nat.  Bank  v.  Asheville,  etc.  Co., 
116  N.  C.  827  (1895).  A  special  meeting 
of  directors  is  void  if  no  notice  is  given 
to  absent  directors.  Tiie  fact  tiiat  a 
director  owns  or  controls  a  majority  of 
the  .stock  does  not  validate  sucli  a  meet- 
ing even  tiiougli  he  favored  their  action. 
Hill  r.  Rich  Hill,  etc.  Co,  119Mo.  9  (1893). 
Where  the  directors  of  a  bank  are  ac- 
customed to  hold  directors'  meetings 
at  the  bank  whenever  a  quorum  is 
present,  this  custom  will  be  upheld, 
and  a  meeting  is  legal  although  no 
notice  thereof  is  given,  there  being  no 
by-law  or  statute  on  the  subject. 
American  Nat.  Bank  r.  First  Nat.  Bank, 
82  Fed.  Rep.  961  (1897).  Directors  are 
required  to  take  notice  of  an  annual 
meeting,  and  no  notice  need  be  given 
of  an  adjournment  thereof.  Western 
Imp.  Co.  V.  Des  Moines  Nat.  Bank,  103 
Iowa,  455  (1897).  Even  though  no  notice 
is  given  to  a  director  of  a  meeting  of 
the  board,  yet  where  the  matter  passed 
upon   by  the   board  is  one  which  he 


business  not  pertaining  to  the  ordinary  would  be  disqualified  from  voting  upon, 
affairs  of  the  corporation  is  transacted,  the  meeting  is  legal.  Troy  Min.  Co.  i'. 
expre.ss  notice  must  be  given  of  the  White,  10  S.  Dak.  475  (1898).  An  as- 
time    and    place    and  the  object  or    signment  for  the   benefit  of  creditors, 

1742 


•CH.  XLIII.]  HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§  713a. 


The  law  is  inclined  to  tolerate  more  freedom  in  the  notice  and 
the  callino^  and  holdino^  of  directors'  meetino^s,  inasmuch  as  the 


authorized  at  a  meeting  of  the  board  of 
directors  where  a  part  of  the  directors 
were  absent  and  had  no  notice  thereof, 
is  not  valid.  Simon  v.  Sevier  Assoc, 
54  Ark.  58  (1890).  Notice  of  a  directors' 
meeting  need  not  be  given  to  a  director 
who  resides  abroad,  nor  to  another  di- 
rector who  is  traveling  abroad.  The 
court,  however,  refused  to  lay  down 
the  broad  rule  that  no  notice  in  any 
case  need  be  given  to  directors  who  are 
abroad.  Halifax,  etc.  Co.  v.  Francklyn, 
62  L.  T.  Rep.  563  (1890).  Notice  of  a 
directors'  meeting  cannot  be  waived  in 
advance  by  a  director  where  the  time 
and  purpose  of  the  meeting  have  not 
yet  been  determined  upon.  Re  Portu- 
guese, etc.  Mines,  L.  R.  42  Ch.  D.  160 
(1889).  Where  three  of  seven  directors 
are  non-residents,  one  having  sold  his 
stock,  one  traveling,  and  one  inacces- 
sible for  immediate  notice,  the  four 
remaining  directors  may  hold  a  meet- 
ing and  authorize  an  assignment  of  the 
corporate  property  for  the  benefit  of 
creditors.  The  assignment  was  held 
to  be  legal,  the  traveling  director  and 
the  inaccessible  director  having  subse- 
quently voted  in  a  meeting  for  the 
selection  of  an  assignee.  National  Bank 
of  Commerce  v.  Shumway,  49  Kan.  224 
(1892).  A  mortgage  authorized  at  a  di- 
rectors" meeting  at  which  four  were 
present  and  the  other  received  no 
notice  is  illegal,  the  giving  of  notice 
being  possible,  and  there  being  no  neces- 
sity for  immediate  action.  Bank  of 
Little  Rock  v.  McCarthy,  55  Ark.  473 
(1892).  An  assignment  for  the  benefit 
of  creditors,  made  by  order  of  a  direct, 
ors'  meeting  at  which  three  directors 
were  present  and  the  other  two  were 
not  notified,  is  invalid,  and  no  bar  to  a 
-creditor's  action  to  collect  unpaid  sub- 
scriptions. Doernbecher  v.  Columbia, 
etc.  Co.,  21  Oreg.  573  (1892).  Where  a 
directors'  meeting,  according  to  the  by- 
laws, may  be  called  b}-  the   president, 

17 


or  if  there  is  no  president  by  two  di- 
rectors, the  two  directors  cannot  call  it 
even  if  the  president  refuses  to  do  so. 
The  acts  of  a  meeting  of  a  board  so 
called  are  illegal,  a  majority  of  the  di- 
rectors only  being  present.  Smith  v. 
Dorn,  96  CaL  73  (1892).  A  director  is 
entitled  to  notice  of  a  meeting  to  elect 
a  president.  Undue  haste  and  failure 
to  give  notice  will  suffice  to  set  the 
election  aside.  A  subsequent  meeting 
of  the  board  cannot  ratify  it.  The 
election  must  be  held  over  again.  State 
r.  Smith,  15  Oreg.  98  (1887);  Singer  u 
Salt,  etc,  Co.,  53  Pac.  Rep.  1024  (1898). 
A  notice  of  a  school  trustees'  meet- 
ing need  not  be  given  to  trustees  out  of 
the  state  who  could  not  have  attended 
anyway.  Porter  v.  Robmson,  30  Hun, 
209  (1883).  In  Harding  v.  Vandewater, 
40  Cal.  77  (1870),  a  note  given  for  an  as- 
sessment upon  a  subscription  which  was 
called  at  a  special  meeting  of  the  board 
of  trustees  of  a  mining  company,  of 
which  two  of  the  trustees  had  no  no- 
tice, was  held  to  be  void.  In  Farwell  v. 
Houghton  Copper,  etc.,  8  Fed.  Rep.  66 
(1881),  it  was  held  that  one  who  had 
been  a  shareholder  and  purchased  all 
the  property  of  the  company  at  a  meet- 
ing of  the  directors  held  without  notice, 
at  which  he  was  present  and  knew  that 
one  director  was  absent,  was  bound  to 
know  that  notice  to  such  absent  di- 
rector was  necessary,  and  that  he  was 
not  a  bona  fide  purchaser  without  no- 
tice. Lane  v.  Brainerd,  30  Conn.  565 
(1862),  holding  that  the  corporate  rec- 
ord of  a  meeting  at  which  a  quorum 
was  present  was  presumptive  proof  that 
all  the  directors  had  been  duly  notified, 
whether  living  in  the  state  or  else- 
where. Where  the  deed  of  settlement 
provided  for  special  meetings,  the  time 
and  place  of  which  were  to  be  fixed  by 
notices  countersigned  by  the  secretary, 
it  was  held  that  a  meeting  of  the  requi- 
site number  of  directors  without  pre- 
43 


§  713^^] 


HOW    CORroKAlE    CONTKACTS    ARE    MADE.  [CH.  XLIII. 


meetings  are  more  frequent,  the  absences  more  common,  the  acts 
less  fundamental,  and  ratification  by  acting  on  the  contracts  more 


vious  agreement  to  meet  on  any  fixed 
day  or  Iiour  was  not  a  meeting  duly 
convened  within  the  charter  provision. 
Moore  v.  Hammond.  6  Barn.  &  C  456 
(1827).  To  same  efTect  in  niunicipal  cor- 
I)oration  cat.es,  Smyth  v.  Darley,  2  II.  L. 
Cas.  789  (1849);  Rex  r.  Carlisle.  1  Slra. 
385  (1720).  An  adjourned  meeting  of 
directors  may  act  to  the  same  extent 
that  the  original  meeting  mi^ht  have 
acted.  Smith  r.  Law.  21  N.  Y.  29G  (ISGO); 
Wills  V.  Murray,  4  Exch.  843  (1850).  A 
by-law  enacted  by  the  directors  in  ref- 
erence to  the  calling  of  a  directors' 
meeting, even  if  not  comi)lied  with, does 
not  invalidate  the  meeting.  Samuel  v. 
Holla  day.  Woolw.  400  (1869);  S.  C.  21 
Fed.  Cas.  306.  A  quorum  of  directors 
ma}-  bind  the  corporation,  although  the 
other  directors  are  not  notihed.  there 
being  no  by-law  or  charter  provision  re- 
quiring notice.  Edgerly  v.  Emerson,  23 
N.  H.  55")  (1851).  Contra.  Despatch  Line 
V.  Bellamy  Mfg.  Co.,  12  N.  H.  205  (1841). 
An  assessment  made  at  an  irregularly- 
called  directors'meetingis  void.  Thomp- 
son V.  Williams,  76  Cal.  153  (1888).  Two 
out  of  three  directors  cannot  authorize 
a  chattel  mortgage,  the  third  not  hav- 
ing been  notified  of  the  meeting.  The 
mortgagee  was  one  of  tlije  directors. 
Doyle  r.  Mizner,  42  Mich.  332  (1879).  A 
corporate  receiver  cannot  object  to  a 
contract  on  the  ground  that  the  direct- 
ors' meeting  authorizing  it  was  not 
properly  convened,  but  the  receiver 
may  avoid  corporate  notes  issued  con- 
trary to  express  statute.  Leavitt  v. 
Yates,  4  Edw.  Ch.  134  (1843).  Bonds 
issued  under  authority  of  a  meeting  of 
two  commissioners  of  a  town  without 
notice  to  a  third  commissioner  are  not 
valid.  Pike  County  v.  Rowland,  94  Pa. 
St.  238  (1880).  In  Kersey,  etc.  Co.  v.  Oil, 
etc.  R.  R.,  12  Phila.  374  (1877),  a  lease 
was  declared  void  because  it  was  au- 
thorized only  by  a  meeting  of  directors 
of  which  part  of  the  directors  had  no 

17 


notice  and  were  not  present,  A  special 
meeting  of  an  executive  committee  is 
irregular  unless  notice  is  given  to  each 
member.  Metropolitan,  etc.  Co.  v.  Do- 
mestic, etc.  Co.,  44  N.  J.  Eq.  568  (1888). 
Where  a  subsequent  meeting  of  di- 
rectors expressly  ratifies  the  acts  of  a 
preceding  meeting,  any  defect  in  the 
notice  given  of  the  latter  meeting  is 
cured.  County  Court  v.  Baltimore,  etc. 
R.  R,  35  Fed.  Rep.  161  (1888).  Acts  of 
a  board  of  directors,  no  notice  having 
i)een  given  to  absent  directors,  may  be 
valid  by  ac(iuiescence.  Reed  r.  Hayt, 
51  N.  Y.  Super.  Ct  121  (1884);  afT'd,  109 
N.  Y.  659.  Although  an  allotment  of 
stock  may  be  illegal  by  reason  of  no- 
tice not  having  lieen  given  of  a  direct- 
ors' meeting,  yet  the  allotment  may  be 
confirmed  by asubsequent  legally-called 
meeting.  Re  Portuguese,  etc.  Mines, 
L.  R.  45  Ch.  D.  16  (1-^90).  A  person  who 
commits  a  tresjjass  on  the  jiroperty  of 
a  corjioration  cannot  question  the  reg- 
ularity of  a  contract  of  such  corpora- 
tion, so  far  as  such  regularity  turns  on 
ths  action  of  a  directors'  meeting,  or 
meeting  of  an  e.xecutive  committee,  or 
assent  of  three-fifths  of  the  stockhold- 
ers, as  required  by  statute.  Farnsworth 
V.  Western,  etc.  Co.,  6  N.  Y.  Supp.  735 
(1889).  "The  evidence  that  a  day  was 
fixed  by  common  consent  is  sufficient 
to  show  notice  to  all  of  the  meetings  on 
that  day."  "It  was  wholly  immaterial 
in  what  way  the  day  of  the  regular 
meetings  was  fixed."  Atlantic,  etc.  Ins. 
Co.  V.  Sanders,  36  N.  H.  252,  269  (1858). 
In  a  case  where  directors  were  empow- 
ered to  meet  once  a  week  at  their  office, 
without  notice  or  summons,  but  on  such 
day  and  at  such  hour  as  they  should 
from  time  to  time  agree  upon,  it  was 
held  that  a  resolution  come  to  by  a 
quorum  assembled  without  notice  was 
invalid,  inasmuch  as  no  day  or  hour  for 
the  meeting  of  the  directors  had  ever 
been  fixed.  Moore  v.  Hammond,  6  B.  «& 
44 


CH.  XLIII.]  now    COKPORATE    CONTRACTS    ARE    MADE. 


[§  713«. 


certain  and  easy.  A  preference  given  by  a  meeting  of  the  board 
of  directors  at  which  a  quorum  is  present,  notice  of  which  was  not 
given  to  the  other  directors,  may  be  valid  if  no  officer  or  stock- 
holder thereafter  objected  to  the  same.'  Where  five  of  eight  mem- 
bers of  the  board  of  an  insolvent  company  meet  and  authorize  the 
sale  of  certain  personal  property,  and  such  sale  is  carried  out,  other 
creditors  cannot  raise  the  objection  that  no  notice  was  given  to  the 
remainins:  three  members  of  the  board.^  If  all  the  directors  are 
present  at  a  meeting,  it  is  immaterial  that  notice  was  not  given, 
even  though  the  by-laws  required  it.^    Where  meetings  of  the  di- 

C.  456  (1827).     If  the  board  meeting  be    to  creditors  who  acquiesce  in  such  as- 


special  ly  convened,  the  general  rule  is 
that  notice  must  be  served  upon  every 
member  entitled  to  be  present.     Pike 
County  V.  Rowland,  94  Pa.  St.  338  (1880). 
Mandamus  lies  to  compel  vestrymen  to 
attend  a  meeting  when  by  reason  of 
dissensions  they  decline  so  to  do.     Peo- 
ple V.  Winans,  9  N.  Y.  Supp.  249  (1890). 
Notice  to  all  is  necessary,  although  a 
quorum  is  present.     Johnston  v.  Jones, 
23  N.  J.  Eq.  216  (1872),  where  the  meet- 
ing was  for  the  purpose  of  calling  a 
stockholders'  meeting.    Concerning  the 
differences  between  the  position  of  mu- 
nicipal corporation  officials  and  the  offi- 
cers of  a  private  corporation,  see  Wal- 
lace V.  Walsh,  125  N.  Y.  26,  36  (1890).    A 
recess  may  be  taken  by  a  board  without 
formal  action,  and  two  meetings  on  the 
same  day  may  be  construed   as  one 
meeting  with  a  recess.  State  v.  Powell, 
101  Iowa,  382  (1897).     Where  a  meeting 
of  the  board  of  directors  could  not  au- 
thorize suit  to  collect  assessments  be- 
cause the  assessments  were  not  yet  due, 
an  adjourned  meeting  of  that  meeting 
cannot  authorize  such  suit,  all  of  the 
directors  not  being  present  at  the  ad- 
journed  meeting  and   no  new  notice 
thereof  having  been  given.     Bank  of 
National  City  v.  Johnston,  133  Cal.  185 
(1901).   An  assignment  by  a  corporation 
for  the  benefit  of  its  creditors,  executed 
by  order  of  a  meeting  of  the  board  of 
directors,  no  notice  of  which  was  given 
to  absent  directors,  is  not  good  as  against 
an  execution  levied  two  days  after  such 
assignment,  although  it  may  be  good  as 


signment. 


Vaught  i\  Ohio,  etc.  Co.,  49 
S.  W.  Rep.  426  (Ky.  1899).  A  deed  of 
all  the  corporate  property  authorized  at 
a  meeting  of  the  board  of  directors  of 
which  no  notice  was  given,  and  only 
four  out  of  seven  were  present,  and 
three  of  the  four  were  interested  in  the 
company  which  purchased  the  prop- 
erty, is  invalid,  and  may  be  set  aside  by 
a  judgment  creditor  of  the  selling  cor- 
poration. Summers  v.  Glenwood,  etc. 
Co.,  86  N.  W.  Rep.  749  (So.  Dak.  1901).  A 
directors'  meeting  without  notice  to  a 
director  who  is  not  present  is  not  valid. 
Cupit  V.  Park  City  Bank,  20  Utah,  293 
(1899).  Notice  need  not  be  given  to  a 
director  where  it  is  not  practicable,  or 
where  he  secretes  himself  or  is  beyond 
the  reach  of  notice  and  it  is  necessary 
that  immediate  action  be  taken.  Singer 
V.  Salt  Lake  City,  etc.  Co.,  17  Utah,  143' 
(1898). 

1  Moller  V.  Keystone,  etc.  Co.,  187  Pa.. 
St.  553  (1898). 

2  Johnson  Co.  v.  Miller,  174  Pa.  St.  605 
(1896). 

3  Minneapolis  Times  Co.  v.  Nimocks, 
53  Minn.  381  (1893).  No  notice  of  a  di- 
rectors' meeting  is  necessary  if  all  are 
present  Bank  of  National  City  v.  Johns- 
ton, 60  Pac.  Rep.  776  (CaL  1900).  In 
Missouri  it  is  held  that  even  though  the 
by-laws  provide  that  a  directors'  meet- 
ing may  be  held  without  notice  if  all 
are  present,  yet  two  of  the  three  direct- 
ors cannot  thereby  go  into  the  presence 
of  the  third  director  and  declare  the 
meeting  on,  as  against  the  objection  of 


(110) 


1745 


fl3a.J 


now     COIiPORATE    CONTRACTS    ARE    MADE.  [ciI.   XLIIL 


rectors  can,  oy  the  by-laws,  be  called  only  by  the  president  or  ma- 
jority of  the  board,  the  secretary  cannot  call  one.'  A  party  dealing 
with  a  corporation  is  not  bound  to  inquire  whether  proper  notice 
was  given  of  a  directors'  meeting.-  A  notice  to  directors  of  a  cor- 
poration of  a  meeting,  not  specifying  the  business  to  be  transacted, 
is  all  tliat  is  necessary  to  authorize  the  transaction  of  the  ordinary 
business  atl'airs  of  the  corporation.' 

The  notice  must  be  given  a  reasonable  time  before  the  hour  of 


such  third  director.     State  v.  Manhat- 
tan, etc.  Co.,  149  Mo.  181  (1«99). 

illill  V.  Rich  Hill,  etc,  Co..  119  Mo.  9 
(1893).  Where  the  secretary  has  power 
to  call  a  meeting  of  the  directors,  but 
instead  of  his  doing  so  the  president 
uses  a  rubber  stamp  to  atlix  the  secre- 
tary's name  to  the  call,  and  it  trans- 
pires that  every  director  either  received 
the  notice  or  was  present  at  the  meet- 
ing, the  informality  is  immaterial.  Ash- 
ley Wire  Ca  v.  Illinois  Steel  Co.,  104 
111.  149(1896). 

2  Kuser  v.  Wright,  52  N.  J.  Eq.  825 
(1895),  reversing  Wright  v.  First  Nat 
Bank,  53   N.  J.  E(i.  392.     A  mortgage 
authorized  by  a  quorum   of  directors 
may  be  valid,  though  the  other  direct- 
ors were  not  present  and  were  not  noti- 
fied.    Bank  v.  Flour  Co.,  41    Ohio  St. 
552  (1885).    See  also  §  712,  stipra,  and 
§  725,  infra.     "  One  who  takes  from  a 
railroad  or  business  corporation,  in  good 
faith,  and  without  actual  notice  of  any 
inherent  defect,  a  negotiable  obligation 
issued  by  order  of  the  board  of  direct- 
ors, signed  by  the  president  and  secre- 
tary in  the  name  and  under  the  seal  of 
the  corporation,  and  disclosing  upon  its 
face  no  want  of  authority,  has  the  right 
to  assume  its  validity,  if  the  corpora- 
tion could,  by  any  action  of  its  officers 
or  stockholders,  or  of  both,  have  author- 
ized the  execution  and  issue  of  the  ob- 
ligation."   Louisville,  etc.  Ry.  v.  Louis- 
ville Trust  Co.,  174  U.  S.  552,  573  (1899), 
the  court  saying  also  that  the  records 
of  the  corporation  and  its  board  of  di- 
rectors are  private  records  which  a  per- 
son dealing  with  the  corporation  is  not 


bound  to  inspect  as  he  would  be  bound 
in  case  of  a  public  record. 

^Re  Argus  Co..  i:3>«  N.  Y.  557  (1893); 
New  Haven  Sav.  Bank  v.  Davis  8  Conn. 
192  (1830),  holding  that  a  meeting  of 
bank   directors  was  legal  for  an  ordi- 
nary transaction,  although  the  notice 
did  not  specify  its  object. and  that  mort- 
gaging its  real  estate  to  secure  a  debt 
was  proper  at  such  meeting.     Where,  a 
few  days  before  a  new  board  was  to  go 
in,   a    notice  of  a  directors'   meeting 
states  that  it  is  to  hear  the  treasurers 
report  and  transact  other  business  that 
miglit  come  before  the  board,  it  is  ille- 
gal for  the  board,  at  such  meeting,  to 
make  a  perpetual  lease  of  all  the  corpo- 
rate property.    Mercantile  Library  Hall 
Co.  V.  Pittsburgh  Library  Assoc,  173  Fix. 
St  30  (1S90).   A  notice  of  a  special  meet- 
ing of  the  boar<l  of  directors  need  not 
specify  the  business  which  is  to  be  con- 
sidered.    Wills  V.  Murray,  4  Exch.  843 
(1850).     A  notice  of  a  special  meeting 
of  the  trustees  of  a  religious  corpora- 
tion must  state  the  object  of  the  meet- 
ing.    Maclaury  v.  Hart,  10  N.  Y.  Supp. 
125  (1890).     It  is  not  necessary  to  state 
in  the  notice  convening  a  meeting  of 
the  directors  of  a  company  the  business 
to  be  transacted  at  the  meeting,  even 
if  It  is  of  an  extraordinary  character; 
and  any  decision  come  to  at  such  meet- 
ing cannot  afterwards  be   questioned 
on  the  ground  that  no  notice  of  such 
business    was    given.     Compagnie    de 
Mayville  v.  Whitley,  [1896]  1  Ch.  78a 
Special  meetings  of  the  directors  may 
be  held,  although  the  by  laws  do  not 
provide  for  such.     United  Growers'  Co. 
V.  Eisner,  22  N.  Y.  App.  Div.  1  (1897). 
1746 


CH 


XLIII.] 


HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§  lida. 


the  meeting,  and  the  mode  of  giving  or  serving  the  notice  must  be 
reasonable.  All  this  turns  on  the  circumstances  and  facts  in  each 
case.'  Where  no  special  method  of  serving  notice  of  directors' 
meetings  is  prescribed,  and  the  notice  is  served  by  mail,  upon  proof 
*)f  mailing,  the  receipt  of  the  notice  is  presumed,  even  as  against  a 
director's  doubt  as  to  his  having  received  it.^  Notice  to  all  the  di- 
■''ectors  is  presumed.* 


1 A  notice    of  a   directors'  meeting 
/sent  out  in  the  afternoon  for  the  even- 
ing is  sufficient,  if  delivered  to  a  serv- 
unt   at    a    director's    residence,    even 
though  such  director  was  absent  from 
home,  his  absence  not  being  known  to 
the   party   calling  the   meeting    until 
such  notice  was  delivered.    Re  Argus 
Co.,  138  N.  Y.  557  (1898).     Notice  of  a 
directors'    meeting,    received    on    the 
morning  of  the  day  of  the  meeting,  is 
insufficient  although  the  meeting  was 
So  be  at  four  o'clock  in  the  afternoon. 
The  court  said:  "  Prima  facie  this  was 
not  a  reasonable  time.     The  managers 
are  all  reported  as  business  men,  who 
cannot   be  presumed  to  be    ready  to 
drop  their  own  affairs  and  attend  off- 
hand on  such  a  notice.     One  full  day 
in  advance  of  the  time  fixed  is  as  little 
as  the  law  could  presume  to  be  reason- 
able, and  in  many  cases  that  would  be 
too  short"    The   court  said,  however, 
that   a  by-law  or  the  practice  of  the 
board  might  vary  this  rule.     Mercan- 
tile Library  Hall  Co.  v.  Pittsburgh  Li- 
brary Assoc,   173  Pa.  St  30  (1896).     A 
meeting    of    directors    called    in    the 
morning  for  two  o'clock  that  day  is  in- 
valid   where    one    director  could  not 
<?ome  until  three  o'clock  and  another 
received  the  notice  next  morning.     A 
quorum  was  present    tie  Homer,  etc. 
Mines,  L.  R  39  Ch.  D.  546  (1888X    Leav- 
ing notice  of  a  directors'  meeting  at  a 
director's  business  place  suffices,  even 
though  he  is  known  to  be  ill.     Corbett 
V.   Woodward,    5    Sawyer,    403  (1879). 
Notice  to  a  director  is  sufficient  if  given 
orally  to  the  director's  brother  at  the 
director's  place  of  business,  where  a  by- 
law allowed  notice  to  be  given  by  mail 

17 


or  in  other  ways.  Williams  v.  German, 
etc.  Ins.  Co.,  68  III.  387  (1873).  Notice 
to  directors,  sent  by  mail,  is  sufficient 
if  sent  in  time  so  that  the  director, 
after  receiving  it,  would  have  time  to 
reach  the  place  of  meeting.  Covert  v. 
Rogers,  38  Mich.  363  (1878).  A  meeting 
of  the  directors  may  be  valid  although 
two  of  them,  being  absent  from  the 
state,  did  not  receive  the  notica  Chase 
V.  Tattle,  55  Conn.  455  (1888).  Tele- 
graphic notice  to  two  directors  out  of 
the  state,  of  a  meeting  to  make  an  as- 
signment, is  sufficient,  though  not  re- 
ceived by  them,  a  majority  having  met 
and  ordered  the  assignment.  Chase  v. 
Tuttle,  55  Conn.  455  (1888). 

2  Ashley  Wire  Co.  v.  Illinois  Steel  Co., 
164  111.  149  (1896).  Where  written  no- 
tices of  a  special  directors'  meeting, 
properly  addressed,  are  sent  by  mail  to 
them,  it  is  presumed  that  such  notices 
were  received,  though  there  is  no  by-law 
that  notice  may  be  given  by  mail. 
Stockton,  etc.  Works  v.  Houser,  109  Cal. 
1  (1895).  Notice  by  postal  card  of  a  di- 
rectors' meeting  suffices  where  it  is  cus- 
tomary and  all  received  it.  People  v. 
Albany  Med.  Coll.,  26  Hun,  348  (1883); 
aff'd,  89  N.  Y.  635. 

3  Ross  V.  Crockett  14  La.  Ann.  811 
(1859);  Chouteau  Ins.  Co.  v.  Holmes,  68 
Mo.  601  (1878).  Notice  of  a  meeting  of 
directors  is  presumed.  Hardin  v.  Iowa, 
etc.  Co.,  78  Iowa,  726  (1889);  Stockton, 
etc.  Works  v.  Houser,  109  Cal.  1  (1895). 
Where  the  corporate  record  shows  that 
a  quorum  of  the  directors  was  present, 
this  is  prima  facie  evidence  that  all  had 
notice.  Fletcher  v.  Chicago,  etc.  Ry.,  67 
Minn.  339  (1897).  Proof  that  the  secre- 
tary, twenty-four  hours  before  a  meet- 

47 


§  713a.] 


HOW    CORPOKATE    CONTRACTS    ARE    MADE,  [CU.  XLIII, 


There  has  been  a  question  whether  directors  couhl  vote  and 
act  as  a  board  without  coming  together,  ^fany  attempts  have  been 
made  to  sustain  a  vote  of  the  directors,  which  they  had  separately 
and  singly  agreed  to.  Tlie  hiw,  however,  is  now  clear  that  such 
separate  assent  is  void.  Directors  are  elected  to  meet  and  confer, 
and  to  act  after  an  opportunity  for  an  interchange  of  ideas.  They 
cannot  vote  or  act  in  any  other  manner.'     Many  of  the  cases  to  the 


ing  of  the  directors,  sent  to  each  of 
tlieru  a  written  notice  by  his  office  boy 
raises  a  presumption  that  proper  notice 
was  given.  Where  the  minutes  of  a 
directors'  meeting  are  written  out  and 
signed  by  tlie  secretary  it  is  presumed 
that  all  directors  had  notice  of  the 
meeting,  Balfour-Guthrie,  etc,  Co,  v. 
Wood  worth.  124  Cal.  169  (1899).  It  is 
presumed  that  directors  had  notice  of 
a  meeting.  Mills  v.  Boyle,  etc.  Co.,  132 
Cal.  9.5  (1901).  A  corporation  defending 
against  its  note  on  the  ground  that  all 
the  directors  were  not  notified  of  a 
meeting  which  authorized  the  same  has 
the  burden  of  proof  of  showing  that 
such  was  the  case,  Barrell  v.  Lake,  etc. 
Co.,  122  Cal.  129  (1898).  Notice  to  di- 
rectors  is  presumed.  Singer  v.  Salt 
Lake  City,  etc.  Ca,  17  Utah.  143  (1S98). 
1  Tradesman  Pub,  Co.  v.  Knoxville 
Car  Wheel  Co..  95  Tenn,  634  (1895), 
Re  Haycraft,  etc  Co.,  [1900]  2  Ch.  230; 
Hamlin  v.  Union,  etc.  Co.,  68  N.  H.  292 
(1895);  Peirce  v.  Morse-Oliver,  etc.  Co., 
94  Me.  406  (1900);  Monroe,  etc,  Co,  v. 
Arnold,  103  Ga,  449  (1899),  A  deed  of 
real  estate  executed  by  the  directors  of 
a  corporation  separately  and  at  differ- 
ent times,  but  not  formally  authorized 
by  them  as  a  board,  is  not  only  inetfect- 
ual  as  a  conveyance  of  real  property, 
but  equally  so  as  a  contract  to  convey. 
Baldwin  v.  Canfield,  26  Minn.  43,  54 
(1879).  The  verbal  assent  of  directors 
to  the  execution  of  a  mortgage  is  not 
good.  Alta  Silver  Min.  Co.  v.  Alta 
Placer  Min,  Co.,  78  CaL  629  (1889). 
Where  the  directors  own  all  the  stock 
of  a  corporation,  they  may  authorize 
its  president  to  sell  its  assets,  and  the 
fact  that  the  authority  was  not  given 
at  a  regular  directors'  meeting  is  im- 


material Jordan  v.  Collins,  107  Ala. 
572  (1895),  A  mere  street  conversation 
between  the  directors,  by  which  tlie}' 
"agree"  that  subscriptions  shall  be 
called,  is  not  a  sufficient  call.  Branch 
V.  Augusta  Glass  Works,  95  Ga,  573 
(1895),  A  separate  assent  of  a  township 
committee  to  the  construction  of  a 
street  railway  is  illegal.  West  .Jersey 
Traction  Co.  v.  Camden,  etc,  Ca,  53  N. 
J.  £q.  103  (1695).  Separate  action  of 
the  directors  without  a  meeting  is  not 
good.  Limer  r.  Traders'  Co.,  44  W,  Va, 
175  (1897).  Separate  acquiescence  of 
the  directors  is  not  sufficient  Sander- 
son V.  Tinkham,  etc.  Co.,  83  Iowa,  446 
(1891).  The  directors  of  a  religious  cor- 
poration cannot  act  as  a  board  by  the 
separate  assents  of  the  members  to  the 
act  in  question.  Columbia  Bank  r. 
Gospel  Tabernacle,  127  N,  Y,  301  (is91). 
The  separate  assent  of  the  directors  to  a 
mortgage  is  not  good.  Duke  v.  Mark- 
ham,  105  N.  C.  131  (1890).  Directors  can 
act  in  behalf  of  the  corporation  only  as 
a  board.  Their  power  is  not  joint  and 
several,  but  joint  only.  Buttrick  v. 
Nashua,  etc.  R.  R.,  62  N,  IL  413  (1882), 
Directors  cannot  act  except  as  a  board. 
North  Hudson,  etc.  Assoc  v.  Childs,  83 
Wis,  460  (1892).  Directors  can  act  as 
such  in  meeting  only.  Their  individ- 
ual assent  is  not  sufficient.  State  v. 
People's,  etc  Assoc,  42  Oiiio  St.  579 
(1885);  Junction  K.  R.  v.  Reeve,  15  Ind, 
236  (1860);  Stoystown,  etc  Turn  p.  Co. 
V.  Graver,  45  Pa.  St.  386  (1863).  A  bar- 
gain and  sale  deed  of  corporate  prop- 
erty, authorized  and  executed  sepa- 
rately and  singly  by  all  the  directors 
without  a  board  meeting,  is  void.  Bald- 
win u.  Can  field,  26  Minn.  43  (1879);  Gash- 
wiler  V.  Willis,  33  Cal.  11  (1807).    Sepa- 


1748 


CH.  XLIIl.]  HOW    CORTORATE    COJSITRACTS    ARE    MADE. 


[§  irsa. 


contrary  may  be  reconciled  by  the  principle  of  law  that  the  acts  of 
a  board  of  directors  may  be  validated  by  subsequent  acquiescence, 
even  though  the  board  was  summoned  irregularly  or  proceeded 
irregularly.  Thus  the  separate  assent  of  directors  to  the  president 
executing  a  mortgage  in  the  name  of  the  corporation  may  be  equiva- 
lent to  acquiescence  on  the  part  of  the  directors  in  his  assuming 


rate  and  single  consent  of  a  quorum  of 
directors  to  the  secretary's  execution  of 
a  bond  is  void.  D'Arcy  v.  Tamar,  etc. 
Ry..  L.  R.  2  Exch.  158  (1867).  The  assent 
of  a  mere  majority  of  the  board,  given 
singly  and  separately,  gives  no  author- 
ity to  a  cashier  to  do  an  act  outside  of 
his  customary  duties.  Elliot  v.  Abbot, 
12  N.  H,  549  (1842).  Where  a  mortgage 
is  executed  by  order  of  directors  assent- 
ing apart  and  not  in  a  meeting,  and  is 
executed  by  a  president  and  secretary 
vsrho  were  elected  by  the  stockholders 
at  a  meeting  not  properly  called,  the 
stockholders  having  no  power  to  elect 
such  officers  in  any  case,  the  mortgage 
is  not  good.  Re  St.  Helen  Mill  Co.,  3 
Sawy.  88  (1874);  s.  a,  21  Fed.  Cas.  161.  A 
pledge  of  corporate  securities  to  raise 
money  is  legal  where  six  of  the  eight 
directors  consented,  even  though  no 
meeting  was  held.  Hubbard  v.  Cam- 
perdown  Mills,  26  S.  C.  581  (1887).  Direct- 
ors may  bind  the  corporation  by  their 
separate  approval  of  claims  when  they 
have  been  accustomed  so  to  do.  Long- 
mont,  etc.  Co.  v.  Coffman,  11  Colo.  551 
(1888).  The  separate  assent  of  the  board 
of  trustees  of  a  religious  corporation  to 
the  execution  of  a  note  is  void.  They 
must  meet.  People's  Bank  v.  St.  An- 
thony's, etc.  Church,  109  N.  Y.  512 
(1888).  An  assignment  for  the  benefit 
of  creditors  authorized  by  the  direct- 
ors acting  separatelj-  and  not  as  a  board 
is  invalid.  Calumet  Paper  Co.  v.  Has- 
kell, etc.  Ca.  144  Mo.  331  (1897). 

Where  an  officer  is  sued  for  malfea- 
sance in  office,  it  is  no  defense  that  his 
acts  were  authorized  by  directors  who 
did  not  meet  as  a  board,  but  separately 
and  singly  assented  to  acts.  Directors 
bind  the  corporation  by  their  votes  only 

17 


when  they  meet  as  a  board.  "  The  law 
proceeds  upon  the  theory  that  the  di- 
rectors shall  meet  and  counsel  with 
each  other,  and  that  any  determination 
affecting  the  corporation  shall  only  be 
arrived  at  and  expressed  after  a  con- 
sultation at  a  meeting  of  the  board 
attended  by  at  least  a  majority  of  its 
members."  National  Bank  v.  Drake,  35 
Kan.  576  (1886).  A  tax  which  is  assessed 
by  two  trustees  in  meeting  assembled, 
who  then  obtain  the  separate  and  pri- 
vate assent  of  the  third  trustee,  is  void, 
Keeler  v.  Frost,  22  Barb.  400  (1856); 
Schuman  v.  Seymour.  24  N.  J.  Eq.  143 
( 1873).  The  members  of  a  board  of  high- 
way commissioners  cannot  authorize  or 
ratify  a  contract  by  separate  approval 
A  meeting  is  necessary.  Taymouth  v. 
Koehler,  35  Mich.  22  (1876).  The  ma- 
jority of  a  school  board  cannot  act 
separately  and  singly,  no  meeting  being 
held.  Herrington  v.  District,  etc.,  47 
Iowa,  11  (1877).  The  separate  consent 
of  three  directors  was  held  not  good  in 
Bosanquet  v.  Shortridge,  4  Excli.  699 
(1850).  A  due-bill  running  from  the  cor- 
poration to  a  person  and  signed  by  the 
directors  cannot  be  defeated  by  show- 
ing that  the  directors  did  not  meet,  but 
signed  it  separately  and  singly.  Samp- 
son V.  Bowdoinham,  etc.  Corp.,  36  Me. 
78  (1853);  Collins' Claim,  L.  R.  12  Eq.  246 
(1871).  The  execution  of  a  replevin 
bond  by  the  president  for  the  corpora- 
tion is  legal,  a  majority  of  the  directors 
singly  and  separately  assenting  thereto. 
Bank  of  Middlebury  v.  Rutland,  etc.  R. 
R.,  30  Vt.  159(1858),  where  Redfield,  Ch. 
J.,  said:  "The  cases  are  numerous 
where  the  consent  of  a  majority  of  the 
directors  given  separately  has  been  held 
binding  upon  the  company. "  Probably 
49 


§  Tl;3^^] 


now 


COKl'OKATE    CONTRACTS    AUE    MADE.  [cil.   XI.III. 


such  authority  and  may  bind  the  corporation.'  Where  a  statute 
provides  that  the  charter  may  be  amended  in  certain  respects  upon 
the  directors  or  a  majority  of  them  making  and  signing  a  certifi- 
cate, such  making  and  signing  need  not  be  at  a  meeting  of  the 
directors.     No  meeting  is  required. - 

A  director  cannot  obligate  himself  to  vote  in  a  certain  way,  even 
as  to  the  election  of  president.'  Directors,  of  course,  cannot  act  or 
vote  by  proxy.* 


in  these  last  cases  the  contract  would 
have  been  binding  even  if  the  directors 
hafl  not  acted  at  all.  See  also  Cam- 
nieyerr.  United,  etc.  Cliurches,  ".JSandf. 
Ch.  186.  229  (1844),  holding  that  the 
trustees  must  meet  in  order  to  act,  and 
that  their  affirmative  vote  in  a  stock- 
holders' or  general  aasemblage  is  not 
sufficient.  Collective  action  as  a  board, 
and  not  individual  action  as  members 
of  the  board,  is  necessary  to  bind  the 
corporation.  Allegheny  County  Work- 
house V.  Moore.  93  Pa.  St  408  (1880); 
T%velth  St.  Market  Co.  v.  Jackson.  103 
Pa.  St.  273  (1883).  Where  there  are  but 
two  stockholders,  and  they  are  direct- 
ors, and  no  directors'  or  stockholders' 
meeting  has  been  held  since  the  organ- 
ization meeting,  and  these  two  have 
carried  on  the  business  as  though  it  was 
a  partnership  concern,  a  bona  fide  as- 


needed  by  the  corporation,  and  the 
latter  uses  them,  they  alone  are  liable 
for  the  i)rice  thereof.  Lyndon,  etc.  Co. 
V.  Lyndon,  etc.  Inst.,  63  Vt,  581  (1891). 

1  National,  etc.  Bank  r.  Sand  ford,  etc. 
Ca,  l.")7  Ind.  10  (1901).  Where  all  the 
.stockholders,  being  directors,  agree  in- 
formally and  without  meeting  that  a 
certain  person  shall  be  the  corporate 
agent  and  take  entire  control,  be  is  au- 
thorized to  bind  the  corporation  by  his 
arts.  Wood  r.  Wiley,  etc,  Co.,  56  Conn. 
87  (1888>.  The  separate  action  of  all  the 
directors  is  legal  when  all  the  stock- 
holders acquiesce  therein  and  wliere 
such  action  has  been  carried  out  by 
the  corporation.  Morisette  r.  Howard, 
02  Kan.  463  (1901 1. 

2  Burden    v.  Burden.   159    N.  Y.  287 
(1899). 

3  Dulin  r.  Pacific,  etc.  Co.,  103  Cal.  357 


signment  by  these  two  persons  in  the     (1894) 


name  of  the  corporation  to  secure  pre- 
ferred creditors  of  the  corporation  is 
good,  although  no  corporate  seal  was 
used  and  no  meetings  were  held  au- 
thorizing the  act.  Teitig  v.  Boesman, 
12  Mont.  404  (1892V  When  all  the  offi- 
cers assent  to  a  money  obligation  being 
given  in  the  corporate  name  by  the 
chief  officer,  the  prioress,  the  educa- 
tional corporation  is  bound.  Louisville, 
etc.  R.  R.  V.  St.  Rose  Literary  Soc,  91 
Ky.  395  (1891).  See  also  Re  Great  North- 
ern, etc.  Works,  L.  R,  44  Ch.  D.  472 
(1890),  drawmg  a  distinction  where  all 
of  the  directors  assent.  Directors  can- 
not act  singly.  Morrison  v.  Wilder  Gas 
Co.,  91  Me.  492  (1898).  Where  some  of 
the  directors  agree  privately  among 
themselves  to  pay  for  certain  things 


*  Perry  v.  Tuskaloosa,  etc,  Co.,  93  Ala. 
364  (1891);  Craig  Medicine  Co.  v.  Mer- 
cliants'  Bank.  59  Hun.  561  (1891);  State 
V.  Perkins,  90  Ma  App.  603  (1901);  Re 
Portuguese,  etc.  Ca,  L.  R.  42  Ch.  D. 
160  (1889);  McLaren  v.  Fisken,  28  Grant, 
Ch.  (Can.)  352  (1881);  Attorney-General 
V.  Scott.  1  Vesey.  413  (1749).  where  the 
election  of  a  minister  was  committed  to 
trustees.  It  was  held  that  they  could 
not  delegate  to  proxies  their  right  to 
vote.  A  vote  by  letter  on  a  particular 
question  would,  of  course,  be  the  same 
as  voting  separately  and  singly.  Al- 
though one  of  the  directors  illegally 
voted  by  proxy,  and  his  vote  was  neces- 
sarj',  yet  the  court  in  Dudley  v.  Ken- 
tucky High  School,  9  Bush  (Ky.),  57t> 
(1873),  refused  to  set  the  vote  aside,  the 


1750 


CH.  XLIII.]  HOW    CORPORATE   CONTRACTS    ARE   MADE. 


[§  713a. 


A  majority  of  the  whole  board  of  directors  constitute  a  quorum. 
When  the  meeting  is  properly  called  and  a  majority  attend,  that 
majority  may  proceed  to  transact  business.  If  a  majority  are 
present,  a  majority  of  that  majority  bind  the  board  and  the  corpo- 
ration, although  they  are  a  minority  of  the  whole  board.^ 

Holcomb  V.  Bridge  Co.,  9  N.  J.  Eq.  457 
(1853).     A  majority  of  the  trustees  are 
necessary    to    constitute     a     quorum. 
State  V.  Porter,  113  Ind.  79  (1888).     A 
by-law   cannot  authorize  less  than  a 
majority  to  act  when  the  charter  re- 
quires a  majority.     State   v.  Curtis,   9 
Nev.  325  (1874).     A  by-law  of  the  corpo- 
ration authorizing  a  quorum  of  five  di- 
rectors, with  the  president,  to  transact 
ordinary  business,  is  valid,  though  there 
are    twenty-three    directors.     Hoyt  v. 
Thompson,  19  N.  Y.  207  (1859).     Where 
by  resolution  of  the  board  four  consti- 
tute a  quorum,  an  act  at  a  board  of 
three  is  not  binding.     Ducarry  v.  Gill, 
4  Car,  &  P.  121  (1830).    "Where  there  are 
eight  vestrymen   and   the  statute  re- 
quires five  to  constitute  a  quorum,  four 
cannot  act,  although  there  are  three 
vacancies  in  the  board.     Moore  v.  Rec- 
tor, etc.,  4  Abb.  N.  Cas.  51  (1873).  When 
the  presence  of  the  president  is  by  law 
necessary  to  the  meeting  of  an  execu- 
tive committee,  a  meeting  without  him 
cannot   bind    the    corporation.      Corn 
Exch.  Bank  v.  Cumberland  Coal  Co.,  1 
Bosw.  436  (1857).    Where  two  out  of  six 
directors  have  been  accustomed  to  act 
as  a  quorum,  a  forfeiture  of  stock  by 
two  is  legal.     Lyster's  Case,  L.  R.  4  Eq. 
233  (1867).    The  acts   of   less   than    a 
quorum    are  valid  if  they  are  subse- 
quently ratified  by  a  quorum.  Austin's 
Case,  24  L.  T.  Rep.  (N.  S.)  932  (1871).     A 
lease  taken  by  a  meeting  of  a  board  of 
directors  at    which   no    quorum   was 
present  is  ratified  by  the  acquiescence 
of  two  boards  elected   in   subsequent 
years,  with  knowledge  and  no  objec- 
tion. Oregon  Ry.  v.  Oregon  Ry.  &  Nav. 
Co.,    28  Fed.  Rep.  505  (1886).     "  Where 
there  is  a  definite  body  in  a  corporation, 
a  majority  of  that  definite  body  must 
not  only  exist  at  the  time  when  any 


court  saying  that  only  one  stockholder 
objected,  and  that  the  majority  might 
ratifj% 

1  Wells  V.  Rahway,  etc  Co.,  19  N.  J. 
Eq.  402  (1869);  Cram  v.  Bangor,  etc.,  12 
Me.  354  (1835);  Cdhill  u  Kalamazoo,  etc. 
Ins.  Co..  2  Doug.  (Mich.)  124  (1845);  Ex 
parte    Willcocks,   7   Cow.    402   (1827); 
People  V.  W^alker,  2  Abb.  Pr.  421  (1856); 
Sargent  v.  Webster,  54  Mass.  497  (1847). 
If  only  a  minority  of  the   board   are 
present  the  acts  are  not  valid.     Lock- 
wood  V.  Mechanics'  Nat.  Bank,  9  R.  I. 
308  (1869);  Ernest  v.  Nichols,  6  H.  L.  Cas. 
401,  417  (1857);  Price  v.  Grand,  etc.  R.  R., 
13  Ind.  58  (1859);  Ridley  r.  Plymouth, 
etc.  Co.,  2  Exch.   711  (1848).    Where  a 
reduction  of  the  number  of  directors  is 
attempted,  but  not  made  in  compliance 
with  the  statute,  an  attempt  at  voluntary 
dissolution  by  a  majority  of  the  directors 
as  reduced  is  not  le-al,  they  not  being  a 
majority  of  the  original  number  of  di- 
rectors.   Matter  of  Dolgeville,  etc  Co., 
160  N.  Y.  500  (1899).     Resqlutions  passeil 
at  a  meeting  at  which  a  quorum  of  the 
directors  is  not  present  cannot  be  vali- 
dated by  action  of  tke  stockholders.  Bas' 
sett  V.  Fairchild,  64  Pac  Rep.  1082  (Cal. 
1901).  A  director  who  is  present  but  does 
not  vote  is  counted  in  the  negative.  Com- 
monwealth V.  Wickersham,  66  Pa.  St. 
134  (1870).    See  also  ^  608.  note  (supra), 
on  this  subject    The  majority  of    a 
board  of  directors  constitute  a  quorum, 
and  a  majority  of  the  quorum  decide 
the  action  of  the  board.   Leavitt  v.  Ox- 
ford, etc  Co.,  3  Utah,  265  (1883).    A  ma- 
jority of  a  quorum  of  directors  bind 
the  corporation.    Buell  v.  Buckingham, 
16  Iowa,  284  (1864).     Where  the  charter 
says  five  shall  constitute  a  quorum  of 
directors,  a  mortgage  executed  under 
the  authority  of  a  directors"  meeting 
when  only  four  are  present   is   void. 


1751 


§  713a.] 


HOW    OORPORATE    CONTRACTS   ARE    MADE.  [CH.   XLIII. 


Difficulty  has  arisen  in  determining  whether  a  person  taking  a 
mortgage  from  or  executing  a  contract  with  a  corporation  is  bound 
to  ascertain  whether  a  quorum  of  the  directors  were  present  at  the 
directors'  meeting  which  authorized  the  instrument,  and  whether  a 
majority  voted  in  favor  thereof.  There  are  many  cases  where  mort- 
gages and  contracts  have  been  held  void  by  reason  of  defects  in  the 
calling,  holding,  or  voting  at  the  directors'  meeting.' 

The  rule  sustained  1)V  the  irreat  weight  of  authoritv,  however,  is 
that  where  a  corporate  mortgage  or  contract  is  signed  and  sealed 
by  the  corporation  and  delivered  to  the  proper  person,  who  takes 


act  is  to  be  done  by  tliem,  but  a  major- 
ity of  that  body  must  attend  tlie  as- 
sembly where  such  act  is  done."  Rex 
V.  Miller,  0  T,  R  268  (1795),  per  Lord 
Kenyon.  A  custom  is  legal  which  al- 
lows tliree  to  constitute  a  quorum  of  a 
board  of  nine  directors.  Re  Regents', 
eta  Co..  W.  N.  1867,  p.  79  (1867).  An  al- 
lotment of  shares  by  a  board  of  two 
when  the  charter  requires  three  is  void. 
The  subscription  is  not  collectible.  Re 
British,  etc.  Co.,  59  L.  T.  Rep.  291  (1888). 
Although  a  meeting  of  directors  is  le- 
gally called,  yet  if  a  quorum  does  not 
attend,  those  who  do  attend  cannot  ad- 
journ to  another  day.  It  requires  a 
quorum  to  adjourn.  McLaren  v.  Fis- 
ken,  28  Grant,  Ch.  (Can.)  352  (ISSl).  A 
managing  committee  of  eight  cannot 
act  at  a  meeting  of  six  only.  Brown 
V.  Andrew,  13  Jur.  938(1849).  A  quorum 
of  the  directors  must  be  present  to  act, 
and  this  quorum  consists  of  a  majority. 
Ci'aig  Medicine  Co.  v.  Merchants' Bank, 
59  Hun,  561  (1891).  In  a  municipal  cor- 
poration, if  all  the  board  are  present 
and  four  vote  one  way,  while  the  other 
four  do  not  vote  all,  the  vote  prevails. 
It  is  a  majority  of  a  quorum.  State  v.  Dil- 
lon, 125  Ind.  65  (1890).  If  all  six  mem- 
bers of  a  city  council  are  present,  three 
may  pass  a  resolution,  although  the 
other  three  do  not  vote.  Rushville  Gas 
Co.  r.  Rushville,  121  Ind.  206  (1889). 
Where  the  record  shows  that  two  of 
the  four  directors  present  voted  aye 
and  one  nay,  and  the  other  director 
was  in  the  chair,  and  the  motion  was 
declared  carried,  the  law  presumes  that 

17 


the  chairman  voted  aye.  Rollins  r. 
Shaver,  etc  Co..  80  Iowa.  380  (1890).  A 
meeting  of  four  legally  elected  and 
three  illegally  elected  directors  of  a 
corporation  is  not  such  a  meeting  as 
sustains  an  action  for  salary  by  the 
jiresideut  who  was  elected  by  them. 
Waterman  r.  Chicago,  etc.  R.  R.,  139  111. 
658  (1892).  The  confirmation  by  the 
l)oard  of  directors  of  resolutions  passed 
by  a  meeting  not  containing  a  quorum 
relates  back,  and  is  as  if  the  resolutions 
were  regularly  passed  in  the  first  place. 
Re  Portuguese,  etc.  Mines,  L.  R.  45  Ch. 
D.  16  (1890).  Two  directors  cannot 
transact  business  when  there  are  four 
directors.  Re  Portuguese,  etc  Ca,  L. 
R.  42  Ch.  D.  160  (1889).  In  an  action 
by  an  insurance  cumi>any  to  collect  an 
assessment,  it  is  no  defense  that  losses 
were  allowed  at  meetings  of  the  direct- 
ors where  no  quorq^  was  present.  At- 
lantic, etc  Ins.  Co.  u  Sanders,  36  N.  H. 
252,  269  (1858).  A  majority  of  the 
quorum  may  decide  a  question,  and  a 
plurality  may  elect  any  officer,  unless 
otherwise  provided  by  charter  or  by- 
laws or  by  law.  Ex  "parte  Willcocks,  7 
Cow.  410  (1827);  Cooley,  Const.  Lim. 
(4th  ed.)  *141;  Oldknowr.  Wainwright, 
2  Burr.  1017  (17G0);  Booker  v.  Young,  12 
Gratt.  (Va.)  303  (1855).  Where  twelve 
are  present,  and  one  candidate  receives 
six  votes,  another  four,  and  another 
one,  and  one  blank,  there  is  no  election. 
People  V.  Conklin,  7  Hun,  138  (1S76). 

1  See  j;§  709,  712  and  cases  in  this  sec- 
tion ;  also  cases  in  ^  808,  infra;  also  g  725, 
infra. 
52 


•CH.  XLIII.]  HOW    CORPOKATE    CONTRACTS    ARE    MADE. 


[§  71da. 


it  in  good  faith,  he  may  act  upon  it,  and  is  protected  even  though 
•the  directors'  meetino-  was  not  regularly  called  or  held.^  A  Quorum 
of  the  directors  is  presumed  to  have  been  present.^  A  quorum  is 
not  present  in  passing  upon  a  matter  in  which  one  of  the  directors 
is  personally  interested,  where  only  a  bare  quorum  is  present  when 
he  is  counted.^ 

Although  a  meeting  of  the  board  of  directors  at  which  a  quorum 
is  not  present  calls  a  stockholders'  meeting,  and  the  stockholders' 
meeting  takes  action,  yet  where  no  stockholders  object  until  six 
months  thereafter  the  court  will  not  interfere.*  Where  the  charter 
makes  a  majority  of  directors  a  quorum,  a  minority  cannot  fill  a 
vacancy  in  the  board.^     The  president  is  not  entitled  to  a  casting 


1  See  §g  725,  808,  in/ra.  Even  though 
a  statute  authorizing  one  railroad  cor- 
poration to  guarantee  the  bonds  of  an- 
otiier  corporation  provides  tliat  such 
guaranty  shall  be  made  only  upon  a 
petition  of  a  majority  in  interest  of  the 
■stockholders  of  the  former,  yet  if  the 
guaranty  is  actually  executed  by  order 
of  the  board  of  directors  without  any 
such  petition,  a  bona  fide  purchaser  of 
the  bonds  may  enforce  such  guaranty, 
although  a  purchaser  with  notice  can- 
not enforce  such  guaranty.  Louisville, 
etc.  Ry.  V.  Louisville  Trust  Co.,  174  U.  S. 
552  (1899),  the  court  saying:  "Thedistinc- 

-tion  between  the  doing  by  the  corpora- 
tion of  an  act  beyond  the  scope  of  the 
powers  granted  to  it  by  law,  on  the  one 
side,  and  an  irregularity  in  the  exercise 
of  the  granted  powers,  on  the  other,  is 
well  established,  and  has  been  con- 
stantly recognized  by  this  court."  A 
bona  fide  purchaser  of  corporate  bonds 
is  entitled  "  to  presume  that  all  neces- 
sary preliminaries  not  required  to  be  a 
matter  of  public  record  have  been 
properly  performed,"  and  hence  it  is  no 
defense  that  the  directors  met  out  of 
-the  state  when  they  authorized  the 
mortgage  securing  the  issue.  Schultze 
V.  Van  Doren,  53  AtL  Rep.  815  (N.  J. 
1902). 

2  Sargent  v.   Webster,  54  Mass.   497 

(1847). 

3Bassett  v.  Fairchild,   64  Pac.   Rep. 

1082  (Cal.  1901).    In  counting  a  quorum 

•of  the   board,  a  director  to  whom   a 

17 


mortgage  is  voted  at  the  meeting  can- 
not be  counted.  Curtin  v.  Salmon,  etc. 
Co.,  130  Cal.  345  (1900).  Where  a  board 
of  directors,  consisting  of  six,  sell  cor- 
porate property  to  two  of  them,  the  sale 
being  authorized  at  a  meeting  at  which 
five  were  present,  including  the  two, 
the  remaining  three  do  not  constitute 
a  quorum  and  the  sale  is  illegal.  Leary 
V.  Interstate,  etc.  Bank,  63  S.  W.  Rep. 
149  (Tex.  1901).  Money  received  by  a  di- 
rector of  a  co-operative  insurance  com- 
pany for  substituting  other  directors 
and  transferring  its  business  to  another 
company  can  be  recovered  back  on  the 
ground  of  fraud,  and  such  director  is 
chargeable  with  notice  of  the  facts 
which  he  knew  or  might  have  learned 
by  the  exercise  of  reasonable  care.  Mc- 
Clure  V.  Wilson,  70  N.  Y.  A  pp.  Div.  149 
(1902). 

*  Southern,  etc.  Bank  v.  Rider,  73  L.  T- 
Rep.  374  (1895);  71  Pac.  Rep.  865. 

5  State  V.  Curtis,  9  Nev.  325  (1874).  A 
director  who  is  chosen  by  the  board 
when  less  than  a  quorum  is  present 
may  be  treated  as  not  a  director,  even 
though  he  has  met  with  the  board  fre- 
quently when  a  majority  was  present. 
His  remedy  is  not  viandamiis.  People 
V.  New  York,  etc.  Asylum,  7  N.  Y.  St 
Rep.  277  (1887;.  A  purchaser  of  prop- 
ert}'  at  an  execution  sale  cannot  con- 
test the  right  of  the  corporation  to  re- 
deem on  the  ground  that  such  redemp- 
tion was  by  a  board  of  directors  ille- 
gally elected,  in  that  a  minority  of  the 
53 


§  7 13a. J 


HOW    CORI'ORATE    CONTRACTS    ARE    MADF^ 


[CU.  XLIII. 


vote,  in  case  of  a  tie,  where  ho  has  already  voted  once.'  Although 
there  are  less  directors  than  the  statute  or  charter  requires,  yet  the 
acts  of  these  are  sufficient  to  sustain  obligations  incurred  by  the 
corporation  with   third   persons.-     A  corporate  creditor  attaching 


board  filled  vacancies  in  the  btmrd  and 
tiien  proceeded  to  take  action.  Ba;,'gott 
r. Turner.  21  Wash.  ;};jy(ls9y).  Under  the 
statutes  of  California,  wliere  a  hank  be- 
comes insolvent  ti)e  court  may  ap[>oint 
directors  to  fill  vacancies.  Braslan  v. 
Superior  Court,  etc..  124  Cal.  123  (1899). 

1  A  by-law  cannot  give  him  this  right. 
State  u  Curtis,  9  Nev.  32.")  (1874 >.  The 
president  does  not  have,  in  addition  to 
his  first  vote,  a  casting  vote  as  presi 
dent,  Toronto,  etc.  Ca  v.  Blake,  2  Out. 
(Can.)  175  (1882). 

2  Welch  V.  Importers',  etc.  Bank,  122 
N.  Y.  177  (1890/;  Wallace  r.  Walsh.  123 
N.  Y.  26  (1890).  Where  the  charter 
provided  that  two  directors  might  act, 
although  vacancies  existed  in  the  board, 
it  is  immaterial  that  the  number  of  di- 
rectors is  less  than  the  minimum  char- 
ter number.  Re  Scottish,  etc.  Co,  L. 
R  23  Ch.  D.  413  (1883).  Although  the 
statutes  require  three  directors  who 
shall  be  stockholders,  and  one  assigns 
his  stock,  and  the  other  two  authorize 
aud  execute  a  corporate  mortgage  at  a 
meeting  held  without  notice  to  the 
other,  yet  the  mortgagee,  having  no 
knowledge  of  these  facts,  is  protected. 
Kuser  r.  Wright,  52  N.  J.  Eq.  825(1895), 
rev'g  Wright  v.  First  Nat.  Bank,  52  N. 
J.  Eq.  392  (1894).  Where  the  charter 
requires  three  directors  who  shall  be 
and  continue  to  be  stockholders,  and 
one  of  them  sells  his  stock,  the  remain- 
ing two  cannot  act.  j^et  the  remaining 
directors  may  call  a  stockholders'  meet- 
ing to  hold  an  election.  Toronto,  etc. 
Co.  V.  Blake,  2  Ont.  (Can.)  175  (1882).  It 
is  held  inFaure,  etc.  Co.  r.  Phillipart,  58 
L.T.  Rep.  525  (1888),  that  where  the  board 
of  directors  was  to  consist  of  from  three 
to  seven,  but  the  quorum  to  consist  of 
two,  and  where  by  resignation  the 
whole  board  is  reduced  to  two,  these 
two  cannot  act ;  nor  can  they  elect  one  or 

1 


more  to  fill  the  vacancies.  The  quorum 
can  act  only  when  the  board  consists 
of  the  requisite  number.  This  objec- 
tion, however,  cannot  be  raised  by  one 
who  takfs  part  as  director.  Where  by 
charter  the  board  of  directors  is  to  be 
from  five  to  seven,  and  three  may  act, 
thrt'o  cannot  act  when  there  are  but 
four  directors.  The  act  is  not  binding 
on  the  corporation.  Kirk  v.  Bell,  IG  Q. 
a  290  (1851).  See  also  Bottoniley'sCase, 
L.  R.  10  Ch.  D.  681  (1880);  Lindley,  Com- 
panics,  p.  157.  A  company  whose  di- 
rectors are  to  be  twelve  may  act,  al- 
though by  resignation  or  death  the 
number  is  less  than  twelve.  Thames, 
etc.  Ry.  t'.  Rose,  4  Man.  &  G.  552  (1842). 
Where  a  majority  of  the  directors  may 
fill  vacancies,  and  of  seven  directors 
only  two  remain,  they  cannot  fill  the 
vacancies.  Moses  r.  Tompkins,  84  Ala. 
Oi:;  (1888). 

Although  there  are  vacancies  in  a 
board  consisting  of  fifteen  members, 
yet  action  may  be  taken  by  eight  or 
more  of  the  directors  at  a  meeting  duly 
called.  New  England,  etc.  Co.  v.  Haynes, 
71  Vt  306  (1899;.  A  mortgage  made  by 
four  directors  when  the  statute  re- 
quired five,  there  being  one  vacancy.  i.s 
legal  if  the  mortgage  is  ratified  by  the 
full  board,  and  such  ratification  may  be 
by  recognition  of  the  mortgage  in  a 
second  mortgaga  Porter  v.  Lassen 
County,  etc.  Co.,  127  Cal.  261  (1899). 
Where  there  are  two  vacancies  in  a 
board  of  five,  the  act  of  two  of  tlie  re- 
maining three  directors  is  not  legal, 
under  the  statutes  of  California.  Brown 
V.  Valley,  etc  Co.,  127  Cal.  630  (1900). 
Where  the  by-laws  provide  that  not- 
withstanding vacancies,  continuing  di- 
rectors may  act,  two  directors  may 
act,  they  being  the  only  directors,  al- 
though the  by-laws  provide  that  there 
should  be  from  three  to  nine  di- 
754 


en.   XLIII.]  HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§  713«. 


property  of  the  company  which  has  already  been  assigned  to  an- 
other creditor  cannot  attack  such  assignment  on  the  ground  that, 
while  the  statute  required  three  directors,  only  two  directors  ex- 
isted, the  third  one  having  resigned.^ 

A  statute  that  upon  an  officer  in  a  bank  borrowing  money  of  th& 
bank  without  security,  his  office  shall  become  vacant  and  he  shall 
cease  to  become  a  director,  is  self  executing.^ 

Even  though  a  director  resigns  for  the  sole  purpose  of  avoiding 
a  statutory  liability  and  causes  his  son  to  be  elected  director  in  his 
place  and  continues  to  be  the  agent  and  manager  of  the  business, 
nevertheless  he  is  not  liable  under  the  statute.^ 

The  question  of  whether  the  directors  may  delegate  their  au- 
thority to  an  executive  committee  has  given  rise  to  much  contro- 


rectors.  Moreover,  persons  dealing 
with  the  corporation  in  ignorance  of 
defects  in  the  constitution  of  the  board 
are  not  bound  to  take  notice  of  it  and 
may  enforce  their  claims.  Re  Bank  of 
Syria,  [19001  2  Ch.  272:  aff'd,  [1901]  1  Ch- 
115.  Where  there  are  vacancies  in  the 
board  of  directors  the  remaining  di- 
rectors have  no  power  to  act  unless  the 
charter  or  by-laws  of  the  company  au- 
thorize them  to  act  under  such  cir- 
cumstances; but  as  to  all  matters  in 
the  ordinary  course  of  business  of  the 
company,  persons  dealing  with  the  cor- 
poration in  good  faith  are  protected, 
even  though  there  are  vacancies  in  the 
board  of  directors.  Lindley  on  Com- 
panies (5th  ed.),  p.  157.  A  committee 
of  arbitration  may  act  by  a  majority 
vote  unless  the  agreement  provides 
otherwise.  The  resignation  of  one  mem- 
ber just  before  the  award  is  made  does 
not  invalidate  the  award.  Republic  of 
Colombia  v.  Cauca  Co.,  106  Fed.  Rep. 
337  (1901). 

1  Castle  V.  Lewis,  78  N.  Y.  131  (1879). 

2  His  continuance  in  office  may  bind 
the  corporation  by  his  acts,  but  does 
not  prevent  a  creditor  attacking  an  as- 
signment for  creditors  made  by  him  in 
behalf  of  the  bank.  Cupit  v.  Park  City 
Bank,  20  Utah,  292  (1899).  Where  a  di- 
rector, who  is  also  treasurer,  sells  his 
stock  to  the  other  directors,  it  being  a 
part  of  the  sale  that  he  give  up  his  of- 

17 


fices,  the  corporation  may  treat  his 
offices  as  vacant.  Anderson,  etc.  Co.  v. 
Pungs,  127  Mich.  543  (1901).  An  injunc- 
tion suit  by  a  director  to  restrain  the 
other  directors  from  excluding  him 
from  the  board  fails  where  the  charter 
provides  that  any  director  accepting 
an  office  for  profit"  in  the  company 
thereby  vacated  his  directorship,  and 
he  had  accepted  a  position  of  trustee 
of  a  corporate  mortgage.  Astley  v. 
New  Tivoli,  Ltd.,  [1899]  1  Ch.  151.  Note& 
issued  by  directors  who  are  disqualified 
by  having  sold  their  stock  and  as  a 
scheme  to  create  a  liability  on  the  part 
of  the  stockholders  are  not  good,  espe- 
cially where  the  meeting  of  the  direct- 
ors was  not  properly  called.  Close  v. 
Potter,  1.55  N.  Y.  145  (1898).  Directors 
cannot  be  ousted  from  office  simply  be- 
cause they  have  sold  all  the  corporate 
property  to  themselves.  The  proper 
remedy  is  a  suit  to  set  aside  the  sala 
Stanley  v.  Luse,  36  Oreg.  25  (1899). 

3  Brown  v.  Clow,  62  N.  R  Rep.  100& 
(Ind.  1902).  Where  the  board  of  direct- 
ors allow  an  illegal  preference  to  one 
director  they  are  personally  liable  to 
other  creditors  to  the  extent  of  such 
preference,  and  even  though  one  of 
them  resigns,  the  liability  continues 
for  the  benefit  of  past  as  well  as  future 
creditors.  Nix  v.  Miller,  26  Colo.  20a 
(1899).     See  also  §  624,  suprou 


.O.D 


§  TU.-] 


now    COKPDK.VTE    CONTRACTS    ARE    MADK. 


[cn.  xi.iir. 


versy.  Such  a  clelegation  of  authority  has  become  very  common, 
and  is  sustained  by  the  courts.  This  question  is  discussed  else- 
where.^ 

§  714.  MinnU-hooli  of  directors'  meetiugs  and  other  lools  of  the 
corporation  as  evidence  of  acts  and  contracts  of  thecorporathni  and 
authorization  of  agents.— The  minute-ljook  of  the  proceedings  of 
the  directors'  meetings  is  the  proper  evidence  to  prove  a  corporate 
contract  or  the  authority  of  a  corporate  agent  to  act  or  contract 
for  it."    "Where  the  resolutions  of  the  directors  authorize  the  maU- 


>  See  §  715.  infra. 

2  Quoted  and  ai)|iroved  in  Torras  v. 
Raeburn.  lOS  Ga.  34.1  (1899).  The  cor- 
jiorate  record  of  tlie  vote  of  the  direct- 
ors and  the  signature  of  the  recording 
officer  satisfies  the  statute  of  frauds  as 
to  answering  for  the  debts  of  another. 
Lamliin  v.  Baldwin,  etc.  Co.,  72  Conn. 
57  (1899).  The  authority  of  a  corporate 
agent  to  manage  the  affairs  of  a  com- 
pany cannot  be  proved  by  a  question  to 
a  witness  in  the  absence  of  the  vote  of 
the  directors  or  proof  that  the  resolu- 
tion caAnot  be  found.  St,  Regis,  etc. 
Co.  V.  Hotchkiss,  45  AtL  Kept  11  (Conn. 
1900).  The  corporate  records  may  be 
shown  to  be  such  by  the  testimony  of  a 
director  who  is  also  treasurer  at  the 
time.  Illinois,  etc  Assoa  v.  Plagge,  177 
111.  431  (1898).  A  resolution  of  the  board 
of  directors  may  be  sufficient  evidence 
of  a  contract  relative  to  land.  Newport 
News,  etc.  Co.  v.  Newport  News,  etc. 
Ry.,  97  Va.  19  (1899).  Entries  in  the  min- 
vite-book  fifty  years  old  are  admissible 
in  behalf  of  the  corporation  to  prove 
title  to  land  claimed  bj-  the  corporation 
by  adverse  possession.  Hamershlag  v. 
Duryea,  58  N.  Y.  App.  Div.  288  (1901). 
Even  though  the  secretary  did  not  sign 
the  minutes  of  a  meeting  as  copied  into 
the  record  book,  yet  such  minutes  may 
be  used  to  prove  that  a  resolution  was 
passed  at  that  meeting.  Woodhaven 
Bank  v.  Brooklyn,  etc.  Co.,  69  N.  Y. 
App.  Div.  489  (1902).  A  party  may  in- 
troduce in  evidence  a  portion  of  the 
minutes  pertaining  to  the  matter  in 
litigation,  leaving  it  to  the  opposite  side 
to  introduce  the  remainder  if  the  latter 

1 


desires.  Foucher.  Merchants', etc.  Bank, 
110  Ga.  827  (1900).  Where  the  appoint- 
ment of  an  agent  is  by  resolution  of  the 
directors,  or  in  any  other  manner  re- 
quiring a  record  of  the  matter,  the 
entry  upon  the  minutes  or  books  of  the 
corporation  may  be  introduced  in  evi- 
dence of  the  appointment  Buncombe 
Tump.  Co.  tx  McCarson,  1  Dev.  &  R 
(N.  C.)  306  (1835);  Owings  v.  Speed.  5 
Wheat.  420, 424  (1820):  Thayer  U.Middle- 
sex Ins.  Co.,  27  Mass.  326  (1830);  Narra- 
gansett  Bank  v.  Atlantic  Silk  Co.,  44 
Mass.  282  (1841);  Clark  v.  Farmers'  Mfg. 
Co.,  15  Wend.  256  (1836);  Methodist 
Chapel  V.  Herrick,  25  Me.  3.H  a>iio); 
Haven  v.  New  Hampshire  Asylum,  13 
N.  H.  532  (1843X  Where  a  corporate 
agent  is  appointed  by  a  resolution,  his 
authority  cannot  be  proved  by  parol. 
The  extent  of  the  authority  in  such  a 
case  is  a  question  of  law  for  the  court. 
McCreery  v.  Garvin,  39  S.  C.  375  (1893). 
In  order  to  make  the  corporate  books 
admissible,  proof  must  be  given  as  to 
who  kept  them,  and  that  the  entries 
were  made  at  the  proper  time  or  by  the 
proper  directors,  and  that  the  entries 
were  properly  made.  Powell  v.  Cono- 
ver,  75  Hun,  11  (1894).  A  contract  duly 
accepted  and  agreed  to  in  a  directors' 
meeting  and  entered  on  the  minutes, 
which  are  duly  signed,  is  a  contract  in 
writing.  Texas,  etc.  Ry.  v.  Gentr}'.  69 
Tex.  625  (1888).  An  entry  on  the  corpo- 
rate minutes  of  a  resolution  to  form  a 
corporate  contract  is  sufficient  on  notice 
of  the  same  to  the  other  party,  and 
suffices  to  form  the  contract.  It  satis- 
fies the  statute  of  frauds.  Argus  Co.  v. 
756 


CH.  XLIII.]  HOW    CORPOKATE    CONTRACTS    ARE    MADE, 


[§  Tid- 


ing of  a  contract,  and  the  contract  is  subsequently  prepared  and 
executed,  its  terms  being  more  full  than  the  resolutions  of  the  di- 


Mayor,  etc.,  55  N.  Y.  495  (18741.     An  en- 
try on  the  directors'  minute-book,  duly 
signed,  is  sufficient  to  prevent  a  con- 
tract being  void  by  the  statute  of  frauds. 
Jones  V.  Victoria,  etc.  Co.,  L.  R.  2  Q.  B. 
I>.  314  (ISTTj.     Directors'  minutes  are 
evidence  of  a  contract,  though  written 
up  after  tlie  meeting.     Wells  v.  Rail- 
way, etc.  Co.,  19  N.  J.  Eq.  402  (1869).     In 
a  suit  by  an  employee  of  a  corporation 
for  pay   for  services,  the  defendants' 
booiv.s,    properly    kept    by    its    proper 
officers,  are  admissible  in  evidence  to 
prove  payments  to  plaintiff  on  account 
of  services.     Ganther  v.  Jenks,  etc.  Co., 
76  Mich.  510  (18^9;,    A  resolution  of  the 
board  of  directors  authorizing  an  as- 
signment for  the  benefit  of  creditors  is 
sufficient.     Tripp  v.  Northwestern  Nat. 
Bank.  45  Minu.  i38o  (1891).     The  minutes 
of  directors'  meetings  as  they  appear 
in  a  corporate  book  will  not  be  excluded 
as  evidence  merely  because  the  secre- 
tary swears  tiiat  they  were  written  up 
several  years  after  the  meetings  and 
were  made  partially  from  the  recollec- 
tions of  the  president     Mcllhenny  v. 
Binz,  80  Tex.  1  (1890).     In  proving  a  de 
facto  corporation,  the  meetings  and  the 
issue  of  stock  and  the  transaction  of 
business  may  be  proved  by  parol  with- 
out producing  the  books.     Johnson  v. 
Akerstrom,  70  Minn.  303  (1897 j.     After 
notice  to  the  corporation  to  produce  its 
records   is  given,   secondary   evidence 
may  be  introduced.     Thayer  v.  Middle- 
sex, etc.  Co.,  27  Mass.  325  (1830);  Elems 
V.  Ogle,  15  Jur.  180  (1850);  Lohman  v. 
New  York,  etc.  R  R,  2  Sandf.  39  (1848), 
holding  that  the  failure  to  produce  may 
send  the  question  to  the  jury.     To  same 
effect.  Narragansett  Bank  v.  Atlantic 
Silk  Co.,  44  Mass.  282  (1841).     The  pre- 
sumption is  that  a  suit  in  the  corporate 
name  was  authorized  by  it.     Bangor, 
etc.  R  R  r.  Smith,  47  Me.  34  (1859).     In 
proving  employment,  notice  to  produce 
must  be  given.     Haven  v.  New  Hamp- 

17 


shire  Asylum.  13  N.  H.  533  (1848).    So 
also  in  proving  agency.     Clark  v.  Farm- 
ers', etc.  Co.,  15  Wend.  256  (1836);  Mont- 
gomery R  R  V.  Hurst,  9  Ala.  513  (1846). 
As  to  proving  subscription  to  stock,  see 
ch.  IV,  supra.    Parol  evidence  cannot 
explain  the  minutes.     Gould  v.  Norfolk, 
eta  Co.,  63  Mass.  338  (1852).     The  rough 
minutes    are    evidence   if    not    subse- 
quently written  out.    Waters  y.  Gilbert, 
56  Mass.  27  (1848).    It  may  be  shown 
that  the  minutes  are  incorrect.    Van 
Hook  V.  Somerville,  etc.  Co.,  5  N.  J.  Eq. 
137,  169  (1845).     If  on  production  of  the 
bocrfis  no  resolution  is  found,  proof  of 
acts,  etc.,  may  be  given.     Melledge  v. 
Boston,  etc.  Co.,  59  Mass.  158, 179  (1849). 
See  also  §  721.     Proof  that  the  book  is 
a  corporate  record  is  made  by  the  per- 
son having  custody  of  the  book.    Smith 
V.    Natchez,   etc.    Co.,   2   Miss.  479,  492 
(1837).     It  must  be  proved  that  it  is  a 
corporate  book,  kept  as  such,  and  by 
the   proper   officer.     Highland   Turnp. 
Co.  V.   McKean,  10  Johns.  154  (1813); 
Whitman  v.  Granite  Church,  24  Me.  236 
(1844).     Proof  may  be  by  the  secretary. 
Stebbins  v.  Merritt,  64  Mass.  27  (1852). 
The  book-keeper  may  prove  his  entries. 
Union    Bank    v.   Knapp,  20    Mass.   96 
(1825).     Or,  if  he  is  dead,  his  handwrit- 
ing  may   be  proved.     Union   Bank  i\ 
Knapp,   20   Mass.  96   (1825):   also  Che- 
nango, etc.   Co.  V.  Lewis,  63  Earb.  Ill 
(1872).     Where  a  corporation  is  disprov- 
ing agency  it  is  held  to  strict  proof. 
Its  records  are  inadmissible  unless  proof 
is  given  that  they  were  kept  by  the 
proper  officer,  and  unless  he  testifies  to 
them.     Union,  etc.  Co.  v.  Rocky  Mount- 
ain Nat  Bank,  2  Colo.  565  (1875).     See 
GaSford  v.  American,  etc.  Co.,  77  Iowa, 
736  (1889).     For  a  very  full  note  on  the 
admissibility  of  corporate  books  as  evi- 
dence, see  23  Cent  L.  J.  468-473.     An 
examination  before  trial,  to  ascertain 
whether  the  defendant  corporation  au- 
thorized a  person  to  make  a  contract 
57 


§  TH-] 


now    CORPORATE    CONTRACTS    AUK    MADE.  [CH.  XLIII. 


rectors,  the  contract  between  the  parties  is  the  one  which  was  act- 
ually executed.'  A  director  has  a  right  to  examine  all  the  l)Ooks 
and  papers  of  the  company.^ 

A  corporation  may  enter  into  a  written  contract  under  seal  witli- 
out  a  formal  vote  or  written  entry  of  a  vote  by  the  directors.  "Wiiere 
the  directors  are  present,  and  all  assent  to  tlie  execution  of  the  con- 
tract, this  is  sulficient.  Proof  of  corporate  resolutions  or  votes,  and 
of  votes  of  the  directors,  is  made  by  producing  the  original  minutes 
or  record-book  of  the  corporation.  J]ut  where  the  record-book  is 
lost,  or  no  record  was  ever  made,  secondary  evidence  may  be  re- 
sorted to.' 


for  it,  wa.s  granted  in  Bloom  v.  Pond's 
Extract  Co.,  18  N.  Y.  Siipp.  179  (1891). 

'  Keystone,  etc.  Co.  v.  Bute,  19G  P;u  St. 
506  U'JUO).  Even  though  tlie  resolution  of 
the  board  of  directors  accepting  an-oral 
proposition  does  not  contain  the  entire 
proiio.sition  made  to  a  corporation,  yet 
the  entire  oral  proposition  may  be  bind- 
ing on  the  corporation.  Rochester,  etc, 
Co.  V.  Browne,  55  N.  Y.  App.  Div.  444 
(1900). 

-See  §  511,  supra. 

^Zihlman  v,  Cumberland  Glass  Co., 
74  Md.  303  (1891).  The  minutes  of  a 
meeting  at  which  directors  were  elected 
may  be  proved  by  parol  if  the  written 
record  has  been  lost.  Hudson  v.  J.  B. 
Parker,  etc.  Co.,  173  Mass.  242  (1899).  A 
by-law  may  be  proved  by  oral  evidence 
where  there  was  no  written  entry  of 
the  same  in  the  corporate  records. 
Masonic,  etc.  Assoc,  v.  Severson,  71 
Conn.  719  (1899).  A  resolution  of  the 
board  of  directors  releasing  the  mort- 
gage may  be  proved  by  parol,  no  record 
having  been  made.  In  re  Bank  of  West 
Superior,  109  Wis.  672  (1901).  The  best 
proof  of  a  corporate  act  is  the  record  of 
the  board  of  directors,  and  other  evi- 
dence cannot  be  introduced  unless 
such  record  does  not  exist  or  is  inac- 
cessible. Topeka  Co.  v.  Oklahoma  Co., 
7  OkL  220  (1898).  Although  the  record 
does  not  show  that  certain  stock  was 
voted,  yet  it  may  be  proved  by  parol 
evidence  that  it  was  voted.  Franklin 
T.  Co.  V.  Rutherford,  etc.  Co.,  57  N.  J. 
Eq.  42  (1898).     Where  no  written  min- 


1758 


utes  are  kept  of  the  proceedings  of 
stockholders,  they  may  be  proved  by 
parol.     Birmingham,    etc    Co.    v.    Bir- 
mingham Traction  Co.,  29  &  Rep.  187 
(Ala.  1900).     Where  no  record  is  kept 
of  directors'  resolutions  authorizing  a 
mortgage,  tliey  may  be  proved  by  parol. 
Murray  v.  Beal,  23  Utah.  548  (1901).     If 
no   record    is   kept,  the  action   of  the 
board  of  directors  may  be  proved  by 
parol.     Hendrie,  etc.  Ca  r.  Collins,  13 
Colo.  App.   8  (1899).     The  fact  that  a 
majority  of  the  members  of  the  corpo- 
ration voted  for  a  loan,  as  required  by 
statute,  may  be  shown  by  parol  evi- 
dence, even  though  such  vote  does  not 
appear  in  the  records  of  the  corpora- 
tion.    Illinoi-s,  etc.  Assoc,  v.  Plagge,  177 
111.   431   (1898).     Where  the   corporate 
books  are  lost,  a  contract  that  a  cer- 
tain person  should  not  pay  toll,  in  con- 
sideration   of   closing   a   private    way, 
may  be  proved  by  parol.     Pigg  r.  Sta- 
cey,   49    S.    W.    Rep.    1065    (Ky.    1899). 
Where  all  the  directors  are  present  and 
assent  thereto,  a  written  contract  may 
be  made  by  the  corporation   without 
any  formal  vote  or  entry  in  the  min- 
utes.    Indiana,  etc.  Co.  v.  Robinson,  63 
N.  E.  Rep.  797  (Ind.  1902).  Where  there 
are  but  two  directors  and  one  of  them 
is  general  manager  and  carries  on  the 
entire  business,  and  he  and  the  presi- 
dent sell  all  the  property  of  the  com- 
pany, it  is  immaterial  that  they  did  not 
hold  a  formal  meeting  as  directors  to 
authorize  such  sale.     Magowan  v.  Gro- 
neweg,  91  N.  W.  Rep.  335  (S.  D.  1902,. 


CH.  XLIII.]  HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§ 


TU. 


But  a  stockholder  cannot  prove  by  parol  that  a  dividend  was 
declared,  the  records  not  showing  the  same.  His  remedy  is  by 
proceedings  to  correct  the  corporate  record.^ 


A  creditor  cannot  complain  that  the 
corporation  sold  some  of  its  property 
to  two  directors  in  consideration  of 
tlieir  paying  certain  of  the  debts; 
neither  can  he  claim  that  the  transac- 
tion was  not  duly  autliorized  by  the 
board  of  directors  or  signed  by  the 
proper  officers,  where  he  has  partici- 
pated in  the  results  of  their  action. 
Swentzel  v.  Franklin,  etc.  Co..  67  S.  W. 
Rep.  596  (Mo.  1902).  Where  a  street- 
railway  company  employs  a  person  as 
its  agent  to  purchase  a  majority  of  the 
stock  of  another  street-railway  com- 
pany, and  he  does  so,  and  the  former 
pays  him  for  the  stock  and  for  his  serv- 
ices, he  cannot  refuse  to  deliver  the 
stock  on  the  ground  that  the  company 
had  no  power  to  purchase  or  on  the 
.^Tound  that  it  had  passed  no  resolu- 
tions authorizing  him  to  purchase,  and 
tlie  former  may  recover  the  stock  from 
a  transferee  with  notice  from  the 
agent.  Manchester  St.  R}'.  v.  Williams, 
52  AtL  Rep.  461  (N.  H.  1902).  Even 
though  no  formal  resolutions  are  passed 
or  record  made,  yet,  if  all  the  stock- 
liolders  and  directors  are  present,  and 
it  is  agreed  that  one  stockholder  should 
loan  money  to  the  company,  the  com- 
pany must  repay  the  same.  Burke  v. 
Sidra  Bay  Co.,  92  N.  W.  Rep.  568  (Wis. 
1902).  A  mortgage  authorized  at  a 
Btockholders'  meeting  at  which  all  the 
directors  were  present  is  legally  au- 
thorized. Crossette  v.  Jordan,  93  N. 
W.  Rep.  782  iMich.  1902).  It  may  be 
ehown  by  parol  that  a  resolution  gave 
the  vice-president  a  certain  salary, 
»vhere  such  resolution  was  not  entered 
on  the  record  and  he  performed  serv- 
ices other  than  those  pertaining  to  his 
office.  Selley  v.  American,  etc.  Co.,  93 
X.  W,  Rep.  590  (Iowa,  1903).  "The  en- 
try of  a  resolution  in  a  minute  is  not 
essential  to  the  validity  of  the  resolu- 


tion, which  is  proved  aliunde."  Re 
Great  Nortliern,  etc.  Works,  L.  R.  44 
Ch.  D.  472  (1890).  Although  a  resolu- 
tion is  not  inserted  in  the  minutes  of 
the  meeting,  it  may  be  proved  by  other 
evidence.  So  held  as  to  a  resolution 
authorizing  the  secretary  to  borrow 
money.  Bank  of  Yolo  v.  Weaver,  31 
Pac.  Rep.  160  (CaL  1892).  "Parol  evi- 
dence is  admissible  to  prove  the  action 
of  the  board  of  directors  or  stockhold- 
ers where  the  record  fails  to  state  it." 
Allis  V.  Jones,  45  Fed.  Rep.  148  (1891). 
"Where  a  corporation  consists  of  a 
small  number  of  persons,  like  a  part- 
nership, they  may  transact  all  their 
business  by  conversation,  without 
formal  votes;  and  it  would  be  a  viola- 
tion of  the  plainest  principles  of  justice 
to  hold  those  who  deal  with  them  to 
prove  all  their  acts  by  written  votes, 
which  they  do  not  keep  or  do  not  pro- 
duce." Melledge  v.  Boston,  etc.  Co..  59 
Mass.  158,  179  (1849).  Parol  evidence 
may  be  given  to  prove  a  vote  of  a  sal- 
ary to  an  officer  where  the  secretary  is 
dead  and  the  minute-book  does  not 
contain  a  record  of  the  vote.  Pickett 
r.  Abney,  84  Tex.  645  (1892).  A  vote  of 
the  directors  employing  a  person  is  not 
a  contract.  It  must  be  known  to  and 
accepted  by  the  person  employed.  It 
may  be  shown  by  parol  that  the  con- 
tract was  to  be  binding  only  in  case 
certain  negotiations  were  carried  out. 
A  statement  by  the  treasurer,  showing 
the  liabilities  and  making  no  mention 
of  his  salary,  is  admissible  as  evidence. 
Sears  v.  King's,  etc.  R  R,  152  Mass.  151 
(1890).  See  also,  on  this  subject,  U.  S. 
Bank  v.  Dandridge,  12  Wheat  64,  95 
(1827);  Union  Bank  v.  Ridgel}',  1  Har. 
&  G.  (Md.)  334,-  425  (1827);  St.  Mary's 
Church  V.  Cagger,  6  Barb.  576  (1849); 
Maxwell  V.  Dulwich  College,  1  FonbL 
Eq.  296   a834);    Magill   v.  Kaufman,  4 


1  Dennis  v.  Joslin,  etc. 
17 


Co.,  19  P^  Le06  (1896> 
59 


§  T14.] 


HOW    COKl'OKATE    CONTKACTS    AKE    MADE. 


[cu. 


XLIII. 


The  question  of  whether  the  books  are  evidence  against  officers, 
and  whether  the  officers  are  conclusively  presumed  to  have  notice 


Serg.  &  R  (Pa.)  317  (1818);  Brady  n 
Brooklyn.  1  Barb.  584  (1847);  Essex 
Turnp.  Corp.  v.  Collins.  8  Mass.  292.  298 
(1811);  Marshall  v.  Queensborough,  1 
Sim.  &  S.  520  (1823);  Elysville  Mtg.  Ca 
17.  Okisko  Co.,  1  Md.  Ch.  392  (1849);  Gar- 
vey  V.  Colcook,  1  Nott  &  McC.  (S.  C.) 
231  (181."));  Bates  v.  Bank  of  Alabama. 
2  Ala.  4r)2  (1841).  The  corporate  secre- 
tary's letters  to  a  vendor  are  admissi- 
bleasevidenee.  Scott  r.  Middletown.etc. 
R  R.,  80  N.  Y.  200  (lb81).  The  minutes 
of  a  directors'  meeting  may  by  parol 
be  shown  not  to  include  the  whole 
agreement  where  the  party  being  con- 
tracted with  was  present  at  the  meet- 
ing and  discussed  the  matter  with 
the  board.  Tibbals  v.  Mount  Olympus 
Water  Co.,  10  Wash.  329  (1894).  A  ver- 
bal  agreement  of  the  directors  in  meet- 
ing assembled  to  pay  the  treasurer  a  cer- 
tain salary  is  binding  on  the  company, 
although  no  written  resolution  thereof 
is  entered  in  the  minutes.  Outterson 
V.  Fonda  Lake  Paper  Co.,  20  N.  Y.  Supp. 
980  (1892).  When  there  are  but  a  few 
persons  interested  in  a  corporation, 
•'ordinary  business  may  be  transacted 
without  the  formality  of  resolutions. 
It  may  be  done  by  conversation  with- 
out formal  votes."  Hall  v.  Herter.  S3 
Hun.  19  (1894).  See  s.  C.  90  Hun.  280. 
and  157  N.  Y.  694,  The  resolutions  of 
directors  need  not  be  reduced  to  writ- 
ing in  order  to  be  valid.  Columbia,  etc. 
Co.  V.  Vancouver,  etc.  Co.,  32  Oreg.  532 
(1898).  Corporate  minutes  need  not  be 
written  out  by  the  secretary  himself. 
It  is  sufficient  that  he  sign  them. 
United  Growers'  Co.  v.  Eisner,  22  N.  Y. 
App.  Div.  1  (1897).  A  resolution  of  the 
board  of  directors  that  the  company 
execute  an  assignment  for  the  benefit 
of  creditors  may  be  carried  out  by  the 
president  without  further  authority, 
but  he  should  not  select  himself  as  as- 
signee. Rogers  v.  Pell,  154  N.  Y.  518 
(1898).    Authority  to  an  agent,  given 

17 


by  the  board  of  directors,  may  b. 
proved  by  oral  eviilence.  there  being  no 
record  of  the  same  in  the  corporate 
books.  There  is  no  law  requiring  a 
board  of  directors  to  keep  a  record  of 
their  proeeeilings.  Morrill  v.  C.  T.  Segai 
Mfg.  Co.,  32  Hun.  543  (1884).  Coutra. 
Andover.  etc.  Turnp.  Co.  v.  Hay.  7  Mass. 
102,  107  (1810):  Colcock  v.  Garvey,  1 
Nott  &  McC.  (a  C.)  231  (1815);  Peek  v. 
Detroit,  etc.  Works.  29  Mich.  313  (1874); 
but  see  Taymouth  v.  Koeliler.  35  Mich. 
22  (1876).  The  acts  of  the  directors 
need  not  be  formally  entered  on  the 
corporate  minutes.  Nashua,  etc.  R  R. 
r.  Boston,  etc.  R  R.  27  Fed.  Rep.  821 
(I'^SO):  Morrill  v.  Segar.  etc.  Co..  32 
Hun.  .■)43  (1S84);  Moss  i\  Averell.  10 
N.  Y.  449  (1853).  Parol  evidence  may 
show  that  the  corporate  records  have 
been  burned.  Bajitist  House  r.  Webb. 
60  Me.  398  (1877).  Or  lost.  Wallace  v. 
First  Parish,  etc.,  109  Mass.  263  (1872); 
Prothro  v.  Minden  Sem.,  3  La,  Ann.  939 
(1847).  It  may  be  proved  by  parol  that 
the  board  of  directors  authorized  an 
agent  to  draw  a  bill  of  exchange.  No 
corporate  seal  or  record  evidence  are 
necessary.  Preston  v.  Missouri,  etc. 
Co.,  51  Mo.  43  (1872).  The  directors' 
votes  may  be  proved  by  parol  when 
they  were  not  recorded.  Edgerly  r. 
Emerson,  23  N.  H.  o.lo  (1851);  Wait, 
Insolv.  Corp.,  ^  529.  It  may  be  for  the 
jury  to  say  whetlier  a  subsequent  meet- 
ing changed  the  minutes.  Delano  v. 
Smith  Charities,  138  Mass.  .63  (1884).  ' 
The  company  is  not  bound  by  fraudu- 
lent insertions,  at  least  where  strangers 
have  not  relied  thereon.  Holden  v. 
Hoyt,  134  Mass.  181  (1883;.  See  also 
Perkins  v.  Washington  Ins.  Ca.  4  Cow. 
045  (1825);  Hoag  v.  Lamont.  60  N.  Y.  96 
(1875);  Fleckner  v.  Bank  of  U.  S..  8 
Wheat.  338  (1823);  Elysville  Mfg.  Co. 
V.  Okisko  Co.,  1  Md.  Ch.  392  (1849), 
holding  that  an  appointment  need 
not  be  entered  upon  the  records  of 
60 


CH. 


XLIII.] 


HOW    CORPORATE    CONTRACTS    ARE   MADE. 


[§  n4. 


of  all  that  is  contained  in  the  corporate  books,  is  considered  else- 
where.^ The  books,  of  course,  are  not  admissible  as  evidence  against 
strangers  dealing  with  the  corporation.^  Where  there  is  no  statute 
or  by-law  requiring  a  private  corporation  to  keep  a  minute-book,  it 
seems  that  the  certificate  of  the  secretary  under  the  corporate  seal 


the  corporation.  Secondary  evidence 
of  the  records  is  not  admissible  un- 
less the  officers  are  first  examined 
and  the  originals  are  not  to  be  found. 
Mullanphy  Sav.  Bank  v.  Schott,  135 
111.  635  (1891).  In  a  suit  to  set  aside 
an  allep;ed  illegal  sale  of  stock  for 
non-payment  of  assessments,  the  rec- 
ords of  the  corporation  cannot  be 
proved  by  oral  evidence.  Corcoran  v. 
Sonora,  etc.  Co.,  71  Pac.  Rep.  127  (Idaho, 
1902).  Entries  in  the  corporate  books 
should  be  proved  by  the  books  them- 
selves, and  not  by  the  clerk,  unless  an 
excuse  is  given  for  their  non-produc- 
tion. National  Bank  v.  Navassa,  etc. 
Co.,  56  Hun,  136  (1890).  Where  the 
original  minutes  have  been  desti'oyed, 
the  minutes  as  they  have  been  copied 
into  the  minute-book  are  admissible. 
Brower  v.  East,  etc.  Co.,  84  Ga,  219 
(1890).  The  books  of  the  company  are 
the  best  evidence,  and  not  the  testi- 
mony of  officers  as  to  what  they  had 
seen  on  the  books.  Dial  v.  Valley,  etc. 
Assoc,  29  S.  C.  560  '1888).  A  copy  of  a 
resolution  of  the  directors  of  an  alien 
corporation  is  not  evidence  until  proof 
of  a  reasonable  effort  to  obtain  the 
original  is  given.  Bowick  v.  Miller,  21 
Oreg.  25  (1891).  Sworn  copies  taken 
from  corporate  books  are  incompetent 
unless  evidence  is  given  of  the  loss  of 
the  book  itself.  Latourette  v.  Clark,  51 
N.  Y.  639  (1872).  Entries  need  not  be 
proven  by  the  clerk  who  made  the  en- 
tries. First  Nat.  Bank  v.  Tisdale,  84 
N.  Y.  655  (1881).  Books.of  the  board  of 
directors,  in  which  their  proceedings 
are  recorded,  proved  by  proving  tiie 
handwriting  of  the  clerk  and  president, 
are  competent  evidence  to  prove  the 
facts  therein  recorded.  Owings  v. 
Speed,  5  Wheat.  420  (1820).     Acts  of  a 


board  of  directors  may  be  shown  by 
parol  when  no  record  of  them  has  been 
made.  Zalesky  v.  Iowa,  etc.  Co.,  103 
Iowa,  512  (1897).  In  an  action  by  a  for- 
eign corporation,  oral  proof  of  the  cor- 
porate books,  papers,  and  records,  in 
the  possession  of  the  corporation  out- 
side the  state,  is  not  admissible  in  its 
behalf.  Mandel  v.  Swan,  etc.  Co.,  154 
111.  177  ( 1895).  Query,  whether,  under 
the  statutes  of  Tennessee  requiring  the 
board  of  directors  to  keep  a  full  and 
true  record  of  all  their  proceedings,  an 
authorization  of  a  mortgage  is  legal 
where  no  such  record  of  the  authoriza- 
tion is  made?  Lowry  Banking  Co.  v. 
Empire  Lumber  Co.,  91  Ga.  624  (1893). 
Even  though  the  resolutions  authoriz- 
ing a  mortgage  were  oral,  and  no  writ- 
ten record  was  made,  yet  they  may  be 
proved  to  sustain  the  mortgage.  Boggs 
V.  Lakeport,  etc.  Assoc,  111  Cal.  354 
(1896).  Where  the  secretary  is  dead, 
and  his  memoranda  of  the  minutes 
cannot  be  found,  and  no  record  has 
been  made,  the  minutes  may  be  proved 
by  parol.  New  Boston,  etc.  Co.  v.  Saun- 
ders, 67  N.  H.  249  (1892).  Resolutions 
of  the  board  may  be  shown  by  parol 
where  only  a  part  of  the  business  has 
been  entered  in  the  minutes.  Cameron 
V.  First,  etc  Bank,  34  S.  W.  Rep.  178 
(Tex.  1896).  The  acts  and  resolutions 
of  the  directors,  if  not  recorded,  maj' 
be  proved  by  parol.  Langsdale  v.  Bon- 
ton,  12  Ind.  467  (1859);  Bay,  etc.  Assoc 
V.  Williams.  50  Cal.  353  (1875).  Minutes 
not  signed  by  the  chairman  are  not 
evidence  of  a  call ;  nor  is  a  subsequent 
ratification  of  those  mmutes.  Corn- 
wall, etc.  Co.  V.  Bennett,  5  H.  &  N.  423 
(1860).    See  120  Fed.  Rep.  318;  id.  925. 

1  See  §  727,  infra. 

2  See  §  727,  m/ro. 


(Ill) 


1761 


§  '715.] 


HOW    CORPORATE    CONTRACTS    ARE    MADE.  [CH.   XLIIL 


that  a  resolution  was  passed  cannot  be  questioned  by  any  one 
claiming  under  or  through  the  corporation.^ 

A  resolution  adopted  at  a  stockholders'  meeting  is  valid,  al- 
though only  a  pencil  memorandum  was  made  of  it  and  no  formal 
record  made  until  long  afterwards.  The  proceedings  may  be 
proved  by  parol.^ 

§  715.  Executive  committee. —  There  formerly  was  some  doubt 
as  to  whether  the  powers  of  a  board  of  directors  might  be  dele- 
gated to  an  executive  committee.  The  right  of  the  board  of  direct- 
ors to  delegate  to  agents  generally  the  transaction  of  the  ordinary 
and  routine  business  of  the  corporation  is  unquestioned,  and  indeed 
is  absolutely  necessary.'  But  in  matters  involving  discretion  there 
are  decisions  to  the  effect  that  the  directors  cannot  delegate  that 
discretion.*     The  clear  weight  of  authority,  however,  holds  that 


1  Prentiss,  etc.  Co.  v.  nodchaux,  66 
Fed.  Rep.  234  (1894).  A  certified  copj- 
of  resolutions  sent  to  a  mortgagee,  and 
authorizing  a  mortgage,  are  suflBcient 
proof  without  proving  loss  of  the  cor- 
poration records.  Purser  v.  Eagle 
Lake,  etc.  Co.,  Ill  Cal.  139  (1806).  A 
person  purchasing  a  mortgage  from  a 
savings  bank  througli  its  treasurer  and 
secretary  may  rely  upon  a  copy  of  a 
resolution  passed  by  the  trustees  au- 
thorizing such  sale,  and  duly  signed  by 
the  secretary.  So  though  the  secretary 
had  intentionally  made  the  copy  differ- 
ent from  the  original.  Whiting  n 
Wellington,  10  Fed.  Rep.  810  (1882).  A 
copy  of  the  directors'  resolution  is  evi- 
dence, not  when  merely  certified  to  by 
the  secretary,  but  when  sworn  to  by 
him.  Hallowell,  etc.  Bank  v.  Hamlin, 
14  Mass.  178  (1817). 

2  Handley  v.  Stutz,  139  U.  S.  417  (1891). 
The  records  of  the  stockholders'  meet- 
ings may  be  used  to  show  the  purpose 
of  a  stockholder's  resolution.  Wiley  v. 
Athol,  150  Mass.  426  (1890). 

3  The  corporation  may  authorize  its 
president  to  sell  and  assign  its  negoti- 
able paper.  Stevens  v.  Hill,  29  Me.  133 
(1848);  Northampton  Bank  v.  Pepoon, 
11  Mass.  288  (1814).  Nearly  all  cor- 
porate acts  are  done  by  means  of  sub- 
ordinate agents.  Such  delegations  of 
authority    are    necessary.      See    Man- 

17G2 


Chester  Ry.  v.  Fisk,  33  N.  H.  297  (1856). 
Difiliculty  occurs  in  defining  the  line 
which  separates  powers  that  may  be 
delegated  from  those  which  may  not 
be.  See  Lyon  v.  Jerome,  26  Wend.  485 
(1841);  Gillis  V.  Bailey,  21  N.  H.  149  (1850). 
A  corporation  owning  water- works  out- 
side of  a  city  may  agree  to  furnish 
water  to  one  inside  the  city,  the  general 
distribution  of  the  water  to  be  under 
the  joint  control  of  two  agents,  each 
corporation  appointing  one  and  the 
profits  to  be  divided  equally.  San  Diego 
Water  Co.  v.  San  Diego  Flume  Co.,  108 
Cal.  549  (1895).  Directors  may  author- 
ize two  of  their  number  to  execute  cor- 
porate notes  to  a  person.  Leavitt  v.  Ox- 
ford, etc.  Co.,  3  Utah,  265  (1883).  Or 
appoint  an  agent  to  execute  a  deed. 
Arms  V.  Conant,  36  Vt.  744  ( 1 864).  Where 
various  corporations  appoint  a  commit- 
tee to  carry  on  litigation,  they  are  each 
liable  for  the  attorneys'  fees,  the  attor- 
neys having  no  knowledge  of  a  limita- 
tion of  the  powers  of  the  committee  in 
the  matter.  Prindle  v.  Washington  L. 
Ins.  Co.,  73  Hun,  448  (1893);  afif'd,  149 
N.  Y.  614.  Directors  having  power  to 
fix  the  rates  of  their  railroad  may  dele- 
gate that  power  to  agents.  Manchester, 
etc.  R.  R  V.  Fisk,  33  N.  H.  297  (1856).  See 
also  many  cases  in  the  following  sec- 
tions of  this  work.  See  also  §  712,  supra. 
*  Directors  cannot  delegate  to  two  of 


OH.  XLIII.]  HOW    CORPORATE   CONTRACTS    ARE    MADE. 


[§  T15. 


the  powers  of  a  board  of  directors  may  be  delegated  to  an  executive 
committee  of  that  board,  and  the  acts  and  contracts  of  such  a  com- 
mittee may  be  made  binding  on  the  corporation.* 


their  number  the  question  of  whether 
a  conditional  subscription  to  shares 
should  be  accepted.  Howard's  Case, 
L.  R.  1  Ch.  561  (1866).  Two  directors 
acting  as  agents  to  receive  calls  have 
no  power  to  waive  a  forfeiture  of  stock 
and  receive  the  calls  thereon.  Card  v. 
Carr,  1  C.  B.  (N.  S.)  197  (1856).  Direct- 
ors cannot  delegate  to  a  committee  the 
power  to  forfeit  and  sell  stock  for  non- 
payment of  calls.  York,  etc.  R.  R.  v. 
Ritchie,  40  Me.  425  (1855).  A  Pennsyl- 
vania railroad  corporation  cannot  au- 
thorize its  board  of  directors  to  delegate 
to  an  executive  committee  the  location 
of  the  route.  Weidenfeld  v.  Sugar,  etc. 
R.  R.,  48  Fed.  Rep.  615  (1892).  In  Gillis 
V.  Bailey,  21  N.  H.  149  (1850),  it  was  held 
that  a  board  of  directors  could  not  dele- 
gate to  an  agent  the  power  to  lease  vari- 
ous pieces  of  property  owned  by  the 
corporation.  Power  to  make  assess- 
ments cannot  be  delegated  by  the  di- 
rectors. Farmers',  etc.  Ins.  Co.  v.  Chase, 
56  N.  H.  341  (1876);  Silver  Hook  Road  v. 
Greene,  12  R.  1.  164  (1878),  where  the 
delegation  was  to  the  treasurer.  But 
see  Read  v.  Memphis,  etc.  Co.,  9  Heisk. 
(Tenn.)  545  (1872),  where  such  delega- 
tion to  the  president  was  upheld.  Cf. 
Lindley,  Companies,  p.  156.  The  di- 
rectors' duty  to  pass  on  paper  offered 
for  discount  cannot  be  delegated  in 
Louisiana.  Percy  v.  Millaudon,  3  La. 
568  (1832).  Cf,  Morse,  Banks  and  Bank- 
ing, 108.  Directors  having  power  to 
purchase  stock  cannot  delegate  that 
power  to  a  general  manager.  No  rati- 
fication arises  from  the  fact  that  the 
purchase  was  entered  on  the  books. 
Cartmell's  Case,  L.  R  9  Ch.  691  (1874). 
A  corporation  by  the  action  of  its  board 
of  directors  and  consent  of  all  its  stock- 
holders may  agree  that  a  certain  per- 
centage of  its  profits  shall  be  paid  an- 
nually to  a  person  for  services  already 
rendered  by  him.     In  a  suit  by  him  to 

17 


enforce  such  agreement  and  asking  an 
injunction  against  any  sales  of  stock, 
except  with  notice  of  such  agreement, 
stockholders  are  necessary  parties  de- 
fendant. Such  an  agreement  is  not  an 
exclusion  of  future  boards  of  directors 
from  the  management  of  the  company. 
Dupignac  v.  Bernstrom,  76  N.  Y.  App. 
Div.  10,5  (1902).     See  also  §  534,  siqira. 

1  An  executive  conimittee  may  be  ap- 
pointed under  the  statutory  power  of 
the  company  "  to  appoint  such  subordi- 
nate ofiScers  and  agents  as  the  busi- 
ness of  the  corporation  shall  require.'' 
The  executive  committee  may  delegate 
to  one  of  their  number  the  indorsing  of 
checks,  etc.  Sheridan,  etc.  Light  Co.  v. 
Chatham  Nat.  Bank,  127  N.  Y.  517  (1891). 
A  contract  between  two  railroads,  by 
which  one  was  given  the  right  to  run 
over  the  tracks  of  the  other,  is  legal,  al- 
though it  is  executed  by  the  authority 
only  of  the  executive  committee  and 
of  a  meeting  of  the  stockholders,  the 
court  saying  the  determination  of  the 
management  of  the  corporate  affairs 
rests  with  its  stockholders,  and  that 
the  stockholders  had  the  power  to  au- 
thorize the  board  of  directors  to  delegate 
the  power  to  the  executive  committee 
to  do  any  and  all  acts  which  the  board 
itself  was  authorized  to  do.  Union,  etc. 
Ry.  V.  Chicago,  etc.  Ry.,  163  U.  S.  564, 
597  (1896),  aff'g  51  Fed.  Rep.  309  (1892), 
and  47  Fed.  Rep.  15  (1891).  See  also 
Black  River  Imp.  Co.  v.  Holway,  85  Wis. 
344  (1893),  and  Hoyt  v.  Thompson's  Ex- 
ecutor, 19  N.  Y.  207  (1859),  where  the 
committee  consisted  of  any  five  or  more 
directors  who  attended  meetings  of 
which  notice  was  given  to  all.  See  also 
Hoyt  V.  Shelden,  3  Bosw.  267  (1858). 

The  acts  and  contracrts  of  a  de  facto 
executive  committee  were  upheld  in 
Salem,  etc.  Co.  v.  Lake  Superior,  etc. 
Mines,  112  Fed.  Rep.  239  (1901),  on  the 
ground  that  the  corporation  and  the 
63 


715.] 


HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[CH. 


XLIII. 


The  majority  of  the  directors  cannot,  however,  exclude  the  minor- 
ity from  the  meetings  and  from  being  heard,  by  delegating  power 


board  of  directors  had  for  a  long  time 
allowed  such  executive  committee  to 
act  as  though  it  had  been  regularly- 
constituted  and  authorized  so  to  act.  A 
party  dealing  with  a  special  committee 
of  the  board  of  directors  of  a  corpora- 
tion must  take  notice  of  the  powers  of 
such  committee.  Kelsey  v.  New  Eng- 
land, etc.  Ry..  60  N.  J.  Eq.  230  (1900). 
Where  the  charter  provides  that  the 
business  shall  be  managed  by  three 
executive  ofiBcers  they  may  execute  a 
mortgage,  it  appearing  that  no  directors 
have  ever  been  elected.  Bell,  etc.  Co.  v. 
Kentucky,  etc.  Co.,  106  Ky.  7  (1899). 

In  Tempel  v.  Dodge,  89  Tex.  68  (1895), 
it  was  held  that  a  corporation  had  no 
right  to  create  by  its  by-laws  an  execu- 
tive committee  to  exercise  the  powers 
of  the  board  of  directors.  "The  man- 
agers might,  undoubtedly,  clothe  a  com- 
mittee, in  the  intervals  between  the 
sittings  of  the  board,  with  all  their  own 
authority  to  conduct  the  ordinary  busi- 
ness of  the  company."  But  it  seems 
that  this  executive  committee  cannot 
delegate  its  power  to  one  of  their  num- 
ber. Olcott  V.  Tioga  R.  R.,  27  N.  Y.  546, 
558  (1863).  Where  the  by-laws  author- 
ize the  directors  to  transact  business 
through  a  committee,  that  committee 
may  consist  of  one  person.  Re  Tourine 
Co."  L.  R.  25  Ch.  D.  118  (1883).  The  by- 
laws may  authorize  the  directors  to 
delegate  their  powers  to  a  committee. 
Harris's  Case,  L.  R.  7  Ch.  587  (1872), 
where  the  cooimittee  allotted  shares. 
Directors  may  delegate  to  a  committee 
power  to  sell  corporate  property,  and  a 
mortgage  given  by  the  committee  is 
valid.  Certainly  so  where  the  board  of 
directors  subsequently  accepted  the 
papers  connected  with  it.  Burrill  v. 
Nahant  Bank,  43  Mass.  163  (1840).  In 
Andres  v.  Fry,  113  Cal.  124  (1896;,  the 
contract  of  the  executive  committee 
authorized  to  purchase  patent-rights 
■was  declared  legal.    The  constitution 

1 


of  an  incorporated  cam]>meeting  associ- 
ation may  authorize  an  executive  com- 
mittee and  give  it  power  to  make  regu- 
lations as  t&  the  use  of  the  grounds. 
Round  Lake  Assoc,  v.  Kellogg.  141  N.  Y. 
348  (1894).  An  employee  of  a  company 
who  sues  for  services,  under  a  written 
contract  made  with  the  "chairman" 
and  "managing  director,"  may  collect; 
their  authority  is  presumed  as  agents 
or  executive  committee.  Totterdell  v. 
Fareham  Brick  Co.,  L.  R  1  C.  P.  674 
(1866).  In  New  York  it  is  clearly  held 
that  the  directors  of  a  banking  or 
loan  and  trust  company  may  appoint 
an  executive  committee  and  authorize 
it  to  act  for  the  board  of  directors,  and 
that  the  acts  of  this  committee  are  as 
binding,  valid,  and  effective  as  though 
they  had  been  authorized  by  the  board 
of  directors  directly.  Palmer  v.  Yates, 
3  Sandf.  137  (1849).  Cf.  Bank  Cora'rs  v. 
Bank  of  Buffalo,  6  Paige,  497  (1837).  In 
Bank  of  Columbian.  Patterson's  Adm'r, 
7  Cranch,  299  (1813),  the  right  of  the 
directors  to  delegate  their  power  to 
contract  to  a  committee  was  not  ques- 
tioned. Stockholders  cannot  elect  a 
committee  not  consisting  of  directors 
and  compel  the  directors  to  act  with 
that  committee  in  corporate  matters. 
Boot,  etc.  Co.  V.  Dunsmore,  60  N.  H.  85 
(1880).  It  is  fraudulent  for  an  executive 
committee  to  vote  large  compensation 
to  themselves  for  services  as  promoters. 
Blatchford  v.  Ross,  54  Barb.  42  (1869). 
In  St.  Louis,  etc.  Assoc,  v.  Augustin.  2 
Mo.  App.  123  (1876),  a  loan  committee 
contracted  for  the  corporation.  Where 
the  executive  committee  can  act  only 
when  the  president  is  present,  action 
without  his  presence  is  void.  Corn,  etc. 
Bank  v.  Cumberland,  etc.  Co.,  1  Bosw. 
436  (1857).  As  to  committees  of  mu- 
nicipal corporations,  see  Dillon,  Mun. 
Corp.,  §§  60,  374.  Contracts,  etc.,  by  an 
executive  committee  have  often  been 
recognized  as  valid.  See  Tracy  v 
764 


CH,  XLIII.]  HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§  '^15. 


to  a  committee,  and  "even  if  the  minority  had  a  voice  given  to 
them,  still,  if  there  existed  a  combination  among  the  majority,  be- 
fore that  voice  was  heard,  to  overbear  it,"  the  acts  of  such  a  body 
would  be  illegal.^  Where  the  board  of  directors  deleaates  to  a 
committee  the  power  to  act  for  it,  due  notice  of  meetings  of  the 
executive  committee  must  be  given  to  all  its  members,  but  a  ma- 
jority of  the  committee  suffices  to  constitute  a  meeting  and  proceed 
to  business,  and  a  majority  of  that  majority  binds  the  committee, 
the  directors,  and  the  corporation  by  its  vote.^    An  auditing  com- 


Guthrie,  etc.  Soc,  47  Iowa,  27  (1877).  A 
stockholder's  request  to  such  a  com- 
mittee to  bring  an  action  to  remedy  a 
corporate  wrong  is  sufficient.  Hazard 
V.  Durant,  11  R.  I.  196  (1875).  The  com- 
mittee's consent  to  an  arbiti'ation  may 
be  ratified  by  the  company.  Fryeburg 
Canal  v.  Frye,  5  Me.  38  (1827).  Although 
a  contract  is  irregularly  made  by  the 
executive  committee  of  a  corporation, 
there  being  no  notice  and  no  quorum, 
yet,  by  accepting  the  benefits  of  the 
contract  afterwards,  the  company  is 
bound.  Metropolitan,  etc.  Co.  v.  Do- 
mestic, etc.  Co..  44  N.  J.  Eq.  568  (1888). 
In  Curtis. V.  Leavitt,  15  N.  Y.  9  (1857),  a 
finance  committee  had  authorized  the 
issue  of  bonds.  The  charter  required  a 
resolution  of  the  board  of  directors.  The 
court  held  that  acquiescence  cured  the 
defect.  In  Taylor  v.  Agricultural  Assoc, 
68  Ala.  229  (1880),  the  executive  com- 
mittee was  provided  for  by  charter.  A 
committee  authorized  to  settle  with  a 
person  cannot  also  settle  with  a  firm  in 
which  he  is  interested,  but  the  company 
may  ratify.  Merchants',  etc.  Co.  v.  Rice, 
70  Iowa,  14  (1886).  The  acts  of  the  ex- 
ecutive committee  may  be  construed  to 
be  subject  to  the  approval  of  the  next 
meeting  of  the  board  of  directors.  In- 
dianapolis, etc.  R.  R.  V.  Hyde,  122  Ind. 
188  (1890).  An  executive  committee 
having  the  general  direction  and  super- 
intendence of  the  aflfairs  of  the  com- 
pany have  no  power  to  issue  stock,  the 
whole  capital  stock  being  already  is- 
sued. Ryder  v.  Bushwick  R,  R.,  134 
N.  Y.  83  (1892).  A  person  sued  on  a  tort 
cannot  raise  the  objection  that  the  pro- 


ceedings of  an  executive  committee  or 
board  of  directors  were  irregular,  or 
that  stockholders  did  not  consent  to  a 
contract.  Farnsworth  v.  Western,  etc. 
Co.,  6  N.  Y.  Supp.  735  (1889).  See  also 
Black  River  Imp.  Co.  v.  Hoi  way,  85  Wis. 
344  (1893). 

1  Great  Western  Ry.  v.  Rushout,  5  De 
G.  &  Sm.  290,  310  (1852). 

2  Burleigh  v.  Ford,  61  N.  H.  360  (1881); 
Metropolitan,  etc.  Co.  ?'.  Domestic,  etc. 
Co.,  44  N.  J.  Eq.  568  (1888).  Such  also 
is  the  case  with  municipal  corpora- 
tions. State  V.  Jersey  City,  27  N.  J.  L. 
493  (1859);  Junkins  v.  Doughty  Falls, 
etc.  Dist,  39  Me.  220  (1855).  The  di- 
rectors may  delegate  to  a  committee 
the  power  to  procure  plans,  and  let  a 
contract.  A  majority  of  that  com- 
mittee may  act  and  bind  the  corpora- 
tion. A  third  party  is  justified  in  act- 
ing on  the  ostensible  authority  of  the 
committee.  McNeil  v.  Boston  Chamber 
of  Com.,  154  Mass.  277  (1891).  A  com- 
mittee appointed  by  the  directors  can- 
not act  unless  all  are  present,  although 
a  majority  may  govern.  lie  Liverpool, 
etc.  Assoc,  62  L.  T.  Rep.  873  (1890). 
Where  many  persons  authorize  eight 
to  act  as  a  managing  committee,  those 
persons  are  not  liable  for  debts  con- 
tracted by  a  meeting  of  six  of  that 
committee.  Brown  v.  Andrew,  13  Jur. 
938  (1849).  Power  to  an  executive  com- 
mittee of  directors  "  to  do  all  acts  nec- 
essary for  the  prosperity"  does  not 
authorize  the  purchase  of  real  estate  by 
a  majority  of  the  executive  committee, 
nor  is  the  company  bound  by  that  same 
majority  improving  the   land.     Tracy 


1765 


§  716.] 


HOW    CORPOKATE    CONTRACTS    ARE    MADE. 


[Cil.   XLIII. 


mittee  with  the  power  to  pay  or  reject  claims  have  no  power  to 
rescind  or  settle  contracts,  or  determine  the  future  action  of  the 
company.^ 

§  716.  President  —  His  poiver  to  contract  for  the  corporation.— 
The  president  of  a  corporation  has  no  ))ower  to  buy,  sell,  or  con- 
tract for  the  corporation,  nor  to  control  its  property,  funds,  or 
management."^  This  is  a  rule  established  by  the  great  weight  of 
authority.     In   Illinois,   however,  a  different  rule   prevails,''  and 


V.  Guthrie,  etc.  Soc,  47  Iowa,  27  (1877). 
The  minority  of  the  committee  cer- 
tainly cannot  act.  Trott  v.  Warren,  11 
Me.  227  (1834).  The  managing?  commit- 
tee of  an  unincorporated  association 
may  legally  resolve  that  checks  signed 
by  any  three  of  them  shall  bind  all. 
Maitland's  Case,  4  De  G.,  M.  &  G.  7G9 
(1853).  The  executive  committee  can- 
not delegate  their  powers  to  one  of  their 
number.  Cook  v.  Ward,  L.  R  2  C.  P. 
D.  225  (1877).  See  also  Lyon  v.  Jerome. 
26  Wend.  485  (1841),  where  canal  com- 
missioners delegated  their  powers  to  an 
engineer.  One  of  two  supervisors  can- 
not contract.  Cooper  v.  Lampeter.  8 
Watts  (Pa.),  125  (1839).  A  committee 
of  arbitration  may  act  by  a  majority 
vote  unless  the  agreement  provides 
otherwise.  The  resignation  of  one  mem- 
ber just  before  the  award  is  made  does 
not  invalidate  the  award.  Republic  of 
Colombia  v.  Cauca  Ca,  106  Fed.  Rep. 
337  (1901). 

1  Skinner  v.  Walter,  etc.  Co.,  140  N.  Y. 
217  (1893). 

2  Quoted  and  approved  in  Groeltz  v. 
Armstrong,  etc.  Co.,  89  N.  W.  Rep.  21 
(Iowa,  1902). 

3  The  president  and  general  manager 
may  together  bind  an  insurance  com- 
pany to  an  agreement  that  its  mort- 
gagor may  redeem  even  after  foreclos- 
ure. Union  Mut.  etc.  Ins.  Co.  v.  White, 
106  IlL  67  (1883).  The  president  of  a 
railroad  company  has  power  to  con- 
tract for  the  transportation  of  railroad 
iron.  Chicago,  etc.  R.  R.  v.  Coleman, 
18  111.  297  (1857).  A  deed  of  land  exe- 
cuted by  the  president  and  secretary  is 
valid  where  all  the  stockholders  join 

i: 


also  in  the  deed.  Hull  v.  Glover,  126 
111.  122  (1S88).  The  president  of  a  rail- 
road company  may  assign  notes  and 
mortgages  given  to  it  to  aid  in  con- 
structing the  road.  Irwin  v.  Bailey,  8 
Biss.  r,23  (1879);  s.  C,  13  Fed.  Cas.  114. 
A  judgment  note  of  a  corporation  may 
be  executed  by  its  president  and  secre- 
tary. It  js  good  as  a  mere  note,  even 
though  not  as  a  judgment  note.  Mat- 
son  V.  Alley.  141  111.  284  (1892).  A  cor- 
porate note  signed  by  the  president 
and  secretary,  giving  the  payee  the 
right  to  enter  judgment,  is  suflScient 
to  sustain  such  a  judgment  although 
the  note  was  not  under  seal.  Snyder 
Bros.  V.  Bailey,  46  N.  E.  Rep.  452  (IlL 
1896).  A  duly  executed  contract  of  a 
corporation  to  give  a  judgment  note  is 
authority  to  the  president  to  give  that 
note.  McDonald  i-.  Chisholm,  131  111. 
273  (1890).  The  president  has  no  power 
to  agree  that  an  absolute  subscription 
for  stock  shall  be  changed  so  as  to  be 
conditional.  Morgan  County  r.  Thomas, 
76  IlL  120  (1875).  The  president  has 
power  to  offer  a  reward  for  the  arrest 
of  a  defaulting  teller.  Baruk  v.  Griffin, 
168  in.  314  (1897).  The  president  is  pre- 
sumed to  have  authority  to  assign  a 
chattel  mortgage.  Anderson  v.  South, 
etc.  Co.,  173  IlL  213  (1898).  In  Illinois 
a  president  has  power  to  give  a  corpo- 
rate judgment  note.  Anderson  Trans- 
fer Co.  V.  Fuller,  174  IlL  221  (1898).  A 
sale  of  land  by  the  president  and  secre- 
tary of  a  building  association  binds  the 
company,  unless  the  purchaser  knows 
that  they  have  no  authority.  Domes- 
tic, etc.  Assoc.  V.  Guadiano,  63  N.  E. 

Rep.  98  (IlL  1902).     The  vice-president 
fi6 


CH.  XLIII.]  HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§  716. 


there  are  a  few  decisions  in  some  other  states  following  the  Illi- 
nois rule.^ 

The  board  of  directors  may  of  conrse  expressly  authorize  the 
president  to  contract;  or  his  authority  to  contract  may  arise  from 
his  having  assumed  and  exercised  that  power  in  the  past;  or  the 
corporation  may  ratify  his  contract  or  accept  the  benefits  of  it  and 
thereby  be  bound.  But  the  general  rule  is  that  the  president  can- 
not act  or  contract  for  the  corporation  any  more  than  any  other 
director.  This  question  has  frequently  been  before  the  courts,  and 
many  decisions  have  been  rendered  in  regard  to  it.  A  large  num- 
ber of  the  cases  are  given  in  the  notes  below.^ 


has  no  inherent  power  to  make  an  as- 
signment for  the  benefit  of  creditors, 
even  though  the  president  is  dead,  and 
even  though  the  vice-president  owns 
most  of  the  stock.  Friedman  v.  Lesher, 
64  N.  E  Rep.  736  (III.  1903). 

1  Where  the  president  is  apparently 
in  charge  of  the  business,  he  may  bind 
the  corporation  by  a  contract  made  by 
him  in  its  behalf.  Meating  v.  Tigerton, 
etc.  Co.,  89  N.  W.  Rep.  152  (Wis.  1902). 
The  court  in  this  case  follows  the  Illi- 
nois rule  and  declares  that,  even  where 
the  president  assumes  the  right  to  act 
as  general  agent,  a  bona  fide  contractor 
with  the  corporation  through  him  is 
protected.  A  bank  president  may  as- 
sign a  judgment  held  by  a  bank. 
Guernsey  u  Black,  etc.  Co.,  68  N.  W. 
Rep.  777  (Iowa,  1896).  In  Iowa  it  is 
held  that  the  president  is  presumed  to 
have  authority  to  act  in  all  matters 
arising  in  the  ordinary  course  of  the 
corporate  business.  White  v.  Elgin,  etc. 
Co.,  108  Iowa,  522  (1899).  The  agree- 
ment of  a  president  of  a  bank,  who  has 
had  entire  charge  of  the  bank,  that  if 
a  creditor  will  not  sue  for  six  months 
to  enforce  the  liability  of  the  bank  as 
a  stockholder  the  bank  will  not  set 
up  the  statute  of  limitations,  is  legal 
Wells,  etc.  Co.  v.  Enright,  127  Cal.  669 
(1900 >.  Where  a  steam  railroad  is  in- 
terfering with  the  rights  of  a  street 
railroad,  and  the  latter  does  not  apply 
for  an  injunction,  relying  on  the  prom- 
ise of  the  steam  railroad  to  the  presi- 
dent of  the  street  railroad  that  the 

17 


steam  railroad  would  pay  all  the  dam- 
ages, such  promise  is  binding,  and  the 
street  railroad  cannot  thereafter  main- 
tain an  ejectment.  Fresno,  etc.  R  R. 
V.  Southern  Pac  R.  R.,  135  CaL  202 
(1901).  The  president  and  secretary  of 
a  corporation  are  presumed  to  have 
authority  to  execute  a  promissory  note 
in  the  name  of  the  corporation,  and 
the  holder  of  such  note  will  not  be  af- 
fected by  the  fact  that  such  authority 
did  not  exist  unless  he  is  shown  to  have 
had  notice  thereof.  American,  etc. 
Bank  v.  Oregon,  eta  Co.,  55  Fed.  Rep. 
265  (1892).  The  president  is  presumed 
to  have  authority  to  issue  notes.  Dex- 
ter Sav.  Bank  v.  Friend,  90  Fed.  Rep. 
703  (1898).  The  fact  that  the  president 
of  a  corporation  indorsed  and  trans- 
ferred in  its  behalf  its  negotiable  paper 
does  not  prevent  the  indorsee  being  a 
bona  fide  holder,  without  proof  of  the 
authority  of  the  president  to  so  ti'ans- 
fer  the  paper.  Jones  v.  Stoddart,  67 
Pac.  Rep.  650  (Idaho,  1902).  Where  a 
contract  consists  of  letters,  the  fact 
that  they  are  signed  by  the  president 
does  not  prevent  his  signature  being 
considered  that  of  the  company.  Tow- 
ers V.  Stevens,  etc.  Co.,  83  Minn.  243 
(1901). 

2  The  president  of  a  slate  company 
has  no  power  to  make  a  time  contract 
with  a  railroad  to  ship  the  product  of 
thecompany  over  such  road,  and  knowl- 
edge of  such  contract  by  the  president 
is  not  notice  to  the  corporation.  Bangor, 
etc.  Ry.  V.  American,  etc.  Co.,  52  Atl. 
67 


§  716.] 


HOW    CORPORATE    CONTRACTS    ARE    MADE.  [CH.  XLIII. 


The  question  seems  to  have  arisen  in  many  forms,  and  the  great 
weight  of  authority  holds  that  a  president  has  no  inherent  power  to 


Rep.  40  (Pa,  1902).  Where  a  corpora- 
tion is  sued  on  a  note,  and  it  denies 
that  the  president  had  authority  to  sign 
the  note,  such  authority  must  be  proved. 
Marshall,  etc.  Co.  v.  Oren,  etc.  Co.,  90 
N.  W.  Rep.  618  (Iowa,  1902).  The  presi- 
dent of  a  bank  has  no  power  to  modify 
the  cashier's  bond  where  by  statute 
such  bond  was  controlled  by  the  board 
of  directors.  Ida  County,  etc.  Bank  v. 
Seidensticker,  92  N.  W.  Rep.  862  (Iowa, 
1902).  "In  the  absence  of  anything  in 
the  act  of  incorporation  bestowing  spe- 
cial power  upon  the  president,  he  has 
from  his  mere  official  station  no  more 
control  over  the  corporate  property  and 
funds  than  any  other  director."  Titus 
V.  Cairo,  etc.  R  R,  37  N.  J.  L.  98  (1874). 
In  the  case  of  De  La  Vergne,  etc.  Co. 
V.  German,  etc.  Inst.,  175  U.  S.  40 
(1899),  a  contract  was  made  by  which 
the  president  of  an  Illinois  manufact- 
uring corporation  sold  all  its  assets  to 
a  rival  New  York  corporation,  and  all 
the  shares  of  stock  in  the  Illinois  cor- 
poration were  also  delivered  to  the  New 
York  corporation.  The  court  held  the 
transaction  to  be  illegal  on  the  ground 
that  the  president  was  not  authorized 
to  sell  the  assets,  and  that  on  the  other 
hand  the  New  York  corporation  was 
prohibited  by  its  charter  from  purchas- 
ing stock  in  other  corporations.  The 
president  of  a  street  railway  company 
has  no  authority  to  indorse  its  name  to 
a  note  given  by  the  construction  com- 
pany in  payment  for  machinery.  Worth- 
ington  V.  Schuylkill,  etc.  Ry.,  195  Pa* 
St.  211  (1900).  The  president  and  treas- 
urer are  not  authorized  to  contract  that 
the  excess  realized  by  the  corporation 
in  the  sale  of  property  taken  by  strict 
foreclosure  shall  belong  to  the  mort- 
gagor. Holland  i\  Laconia,  etc.  Assoc, 
68  N.  H.  480  (1896).  A  mortgage  made 
by  the  president  without  authority  is 
not  binding  on  the  company  and  can- 
not  be  validated   after  the  company 

17 


has  become  insolvent,  where  the  stat- 
ute prohibits  assignments  after  insolv- 
ency. Howell  1".  Keen,  43  Atl.  Rep. 
1070  (N.  J.  1899).  Where  the  corporate 
seal  is  not  attached  to  a  mortgage  the 
authority  of  the  president  to  execute  it 
must  be  shown.  American,  etc.  Assoc. 
V.  Smith,  122  Ala.  502  (1899).  The  presi- 
dent and  secretary  have  no  power  to 
execute  a  note  for  the  corporation,  and 
even  though  they  are  two  of  the  five 
directors,  and  two  other  directors  know 
of  the  note  and  do  not  object,  yet  the 
note  is  not  enforceable.  Crawford  v. 
Albany  Ice  Co.,  36  Oreg.  535  (1900).  The 
president  has  no  authority  to  discharge 
the  secretary,  who  was  elected  by  the 
board  of  directors.  Mobile,  etc.  R.  R 
V.  Owen,  121  Ala.  505  (1899).  Where 
two  officers  jointly  are  authorized  to 
make  leases,  the  terms  of  the  lease, 
when  once  fixed  by  them,  cannot  be 
changed  without  the  consent  of  the 
board  of  directors.  Aliunde,  etc.  Co.  u 
Arnold,  67  Pac.  Rep.  28  (Colo.  1901).  Mis- 
representations by  the  president  of  a 
bank  to  a  surety  company  in  order  to 
obtain  a  bond  fx'om  the  cashier  do  not 
bind  the  bank.  United  States,  etc.  Co. 
V.  Muir,  115  Fed.  Rep.  264  (1902).  The 
president  and  secretary  have  no  power 
to  make  a  contract  by  which  the  cor- 
poration issues  certain  stock  and  agrees 
to  take  it  back  within  a  certain  time 
and  to  pay  the  equivalent  of  dividends 
thereon  in  the  meantime.  Fontana  v. 
Pacific,  etc.  Co.,  129  Cal.  51  (1900).  A 
dentist  cannotavoid  payment  for  goods 
which  he  buys  of  a  corporation  by  set- 
ting up  that  he  was  to  make  payment 
in  professional  services  to  the  president 
and  his  family,  such  agreement  not 
being  known  to  the  board  of  directors 
Bowditch,  etc.  Co.  v.  Jones,  50  Atl.  Rep, 
41  (Conn.  1901).  The  president  and  sec 
retary  have  no  inherent  power  to  exe 
cute  a  corporate  mortgage.  Mason,  etc, 
Co.  V.  Metcalfe  Mfg.  Co.,  44  S.  W.  Rep 
68 


•Oil.  XLIII.J  HOW    COKPORATE    CONTRACTS    ARE    MADE. 


[§  TIG. 


represent  or  contract  for  the  corporation.     His  duties  are  confined 
to  presiding  and  to  voting  as  a  director.     Tiie  fact,  however,  that 


629  (Ky.  1898).  The  president  has  no 
authority  to  direct  the  treasui'er  to  re- 
fuse to  receive  payments  of  subscrip- 
tions. Potts  V.  Wallace,  146  U.  S.  689 
(1892).  The  president  has  no  power  to 
employ  an  architect  to  prepare  plans, 
and  the  company  is  not  liable  therefor. 
Wait  V.  Nashua,  etc.  Assoc,  66  N.  H. 
581  (1891).  A  president  has  no  inherent 
power  to  execute  a  mortgage.  Alta 
■Silver  Min.  Co.  v.  Alta  Placer  Min.  Co., 
78  Cal.  629  (1889).  The  president  has 
no  implied  power  to  mortgage  the  cor- 
porate property.  National  State  Bank 
V.  Vigo,  etc.  Bank,  141  Ind.  352  (1895). 
The  president  has  no  power  to  mort- 
gage, even  though  he  has  been  given 
power  to  pledge  notes  and  contracts. 
Currie  v.  Bowman,  25  Oreg.  364  (1894). 
The  president  has  no  inherent  author- 
ity. Brush,  etc.  Co.  v.  City,  etc.  Mont- 
gomery, 114  Ala.  433  (1897).  The  presi- 
dent has  no  authority  to  increase  the 
price  of  construction  work.  Grant  v. 
Duluth,  etc.  Ry..  66  Minn.  349  (1896). 
The  president  and  secretary  have  no 
inherent  power  to  execute  notes  in  the 
flame  of  the  corporation.  Estes  v.  Ger- 
man Nat.  Bank,  62  Ark.  7  (1896).  The 
president  has  no  power  to  assign  a  pat- 
ent belonging  to  the  company  to  pay  a 
corporate  debt,  where  there  is  no  meet- 
./ng  of  the  board  of  directors  to  author- 
ize the  same.  Kansas,  etc.  Co.  v.  Devol, 
73  Fed.  Rep.  717  (1896).  The  president 
has  no  power  to  confess  judgment  for 
ihe  corporation.  Raub  v.  Blairstown 
Creamery  Assoc,  56  N.  J.  L.  262  (1893). 
A.  president  and  secretary  have  no  im- 
plied power  to  give  a  corporate  note. 
Edwards  v.  Carson  Water  Co.,  21  Nev. 
4t69  (1893).  The  president  cannot  bind 
.tlie  corporation  by  his  agreement  that 
it  will  pay  the  debts  of  a  person.  Ham- 
vltoa  V.  Bate.?,  35  Pac  Rep.  304  (Cal. 
ii'893).  The  president  of  a  roadroad  com- 
pany has  no  inherent  authority  to  ne- 
.gotiate  a  loan  of  $150,000  and  agree  to 

IT 


pay  ten  per  cent,  thereof  as  brokerage. 
Tobin  V.  Roaring,  etc.  R.  R.,  86  Fed. 
Rep.  1020  (1898).  The  fact  that  a  per- 
son buying  land  is  president  of  a  com- 
pany and  gives  a  draft  on  the  company 
in  part  payment  does  not  make  it  a 
purchase  by  the  company  for  which  it 
is  liable.  Re  Seymour,  83  Mich.  496 
(1890).  The  president  of  a  literary  and 
biblical  institution  has  no  power  to  buy 
lumber  for  it,  and  it  is  not  liable  there- 
for although  it  lias  used  it,  where  some 
of  the  directors  had  agreed  among 
themselves  to  pay  for  the  lumber.  Lyn- 
don Mill  Co,  V.  Lyndon,  etc.  Inst.,  63 
Vt.  581  (1891).  A  president  of  a  bank 
cannot  agree  that  sureties  on  paper 
given  to  the  bank  will  not  be  held  lia- 
ble. First  Nat.  Bank  v.  Bennett,  33 
Mich.  520  (1876).  The  president  and 
cashier  cannot  agree  with  an  indorser 
that  he  will  not  be  held  liable.  Bank 
of  U.  S.  V.  Dunn,  6  Pet.  51  (1832);  Bank 
of  Metropolis  v.  Jones,  8  Pet.  13  (1834). 
The  president  of  a  bank  has  no  power 
to  release  a  claim.  Olney  v.  Chadsey,  7 
R.  L  224  (1862);  Hodges  v.  First  Nat. 
Bank,  22  Gratt.  (Va.)  52  (1872).  The 
president  and  cashier  have  no  power  to 
execute  a  mortgage.  Leggett  v.  New 
Jersey,  etc  Ca,  1  N.  J.  Eq.  541  (1832). 
Nor  has  the  president  alone  that  power. 
Corbett  v.  Woodward,  5  Sawyer,  403 
(1879);  S.  C,  6  Fed.  Cas.  531.  The  presi- 
dent of  a  bank  has  no  power  to  sell  and 
assign  a  note  held  by  it.  Hallowell,  etc. 
Bank  v.  Hamlin,  14  Mass.  178  (1817). 
The  president  of  a  national  bank  can- 
not bind  it  by  his  purchase  of  bonds 
and  stock  for  it.  First  Nat.  Bank  v. 
Hoch,  89  Pa.  St.  324  (1879).  The  presi- 
dent of  a  railroad  corporation  has  no 
power  to  let  a  construction  contract. 
Templin  v.  Chicago,  etc.  Ry.,  73  Iowa, 
548  (1887);  GriflSth  v.  Chicago,  etc.  R. 
R.,  74  Iowa,  85  (1888).  The  president 
and  a  director  of  a  miner's  water  sup- 
ply company  have  no  power  to  pur- 
m  ' 


§  716.] 


HOW    COKPORATE   CONTRACTS    ARE    MADE. 


[CH. 


XLIII. 


he  is  almost  always  the  corporate  officer  who  is  directed  to  sign 
the  corporate  contracts  that  have  been  authorized  by  the  board  of 


chase  land  for  an  extension  of  the 
works,  but  the  board  of  directors  may 
ratify  the  purchase.  Blen  v.  Bear,  etc. 
Co.,  20  Cal.  602  (1862).  The  president  of 
a  ditch  company  has  no  power  to  ex- 
change half  of  its  ditch  for  ha'lf  of  the 
ditch  of  another  company.  Bliss  v. 
Kaweah,  etc  Co.,  65  Cal.  502  (1884).  A 
railroad  president  cannot  sell  Its  ties. 
Walworth,  eta  Bank  v.  Farmers',  etc. 
Trust  Co.,  14  Wis.  325  (1861).  The  presi- 
ident  cannot  execute  a  note  for  the 
company.  Bacon  v.  Mississippi  Ins.  Co., 
31  Miss.  IIG  (1856).  The  president  of  a 
railroad  company  cannot  give  a  chattel 
mortgage  on  one  of  its  engines,  even 
though  he  is  also  its  "business  and 
financial  agent"  Luse  v.  Isthmus,  etc 
Ry.,  6  Oreg.  125  (1876).  If  the  president 
of  a  bank  sells  its  securities  he  is  liable 
to  it  for  any  loss  incurred  thereby. 
First  Nat  Bank  v.  Lucas,  21  Neb.  280 
(1887).  The  president  of  a  bank  has  no 
power  to  compromise  a  debt  due  to  it 
from  an  insolvent  firm.  Wheat  v.  Bank 
.of  Louisville,  5  S.  W.  Rep.  305  (Ky. 
1887).  The  president  of  a  lumber  com- 
pany has  no  power  to  employ  a  general 
agent  in  another  part  of  the  country. 
The  latter  can  hold  the  company  liable 
for  his  salary  only  by  proving  that  at 
least  a  majority  of  the  directors  knew 
thereof  and  acquiesced.  Murray  v.  Nel- 
son Lumber  Co.,  143  Mass.  250  (1887). 
The  president  of  a  railroad  cannot  sell 
its  bonds.  Titus  v.  Cairo,  etc.  R.  R.,  37 
N.  J.  L.  98  (1874).  The  president  has  no 
power  to  sell  goods  unless  he  is  spe- 
cially authorized  or  has  made  similar 
sales  without  objection.  Pittsburgh 
Melting  Co.  v.  Reese,  118  Pa.  St!  355 
(1888).  The  president  of  a  company 
cannot  agree  for  it  to  redeem  certain 
outstanding  claims  agamst  it  —  "labor 
tickets."  Stanley  v.  Sheffield,  etc.  Co., 
83  Ala.  260  (1888).  The  president  can- 
not increase  the  pay  allovved  to  a  di- 
rector by  a  vote  of  the  directors.  Hodges 

17' 


V.  Rutland,  etc  R.  R,,  29  Vt  220  (1857). 
A  president  authorized  to  execute  a 
mortgage  cannot  insert  the  usual 
terms  —  such  as  that  the  principal  sum 
should  become  due  at  the  option  of  the 
bondholder  in  case  of  non-payment  of 
interest.  Jesup  v.  City  Bank,  etc.,  14 
Wis.  331  (1861).  Misrepresentations  of 
the  president  as  to  property  which  the 
company  sells  are  not  binding  upon  it. 
Crump  V.  U.  S.  Min.  Co.,  7  Gratt  (Va.) 
352  (1851).  The  president  and  cashier 
cannot  even  conjointly  sell  the  safe  of 
a  bank.  Asher  v.  Sutton,  31  Kan.  286 
(1884).  One  who  is  president,  treasurer, 
and  general  manager  cannot  confess 
judgment  for  the  company,even  though 
he  owns  all  but  two  shares  of  the  stock. 
Stokes  V.  New  Jersey,  etc.  Co.,  46  N.  J. 
L.  237  (1884).  Nor  give  a  mortgage. 
England  v.  Dearborn,  141  Masa  590 
(1886).  Nor  give  accommodation  or  re- 
newal notes.  McLellan  v.  Detroit,  etc 
Works.  56  Mich.  579  (1885).  The  presi- 
dent of  a  bank  has  no  power  to  trans- 
fer its  paper.  Smith  v.  Lawson,  18  W. 
Va.  212,  228  (1881).  A  director  is  liable 
to  his  bank  on  a  note  given  to  it  by 
him,  although  the  president,  who  has 
purchased  stock  of  the  director,  cancels 
the  note  in  payment  for  the  stock  and 
considers  himself  indebted  to  the  bank 
for  that  amount  There  was  no  ratifica- 
tion by  the  bank.  Rhodes  u  Webb,  24 
Minn.  292  (1877). 

Brokers  employed  by  the  president 
cannot  hold  the  corporation  liable,  even 
though  the  corporation  has  had  the 
benefit  of  their  services,  the  board  of 
directors  having  no  knowledge  thereof. 
Twelfth  St  Market  Cc  v.  Jackson,  102 
Pa.  St  269  (1883);  Allegheny  County 
Workhouse  v.  Moore,  95  Pa.  St  408 
(1880);  in  the  last  case  the  superin- 
tendent joined  in  employing  the  broker. 
The  president  cannot  employ  workmen. 
Mt.  Sterling,  etc.  Co.  r.  Looney,  1  Mete. 
(Ky. )  550  (1858).  Nor  agree  to  pay  a  salary. 
0 


CH. 


XLIII.] 


HOW    CORPOKATE    CONTRACTS    ARE    MADE. 


[§   "16- 


directors  has  led  to  an  enlargement  of  his  importance  as  a  corporate 
officer.     Hence  the  rule  has  arisen  in  Kew  York  that  a  contract, 


Murray  v.  Nelson  Lumber  Co.,  143  Mass. 
250  (1887);  Wood.  Railw.  Law,  pp.  436- 
439.  The  president  may  accept  a  con- 
ditional subscription  to  stock.  Pitts- 
burgh, etc.  R.  R.  V.  Stewart,  41  Pa.  St 
54  (1861).  A  president  of  a  bank  may 
bind  it  by  his  agreement  with  an  in- 
dorser  of  a  note  that  the  maker  of  a 
note  will  not  give  a  mortgage,  and  that 
the  indorser  will  not  be  held  liable. 
Cake  V.  Pottsville  Bank,  116  Pa.  St.  264 
(1887).  Where  the  corporation  is  merely 
an  intermediary  of  title  to  a  note,  less 
strict  proof  is  required.  Brown  v.  Don- 
nell,  49  Me.  421  (1860).  The  president 
cannot  lease  land.  Yellow,  etc.  Co.  v. 
Stevenson,  5  Nev.  224  (1869).  Where  he 
is  authorized  to  discharge  one  mortgage, 
the  company  is  not  bound  by  his  mis- 
take in  discharging  two  mortgages. 
Smith  V.  Smith,  117  Mass.  72  (1875); 
Mobile,  etc.  Ry.  v.  Gilmer,  85  Ala.  422 
(1888).  The  president  of  a  national  bank 
has  no  power  inherent  in  his  office  to 
execute  a  note  in  the  name  of  the  bank. 
National  Bank,  etc.  v.  Atkinson,  55  Fed. 
Rep.  465  (1893).  The  president  cannot 
be  held  personally  liable  for  plans  which 
he  orders  for  the  corporation,  unless 
want  of  authority  to  give  the  order  is 
shown.  Johnson  v.  Armstrong,  83  Tex. 
325  (1892).  The  president  of  a  national 
bank  has  power  to  take  property  in 
payment  of  a  debt  and  bind  the  bank 
to  pay  off  a  lien  on  it.  Panhandle  Nat. 
Bank  v.  Emery,  78  Tex.  498  (1890).  The 
president  and  managing  agent  renders 
his  corporation  liable  for  a  bonus  of 
stock  in  another  corporation  which  he 
gives  secretly  and  corruptly  to  the  agent 
of  the  latter  corporation  in  order  to  get 
a  contract  for  the  former  corporation. 
Grand  Rapids,  etc,  Co.  v.  Cincinnati, 
etc.  Co.,  45  Fed.  Rep.  671  (1891),  holding 
the  former  corporation  liable  for  the 
par  value  of  the  stock,  inasmuch  as  it 
was  the  original  issue  of  that  stock. 
Where  an  executor  is  president  of  a 

17 


corporation,  no  formal  demand  for  pay- 
ment of  a  claim  by  the  corporation 
against  the  estate  need  be  made.  Brown 
V.  Brown,  58  Conn.  85  (1889).     A  bank 
may  reclai  m  money  paid  by  the  cashier 
on  overdrafts  of  the  president  to  pay  his 
private  debts,  such  overdrafts  not  hav- 
ing been  authorized  by  the  board  of 
directors.     Dowd    u    Stephenson,   105 
N.  C.  467  (1890).     A  corporate  deed  by 
the  president  conveying  what  he  owns 
personally  does    not  estop  him   from 
claiming  the   property.      Carothers  v. 
Alexander,  74  Tex.  309  (1889).     An  offer 
of  a  corporation  to  sell  out  in  considera- 
tion of  stock  in  another  corporation^ 
the  latter  to  pay  all  existing  debts,  is 
not  enforceable  by  the  former  company 
where  the  latter  company  accepted  the 
offer  on  condition  that  the  debts  should 
not  exceed  a  certain  amount.   Not  even 
the  assent  of  the  president  of  the  former 
company  to  the  condition  is  sufficient. 
Bi-Spool,  etc.  Co.  v.  Acme  Mfg.  Co.,  153 
Mass.  404  (1891).    The  president  of  a 
bank  has  no  implied  power  to  borrow 
money  for  it.     Western  Nat.  Bank  v. 
Armstrong,  152  U.  S.  346  (1893).     As  to 
the  declarations  or  admissions  of  the 
president,  see  g  726,  infra.    The  presi- 
dent has  no  power  to  employ  an  archi- 
tect.    Mathias  v.  White  S.  S.  Assoc,  19 
Mont   3.59   (1897).     The   president' and 
secretary  have  no  power  to  buy  ma- 
chinery    for     the     corporation.      Des 
Moines,  etc.   Co.  v.  Tilford,  etc.  Co.,  9 
S.  Dak.  542  (1897).     In  Ford  v.  Hill,  93 
Wis.  188  (1896),  the  court  held  that  the 
president  had  no  inherent  power  to  con- 
fess judgment,  but  that  under  the  cir- 
cumstances of  the  case  the  court  would 
not  set  the  judgment  aside.     The  presi- 
dent and  secretary  have  no  power  to 
sell  the  property  of  the  corporation  or 
to  authorize  anybody  el.se   to  sell  it 
Johnson  v.  Sage,  44  Pac  Rep.  641  (Idaho, 
1896).     The  president  has  no  power  to 
waive  the  purchase-money  mortgage  of 
71 


§  716.] 


HOW    CORPORATE    CONTRACTS    ARE    MADE.  [CH.  XLIII. 


which  apparently  is  a  corporate  contract,  being  signed  by  the  pres- 
ident, is  presumed  to  be  a  corporate  contract  until  the  want  of  au- 
thority of  the  president  is  shown  by  the  corporation.^ 


the  corporation  upon  land  sold  by  the 
corporation.  Franco-Texan  Land  Co.  v. 
McCormick,  85  Tex.  416  (1893). 

'"Where  a  contract  made  in  the 
name  of  a  corporation  by  its  president 
is  one  the  corporation  has  power  to  au- 
thorize its  president  to  make,  or  to  rat- 
ify after  it  has  been  made,  the  burden 
is  upon  the  corporation  of  showing  that 
it  was  not  authorized  or  ratified."  Pat- 
terson V.  Robinson,  116  N.  Y.  193(1889); 
Chemical  Nat.  Bank  v.  Kohnei*,  85  N.  Y. 
189  (1881);  Lee  v.  Pittsburgh  Coal,  etc. 
Co.,  56  How.  Pr.  373  (1877);  aflf'd,  75  N. 
Y.  601.  Where  a  bank  and  a  mill  com- 
pany have  the  same  individual  as  presi- 
dent, his  action  as  representing  the 
bank  in  regard  to  the  application  of 
moneys  to  particular  paper  due  from, 
the  mill  to  the  bank  is  valid  and  bind- 
ing on  the  bank,  if  fair  and  reasonable 
Patterson  v.  Robinson,  116  N.  Y.  193 
(1889).  The  signature  of  the  president 
and  secretary  of  a  religious  corporation 
does  not  raise  any  presumption  as  to  its 
being  the  vote  of  the  corporation. 
Columbia  Bank  v.  Gospel  Tabernacle, 
137  N.  Y.  361  (1891).  Although  a  note  is 
signed  by  the  president,  secretary,  and 
treasurer  of  a  religious  corporation,  yet 
it  may  be  shown  that  they  were  not  au- 
thorized by  the  board  of  trustees  to 
sign.  People's  Bank  v.  St.  Anthony's, 
etc.  Church,  109  N.  Y.  512  (1888).  The 
president  has  no  power  to  sell  treasury 
stock.  Re  Utica,  etc.  Co.,  154  N.  Y.  268 
(1897).  A  tender  of  calls  on  stock  may 
be  made  to  the  president  in  order  to 
avoid  a  forfeiture.  Mitchell  v.  Vermont, 
etc.  Co.,  67  N.  Y.  280  (1876).  The  com- 
pany is  liable  to  an  architect  who  has 
done  work  at  the  instance  of  the  presi- 
dent and  two  directors.  Hooker  v.  Eagle 
Bank,  30  N.  Y.  83  (1864).  A  corporation 
may  demand  a  bill  of  particulars  in 
order  to  ascertain  what  oflScers  exe- 
cuted a  contract  which  the  corporation 


denies  was  ever  authorized.  Fruin,  etc. 
Co.  V.  Marks,  48  N.  Y.  App.  Div.  51  (1900). 
The  president  of  a  corporation  engaged 
in  conducting  a  large  department  store 
has  power  to  make  a  contract  with  a 
pattern  publishing  company  in  regard 
to  the  pattern  department  of  the  store, 
there  being  but  five  stockholders  in  the 
corporation.  Standard,  etc.  Co.  v.  Siegel- 
Cooper  Co.,  44  App.  Div.  121  (1899).  A 
national  bank  which  sells  securities  to 
a  person  by  means  of  misrepresenta- 
tions of  its  president  as  to  the  character 
of  the  securities  and  by  means  of  a 
breach  of  trust  on  his  part  is  liable  for 
the  money  so  paid  to  it.  Carr  t'.  Na- 
tional Bank,  etc.,  43  App.  Div.  10  (1899). 
The  president  has  no  authority  to  make 
an  assignment  for  the  benefit  of  credit- 
ors. Schaefer  v.  Scott,  40  N.  Y.  Apjx 
Div.  438  (1899).  Where  the  president, 
who  is  also  managing  director,  presents 
for  discount  a  note  running  to  himself 
and  indorsed  both  by  him  and  the  cor- 
poration, and  states  that  the  proceeds 
are  to  be  used  to  pay  a  corporate  obli- 
gation, the  purchaser  of  tlie  note  is 
protected.  Orvis  v.  Warner  &  Co.,  75 
N.  Y.  App.  Div.  463  (1902).  A  telegram 
from  the  president  authorizing  an 
agent  to  contract  is  insufficient  proof  of 
authority.  Felton  v.  McClave.  46  N.  Y. 
Super.  Ct.  53  (1880).  Where  the  presi- 
dent of  a  bank  receives  money  on  de- 
posit from  himself  as  attorney  and  sub- 
sequently withdraws  it  and  misappro- 
priates it,  the  bank  is  liable.  Smith  v. 
Anderson.  57  Hun.  72  (1890).  The  presi- 
dent has  no  power  to  modify  a  resolu- 
tion of  the  board  that  certain  notes 
shall  be  subject  to  the  joint  order  of 
himself  and  the  secretary.  Tradesmen's 
Nat.  Bank  v.  Manhattan  Lumber  Co.,  18 
N.  Y.  Supp.  920  (1892).  "  It  is  not  within 
the  authority  of  the  president  of  a  bank, 
when  he  discounts  paper  for  the  bank, 
to  promise  the  maker  that  he  need  not 


1772 


CH.  XLIII.]  HOW    COKPOKATE    CONTRACTS    AKE    MADE. 


[§  no. 


A  person  taking  a  company's  note  from  the  president  in  payment 
of  an  individual  debt  is  bound  to  inquire  into  the  regularity  of  the 
issue  of  the  note.^ 

A  president,  however,  may  employ  an  attorney  for  the  company 


pay  it."    First  Nat.  Bank  u  Tisdale,  18    tained  from  another  bank  by  using  his 


Hun,  151  (1879);  aff'd.  84  N.  Y.  655.  The 
president  cannot  borrow  money  for  the 
company    unless  the   charter    or    the 
board  of  directors  authorizes  him.  Life 
&  F.  Ins.  Co.  V.  Mechanics'  F.  Ins.  Co.,  7 
Wend.  31  (1831).    In  Powers  v.  Schlicht, 
etc.  Co.,  33  N.  Y.  App.  Div.  380  (1897), 
the  court  stated  that  the  president  of 
a    business     corporation    has    implied 
power  to  make  contracts  in  its  behalf. 
The  president  of  a  national  bank  has  no 
power  to  bind  it  to  accept  di-afts  in  the 
future  drawn  by  a  railroad  company, 
where  the  party  relying  thereon  knew 
that  the  bank  directors  objected.  Stall- 
cup  V.  National  Bank,  15  N.  Y.  St.  Rep. 
89  (1888).     The  president  and  secretary 
cannot  issue   drafts  in  the  company's 
name.     Dabney  v.  Stevens,  40  How.  Pr. 
341   (1870).     A   resolution     authorizing 
the  president  to  sign  checks,  drafts,  etc., 
does  not  authorize  an  indorsement  of 
commei'cial  paper  by  him  in  the  com- 
pany's name  and  in  its  behalf.     Hitch- 
ings  V.  St.  Louis,  etc.  Co.,  68  Hun,  33 
(1893).     A  corporation  is  not  liable  for 
commissions  promised  by  its  president 
to  a  broker,  even  though  a  sale  resulted. 
Bright  V.  Canadian,  etc.  Co.,  83  Hun,  483 
(1895).    The  president  of  a  manufactur- 
ing company  cannot  buy  goods  for  it. 
Westerfield  v.  Radde,  7  Daly,  336  (1877). 
Cf.   Silva  V.  Metropolitan,  etc.  Co.,  43 
N.  Y.  Super.  Ct.  307  (1877).     Where  a 
contract  to  build  a  railroad  is  made  by 
contractors  with  a  committee  of  direct- 
ors duly  authorized  to  make  it,  a  pro- 
vision   against    sub-letting   cannot  be 
waived  by  the  president  of  the  railroad 
and  a  director.  Western  R.  R.  v.  Bayne, 
11  Hun.- 166  (1877);  affirmed.  75  N.  Y.  1. 
A  bank  receiving  funds  from  its  presi- 
dent in    payment  of  his  debts  to  it, 
which  funds  he  had  fraudulently  ob- 


standing  as  president  of  the  former,  is 
bound  to  pay  over  the  same  to  the  de- 
frauded bank,  where  such  president  had 
complete  control  of  the  former  bank. 
City  Nat.  Bank  v.  National  Park  Bank, 
32  Hun,  105  (1884).    A  president  author- 
ized by  resolution  of  the  board  of  di- 
rectors to  sell  bonds  cannot  loan  them; 
if  he  does  so  it  is  a  conversion  of  the 
property  of  the   corporation.     Secondi 
Ave.  R.  R.  V.  Mehrback,  46  N.  Y.  Super. 
Ct.  267  (1883).     The  president  of  an  in- 
surance company  cannot  indorse  and 
transfer  notes.     Marine   Bank,  etc.   v. 
Clements,  3  Bosw.  600  (1858).     But  in  an 
earlier  case  it  was  held  that  the  indorsee 
in  good  faith  was  protected.     Caryl  v. 
McElrath,  3  Sandf.  176  (1849).     A  bank 
president    has    no    implied    authority 
from  the  bank  to  agree  to  pay  interest 
on  a  particular  deposit,  there  being  no 
evidence  of  special  authority  nor  of  a 
bank  custom  to  that  effect.     The  presi- 
dent of  a  corporation  has  no  implied 
authority  to  check  corporate  funds  out 
of  the  bank  unless  there  is  an  estab- 
lished usage  to  that  effect.  Fulton  Bank 
V.  New  York,  etc.  Canal  Co.,  4  Paige,  137 
(1833).     The    president,  secretary,   and 
general  agent  cannot  issue  the  corpo- 
rate notes.  McCuUough  v.  Moss,  5  Denio, 
567  (1846).     Cf.  Moss  v.  Rossie,  etc.  Co., 
5  Hill,  137  (1843).     A  railroad  president 
cannot  contract  to  pay  a  commission  to 
a  promoter  who  induces  a  contractor  to 
build  the  road.     Risley  v.  Indianapolis, 
etc.  R  R.,  1  Hun,  203  (1874);  rev'd  on 
other  points,  63  N.  Y.  340.     The  presi- 
dent cannot  increase  the  pay  of  a  di- 
rector.    Bailey  v.  Buffalo,  etc.  R.  R.,  14 
Hun,  483  (1878).     See  also  De   Bost  v. 
Albert  Palmer  Co.,  35  Hun,  386  (1885). 

1  Wilson  V.  Metropolitan,  etc.  Ry.,  120 
N.  Y.  145  (18901     See  also  §  393,  supra. 


1773 


.§  ne.] 


HOW    CORPORATE    CONTRACTS    ARE    MADE.  [CH.  XLIII. 


and  authorize  him  to  prosecute  or  defend  a  case.'  And  in  all  cases 
the  president  binds  the  corporation  by  his  acts  and  contracts  when 
he  is  expressly  authorized  to  so  act  or  contract,-  or  when  he  has 


1  Beebe  v.  George  H.  Beebe  Co.,  64  N. 
J.  L.  497  (1900);  American  Ins.  Co.  v. 
Oakley,  9  Paige,  496  (1842);  Mumford  v. 
Hawkins,  5  Denio,  355  (1848):  Potter  u 
New  York  Inf.  Asylum,  44  Hun,  367 
(1887).  He  may  also  employ  special 
counsel.  Davis  u  Memphis,  etc.  Ry.,  22 
Fed.  Rep.  883  (1883);  Recamier  Mfg.  Co. 
V.  Seymour,  5  N.  Y.  Supp.  648  (1889), 
holding  that  he  may  do  so,  though  the 
suit  is  by  the  corporation  against  the 
board  for  fraud.  Contra,  Bright  v.  Me- 
tairie  Cem.  Assoc,  33  La.  Ann.  58(1881). 
The  president  may  bring  a  writ  of  entry 
to  foreclose  a  mortgage.  Smith  Chari- 
ties V.  Connolly,  157  Mass.  272  (1892). 
The  president  cannot  authorize  an  at- 
torney to  accept  service  where  the 
board  of  directors  were  accustomed  to 
vote  on  the  employment  of  attorneys. 
Bridgeport  Sav.  Bank  v.  Eldredge,  28 
Conn.  556  (1859).  The  case  of  Ashuelot, 
etc.  Co.  V.  Marsh,  55  Mas&  507  (1848), 
holds  that  the  president  cannot  cause 
an  action  to  be  commenced.  Where  the 
president  is  dead  the  vice-president  may 
emplo}'^  an  attorney.  Coleman  v.  West, 
etc.  Co.,  25  W.  Va.  148  (1884).  A  hold- 
over president  and  manager  for  sixteen 
years  may  institute  a  suit  in  belialf  of 
the  corporation.  Lucky  Queen  Min.  Co 
V.  Abraham,  26  Greg.  282  (1894).  The 
president  and  general  manager  may 
engage  an  attorney  to  give  advice  in 
company's  matters.  Dallas,  etc.  Ca  v. 
Crawford,  18  Tex.  Civ.  App.  176  (1898). 
A  bank  president  has  no  power  to  em- 
ploy an  attorney.  Pacific  Bank  v.  Stone, 
121  Cal.  202  (1898). 

2  The  board  of  directors  may,  of  course, 
.authorize  the  president  to  sign  the  com- 
pany's name  to  a  promissory  not&  Mc- 
Cormick  v.  Stockton,  etc.  R,  R.,  130  Cal. 
100  (1900).  A  resolution  authorizing  the 
president  to  execute  a  chattel  mort- 
gage does  not  authorize  him  to  give  a 
chattel  mortgage  which  can  be  fore- 


closed on  ten  days'  notice  and  which 
gives   other  executory  powers  to  the 
mortgagee.   Monroe,  etc.  Co.  r.  Arnold. 
108  Ga,  449  (1899).     Even  though  the 
president  has  full  power  to  sell  corpo- 
rate property,  yet  where  he  refers  the 
party  to  the  superintendent   and  the 
latter  makes  the  sale,  it  is  not  binding 
on  the  company,  even  though  the  pres- 
ident  stated  that  the  superintendent 
had  full  authority  to  sell.     He  could 
not  so  delegate  his  authority.    Trent  v. 
Sherlock,  24  Mont.  255  (1900).     Under 
express  power  to  have  full  control  of 
the  business,  the  president  may  pur- 
chase materials.     Castle  v.  Belfast,  etc. 
Co.,  72  Ma  167  (1881).     Under  power  to 
adjust  and  pay  losses  he  may  transfer 
papers.     Baker  v.   Cotter,   45  Me.   236 
(1858);  Aspinwall  v.  Meyer.  2  Sandf.  186; 
S.  C,  3  N.  Y.  290  (1850),  where  the  ex- 
press power  was  very  general.  Express 
authority,  of  course,  may  be  given  to 
the  president  to  sell  and  assign  the  se- 
curities of  the  corporation.     Mitchell 
V.  Deeds.  49  111.  416  (1867).     Autliority 
to  the  president  to  borrow. includes  au- 
thority to  give  ordinary  securities,  i.  &, 
bonds,  cotes,  acceptances,  and  collat- 
erals.   A  person  dealing  with  him  may 
rely  on  it»    He  is  not  bound  to  know 
that  the  president's  authority  has  been 
revoked.     Hatch  v.  Coddington,  95  U. 
S.  48  (1877).     Where  the  president  has, 
by  by-laws,  authority  to  make  a  con- 
tract, and  does  make  one,   and  it  is 
signed  by  him  as  such,  though  no  cor- 
porate seal  and  no  resolution  are  re- 
cited, the  president  may  compromise 
and  release  the  same.     Six    months' 
delay  by  directors  in  repudiating  the 
compromise  after  knowledge  is  a  fatal 
delay.     Rolling  Mill  v.  St.  Louis,  etc.  R. 
R.,  120  U.  S.  256  (1886).     Parol  author- 
ity  to  the  president  suffices  to  enable 
him  to  pay  out  money.     New  Orleans 
Bldg.  Co.  V.  Lawson,  11  La.  34  (1837). 


1774 


CH.   XLIII.]  HOW    COKPOKATE    CONTKACTS    ARE    ilADE. 


[§  ne. 


been  permitted  by  the  corporation  for  some  time  to  act  and  con- 
tract for  it.^ 


Although  the  president  is  given  power 
to  make  a  contract,  yet  the  directors 
may  make  it,  and  their  action  over- 
rules his.  East,  etc.  Co.  v.  Brower.  80 
Ga  258  (1888).  Authority  to  sell  gives 
authority  to  contract  to  sell.  Augusta 
Bank  v.  Hamblet,  35  Me.  491  (1853). 
Officers  authorized  to  give  a  note  can- 
not agree  to  pay  attorney  fees.  Hardin 
V.  Iowa,  etc.  Co.,  78  Iowa,  726  (1889). 
The  authority  of  a  president  to  sell  or 
lease  gives  him  power  to  point  out  and 
make  representations  as  to  the  bound- 
aries. Holmes  u  Turner's  Falls  Co.,  150 
Mass.  535  (1890).  The  president  who 
makes  an  assignment  of  the  company's 
assets  for  the  benefit  of  creditors  under 
a  resolution  of  the  board  of  directors 
cannot  afterwards  attack  it.  lie  George 
T.  Smith,  etc.  Co.,  86  Mich.  149  (1891). 
The  authority  of  the  president  to  buy 
property  gives  authority  also  to  buy  on 
credit.  Arapahoe,  etc.  Ca  v.  Stevens, 
13  Colo.  534  (1889).  Under  a  by-law 
giving  him  authority,  the  president 
may  purchase  on  credit.  Siebe  v. 
Joshua,  etc.  Works,  86  CaL  390  (1890). 
An  assignment  of  a  corporate  claim  by 
the  manager  and  president  in  the  regu- 
lar course  of  business,  and  with  the 
knowledge  and  consent  of  the  board  of 
directors,  is  suflScient.  Greig  v.  Rior- 
dan,  99  Cal.  316  (1893).  Under  a  broad 
power  given  to  the  president  to  make 
contracts  he  may  take  a  lease  of  prop- 
erty. Hawley  v.  Gray,  etc.  Co.,  106  CaL 
337  (1895).  The  president  and  secretary 
authorized  to  execute  a  mortgage  have 
no  authority  to  insert  a  provision  to 
pay  the  attorney  fee  in  case  ol  fore- 
closure. Ratification  Of  the  mortgage 
by  the  directors  without  knowledge  of 
such  provision  is  not  ratification  thereof. 
Pacific,  etc.  Mill  v.  Dayton,  etc.  Ry.,  5 
Fed.  Rep.  852  (1881). 

1  Where  the  president  of  a  construc- 
tion company  takes  entire  ciiarge  of  its 
business,  and  is  allowed  so  to  do  by  the 

17 


directors,  the  company  is  bound  by 
notes  given  in  the  corporate  name  by 
him  for  the  company's  business.  "The 
execution  of  the  paper  could  not  be 
held  to  be  in  excess  of  the  powers 
given,  and  it  was  clearly  the  dut}'  of 
the  directors  to  give  contrary  instruc- 
tions, if  they  wished  to  withdraw  the 
general  management  from  the  presi- 
dent; and  to  disaffirm  the  action  of 
their  agents  promptly  and  at  once,  if 
they  objected  to  it."  Fitzgerald,  etc. 
Co.  V.  Fitzgerald,  137  U.  S.  98.  109  (1890). 
Where  the  president  has  been  accus- 
tomed to  exercise  power  without  the 
dissent  of  the  company  and  with  its 
acquiescence,  the  law  implies  that  he 
has  such  power.  Chambers  v.  Lancas- 
ter, 160  N.  Y.  342  (1899).  As  to  the  evi- 
dence  necessary  to  prove  that  the  of- 
ficers of  a  corporation  consented  and 
acquiesced  in  acts  of  the  president,  see 
Corn,  etc.  Bank  v,  American,  etc  Co., 
163  N.  Y.  332  (1900).  A  sale  of  all  the 
property  by  the  president  and  general 
manager  will  be  sustained  where  they 
have  been  allowed  to  take  entire  charge 
of  the  company  and  the  directors  did 
not  repudiate  the  sale.  Northwestern, 
etc.  Co.  V.  Lee,  102  Wis.  426  (1899). 
Where  the  president  is  allowed  for  sev- 
eral years  to  carry  on  all  the  business 
of  the  corporation  and  sign  its  name  to 
contracts,  notes,  etc.,  a  note  signed  by 
him  in  the  name  of  the  corporation  is 
valid,  especially  where  he  and  another 
stockholder,  who  s'ign  the  note,  own 
nearly  all  of  the  stock.  The  same  rule 
applies  to  a  mortgage  executed  by  him 
in  the  name  of  the  corporation.  First 
Nat.  Bank  v.  G.  V.  B.  Min.  Co.,  89  Fed. 
Rep.  439  (1898).  Where  a  corporation 
has  recognized  the  authority  of  its  pres- 
ident to  make  certain  contracts,  this  is 
prima  facie  evidence  of  his  authority 
to  make  another  contract  of  that  kind. 
Sciibner  v.  Flagg,  etc.  Co.,  175  Mass. 
536  (1900).      Where    the  president  has 


lO 


§  ™'\ 


HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[CII.   XLIIL 


So  also  the  company  is  bound  when  it  ratifies  or  accepts  the  con- 
tract after  it  is  made,  or  accepts  the  benefit  of  the  contract.  Hav- 


been  allowed  by  the  board  of  directors 
to  carry  on  all  the  business  as  though  it 
was  his  own,  a  mortgage  in  the  name  of 
the  corporation  executed  by  him  on  the 
corporate  property  is  valid.  National, 
etc.  Bank  v.  Sanford,  etc.  Co.,  157  Ind.  10 
(1901).  Where  the  president  is  also 
general  manager  and  practically  the 
whole  corporation,  a  bill  of  sale  of  cor- 
porate property  by  him  is  good.  Quee 
Drug  Co.  V.  Plant,  55  N.  Y.  App.  Div. 
87  (1900).  Where  the  corporation  al- 
lows all  its  affairs  to  be  conducted  by 
its  president,  without  observing  legal 
formalities,  a  note  and  mortgage  exe- 
cuted by  him  is  valid,  it  being  shown 
that  such  note  had  been  renewed  sev- 
eral times.  G.  V.  B.  Min.  Co.  v.  First 
Nat.  Bank,  etc.,  95  Fed.  Rep.  23  (1899). 
Where  the  president  had  been  accus- 
tomed to  act  and  contract  for  the  com- 
pany without  express  authority,  and 
his  acts  had  always  been  accepted,  his 
order  to  a  contractor  to  stop  work  binds 
the  company.  Leroy,  etc.  R  R.  v.  Sidell, 

66  Fed.  Rep.  27  (1895). 

A  note  signed  by  the  president  and 
secretary  is  binding,  if  they  have  been 
accustomed  to  sign  notes,  especially 
where  a  corporation  obtains  the  bene- 
fit of  the  note.  Bullen  v.  Milwaukee, 
etc.  Co.,  109  Wis.  41  (1901).  Where  the 
pi'esident  of  a  national  bank  manages 
its  business  he  may,  for  the  benefit  of 
the  bank,  rediscount  paper  held  by  the 
bank.  Hanover,  etc.  Bank  v.  First,  etc 
Bank,  109  Fed.  Rep.  421  (1901).  Where 
the  president  of  a  railroad  has  been  ac- 
customed to  sign  notes  without  action 
of  the  board  of  directors,  a  note  signed 
by  him  is  enforceable,  even  thougli  he 
used  the  money  for  his  own  purposes. 
Texarkana,  etc.  Ry.  v.  Bemis,  etc.  Co., 

67  Ark.  542  (1900).  Where  the  board  of 
directors  of  a  bank  allow  the  president 
to  transact  all  the  business  of  the  bank 
the  bank  is  bound.  Tourtelot  v.  Whit- 
hed,  84  N.  W.  Rep.  8  (N.  Dak.  1900).     The 


president  has  no  inherent  power  to  con- 
tract for  the  company,  but  where  he 
has  been  allowed  to  carry  on  the  whole 
business  of  the  corporation,  the  com- 
pany is  bound  by  a  contract  within  the 
ordinary  business  of  the  corporation, 
such  as  selling  timber  land  on  tima 
St  Clair  v.  Rutledge,  92  N.  W.  Rep.  284 
(Wis.  1902).  Where  a  corporation  al- 
lows certain  officers  to  manage  its  busi- 
ness it  is  responsible  for  their  contracts, 
unless  it  is  shown  that  such  contracts 
were  unauthorized.  Anderson  v.  Wal- 
lace, etc.  Co.,  70  Pac.  Rep.  247  (Wash. 
1902).  The  president  binds  the  com- 
pany when  he  does  all  the  business 
with  the  knowledge  and  consent  of  the 
directors.  McComb  v.  Barcelona,  etc. 
Assoc.  134  N.  Y.  598,  608  (1892).  Where 
for  eight  years  the  president  has  been 
allowed  to  manage  and  carry  on  the 
-whole  business  of  the  company,  and  to 
indorse  its  name  to  notes  in  order  to 
raise  money  for  the  business,  and  the 
company  had  no  cash  capital  and  no 
other  way  of  obtaining  money,  it  is  for 
the  jury  to  say  whether  the  company 
is  bound  by  such  an  indorsement  by 
him.  Fifth  Nat.  Bank  v.  Navassa,  etc 
Co.,  119  N.  Y.  256  (1890).  Cf.  National 
Bank  v.  Navassa  Phosphate  -Co.,  56 
Hun,  186  (1890).  Where  for  many 
years  the  president  has  managed  a 
company,  the  company's  note  executed 
by  him  binds  the  company  without 
special  authority.  Martin  v.  Niagara, 
etc  Co.,  122  N.  Y.  165  (1890),  aff'g  44 
Hun,  130  (1887).  Where  the  president  for 
several  years  has  run  the  company, 
borro.wed  money  for  it,  and  given  its 
notes,  etc.,  and  the  by-laws  give  him 
"  general  supervision  over  the  property 
and  affairs  of  the  corporation,"  the  com- 
pan3''s  note  made  by  him,  and  an  as- 
signment of  "$150,000  of  such  good  and 
collectible  accounts  now  existing  or 
that  shall  hereafter  accrue  or  be 
acquired  in  the  conduct  of  the  busine.ss." 


1776 


CU.  XLIII.]  now   COKPOKATE    CONTKACTS    ARE   MADE. 


[§  716,. 


ing  knowingly  received  the  benefit  of  a  contract  made  and  carried 
out  by  the  president,  even  without  authority,  the  corporation  must 


are  valid.  Preston  Nat.  Bank  v.  George 
T.  Smith,  etc.  Co.,  84  Mich.  364  (1890). 
A  president  who  has  been  accustomed 
to  issue  corporate  notes  may  bind  the 
corporation  by  a  similar  note.  McDon- 
ald V.  Chisholm,  131  111.  273  (1890). 

A  general  understanding  that  the 
president  and  secretary  shall  manage 
the  business  and  make  contracts,  and 
their  open  and  public  assumption  of 
that  power,  with  the  knowledge  and 
acquiescence  of  the  directors,  are  equal 
to  a  vote  of  the  directors  authorizing 
them  to  make  contracts.  Sherman,  etc. 
Ca  V.  Morris,  43  Kan.  283(1890).  Where 
the  president  and  secretary  of  a  mining 
company  have  for  a  long  time  signed 
checks,  and  they  have  been  paid  by  a 
bank,  they  may  continue  to  draw 
checks  and  the  bank  must  pay  them. 
The  corporation  is  liable  for  overdrafts 
caused  thereby.  Mining  Ca  v.  Angelo, 
etc.  Bank,  104  U.  S.  193  (1881).  A  uni- 
form practice  of  a  company  for  several 
months  previous  to  the  transfer  of  a 
corporate  note  by  its  president,  in  cases 
of  notds  negotiated  for  the  purpose  of 
raising  money  to  carry  on  its  legiti- 
mate business,  where  such  notes  were 
payable  to  the  company,  to  have  them 
indorsed  by  the  president,  is  sufficient 
authority  for  his  indorsement  Marine 
Bank  v.  Clements,  31  N.  Y.  33  (1865). 
See  also,  in  general,  Chicago,  etc.  Ry. 
V.  James,  34  Wis.  388  (1869);  First  Nat. 
etc.  Bank  v.  North,  etc.  Co.,  86  Ma  125 
(1885),  where  the  president  and  secre- 
tary were  accustomed  to  make  notes. 
Where  the  board  of  directors  for  three 
3-ears  relinquishes  to  the  president  the 
exclusive  management  of  the  business 
of  the  corporation  and  the  purchase  of 
all  classes  of  articles,  giving  corporate 
notes,  bills,  and  securities  therefor,  and 
then  the  directors  took  charge  and  for 
sevei'al  years  continued  business  with- 
out repudiating  his  acts,  his  purchase 
of  locomotives  and  giving    corporate 


notes  therefor  while  he  was  in  charge 
binds  the  corporation.  Olcott  v.  Tioga 
R.  R..  27  N.  Y.  546  (1863).  If  accus- 
tomed so  to  do,  the  president  may  settle 
an  account  and  take  a  due-bill  in  pay- 
ment. Dougherty  v.  Hunter,  54  Pa.  St. 
380  (1867).  Where  the  president  has 
been  accustomed  to  make  and  indorse 
paper,  the  corporation  will  be  bound, 
even  though  the  directors  supposed 
that  all  business  had  been  stopped. 
National  Park  Bank  v.  German,  etc. 
Ca,  53  N.  Y.  Super.  Ct.  367  (1886). 
Where  the  president  has  several  times 
been  authorized  to  pledge  corporate  se- 
curities, and  now  does  so  without  special 
authorization,  and  a  majority  of  the 
directors  ratify  the  act,  not  in  meeting, 
but  separately,  the  pledge  is  legal. 
Bibb  V.  Hall,  101  Ala.  79  (1893).  Where 
the  president  owns  practically  all  the 
stock,  and  for  years  has  managed  the 
business  without  any  meeting  of  the 
board  of  directors,  a  sale  of  the  corpo- 
rate property  by  him  is  legal.  McElroy 
V.  Minnesota,  etc.  Ca,  96  Wis.  317  (1897). 
The  authority  of  the  president  to  dis- 
charge mortgages  may  be  shown  by 
the  fact  that  he  has  done  so  many  times 
before.  Swasey  v.  Emerson,  168  Mass. 
118  (1897).  The  power  of  a  president  of 
a  bank  to  rediscount  paper  may  arise 
from  his  having  done  so  for  a  long: 
time  to  the  knowledge  of  the  board  of 
directors.  U.  S.  Nat.  Bank  v.  First 
Nat.  Bank,  79  Fed.  Rep.  296  (1897). 
Where  the  president  of  a  bank  is  prac- 
tically manager,  he  may  settle  a  claim 
by  taking  an  assignment  of  a  judg- 
ment. First  Nat.  Bank  v.  New,  146' 
Ind.  411  (1896).  Long  usage  may 
give  the  president  authority.  Estes  v.. 
German  Nat.  Bank,  63  Ark.  7  (1896);: 
Missouri  Pac.  Ry.  v.  Sidell,  67  Fed.  Rep. 
464  (1895).  Where  the  president,  whc 
is  also  general  manager  and  financial 
agent,  is  accustomed  to  borrow  money 
for  the  corporation,  he  binds  the  com- 


(112) 


1777 


§  716.] 


HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[oh. 


XLIII. 


perform  on  its  part.^     The  authority  of  the  president  of  a  railroad 
to  take  a  lease  of  a  hotel  in  behalf  of  the  company  may  be  inferred 


pany  by  a  loan,  even  though  he  mis- 
applies the  proceeds.  Kraft  v.  Free- 
man, etc.  Co.,  S7  N.  Y.  628  (1881).  If  he 
has  been  accustomed  for  a  long  time  to 
sign  notes,  a  person  taking  a  note  with- 
out his  signature  is  not  protected. 
Davis,  etc.  Co.  v.  Best,  105  N.  Y.  59 
(1887).  The  president  has  no  implied 
power  to  sell  the  lands  of  the  company, 
and  the  power  given  by  usage  to  former 
presidents  to  sell  and  take  a  purchase- 
money  lien  does  not  give  power  to  sell 
without  retaining  that  lien.  Fitzhugh 
V.  Franco-Texas  Land  Co.,  81  Tex.  306 
(1891).  The  president,  even  though  he 
is  also  manager,  head,  and  majority 
stockholder,  cannot  bind  tiie  corpora- 
tion by  his  statement  that  the  corpora- 
tion was  to  indemnify  him  from  loss 
on  certain  indorsements  made  by  him. 
Minneapolis  Trust  Co.  v.  Clark,  47  Minn. 
108  (1891).  Where  the  board  of  direct- 
ors allow  one  of  its  officers  the  exclusive 
management  of  its  affairs,  the  com- 
pany is  bound  by  its  acts.  Davies  v. 
New  York  Concert  Co.,  13  N.  Y.  Supp. 
739(1891);  Sparks  v.  Dispatch  Transfer 
Co.,  104  Mo.  531  (1891).  Although  the 
president  has  been  accustomed  to  issue 
corporate  notes,  yet,  if  the  bank  taking 
the  note  in  question  knew  that  the  pro- 
ceeds were  to  be  used  by  him  in  his 
private  business,  the  note  cannot  be 
enforced.  Third  Nat.  Bank  v.  Marine 
Lumber  Co.,  44  Minn.  65  (1890). 

^  Quoted  and  approved  in  Bennett  v. 
Mill  villa  Imp.  Co.,  51  AtL  Rep.  706  (N. 
J.  1902);  Pittsburgh,  etc.  Ry.  v.  Keo- 
kuk Bridge  Co.,  131  U.  S.  371  (1889). 
Where  the  president  bought  railroad 
iron  without  authority  so  to  do,  but  the 
directors  stood  by  and  allowed  the  cor- 
poration to  use  it,  the  company  is  liable 
for  the  prica  Scott  v.  Middietown,  etc. 
R.  R.,  83  N.  Y.  200  (1881).  If  a  corpora- 
tion retains  and  uses  money  borrowed 
for  it  by  its  officer  in  excess  of  his  au- 
thority, it  ratifies  the  transaction,  and 

17 


is  liable.  Willis  v.  St.  Paul  Sanitation 
Co.,  53  Minn.  370  (1893).  Even  though 
a  mortgage  is  not  authorized  at  a  formal 
meeting  of  the  directors,  nevertheless 
if  the  directors  knew  and  approved  of 
the  same  and  the  corporation  accepted 
the  benefits,  the  mortgage  will  be  en- 
forced, it  having  been  signed  b}'  the 
president  and  secretary  and  the  corpo- 
rate seal  having  been  attached.  Ne- 
vada, etc.  Syndicate  v.  National,  etc. 
Co.,  96  Fed.  Rep.  133  (1899).  Where  one 
person  is  president  and  general  man- 
ager and  owns  all  the  stock,  a  note  exe- 
cuted by  him  in  the  name  of  the  cor- 
poration is  valid,  the  proceeds  being 
used  in  the  corporate  business.  Africa 
v.  Duluth,  etc.  Co.,  82  Minn.  283  (1901). 
Where  a  corporation  accepts  the  bene- 
fit of  a  lease  made  by  the  president  it 
is  bound  thereby.  Alexander  v.  Cul- 
bertson,  etc.  Co.,  85  N.  W.  Rep.  283 
(Wis.  1901).  Proof  that  a  corporation 
carried  out  a  contract  and  accepted 
the  benefits  of  it  is  sufficient  to  show 
that  it  was  duly  authorized,  it  having 
been  signed  by  the  president.  Neosho 
etc.  Co.  V.  Hannum,  10  Kan.  App.  499 
(1901).  A  chattel  mortgage  executed 
by  the  president  and  secretary  of  an  in- 
solvent corporation,  with  the  knowl- 
edge and  consent  of  all  the  stockhold- 
ers, is  valid.  Kalamazoo,  etc.  Co.  v, 
Winans,  etc.  Co.,  106  Mich.  193  (1895'. 
Even  though  the  president  sells  prop- 
erty without  authority,  yet  if  the  board 
of  directors  receive  the  interest  on  a 
note  given  in  part  payment  they  ratify 
the  sale.  Poche  v.  New  Orleans,  etc. 
Co.,  52  La.  Ann.  1287  (1900).  Where  a 
corporation  ratifies  its  president's  con- 
tract it  is  bound  by  his  declarations  as 
to  the  meaning  of  the  contract.  Bal- 
four V.  Fresno,  etc.  Co.,  123  CaL  395 
(1899).  Where  but  one  meeting  of  the 
board  of  directors  was  ever  held  and 
then  the  charter  was  forfeited,  and 
the  president,  with  the  consent  of  the 
78 


CH.  XLIII.]  HOW    COEPOEATE    CONTEACTS    AEE   MADE. 


[§  T16. 


from  the  facts  of  his  sio-ning',  sealino^,  and  deliverino-  the  instru- 


■■0  5 


o» 


ment,  and  of  the  company's  entering  into  possession  under  the  lease 


directors,  individually,  and  of  all  the 
stockholders,  conveyed  av^ay  the  prop- 
erty, and  creditors  were  not  injured, 
the  transaction  is  legal.  Aransas,  etc. 
Co.  V.  Manning,  63  S.  W.  Rep.  627  (Tex. 
1901).  A  corporate  creditor  cannot  at- 
tack a  sale  of  all  the  assets  of  the  cor- 
poration for  a  valuable  consideration 
and  in  good  faith,  even  though  such 
sale  was  not  formally  authorized  by 
the  board  of  directors  or  stockholders. 
Magowan  v.  Groneweg,  86  N.  W.  Rep. 
636  (S.  Dak.  1901).  The  board  of  direct- 
ors may  ratify  an  act  of  the  president 
without  a  formal  resolution  being 
spread  on  the  minutes.  Texas,  etc.  Ry. 
V.  Davis,  5-4  S.  W.  Rep.  381  (Tex.  1899). 
A  note  guaranteed  by  a  corporation 
through  its  president,  the  act  being 
within  the  corporate  power,  is  binding 
if  the  corporation  had  the  benefit,  even 
though  the  president  had  no  authority 
to  make  such  indorsement.  Hunt  v. 
Northwestern,  etc.  Co.,  92  N.  W.  Rep. 
23  (S.  Dak.  1902).  Where  the  president 
agrees  to  pay  an  employee  a  certain 
percentage  of  the  profits  of  the  business 
and  tlie  corporation  acquiesces  in  the 
contract  and  has  been  benefited  by  it, 
the  corporation  is  bound.  Bennett  v. 
Millville  Imp.  Co.,  51  Atl.  Rep.  706  (N. 
J.  1902).  If  the  board  of  directors  by 
their  acts  accept  a  modification  made 
by  the  president  in  a  contract,  the  com- 
pany is  bound,  although  there  was  no 
formal  ratification.  Taylor,  etc.  Co.  v. 
Wood,  119  Fed.  Rep.  966  (1903).  A 
pledge  of  bonds  by  the  president  is 
ratified  by  the  directors  knowing 
thereof  and  accepting  the  proceeds. 
Prentiss,  etc.  Co.  v.  Godchaux,  66  Fed. 
Rep.  234  (1894).  A  bank  is  liable  for 
money  received,  and  used  by  it  in  its 
business,  even  though  the  president 
was  not  authorized  to  borrow  it. 
Blanchard  v.  Commercial  Bank,  75  Fed. 
Rep.  249  (1896),  A  bank  cannot  enforce 
notes  which  its  president  obtains  for  it 


by  misrepresentations  inducing  the 
maker  of  the  notes  to  give  them  in  ex- 
change for  the  notes  of  a  worthless 
party.  Wilson  v.  Pauly,  72  Fed.  Rep. 
129  (1896).  The  president  may  release 
a  mortgage  where  a  majority  of  the  di- 
rectors separately  authorized  it,  and 
the  stockholders  in  meeting  assembled 
gave  him  general  authority.  Smith  v. 
Wells,  etc.  Co.,  148  Ind.  333  (1897).  By 
acquiescence  of  the  board  of  directors 
the  president's  contract  employing  an 
editor  and  manager  of  a  newspaper 
may  bind  the  company.  Jones  v.  Will- 
iams, 139  Mo.  1  (1897).  Allowing  the 
contract  to  be  completed  cures  any  de- 
fect of  power  on  the  part  of  the  presi- 
dent to  make  the  contract.  Omaha, 
etc.  Co.  V.  Burns,  49  Neb.  229  (1896). 
Accepting  the  benefit  of  the  president's 
contract  cures  any  defect  in  his  author- 
ity. Davies  v.  Harvey  Steel  Co.,  6  N.  Y. 
App.  Div.  166  (1896).  By  accepting  a 
deed  of  a  right  of  way  a  corporation 
accepts  written  covenants  which  its 
president  made  in  connection  there- 
with. Mobile,  etc.  Ry.  v.  Gilmer,  85 
Ala.  422  (1888).  Where  the  president, 
as  the  financial  manager,  pledges  the 
company's  bonds,  and  for  more  than  a 
year  such  pledge  continues  without  ob- 
jection, the  pledge  is  ratified.  Illinois 
T.  &  S.  Bank  v.  Pacific  Ry.,  117  Cal.  332 
(1897),  holding  also  that  although  the 
by-laws  require  notes  to  be  signed  by 
the  secretary,  yet  by  acquiescence  a 
note  signed  by  the  president  alone  may 
bind  the  corporation.  A  chattel  mort- 
gage given  by  the  president  and  treas- 
urer, without  previous  authority  from 
the  directors,  may  be  validated  by  the 
corporation  accepting  the  benefit  of 
the  same.  Edelhoff  v.  Horner,  etc.  Co., 
86  Md.  595  (1898).  A  contract  made  by 
the  president  without  authority  may 
be  considered  ratified  by  the  fact  that 
the  directors  individually  knew  of  the 
same,  although  they  did  not  act  upon 


1779 


§  716.] 


HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[on.  XLIII. 


and  exercising  acts  of  ownership  and  control  over  the  demised 
premises,  even  if  the  minutes  of  the  company  failed  to  disclose  such 


the  matter  as  a  board.  Henry  v.  Colo- 
rado, etc.  Co.,  10  Cola  App.  14  (1897).  A 
railroad  contractor  may  enforce  his 
construction  contract  with  a  railroad 
corporation,  although  he  made  it  with 
the  president,  and  the  board  of  direct- 
ors did  not  pass  upon  it,  wlierethe  con- 
tractor proceeded  to  perform.  The 
contractor  was  justified  in  stopping 
work  when  he  was  not  paid  according 
to  the  contract  Cunningham  v.  Mas- 
sena,  etc.  R  R.  63  Hun,  439  (1892);  aflf'd, 
138  N.  Y.  614.  Acquiescence  in  sales 
by  the  president,  where  a  vendor's  lien 
was  retained,  does  not  sustain  a  sale  by 
him  without  retaining  such  a  lien. 
Fitzhugh  V.  Franco-Texas  Land  Co.,  81 
Tex.  30G  (1891).  Although  the  president 
accepts  in  the  corporate  name  a  draft 
drawn  on  him  personally,  yet  where  the 
bank  of  the  corporation  pays  the  draft 
and  charges  it  to  the  corporation,  and 
the  latter  acquiesces  for  nine  months,  it 
cannot  hold  the  bank  liable.  McLaren 
V.  First  Nat.  Bank,  76  Wis.  259  (1890). 
The  president's  contract  with  an  attor- 
ney may  be  ratified.  Merrill  v.  Con- 
sumers' Coal  Co.,  114  N.  Y.  216  (1889). 
A  transfer  of  all  the  property  by  the 
president  is  valid  where  the  directors 
and  all  the  stockholders  knew  of  it  and 
assented  to  it.  Fort  Worth  Pub.  Co.  v. 
Hitson,  80  Tex.  216(1890).  The  company, 
by  accepting  and  using  property  pur- 
chased by  the  president  without  author- 
ity, thereby  ratifies  the  purchase.'  West 
Salem  Land  Co.  v.  Montgomery  Land 
Co.,  89  Va.  192  (1892).  That  stock- 
holders may  ratify  and  validate  notes 
and  mortgages  given  by  the  president, 
see  Martin  v.  Niagara,  etc.  Mfg.  Co.,  122 
N.  Y.  165  (1890).  The  contracts  of  the 
president  may  be  ratified  subsequently 
by  the  board  of  directors.  Wehrhane 
V.  Nashville,  etc.  R  R,  4  N.  Y.  St  Rep. 
541  (1886).  For  a  clear  statement  of 
this  principle,  see  Dabney  v.  Stevens, 
40  How.  Pr.  341  (1870)    Rates  as  adver- 


tised by  the  president  bind  the  railroad 
when  it  continues  to  accept  them. 
Hilliard  v.  Goold,  34  N.  H.  230  (1856). 
The  president's  unauthorized  contracts, 
when  known  to  and  acted  upon  by  the 
directors  and  corporation,  are  binding. 
Perry  v.  Simpson,  etc.  Co.,  37  Conn.  520 
(1871);  93  N.  W.  Rep.  882. 

Where  the  president  of  a  bank  in- 
structs its  correspondent  bank  to  charge 
to  the  former  a  debt  due  by  him  to  the 
latter  bank,  and  the  accounts  of  the 
latter  to  the  former  bank  showed 
to  that  effect,  and  no  objection  is 
made,  the  former  bank  is  bound. 
Burton  v.  Burley,  13  Fed,  Rep.  811 
(1880).  A  lease  by  the  president  and 
treasurer  without  authority  may  be 
ratified  by  the  stockholders.  Mount 
Washington  Hotel  Co.  v.  Marsh.  63  N. 
H.  230  (1884).  A  bank  is  liable  on  an 
agreement  of  its  president  to  give  a 
person  ten  shares  of  stock  if  he  would 
deposit  w'ith  it,  the  deposits  having 
been  made.  Rich  v.  State  Nat.  Bank, 
7  Neb.  201  (1878).  Where  the  company 
acquiesces  in  work  done  by  contract 
with  the  president  it  is  liable.  Grape  Co. 
V.  Small,  40  Md,  395  (1874).  The  com- 
pany may  ratify  a  mortgage  given  by 
him.  Krider  u.  Western  College,  31 
Iowa,  547  (1871);  Sherman  u  Fitch,  98 
Mass.  59  (1867),  where  all  but  one  of  the 
directors  knew  and  acquiesced.  The  ac- 
quiescence of  a  minority  of  the  directors 
is  insufficient.  Yellow,  etc.  Co.  r. 
Stevenson,  5  Nev.  224  (1869).  Accept- 
ance of  the  property  purchased,  with 
knowledge,  is  ratification.  Dent  v. 
North,  etc.  Co.,  49  N.  Y.  390  (1872;.  The 
failure  of  the  president  to  repudiate  at 
once  an  agent's  unauthorized  act  is 
ratification.  First  Nat.  Bank  v.  Fricke, 
75  Mo.  178  (1881);  Alabama,  etc.  R  R 
V.  Kidd,  29  Ala.  221  (1856).  See  also 
§  727,  infra,  on  notice.  Ratification  of  a 
president's  acts  may  arise  by  long  use 
of  the  results,  even  though  the  directors 


1780 


CH.  XLIII.]  HOW    COEPOKATE   CONTRACTS    AKE   MADE. 


[§  716. 


authority  expressly  given. ^  The  stockholders  of  a  corporation  at  a 
special  meeting  dul}'  called  may  amend  the  by-laws  so  as  to  au- 
thorize the  board  of  directors  to  remove  the  president  and  treasurer, 
and  the  board  of  directors  may  subsequently  make  such  removal 
under  the  amended  by-laws.^ 

The  same  rules  apply  to  a  vice-president  that  apply  to  the  presi- 
dent on  this  subject.^    A  stockholder  cannot  act  as  temporary  presi- 


expressly  repudiated  the  acts,  but  did 
not  notify  the  other  party.  Belleville 
Sav.  Bank  v.  Winslow,  35  Fed.  Rep.  471 
(1888).  It  is  a  sufficient  ratification  if 
the  directors  discuss  the  matter  at  a 
meeting,  though  they  take  no  action. 
Walworth,  etc.  Bank  v.  Farmers',  etc. 
Co.,  16  Wis.  629  (1883).  A  corporate 
agent  with  full  powers  may  ratify  the 
president's  act.  Perry  v.  Simpson,  etc. 
Co.,  37  Conn.  520  (1871).  Acquiescence 
of  the  board  of  directors  may  cure  the 
omission  of  a  previous  resolution  as  re- 
quired by  the  charter  in  the  issue  of 
the  bonds.  Curtis  v.  Leavitt,  15  N.  Y. 
9  (1857),  the  court  saying  of  the  board 
(p.  49):  "They  may  previously  resolve; 
they  may  subsequently  acquiesce;  they 
may  expressly  ratify;  they  may  inten- 
tionally receive  and  appropriate  the  pro- 
ceeds of  the  unauthorized  transaction, 
and  so  put  it  out  of  their  power  to  dis- 
pute its  validity."    54  Atl.  Rep.  385. 

1  Jacksonville,  etc.  Nav.  Co.  v.  Hooper, 
160  U.  S.  514  (1896). 

2  In  re  Griffing  Iron  Co.,  63  N.  J.  L. 
168  (1898);  afiE'd,  63  N.  J.  L.  357  (1899). 

•*The  mere  fact  that  a  deed  is  exe- 
cuted by  the  vice-president  instead  of 
the  president  does  not  require  addi- 
tional proof  as  to  why  the  vice-president 
signed  it  instead  of  the  president  doing 
so.  Ellison  V.  Branstrator,  153  Ind.  146 
(1899).  It  is  legal  for  the  board  of  di- 
rectors to  authorize  the  vice-president 
to  execute  a  deed.  American,  etc.  Bank 
V.  Ward,  111  Fed.  Rep.  782  (1901).  The 
unauthorized  action  of  the  vice-presi- 
dent in  delivering  a  note  which  had 
been  duly  indorsed  by  the  corporation 
is  ratified  by  the  corporation  receiving 
the     benefit    therefrom.      Johnson    v. 


Weed,  etc.  Co.,  103  Wis.  291  (1899).  A 
lumber  company  is  not  liable  for  trans- 
actions of  its  vice-president  with  out- 
siders, where  such  vice-president  had 
no  power  to  represent  it.  Shavalier  v. 
Grand  Rapids,  etc.  Co.,  87  N.  W.  Rep. 
212  (Mich.  1901).  The  vice-president  of 
a  bank  may,  by  reason  of  having  for  a 
long  time  conducted  the  business  of 
the  bank,  have  power  to  assign  a  judg- 
ment owned  by  the  bank.  Cox  v.  Rob- 
inson, 82  Fed.  Rep.  277  (1897).  The  vice- 
president  may  sign  a  corporate  deed  if 
the  president  refuses  to  do  so.  Smith 
V.  Smith,  62  111.  492  (1872).  The  fact 
that  a  vice-president  swears  to  a  com- 
plaint does  not  raise  a  presumption 
that  the  company  authorized  its  serv- 
ice. American  Water- works  Co.  v. 
Venner,  18  N.  Y.  Supp.  379  (1892).  The 
vice-president  may  make  an  assign- 
ment for  the  benefit  of  creditors,  where 
he  is  authorized  ''to  use  all  means  and 
do  all  acts  and  make  all  deeds  by  him 
deemed  necessary  or  proper  to  serve  the 
best  interest  of  the  association,  and  to 
use  the  corporate  seal  for  such  pur- 
posa"  Huse  v.  Ames,  104  Mo.  91  (1891). 
The  vice-president  has  no  power  to  sell 
the  bonds  of  the  company,  even  though 
he  is  a  director,  member  of  the  exec- 
utive committee,  and  one  of  the  two 
persons  who  "  run  "  the  company.  The 
purchasers  are  not  bona  fide.  American 
L.  &  T.  Co.  V.  St.  Louis,  etc.  Ry.,  42  Fed. 
Rep.  819  (1890).  It  may  be  proved  that 
the  vice-president  had  authority  to  ac- 
cept a  draft,  although  drawn  by  him- 
self upon  the  company.  Rum  bough  v. 
Southern  Imp.  Co.,  106  N.  C.  461  (1890). 
A  suit  is  presumed  to  be  authorized 
where  the  vice-president  swears  to  the 


1781 


§  717.] 


HOW    COErOKATE    CONTRACTS    ARE    MADE. 


[cu. 


XLIII. 


dent  of  the  board  of  directors  where  he  has  never  been  elected  a 
director.^ 

§  717.  Secretary  and  treasurer —  Tlieir  ijower  to  contract  for  the 
corporation. — The  secretary  of  a  corporation  has  no  power,  merely 
as  secretary  of  the  company,  to  make  contracts  for  it.^  The  secre- 
tary is  one  of  the  corporate  officers,  but  he  has  practically  no  au- 
thority.* The  corporation  may,  of  course,  expressly  authorize  the 
secretary  to  contract  for  it,  or  may  accept  and  ratify  his  contracts 
after  they  are  made.* 


pleading.  Lacaze  v.  Creditors.  46  La. 
Ann.  237  (1894).  The  vice-president's 
contracts  may  be  ratified  by  the  direct- 
ors. Dallas  V.  Columbia,  etc.  Co..  158 
Pa.  St.  444  (1893).  The  vice-president 
may,  in  certain  circumstances,  employ 
counsel.  Streeten  v.  Robinson,  102  Cal. 
542  (1894).  The  vice-president  has  no 
power  to  sign  notes.  Morris  v.  Griffith, 
etc.  Co.,  69  Fed.  Rep.  131  (1895).  As  to 
the  powers  of  a  vice-president,  see  also 
Missouri,  etc.  Ry.  u  Faulkner.  88  Tex. 
649  (1895). 

1  Benson  v.  Keller,  37  Oreg.  120  (1900). 

2  "  A  secretary  is  a  mere  servant.    His 
position  is  that  he  is  to  do  what  he  is 
told,  and  no  person  can  assume  that  he 
has  any  authority.to  represent  anything 
at  all."    Hence  a  receipt  by  the  secre- 
tary that  certificates  of  stock  had  been 
actually  lodged  in  the  corporate  office 
for  transfer  does  not  bind  the  corpora- 
tion   where    they   were   not    actually 
lodged,  and  the  receipt  was  a  part  of  a 
fraud,    George   Whitechurch.  Ltd.   v. 
Cavanagh.  [1902]  A.  C.  117.     Where  the 
secretary  wrongfully  deposits  another 
person's  money  to  the  credit  of  the 
company,  and  then  checks  it  out  for  his 
private  debts,  the  company  is  not  liable 
therefor.  Glendale,  etc.  Assoc,  v.  Harvey, 
etc  Co.,  90  N.  W.  Rep.  456  (Wis.  1902). 
The  secretary  has  no  power  to  assign 
the  company's  claims  for  goods  sold  by 
it.    The  assignee's  rights  are  not  per- 
fected   by    the    directors'    resolution 
made  after  he  sues  on  the  account. 
Read  v.  Buffum,  79  Cal.  77  (1889).     The 
secretary  of  a  religious  corporation  can- 
not contract  for  paving  for  the  corpo- 

1 


ration.  Thomason  v.  Grace,  etc  Church, 
113  Cal.  558  (1896).     The  secretary  has 
no  implied  power  to  bind  the  company. 
Wolf  V.  Davenport,  etc.  R  R.,  93  Iowa, 
218  (1895).     He  cannot  sell  and  assign 
its  notes,  Blood  v.  Marcuse,  38  Cal.  590 
(1869);  nor  sign  a  draft  for  it.  First  Nat. 
Bank  u  Hogan,  47  Mo.  472  (1871);  noi 
purchase  iron  for  it,  Williams  r.  Chester, 
etc.  R  R.»  15  Jur.  828  (1850);  nor  accept 
a  bill  of  exchange,  Neale  v.  Turton,  4 
Bing.  149  (1827);  nor  bind  it  to  pay  a 
debt  of  an  old  company  whose  property 
it  purchased   upon    a    reorganization, 
American,  etc  Ry.  v.  Miles,  52  111.  174 
(1869) :  nor  rent  a  place  for  the  company, 
Ridley  v.  Plymouth,  etc.  Co.,  2  Exch. 
711  (1848);  nor  accept  accommodation 
paper.  Farmers',  etc.   Bank  v.  Empire, 
etc.  Co.,  5  Bosw.  275  (1859);  nor  purchase, 
Kingsbridge  Flour  Mill  Co.  v.  Plymouth, 
etc.  Co..  2  Exch.  718  (1848).     Where  the 
assistant  secretary  signs  a  mortgage  in- 
stead of  the  secretary,  it  is  suflBcient  to 
prove  that  he  was  the  de  facto  assistant 
secretary.     Augusta,  etc.  R,  R  u  Kittei, 
52  Fed.  Rep.  63  (1892).     The  secretary 
has  no  power  to  execute  a  note.   Thomp- 
son V.  Des  Moines,  etc.  Park,  84  N.  W. 
Rep.  678  (Iowa,  1900);  Sanders  v.  Char- 
trand,  59  S.  W.  Rep.  95  (Mo.   1900).     A 
letter  signed  by  the  secretary  employ- 
ing a  person  is  not  sufficient  to  prove  a 
contract.     Hallenbeck   v.  Powers,  etc. 
Co.,  117  Mich.  680  (1898). 

3  Hastings  v.  Brooklyn  Life  Ins.  Co., 
138  N.  Y.  478  (1893). 

4  Hill  V.  Manchester,  etc.  Co.,  5  B,  &  A  d. 
866  (1833),  where  the  secretary  was  au- 
thorized to  affix  the  corporate  seal;  New 

782 


CH.  XLIII.]  HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§ 


T17. 


The  treasurer  of  a  corporation  has  no  power,  merely  by  reason 
of  his  office  as  treasurer,  to  contract  for  the  corporation.^  But  if 
the  treasurer  has  been  accustomed  to  make  certain  contracts  for  the 
corporation,  and  the  corporation  has  acquiesced  in  them,  it  is  bound 


England,  etc,  Ins.  Co.  v.  De  Wolf,  25 
Mass.  56  (1829),  where  the  company  ac- 
cepted the  benefits.  A  note  signed  by 
the  corporate  secretary  as  directed  by 
the  president,  the  money  therefor  be- 
ing used  by  the  corporation,  is  enforce- 
able against  it.  Jansen  v.  Otto  Stietz, 
etc.  Co.,  1  N.  Y.  Supp.  605  (1888).  Al- 
though corporate  notes  given  by  the  sec- 
retary to  a  bank  are  unauthorized,  yet 
if  the  money  was  used  regularly  in  the 
business  of  the  company  it  is  liable. 
Pauly  V.  Pauly,  107  Cal.  8  (1895).  Where 
the  secretary  has  been  permitted  to  sell 
the  notes  of  the  corporation,  a  transfer 
of  a  note  by  him  to  a  bank  makes  the 
latter  a  bona  fide  purchaser,  the  corpo- 
ration being  the  payee.  Commercial 
Nat.  Bank  v.  Brill,  37  Neb.  626  (1893). 
The  secretary  has  power  to  indorse  the 
company's  note  for  discount  or  sale 
where  for  a  long  time  he  has  been  al- 
lowed to  do  so.  Blake  ?'.  Domestic,  etc. 
Co.,  38  Atl.  Rep.  241  (N.  J.  1897).  By  al- 
lowing the  secretary  to  conduct  the 
business  the  company  is  bound  by  his 
contracts.  Hess  v.  Sloane,  66  N.  Y.  App, 
Div.  522  (1901).  Where  a  corporation 
pays  the  expense  of  collecting  notes 
owned  by  it  and  assigned  by  its  secre- 
tary, it  thereby  ratifies  such  assign- 
ment. McCormick  v.  Bittinger,  13  Colo. 
App.  170  (1899). 

1  The  treasurer  has  no  power  to  bor- 
row money  and  give  the  corporate  note 
therefor,  and  the  company  is  not  liable 
where  the  money  was  paid  into  the  cor- 
porate treasury  and  immediately  em- 
bezzled by  the  treasurer.  Craft  v.  South 
Boston  R.  R.,  150  Mass.  207  (1889).  A 
treasurer  has  no  power  to  sign  the  cor- 
porate name  to  promissory  notes  unless 
he  is  expressly  given  that  power.  If  the 
note  is  made  payable  to  his  own  order, 
the  purchaser  of  it  must  take  notice 
that  it  was  issued  without  authority. 


Chemical  Nat.  Bank  v.  Wagner,  93  Ky. 
525  (1892).  Notes  of  a  cattle  company 
purporting  to  be  signed  by  it  through 
its  treasurer  are  presumed  to  have  been 
authorized.  Corcoran  v.  Snow  Cattle 
Co.,  151  Mass.  74  (1890).  Where  a  corpo- 
ration repudiates  a  pledge  of  stock  made 
by  its  treasurer,  it  cannot  sue  the 
pledgee  for  the  money  received  by  the 
pledgee  upon  a  sale  of  the  stock  by  the 
latter.  Holden  v.  Metropolitan  Nat. 
Bank,  151  Mass.  112  (1890).  The  treas- 
urer cannot,  upon  the  sale  of  a  note  held 
by  the  company,  indorse  the  note  so  as 
to  render  the  company  liable,  even 
though  a  trustee  was  aware  thereof, 
the  opening  of  an  account  with  the 
bank  being  unknown  to  the  company. 
Columbia  Bank  v.  Gospel  Tabernacle, 
57  N.  Y.  Super.  Ct  149  (1889).  A  treas- 
urer has  no  power  to  issue  corporate 
notes,  and  where  he  does  so,  the  pro- 
ceeds being  used  to  pay  his  personal 
debt  to  the  corporation,  the  notes  are 
not  binding  on  the  company.  First 
Nat.  Bank  v.  Council  Bluffs,  etc.  Co., 
56  Hun,  412  (1890).  The  corporate  in- 
dorsement of  a  note  by  the  treasurer 
without  authority  and  for  accommo- 
dation does  not  bind  the  corporation. 
Wahlig  V.  Standard,  etc.  Co.,  9  N.  Y. 
Supp.  739  (1890).  The  treasurer  has  no 
inherent  authority  to  indorse.  Se- 
curity Bank  v.  Kingsland,  5  N.  Dak. 
263  (1895).  The  treasurer  has  no  im- 
plied power  to  make  a  corporate  note. 
Oak,  etc.  Co.  v.  Foster,  7  N.  M.  650  (1895). 
The  treasurer  of  a  manufacturing  cor- 
poration has  no  implied  power  to  bind 
the  corporation  as  an  accommodation 
indorser,  and  a  person  taking  the  note 
with  notice  cannot  enforce  such  in- 
dorsement. Usher  v.  Raymond  Skate 
Co,,  163  Mass,  1  (1895).  An  arbitration 
agreed  to  by  the  treasurer  was  sus- 
tained in  Remington  Paper  Co.  v.  Lon- 


1783 


§  717.] 


HOW    COKPOKATE    CONTKACTTS    ARE    MADE. 


[CH. 


XLIII. 


by  a  new  contract  of  that  kind  entered  into  by  him.'  It  is  for  the 
jury  to  decide  whether  such  a  custom  exists.-  A  treasurer  has  no 
power  to  indorse  the  company's  note  for  discount  or  sale,  but  if 
allowed  to  do  so  for  a  long  time  such  indorsements  are  legal.^  If 
the  treasurer  is  accustomed  to  act  as  the  managing  agent  of  the 
corporation  he  can  sell  its  property,*  and  borrow  money  and  give 
security.*  The  treasurer  binds  the  corporation  by  a  contract  which 
he  is  expressly  authorized  to  make.^     The  secretary  and  treasurer 


don  Assur.  Corp.,  12  N.  Y.  App.  Div.  218 
(1896).  A  demand  for  rent  may  prop- 
erly be  made  on  the  secretary  and 
treasurer.  State  v.  Felton,  53  N.  J.  L. 
161  (1889;.  He  cannot  compromise  or 
relinquish  its  claims,  Carver  Co.  v. 
Manufacturers',  etc.  Co..  72  Mass.  214 
(1856):  nor  sell  and  indorse  its  paper, 
Bradlee  v.  Warren,  etc  Bank,  127  Mass. 
107  (1879);  Holden  v.  Upton,  134  Mass. 
177  (1883).  Contra,  Perkins  v.  Bradley, 
24  Vt.  66  (1851);  nor  assume  the  debt  of 
a  third  person,  Stark  Bank  v.  U.  S.  Pot- 
tery Co.,  34  Vt  144  (1861);  nor  sell  and 
assign  a  mortgage  owned  by  the  cor- 
poration, even  though  he  uses  the  coi> 
porate  seaL  Jackson  v.  Campbell,  5 
Wend.  572  (1830).  He  may  employ  an 
attorney  to  collect  unpaid  bills.  Bris- 
tol, etc.  Bank  v.  Keavy,  128  Mass.  298 
(1880).  He  cannot  give  a  release  under 
seal.  Dedham  Inst.  v.  Slack,  60  Mass. 
408  (1850).  He  may  accept  money. 
Brown  v.  Winnissimmet  Co.,  93  Mass. 
326  (1865).  The  treasurer  of  a  manu- 
facturing corporation  is  presumed  to 
have  authority  to  indorse  and  sell  to  a 
bank  a  note  running  to  the  corporation. 
Standard,  etc  Co.  v.  Windham  Nat. 
Bank,  71  Conn.  668  (1899).  As  to  ad- 
missions by  him,  see  §  726,  infra. 

iThe  treasurer  has  no  inherent 
power  to  sign  and  indor.se  corporate 
notes,  but  long  usage  may  constitute 
such  authority.  Page  v.  Fall  River,  etc 
R  R.,  31  Fed.  Rep.  257  (1887);  Lester  v. 
Webb,  83  Mass.  34  (1861),  where  the 
treasurer  indorsed  a  note;  Bank  of  At- 
tica V.  Pottier,  etc.  Co.,  1  N.  Y.  Supp. 
483  (1888);  Partridge  u  Badger,  25 
Barb.  146  (1857);  Foster  v.  Ohio,  etc. 
Co.,  17  Fed.  Rep.  130   (1883),  where  he 


gave  a  note.  Where  the  secretary  and 
treasurer  have  been  accustomed  to  man- 
age the  entire  business  and  make  con- 
tracts, a  contract  entered  into  by  them 
for  the  company  is  legal  and  enforce- 
able. Moore  v.  H.  Gaus  Co.,  113  Ma  98 
(1892). 

2  Foster  V.  Ohio,  etc  Co.,  17  Fed.  Rep. 
130  (1883);  Fifth,  etc  Banku  First  Nat 
Bank,  48  N.  J,  L.  513  (1886),  where  the 
treasurer  pledged  securities. 

3  Blake  v.  Domestic,  etc.  Co.,  38  Ati. 
Rep.  241  (N.  J.  1897).  Where  the  corpo- 
ration has  allowed  the  secretary  and 
treasurer  to  indorse  notes  received  by 
it,  such  indorsements  are  legal.  Black 
V.  First  Nat  Bank,  54  Atl.  Rep.  88  (Md. 
1903). 

*  Phillips  V.  Campbell,  43  N.  Y.  271 
(1870). 

6  Fay  V.  Noble,  66  Mass.  1  (1853);  Fifth, 
etc  Bank  v.  First  Nat  Bank.  48  N.  J.  L. 
513  (1886).  Where  the  treasurer  has 
been  accustomed  to  handle  the  finarices 
of  the  corporation,  a  judgment  note 
with  wari'ant  of  attorney  by  him  is 
valid.  Chicago,  etc.  Co.  v,  Chicago 
Nat  Bank,  176  111.  224  (1898).  Where 
the  secretary  and  treasurer  and  a  di- 
rector have  been  allowed  to  transact 
the  business  of  the  company  and  they 
borrow  money  for  the  company  and 
give  the  company's  bond  and  mortgage 
therefor,  and  produce  a  certified  copy 
of  a  resolution  passed  by  the  board  of 
directors,  the  lender  may  rely  on  such 
certified  copy,  even  though  it  after- 
wards turns  out  to  have  been  unauthor- 
ized. Hutchison  v.  Rock  Hill,  etc.  Co., 
43  S.  E.  Rep.  295  (S.  C.  1902). 

«  Odd  Fellows  v.  Bank  of  Sturgis,  42 
Mich.  461  (1880),  where  the  authority 


1784 


-CH.   XLIir.]  HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§  ai, 


cannot  even  conjointly  bind  the  corporation  by  their  purchases  of 
the  article  in  which  it  deals;  ^  nor  can  they  borrow  money  for  the 
corporation ;  -  nor  release  the  maker  of  a  note  to  the  corporation ; ' 
nor  subscribe  for  stock  in  another  corporation.^  But  if  the  com- 
pany acquiesces  in  a  contract  made  by  either  or  both  of  these  offi- 
cers it  is  bound.^     By  usage  the  treasurer  may  have  power  to  sell 


was  oral ;  Gafford  v.  American,  etc.  Co., 
77  Iowa,  736  (1889).  Funds  drawn  out 
by  the  treasurer  on  the  express  author- 
ity of  the  directors  and  kept  apart 
from  his  funds  are  held  by  him  at  the 
risk  of  the  corporation.  Butler  v.  Du- 
iprat,  51  N.  Y.  Super.  Ct.  77  (1884). 
Where  a  corporation  authorizes  its 
agent  to  pledge  its  bonds  the  agent  may 
make  the  pledge  on  the  usual  terms  as 
<to  selling  the  bonds  in  case  of  default. 
Morris,  etc.  v.  East  Side  Ry.,  104  Fed. 
Eep.  409  (1900),  rev'g  95  Fed.  Rep.  13. 
Where  a  corporation  keeps  two  ac- 
counts in  the  same  bank,  and  in  one  ac- 
count the  checks  are  to  be  signed  by 
the  president  and  the  treasurer,  and  in 
the  other  by  the  treasurer  alone,  a 
check  on  the  first  account  signed  by 
the  treasurer  alone  is  not  good,  and  the 
bank  is  liable  if  it  pays  it.  Shoe,  etc. 
Ca  V.  Western  Nat.  Bank,  70  N.  Y.  App. 
Div.  588  (1902).  Where  an  officer  is 
authorized  to  issue  notes,  a  note  issued 
by  him  is  legal  if  in  the  hands  of  a 
bona  fide  holder,  though  the  purpose 
was  unauthorized.  Hence  he  cannot 
be  held  personally  liable,  and  the  notes 
are  binding  on  the  corporation.  Dexter 
Sav.  Bank  v.  Friend,  90  Fed.  Rep.  703 
(1898). 

1  Alexander  v.  Cauldwell,  83  N.  Y. 
480  (1881),  where  a  coal  company  was 
held  not  liable  for  coal  so  purchased, 
there  being  no  evidence  that  the  cor- 
poration authorized  it,  or  used  it,  or 
ratified  it.  Cf.  Alexander  v.  Brown,  9 
Hun,  641  (1877).  The  secretary  and 
treasurer  has  no  power  to  sell  ma- 
chinery of  the  company.  Winsted,  etc. 
Ca  V.  New  Britain,  eta  Co.,  69  Conn. 
565  (1897). 

2  Adams  v.  Mills,  60  N.  Y.  533  (1875). 
The  secretary  and  treasurer  of  a  coal 

17 


company  has  no  implied  power  to  bor- 
row money  for  it.  Alabama,  etc.  Bank 
V.  O'Neil,  128  Ala.  192  (1901).  The  secre- 
tary and  treasurer  has  no  authority  to 
agree  to  pay  a  commission  to  an  agent 
for  selling  property  belonging  to  the 
corporation,  Extension,  etc.  Co.  v.  Skin- 
ner, 28  Colo.  237  (1901).  A  bona  fide  pur- 
chaser of  a  promissory  note  executed 
by  the  officers  of  a  private  trading  cor- 
poration is  protected  in  assuming  that 
the  officers  have  not  exceeded  their 
authority  in  issuing  the  note.  National, 
etc.  Co.  V.  Rockland  Co.,  94  Fed.  Rep. 
335  (1899). 

3  Moshannon,  etc.  Co.  v.  Sloan,  7  Atl. 
Rep.  102  (Pa.  1885).  The  secretary  and 
treasurer  of  a  company  organized  to 
deal  in  mortgages  may  authorize  a 
debtor  of  the  company  to  transfer  real 
estate  to  one  of  the  company's  credit- 
ors in  settlement  of  both  claims.  First 
Nat.  Bank  v.  Garretson,  107  Iowa,  196 
(1899). 

*The  secretary  and  treasurer  of  a 
cotton  trading  company  has  no  power 
to  subscribe  in  the  name  of  the  com- 
pany for  stock  in  a  cotton  manufactur- 
ing company.  Wells  Co.  v.  Avon  Mills, 
118  Fed.  Rep.  190  (1902). 

5  St.  James's  Parish  v.  Newburyport, 
etc.  R.  R,  141  Mass.  500  (1886),  where 
the  treasurer  gave  an  obligation  under 
seal  and  reported  it  in  his  reports,  and 
a  committee  approved.  If  the  com- 
pany ratifies  a  contract  made  by  the 
president  and  secretary,  the  company 
may  compel  its  officers  to  give  it  the 
benefit  of  the  contract.  Church  v. 
Sterling,  16  Conn.  383  (1844).  Accept- 
ing the  benefit  of  an  insurance  con- 
tract made  by  the  secretary  and  presi- 
dent accepts  the  contract  itself.  Emmet 
V.  Reed,  8  N.  Y.  312  (1853).  An  indorse- 
es 


§n7.] 


HOW    COKPOUATE    CONTRACTS    ARE    MADE.  [CH.  XLIII. 


goods.'  In  ^lassachusetts  it  is  held  that  the  treasurer  of  a  trading 
or  manufacturing  company  has  implied  power  to  execute  notes  in 
behalf  of  the  corporation,  and  the  hona  fide  holder  of  such  notes 
may  enforce  them.  This  rule  was  also  applied  to  a  gas-light  com- 
pany.- And  in  Vermont  it  is  held  that  the  treasurer  has  power  to 
buy,  where  the  company's  letterheads  direct  that  all  correspondence 
be  addressed  to  him.'  Where  the  treasurer  of  a  corporation  uses  its 
money  for  his  own  purposes  he  may  be  sued  therefor,  even  though 
he  continues  to  be  treasurer.*  A  new  treasurer  may  bring  suit 
-against  a  former  treasurer  to  recover  corporate  funds,  and  such 
suit  may  be  in  equity.*  A  treasurer  sued  by  the  corporation  for 
money  held  by  him  as  treasurer  cannot  offset  a  debt  due  from  the 
corporation  to  him  individually.^  A  peremptory  mandamus  granted 
without  notice  is  not  the  proper  remedy  to  compel  the  treasurer  of 


ment  by  the  secretary,  with  the  knowl- 
edge and  acquiescence  of  the  directors, 
is  binding.  Williams  v.  Clieney,  69 
Mass.  215  (1855).  So,  also,  where  he 
pledges  bonds  with  their  knowledge 
and  acquiescence.  Darst  v.  Gale.  83  III. 
136  (1876).  And  see  Durar  r.  Hudson, 
etc.  Ina  Co.,  24  N.  J.  L.  171  (1853),  in  in- 
surance contracts:  and  Conover  v.  Mut- 
ual Ins.  Ca,  1  N.  Y.  290  (1848),  where  he 
was  accustomed  to  contract  for  the 
company;  Chicago  Bldg.  Soc.  v.  Crowell, 
65  111.  453  (1872);  Talladega  Ins.  Co.  v. 
Peacock,  67  Ahx.  253  (1880),  where  the 
secretary  was  accustomed  to  sign  notes. 
Where  a  corporation  uses  a  wharf  un- 
der a  contract  made  by  its  treasurer,  it 
is  liable  for  the  contract  price.  Taylor 
V.  Albemarle,  etc.  Co.,  105  N.  C.  484 
(1890).  Taking  the  benefit  of  a  piete 
of  statuary  for  advertising  purposes 
binds  it  to  pay  therefor,  though  the 
treasurer  made  the  contract.  Ellis  v. 
Howe,  etc.  Co.,  9  Daly,  78  (1880). 
The  secretary  and  treasurer  may  bind 
the  company  by  being  allowed  to  do 
all  the  business  of  the  company.  Colo- 
rado, etc.  Co.  V.  American,  etc.  Co.,  97 
Fed.  Rep.  843  (1899).  Where  the  secre- 
tary and  treasurer  has  managed  the 
business  as  though  the  property  was 
his  own,  a  sale  of  all  the  property 
with  the  consent  of  ninety-five  per 
cent,  of  the  stockholders  to  an  innocent 


purchaser  for  value  is  legal,  even 
though  no  meeting  of  the  directors  or 
stockholders  authorized  the  sale.  Ma- 
gowan  XI.  Groneweg,  86  N.  W.  Rep.  626 
(S.  Dak.  1901).  WHiere  the  treasurer 
signs  the  company's  name  to  a  note 
without  authority,  but  the  company 
uses  the  money,  it  is  liable  on  the  note. 
Wayne,  etc.  Co.  v.  Schuylkill,  etc.  Ry., 
191  Pa.  St.  90  (1899).  Where  the  treas- 
urer has  had  entire  management  of  the 
business,  an  extension  of  the  company's 
notes  by  hiip  is  legal.  Franklin  Sav. 
Bank  v.  Cochrane,  66  N.  E.  Rep.  200 
(Mass.  1903). 

1  Nashua,  etc.  Co.  v.  Chandler,  etc.  Co.,^ 
166  Mass.  419  (1896). 

-  Merchants'  Nat.  Bank  v.  Citizens' 
Gas  Light  Co.,  159  Mass.  505  (1893). 

3  Wood  bury  Granite  Co.  v.  MuUiken, 
66  Vt.  465  (1894). 

^Marlborough  Assoc,  v.  Peters,  179 
Mass.  61  (1901). 

5  Hunter  v.  Robbins,  117  Fed.  Rep. 
920  (1902).  See  also  §  648,  supra,  A 
corporation  may  file  a  bill  to  compel  its 
secretary  and  treasurer  to  account  for 
funds  coming  into  his  hands,  and  need 
not  resort  to  a  suit  at  law.  Such  a  suit 
is  practically  one  to  compel  a  trustee 
to  account.  Consolidated,  etc.  W^orks 
V.  Brew,  88  N.  W.  Rep.  603  (Wis.  1902). 

«  Oregon,  etc.  Co.  v.  Schmidt,  60  S.  W.. 
Rep.  530  (Ky.  1901> 


1786 


CH.  XLIII.]  HOW    COEPORATE    CONTKACTS    AEE   MADE. 


[§  718. 


the  corporation  to  pay  a  debt  in  accordance  with  the  order  of  the 
executive  committee.'  Where  the  statute  prescribes  that  officers 
and  agents  shall  hold  their  places  during  the  pleasure  of  the  board, 
the  board  may  oust  the  secretary  and  treasurer  at  any  tirae.^ 

§718.  Cashier — The  extent  of  his  powers. —  The  cashier  of  a 
bank  has  greater  inherent  powers  than  any  other  corporate  officer. 
By  virtue  of  his  office  he  performs  many  and  important  acts  for 
the  bank.  He  may  pledge  the  bank's  securities;'  and  sell  and  as- 
sign its  paper;*  and  extend  the  payment  of  a  note;*  and  certify 
checks;^  and  may  bind  the  bank  by  various  other  acts.'^  But  a 
cashier  cannot  authorize  a  person  to  loan  money  to  the  bank,  and 
deliver  it  to  an  agent  to  carry  it  to  a  distant  city;^  nor  any  other 

'  Horton  v.  State,  60  Neb.  701  (1900).     the  priority  of  a  mortgage.   Peninsular 


2  Darrah  v.  Wheeling,  eta  Co.,  50  W. 
Va.  417  (1901). 

'  Coats  V.  Donnell,  94  N.  Y.  168  (1883); 
Barnes  v.  Ontario  Bank,  19  N.  Y.  152 
(1859);  Donnell  v.  Lewis  County  Sav. 
Bank,  80  Mo.  165  (1883).  As  to  the 
power  of  the  cashier  to  borrow  money 
for  the  bank,  compare  Coats  v.  Donnell, 
94  N.  Y.  168  (1883).  with  W^estern  Nat. 
Bank  v.  Armstrong,  153  U.  S.  346  (1893). 

4  Smith  V.  Lawson,  18  W.  Va,  312,  327 
(1881);  Wild  v.  Bank,  3  Mason,  505 
(1825);  s.  C,  29  Fed.  Cas.  1215;  Lafayette 
Bank  v.  State  Bank,  4  McLean,  208 
(1847);  Everett  v.  United  States,  6  Port. 
(Ala.)  166  (1837);  Crocket  v.  Young,  9 
Miss.  241  (1848).  He  may  indorse  paper 
in  a  private  bank  after  banking  hours. 
Bissell  V.  First  Nat.  Bank,  69  Pa.  St.  415 
(1871). 

5  Wakefield  Bank  v.  Truesdell,  55 
Barb.  602  (1864). 

**  Merchants'  Bank  v.  State  Bank,  10 
Wall.  604  (1870);  Cooke  v.  State  Nat. 
Bank,  52  N.  Y.  96  (1873).  A  bona  fide 
holder  of  a  certificate  of  indebtedness 
issued  by  him  is  protected.  Citizens', 
etc.  Bank  v.  Blakesley,  43  Ohio  St.  645 
(1885). 

7  A  bank  is  liable  for  the  embezzle- 
ment by  a  cashier  of  a  special  deposit 
of  bonds.  First  Nat.  Bank  v.  Dunbar, 
118  111.  625  (1886).  See  also  Caldwell  v. 
National  Mohawk  Bank,  64  Barb.  333 
(1869),  and  §  681,  supra.  He  may  sell 
assets  to  pay  a  debt,  and  may  guarantee 


Bank  v.  Hanmer,  14  Mich.  208  (1866). 
He  may  employ  an  attorney.  Root  v. 
Olcott,  43  Hun,  536  (1886);  aff'd,  115  N.  Y. 
635;  Potter  v.  New  York  Inf.  Asylum, 
44  Hun,  367  (1887);  Western  Bank  v. 
Gilstrap,  45  Ma  419  (1870),  where  the 
other  oflScers  were  absent;  Mumford  v. 
Hawkins,  5  Denio,  355  (1848).  The  presi- 
dent and  cashier  are  presumed  to  have 
authority  to  compromise  a  debt.  Chem- 
ical Nat.  Bank  v.  Kohner,  85  N.  Y.  189 
(1881).  Where  an  agreement  is  signed 
by  the  president  and  cashier  of  a  bank 
concerning  a  matter  which  is  within 
the  regular  business  of  the  bank,  the 
authority  of  these  officers  to  execute 
the  contract  is  presumed.  Nat.  Bank 
Commerce  v.  Atkinson,  54  Paa  Rep.  8 
(Kan.  1898).  The  president  and  cashier 
of  a  bank  have  inherent  power  to  sell 
or  mortgage  land  owned  by  the  bank. 
Steinke  v.  Yetzer,  108  Iowa,  512  (1899j. 
The  cashier  may  transfer  stock  held 
in  pledge.  Matthews  v.  Massachusetts 
Nat.  Bank,  1  Holmes,  396  (1874);  s.  C, 
16  Fed.  Cas.  1113.  A  bona  fide  holder 
may  enforce  accommodation  paper  in- 
dorsed by  him.  City  Bank  v.  Perkins, 
29  N.  Y.  554  (1864);  Bank  of  Genesee  r. 
Patchin  Bank,  19  N.  Y.  312  (1859); 
Faneuil  Hall  Bank  v.  Bank  of  Brighton, 
82  Mass.  534  (1860). 

8  In  no  case  has  the  term  "ordinary 
business"  "been  judicially  allowed  to 
comprehend  a  contract  made  by  a  cash- 
ier, without  an  express  delegation  of 


1787 


§  ns.] 


HOW    CORPORATE    CONTRACTS    ARE    MADE.  [CH.  XLIII. 


act  which  is  not  in  the  regular  course  of  business.'  A  bank  may 
be  a  lonafide  pledgee  of  stock  from  its  cashier,  even  though  such 
stock  is  in  the  name  of  a  third  person  and  is  indorsed  by  the 
latter.^  A  bank  may  borrow  money,  but  it  is  so  unusual  that  the 
leaner  must  inquire  into  the  authority  of  the  officer  or  agent  acting 
for  the  bank  which  borrows  the  money.  Special  authority  or  rati- 
fication by  the  board  of  directors  must  be  shown.'  A  bank  has  no 
power  to  buy  stock  in  an  insurance  company,  and  the  cashier  of  the 
bank  has  no  authority  to  take  stock  in  payment  of  a  debt.*  Where' 
a  director  of  a  bank  delivers  bonds  to  the  cashier  as  security  for  a 
debt,  and  the  cashier  pledges  them  to  the  bank  to  secure  his  own 
debt,  the  court  will  hold  that  the  bank  holds  the  bonds  as  security 
for  the  creditor's  debt  and  not  for  the  cashier's  debt.'  The  cashier 
of  a  bank,  in  answering  an  inquiry  as  to  the  responsibility  of  a 
third  person,  need  not  disclose  the  fact  that  the  bank  has  a  mort- 
gage on  the  property  of  such  person.^  A  cashier  has  no  right  to 
agree  that  a  note  discounted  by  another  bank  for  a  company  in 
which  he  is  personally  interested  shall  be  charged  up  to  his  bank 
in  case  of  non-payment.^  Although  a  cashier  does  an  act  in  excess 
of  his  powers,  yet  if  the  board  of  directors  ratify  it  or  accept  its 
benefits  the  corporation  is  bound.^ 


•power  from  a  board  of  directors  to  do 
BO,  which  involves  the  payment  of 
money,  unless  it  be  such  as  has  been 
loaned  in  the  usual  and  customary 
way.  Nor  has  it  ever  been  decided 
that  a  cashier  could  purchase  or  sell 
the  property  or  create  an  agency  of  any 
kind  for  a  bank  which  he  had  not  been 
authorized  to  make  by  those  to  whom 
had  been  confided  the  power  to  man- 
age its  business,  both  ordinary  and  ex- 
traordinary." U.  S.  V.  City  Bank  of 
Columbus,  21  How.  356  (1858). 

'  He  cannot  bind  the  bank  by  indors- 
ing tlie  bank's  name  as  an  accommoda- 
tion indorser  to  his  own  note.  West 
St.  Louis  Sav.  Bank  v.  Shawnee  County 
Bank,  95  U.  S.  557  (1877).  A  cashier 
may  indorse  bank  paper  to  any  one  ex- 
cept himself.  Preston  v.  Cutter,  64 
N.  H.  461  (1888).  A  cashier  has  no 
power  to  make  the  bank  a  surety  on  a 
replevin  bond  for  the  accommodation  of 
a  third  person.  Sturdevant  v.  Farmers', 
etc.  Bank,  87  N.  W.  Rep.  156  (Neb.  1901). 
The  mere  fact  that  the  cashier  of  the 
bank  acts  as  intermediary  in  the  pur- 

17 


chase  and  sale  of  stock  in  the  bank 
does  not  make  the  bank  liable  for  his 
conversion  of  a  certificate  of  stock. 
Preston  v.  Marquette  County,  etc.  Bank, 
81  N.  W.  Rep.  U20  (Mich.  1900). 

-  Brady  u  Mount  Morris  Bank,  65  N. 
Y.  App.  Div.  212  (1901). 

3  Western  Nat.  Bank  v.  Armstrong, 
152  U.  S,  346  (1893).  A  cashier  having 
power  to  borrow^  money  for  the  bank 
has  power  to  pledge  bank  securities  as 
collateral.  Sloan  v.  Kansas  City,  etc. 
Bank,  158  Mo.  431  (1900). 

<  Bank  of  Commerce  v.  Hart,  37  Neb. 
197  (1893). 

5  Detroit,  etc.  Co.  v.  Third,  etc.  Bank, 
111  Mich.  407  (1897). 

6  First  Nat.  Bank  u  Marshall,  etc 
Bank,  83  Fed.  Rep.  725  (1897). 

7  Ft.  Dearborn  Nat.  Bank  r.  Seymour, 
71  Minn.  81  (1898). 

8  Although  the  ofBcers  of  a  bank 
have  no  power  to  borrow  money  from 
the  bank  without  special  authority 
from  the  board  of  directors,  yet  if  for  a 
long  time  they  have  been  accustomed 
to  do  so,  this  is  the  same  as  though  ex- 

88 


CH.  XLIII.]  HO"W    COKPORATE    CONTRACTS    ARE    MADE. 


[§  n%.. 


§  719.  General  manager^  siqyerintendent,  and  general  agent — 
Their  j^ower  to  contract  for  the  corporation. —  The  general  manager 
of  a  corporation  has  no  power  to  make  and  deliver  the  promissory 
note  of  the  company;^   nor  to  indorse  the  company's  name  on 


press  authority  had  been  given.    Arm- 
strong V.  Chemical  Nat.  Bank,  83  Fed. 
Rep.  556  (1897);  aff'd,  176  U.  S.  618  (1900). 
Even  though  an  officer  of  a  bank  is  not 
authorized   to  obtain   a  loan   for  the 
bank  from  its  correspondent  bank,  yet 
if  he  does  so  and  the  bank  uses  the 
money,  it  is  liable  to  repay  the  same. 
Aldrich  v.  Chemical,  etc.  Bank.  176  U. 
S.  618(1900);  Martin  v.  Webb,  110  U.  S. 
7  (1884),  where  the  cashier   had   can- 
celed a  deed  of  trust;  Payne  v.  Com- 
mercial Bank,  14  Miss.  24  (1846);  Bank 
of  Pennsylvania   r.  Reed.  1  "Watts  &  S. 
(Pa.)  101  (1841);  Ryan  r.  Dunlop,  17  111. 
40   (1855),  where   he  satisfied  a   mort- 
gage; Kelsey  v.  National  Bank,  69  Pa. 
St.  426  (1871),  where  he  offered  a  reward 
with  the  knowledge  and  acquiescence 
of  the    directors;    Medomak   Bank  v. 
Curti.s,  24  Me.  36  (1844),  where  the  bank 
claimed  the  benefit  of  a  contract;  U.  S. 
Bank  v.Dandridge,  12  Wheat.  64  (1827), 
where  a  cashier's  bond  in  possession  of 
a  bank  was  held  to  have  been  accepted 
by  the  bank,  though  no  vote  accepting 
it  was  to  be  found  in  its  records;  Bank  of 
Lyons    v.  Demmon,    Hill   &   D.  Supp. 
(N.  Y.)  398  (1844),  where  the  president 
and  secretary  sold  stock  and  agreed  to 
purchase  it  if  the  vendee  desired.     He 
cannot    assign    non-ne^^otiable    paper. 
Barrick  v.  Austin,  21  Barb.  241  (1855). 
As  to  the  power  of  the  cashier  and 
president  together  to  pledge  paper  for 
an  antecedent  debt,  see  Tennessee  v. 
Davis,  50  How.  Pr.  447    (1874).     As  to 
the  power  of  the  cashier  to  take  pay- 
ment in   other  notes,   etc.,  see  Sandy 
River  Bank  v.  Merchants',  etc.  Bank,  1 
Biss.  146  (1857);  S.  c,  21  Fed.  Cas.  356. 
A  cashier  has  no  power  to  agree  with 
an  indorser  of  a  note  to  a  bank  that  he 
shall  not  be  liable.     Thompson  v.  Mc- 
Kee,  5  Dak.  172  (1888);  Bank  of  Metrop- 
olis V.  Jones,  8  Pet.  12  (1834);  Bank  of 

1 


U.  S.  V.  Dunn,  6  Pet.  51  (1832).     A  per- 
son taking  a  note  from  the  cashier  on 
the  latter's  personal  debt  cannot  hold 
the  bank  liable  on  the  latter's  indorse- 
ment of   the  note  as  cashier.      West 
St.  Louis  Sav.    Bank  v.  Shawnee,   etc. 
Bank,  3  Dili.  403   (1874);  s.  C,  29   Fed.^ 
Cas.  831 ;  s.  C,  95  U.  S.  557.     A  cashier- 
cannot    assign    corporate    notes  to  a 
depositor    in    payment    of   a  deposit. 
Schneitman     v.   Noble,  75    Iowa,  120, 
(1888).     He  cannot  render  the  charter 
forfeitable  by  taking  payment  on  sub- 
scriptions in  an  illegal  manner.     State 
V.  Commercial  Bank,  14  Miss.  218  (1846). 
A  bank  may  be  bound  by  a  release  of 
its  cashier  upon  a  note  signed  by  th« 
cashier  and  several  others,  where  the 
cashier  pays  his  part  of  the  note  and 
erases  his  name  from  the  note,  and  such 
facts  become  known   to  the  board  of 
directorii,     First  Nat.  Bank  v.  Shook- 
100  Tenn.  436  (1898). 

1  New  York,  etc.  Mine  v.   Negaunee 
Bank.  39  Mich.  644  (1878),  in  which  case 
the  note  was  held  not  enforceable,  al- 
though the  general  manager  had  often 
drawn  drafts  on  the  company.     See  Re 
Cunningham,    L.    R.    36    Ch.    D.   532. 
Where  a  corporation  and  a   firm  are 
practically  one  and  the  same  concern, 
and  the  same  man  signs  for  both,  his 
signature  of  the  corporate  name  to  the 
firm  obligation  is  binding  on  the  corpo- 
ration. National  Bank,  etc  v.  John,  etc. 
Sons,  33  S.  W.  Rep.  415  (Ky.  1895).     A 
general  manager  is  presumed  to  have 
authority   to    sign    a    corporate   note. 
Citizens'    Nat.    Bank    v.    Wintler,    14- 
Wash.  558   (1896).     The   president   and 
general  manager  has  no  implied  power 
to  issue  notes.     The  fact  that  he  has 
done  so  before  is    immaterial,  where 
all  of  the  directors,  excepting  one,  were 
ignorant  of  such  acts.     Elwell  v.  Puget 
Sound,  etc.  R.  R.,  7  Wash.  487  (1893>. 
789 


§  719.] 


HOW    CORPOfiATE    CONTEACIS    AliE   MADE. 


[CH. 


XLIII. 


commercial  paper,'  except  possibly  in  payment  of  debts;-  nor  to 
change  the  terms  of  a  sealed  contract  of  the  corporation;'  but  he 
may  give  a  note  in  payment  of  wages  due;*  and  he  may  accept  a 
draft.-^  There  is  grave  doubt  as  to  whether  he  may  borrow  money 
and  give  a  lien  or  chattel  mortgage  therefor.^  A  gas  company  can- 


The   general  manager  of  a  telegraph 
company  has  no  implied  authority  to 
make  a  note  for  it  and   in   its  name. 
Helena  Nat.  Bank  v.  Rocky,  etc.  TeL 
Co.,  20  Mont.   379  (1898).    Where  the 
manager  for  several  years  has  been  ac- 
customed to  sign  notes  for  tlie   com- 
pany, the  company  is  bound  by  such 
notes.     Cadillac,  etc.  Bank  v.  Cadillac, 
etc.  Co.,  88  N.  W.  Rep.  67  (Mich.   1901). 
1  Accommodation     acceptances,    ac- 
cepted in   tiie  corporate  name  by  tlie 
manager  of  the  corporation  without  the 
knowledge  of  the  directors,  are  not  en- 
forceable, though  tlie  manager  had  at 
times  drawn  notes  to  meet  expenses. 
Merchants'  Nat.  Bank  v.  Detroit,   etc. 
Works,  68  Mich.  620  (1888).     The  power 
of  a  manager  to  borrow  money  for  the 
company  by  giving  his  own  note  and 
indorsing  the  company's  name  to  it  is 
a  question  for  the  jury.     The  books  of 
the    company  are  evidence  to  prove 
that  the  company  received  the  money. 
The  jury  may  decide  that  his  author- 
ity might  be  "either  authority  or  sub- 
sequent ratification,  and  that  it  could 
be  evidenced  by  general  course  of  busi- 
ness as  well  as  by  resolution."    Hunt- 
ington V.  Attrill,  118  N.  Y.  365  (1890). 
A  general  manager  has  no  power  to 
guarantee  in  the  corporate  name  the 
payment  of  a  third  person's  note.    Dob- 
son  V.  More,  104  111.  110  (1896).     A  gen- 
eral manager  has  no  inherent  power  to 
indorse  the  commercial  paper  coming 
to  the  company.    The  by-laws  are  ad- 
missible on  the  subject  Railway  Equip, 
etc.  Co.  V.  Lincoln  Nat.  Bank,  82  Hun, 
8  (1894).     But  he  may  accept  a  draft  if 
he  is  accustomed  so  to  do.     Munn  v. 
Commission   Co.,   15  Johns.   44   (1818). 
And  the  general  agent  of  a  bank  may 
indorse.     Merchants'  Bank  v.   Central 
Bank,  1  Ga.  418  (1846).     Where  there  is 

1 


no  treasurer,  the  general  manager  or  a 
director  may  sign  the  corporate  name 
to  negotiable  paper  for  collection. 
Craig  Medicine  Ca  v.  Merchants'  Bank, 
59  Hun,  561  (1891).  Where  the  power 
to  indorse  notes  is  given  by  the  by-laws 
to  the  president  and  vice-president,  a 
general  manager  does  not  have  that 
power,  although  he  has  drawn  checks 
and  previously  indorsed  two  notes,  but 
without  the  knowledge  of  the  board  of 
directors.  Davis  v.  Rockingham  Invest- 
ment Ca,  89  Va.  290  (1892).  The  gen- 
eral manager  of  a  corporation  organ- 
ized to  buy  and  sell  products  has  no 
power  to  have  it  do  business  gratui- 
tously as  an  accommodation  to  a  third 
party,  the  directors  never  having  au- 
thorized the  same.  Clark,  etc.  Co.  v. 
Parker,  etc.  Co.,  91  N.  W.  Rep.  134 
(Mich.  1902). 

2  McKieran  v.  Lenzen,  56  CaL  01 
(1880);  Seeley  v.  San  Jose,  59  Cal.  22 
(1881). 

3  Boynton  v.  Lynn,  etc.  Co.,  124  Mass. 
197  (1878). 

*  Bates  V.  Keith,  etc  Co.,  48  Mass.  224 
(1843). 

*  Hascall  v.  Life,  etc.  Assoc,  5  Hun, 
151  (1875);  aff'd,  66  N.  Y.  616. 

•>  The  general  agent  and  treasurer  may 
borrow  money  and  give  a  chattel  mort- 
gage as  security.  Fay  v.  Noble,  66 
Mass.  1  (1853).  The  general  manager 
has  no  power  to  mortgage  the  property. 
First  Nat  Bank  v.  Kirkby,  32  S.  Rep.  881 
(Fla.  1901).  The  superintendent  of  a 
mine  cannot  borrow  money  for  the 
company.  Union,  etc.  Co.  v.  Rocky 
Mountain  Nat  Bank,  1  Colo.  531  (1872). 
Where  a  superintendent  borrows  money 
for  himself,  giving  a  lien  on  corporate 
property  as  security,  the  parties  loan- 
ing the  money  with  knowledge  of  these 
facts  cannot  hold  the  company  liable. 
790 


OH.  XLIIl.]  HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§  T19. 


not  be  held  liable  for  letters  written  by  its  general  manager  for 
publication  attacking  a  former  general  manager,  unless  it  be  shown 
that  such  letters  were  authorized  by  the  corporation  itself.  A  general 
manager  has  no  such  inherent  authority.^  But  where  the  president 
and  manager  and  attorney  of  the  company  illegally  cause  the  arrest 
of  an  employee  for  embezzling  corporate  funds,  the  corporation  may 
be  held  liable  for  malicious  prosecution.^  A  newspaper  corpora- 
tion may  be  liable  on  the  contract  of  its  managing  editor  char- 
tering a  boat  to  collect  war  news,  and  agreeing  to  pay  the  value 
of  the  boat  in  case  it  is  lost.'  A  general  manager  or  general 
agent  has  power  at  common  law  to  direct  and  contract  in  re- 
gard to  the  usual  running  business  of  the  corporation.'*  A  gen- 
eral manager  has  power  to  borrow  money  to  meet  corporate  bills 
in  due  course  of  business.^  The  president  and  general  manager 
of  an  insolvent  corporation  has  no  power  to  give  a  preference;' 
nor  can  he  transfer  all  its  assets  to  one  creditor  in  payment  of  his 
claim,  even  though  the  by-laws  gave  him  entire  charge  of  the 
business,  subject  to  the  approval   of  the  board  of  directors.^     A 


Planters',  etc.  Co.  v.  Olmstead,  78  Ga, 
586  a887).  The  well  considered  case  of 
Whitwell  V.  Warner,  20  Vt  425  (1848), 
holds  that  the  general  manager  cannot 
give  a  lien  to  secure  the  price  of  goods 
which  he  purchases;  but  it  is  held  that 
if  the  company  uses  the  goods,  even 
without  knowledge  of  the  lien,  the  ven- 
dors may  pursue  the  goods  or  the  pro- 
ceeds realized  therefrom.  In  Leonard  v. 
Burlington,  etc.  Assoc,  55  Iowa,  594 
(1881),  it  is  held  that  he  may  borrow 
money,  and  the  company  is  liable  if  it 
has  used  the  money.  A  superintend- 
ent's mortgage  was  upheld  in  Poole  v. 
West,  etc.  Assoc,  30  Fed.  Rep.  513 
(1887). 

1  Washington  Gas  L.  Co.  v.  Lansden, 
172  U.  S.  534  (1899). 

2Schwarting  v.  Van  Wie,  etc  Co.,  69 
N.  Y.  App.  Div.  282  (1902),  A  general 
superintendent  who  causes  the  arrest  of 
a  person  to  whom  stolen  goods  have 
been  sold,  for  which  goods  the  corpo- 
ration had  offered  a  reward,  does  not 
thereby  render  the  corporation  liable 
for  false  imprisonment.  Lubliner  v. 
Tiffany  &  Co.,  54  N.  Y.  App.  Div.  326 
:1900). 

3  Sun,  etc.  Assoc  v.  Moore,  183  U.  S. 

642  (1902). 

1 


*  Kansas  City  v.  CuUinan,  68  Pac  Rep. 
1099  (Kan.  1902);  93  N.  W.  Rep.  1088. 

&  Rosemond  v.  Northwestern,  etc.  Co., 
62  Minn.  374  (1895).  Even  though  a 
manager  has  no  power  to  borrow 
money  for  the  company,  yet,  if  he  does 
so  and  the  company  uses  it,  the  com- 
pany must  repay  it.  Topeka,  etc  Co. 
V.  March,  61  Pac  Rep.  876  (Kan.  1900). 

CDooley  v.  Pease,  79  Fed.  Rep.  860 
(1897). 

THadden  v.  Linville,  86  Md.  210 
(1897).  A  general  manager  of  an  insolv- 
ent corporation  has  no  power  to  turn 
over  all  the  property  to  one  creditor  as 
a  preference.  Hadden  v.  Dooley,  92 
Fed.  Rep.  274  (1899).  Where  the  stock- 
holders do  not  hold  meetings,  and  allow 
a  person  to  manage  the  corporation,  an 
assignment  by  him  for  the  benefit  of  its 
creditors  will  be  upheld,  and  a  transfer 
of  all  the  assets  to  a  person  in  trust  to 
sell  and  pay  the  debts  is  such  an  assign- 
ment and  is  not  a  mortgage.  Conely  v. 
Collins.  119  Mich.  519  (1899).  The  gen- 
eral  manager  and  treasurer  has  no 
power  to  turn  over  the  whole  property 
to  a  corporate  creditor,  even  though  he 
ran  all  the  business  of  the  company. 
First  Nat.  Bank,  etc.  v.  Asheville,  etc 
Ca,  116  N.  C.  827  (1895). 
791 


§  719.] 


HOW    CORPORATE    CONTRACTS    ARE    MADE. 


fcH.   XLIII. 


transfer  of  a  lease  of  property  by  the  general  manager  who- 
has  exercised  all  the  powers  of  the  company  is  valid,  even  though 
there  is  no  vote  of  the  stockholders,  where  such  lease  does  not 
constitute  all  the  assets  of  the  corporation  and  the  transaction 
was  fair  in  itself.'  A  general  manager  may  give  a  mortgage  where 
he  has  the  power  to  sell  the  property  and  carry  on  the  entire  busi- 
ness.2  Where  the  duties  and  powers  of  a  general  manager  are  not 
defined  they  may  be  proved  by  parol  evidence.' 

It  has  been  held  that  he  may  waive  demand  and  notice  of  a  note 
indorsed  by  the  company;^  may  also  employ  an  attorney;'  may 
render  the  company  liable  for  overpayment  of  a  check  by  mistake 
of  the  bank;^  may  contract  for  the  use  of  a  patent;  ^  may  render 
the  company  liable  for  an  illegal  use  of  the  word  "  patented;" «  and 
may  enter  into  various  contracts  which  pertain  to  the  regular 
course   of   his   business.''      Where   the   president   is   also   general 


1  Pennsylvania,  etc.  Co.  v.  Pure-Oil 
Co.,  195  Pa.  St.  388  (1900). 

2  Thayer  v.  Nehalera  Mill  Co.,  31 
Oreg.  437  (1897). 

3  Clarke  v.  Lexington  Stoveworks,  72 
S.  W.  Rep.  286  (Ky.  1903). 

4  Whitney  v.  South,  etc.  Co.,  39  Ma 
316  (1855). 

5  St.  Louis,  etc.  R.  R.  u.  Grove,  39  Kan. 
731  (1888);  Frost  v.  Domestic,  etc.  Co., 
133  Mass.  563  (1883);  Southgate  v.  At- 
lantic, etc.  R  R,  61  Mo.  89  (1875).  A 
general  manager  may  employ  an  at- 
torney. Gulf,  etc.  Ry.  v.  James,  73  Tex. 
12  (1889).  The  general  manager  may 
execute  an  appeal  bond.  Sarmiento  v. 
Davis,  etc.  Co.,  105  Mich.  300  (1895). 

*>  Kansas,  etc.  Co.  v.  Central  Bank,  34 
Kan.  635  (1886). 

1  Eureka  Co.  v.  Bailey  Co.,  11  Wall.  488 
(1870). 

8 Tompkins  v.  Butterfield,  25  Fed.  Rep. 
556  (1885). 

9  Where  the  manager,  in  order  to  con- 
tinue a  profitable  contract  vrhich  he  has 
with  the  corporation,  keeps  up  a  dead- 
lock in  the  board  of  directors,  due  to 
there  bemg  a  vacancy,  he  is  bound  to 
prefer  the  interests  of  the  company  or 
else  to  terminate  his  employment  and 
rely  on  his  contract.  Kane  v.  Schuyl- 
kill, 199  Pa.  St.  198  (1901).  Where  the 
general  manager    attempts  to  obtain 


proxies  for  the  purpose  of  ousting  the 
existing  management,  and  uses  meth- 
ods calculated  to  deceive  the  persons 
giving  the  proxies,  he   is   guilty  of  a 
breach  of  trust  and  his  contract  vs.'ith 
the  company  may  be  canceled.  Towns- 
ley  V.  Bankers',  etc  Co.,  56  N.  Y.  App. 
Div.  232  (1900).  The  president,  treasurer, 
and   general    manager  of  a  plumbing 
company  may  employ  a  person  to  re- 
pair  certain   buildings  on   which  the 
company  has  an  option.     Paphro,  etc. 
Co.  V.  Baty,  69  N.  H.  453  (1899).  The  gen- 
eral manager  of  a  mining  corporation 
has  no   inherent  authority  to  grant  a 
right  of  way  for  a  tramway.  Butte.'etc. 
Min.  Co.  V.  Montana,  etc.  Co.,  21  Mont. 
539  (1898).    The  general  manager  can- 
not render  the  corporation  liable  for 
his  own  debts,   Barnhardt  v.  Star  Mills, 
123  N.  C.  428  (1898).  A  general  manager 
may  buy   land  which  is  necessary  or 
useful  to  the  corporation  in  conducting 
its  business.  New,  etc.  Co.  v.  Shuck,  50 
S.  W.  Rep.  681  (Ky.  1899).     A  general 
manager  may  employ  a  superintendent. 
Sand  berg  v.  Victor,  etc.  Co.,  24  Utah,  1 
(1901).     Where  a  firm  is  turned  into  a 
corporation  the  latter  may  assume  a 
contract  of  the   former,  for  the   pur- 
chase of  lumber,  by  adopting  it  through 
its  manager.     Pratt  v.  Oshkosh  Match 
Co.,  89  Wis.  406  (1895).     The  president 


1792 


CH.  XLIII.]  HOW    COEPOKATE    CONTRACTS    AEE   MADE. 


[§  719. 


manager  and  has  entire  charge  of  the  business  of  a  corporation,  he 
may  bind  it  by  his  contract  to  pay  for  promoting  expenses,^  and 
where  the  president  is  general  manager  and  is  authorized  to  carry 
on  the  business,  he  may  agree  to  pay  a  salary  as  well  as  a  commis- 


and  general  manager  may  agree  that 
the  stage  company  will  be  co-owner  of 
a  stage  line  with  another.  Calvert  v. 
Idaho  Stage  Co.,  25  Oreg.  413  (1894).  A 
local  manager  of  a  branch  store  is  a 
general  manager  to  the  extent  of  having 
power  to  take  a  lease  of  a  store  for  five 
years.  Phillips,  etc.  Co.  v.  Whitney,  109 
Ala.  645  (1896).  The  general  agent  of  a 
cattle-feeding  company  has  power  to 
buy  feed.  Powder  River,  etc.  Co.  v. 
Lamb,  38  Neb.  839  (1893).  Although  the 
company  owes  a  bank  money  secured 
by  mortgage,  the  manager  and  secre- 
tary may  deposit  the  company's  money 
and  agree  that  it  may  be  drawn  out 
free  from  the  mortgage.  Merchants', 
etc.  Bank  v.  Hervey  Plow  Co.,  45  La. 
Ann.  1214  (1893).  Where  the  general 
manager  of  a  corporation  owning  a 
mine  and  reduction  mill  causes  labor- 
ers to  work  in  the  company's  mine 
and  mill,  and  also  to  open  a  mine  of 
his  own,  all  without  the  knowledge  of 
the  company  or  the  employees,  who 
supposed  they  were  working  for  the 
company,  the  company  is  liable  for 
their  wages.  Oro,  etc.  Co.  v.  Kaiser,  4 
Cola  App.  219(1893).  A  general  mana- 
ger authorized  to  pay  commissions  on 
receipts  from  sales  may  agree  to  pay 
commissions  on  sales  irrespective  of  the 
receipts.  American,  etc.  Co.  v.  Maurer, 
10  Atl  Rep.  763  (Pa.  1887).  A  contract 
for  a  corporation  by  its  general  super- 
intendent to  give  right  of  way  to  an- 
other railroad  may  become  binding  by 
acquiescence.  Alabama,  etc.  R.  R.  v. 
South,  etc.  R  R.,  84  Ala.  570  (1887).  The 
president  and  manager  of  a  milling 
company  cannot  purchase  flour.  Getty 
V.  Barnes,  etc.  Co.,  40  Kan.  281  1888). 
As  to  insurance  agents,  see  Insurance 
Co.  V.  McCain,  96  U.  S.  84  (1877).  A 
treasurer  of  a  corporation  not  author- 


ized to  sell  any  part  of  its  property,  but 
who  was  its  sole  managing  agent,  may 
pass  a  valid  title  of  personal  property 
to  a  vendee  as  against  the  claim  of  one 
who  levied  upon  it  under  judgment. 
Phillips  V.  Campbell,  43  N.  Y.  371  (1870). 
A  general  manager  has  implied  power 
to  make  a  time  contract  of  employ- 
ment. Stahlberger  v.  New  Hartford 
Leather  Co.,  93  Hun,  245  (1895).  A 
general  manager  has  no  power  to  en- 
gage an  employee  for  five  years.  Ca- 
macho  v.  Hamilton,  etc.  Co.,  3  N.  Y» 
App.  Div.  369  (1896).  An  executive  of- 
ficer having  power  to  employ  persons 
does  not  thereby  have  power  to  employ 
a  person  for  life.  Carney  v.  New  York 
L.  Ins.  Co.,  19  N.  Y.  App.  Div.  160  (1897); 
aflf'd,  163  N.  Y.  453.  The  managing 
agent  may  employ  a  person,  but  not 
for  a  long  time  in  the  futura  Smith 
V.  Co-operative,  etc.  Assoc,  13  Daly, 
304  (1884).  He  cannot  employ  a  broker. 
Allegheny,  etc.  Co.  v.  Moore,  95  Pa.  St. 
413  (1880).  The  general  manager  of  a 
mining  company  has  no  inherent  power 
to  contract  for  it  for  machinery.  Vic- 
toria, etc.  Ca  V.  Fraser,  2  Colo.  App.  14- 
(4892).  The  general  manager  of  a  live- 
stock company  has  implied  power  tO' 
sell  a  part  of  such  stock.  Hamm  v. 
Drew,  83  Tex.  77  (1893).  Long  acquies- 
cence in  a  person's  assuming  to  act  for 
the  company  is  the  same  as  expressly 
authorizing  his  action.  Craig  Medicine 
Co.  V.  Merchants'  Bank,  59  Hun,  561 
(1891).  A  general  manager  has  no 
power  to  deed  the  company's  real  estate, 
and  a  purchaser  other  than  a  boiia  fide 
one  from  the  vendee  cannot  retain  the 
titla  Allowance,  however,  will  be  made 
for  improvements.  Especially  is  the 
deed  invalid  where  the  grantee  was  a 
director.  Schetter  v.  Southern,  etc.  Co., 
19  Oreg.  193  (1890).    The  president  and: 


(113) 


1  Oakes  v.  Cattaraugus  Water  Co.,  143  N.  Y.  430  (1894). 

1793 


§  719.] 


HOW    CORPORATE    CONTRACTS    ARE    MADE.  [oH.  XLIII. 


sion  on  sales  made.^  The  by-laws  may  give  to  the  general  manager 
power  to  carry  on  the  business  of  the  company.^  Although  a  gen- 
eral manager  exceeds  his  authority  in  agreeing  to  an  arbitration, 
yet,  if  the  company  does  not  repudiate  his  agreement  promptly,  it 
is  bound.''  Even  though  a  by-law  confers  upon  the  general  man- 
ager, among  other  powers,  the  "general  and  exclusive  charge  and 
management  of  the  business  of  the  company,"  the  by-law  is  not 
void  as  a  whole,  and  until  the  general  manager  illegally  exercises 
power  the  courts  will  not  interfere.*  A  managing  director  may,  by 
a  by-law,  be  given  the  powers  of  the  board.  An  outside  party 
need  not  inquire  as  to  whether  his  appointment  was  validly  made, 
and  may  assume  that  such  director  has  the  powers  which  the  board 
might  delegate  to  him."^  A  "business  manager"  is  not  known  in 
the  law,  and  hence  a  note  to  which  he  affixes  the  name  of  the  cor- 


general  manager  of  a  lumber  company 
may  engage  a  lawyer  for  the  season. 
Ceeder  v.  Loud,  etc.  Co.,  86  Mich.  541 
(1891).  Where  the  president  carries  on 
the  negotiations  in  regard  to  a  con- 
tract, and  also  the  modifications  of 
that  contract,  and  is  the  manager  and 
in  control,  and  as  manager  assents  to 
the  modifications,  tlie  company  Is 
bound  thereby.  Nichols  v.  Scranton 
Steel  Co.,  137  N.  Y.  471  (1893).  A  general 
manager  has  no  power  to  sell  rights  for 
a  particular  state,  and  a  power  of  at- 
torney which  has  been  revoked  is  in- 
sufficient to  be  relied  upon.  Johnson 
V.  Alabama,  etc.  Co.,  90  Ala.  505  (1890). 
Where  the  by-laws  give  the  general 
manager  power  to  sell,  he  has  power  to 
sell  the  product  for  &,  certain  length  of 
time  in  the  future.  Robert,  etc.  Min. 
Co.  V.  Omaha,  etc,  Co.,  16  Cola  118 
(1891).  For  a  discussion  of  what  consti- 
tutes the  appointment  of  a  resident 
general  agent  by  a  corporation,  see 
Rathbun  v.  Snow,  123  N.  Y.  343  (1890). 
Where  a  superintendent  negotiates 
sales  and  the  president  fixes  the  price, 
the  corporation  is  responsible  for  the  su- 
perintendent's representations.  Decker 
u  Gutta  Percha,  etc.  Co.,  61  Hun,  516 
(1891). 

1  Pettibone  v.  Lake  View,  etc.  Co.,  134 
Cal.  227  (1901). 

2  Burden  v.  Burden,  8  N.  Y.  App.  Div. 
160  (1896);  aff'd,  159  N.  Y.  287  (1899).    A 

17 


general  manager  authorized  to  "  take 
full  charge  of  the  company's  business, 
and  to  enter  into  such  negotiations  and 
contracts  as  he  thinks  best  for  the  com- 
pany's interest,"  may  appoint  a  local 
agent  and  empower  him  to  hire  a  barge. 
Tennessee  River  Transp.  Co.  v.  Kava- 
naugh,  101  Ala.  1  (1893). 

3  Central  Trust  Co.  v.  Ashville  Land 
Co.,  72  Fed.  Rep.  361  (1896).  Where  a  cor- 
poration allows  its  manager  to  largely 
control  its  business,  it  is  liable  on  aeon- 
tract  made  by  him  in  the  name  of  the 
company  and  in  the  line  of  its  business. 
Carrigan  v.  Port  Crescent  Imp.  Ca,  f 
Wash.  590  (1893).  So  also  as  to  its  pres- 
ident and  secretary.  Duggan  v.  Pacific 
Boom  Co.,  6  Wash.  593  (1893).  Where 
a  party  who  buys  a  mine  does  not  ob- 
ject to  a  lease  thereof  made  by  the  su- 
perintendent without  authority,  but 
on  the  contrary  allows  the  lessee  to 
proceed  and  receives  the  rent,  he  there- 
by ratifies  the  leasa  Bicknell  v.  Austin 
Min.  Co.,  62  Fed.  Rep.  432  (1894). 

4  Burden  v.  Burden,  159  N.  Y.  287  (1899). 

5  Biggerstaff  v.  Ro watt's  Wharf.  [1896] 
2  Ch.  93.  Even  though  the  by-laws 
give  a  managing  director  wide  powers 
as  to  the  commercial  business  of  the 
company,  this  does  not  give  him  any 
powers  as  to  the  transfer  of  stock. 
George  Whitechurch  Ltd.  v.  Cavanagh, 
[1902]  A.  C.  117.  C/.  Orvis  v.  Warner, 
etc.  Co.,  75  N.  Y.  App.  Div.  463  (1902). 

91 


CH.  I.LlTl.'j 


HOW    COKPORATE    CONTRACTS    ARE    MADE. 


[§  T19. 


poratioR  is  not  enforceable  against  it,  unless  proof  is  given  of  his 
authority.^ 

A  railroad  superintendent  may  employ  a  physician  in  cases  ol 
accidentj^and  ma}''  offer  rewards  for  the  conviction  of  persons  ob- 
s-tructing  the  tracks.^  A  general  freight  agent  may  agree  to  give 
rebates.*  It  has  been  held  that  a  superintendent  has  not  the  pow- 
ers of  a  general  manager.^    The  superintendent  may,  of  course,  be 


^  Topeka,  etc.  Co.  v.  Remington,  etc. 
^o.,  57  Pac.  Rep.  504  (Kan.  1899). 

2  Pacific  R.  R  V.  Thomas,  19  Kan.  257 
^1877);  Toledo,  etc.  Ry.  v.  Rodrigues,  47 
111.  188  (1868);  Atlantic,  etc.  R,  R.  v. 
Reiser,  18  Kan.  458  (1877).  Contra, 
Stephenson  v.  New  York,  etc.  R.  R..  2 
Duer,  341  (1853);  Shriver  v.  Stevens,  12 
Pa.  St.  258(1849),  holding  that  the  agent 
of  a  stage  line  cannot.  A  yardmaster 
cannot  employ  a  physician  for  the  com- 
pany. Marquette,  etc.  R.  R.  v.  Taft,  28 
Mich.  289  (1873).  Nor  an  engineer. 
Cooper  V.  New  York,  etc.  R.  R.,  6  Hun, 

.276(1875).  Nor  a  station  agent.  Tucker 
V.  St.  Louis,  etc.  R.  R,  54  Mo.  177 
(1873);  Cox  v.  Midland,  etc.  R.  R,  3 
Exch.  268  (1849).  Unless  the  superin- 
tendent ratifies  it  by  silence  upon  be- 
ing notified  thereof.  Cairo,  etc.  R  R. 
V.  Mahoney,  82  111.  73  (1876);  Toledo,  etc. 
R  R  V.  Prince,  50  ILL  26  (1869).  The 
general  manager  cannot  render  the 
company  liable  for  medical  services 
rendered  on  an  occasion  of  a  private 
brawL  Dale  v.  Donaldson  Lumber  Co., 
48  Ark.  188  (1887);  Wood,  Railw.  Law, 
pp.  439444  The  general  manager  of  a 
mining  company  cannot  bind  the  com- 
pany by  employing  a  doctor  for  an  in- 
jured employee.  Spelman  v.  Gold,  etc. 
Co.,  26  Mont.  76  (1901).  The  general 
manager  of  a  coal  company  has  no 
power  to  employ  a  physician  in  case 
of  an  accident.  New,  etc.  Co.  v.  Shaley, 
58  N.  R  Rep.  87  (Ind.  1900).  A  general 
manager  has  power  to  render  the  com- 
pany liable  for  hospital  services  ren- 
ered  to  a  sick  employee.  Mt.  Wilson,  etc. 
Co.  V.  Burbidge,  11  Colo.  App.  487  (1898). 

3  Central,   etc.   Co.   v.   Cheatham,  85 
Ala.  292  (1888). 


*  Kansas  Pac.  Ry.  v.  Bayles,  19  Colo. 
348  (1894).  Even  though  a  railroad 
agent  has  no  power  to  advertise,  yet  if 
he  does  so  and  the  bills  are  submitted 
to  the  general  passenger  agent,  who  has 
power  and  does  not  object,  the  com- 
pany may  be  bound.  McMahan  v.  Cana- 
dian, etc.  Ry.,  40  Oreg.  148  (1901). 

SAdriance  v.  Roome,  52  Barb.  399 
(1868).  holding  that  the  superintendent 
cannot,  borrow  money  and  agree  to 
make  payment  in  iron.  Where  it  is 
customary  for  a  railroad  so  to  do,  the 
superintendent  may  bind  the  companj' 
by  his  agreement  that  the  company 
will  give  a  life  job  to  a  person  who  has 
been  injured  by  the  railroad,  and  it  is 
for  the  jury  to  say  whether  such  prom- 
ise was  made.  Jackson  v.  Illinois,  etc. 
R  R.,  76  Miss.  607  (1899).  Where  the 
president  has  power  to  execute  a  bill 
of  sale,  but  instead  of  doing  so  allows 
the  superintendent  to  execute  it,  it  may 
be  a  question  for  a  jury  as  to  whether 
the  sale  was  binding  on  the  corpora- 
tion. Trent  v.  Sherlock,  26  Mont.  85 
(1901),  modifying  24  Mont.  255.  The  su- 
perintendent of  a  mining  company  has 
no  power  to  pledge  the  company's  prop- 
erty to  secure  a  debt.  Trent  v.  Sher- 
lock, 24  Mont  255  (1900);  s.  C,  26  Mont. 
85.  The  authority  of  a  corporate  agent 
to  manage  the  affairs  of  a  company 
cannot  be  proved  by  a  question  to  a 
witness  in  the  absence  of  the  vote  of  the 
directors  or  proof  that  the  resolution 
cannot  be  found.  St.  Regis,  etc.  Ca  v. 
Hotchkiss,  45  Atl.  Rep.  11  (Conn.  1900). 
A  superintendent  has  no  inherent  power 
to  indorse  checks  of  the  company.  Jack- 
son, etc.  Co.  V.  Commercial  Nat.  Bank, 
65  N.  K  Rep.  136  (III.  1902). 


1795 


720.] 


HOW    CORPORATE    CONTRACTS    ARE   MADE.  [CH.  XLIII. 


given  express  power  to  contract.^     If  the  company  ratifies  the  con- 
tract or  accepts  its  benefits  the  contract  becomes  bindino-.2 

§720.  Subordinate  agents  —  Their  imiver  to  contract. —  It  is  a 
general  rule  that  a  corporate  agent,  like  the  agent  of  an  individual, 
can  make  only  such  contracts  as  he  is  expressly  authorized  to  make, 
or  such  contracts  as  pertain  to  the  duties  which  the  corporation 
imposes  upon  him.  It  is  a  rule,  however,  that  the  corporation  may 
ratify  and  confirm  a  contract  which  an  unauthorized  agent  has  made 
in  its  name,  and  this  ratification  may  be  by  express  vote  of  the  di- 
rectors, or  it  may  be  implied  by  an  acceptance  of  the  benefits  to  the 
corporation.  The  subordinate  agents  of  a  corporation  may  be  of 
great  variety:  tellers,  engineers,  stewards,  station  agents,  local 
agents,  freight  agents,  roadmasters,  clerks,  attorneys,  and  miscella- 
neous agents.  Various  decisions  on  their  powers  are  given  in  the 
notes.^    These  decisions   show  that  a  corporation  is  bound  by  its 


^  Where  the  by-laws  give  the  presi- 
dent and  superintendent  power  to  make 
a  contract,  they  have  power  to  release 
that  contract.  Directors  knowing  of 
the  release  must  act  promptly  if  they 
intend  to  question  its  validity.  Indian- 
apolis, etc.  Co.  V.  St.  Louis,  etc.  R  R..  26 
Fed.  Rep  140  (1886);  aff'd,  120  U.  S.  256. 
A  general  power  authorizes  the  pur- 
chase of  a  house  and  the  giving  of  a 
mortgage.  Shaver  v.  Bear,  etc.  Co.,  10 
Cal.  396  (1858). 

2Kickland  v.  Menasha,  etc.  Co.,  68 
Wis.  34  (1887),  where  the  superintend- 
ent and  a  director  took  a  deed  and 
agreed  to  pay  an  extra  price;  Despatch 
Line  v.  Bellamy  Mfg.  Co.,  12  N.  H.  205 
(1841),  where  he  gave  a  mortgage  and 
the  company  received  the  money; 
Lyndeborough,  etc.  Co.  v.  Massachu- 
setts, etc.  Co.,  Ill  Mass.  315  (1873),  where 
he  bought  glass  and  the  directors  ac- 
quiesced; Seeley  v.  San  Jose,  etc.  Co., 
59  Cal.  22  (1881),  where  he  and  the 
president  gave  a  note;  Goodwin  v. 
Union,  etc.  Co.,  34  N.  H.  378  (1857), 
where  he  and  the  president  employed 
workmen;  Starr  v.  Gregory,  etc.  Co.,  6 
Mont.  485  (1887),  where  he  accepted  a 
mill;  Union,  etc.  Co.  v.  Rocky  Mount- 
ain Nat.  Bank,  2  Colo.  565  (1875);  af- 
firmed, 96  U.  S.  640,  where  a  loan  of  the 
bank's  money  was  made  by  him  and 


1796 


the  president.  Ratification  cannot  be 
by  the  same  persons  who  assume  power 
to  contract.    Tracy  v.  Guthrie,  etc.  Soc, 

47  Iowa,  27  (1877);  120  Fed.  Rep.  624. 

3  An  inquiry,  by  a  purchaser  of  stock, 
of  corporate  officers,  as  to  whether  it 
was  full-paid  stock  must  be  made  of 
officers  having  authority  to  speak  for 
the  corporation.     Browning  v.  Hinkle, 

48  Minn.  544  (1892).  The  fin'ancial  agent 
may  give  notes  in  accordance  with  a 
corporate  contract.  Case  Mfg.  Co.  v. 
Soxman.  138  U.  S.  431  (1891);  Wilson  v. 
Kings,  etc.  Ry.,  114  N.  Y.  487  (1889). 
The  cashier  and  clerk  of  a  lumber  com- 
pany cannot  agree  to  give  a  customer 
a  carload  of  lumber  in  case  certain 
other  lumber  is  not  satisfactory.  Delta 
Lumber  Co.  v.  Williams,  73  Mich.  8ft 
(1888).  The  local  manager  of  a  branch 
bank  renders  it  liable  for  his  embezzle- 
ment of  depositor's  funds  which  he  in- 
duces the  depositor  to  give  to  him  to 
pay  a  lien  of  the  bank  on  the  property. 
Thompson  v.  Bell,  26  Eng.  L.  &  Eq.  536 
(1854).  The  receiving  teller  of  a  savings 
bank  has  no  power  to  bind  the  bank 
not  to  pay  out  money  deposited  in  one 
name,  except  upon  the  order  of  three 
other  persons.  The  bank  is  protected 
in  paying  on  the  check  of  a  person  in 
whose  name  the  deposit  is  made.  Riley 
V.  Albany  Sav.  Bank,  36  Hun,  513(1885). 


CH.  XLIII.]  HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§  T20. 


agents'  acts  only  when  a  partnership  would  be  bound  under  similar 
circumstances.     There  are  no  arbitrary  rules  as  to  the  mode  of 


A  teller's  certification  of  a  check  in  bad 
faith  does  not  bind  the  bank.  Mussey 
V,  Eagle  Bank,  50  Mass.  306  (1845);  un- 
less it  is  in  the  hands  of  a  bona  fide  in- 
dorsee. Farmers',  etc.  Bank  v.  Butch- 
ers', eta  Bank,  16  N.  Y.  125  (1857); 
Farmers',  etc.  Bank  v.  Butchers',  etc. 
Bank,  14  N.  Y.  624  (1856).  As  to  cer- 
tification of  check,  see  also  Meads  r. 
Merchants'  Bank,  25  N.  Y.  143  (1862); 
Cooke  V.  State,  etc.  Bank,  52  N.  Y.  96 
(1873);  in  the  latter  case  the  certifica- 
tion being  by  the  cashier.  Where  a 
depositor  sends  deposits  by  the  bank's 
book-keeper  without  the  bank-book, 
the  bank  is  not  liable  for  the  book- 
keeper's fraud.  Manhattan  Co.  v. 
Lydig,  4  Johns.  377  (1809).  A  teller  may 
receive  a  special  deposit  of  valuables. 
Pattison  v.  Syracuse  Nat.  Bank,  80  N. 
Y.  82  (1880).  It  may  be  a  question  for 
the  jury  as  to  whether  the  foreman  of 
the  works  of  a  foreign  corporation  may 
employ  workmen  on  long  time.  Tuni- 
.son  V.  Detroit,  etc.  Co.,  73  Mich.  452 
(1889).  Where  a  bank  owning  railroad 
bonds  allows  its  agent  to  exchange 
them  for  stock  in  a  reorganized  com- 
pany, it  is  bound.  Deposit  Bank  v.  Bar- 
rett, 13  S.  W.  Rep.  337  (Ky.  1890).  A 
caterer  may  hold  a  club  responsible 
for  food,  etc.,  furnished  to  its  guests 
under  the  authorized  contract  of  the 
house  committee.  Deller  v.  Staten 
Island,  etc.  Club,  9  N.  Y.  Supp.  876 
(1890). 

A  corporation  is  not  liable  for  the 
malice  of  its  agent  in  publishing  a 
libel,  unless  the  corporation  authorized 
the  libel  or  ratified  it  or  did  something 
from  which  such  authority  or  ratifica- 
tion may  be  implied.  Warner  r.  Missouri, 
etc.  Ry.,  112  Fed.  Rep.  114  (1901).  A 
corporation  is  bound  by  its  adoption  or 
acquiescence  in  the  acts  of  an  unau- 
thorized agent  the  same  as  an  individual 
is.  German,  etc.  Bank  v.  First,  etc.  Bank, 
59  Neb.  7  (1899).     An  agent  of  a  corpo- 


ration may  sign  its  pame  to  a  demand 
of-  payment  of  money  due,  and  may 
serve  the  same  without  showing  writ- 
ten authority  to  make  such  demand. 
It  is  sufiicient  that  the  company  ac- 
cepted and  ratified  his  action.  Fla- 
herty V.  Atlantic,  etc.  Co.,  58  N.  J.  Eq. 
467  (1899).  A  collecting  agent  has  no 
power  to  bind  the  corporation  by  as- 
suming a  mortgage  on  the  property 
which  he  takes  in  payment  of  a  debt. 
Bristol  Sav.  Bank  v.  Judd,  89  N.  W. 
Rep.  93  (Iowa,  1902).  A  corporation 
sued  for  a  trespass  cannot  compel  the 
plaintiff  to  specify  what  ofiicers  com- 
mitted the  trespass.  Commonwealth 
V.  Nunn,  67  Paa  Rep.  342  (Colo.  1902). 
The  attorney  of  a  railroad  company  has 
no  power  to  agree  that  a  person  in- 
jured by  the  railroad  will  in  settle- 
ment of  his  claim  be  employed  for  life 
by  the  railroad.  Nephew  v.  Michigan, 
etc.  Ry.,  128  Mich.  599  (1901).  The  gen- 
eral counsel  of  the  corporation  has  no 
authority  to  file  papers  in  another  state 
whereby  the  corporation  is  made  a  do- 
mestic corporation  in  that  state.  Mut- 
ual, etc.  Assoc.  V.  Thompson,  125  N.  C. 
435  (1899).  In  South  Dakota  by  statute 
a  corporation  is  bound  by  an  unauthor. 
ized  contract  of  an  agent  where  the 
corporation  accepts  the  benefit  thereof. 
Dederick  v.  Ormsby,  etc.  Co.,  12  S.  Dak. 
59  (1899> 

The  following  decisions  are  concern- 
ing railroad  agents:  The  engineer  of  a 
railroad  company  may  have  authority 
to  modify  a  construction  contract  or 
enter  into  a  new  contract.  Henderson 
Bridge  Co.  v.  McGrath,  134  U.  S.  260 
(1890).  The  civil  engineer  of  a  railroad 
cannot  employ  a  station  agent.  Willis 
V.  Toledo,  etc.  Ry.,  72  Midi.  160  (1888). 
The  engineers  of  a  railroad  company 
cannot  bind  it  to  an  agreement  to  pay 
the  construction  contractors  extra  pay. 
Woodruff  V.  Rochester,  etc.  R  R.,  108 
N.  Y.  39  (1888).     The  construction  engi- 


1797 


§  720.] 


HOW  COKPORATE  CONTRACTS  ARE  MADE. 


[cn    3(r.nr« 


making  a  corporate  contract.     A  contract  may  be  inferred  from 
corporate  acts  and  customs  without  a  vote  or  formal  act.^     It  is  not 


neer  of  a  railroad  has  no  power  to  vary 
the  construction  contract  Campbell 
V.  Cincinnati  Southern  Ry.,  6  S.  W. 
Rep.  337  (Ky.  1888).  A  person  whom 
the  railroad  holds  out  as  the  general 
freight  agent  of  the  company  may  bind 
it  by  his  contracts  relative  to  freight. 
Baker  v.  Kansas  City,  etc.  R.  R.,  91  Mo. 
152(1887).  A  road  master  of  a  railway 
has  power  to  purchase  such  material  as 
he  uses,  and  the  company  is  liable 
therefor  where  the  material  has  been 
used.  Walker  v.  Wilmmgton,  etc.  R. 
R.,  26  S.  C.  80  (1887).  A  station  agent 
may  contract  that  goods  will  be  de- 
livered at  a  certain  time.  Blodgett  v. 
Abbott,  72  Wis.  516  (1888).  See  also 
Wood,  Railw.  Law,  pp.  444-454. 

The  following  decisions  concern  mis- 
cellaneous agents  and  powers:  An 
agent  with  power  to  give  and  indorse 
notes  may  waive  notice  of  protest,  etc. 
Whitney  v.  South,  etc.  Co.,  39  Me.  316 
(1855).  A  resident  agent  of  a  mining 
company  has  no  implied  authority  to 
borrow  money  on  account  of  the  corpo- 
ration to  pay  arrears  of  wages  due  tlie 
workmen  in  the  mines.  Hawtayne  v. 
Bourne,  7  M.  &  W.  595  (1841).  An  agent 
attending  to  the  dailj'  routine  of  the 
business  of  a  corporation  cannot  create 
a  general  lien  upon  its  property  to  se- 
cure a  creditor,  unless  by  the  approval 
of  the  board  of  directors.  Whitwell  v. 
Warner,  20  Vt.  425  (1848).     An  agent 


employed  to  promote  the  interests  of  a 
corporation  in  every  way  has  no  au- 
thority to  purchase  land  for  it.     Bocock 
V.  Alleghany,  etc.  Co.,  82  Va.  913  (1887). 
Where  a  corporation  agent  buys  land 
for  the  company  at  a  certain  price,  and 
agrees  that  the  company  will  pay  also 
the  vendor  one-half  of  its  profits  upon 
sale  of  said  land,  the  company  is  bound 
by  this  latter  parol  agreement.    Kick- 
land  V.  Menasha,  etc.  Co.,  68  Wis.  34 
(1887).     Persons  expending  money  for 
a   corporation   under  the  direction  of 
authorized  corporate  officers  may  hold 
the    corporation    liable.     Topeka,   etc. 
Assoc.  V.  Martin,  39   Kan.    750   (1888). 
An  agent  of  a  lumber  company  cannot 
pay  debts  due  the  company  by  boarding 
them  out.    St.  John.  etc.  Co.  v.  Corn- 
well,   52   Kan.    712   (1894).     A  sewing- 
machine  company's  agent  to  sell  ma- 
chines   has    no    power    to    trade    the 
company's  horse,  but  ratification  suf- 
fices.    Singer  Mfg.    Co.  v.   Belgart,  84 
Ala,  519  (1888).     Acts  of  local  insurance 
agents  appointed  by  the  general  agent 
of  a  foreign   insurance   company  are 
binding  on  such  company,  such  acts 
being  within  the  express  powers  given 
by  the  general  agent  therein  to  solicit 
or  take    insurance.      Kuney   v.    Ama- 
zon  Ins.    Co.,   36  Hun,   66   (1885).      In 
Rice  V.   Peninsular  Club,  52  Mich.  87 
(1883),  Cooley,  J.,  said :  "  A  party  dealing 
with  the  agent  of  a  corporation  must 


IBank  of  Columbia  v.  Patterson,  7 
Cranch,  299,  306  (1813);  Randall  v.  Van 
Vechten,  19  Johns.  60,  65  (1821);  Haight 
V.  Sahler,  30  Barb.  218  (1859);  Canal 
Bridge  v.  Gordon,  18  Mass.  297  (1823); 
Dunn  V.  St.  Andrew's  Ch.,  14  Johns.  118 
(1817);  Mendham  v.  Losey,  2  N.  J.  L. 
252  (1808);  Saddle  River  v.  Colfax,  6  N. 
J.  L.  115  (1821);  Antipseda  Bapt.  Ch.  v. 
Mulford,  8  N.  J.  L.  182  (1825);  Powell  y. 
Newburgh,  19  Johns.  284  (1821);  Chest- 
nut Hill  Turnp.  v.  Rutter,  4  Serg.  &  R. 
6  (1818);  American  Ins.  Co.  v.  Oakley,  9 

17 


Paige,  496  (1842);  Fister  v.  La  Rue,  15 
Barb.  323  (1853),  where  a  contract  was 
inferred  from  the  acts  of  the  corporate 
officers;  Bulkley  v.  Derby  Fishing  Co.. 
2  Conn.  252  (1817);  Witte  v.  Derby  Fish- 
ing Co.,  2  Conn.  260  (1817);  Petrie  v. 
Wright.  6  Sm.  &  M.  (Miss.)  647  (1846); 
Lime  Rock  Bank  v.  Macomber,  29  Me. 
564  (1849):  Bank  of  Metropolis  v.  Gutt- 
schlick,  14  Pet.  19  (1840)  (contract  in- 
ferred from  acts  of  officers);  New  York, 
etc.  R.  R.  V.  New  York,  1  Hilt.  587(1858); 
Wood,  Railw.  Law,  pp.  454-457. 
98 


CH.  XLIII.j  HOW    CORPORATE   CONTRACTS    ARE   MADE. 


[§  ir2o. 


necessary  that  such  assent  and  acceptance  be  under  seal  or  in  writ- 
ing or  be  spread  upon  the  records.^     The  acceptance  of  the  con- 


at  his  peril  ascertain  what  authority 
the  agent  possesses,  and  is  not  at  liberty 
to  charge  the  corporation  by  relying 
upon  the  agent's  assumption  of  author- 
ity." the  club  is  not  liable  for  the 
steward's  purchases.  The  powers  of  an 
agent  appointed  for  a  special  purpose 
cease  when  the  object  of  his  appoint- 
ment is  accomplished.  Seton  v.  Slade, 
7  Ves.  265,  276  (1802).  A  subordinate 
agent  cannot  employ  an  attorney  for 
the  company.  Maupin  v.  Virginia,  etc. 
Co.,  78  Mo.  24  (1883).  Nor  can  he  make 
the  corporation  liable  for  the  debt  of 
another.  Rahm  v.  King,  etc.  Co.,  16 
Kan.  277  (1876).  Nor  make  a  note  for 
the  company.  Benedict  v.  Lansing,  5 
Denio,  283  (1848).  If  the  purchaser  of 
corporate  bonds  knows  that  the  agent 
is  selling  for  his  own  purposes  he  is  not 
protected.  Chew  u  Henrietta,  etc.  Co., 
2  Fed.  Rep.  5  (1880).  Secret  instructions 
to  a  general  insurance  agent  do  not  bind 
a  person  dealing  w^ith  him.  Insurance 
Co.  V.  McCain,  96  U.  S.  84  (1877).  So 
also  as  to  a  cashier.  Merchants'  Bank 
V.  State  Bank,  10  Wall  604,  650  (1870). 
A  grantor  to  a  corporation  cannot  deny 
the  authority  of  the  corporate  agent  to 
accept  the  deed.  Case  v.  Benedict,  63 
Mass.  540  (1852).  An  agent  who  is 
accustomed  to  contract  for  the  com- 
pany may  bind  it.  Christian  Univer- 
sity V.  Jordan,  29  Mo.  68  (1859);  Mead  u. 
Keeler,  24  Barb.  20  (1857).  Acceptance 
of  services  known  to  officers  binds  the 
company.  Lee  v.  Pittsburgh,  etc.  Co., 
56  How.  Pr.  875  (1877).  But  the  use  of 
a  building  has  been  held  not  to  consti- 
tute an  acceptance  of  debts  incurred  in 
building  it.  Ruby  v.  Abyssinian  Soc, 
15  Me.  306  (1839).    Use  of  goods  with 


knowledge  is  acceptance.  Smith  v. 
Hull  Glass  Co..  11  C.  B.  897,  925  (1852); 
S.  C,  8  C.  B.  668  (1849).  Even  if  the 
agent  gave  a  note  which  is  not  binding. 
Emerson  v.  Providence,  etc.  Co.,  13 
Mass.  237  (1815).  Acceptance  is  pre- 
sumed where  a  written  statement  is 
placed  before  a  directors'  meeting. 
State  Bank  v.  Comegys,  12  Ala.  772 
(1848).  Satisfaction  by  subsequent  offi- 
cers is  good.  Chouteau  v.  Allen,  70 
Mo.  290  (1879).  If  an  agent  with  au- 
thority to  give  a  note  embezzles  the 
funds  the  company  is  liable.  Bird  v. 
Daggett,  97  Mass.  494  (1867).  A  suit  on 
a  note  is  a  ratification  of  its  execution. 
Planters'  Bank  v.  Sharp,  12  Miss.  75 
(1844).  An  actuary  of  a  bank,  who  is 
accustomed  so  to  do,  may  give  the  note 
of  the  bank,  especially  where  the  di- 
rectors acquiesce.  Creswell  v.  Lanahan, 
101  U.  S.  347  (1879).  As  to  insurance 
agents,  see  Perkins  v.  Washington  Ins. 
Co.,  4  Cow.  645  (1825).  Knowledge  of 
the  president  of  drafts  by  an  agent,  and 
acquiescence  therein,  binds  the  com- 
pany. Gold  Min.  Co.  v.  National  Bank, 
96  U.  S.  640  (1877).  See  §  727,  infra,  on 
notice;  also  Lindley,  Companies,  p.  159, 
etc.  An  agent's  authority  to  act  for  a 
corporation  is  not  terminated  by  the 
fact  that  the  members  of  the  board  of 
directors  or  other  body  which  appoi  nted 
have  gone  out  of  office  by  the  expiration 
of  their  terms  or  by  removal.  Anderson 
V.  Longden,  1  Wheat.  85  (1816);  Brown 
V.  Somerset,  11  Mass.  221  (1814);  North- 
ampton Bank  v.  Pepoon,  11  Mass.  294 
(1814);  Dedham  Bank  v.  Chickering,  20 
Mass.  335  (1825) ;  Exeter  Bank  v.  Rodgers, 
7  N.  H.  21,  33  (1834) ;  Thompson  v.  Young, 
2  Ohio,  334  (1825).     It  has  been  held 


1  Dedham    Bank    v.    Chickering.    20    272  (1841);    Monumoi  Great    Beach  v. 


Mass.  335  (1825);  Union  Bank  v.  Ridge- 
ley,  1  Har.  &  G.  (Md.)  324  (1827);  Bur- 
gess V.  Pue,  2  Gill  (Md.),  11  (1844); 
Apthorp  V.  North,  14  Mass.  167  (1817); 
Smith  V.  Bank  of  Scotland,  1  Dow,  P.  C. 


Rogers,  1  Mass.  159  (1804);  Amherst 
Bank  v.  Root,  43  Mass.  522,  533  (1841); 
Western  R.  R.  v.  Babcock,  47  Mass.  346 
(1843),  and  the  many  cases  supra.  See 
also  §  714,  supra-. 


1799 


§  T21.] 


HOW  OOKPORATE  CONTRACTS  ARE  MADE. 


[CH. 


XLIII. 


sideration  of  an  unauthorized  contract  by  the  corporation,  how- 
ever, without  knowledge  of  the  terms  of  the  contract  or  of  the 
account  upon  which  it  is  paid,  is  not  in  itself  a  ratification  of  the 
contract.*  It  is  elementary  that  a  corporation  may  ratify  and  adopt 
the  unauthorized  acts  of  an  agent.'^ 

B.    THE    FORM    OF    CORPORATE    CONTRACTS THE     CORPORATE     SEAL    IS 

NECESSARY  ONLY  WHEN  THE  SAME  INSTRUMENT  BY  AN  INDIVIDUAL 
MUST  BE  UNDER  SEAL  —  FORMS  OF  THE  BODY  OF  THE  CONTRACT; 
ALSO  THE  METHOD  OF  SIGNING  AND  SEALING LIABILITY  OF  OFFI- 
CERS AND  AGENTS  ON  CORPORATE  CONTRACTS  WHICH  ARE  INFORMALLY 
EXECUTED. 

§  T21.  The  corporate  seal  need  not  le  attached  to  a  corporate  con- 
tract unless  a  similar  contract,  when  made  by  an  individual,  would 
require  a  seal. —  This  is  now  the  well-established  rule,  although 
formerly  it  was  supposed  that  a  corporation  could  not  enter  into  a 


that  a  mortgage  of  corporate  property 
which  is  illegal  for  want  of  authority 
may  be  rendered  valid  by  subsequent 
ratification  by  acts  of  the  legislature. 
Wite  Water,  etc.  Canal  Co.  v.  Vallette, 
.1  How.  414  (1858);  Shepley  v.  Atlantic, 
etc.  R.  R.,  55  Me.  395  (1868);  Richards  v. 
Merrimack,  etc.  R  R.,  44  N.  H.  127 
<1862),  where  an  act  authorizing  the 
trustees  of  a  mortgage  to  sell  the  mort- 
gaged property  was  held  to  be  a  ratifi- 
cation; Shaw  V.  Norfolk  County  R.  R., 
71  Mass.  162  (1855);  Whitney  v.  Union 
Trust  Co.,  65  N.  Y.  576  (1875),  where 
bonds  signed  by  the  treasurer  instead 
of  the  secretary  were  held  ratified  by  a 
subsequent  act  referring  to  them  as 
"now  a  valid  lien  on  said  property." 
Power  to  act  as  agent  of  the  corporation 
may  be  conferred  by  a  general  resolu- 
tion. Elwell  V.  Dodge,  33  Barb.  336  (1861). 

1  Pennsylvania  Co.  v.  Dandridge.  8 
Gill  &  J.  (Md.)  248  (1836);  Christian 
University  n  Jordan,  29  Mo.  68  (1859); 
Hilliard  v.  Goold,  34  N.  H.  230  (1856), 
and  cases  supra. 

2  Essex  Turnp.  Co.  v.  Collins,  8  Mass. 
292  (1811);  Hayden  v.  Middlesex  Turnp. 
Co.,  10  Mass.  403  (1813);  White  v.  West- 
port  Cotton  Mfg.  Co.,  18  Mass.  220  (1822); 
Bulkley  v.  Derby  Fishing  Co.,  2  Conn. 
252  (1817);    Peterson  v.  New  York,  17 


N.  Y.  449  (1858);  Canal  Bridge  v.  Gor- 
don, 18  ]\rass.  297  (1823);  Baker  v.  Cot- 
ter, 45  Me.  236  (1858);  Bennett  v.  Mary- 
land F.  Ins.  Ca,  14  Blatchf.  422  (1878); 
S.  C,  3  Fed.  Cas.  229;  Church  v.  Ster- 
ling, 16  Conn.  388  (1844);  Pennsylvania 
Bank  v.  Reed,  1  Watts  &  S.  (Pa.)  101 
(1841);  Hayward  v.  Pilgrim  Soc,  38 
Mass.  270  (1838);  Despatch  Line  v.  Bel- 
lamy Mfg.  Co.,  12  N.  H.  205  (1841); 
Planters'  Bank  v.  Sharp,  4  Sm.  &  M. 
(Miss.)  75  (1844);  Burrill  v.  Nahant  Bank, 
43  Mass.  167  (1841);  Fox  v.  Northern 
Liberties,  3  Watts  &  S.  (Pa.)  103  (1841); 
New  Hope,  etc.  Co.  v.  Phenix  Bank,  3 
Comst.  156  (1850);  Alabama,  etc.  R.  R. 
V.  Kidd,  29  Ala,  221  (1850);  Everett  v. 
U.  S.,  6  Port  (Ala.)  166  (1837);  Medomak 
Bank  v.  Curtis,  24  Me.  38  (1844);  Whit- 
well  V.  Warner,  20  Vt.  425  (1848);  Trott 
V.  Warren,  11  Me.  227  (1834);  Detroit  r. 
Jackson,  1  Doug.  (Mich.)  106  (1842): 
Merchants'  Bank  v.  Central  Bank,  1 
Ga.  428  (1846);  Hoyt  v.  Bridgewater 
Copper  Co.,  6  N.  J.  Eq.  253  (1847);  Durar 
V.  Hudson,  etc.  Ins.  Co.,  24  N.  J.  L.  171 
(1853);  Moss  u  Rossie  Lead  Co.,  5  Hill, 
137  (1843):  Brown  v.  Winnissimmet  Co.. 
93  Mass.  326  (1865);  Sherman  v.  Fitch,  98 
Mass.  59  (1867);  Lyndeborough  Glass 
Co.  V.  Massachusetts  Glass  Co.,  Ill  Mass. 
315  (1873);  Moss  r.  Averell,  8  Seld.  449 


1800 


•CH.  XLIII.]  HOW    CORPOKATE    CONTRACTS    ARE    MADE. 


L§  ^21. 


contract  except  by  attaching  the  corporate  seal  to  a  written  state- 
ment of  that  contract.^ 

It  is  settled  law  that  it  is  not  necessar\'  to  use  a  seal  in  appoint- 
ing agents  or  entering  into   ordinary   contracts  for  the  corpora- 


(1853);  Olcott  v.  Tioga  R.  R,  27  N.  Y. 
546  (1863);  Shaver  v.  Bear  River,  etc. 
Co..  10  Cal.  396  (1858). 

1 A  corporate  contract  need  not  be  in 
writing  nor  under  the  corporate  seal. 
Leinkauf  v.  Caiman,  110  N.  Y.  50  (1888). 
A  corporation  need  not  necessarily  have 
or  use  a  seal  in  making  its  contracts. 
Muscatine  Water  Co.  v.  Muscatine  Lum- 
ber Co.,  85  Iowa,  112  (1893).  "  The  Eng- 
lish rule  that  a  corporation  cannot 
expressly  bind  itself  except  by  deed, 
unless  the  act  establishing  it  authorizes 
it  to  contract  in  another  mode,  has  been 
broken  in  upon,  and,  indeed,  entirely 
■overturned,  as  a  general  proposition, 
throughout  the  United  States;  and  it  is 
here  well  settled  that  the  acts  of  a  cor- 
poration, evidenced  by  vote,  written  or 
unwi-itten,  are  as  completely  binding 
upon  it,  and  are  as  complete  authority 
■to  its  agents,  as  the  most  solemn  acts 
done  under  the  corporate  seal;  that  it 
may  as  well  be  bound  by  express  prom- 
ises through  its  authorized  agents  as  by 
deed;  and  that  promises  may  as  well 
be  implied  from  the  acts  of  its  agents 
as  if  it  had  been  an  individual; "  citing 
many  cases.  Davenport  v.  Peoria,  etc. 
Co.,  17  Iowa,  276  (1864).  See  also  Bank 
•of  U.  S.  V.  Dandridge,  12  Wheat  64 
(1827);  Gottfried  v.  Miller,  104  U.  S.521 
(1881);  Barry  v.  Merchants'  Exchange. 
Co.,  1  Sandf.  Ch.  280  (1844):  Hoag  v.  La- 
ment, 60  N.  Y.  96  (1875);  McCullough  v. 
Talladega  Ins.  Co.,  46  Ala.  376  (1871); 
Auerbach  v.  Le  Sueur  Mill  Co.,  28  Minn. 
291  (1881);  Eacine,  etc.  R.  R  v.  Farmers' 
Loan  &  T.  Co.,  49  111.  331  (1868);  Bulk- 
ley  V,  Briggs,  30  Mo.  452  (1860);  New 
England  F.  &  M.  Ins.  Co.  v.  Robinson, 
25  Ind.  535  (1865);  Hamilton  v.  Lycom- 
ing Ins.  Co.,  5  Pa.  St.  339  (1847);  Muiru 
Louisville,  etc.  Canal  Co.,  8  Dana  (Ky.), 
161  (1839);  Henning  v.  U.  S.  Ins.  Co.,  47 
Mo.  425  (1871);  Salem  Bank  v.  Glouces- 


ter, 17  Mass.  1  (1820);  Gloucester  Bank 
V.  Salem  Bank,  17  Mass.  33  (1820);  Foster 
V.  Essex  Bank,  17  Mass.  479  (1821);  Smith 
V.  Lowell  Meeting-house,  25  Mass.  178 
(1829);  Limerick  Academy  v.  Davis,  11 
Mass.  113  (1814);  Farmington  Academy 
V.  Allen,  14  Mass.  172  (1817);  Amherst 
Academy  v.  Cowels,  23  Mass.  427  (1828); 
Kennedy  v.  Baltimore  Ins.  Co.,  3  Har.  & 
J.  (Md.)  387  (1813);  Stone  v.  Berkshire, 
etc.  Soc,  14  Vt.  86  (1843);  Episcopal,  etc. 
Soc.  V.  Needham,  etc.  Church,  18  Mass. 
372  (1823);  Banks  v.  Poitiaux.  3  Rand 
(Va.)  136  (1825):  Bank  of  Columbia  v. 
Patterson,  7  Cranch,  399(1813);  Randall 
V.  Van  Vechten,  19  Johns.  60  (1831); 
Gooday  v.  Colchester  Ry.,  17  Beav.  132 
(1853):  Magill  v.  Kauffman,  4  Serg.  & 
R.  317  (1S18);  Dunn  v.  St.  Andrew's 
Church,  14  Johns.  118  (1817);  Waller  v. 
Bank  of  Kentucky,  3  J.  J.  Marsh.  (Ky.) 
201  (1830);  Western,  etc.  Co.  v.  First 
Nat.  Bank,  47  Pac.  Rep.  721  (N.  ]\L  1897); 
Grubbs  v.  National,  etc.  Ins.  Co.,  94  Va, 
589  (1897).  Crawford  v.  Longstreet,  43 
N.  J.  L.  325  (1881),  held  that,  to  bind  a 
corporation  under  a  lease  for  years,  ex- 
ecution under  its  corporate  seal  is  not 
necessary.  See  also,  in  general.  Moss  v. 
Averell,  10  N.  Y.  449  (1853).  The  corpo- 
rate seal  to  a  note  is  superfluous.  St. 
James's  Parish  v.  Newburyport,  etc.  R. 
R,  141  Mass.  500  (1886).  On  this  point, 
see  also  §761,  infra.  The  word  "seal," 
following  the  name  of  a  corporation  on 
an  insurance  policy,  does  not  prevent 
the  suit  being  in  assumpsit.  Grubbs  v. 
National,  etc.  Ins.  Co.,  94  Va,  589  (1897). 
Contra,  Benoistr.  Carondelet,  8  Mo.  250 
(1843);  Clark  v.  Farmers',  etc.  Co.,  15 
Wend.  256  (1836).  The  seal  may  be  con- 
sidered to  be  the  company's  signature. 
Levering  v.  Mayor,  etc.,  7  Humph. 
(Tenn.)  553  (1847).  See  also  §  732,  infra; 
Despatch  Line  v.  Bellamy  Mfg.  Co.,  12 
N,   H.   205  (1841),  a  chattel  mortgage. 


1801 


§  T21.] 


HOW    CORl'ORATE    CONTBACTS    AKE   MADE. 


[CH.  XLIII. 


tion.^  The  supreme  court  of  Illinois  says,  "  the  rule  now  is  that  a 
corporation  may  bind  itself,  in  a  matter  within  its  charter  powers, 
by  a  writing  not  under  seal  to  the  same  extent  as  an  individual 


The  oflBcers'  seal  to  the  contract  may 
be  disregarded.  Bank,  etc.  v,  Gutt- 
schlick.  14  Pet.  19  (1840);  Eureka  Co.  v. 
Bailey  Co.,  11  Wall.  488  (1870);  Dubois 
V.  Delaware,  etc.  Co.,  4  Wend.  285  (1830). 
'Pennsylvania  R.  R.  v.  Vandiver,  42 
Pa.  St.  3f)5,  369  (1862);  Bank  of  Colum- 
bia V.  Patterson,  7  Cranch.  299  (1813); 
Lathrop  v.  Commercial  Bank,  8  Dana 
(Ky.),  114(1839);  Buncombe  Tump.  Co. 
V.  McCarson,  1  Dev.  &  B.  310  (1835), 
holding  that  an  appointment  need  not 
be  under  the  corporate  seal;  Bates  v. 
Bank  of  Alabama,  2  Ala.  452  (1841), 
where  the  appointment  of  an  agent  was 
by  vote  of  the  corporation;  Maine 
Stage  Co.  V.  Longley,  14  Me.  444  (1837), 
holding  that  the  fact  of  agency  may 
be  proved  by  parol.  See  also  Union 
Mfg.  Co.  V.  Pitkin,  14  Conn.  174  (1841); 
State  Bank  v.  Bell,  5  Blackf.  (Ind.)  127 
(1839);  Brookville  Ins.  Co.  r.  Records,  5 
Blackf.  (Ind.)  170  (1839);  Bridgeton  v. 
Bennett,  23  Me.  420  (1844).  retaining  an 
attorney  proved  by  his  statement ;  Ran- 
dall V.  Van  Vechten.  19  Johns.  60  (1821); 
Antipasda  Bapt.  Ch.  v.  Mulford,  8  N.  J. 
L.  182  (1825);  Perkins  v.  Washington 
Ins.  Co.,  4  Cow.  645  (1825);  Lathrop  r. 
Scioto  Bank,  8  Dana  (Ky.),  115  (1839); 
New  Haven  Sav.  Bank  v.  Davis,  8  Conn. 
191  (1830),  vote  of  directors  without 
evidence  under  seal;  Bank  of  Colum- 
bia V.  Patterson,  7  Cranch,  299  (1813); 
Andover  Turn  p.  Co.  v.  Hay,  7  Mass.  102 
(1810);  Haydenr?.  Middlesex  Turnp.  Co., 
10  Mass.  397  (1813);  Essex  Turnp.  v. 
Collins,  8  Mass.  292  (1811);  Wright  v. 
Lanckton,  36  Mass.  288  (1837);  Ban- 
croft V.  Wilmington,  etc,  5  Houst. 
(Del.)  577  (1876);  Dunn  v.  St.  Andrew's 
Church,  14  Johns.  118  (1817):  Union 
Bank  v.  Ridgley,  1  Har.  &  G.  (Md.)  324 
(1827);  Kennedy  v.  Baltimore  Ins.  Co., 
3  Har.  &  J.  (Md.)  367  (1813);  Garrison  v. 
Coombs,  7  J.  J.  Marsh.  (Ky.)  85  (1831); 
Legrand  v.  Hampden-Sidney  College,  5 


Munf.  (Va.)  324(1817);  Bates?'.  Alabama 
Bank,  2  Ala.  451  (1841);  Stamford  Bank 
V.  Benedict,  15  Conn.  437,  445  (1843); 
Detroit  v.  Jackson,  1  Doug.  (Mich.)  106> 
(1843);  St.  Andrew's  Bay  Land  Co.  v. 
Mitchell,  4  Fla.  192  (1851);  Topping  u 
Bickford,  86  Mass.  120  (1862).  A  con- 
tract of  employment  by  a  corporation 
need  not  be  under  seal.  Speirs  r. 
Union,  etc.  Co.,  174  Mass.  175  (1899;. 
Parol  evidence  may  prove  the  creation 
of  a  debt  by  the  companj'.  Borland  tv 
Haven,  37  Fed.  Rep.  394  (1888).  An 
appeal  bond  given  by  a  corporation 
may  be  signed  without  the  corporate 
seal.  Campbell  v.  Pope,  96  Mo.  468 
(1888).  Corporations  may  enter  into 
contracts  through  agents  duly  author- 
ized, and  such  contracts  may  be  by 
writing  not  under  seal  or  by  parol,  as 
though  made  by  natural  persons.  See 
§  714,  supra;  also  American  Ins.  Co.  v. 
Oakley,  9  Paige,  496  (1842);  Watson  v. 
Bennett,  12  Barb.  196  (1^51);  Hamilton 
V.  Lycoming  Ins.  Co.,  5  Pa.  St.  344(1847); 
Union  Bank  v.  Ridgley,  1  Har.  &  G. 
(Md.)  324,  413  (1827);  Hayden  v.  Middle- 
sex Turnp.  Co.,  10  Mass.  4Cv'  (1813); 
Shotwell  V.  McKown,  5  N.  J.  L.  828 
(1820);  and  an  agent  is  not  personally 
liable  on  a  note  signed  by  him  as  agent. 
Merrick  v.  Burlington,  etc.  P.  R.  Co.,  11 
Iowa,  74  (1860),  a  verbal  contract  made 
by  an  agent;  Buckley  v.  Briggs,  30 
Mo.  452  (1860);  Dunn  v.  St.  Andrew's 
Church,  14  Johns.  118  (1817).  In  Eng- 
land a  contrary  rule  has  been  upheld. 
Homersham  v,  Wolverhampton  Water- 
works, 6  Exch.  137  (1851);  Diggle  v. 
London  Ry.,  5  Exch.  442(1850);  Copper 
Miners  v.  Fox,  16  Q.  B.  229  (1851);  Clark 
V.  Cuckfield  Union,  11  Eng.  L.  &  Eq. 
442  (1852),  citing  and  reviewing  other- 
authorities.  In  England,  by  statute  8 
&  9  Vict.,  c.  16.  sec.  97,  directors  may 
contract  by  parol  on  behalf  of  a  corjio- 
ration  where  private  persons  may  make- 


1802 


CH.  XLIII.]  HOW    COKPOKATE    CONTEACTS   ARE   MADE. 


[§  721. 


may."  ^  The  corporate  seal  must  be  used  in  deeds  and  other  instru- 
ments which  would  require  a  seal  if  they  were  the  deeds  or  instru- 
ments of  individuals.'-  A  corporate  deed  twenty-five  years  old, 
reciting  that  it  is  under  seal,  is  presumed  to  have  been  under  seal, 
though  none  is  present.'  A  corporate  deed,  signed  "  J,,  President," 
is  not  sufficiently  signed.  A  corporate  seal  is  also  necessary.*  A 
mortgage  may  be  valid  although  the  corporate  seal  is  not  attached 
thereto.'^ 

Hence  the  law  is  that  a  corporation  may  become  bound  by  a  con- 
tract which  is  executed  in  any  of  the  following  ways:  by  a  written 
instrument  sealed  with  the  corporate  seal,  and  either  with  cr  with- 
out the  corporate  name  signed  thereto;^  by  an  unsealed  written 
instrument  signed  with  the  corporate  name;  by  a  written  record 
of  a  resolution  of  its  directors; '  by  an  unwritten  resolution  of  its 
directors;^  by  the  oral  agreements  of  its  authorized  agents;^  or  by 


a  valid  parol  contract.  See  also  Paul- 
ing V,  London,  etc.  Ry.,  8  Exch.  868 
(1853).  Cf.  Crampton  v.  Varna  Ry.,  L. 
R.  7  Ch.  562  (1872).  After  a  contract 
for  necessary  work  or  goods  is  executed 
by  the  other  party,  and  accepted  by  the 
corporation,  it  must  pay  for  the  same 
notwithstanding  the  irregularity.  Clark 
V.  Cuckfield  Union,  11  Eng.  L.  &  Eq. 
442  (1852);  Doe u.  Tainere,  12  Q.  B.  1011 
(1848).  Cf.  Lindley,  Companies,  p.  220, 
etc. 

1  Green   Co.  v.  Blodgett,  159  III  169 
(1895). 

2  See  §  722,  infra,  A  deed  of  a  cor- 
poration not  under  seal  is  not  a  deed 
and  is  void.  Danville  Seminary  v.  Mott, 
136  111.  289  (1891).  The  corporate  seal 
must  be  used  in  the  conveyance  of  cor- 
porate real  estate  in  Texas.  Shropshire 
V.  Behrens,  77  Tex.  275  (1890).  The  cor- 
poirate  seal  must  be  attached  to  a  deed 
in  order  to  make  it  a  deed.  Allen  v. 
Brown,  6  Kan.  App.  704  (1897).  A  deed 
by  a  corporation  must  have  the  corpo- 
rate seal  attached.  Precious,  etc.  Soc. 
V,  Elsythe,  102  Tenn.  40  (1899).  In  quo 
warranto  against  a  turnpike  company 
the  burden  of  proof  is  on  the  company 
to  prove  its  title,  and  deeds  from  other 
companies  without  seals  and  not  ac- 
knowledged as  corporate  deeds  are  in- 
suflScient.     Lyons,  etc.  Co.  v.  People,  68 


Pac.  Rep.  275  (Colo.  1902).  A  power  of 
attorney  by  a  corporation  to  an  agent 
to  execute  a  deed  of  land  must  be  under 
the  seal  of  the  corporation  or  must  be 
accompanied  by  proof  that  the  agent 
was  authorized  to  sign  for  the  corpora- 
tion. Dodge  V.  American,  etc.  Co.,  109 
Ga.  394  (1899).  A  statute  to  the  effect 
that  private  seals  need  not  be  used  ap- 
plies to  the  seal  of  a  private  corpora- 
tion. Murray  v.  Beal,  23  Utah,  548 
(1901). 

3  Catlett  V.  Starr,  70  Tex.  485  (1888). 

*  Garrett  v.  Belmont  Land  Co.,  94 
Tenn.  459  (1895). 

5  First  Nat.  Bank  v.  G.  V.  B.  Min.  Co., 
89  Fed.  Rep.  439  (1898).  See  also  §  723. 
infra.  Even  though  a  corporation  does 
not  attach  its  seal  to  a  mortgage,  yet 
the  mortgage  is  valid,  unless  it  is  shown 
that  the  corporation  had  a  seal  and 
that  the  board  of  directors  did  not  au- 
thorize its  omission.  Turner  v.  Kings- 
ton, etc.  Co.,  59  S.  W.  Rep.  410  (Tenn. 
1900);  aff'd,  106  Tenn.  L  See  also  g  810 
infra;  72  S.  W.  Rep.  759. 

<=  See  §  722,  infra. 

'  See  §  714,  supra. 

8  See  §  714,  supra. 

9  See  §§  716-720,  supra,  relative  to  the 
inherent  powers  of  the  president  and 
various  other  corporate  agents  to  con- 
tract.    A  parol  contract  with  a  corpo- 


1803 


§  T22.] 


HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[CH.  XLIIL 


ratifying,  acquiescing  in,  or  accepting  the  benefits  of  contracts 
made  in  its  name  by  unauthorized  agents.' 

§  722.  Melliod  of  drafting^  signing,  sealing,  and  acknowledging  a 
corporate  deed  or  contract. —  A  deed  or  contract  of  a  corporation 
siiould  be  drawn  so  that  the  name  of  the  corporation  appears  in  the 
body  of  the  instrument,  and  not  the  name  of  the  officer  or  agent 
who  signs,  seals,  or  acknowledges  it.  The  name  of  the  corporation 
should  be  sijrned  to  the  instrument,  and  this  should  be  follow^ed  bv 
the  word  "by"  and  by  the  signature  of  the  officer  or  person,  who  is 
executing  the  instrument  in  behalf  of  the  corporation."'' 

The  courts  will  hold  any  device  or  form  to  be  the  corporate  seal, 
if  there  was  an  intent  to  bind  the  corporation,  and  if  the  device 
was  intended  for  the  corporate  seal.'  The  corporate  seal  must  be 
attached  to  a  deed  and  should  be  attached  to  a  mortgage.'' 


ration  may  be  proved  although  the 
director  with  whom  it  was  made  is 
doud.  South  Baltimore  Co.  v.  Muhl- 
back,  69  Md.  395  (1888). 

I  See  §§  716-720,  supra. 

^  Clark  V.  Farmers',  etc.  Co.,  15  Wend. 
250  (1836);  Stinchfield  v.  Little,  1  Ma 
231  (1821);  New  Haven  Sav.  Bank  v. 
Davis.  8  Conn.  191  (1830);  Hatch  v.  Barr. 
1  Ohio,  390  (1824);  Brinley  v.  Mann,  56 
Mass.  337  (1848);  Kinzie  v.  Chicago,  3 
III.  187  (1839).  in  which  it  is  also  held 
that  the  mode  of  executing  an  instru- 
ment by  a  corporation  "is  to  affix  the 
seal  with  a  declaration  that  it  is  the 
seal  of  the  corporation,  and  to  verify 
the  act  by  the  signature  of  the  presi- 
dent and  secretary  of  the  corporation." 
Koehler  v.  Black  River,  etc.  Co.,  2 
Black,  715  (18G2).  "The  appropriate 
form  of  verifying  any  written  obliga- 
tion to  be  the  act  of  the  corporation  is 
by  affixing  the  signatures  of  the  presi- 
dent and  secretary  and  the  corporate 
seal."  Louisville,  etc.  Ry.  v.  Louisville 
Trust  Co..  174  U.  S.  552  (1899). 

8  Where  a  lease  recites  that  it  is  given 
under  the  corporate  seal,  "in  the  ab- 
sence of  evidence  to  the  contrary,  the 
scroll  or  rectangle  containing  the  word 
'seal'  will  be  deemed  to  be  the  proper 
and  common  seal  of  the  company.  A 
seal  is  not  necessarily  of  any  particular 


form  or  figure.  .  .  .  Whether  a  mark 
or  character  shall  be  held  to  be  a  seal 
depends  upon  the  intention  of  the 
executant  as  shown  by  the  paper." 
Jacksonville,  etc.  Nav.  Co.  v.  Hooper, 
160  U.  S.  514  (1896).  "As  to  private 
corporations,  where  authority  is  shown 
to  execute  a  contract  under  seal,  the 
fact  that  a  seal  is  attached  with  intent 
to  seal  on  behalf  of  the  corporation  is 
enough  though  some  other  seal  than 
the  ordinary  common  seal  of  the  com- 
pany should  be  used."  District  of 
Columbia  v.  Camden,  etc.  Works,  181 
U.  S.  453,  460  (1901).  A  mortgage  signed 
bj'  an  individual,  followed  by  the  word 
"president,"  and  by  an  individual,  fol- 
lowed by  the  word  "  secretary,"  is 
nevertheless  a  mortgage  of  the  corpo- 
ration if  the  seal  is  attached  and  the 
instrument  recites  that  the  corporation 
has  caused  it  to  be  signed  by  the  presi- 
dent and  secretary.  Rawlings  v.  New 
Memphis,  etc.  Co.,  60  S.  W.  Rep.  206 
(Tenn.  1900).  The  company's  name 
may  be  signed  by  stamp  per  an  officer 
who  signs  his  name  after  the  "per." 
Cadillac,  etc.  Bank  v.  Cadillac,  etc.  Co., 
88  N.  W.  Rep.  67  (Mich.  1901).  The  use 
by  the  board  of  directors  of  a  facsimile 
of  the  regular  corporation's  seal  may  be 
legal.  State  v.  Manhattan,  etc.  Co.,  149 
Mo.  181  (1899).     Where  the  attestation 


*  See  ^  721,  supra. 
1804 


CH.  XLIII.]  HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§  722; 


It  is  no  longer  necessary  that  the  impression  of  a  corporate  seal 
shall  be  made  upon  wax  or  other  adhesive  substance  —  an  impression 


clause  is  complete,  a  simple  "(L.  S.)" 
will  be  considered  the  seal  of  the  cor- 
poration for  that  occasion.  G.  V.  B.  Min. 
Co.  r.  First  Nat.  Bank,  etc.,  9.5  Fed.  Rep.  23 
(1899).     Where  the  instrument  recites 
that  it  is  under  seal  it  will  be  presumed 
to  be  a  sealed   instrument,  especially 
where  a  seal  follows  the  name  of  the 
officer  who  signs  it.     So  held  as  regards 
the  statute  of  limitations.     Rusling  v. 
Union,  etc.  Co.,  5  N.  Y.  App.  Div.  448 
(1896);  aff'd,  158  N.  Y.  737;  Christie  v. 
Gage,  2  Thomp.  &  C.  344  (1873),  where 
the  private  seals  of  trustees  of  a  church 
were  held  to  be  the  corporate  seal  to  a 
deed  of  its  property.     To  same  effect, 
Johnston  v  Crawley,  2.5  Ga.  316  (1858); 
Porter  v.   Androscoggin  R.  R.,  37  Me. 
349  (1853);  Taylor  v.  Heggie,  83  N.  C. 
244  (1880).     Cf.  Saxton  v.  Texas,  etc.  R. 
R.,  4  N.  M.  201  (1888);    South  Baptist 
Clmrch  u  Clapp,   18   Barb.   35   (1853); 
Tenney  v.  Lumber  Co.,   43  N.  H.  350 
(1861).     See  also  Ransom  v.  Stonington, 
etc.  Bank,  13  N.  J.  Eq.  212  (1860);  Mill- 
dam  Foundery  v.  Hovey,  38  Mass.  417 
(1839);  Stebbins  v.  Merritt,  64  Mass.  27 
(1852);  Sherman  v.  Fitch,  98  Mass.  59 
(1867);  McDaniels  v.   Flower,   etc.  Co., 
23  Vt.  274  (1850);  Benbow  v.  Cook,  115 
N.  C.  324  (1894);  Woodman  v.  York,  etc. 
R  R.,  50  Me.  549  (1861).  where  an  im- 
print in  red  ink  upon  bonds  was  held 
valid;  Ontario  Salt  Co.  v.   Merchants' 
Salt  Co.,  18  Grant,  Ch.  (U.  C.)  551  (1871), 
where  simple  wafer  seals  used  by  cor- 
porations in  executing  a  deed  were  held 
sufficient  in  the  absence  of  evidence 
that  they  were  not  their  proper  corpo- 
rate   seals;     Hamilton    v.    Dennis,    12 
Grant,  Ch.  (U.  C.)  325  (1866),  in  which  a 
ribbon  woven  through  slits  in  the  paper, 
so  as  to  appear  at  intervals  opposite  the 
signatures,  was  held  sufficient;  Bates 
V.  New  York  Central  R.  R.,  92  Mass.  251 
(1865),  where,  however,  it  was  held  that 
a  fac  simile  printed  in  ink  when  the 
blank  instrument  was  printed  is  a  mere 


scroll  and  not  a  valid  seal.    The  fac- 
simile of  the  seal  of  a  corporation  printed 
on  a  blank  form  is  not  the  corporate 
seal.     McCarthy  v.  Metropolitan  L.  Ins. 
Co.,  162  Mas&  254  (1894).     After  a  decree 
of  foreclosure,  it  is  too  late  to  claim 
that  a  seal  printed  on  the  mortgage  was 
not  good.     Haven  v.  Grand  Junction, 
etc.  Co.,  94  Mass.  337  (1866).     Cf.  Royal 
Bank  v.  Junction,  eta  R  R,  100  Mass. 
444  (1868),  in  which  a  seal  printed  upon 
bonds  by  direction  of  the  officers  of  a 
corporation  after  they  had  been  other- 
wise executed,  and  which  purported  to 
bear  the  corporate  seal,  was  held  valid* 
Contra,  ]\Iitchell  v.  Union,  etc.  Co.,  45 
Me.    104  (1858).    The  corporation  may 
have  several  seals.    Bank  of  Middlebury 
V.  Rutland,  etc.  R  R,  30  Vt  159  (1858). 
An  official  may,  while  out  of  the  state, 
cause    a   new    seal    to   be   made    and 
attach  it  to  bonds  of  the  corporation 
out  of  the  state.     Lynde  v.  Winnebago 
County,  16   Wall.   6   (1872).     A   blank 
wafer   will   do  for  a  seal.     Brinley  v. 
Mann,  56  Mass.  337  (1848).     A  scroll  has 
been  held  good.     Kansas  City  v.  Hanni- 
bal, etc.   R  R,  77   Mo.   180  (1882).     A 
scroll   may  be  a  sufficient  seal   even 
though  the  corporation  has  a  regular 
seal.    Thayer  v.  Nehalem  Mill  Co.,  31 
Greg.   437   (1897).     Contra,    Hendee    r. 
Pinkerton,  96  Mass.  381  (1867).     A  scroll 
will  Jo  for  the  corporate  seal  on  an  ap- 
peal bond.     Sarmiento    v.   Davis,  etc. 
Co.,   105  Mich.   300   (1895).     The  word 
"seal."  following  the  name  of  a  presi- 
dent, is  not  a  sufficient  corporate  seal 
in  a  deed.     Caldwell  v.  Morganton  Mfg. 
Co.,  28  S.  E.  Rep.  475  (N.  C.  1897).     The 
use  of  a  seal  may  be  a  sufficient  adop- 
tion of  it  as  the  corporate  seal.     Blood 
V.  La  Serena,  etc.  Co.,  113  CaU  221  (1896,i 
Any  seal  is  presumed  to  be  the  corpo- 
rate seal,  the  signature  of  the  agent 
executing  the  instrument  being  proved. 
Pennsylvania  Nat.  Gas  Co.  v.  Cook,  123 
Pa.  St.  170  (1889).    Where  a  deed  is  exe- 


1805 


-§  T22.] 


HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[CH.  XLlIi. 


upon  the  paper  itself  being  held  sufficient.^  It  is  not  necessary  that 
express  authority,  or  authority  under  seal,  be  given  to  an  officer 
or  agent  to  affix  the  corporate  seal  to  an  instrument;  such  powers 
may  be  inferred  from  the  general  powers  of  the  officer  or  agent, 
the  usual  course  of  business,  and  similar  circumstances.^ 

The  mere  affixing  of  the  corporate  seal  is  of  itself  sufficient  exe- 
cution of  a  contract  or  deed,  when  properly  affixed  by  a  person  duly 
authorized.  No  writing  or  further  signature  whatsoever  is  necessary.^ 


outed  by  the  president  and  secretary 
under  tlieir  private  seals,  there  is  a  flaw 
in  the  title  to  the  land.  McCroskey  v. 
Ladd,  28  Pac.  Rep.  216  (Cal.  1891). 

1  Hendee  v.  Pinkerton,  96  Mass.  381 
(1867),  holding  that  a  distinct  and  visi- 
ble impression  of  a  corporate  seal  upon 
and  into  the  substance  of  the  paper  is 
sufficient  and  valid;  Pillow  o.  Roberts, 
13  How.  472  (1851);  Allen  v.  Sulli%-an, 
etc.  R.  R.,  32  N.  H.  446  (1855);  Corrigan  v. 
Trenton,  etc.  Co.,  5  N.  J.  Eq.  52  (1845). 
But  see,  contra,  Farmers',  etc.  Bank  v. 
Haight,  3  Hill.  493  (1842). 

2  Union  Gold  Min.  Co.  v.  Bank,  2  Colo. 
226  (1873);  Merchants'  Bank  v.  Goddin, 
76  Va.  503  (1882);  Hill   v.  Manchester, 
etc,    Co.,  5.  B.  &  Ad.  866   (1833);  Berks, 
etc.  R.  R  V.  Myers,6  Serg.  &  R.  (Pa.)  12 
(1820),  holding    that    tlie    question    of 
authority  to    affix  a  corporate  seal   is 
for  the  jury;  Haven  v.  Adams,  86  Mass. 
80  (1862);  Gordon  v.  Preston,  1  Watts 
(Pa.),  385  (1833),  saying  that  power  to 
affix  a  seal  carries  vpith  it  the  power 
to   acknowledge  the  execution  of  the 
instrument.      See,    however,    Hoyt    v. 
Thompson,  5  N.   Y.  320   (1851),  holding 
that  the  usual  duties  and  powers  of  the 
president  and  cashier  of  a  bank  are  not 
such  as  will  justify  them  in  affixing  its 
corporate  seal  without  express  author- 
ity from  the   directors.     A  corporate 
officer  may  execute  a  mortgage  for  it 
without  being    authorized  under  the 
•corporate  seal.     A  mere  resolution  suf- 
fices.    Hopkins  v.   Galiatin,  eta  Co.,  4 
Humph.  (Tenn.)  403  (1843);  Fitch  v.  Lew- 
iston,  etc.   Co.,  80  Me.  34  (1888);   New 
Haven  Sav.  Bank  v.  Davis,  8  Conn.  191 
(1830);    Howe  v.   Keiler,  27   Conn.  538 


(1858);  Hutchins  v.  Byrnes,  75  Mass. 
367  (1857);  Beckwith  v.  Windsor,  14 
Conn.  594  (1842).  Members  of  the  board 
of  directors  may  affix  the  corporate 
seal  to  a  mortgage  and  acknowledge  the 
execution.  Gordon  v.  Preston,  1  Watts 
(Pa.),  385  (1833).  An  employee  may 
be  directed  to  affix  the  seal.  Royal 
Bank  v.  Grand,  etc.  R.  R,  100  Mass. 
445  (1868),  where  it  was  affixed  by  the 
printer. 

3  Union  Bridge  Ca  v.  Troy,  etc.  R  R., 
7  Lans.  240  (1872);  Clark  v.  Farmers', 
etc.  Co.,  15  Wend.  256  (1836).  Affixing 
the  corporate  seal  is  the  regular  mode 
of  executing  a  corporate  mortgage.  Sa- 
vannah, etc  R.  R.  u.  Lancaster,  62  Ala, 
555  (1878);  Whitney  v.  Union  Trust  Co., 
65  N.  Y.  576  (1875),  where  authority  was 
given  to  the  seci*etary  to  sign  an  in- 
strument, and  it  was  held  that  signa- 
ture by  the  treasurer  did  not  render  it 
invalid,  since  the  seal  of  the  corpora- 
tion was  sufficient  execution;  McDan- 
iels  V.  Flower,  etc.  Co.,  22  Vt.  274  (1850); 
Bason  v.  King's  Mountain  Min.  Co.,  90 
N.  C.  417  (1884),  holding  that  a  deed 
concluding  "in  witness  whereof  the 
said  corporation  has  caused  this  inden- 
ture to  be  signed  by  the  president  and 
attested  by  its  secretary,  and  its  com- 
mon seal  to  be  affixed,"  signed  "G.  C. 
W.,  President,"  with  the  seal  affixed,  is 
a  valid  common-law  deed;  Shewalter 
V.  Pirner,  55  Mo.  218  (1874);  Miners' 
Ditch  Co.  V.  Zellerbach,  37  Cal.  543 
(1869);  Union  Bridge  Co.  v.  Troy,  etc. 
R.  R.,  7  Lans.  240  (1872),  saying,  "  it 
seems,  a  corporate  seal  being  properly 
affixed,  no  signature  is  necessary;  " 
Lovett     V.   Steam  Saw-mill  Assoc,   6 


1806 


en.  XLIII.]  HOW    COEPOKATE    CONTRACTS    AKE    MADE. 


[g  T22. 


"When  proof  is  given  that  an  instrument  was  signed  by  the  cor- 
porate officers,  and  that  the  seal  attached  is  the  corporate  seal,  the 
courts  will  presume  that  the  seal  was  affixed  by  proper  authority, 
and  that  the  execution  was  duly  authorized,^  but  this  presumption 


Paige,  54,  60  (1836);  Bank  of  Vergennes 
V.  Warren,  7  Hill,  91  (1845);  Camp- 
bell V.  James,  17  Blatchf,  43  (1879); 
S.  C,  4  Fed.  Cas.  1168;  rev'd  on  other 
grounds,  104  U.  S.  357  (1881);  Lamson, 
etc.  Co.  V.  Russell,  113  Mass.  387  (1873); 
Levering  v.  Mayor,  7  Humph.  (Tenn.) 
553  (1847);  Memphis  v.  Adams,  9  Heisk. 
(Tenn.)  518  (1872).  Where  three  direct- 
ors, as  a  committee,  are  authorized  to 
make  a  lease,  and  the  lease  is  signed  by- 
two,  and  the  corporate  seal  is  affixed 
by  them,  it  is  sufficient,  the  third  ac- 
quiescing. Union  Bridge  Co.-  v.  Troy, 
etc.  R.  R.,  7  Lans.  240  (1872).  Mandamvs 
to  an  officer  t©  attach  the  corporate  seal 
will  be  denied  if  there  is  any  doubt  as  to 
the  legal  rights  of  the  parties.  People 
V.  Blackhurst,  11  N.  Y.  Supp.  675  (1890). 
At  common  law  a  corporation  signed  a 
contract  by  attaching  its  seal  thereto. 
Globe  Ace.  Ins.  Co.  v.  Reid,  19  Ind.  App. 
203(1897).  See  also  §  761,  in/ra.  But  see 
Isham  V.  Bennington,  etc.  Co.,  19  Vt. 
230  (1847),  holding  that  affixing  a  cor- 
porate seal  will  not  excuse  default  in 
signing  a  deed  when  signing  is  neces- 
sary by  statute.  A  deed  of  corporate 
real  estate  signed  by  an  agent  individu- 
ally does  not  convey  title,  even  though 
the  seal  of  the  corporation  is  affixed. 
Hutch  ins  v.  Barre,  etc.  Co.,  53  Atl.  Rep. 
70  (Vt.  1901). 

1  Underbill  v.  Santa  Barbara,  etc.  Co., 
93  Cal.  300  (1893);  McDonald  v.  Chis- 
holm,  131  111.  273  (1890);  Sherman,  etc. 
Co.  V.  Morris,  43  Kan.  283  (1890);  Mul- 
lanphy  Sav.  Bank  v.  Schott,  135  III  635 
(1891);  Union  Pac.  Ry.  v.  Chicago,  etc. 
Ry.,  51  Fed.  Rep.  309  (1893);  Bowers  v.. 
Hechtman,  45  Minn.  238  (1891);  Boyce 
V.  Montauk,  etc.  Co.,  37  W.  Va.  73  (1892); 
Gorder  v.  Plattsmouth  Canning  Co.,  36 
Neb.  548  (1893);  Reed  v.  Bradley,  17  111. 
321  (1856);  Blackshire  v.  Iowa,  etc.  Co., 
39    Iowa,    624    (1874);    Southern    Cal. 


Colony  Assoc,  v.  Bustamente,  53  Cal. 
193  (1877);  Wood  v.  Whelen,  93  111.  153 
(1879);  Mickey  v.  Stratton,  5  Sawyer,  475 
(1879);  Thorington  v.  Gould,  59  Ala.  461 
(1877);  Morris  v.  Keil,  20  Minn.  531 
(1874);  Abbott,  Tr.  Ev.  85;  Canandarqua 
Academy  v.  McKechnie,  19  Hun,  63 
(1879);  90  N.  Y.  628;  Union  Gold  Min.  Co. 
V.  Banli,  2  Colo.  226  (1873);  Mill-dam 
Foundery  v.  Hovey,  38  Mass.  417,  428 
(1839);  Malone  v.  Crescent,  etc.  Co.,  77 
Cal.  38  (1888);  Johnson  v.  Bush,  3  Barb. 
Ch.  307  (1848);  Leggett  v.  New  Jersey 
M.  &  B.  Co.,  1  N.  J.  Eq.  541  (1832);  Par- 
ker V.  Washoe  Mfg.  Co.,  49  N.  J.  L.  465 
(1887);  Hoyt  v.  Thompson,  5  N.  Y.  320 
(1851);  Hill  V.  Manchester,  etc.  Co.,  5 
B.  &  Ad.  866  (1833);  Chicago,  etc.  R.  R. 
V.  Lewis,  53  Iowa,  101  (1880);  Morse  v. 
Beale,  68  Iowa,  463  (1886);  Bliss  v.  Ka- 
weah,  etc.  Co.,  65  Cal.  502  (1884);  Good- 
now  V.  Oakey,  68  Iowa,  25  (1885);  Evans 
V.  Lee,  11  Nev.  194  (1876);  Cincinnati, 
etc.  Pu  R.  V.  Harter,  26  Ohio  St  426 
(1875);  Whitney  v.  Union,  etc.  Co.,  64 
N.  Y.  576  (1875);  President,  etc.  v. 
Myers,  6  Serg.  &  R.  (Pa.)  12  (1820j; 
Adams  v.  Creditors,  14  La.  454  (1840); 
Darnell  v.  Dickens,  4  Yerg.  (Tenn.)  7 
(1833);  Burrill  v.  Nahant  Bank,  43  Mass. 
163  (1840);  Flint  v.  Clinton,  etc.  Co.,  12 
N.  H.  434  (1841);  Indianapolis,  etc.  R.  R 
V.  Morganstown,  103  IlL  149  (1882); 
Solomon's  Lodge  v.  Montmoclin,  58  Ga. 
548  (1877);  St.  Louis  v.  Risley,  28  Mo.  415 
(1859);  St.  Johns  v.  Steinmetz,  18  Pa.  St. 
273  (1852);  Lovett  v.  Steam,  etc.  Assoc, 
6  Paige,  54  (1836);  Bank  of  Vergennes 
V.  Warren,  7  Hill,  91  (1845);  New  Eng- 
land, etc.  Co.  V.  Gilbert,  etc.  R.  R.,  91 
N.  Y.  153  (1883).  If  the  corporate  name 
is  signed  by  the  president  to  the  con- 
tract and  the  corporate  seal  affixed  by 
the  secretary,  this  raises  a  presumption 
that  the  contract  was  legally  author- 
ized.   Little,  etc.  Co.  v.  Federal,  etc.  Ry., 


1807 


799 


22.] 


HOW    CORPORATE    00>;TRACTS    ARE    MADE.  [CH.  XLIII. 


may  be  overthrown  by  proof  that  the  seal  was  affixed  without 
proper  authority.^     The  corporation,  by  ratification  and  otherwise, 


194  Pa.  St  144  (1899).  Proof  that  the 
seal  attached  to  a  lease  is  the  seal  of 
the  corporation  raises  a  presumption 
that  it  had  been  attached  with  author- 
ity. West  Side,  etc.  Co.  v.  Connecti- 
cut, etc.  Co.,  186  111.  156  (1900).  Where 
a  contract  is  executed  under  the  cor- 
porate seal  and  signed  by  the  vice-presi- 
dent and  secretary,  and  is  within  the 
powers  of  the  corporation,  it  is  pre- 
sumed that  they  were  authoriaed  to  so 
sign.  Neosho,  etc.  Co.  v.  Hannuni,  10 
Kan.  App.  499  (1900).  Where  the  seal 
is  attached  to  a  promissory  note  of  a 
corporation  it  raises  a  presumption  that 
the  note  is  legally  authorized.  Bnllen 
V.   Milwaukee,   etc.    Co.,   109    Wis.    41 


(1901),  An  assignment  of  a  cause  of  ac- 
tion by  a  corporation  is  presumed  to 
have  been  authorized  if  it  is  executed 
by  the  president  and  attested  by  the 
secretary  with  the  corporate  seal  af- 
fixed. Texas,  etc.  Ry.  v.  Davis,  54  S.  W. 
Rep.  381  (Tex.  1899).  Where  the  name 
of  the  corporation  as  grantor  in  a  deed 
is  signed  by  a  person  as  treasurer  and 
the  seal  is  attached,  it  is  presumed  that 
the  corporation  authorized  the  execu- 
tion of  the  deed.  Carr  v.  Georgia,  etc. 
Co.,  108  Ga.  757  (1899).  On  an  appeal 
the  corporate  seal  will  be  presumed  to 
have  been  on  a  deed  of  the  corporation, 
and  hence  that  the  deed  was  duly  exe- 
cuted.    Almand  v.  Equitable,  etc.  Co.. 


1  Koehler  v.  Black  River,  etc.  Co..  2 
Black,  715  (1862);  Parker  v.  Washoe 
Mfg.  Co.,  49  N.  J.  L.  465  (1888),  holding 
also  that  the  testimony  of  a  single  offi- 
cer that  he  had  no  knowledge  of  any 
authority  having  been  given  by  the  cor- 
poration to  execute  the  instrument  in 
suit  was  not  sufficient  to  overcome  the 
presumption  of  proper  execution  raised 
by  the  fact  that  the  corporate  seal  was 
affixed  to  it.  Union  Gold  Min.  Co.  v. 
Bank,  2  Colo.  226  (1873).  The  execution 
of  a  corporate  deed,  apparently  perfect 
on  its  face,  may  be  overthrown  by 
proof  that  the  board  of  directors  never 
authorized  it;  that  the  president  signed 
it  before  the  description  was  filled  in ; 
and  that  the  description  was  to  bo  other 
than  that  which  was  written  in.  Vica, 
etc.  R  R  u.  Mansfield,  84  Cal.  560  (1890). 
Where  the  seal  of  a  company  has  been 
duly  affixed  to  a  mortgage  by  the  secre- 
tary, the  mortgagee  need  not  inquire 
whether  the  secretary  was  duly  author- 
ized to  affix  it,  or  whether  a  quorum  of 
the  directors  was  present  at  the  meet- 
ing and  authorized  the  mortgage,  the 
court  upholding  the  mortgage, although 
a  quorum  was  not  present  when  it  was 
authorized.  County,  etc.  Bank  v.  Rudry 
Merthyr,  etc.  Co.,  [1895]  1  Ch.  629.     See 


1808 


also  g§  725.  808,  infra.  Where  there  is  no 
statute  or  by-law  requiring  a  private 
corporation  to  keep  a  minute-book,  it 
seems  that  the  certificate  of  the  secre- 
tary under  the  corporate  seal  that  a 
resolution  was  passed  cannot  be  ques- 
tioned by  any  one  claiming  under  or 
through  the  corporation.  Prentiss,  etc. 
Co.  r.  Godchaux,  66  Fed.  Rep.  234  (1894). 
Where  it  is  proven  that  the  proper 
agents  of  a  corporation  signed  a  deed, 
and  the  seal  attached  to  the  deed  is 
presumed  to  be  the  corporate  seal,  such 
presumption  is  not  overcome  bj'  proof 
that  no  vote  of  the  directors  was  had 
authorizing  the  execution  of  the  deed. 
Ruffner  v.  Welton,  etc  Co.,  36  W.  Va. 
244  (1892).  Although  the  proper  signa- 
tures and  seal  attached  to  corporate 
contracts,  deeds,  and  mortgages  raises 
a  presumption  of  authority  on  the  part 
of  the  officers  to  sign,  yet  the  want  of 
authority  may  be  shown.  Leggett  v. 
New  Jersey,  etc.  Co.,  1  N.  J.  Eq.  541 
(1832).  Where  it  is  shown  that  the  seal 
was  attached  at  the  request  of  the 
president  and  not  by  authority  of  the 
board  of  directors,  the  presumption 
raised  by  its  appearance  is  removed. 
Quackeuboss  v.  Globe,  etc.  Co.,  77  N.  Y. 
App.  Div.  168  (1902). 


CH.  XLIII.]  BOW    COKPORATE    COXTKACTS    ARE   MADE. 


[§  '^22. 


may  easily  cure  a  defect  as  to  the  sealing.^  The  execution  and 
delivery  of  an  instrument  by  a  corporation  as  a  corporation  raises 
the  presumption  that  the  company  was  regularly  incorporated.^ 


113  Ga.  983  (1901).  A  deed  which  ap- 
parently has  been  executed  by  a  cor- 
poration and  has  been  signed  and  ac- 
knowledged by  its  president  and  sec- 
retary and  its  seal  attached  is  presumed 
to  have  been  duly  authorized.  Ellison 
V.  Branstrator,  153  Ind.  146  (1899).  An 
admission  that  the  corporate  instru- 
ment was  duly  executed  is  fatal  to  a  de- 
fense that  the  persons  executing  it  had 
no  authority  to  do  so,  and  also  to  the  de- 
fense that  the  seal  was  not  the  corpo- 
rate seal  Woronieki  v.  Pairskiego,  50 
Atl.  Rep.  562  (Conn.  1901).  Where  it  is 
proved  that  a  note  was  signed  by  the 
proper  officers  of  a  corporation  and  its 
seal  attached,  this  raises  a  presumption 
that  the  officers  had  authority  to  sign 
and  that  the  note  was  duly  executed. 
Mills  V.  Boyle,  etc.  Co.,  64  Pac.  Rep.  123 
(Cal.  1901),  A  chattel  mortgage  of  a 
corporation  signed  by  its  officers  and 
with  its  seal  attached  is  presumed  to 
have  been  duly  authorized.  Sargent 
V.  Chapman,  12  Colo.  App.  529  (1899). 
A  bond  executed  under  the  corporate 
seal  and  duly  acknowledged  by  the 
president  is  presumed  to  have  been  au- 
thorized, even  though  no  resolutions 
are  found  in  certain  minutes  of  the 
board  of  directors.  Mutual  Life  Ins.  Co. 
V.  Yates  Co.  Nat.  Bank,  35  N.  Y.  App. 
Div.  218  (1898). 

The  seal  is  not  proof  per  se.  The  sig- 
nature of  the  officer  must  be  proved. 
Southern,  etc.    Assoc,   v.    Bustamente, 


52  Cal.  192  (1877).  The  presence  of  the 
seal  raises  the  presumption  that  the 
contract  was  duly  authorized.  Andres 
V.  Fry,  45  Pac.  Rep.  534  (Cal.  1896).  The 
action  of  the  board  authorizing  a  deed 
need  not  be  proved  where  the  deed  re- 
cites that  it  was  executed  by  order  of 
the  board  of  directors.  Caldwell  v. 
Morganton  Mfg.  Co.,  28  S.  E.  Rep.  475 
(N.  C.  1897).  The  seal  of  a  corporation, 
like  the  seal  of  an  individual,  must  be 
proved  in  establishing  the  assignment 
of  a  mortgage  Jackson  v.  Pratt,  10 
Johns.  381  (1813).  That  the  seal  is  the 
company's  seal  must  be  proved.  Den 
V.  Vreeiandt,  7  N.  J.  L.  352  (1800); 
Leazure  v.  Hillegas,  7  Serg.  &  R  (Pa.) 
313  (1821).  "  A  corporate  deed  can  be 
proved  only  by  proving  that  the  seal 
affixed  is  the  seal  of  the  corporation,  or 
that  it  was  affixed  as  the  corporate  seal 
by  an  officer  of  the  corporation  or 
other  person  thereunto  duly  author- 
ized." Osborne  v.  Tunis,  25  N.  J.  L.  633, 
658  (1856).  A  mortgage  with  the  cor- 
porate seal  attached  is  presumed  to 
have  been  regularly  sealed.  It  is  not 
invalidated  by  proof  that  the  directors 
passed  no  resolution  authorizing  the 
use  of  the  seal  Fidelity,  etc.  Co.  v. 
Shenandoah,  etc.  R  R,  32  W.  Va.  244 
(1889).  The  signature  of  the  president 
and  the  seal  of  the  corporation  does 
not  prove  the  deed.  It  is  necessary  to 
prove  that  it  was  executed  by  the  presi- 
dent.   Walsh  V.  Barton.  24  Ohio  St  28, 


1  Wood  V.  Whelen,  93  111.  153  (1879), 
where  a  mortgage  executed  by  cor- 
poration officers  under  its  seal  without 
proper  authority  was  held  to  be  adopted 
by  a  simple  resolution  without  again 
affixing  the  seal.  See  also  §  810,  infra, 
and  Royal  Bank  v.  Grand  Junction  R 
R,  100  Mass.  444  (1868);  St.  James's 
Parish  v.  Newburyport,  etc.  R  R.,  141 
Mass.  500  (1886),  In  which  the  facts  that 
two  directors  had  examined  corporate 


notes  under  seal  and  pronounced  them 
genuine,  and  that  the  treasurer  had 
paid  interest  upon  them,  were  held  to 
constitute  a  ratification.  A  court  of 
equity  may  compel  a  corporation  to 
affix  its  seal.  Missouri  River,  etc.  R.  R 
V.  Miami  County,  12  Kan.  483  (1874X 
Mandamus  sometimes  lies.  Rex  v.  Vice- 
Chancellor,  3  Burr.  1647  (1765). 

2  See  §  637;  also  West  Side,  etc,  Co.  v. 
Connecticut,  etc.  Co.,  186  111.  156  (1900). 


(114) 


1809 


§  722.] 


HOW    CORPORATE    CONTRACTS    ARE   MADE. 


[CII.  XLIII, 


A  defect  in  the  acknowledgment  of  a  corporate  instrument  is 
overlooked  by  the  courts  if  there  is  sufficient  to  indicate  an  intent 
to  acknowledge.^  The  acknowledgment  is  made  by  one  of  the 
officers  who  executed  it.^ 


41  (1873).  The  execution  and  record- 
ing of  a  deed  by  a  corporation  is  prima 
facie  evidence  of  delivery  and  accept- 
ance. Stokes  V.  Detrick,  75  Md.  256 
(1892).  The  presence  of  the  seal  is 
prima  facie  evidence  that  tlie  corpo- 
ration duly  authorized  the  contract. 
Berks,  etc.  Turnp.  Co.  v.  Myers,  6  Serg. 
&  R.  (Pa.)  16  (1820);  Parkinson  v.  Par- 
ker, 85  Pa.  St.  313  (1877);  and  that  it 
was  affixed  by  competent  authority. 
St  John's  Church  v.  Steinraetz,  IS  Pa. 
St.  273  (1852);  Solomon's  Lodge  v. 
Montmoclin,  58  Ga.  547  (1877);  Morris  v. 
Keil,  20  Minn.  531  (1874);  Conine  v. 
Junction,  etc.  R.  R.,  3  Houst.  (Del.)  288 
(1866).  Where  a  contract  is  signed  by 
the  second  vice-president  and  assistant 
secretary,  and  has  the  seal  attached,  it 
is  presumed  to  have  been  properly  exe- 
cuted. Gutzeil  V.  Pennie,  95  Cal.  598 
(1892).  Where  a  corporate  deed  is  not 
under  seal,  proof  must  be  given  that 
the  corporation  authorized  the  deed. 
Barney  v.  Pforr,  117  Cal.  55  (1897).  In 
Maine  it  has  been  held  that  the  pres- 
ence of  the  corporate  seal  on  an  in- 
strument does  not  raise  a  presumption 
that  the  corporation  entered  into  the 
contract.  Morrison  v.  Wilder  Gas  Co., 
91  Me.  492  (1898).  The  court  evidently 
overlooked  the  fact  that  originally  a 
corporation  signed  a  deed  or  contract 
by  affixing  its  seal  without  any  written 
signature  whatsoever,  and  that  conse- 
quently, upon  proof  that  such  seal  was 
the  corporate  seal,  the  presumption 
arose  that  it  was  properly  affixed,  just 
as  proof  of  the  signature  of  the  maker 
of  a  promissory  note  raises  a  presump- 
tion that  the  maker  signed  the  note  and 
was  bound  by  it. 

1  An  acknowledgment  is  "the  act  of 
one  who  has  executed  a  deed  in  going 
before  some  competent  officer  or  court 
and  declaring  it  to  be  his  act  or  deed." 


Hence,  even  though  the  notary's  cer- 
tificate may  be  insufficient  it  may  be 
shown  that  the  corporate  officer,  author- 
ized to  execute  the  deed,  did  actually  ac- 
knowledge such  execution,  the  statute 
not  requiring  the  certificate  of  acknowl- 
edgment to  appear  upon  the  document. 
Linderman  v.  Hastings,  etc.  Co.,  38  N. 
Y.  App.  Div.  488  (1899).  A  defective 
acknowledgment  does  not  affect  a  deed 
as  between  the  parties.  Marvin  v.  An- 
derson, 111  Wis.  387  (1901). 

'^  The  officer  or  ageut  who,  in  behalf 
of  the  corporation,  affixes  the  common 
seal  to  an  instrument  is,  in  the  absence 
of  any  statutory  provision,  deemed  the 
agent  executing  it  He  also  stands  in 
the  relation  of  a  subscribing  witness  to 
the  execution  of  the  deed  by  the  corpo- 
ration, and  is  the  proper  party  to  be 
examined  or  to  make  affidavit  to  prove 
that  the  seal  affixed  by  him  was  the 
corporate  seal,  and  that  it  was  affixed 
by  authority  of  the  board  of  directors. 
Bowers  v.  Hechtman,  45  Minn.  238 
(1891).  The  deed  of  a  corporation  is  ca- 
pable of  being  acknowledged.  Proving 
the  execution  is  not  the  only  way  of 
preparing  it  for  record.  Hopper  v- 
Lovejoy,  47  N.  J.  Eq.  573  (1891).  Au- 
thority to  execute  gives  authority  to 
acknowledge  the  instrument.  Wright 
V.  Lee,  2  S.  D.  596  (1892).  The  deed  is 
good  though  there  is  no  attestation  as 
to  seal.  Smith  v.  Smith,  62  111.  492 
(1872).  If  the  president  signs  the  deed 
he  is  the  proper  person  to  acknowledge 
it  Lovett  V.  Steam,  etc.  Assoc,  6  Paige, 
54  (1836).  The  acknowledgment  may 
be  taken  out  of  the  state.  Hodder  v. 
Kentucky,  etc.  Ry.,  7  Fed.  Rep.  793 
(1881).  Where  a  deed  of  the  corpora- 
tion is  acknowledged  by  individuals, 
instead  of  being  proved  by  the  officers, 
the  recording  of  such  deed  is  of  no  effect 
Bernhardt  v.  Brown,  122  N.  C.  587  (1898). 


1810 


CH.  XLIII.]  HOW    COKPORATE    CONTKACTS   ARE   MADE. 


[§  T2f 


An  acknowledgment  by  a  corporation  should  show  the  identitj^ 
of  the  corporation  and  of  the  officers  executing  the  instrument,  and 
their  acknowledgment  or  deposition  that  they  had  executed  it,  and 
that  they  had  been  duly  authorized  to  execute  it.  At  common 
law  there  is  no  particular  form  for  the  acknowledgment  of  an  in- 
strument by  a  corporation.^  An  affidavit  proving  the  signature  of 
the  president  and  the  affixing  of  the  corporate  seal  is  a  sufficient 


An  acknowledgment  similar  in  form  to 
that  of  an  individual  suffices.  Hoopes 
V.  Auburn,  etc.  Co.,  37  Hun,  568  (1885); 
aff'd,  109  N.  Y.  635.  Cf.  Howe,  etc.  Co. 
V.  Avery,  16  Hun,  555  (1879).  See  also 
Kelly  V.  Calhoun,  95  U.  S.  710  (1877); 
Frostburg,  etc.  Assoc,  v.  Bruce,  51  Md. 
508  (1879);  MuUer  ?;.  Boone,  63  Tex.  91 
(1885);  Eppright  v.  Nickerson.  78  Mo. 
483  (1883);  City  of  Kansas  v.  Hannibal, 
etc.  R.  R.,  77  Mo.  180  (1883j;  Tenney  v. 
Lumber  Co..  43  N.  H.  350  (1861).  A  no- 
tary's certificate  to  the  effect  that  the 
persons  signing  are  known  to  him  to  be 
president  and  secretary  is  sufficient 
under  the  statutes  of  South  Dakota. 
Holt  t'.  Met.  Trust  Co.  etc.,  11  S.  Dak. 
456  (1899).  Under  the  Texas  statute  it 
is  sufficient  that  the  officer  acknowl- 
edge that  he  executed  the  deed.  Zim- 
pleraan  v.  Stamps,  31  Tex.  Civ.  App.  139 
(1899).  Even  though  the  acknowledg- 
ment by  an  Arkansas  corporation  of  a 
mortgage  on  land  in  Arkansas  is  in  the 
usual  common -law  form,  but  not  in  ac- 
cordance with  the  statute  of  Arkansas, 
yet  any  defect  may  be  cured  by  stat- 
ute. Steers  v.  Kinsey,  68  Ark.  360  (1900). 
In  West  Virginia  a  certificate  of  ac- 
knowledgment of  a  deed  by  a  corpora- 
tion which  fails  to  show  that  the  officer 
executing  it  was  sworn  and  deposed 
to  the  facts  required  by  statute  is  in- 
sufficient, and  a  record  of  the  deed  is 
not  notice.  Abney  v.  Ohio,  etc.  Co.,  45  W. 
Va.  446  (1898).  A  deed  may  conclude 
with  the  words:  "  In  testimony  whereof 
the  common  seal  of  said  company  is 
hereunto  affixed."  Bason  v.  King's 
Mountain  Min.  Co.,  90  N.  C.  417  (1884). 
As  already  stated,  if  the  seal  is  attached, 
this  raises  the  presumption  that  the 


party  executing  it  was  authorized  so  to 
do.  and  hence  to  that  extent  it  need  not 
be  acknowledged.  Bennett  v.  Knowles, 
66  Minn.  4  (1896).  Proof  by  a  witness 
whose  name  does  not  appear  on  the 
paper  as  a  witness  is  insufficient.  Dodge 
V.  American,  etc.  Co.,  109  Ga.  394  (1899). 
An  approved  form  of  attestation  is: 

"In  witness  whereof  the  said  party  of  the 
first  part  has  caused  its  corporate  seal  to  be 
aCBxed  hereunto  by  its  secretary,  and  its  name 
to  be  subscribed  hereto  by  its  president "  [or 
other  corporate  officers,  as  the  case  may  be], 
the  day  and  year  aforesaid. 

[Seal.]  [Signatures.] 

A  form  of  proof  of  the  deed  of  a  cor- 
poration by  the  secretary  is  as  follows: 


S3. 


State  of  New  York, 
County  of  New  York. 

On  this day  of ,  in  the  year  A.  D.  19—, 

before  me  personally  came ,  the  secre- 
tary of ,  with  whom  I  am  personally  ac- 
quainted, who,  being  by  me  duly  sworn,  did  de- 
pose and  say:  that  he  resided  in  , ,  and 

was  the  secretary  of  ,  the  corporation  de- 
scribed in  and  which  executed  the  foregoing 
deed;  that  he  knew  the  corporate  seal  of  said 

;  that  the  seal  affixed  to  the  foregoing  deed 

was  such  corporate  seal,  and  was  so  affixed  by 

order  of  the  board  of  directors  of  the  said , 

and  that  he  attested  to  the  same  by  subscribing 
his  name  to  said  deed  as  secretary  of  said  com- 
pany by  the  like  order.    And  the  said 

further  said  that  he  was  acquainted  with 

and  knew  him  to  be  the  president  of  the  said ; 

that  the  signature  of  the  said subscribed 

to  the  said  deed  was  in  the  genuine  handwriting 

of  said ,  and  was  thereunto  subscribed 

by  like  order  of  the  board  of  directors  of  the 
said  ,  and  in  the  presence  of  him,  the  said 

,  Notary  Public 

1  Pruyne  v.  Adams,  etc.  Co.,  93  Hun, 
214  (1895);  aff'd,  155  N.  Y.  639,  uphold- 
ing an  acknowledgment  by  the  secre- 
tary. 


1811 


§  723.] 


HOW    COKPOKATE    CONTIiACTS    ARE    MADE.  [OH.  XLIII. 


acknowledgment.'  A  mortgage  should  not  be  acknowledged  be- 
fore a  notary  public  who  is  a  stockholder  in  and  officer  of  the  mort- 
gagee.^ 

§  723.  Corporate  instruments  made  out  in  the  name  of  an  officer 
or  agent  instead  of  in  the  name  of  the  corporation  may  he  enforced 
hy  or  against  the  corporation. —  This  is  now  the  well-established 
rule.^    Thus,  where  a  contract  is  made  by  the  president   in  his  in- 


1  General,  etc.  Co.  v.  Transit,  etc.  Co., 
57  N.  J.  Eq.  460  (1898). 

2Kotheu  Krag,  etc.  Co..20Ind.  App. 
293  (1898).  The  fact  that  the  acknowl- 
edgment is  taken  before  a  notary  who 
was  also  the  vice-president  of  the  com- 
pany does  not  necessarily  invalidate 
the  acknowledgment.  Florida,  etc. 
Exchange  v.  Rivers,  36  Fla.  575  (1886). 
An  acknowledgment  by  a  corporation 
taken  before  a  notary  who  is  a  stock- 
holder is  of  no  effect  in  Texas.  Bexar, 
etc.  Assoc.  V.  Heady,  21  Tex.  Civ.  App. 
154  (1899).  The  assistant  cashier,  who 
is  also  a  stockholder  and  director,  can- 
not take  the  acknowledgment  of  a 
mortgagor  to  the  bank.  Wilson  v. 
Griess,  90  N.  W.  Rep.  866  (Neb.  1902). 

3  Where  the  president  loans  corporate 
funds  and  takes  notes  in  his  own  name, 
the  corporation  is  considered  to  be  the 
payee.  New  England,  etc.  Co.  v.  Gay, 
33  Fed.  Rep.  636  (1888);  El  well  v.  Dodge, 
33  Barb.  336  (1861).  The  indorsement  of 
a  note  by  signing  the  corporate  name, 
without  adding  by  whom  the  name  is 
signed,  is  good.  Second  Nat.  Bank  v. 
Martin,  82  Iowa,  442  (1891).  A  lease 
ruunmg  to  the  company  is  good  though 
only  its  officers'  names  were  signed. 
Clark  V.  Gordon,  121  Mass.  330  (1876); 
Carrol  v.  St.  Johns,  etc.,  125  Mass.  565 
(1878).  A  sealed  instrument  to  pay 
money,  signed  by  an  individual's  name, 
followed  by  the  words  "  President  of  the 
New  York  Banking  Co.,"  is  enforceable 
against  it.  Boisgerard  v.  New  York 
Banking  Co.,  2  Sandf.  23  (1844).  A 
bond  running  to  the  treasurer  may  be 
sued  on  by  the  company.  New  York, 
etc.  Soc.  u  Varick,  13  Johns.  38  (1816). 
So  also  as  to  a  note  running  to  a  cashier. 


Baldwin  u  Bank,  etc,  1  Wall.  234  (1863) ; 
Commercial  Bank  v.  French,  38  Mass. 
486  (1839).  Or  to  a  manager.  Societe, 
etc.  V.  Mackintosh,  5  Utah,  568  (1888). 
The  company  is  liable  on  an  order  for 
goods  though  the  order  is  signed  by  an 
officer  as  such  officer.  Rogers,  etc.  Ca 
V.  Union,  etc.  Co..  134  Mass.  31  (1883). 
The  case  of  Farmers',  etc.  Bank  v. 
Haight,  3  Hill,  493  (1842),  holds  a  cor- 
poration not  liable  on  a  note  informally 
made  out.  See  also  Steele  v.  Oswego, 
etc.  Co.,  15  Wend.  266  (1836).  Suit  lies 
against  a  bank  on  its  check  signed 
by  its  cashier  in  his  own  name.  Me- 
chanics' Bank  v.  Bank  of  Columbia, 
5  Wheat.  326  (1820).  See  also  Edwards 
V.  Cameron's,  etc.  Co.,  11  Eng.  L.  &  Eq. 
565  (1852),  where  directors  signed  a 
note;  Olcott  v.  Tioga  R.  R,  27  N.  Y. 
546  (1863);  Bank  of  Brit.  N.  A.  u. 
Hooper,  71  Mass.  567  (1856);  Morrill  v. 
Segar  Co.,  32  Hun,  548  (1884),  where  the 
secretary  signed  a  contract;  Van  Leu- 
ven  V.  First  Nat.  Bank,  54  N.  Y.  671 
(1873),  where  the  president  signed; 
Bank  of  Genesee  v.  Patchin  Bank,  19 
N.  Y.  313  (1859);  s.  C,  13  N.  Y.  30^ 
(1855);  Many  v.  Beekman,  etc.  Co.,  9 
Paige,  188  (1841).  But  see  De  Witt  v. 
Walton,  9  N.  Y.  570  (1854).  A  cashier 
may  transfer  a  note  by  signing  his 
own  name  as  cashier.  Mclntyre  v. 
Preston,  10  111.  48  (1848).  See  also  §  724, 
notes,  infra.  A  note  payable  to  and 
indorsed  by  "E.  S.  Hubbell,  agent  for 
Buffalo  Colliery  Company,"  is  collect- 
ible against  the  company  where  it  is 
shown  that  he  was  authorized  by  the 
company  by  its  mode  of  doing  business. 
Lake  Shore  Nat.  Bank  v.  Butler  Col- 
liery Co.,  51  Hun,  63  (1889).     A  corpo- 


1812 


CH.  XLllI.]  HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§  723. 


dividual  name,  but  for  the  corporation,  and  the  corporation  knows 
of  the  contract,  and  acts  upon  it,  and  partially  performs  it,  the  cor- 


ration  is  liable  on  a  note  signed  "R., 
President  S.  &  T.  Co.  R.  R  Co.;  R,  Per- 
sonally." McCormick  v.  Stockton,  etc. 
R  R,  130  Cal.  100  (1900).  A  note  signed 
"  Iowa  National  Bank,  by  William  Dag- 
get.  V.  P.,"  is  properly  signed  and  is  not 
a  personal  obligation,  even  though  in 
correspondence  the  word  "  we  "  is  used 
by  such  vice-president.  Thilruany  v. 
Iowa,  etc.  Co.,  108  Iowa,  357  (1899).  In 
foreclosing  a  vendor's  lien  a  note  given 
by  the  corporation  may  be  shown  to  be 
a  corporate  note,  although  signed  "  T.  R 
Wagner,  Secy.  &  Genl.  Manager  of  the 
Shelby  Lime  &  Cement  Works."  Wag- 
ner V.  Brinkerhoff,  133  Ala.  516  (1899). 
It  may  be  shown  by  parol  evidence 
that  a  note  signed  "  R  J.  B.,  President," 
was  a  corporate  note.  Second,  etc. 
Bank  v.  Midland,  etc.  Co.,  155  Ind.  581 
(1900).  Even  though  the  name  of  the 
corporation  only  is  signed  to  a  note 
without  the  signature  of  the  officer  fol- 
lowing the  corporate  name,  yet  the 
note  is  a  valid  obligation  of  the  corpo- 
ration. Youngs  V.  Perry,  42  N.  Y.  App. 
Div.  247  (1899).  Where  a  corporation 
buys  land  in  the  name  of  its  agent  as 
trustee  it  is  liable  for  the  price  thereof. 
Hurst  V.  Am.  Assoc,  49  S.  W.  Rep.  800 
(Ky.  1899).  A  due-bill  signed  by  an  in- 
dividual may  be  shown  to  have  been 
intended  as  a  due-bill  of  the  company, 
be  being  the  president.  Richmond,  etc. 
R  R  V.  Snead,  19  Gratt,  (Va.)  354  (1869). 
An  instrument  for  the  payment  of 
money  running  from  a  person  "as 
manager  and  president"  is  enforceable 
against  the  corporation,  although 
signed  by  the  person  as  an  individual. 
Jones  V.  Woolley,  2  Idaho,  790  (1891). 
A  check  signed  by  an  individual  with 
the  corporate  seal  and  the  name  of  the 
secretary  attached  is  not  enforceable 
against  the  company,  it  having  no  bene- 
fit thereof.  Serrell  v.  Derbyshire,  etc. 
Ry.,  9  C.  B.  811  (1850).  Where  notes  are 
made  by  an  individual  the  j^ayee  can- 


not introduce  evidence  that  they  were 
in  behalf  of  the  corporation,  the  suit 
being  on  the  notes.  Sparks  v.  Dispatch 
Transfer  Co.,  104  Mo.  531  (1891).  An 
accommodation  note  running  to  "F. 
Medhurst,  commercial  director,"  given 
to  him  by  a  friend,  cannot  be  enforced 
by  the  corporation,  Medhurst  having 
defaulted  and  defrauded  the  company. 
Societe,  etc.  v.  Mackintosh,  7  Utah,  35 
(1890).  The  corporation  is  not  liable  on 
a  note  as  follows:  "  For  value  received, 
we,  the  subscribers,  jointly  and  sev- 
erally, promise  to  pay  the  plaintiffs  or 
order,  for  the  Boston  Glass  Manufactory, 
$8,500,  on  demand,"  and  signed  by  in- 
dividuals as  individuals.  Bradlee  v. 
Boston,  etc.  Mfy.,  33  Mass.  347  (1835). 
A  grant  to  "  the  governors,  president, 
and  fellows  of  King's  College,  at  Wind- 
sor, in  the  province  of  Nova  Scotia,"  is 
prima  facie  a  grant  to  the  corporation. 
King's  College  v.  McDonald,  2  Thani. 
106  (Can.  1843).  A  deed  to  the  ''trustees 
of  the  First  Baptist  Church"  passes 
title  to  the  corporation.  Keith,  etc.  Co. 
V.  Bingham,  97  Mo.  196  (1888 1.  A  bill 
of  sale  to  an  individual,  "  president  of  " 
a  corporation,  "  his  executors,  adminis- 
trators, and  assigns,"  does  not  convey 
title  to  the  corporation.  Florida,  etc. 
Co.  V.  Usina,  111  Ga.  697  (1900).  A  com- 
pany may  be  bound  by  a  contract  al- 
though the  contract  is  signed  in  the 
name  of  an  individual.  Jones  v.  Will- 
iams, 139  Mo.  1  (1897).  A  contract 
drawn  and  signed  by  "S.,  general  agent," 
may  be  shown  by  parol  to  be  a  corpo- 
rate contract.  Lewis  v.  Mutual  L.  Ins. 
Co.,  8  Colo.  App.  368  (1896).  The  agree- 
ment of  J.  Gould,  as  trustee  for  the 
Missouri  Pacific  Railroad,  that  the  lat- 
ter will  do  a  certain  thing  upon  an  ex- 
tension being  made,  does  not  bind  the 
latter.  Hill  v.  Gould,  129  Mo.  106  (1895). 
Where  a  note  is  signed  by  the  officers 
individually,  but  is  really  a  corporate 
note,  the  officei-s  who  pay  and  take  up 


1813 


§  T23.] 


HOW    CORPORATE    CONTRACTS    ARE   MADE. 


[CH.  XLIII. 


poration  is  bound.^  A  mortgage  made  in  the  president's  name, 
signed  by  him,  and  sealed  with  his  own  seal,  is  not  a  legal  mortgage 
although  authorized  by  the  corporation.  It  operates,  however,  as 
an  equitable  mortgage  as  regards  subsequent  mortgagees  with 
notice.'^  Although  a  contract  under  seal  is  executed  by  the  cor- 
porate officers  in  their  individual  names,  it  may  be  proved  by  parol 


the  note  may  enforce  it  against  the 
corporation.  Re  Pendleton  Hardware, 
etc.  Co.,  24  Oreg.  330  (1893).  A  note 
signed  "  National  Forge  and  Iron  Co., 
Mark  Swarts,  President,"  may  be  shown 
to  be  the  joint  note  of  the  company 
and  president.  Swarts  v.  Cohen,  11  Ind. 
App.  20  (1894),  classifying  many  author- 
ities.   See  also  §  810,  infra. 

1  Cotting  V.  Grant  Street  Elec.  Ry.,  65 
Fed.  Rep.  545  (1895). 

•-^Milleru  Rutland,  etc.  R.  R.,  36  Vt. 
452  (1863).     See  Hatch  v.  Barr,  1  Ohio, 
390  (1823).  and  §  721,  supra,  and  §  810, 
infra.    A  corporate  chattel  mortgage 
is  good   if    it  runs   in    the    corporate 
name,  even  though  the  president  signs 
only  his  own  name.    Sherman  v.  Fitch, 
98  Mass.    59   (1867);   Hamilton   v.   Mc- 
Laughlin, 145  Mass.   20  (1887).      If  so 
drawn  it  is  immaterial  as  to  who  signs 
or  seals.     Wiley  u.  Board  of  Education, 
11  Minn.  371  (1866),  involving  a  bond.  If 
the  statute  authorizes  the  trustees  to 
convey,   their  personal    deed  suffices. 
DeZeng  v.  Beekman,  3  Hill,  489  (1842). 
Where  the   president  has  title  in  his 
name    he    may   convey  as    president. 
Vilas  V.  Reynolds,  6  Wis.  214  (1858).     A 
deed    made    before    incorporation,    to 
be  delivered  to  the  corporation  after 
incorporation,  is    good.      Spring,    etc. 
Bank  v.  Hurlings,  etc.  Co.,  32  W.   Va. 
357   (1889).     Although  the  body  of  the 
deed  reads,  "the  president,  directors, 
etc.,  of,"  followed  by  the  name  of  the 
corporation  as  grantor,  the  deed  should 
be   construed  as  the  deed  of  the  cor- 
poration.    Shaffer  u.  Hahn,  111  N.  C.  1 
(1892).      The  contract   is  signed    suffi- 
ciently to  satisfy  the  statute  of  frauds 
where  the  name  of  the  corporation  ap- 
pears in  the  body  of  the  instrument 


Tingley    v.    Bellingham,    etc.    Co.,    5 
Wash.  St.  644  (1893).     Where  a  mort- 
gage purports  to  be  by  a  corporation, 
but  is  signed  by  the  president,  treas- 
urer, and  secretary  personally,    with 
their    official    titles    following    their, 
names,  and  is  acknowledged  the  same 
as  they  would  acknowledge  a  personal 
mortgage,   and   the  corporate  seal    is 
not  attached,  the  mortgage  is  at  most 
only   an   equitable  mortgage,  and    in 
order  to  be  foreclosed  must  be  alleged 
to  be  such.     Brown  v.  Farmers'  Supply 
Co.,  23  Oreg.  541  (1893).     The  signature 
to  a  corporate  mortgage  omitting  one 
word  of  the  name  is  nevertheless  good, 
and  although  signed  "  Chas.  P.   Law, 
President  of  the  Santa,"  etc.,  is  suffi- 
cient where  the  corporate  seal  is  affixed. 
Underbill  v.  Santa  Barbara,  etc.  Co.,  93 
Cal.  300  (1892).     A  deed    <5f  corporate 
land  properly  drawn  in  the  body  of  the 
deed,  sealed   with  the  corporate  seal, 
and  properly  acknowledged,  but  signed 
"  M.  Brayman,  President  C.  &  F.  R.  R. 
Co.,"  etc.,  is  nevertheless  good.     Chou- 
teau V.  Allen,  70  Mo.  290  (1879).      Cf 
Taylor  v.  Agricultural,  etc.  Assoc.  68 
Ala.  229  (1880).     A  corporate  mortgage 
signed  by  the  officers  with  their  own 
names,   followed   by    their  titles  and 
scrolls  for  seals,  is  good.    Johnston  v. 
Crawley,  25  Ga.  316  (1858).   A  mortgage 
signed  by  certain  individuals  as  trus- 
tees of  a  church  is  not  on  its  face  a 
mortgage  by  the  church.  Shackleton  v. 
Allen,  etc.  Church,  25  Mont.  421  (1901). 
Even    though    a    mortgage   is  signed 
"Mary  L.  Byrd,  President  of  the  Kings- 
ton Lumber  &  Mfg.  Co.,"  it  is  a  valid 
mortgage.      Turner    v.   Kingston,  etc. 
Co.,   59  S.   W.    Rep.    410  (Tenn.    1900); 
aff'd,  106  Tenn.  1. 


1814 


CH.  XLIII.]  HOW    COKPORATE    CONTRACTS    ARE    MADE. 


[§  T24. 


that  it  was  a  corporation  contract,  and  that  the  corporation,  having 
adopted  and  ratified  it  and  attempted  to  carry  it  out,  is  liable  on 
it.^  In  Massachusetts,  however,  it  is  held  that  where  a  contract 
under  seal  is  made,  not  by  the  corporation,  but  by  its  agent  indi- 
vidually, the  corporation  cannot  be  sued  thereon  by  the  other  party, 
unless  it  is  estopped  by  some  subsequent  act  or  writing."^ 

Questions  relative  to  the  power  of  certain  officers  to  sign  notes 
and  contracts  are  considered  elsewhere.'' 

§  72J:.  Liability  of  officers  and  agents  on  corporate  securities 
ivhich  are  not  properly  dratvn,  signed,  or  sealed  in  the  corporate 
name. —  It  frequently  happens  that  the  person,  with  whom  a  corpo- 
rate contract  has  been  made,  attempts  to  hold  personally  liable  the 
ofiicer  or  agent  of  the  corporation,  on  the  ground  that  such  officer  or 
agent  used  his  own  name  in  the  body  of  the  contract,  or  signed  it  as 
principal  instead  of  using  the  corporate  name.  But  the  courts  have 
quite  uniformly  defeated  such  attempts  to  hold  the  officer  or  agent 
liable.  If  the  instrument  or  contract  indicates  that  the  officer  or 
agent  is  acting  only  as  agent,  and  if  the  name  of  the  corporation 
appears  on  the  instrument,  the  officer  or  agent  is  not  liable  thereon.* 


4 Williams  v.  Uncompahgre  Canal 
Co.,  13  Colo.  460  (1889).  Tlie  corpora- 
tion is  bound  where  the  president 
signs  his  name  followed  by  the  word 
'•  president,"  and  the  secretary  signs 
his  name  followed  by  the  word  "  secre- 
tary," the  -corporate  seal  having  been 
also  impressed  upon  the  document  in 
the  body  thereof.  Union,  etc.  Co.  v. 
Robinson,  79  Fed.  Rep.  420(1897).  Where 
the  lease  in  its  body  is  to  a  corporation, 
the  corporation  is  bound,  even  though 
it  is  signed  "  E.  J.  Crandall  [Seal],  Pres- 
ident." Consolidated  Coal  Co.  etc.  u 
Peers,  150  111.  344  (1894).  A  sealed  con- 
tract to  sell  land  running  to  the  presi- 
dent cannot  be  enforced  by  the  corpora- 
tion. Buffalo,  etc.  Inst.  v.  Bitter,  87  N. 
Y.  250  (1881).  It  is  liable  on  a  deed  to 
the  manager.  Pickering's  Claim,  L.  R, 
6  Ch.  535  (1871).  An  assignment  of  a 
lease  running  in  its  body  from  '•  George 
F.  Baker,  Treasurer,"  etc.,  of  the  com- 
pany, and  assign  in  the  same  way,  is 
not  a  corporate  assignment.  Norris 
V.  Dains,  52  Ohio  St.  215  (1894).  A  mort- 
gage is  not  enforceable  against  a  cor- 
poration where  it  is  drawn  as  a  per- 
sonal   obligation    and    signed    by  an 


individual  "  as  president."  Clark  v. 
Hodge.  116  N.  C.  761  (1895).  An  assign- 
ment of  a  mortgage  and  a  note  belong- 
ing to  a  corporation  by  its  president  and 
secretary  as  follows:  "We,  the  un- 
dersigned, D.  R  T.,  president,  and  C.  S. 
B.,  secretary,  have  transferred  .  .  . 
and  on  the  part  of  said  company  have 
hereunto  attached  our  names  and  af- 
fixed our  seals,"  signing  their  names 
and  afliixing  their  private  seals,  is  pre- 
sumptively a  corporate  transfer.  Lay 
V.  Austin,  25  Fla.  933  (1890). 

2  Congress,  etc  Co.  v.  Worcester,  etc. 
Co..  65  N.  E.  Rep.  792  (Mass.  1903). 

3  See  g§  715-720,  supra. 

*  Quoted  and  approved  in  Morrison  v. 
Baechtold,  93  Md.  319,  329  (1901).  A 
note  stamped  with  the  corporate  seal, 
followed  by  the  words  "  John  Roach, 
Treasurer,"  is  the  company's  note  alone. 
Miller  v.  Roach,  150  Mass.  140  (1889).  A 
note,  "We  promise  to  pay,"  and  signed 
"San  Pedro  Mining  and  Milling  Com- 
pany, T.  Kraus,  President,"  cannot  be 
enforced  against  Kraus  personally. 
Liebscher  v.  Kraus,  74  Wis.  387  (1889). 
A  note  reading  "  We  promise,"  etc.,  and 
signed  "  Warrick  Glass  Works,  J.  Price 


1815 


§  T24.] 


HOW   COEPOEATE    CONTEACTS    AEE    MADE.  [CH.  XLIII. 


Especially  is  this  the  rule  as  between  the  original  parties  to  the  con- 
tract.    It  also  is  the  rule  as  to  parties  taking  with  notice.     The 

Warrick,   President,"    is    conclusively     the  corporation  only,  provided  the  cor- 


held  to  be  the  note  of  the  corporation 
alone.  Reeve  u  First  Nat.  Bank,  54  N. 
J.  L.  208  (1893).  It  is  a  question  of  fact 
whether  a  note  is  that  of  the  corpora- 
tion or  of  an  individual  where  in  the 
body  it  is  made  by  the  corporation,  but 
the  signature  is  that  of  a  person  as 
"Gen.  Supt"  Frankland  v.  Johnson, 
147  III.  520  (1893).  A  treasurer  is  not 
liable  on  a  note  signed  as  follows: 
"The  Sanitary  Milk-Supply  Co.,  T.  A. 
Huston,  Trs."  Gleasou  v.  Sanitary,  etc. 
Co.,  93  Me.  544  (1900).  A  note  reading 
"We  promise  to  pay,"  and  signed  by 
the  corporation  and  also  by  the  offi- 
cers as  officers,  does  not  render  the  lat- 
ter liable  personally.  Wilson  v.  Fite, 
46  S.  W.  Rep.  1056  (Tenn.  1897).  The 
following  indorsement  on  negotiable 
paper,  "Estate  of  Wheeler,  Wing,  Ex- 
ecutor," does  not  bind  such  executor 
individually,  even  though  it  does  not 
bind  the  estate.  Grafton  Nat.  Bank  v. 
Wing,  172  Mass.  513  (1899).  A  note 
signed  by  an  individual  maker,  with 
the  word  "President"  following  the 
signature,  is  at  law  a  personal  note,  and 
the  word  "President,"  etc.,  is  disre- 
garded. The  defendant,  however,  may 
by  cross-complaint  cause  the  note  to  be 
reformed  on  the  ground  of  a  mistake, 
and  thus  relieve  himself  from  liability 
and  render  the  corporation  liable. 
Prescott  V.  Hixon,  22  Ind.  App.  139 
(1899).  Where  the  body  of  a  note  does 
not  refer  to  the  company,  and  it  is 
signed  by  individuals  with  the  words 
"  President,"  etc.,  following  their 
names,  they  are  liable  personally  on 
the  note,  but  the  defendants  may  file 
a  cross-bill  to  have  the  note  reformed 
so  as  to  relieve  them  from  personal 
liability.  Lawrence  County  Bank  v. 
Arndt,  69  Ark.  406  (1901).  A  guaranty 
signed  by  an  individual  in  his  own 
name,  followed  by  the  letters  "Pt," 
may  be  shown  to  be  the  obligation  of 


poration  might  execute  a  guaranty 
and  authorized  the  president  to  exe- 
cute it.  Small  V.  Elliott,  12  S.  D.  570 
(1900).  A  note  signed  by  individuals 
as  officers  is,  prima  facie  their  individ- 
ual note,  but  it  may  be  shown,  as  be- 
tween the  original  parties,  that  it  was 
really  the  note  of  a  corporation.  Bush 
V.  Gilmore,  45  N.  Y.  App.  Div.  89  (1899). 
Where  the  name  of  an  individual  is 
the  same  as  that  of  a  corporation  of 
which  he  is  president,  parol  evidence 
may  show  that  the  signature  to  an  in- 
strument was  the  signature  of  the 
company  and  not  of  the  individual. 
Hall  V.  Ochs,  34  N.  Y.  App.  Div.  103 
(1898).  A  note  signed  with  the  com- 
pany's name  per  officers  does  not  bind 
them  personally,  although  the  body  of 
the  note  reads  "  We  promise  to  pay." 
Williams  v.  Harris,  198  111.  501  (1902). 
Where  the  unissued  stock  of  a  corpora- 
tion (upon  its  reorganization  on  the  ex- 
piration of  its  charter)  is  issued  to  the 
president  as  trustee  to  sell  from  time 
to  time,  and  to  turn  over  the  proceeds 
of  the  sales  to  the  company,  the  fact 
that  he  gives  the  company  a  note  for 
the  same  signed  by  him  as  "Trustee  for 
Bank  "  does  not  render  him  liable  on 
such  note  upon  the  bank  becoming  in- 
solvent. Neptune  v.  Paxton,  15  Ind. 
App.  284  (1896).  Where  the  directors 
sign  a  corporate  note  on  the  back  with 
the  words  added  "  board  of  directors," 
it  may  be  shown  by  parol  evidence 
that  they  signed  it  as  directors,  and 
are  not  liable  personally.  Kline  v. 
Bank  of  Tescott,  50  Kan.  91  (1892).  A 
note  signed  "G.  A.  Colby,  President 
Pac.  Peat  Coal  Co.,  D.  K  Tripp,  Sec. 
Tpro  tern."  is  on  its  face  a  corporate 
note.  Farmers',  etc.  Bank  v.  Colby,  64 
Cal.  352  (1883);  Mott  v.  Hicks,  1  Cow. 
513  (1823);  Bellinger  v.  Bentley,  1  Hun, 
562  (1874);  Hascall  v.  Life  Assoc,  5 
Hun,   151   (1875);   aff'd,  66  N.  Y.   616; 


i8ie 


OH.  XLIII.]  HOW    CORPORATE   CONTRACTS    ARE    MADE. 


[§  T24. 


?? 


addins:  of  a  title  does  not  necessarily  constitute  such  notice.^     Thus, 
where  a  note  is  signed  by  two  persons  with  the  words  "  president 
and  "  treasurer"  following  their  names,  they  are  liable  individually, 


Morrill  v.  Segar  Co.,  33  Hun.  543  (1884), 
the  court   saying:   "The   rule   now   is 
that,  where  the  instrument  raises  on 
its  face  a  question  as  to  the  personal 
liability  of  the  party  signing  it,  parol 
evidence  is  admissible  to  show  the  in- 
tention of  the  parties;  "  Babcock  v.  Be- 
man,  11   N.  Y.  200  (1854);  Whitney  v. 
Wyman,  101  U.  S.  393  (1879);  Whitford 
V.  Laidler,  94  N.  Y.   145  (1883),  where 
€ven  a  lease  made  out  to  an  officer  as 
tsuch  was  held  not  enforceable  against 
him ;  Holt  v.  Winfield  Bank,  25  Fed.  Rep, 
813  (1885),  where  an  attempt  was  made 
to  hold  a  president  liable  on  an  ultra 
vires  subscription;  Haight  v.  Sahler,  30 
Barb.  218  (1859),  where  also  the  con- 
tract was  sealed;  Pitman  v.  Kintner,  5 
Blackf.   (Ind.)  250   (1839);    Stanton    v. 
Camp,  4   Barb.    274   (1848);    Draper  v. 
Mass.    etc.    Co.,    87    Mass.    838    (1862); 
Sharpe  v.  Belles,  61  Pa.  St.  69   (1869); 
Hopkins  v.  Mehaffy,  11  Serg.  &  R.  (Pa.) 
126  (1824),  where  also  a  seal  was  used, 
the  body  of  the  instrument  being  in 
the  company's  name.     To  same  effect. 
Abbey  v.  Chase,  60  Mass.  54  (1850),  and 
;Ellis  V.   Pulsifer,  86   Mass.  165  (1863); 
McHenry  v.  Duffield,  7  Blackf.  (Ind.)  41 
(1843),  where  a  due-bill  was  signed  by 
a  committee;  Passmore  v.  Mott,  3  Binn. 
(Pa.)  201  (1809),  where  a  secretary  signed 
a  ticket;  Hovey  v.  Magill,  2  Conn.  680 
(1818);  McWhorter  v.  Lewis,  4  Ala,  198 
(1843);  Means,  v.  Swormstedt,   33   Ind. 
87  (1869);  Mann  v.  Chandler,  9  Mass.  335 
(1812);  Carpenter    v.   Farnsworth,   106 
Mass.  561  (1871).  An  officer  is  not  liable 
personally  on  a  note  payable  to  him  as 
"  Sec.  and  Treas.,"  and  indorsed  by  him 
likewise.     Falk  v.  Moebs.  127  U.  S.  597 
(1888).    A  promissory  note:  "We  prom- 
ise   to    pay,"    etc.,    signed    "Houston 
Flour-mills  Co.,  D.  P.  Shepherd,  Presi- 
dent," is  enforceable  against  the  com- 
.laany  only.     Latham  v.  Houston  Flour 
Mills,  68  Tex.  127  (1887);  Jefts  v.  York, 


58  Mass.  371  (1849);  S.  C,  64  Mass.  393 
(1853);  Okell  v.  Charles.  34  L.  T.  Rep. 
828  (1876).  It  may  be  a  question  of  fact' 
as  to  whether  a  treasurer,  in  buying, 
bought  stock  for  himself  or  the  com- 
pany. Haynes  v.  Huunewell,  43  Me. 
276  (1856).  See  also  Randall  v.  Van 
Vechten,  19  Johns.  60  (1821),  holding  a 
committee  not  liable  on  a  sealed  instru- 
ment; Stearns  v.  Allen,  25  Hun,  558 
(1881).  Cf.  De  Witt  v.  Walton.  9  N.  Y. 
571  (1853).  In  support  of  the  text  see 
also  Dubois  v.  Delaware,  etc.  Co.,  4 
Wend.  285  (1830);  Olcott  v.  Tioga,  etc. 
R.  R,  27  N.  Y.  546  (1863).  See  also  Lind- 
ley.  Companies  (5th  ed.),  p.  231,  etc.; 
Green's  Brice,  Ultra  Vires,  p.  754.  The 
denial  of  the  directors'  liability  on  a 
note  signed  by  them  as  directors  is 
raised  by  answer,  not  by  demurrer. 
McKensey  v.  Edwards,  88  Ky.  272 
(1889).  A  note  drawn  by  the  directors 
as  directors  of  the  company,  and  sealed 
with  the  seal  of  the  company,  is  not 
enforceable  against  the  directors  indi- 
vidually. Aggs  V.  Nicholson,  1  H.  &  N. 
165  (1856).  The  president  is  not  liable 
on  bonds  which  he  signed  as  president 
and  which  the  Corporation  had  power 
to  issue.  McMasters  v.  Reed,  1  Grant, 
Cas.  (Pa.)  36  (1854);  Wilson  v.  Fite,  46 
S.  W.  Rep.  1056.  (Tenn.  1897). 

1  Where  a  note  reads,  "We  promise 
to  pay."  etc.;  and  is  signed  "D.  M.  Co. 
J.  K.,  President,"  the  president  alone  is 
liable.  Mathews  v.  Dubuque  Mattress 
Co.,  87  Iowa,  246  (1893).  A  note  signed 
in  the  company's  name,  followed  by  the 
words  "B.  L.  Brownell,  Pres.,"  binds 
him  personally.  Heffner  v.  Brownell, 
70  Iowa,  591  (1887).  So  also  of  a  note 
signed  "C.  F.  Clark,  Trustee  Omega 
Lodge."  Coburn  v.  Omega  Lodge,  71 
Iowa,  581  (1S87).  The  trustees  of  an 
association  who  signed  a  note  as  trus- 
tees are  personally  liable  thereon.  Mc- 
Keniiey  v.  Bowie,  94  Me.  397  (1900).     A 


ISl- 


r24.] 


HOW    CORPOBATE    CONTRACTS    ARE   MADE. 


[CH.  XLIII. 


unless  the  plaintiff  had  notice  that  the  note  was  a  corporate  note. 
The  fact  that  the  plaintiff  had  brought  anothersuit  on  another  sim- 
ilar note  ao-ainst  the  corporation  after  the  note  in  this  case  had  been 


note  signed  by  individual  names,  fol- 
lowed by  the  words  "  Board  of  Business 
Managers,"  is  enforceable  against  them 
personally,  although  it  was  intended  as 
a  note  of  a  corporation.  Richmond,  etc. 
Works  V.  Moragne,  119  Ala,  80  (1898). 
A  note  signed  by  a  corporation  and 
several  stockholders  is  binding  on  all 
of  them,  even  though  the  words  "as 
stockholders"  follow  the  individual 
names.  Savings  Bank,  eta  v.  Central 
Co.,  123  CaL  28  (1898).  Where  an  unin- 
corpoi'ated  association  becomes  incor- 
porated, a  person  who  does  not  know  of 
that  fact  may  hold  the  trustees  person- 
ally liable  on  a  note  signed  by  them, 
although  the  word  "  trustees  "  precedes 
their  signature.  Vliet  v.  Simanton,  63 
N.  J.  L.  458  (1899).  Where  a  note  is 
signed  by  the  president  and  secretary 
in  their  individual  names,  except  that 
they  add  the  words  "President"  and 
"Secretary"  respectively,  there  being 
nothing  on  the  face  of  the  note  to  show 
that  it  is  a  company  note,  they  are 
liable  personally  on  the  note.  They 
will  not  be  allowed  to  show  that  it  was 
the  intention  of  all  parties  to  bind  the 
company  only,  or  that  the  money  went 
to  the  company  only,  or  that  the  com- 
pany authorized  the  note;  nor  can  they 
file  a  cross-bill  to  rekeve  themselves 
from  the  note.  San  Bernardino,  etc. 
Bank  x\  Andreson,  32  Pac.  Rep.  168 
(Cal.  1893).  In  the  case  of  Hackemack 
V.  Wiebrock,  172  111.  98  (1898),  the  court 
held  that  the  signers  were  individually 
liable  on  a  note  which  recited,  "We 
promise  to  pay,"  and  was  signed  "  Henry 
Hackemack,  Pres.,  Raythe  Nagel, 
Secy.,"  to  a  person  who  took  the  note 
supposing  that  they  were  personally 
liable.  A  note,  "We  promise  to  pay," 
etc.,  signed  "  E.  H.  Close,  Treas.,  John 
Clark,  Pres't,"  without  referring  to  the 
corporation,  may  be  enforced  against 
Close  and  Clark  personally,  although 


in  the  border  of  the  note  the  company's 
name  appears.     Merchants'  Nat.  Bank 
V.  Clark,  64  Hun,  175  (1892);  affirmed  in 
139   N.  Y.   314  (1893).     A  treasurer  is 
liable  personally  on  a  note  signed  per- 
sonally by  him,  although  the  signature 
is  followed  by  the  word  "Treasurer." 
Medberry  v.  Short,  15  N.  Y.  Week.  Dig. 
227  (1882);  Tippets  v.  Walker,  4  Mass, 
595    (1808).     A    note  in   the   form    "I 
promise  to  pay,"  and  signed  by  "  E., 
Pres.  &  Treas.  C.  Co.,"  has  been  held  to 
be  the  note  of  E.  and  not  of  the  corpo- 
ration.    Davis  V.  England,  141  Mass.  587 
(1886);  Stinchfield  v.  Little,  1  Me.  231 
(1821),  where  a  deed  was  to  the  agent; 
Bruce  v.  Lord,  1  Hilt.  247  (1850),  holding 
the  agent  prima  facie  liable  on  a  draft; 
Mare  v.  Charles,  5  El.  &  B.  978  (1856); 
Dayton  v.  Warne,  43  N.  J.  L.  659  (1881), 
involving  a  bond;    Sawyer  r,  Winne- 
gance  Mill  Co.,  26  Me.  122  (1846),  holding 
the  company  not  bound  by  an  agree- 
ment to  arbitrate ;  Seaver  v.  Coburn,  64 
Mass.    324    (1852),    involving    a    lease;. 
Drake  v.  Flewellen,  33  Ala.  106  (1858), 
holding   the    secretary    prima    facie 
liable;  Dutton  v.  Marsh,  L.  R.  6  Q.  B. 
361  (1871),  where  the  note  was,  "We,, 
the  directors  of  the  Isle  of  Man  Slate  & 
Flag  Co.,  Limited,  do  pi'omise  to  pay 
J.  D.  £1,600."    The  company's  seal  was 
affixed;  Tucker,  etc.  Co.  v.  Fairbanks, 
98  Mass.  101  (1807);  Barker  r.  Mechanics', 
etc.   Co.,   3   Wend.   94    (1829);    Taft  v. 
Brewster,  9  Johns.  334  (1812),  involving 
a  bond;  Brockway  v.  Allen,  17  Wend. 
40  (1837).     Where  a  draft  was  drawn  on 
an  individual  name,  followed   by  the 
vFords  "President  Rosendale  M'ng  Co., 
New  York,"  and  accepted  by  him  by 
the  same  signature,  he  is  liable  person- 
ally on  it.     Moss  V.  Livingston,  4  N.  Y. 
208  (1850);  Hills  v.  Bannister,  8  Cow.  31 
(1827).     Persons  signing  and  sealing  a 
bond  in  their  own  names  and  undeir 
their  own  seals  are  individually  bound. 


1818 


en.  XLiii.j 


HOW    COKPOKATE   CONTRACTS    ARE    MADE. 


[§  725. 


issued  does  not  prove  such  notice.^  A  hona  fide  purchaser  of  a 
promissory  note  which  does  not  disclose  any  corporate  obligation, 
and  is  signed  by  the  officers  with  their  title  attached,  may  enforce 
such  note  against  the  officers  as  individuals,  if  the  holder  has  no 
notice  of  the  fact  that  it  was  a  corporate  obligation.  The  fact  that 
the  name  of  the  corporation  is  on  the  margin  does  not  constitute 
notice.^  The  liability  of  officers  for  signing  the  company's  name 
to  notes  and  contracts  without  authority  is  considered  elsewhere.' 
§  725.  Requirements  hy  charter  or  hy-laws  that  contracts  shall  he 
made  hy  certain  officers  or  tvith  certain  formalities  —  Eight  of  party 
contracting  with  corpoy-ation  to  rely  on  proper  corpo7'ate  action 
having  been  talicn. —  It  has  been  held  that,  where  the  charter  pre- 
scribes that  corporate  contracts  shall  be  signed  by  certain  officers, 
a  contract  that  is  signed  by  only  a  part  of  them  is  not  enforceable, 
even  in  bona  fide  hands.^     But  the  harshness  and  the  inconvenience 


even  though  they  intended  to  bind  the 
corporation,  and  in  the  body  of  the  in- 
struments they  are  described  as  trus- 
tees. Cullen  V.  Nickerson,  10  Up.  Can. 
C.  P.  Rep.  549  (1861).  Prima  facie  a 
person  is  liable  personally  who  signs  a 
note  as  follows:  "J.  W.  Parrott,  Presi- 
dent of  Long  Branch  Hotel  and  Cottage 
Co."  Terhune  v.  Parrott,  59  N.  J.  L.  16 
(1896).  A  corporate  agent  who  signs 
the  corporate  name  to  a  note  without 
authority  is  liable  personally  thereon. 
Frankland  v.  Johnson,  147  111.  520  (1893). 
An  officer  making  a  corporation  note 
without  authority  is  personally  liable 
thereon.  Miller  v.  Reynolds,  93  Hun, 
400  (189o).  Where  a  note  reads,  "  We 
promise  to  pay,"  etc.,  and  is  signed 
'•William  T.  Wallis,  President,  Geo.  T. 
Smith,  Treasurer,"  they  are  liable  per- 
sonally to  a  bona  fide  holder.  First 
Nat.  Bank  v.  Stuetzer,  80  Hun,  435 
(1894).  See  also  Keokuk  Falls  Imp.  Co. 
V.  Kingsland,  etc.  Co.,  5  Okla.  33  (1896). 
The  president  executing  an  ordinary 
guaranty  in  the  name  of  the  corporation 
without  authority  is  personally  liable 
thereon.  Nelligan  v.  Campbell,  20  N.  Y. 
Supp.  234  (1893).  The  incorporators 
may  be  liable  on  a  note  indorsed  in  the 
name  of  the  corporation  prior  to  the 
certificate  of  incorporation  being  filed 
with  the  secretary  of  state  in  Missouri, 


but  the  allegations  must  be  clear  as  to 
the  exact  dates.  Ryland  v.  Hollinger, 
117  Fed.  Rep.  216  (1902).  A  note,  re- 
citing in  its  body  that  the  corporation 
and  the  undersigned  promise  to  pay,  is 
binding  on  the  latter  individually,  they 
actually  having  signed.  Nunneraacher 
V.  Poss,  93  N.  W.  Rep.  375  (Wis.  1902). 
Where  a  corporation  as  lessee  assigns 
the  lease  to  trustees,  the  corporation  is 
not  liable  for  negligence  in  connection 
with  the  property,  but  the  trustees  are 
the  parties  to  be  sued.  Falardeau  v. 
Boston,  etc.  Assoc,  65  N.  E.  Rep.  797 
(Mass.  1903).  On  this  subject  of  liability 
see  also  §§  245,  503c,  supra,  on  the  lia- 
bility of  trustees;  §  705,  siipra,  on  the 
liability  of  promoters;  §  508,  supra,  on 
the  liability  of  officers  of  unincorpo- 
rated associations;  and  j^  888,  infra,  on 
the  liability  of  committeemen. 

1  First  Nat,  Bank  v.  Wallis,  150  N.  Y. 
455  (1896). 

2  Casco  Nat.  Bank  v.  Clark,  139  N.  Y. 
307  (1893);  Merchants'  Nat,  Bank  v. 
Clark,  139  N.  Y.  314  (1893). 

3  See  ti§  682  and  715-720,  supra. 

*  Safford  u  Wyckoff,  4  Hill,  443  (1842); 
Head  v.  Providence  Ins.  Co.,  2  Cranch, 
127  (1804);  Badger  v.  American  Ins.  Co., 
103  IMass.  244  (1869);  Dawes  v.  North 
River  Ins.  Co.,  7  Cow.  462(1827);  Hill  r. 
Manchester,   etc.   Water-works    Co.,  2 


1819 


§  T^5.] 


HOW    CORPORATE    CONTRACTS    ARE   KADE.  [OH.  XLIII. 


0f  this  rule  have  caused  it  to  be  widely  departed  from  and  practi< 
cally  abandoned.^ 


Nev.  &  M.  573  (1833);  s.  C,  5  B.  &  Ad. 
866;  Corn  Exchange  Bank  v.  Cumber- 
land Coal  Co.,  1  Bosw.  436(1857).  Where 
the  charter  says  five  shall  constitute  a 
quorum  of  directors,  a  mortgage  exe- 
cuted under  the  authority  of  a  direct- 
ors' meeting  when  only  four  are  pres- 
ent is  void.     Holcomb  v.  Bridge  Co.,  9 
N.  J.  Eq.  457  (1853).     A  corporate  deed 
not  countersigned  by  the   secretary  as 
required  by  statute  is  void  as  against  a 
subsequent  levy  of  execution.     Gallo- 
way V.  Hamilton,   68  Wis.   651   (1887). 
Where  the  articles  prohibit  a  purchase 
on  credit,  a  vendor  who  knew  it  can- 
not recover.    Hotchin  v.  Kent,  8  Mich. 
526    (1860).    Where    the    charter    pre- 
scribes   who    may    be    the    corporate 
agents  for  particular  purposes,  the  pro- 
vision is  a  limitation  upon  the  power 
of  the  corporation,  and  it  cannot  ap- 
point other  agents  for  such  purposes. 
Washington' Turnpike  v.  Cullen,  8Serg. 
&  R.  (Pa.)  517, 531  (1822).     And  see  U.  S. 
Bank  v.  Dandridge,  12  Wheat.  64,  113 
(1827);  Royalton  v.  Royalton  Turn  p.  Co., 
14  Vt.   311   (1842);  Union  Turnpike  v. 
Jenkins,  1  Caines.  381,  391  (1803);  Beatty 
V.  Marine  Ins.  Co.,  2  Johns.  109  (1807); 
Commonwealth  v.  St.  Mary's  Church,  6 
Serg.   &   R.   (Pa.)    508  (1821);  Conro  v. 
Port  Henry  Iron  Co.,  13  Barb.  27  (1851); 
Re  General,  etc.  Co.,  38  L.  J.  (Ch.)  320 
(1809),    where    the     general    manager 
signed  instead  of  two  directors  and  the 
secretary.     Time  notes  are  void  where 
the  charter  forbids  all  except  demand 
notes.    Root  v.  Godard,  3  McLean,  103 
(1842);  s.  C  20  Fed.   Cae.   1159;  Root  v. 
Wallace,  4  McLean,  8  (1845);  s.  C,  20 
Fed.  Cas.   1167.     The  president  cannot 
discount  paper  where  the  charter  re- 
quires the  board  to  pass  on  it.    Man- 
derson  v.  Commercial  Bank,  28  Pa.  St. 
879  (1857).    See  also  British  Assur.  Co. 
V.  Brown,  12  C.  B.  723  (1852);  but  here, 
the  contract,  being  unilateral,  was  held 
not  to  be  within  the  statute;  Edwards  i\ 


Cameron's,  etc.  Co.,  11  Eng.  L.  &  Eq.  565 
(18.52)  —  an  acceptance  of  a  bill;  Hal- 
ford  V.  Cameron's,  etc.  Ry.,  16  Q.  B.  442 
(1851);  Andrews,  etc.  Co.  v.  Youngs- 
town,  etc.  Co.,  39  Fed.  Rep.  353  (1889). 

1  The  custom  of  the  corporation  may 
have  that  effect.  Barnes  v.  Ontario 
Bank,  19  N.  Y.  152  (1859);  Bulkley  v. 
Derby  Fishing  Co.,  3  Conn.  253  (1817); 
Kilgore  v.  Bulkley,  14  Conn.  362  (1841); 
Kenner  v.  Lexington,  etc.  Mfg.  Co.,  91 
N.  C.  421  (1884),  holding  also  that  the 
provision  must  be  pleaded;  Witte  v. 
Derby  Fishing  Co.,  2  Conn.  260  (1817). 
If  the  corporation  ratifies  or  receives 
the  benefits  of  the  contract,  the  con- 
tract is  valid.  Whitney  v.  Union  Trust 
Co.,  65  N.  Y.  576(1875);  Curtis  v.  Leavitt, 
15  N.  Y.  9  (1857);  Merchants'  Bank  v. 
Central  Bank,  1  Ga.  418  (1846).  Where 
the  statute  requires  corporate  con- 
tracts to  be  executed  in  a  certain  way, 
a  contract  not  so  executed  cannot  be 
enforced,  although  probably  a  quan- 
tum meruit  would  lie.  Curtis  v.  Pied- 
mont, etc.  Co.,  109  N.  C.  401  (1891).  A 
hona  fide  purchaser  of  bonds  is  pro- 
tected against  the  defense  that  they 
were  issued  illegally  and  in  violation 
of  statutory  provisions,  the  issue  itself 
having  been  authorized.  Webb  v. 
Heme  Bay,  L.  R  5  Q.  B.  643  (1870).  A 
substantial  compliance  with  a  statu- 
tory provision  that  bills  of  exchange 
must  be  accepted  by  the  corporation  in 
a  certain  way  is  sufficient.  Halford  v. 
Cameron's,  etc.  Ry.,  16  Q.  B.  443  (1851). 
In  regard  to  the  method  in  which  New 
York  religious  corporations  contract 
for  the  services  of  the  minister,  see  Lan- 
ders V.  Frank,  etc  Church,  97  N.  Y.  119 
(1884).  A  statute  requiring  that  no 
contract  shall  be  binding  upon  a  cor- 
poration unless  made  in  writing  is  held 
to  refer  wholly  to  contracts  executory. 
Foulker.  San  Diego,  etc.  Ry.,  51  Cal.  365 
(1870);  Renter  v.  Electric  Tel.  Co..  6  EL 
&  B.  341  (1850).     In  this  case  an  agree- 


1820 


CH.  XLIII.]  HOW    CORPORATE    CONTRACTS   ARE    MADE. 


[§  725. 


"Acts  clone  by  a  corporation,  which  presuppose  the  existence  of 
other  acts  to  make  them  legally  operative,  are  presumptive  proofs 


ment  of  the  chairman  was  held  to  have 
been  ratified  by  the  corporation,  though 
the  deed  of   settlement   required  the 
signatures  of  three  directors  to  con- 
tracts of  the  kind  in  controversy.     Bar- 
gate  V.  Shortridge,  5  H.  L.  Cas.  297  (1855). 
Although  the  statute  says  that  deeds  of 
a  corporation   shall  be   signed  by  the 
president,  yet  signature    by  the   vice- 
president  is  sufficient.     Ballard  v.  Car- 
michael,  83  Tex.  355  (1892).     Although 
the  statutes  require  contracts  of  corpo- 
rations involving    a  liability  of   over 
§100  to  be  in  writing,  and  under  the  cor- 
porate seal,  or  signed  by  a  corporate 
officer,  yet  a  person  performing  work 
for  the  company  may  sue  on  a  quantum 
meruit.  Eoberts  v.  Deraing,  etc.  Co.,  Ill 
N.  C.  432  (1892).     A  charter  provision  as 
to  certain   officers  signing  documents 
may  be  disregarded.     Re  Norwich,  etc. 
Co.,  22  Beav.  143  (1856),  where  three  di- 
rectors did  not  sign  as  required.     The 
provision  in  Pennsylvania  that  certain 
corporations  shall  not  make  certain  con- 
tracts except  in  writing  signed  by  two 
directors  does   not  apply  to  contracts 
made  out  of  the  state,  and  is  waived  if 
the  corporation  sues  on  the  contract; 
and  it  does  not  apply  to  a  contract  exe- 
cuted on  one  side.  Park,  etc.  Co.  v.  Kelly 
Axe  Mfg.  Co.,  49  Fed.  Rep.  618  (1892). 
Where  the  charter  provides  that  prop- 
erty shall  be  purchased  by  five  trustees, 
a  purchase-money  mortgage  executed 
by  the    president    and   secretary,  not 
sealed  with  the  corporate  seal  and  not 
authorized  by  the  corporation,  is  void. 
McElroy  v.  Nucleus  Assoc,  131  Pa.  St. 
393  (1890).     A  corporate  lease  not  mala 
prohibita  nor  mala  in  se,  but  informal 
in  that  all  the  statutory  formalities 
were  not  complied   with,  supports  an 
action  for  past-due  rent.     Mayor,  etc.  v. 
Wylie,  43  Hun,  547  (1887).     But  where 
a  statute  prohibited   transfers    of  se- 
curities over  $1,000  in  value    by  the 
cashier,  unless  the  directors  had  pre- 


viously authorized,  a  director  taking 
such  securities  without  there  being  a 
previous  authorization   takes  nothing 
by   the   transfer  and   cannot    recover 
back  wliat  he  paid  therefor,  the  corpo- 
ration being  in  a  receiver's  hands.  Gil- 
let   V.  Phillips,  13  N.  Y.  114  (1855).     C/. 
Atkinson  v.  Rochester,  etc.  Co.,  114  N.Y. 
168  (1889).     A  statute   providing  that 
the  president  and  two  other  members 
of  a  corporation  shall  sign  deeds  does 
not  exclude  the  common-law  method. 
Bason  v.  King's  Mountain  Min.  Co.,  90 
N.  C.  417  (1884).     A  statute  requiring 
corporate  contracts  for  over  $100  to  be 
in  writing  does  not  apply  to  executed 
contracts.     Clowe  v.  Imperial,  etc.  Co., 
114  N.  C.  304  (1894).     Where  the  charter 
prohibits  the  directors  making  a  con- 
tract for  over  $250,  unless  a  stockhold- 
ers"   meeting  authorizes  the  same,   a 
contract  for  $2,000  without  such  au- 
thorization  is  void.     Georgetown,  etc. 
Co.  V.  Central,  etc.  Co.,  34  S.  W.  Rep.  435 
(Ky.  1896).     A  provision  in  the  charter 
that  contracts  beyond  a  certain  amount 
must  be  executed  in  a  certain  way,  or 
else  ratified  by  the  board  of  directors,  is 
satisfied  if  all  of  the  directors  assent  to 
the  contract.    New  York,  etc.   Co.  v. 
Metropolitan   Inv.  Co.,  10  N.  Y.  App. 
Div.  342  (1896).     Although  a  corporate 
debt  is  not  incurred  with  the  formali- 
ties required  by  statute,  yet  acquies- 
cence therein   by  a  stockholder   bars 
any    complaint    by    him.     Manhattan 
Hardware  Co.  v.  Phalen,  128  Pa.  St.  IIC 
(1889).     A  statute  providing  that  con- 
tracts signed   by  the    president  shall 
bind  the  company   does    not  prevent 
the  company  being  bound  by  an  oral 
contract.    St.  Joseph,  etc.  Co.  v.  Globe, 
etc.  Co.,  59  N.  E.  Rep.  995  (Ind.  1901). 
Where  the  president  has  authority  to 
make  contracts,  a  secret  agreement  be- 
tween him  and  the  stockholders  that 
he  would  not  make  certain  contracts  is 
not  binding  on  a  stranger  dealing  with-. 


1821 


§  725.] 


HOW    CORl'OEATE    CONTRACTS    ARE    MADE.  [CH.  XLIII. 


of  the  latter,"  ^     A  mortgagee  is  not  bound  to  inquire  into  the  ob- 
servance of  the  rules  and  regulations  of  the  comj3any  relative  to  the 


the  corporation.  Heinze  v.  South,  etc. 
Co.,  109  Wis.  99  (1901).  A  deed  of  cor- 
porate land  made  by  the  president 
under  his  own  name  and  seal  is  good 
when  the  statute  said  "  the  deed  of  the 
president."  Warner  v.  Mower,  11  Vt. 
385  (1839).  But  see  Isham  v.  Benning 
ton,  19  Vt.  230  (1847),  where  the  deed 
was  signed  by  the  president  and  failed 
to  recite  a  resolution  authorizing  it, 
and  was  held  void.  A  statute  author- 
izing a  corporation  to  convey  real  es- 
tate by  an  agent  appointed  for  the  pur- 
pose does  not  exclude  other  means  of 
conveyance,  as  by  Its  officers.  Morris 
V.  Keil,  20  Minn.  531  (1874),  where  the 
deed  was  by  a  foreign  corporation.  And 
in  general  the  ordinary  contracts  of  the 
company  may  be  made  without  ob- 
serving this  statutory  provision  as  to 
what  officers  shall  contract.  Mechan- 
ics' Bank  v.  Bank  of  Columbia,  5 
Wheat.  326  (1820);  Prince  of  Wales 
Ass.  Co.  V.  Harding,  El.,  Bl.  &  E.  183 
(1857);  Rockwell  v.  Elkhorn  Bank,  13 
Wis.  653  (1861);  Merrick  v.  Burlington 
Plank-Road,  11  Iowa,  74  (1860);  Dana  v. 
Bank  of  St.  Paul,  4  Minn.  385  (1860); 
De  Groff  v.  American  Linen  T.  Co.,  21 
N.  Y.  124  (1860);  Ores  well  v.  Lanahan, 
101  U.  S.  347  (1879);  Kelley  v.  Mayor  of 
Brooklyn,  4  Hill,  263  (1843);  Moreland  v. 
State  Bank,  1  111.263  (1828);  South  Caro- 
lina Bank  v.  Hammond,  1  Rich.  L. 
(S.  C.)  281  (1845);  Boisgerard  v.  N.  Y. 
etc.  Co.,  2  Sandf.  Ch.  23  (1844).  See 
also  Merritt  v.  Lambert,  Hoflfm.  Ch. 
166  (1840),  where  title  to  land  was 
taken  in  the  presidents  name  instead 
of  the  company's.  Cf.  Farmers'  Loan, 
etc.  Co.  V.  Carroll,  5  Barb.  613  (1849). 
See  also  Fountaine  v.  Carmarthen  Ry., 
L.  R.  5  Eq.  316  (1868),  where  no  previous 
authorization  by  the  stockholders  was 
obtained;  Agar  v.  Athenaeum,  etc.  Soc, 
3  C.  B.  (N.  S.)  725  (1858),  where  a  seal 
was  required  but  was  omitted;  Lind- 
ley,  Companies,  p.  160. 


1  Demings  v.  Supreme  Lodge,  131 N.  Y. 
522  (1892).  See  also  Campbell  v.  Ar- 
genta,  etc.  Co.,  51  Fed.  Rep.  1  (1892).  A 
bona  fide  purchaser  of  a  negotiable  cor- 
poration bond  is  protected  in  assuming 
that  the  acts  of  the  corporation  and 
relating  to  its  management  in  the  issue 
of  the  bonds  have  been  complied  with. 
Hackensack  Water  Co.  v.  De  Kay,  36 
N.  J.  Eq.  548  (1883);  Connecticut,  etc. 
Ins.  Co.  V.  Cleveland,  etc.  R.  R.,  41 
Barb.  9  (1863),  where  the  defense  was 
set  up  that  the  stockholders  had  not 
voted  on  the  matter,  as  required  by 
statute.  The  court  held  tliat  the  reg- 
ular execution  of  the  corporate  powers 
was  conclusively  presumed  in  favor  of 
bona  fide  holders.  Purchasers  are  not 
affected  by  informalities  in  the  notice 
of  and  the  conducting  of  meetings. 
Fontaine  v.  Carmarthen  Ry.,  L.  R.  5  Eq. 
316  (1868).  It  has  been  held  that  a 
purchaser  of  corporate  securities  may 
safely  assume  that  all  charter  require- 
ments in  regard  to  votes  relative  to  the 
securities  have  been  complied  with. 
Royal  British  Bank  v.  Turquand,  6  EL 
&  B.  327  (1856);  Colonial  Bank  v.  Willan, 
L.  R.  5  P.  C.  417  (1874);  London,  etc. 
Ry.  V.  M'Michael,  5  Exch.  855  (1850), 
where  the  company  sued  for  subscrip- 
tions; Zabriskie  v.  Cleveland,  etc.  R.  R., 
23  How.  381  (1859),  where  the  stock- 
holders acquiesced.  See  also  Bank  of 
U.  S.  V.  Dandridge,  12  Wheat.  64  (1827). 
But  compare  the  cases  under  the  New 
York  statute  requiring  the  written  con- 
sent of  stockholders  before  a  mortgage 
can  be  made  by  certain  corporations. 
§  779,  infra.  See  also  §  808,  infra. 
Where  directors  have  power  to  bind 
the  company,  "  but  certain  prelimina- 
ries are  required  to  be  gone  through  on 
the  part  of  the  company  before  that 
power  can  be  duly  exercised,  then  the 
person  contracting  with  the  directors 
is  not  bound  to  see  that  all  these  pre- 
liminaries  have  been    observed."    Re 


1832 


CH.  XLIII.]      HOW  COEPOKATE  CONTRACTS  AKE  MADE. 


[§ 


725. 


call  of  meetings.^  "Where  the  seal  of  the  company  has  been  affixed 
to  a  mortgage  by  the  secretary,  the  mortgagee  need  not  inquire 
whether  a  quorum  of  the  directors  was  present  at  the  meeting  and 
authorized  the  mortgage,  nor  whether  the  secretary  was  duly  author- 
ized to  affix  the  seal,  the  court  upholding  the  mortgage,  although  a 
quorum  was  not  present  when  it  was  authorized.^ 

The  supreme  court  of  the  United  States  lays  down  the  rule  as 
follows:  "  One  who  takes  from  a  railroad  or  business  corporation 
in  good  faith,  and  without  actual  notice  of  any  inherent  defect,  a 
negotiable  obligation  issued  by  order  of  the  board  of  directors, 
signed  by  the  president  and  secretary  in  the  name  and  under  the 
seal  of  the  corporation,  and  disclosing  upon  its  face  no  want  of  au- 
thority, has  the  right  to  assume  its  validity,  if  the  corporation  could, 
by  any  action  of  its  officers  or  stockholders,  or  of  both,  have  author- 
ized the  execution  and  issue  of  the  obligation."* 

These  rules,  however,  do  not  apply  to  usurpations  of  authority  by 


Land  Credit  Co.,  L.  R.  4  Ch.  460  (1869), 
where  bills  of  exchange  had  been  is- 
sued and  the  directors  knew  it  and  ac- 
quiesced. Where  the  statute  requires 
the  consent  of  the  court  to  a  mortgage, 
the  mortgage  cannot  be  foreclosed  if 
such  consent  was  not  obtained.  Dudley 
i:  Congregation  of  St.  Francis,  N.  Y.  L.  J., 
Sept.  e,  1891;  S.  C,  138  N.  Y.  451  (1893). 
1  Ashley  Wire  Co.  v.  Illinois  Steel  Co., 
164  111.  149  (1896).  Where  a  mortgage 
is  approved  by  all  the  stock  except  two 
shares,  it  is  good  as  an  equitable  mort- 
gage, even  though  the  meeting  of  stock- 
holders authorizing  it  was  not  called 
by  advertisement  as  required  by  stat- 
ute. Central  Trust  Co.  v.  Bridges,  57 
Fed.  Rep.  753  (1893).  Even  though  the 
statutory  noticeof  a  stockholder's  meet- 
ing is  not  given,  a  mortgage  authorized 
by  the  board  of  directors  elected  at 
such  a  meeting  is  legal,  where  the  cor- 
poration receives  the  benefit  therefrom, 
without  any  stockholder  objecting.  At- 
lantic, eta  Co.  V.  The  Vigilancia,  73 
Fed.  Rep.  452  (1896).  Although  the  stat- 
ute requires  three  directors,  who  shall 
be  stockholders,  and  one  assigns  his 
stock,  and  the  other  two  authorize  and 
execute  a  corporate  mortgage  at  a  meet- 
ing held  without  notice  to  the  other, 
yet  the  mortgagee,  having  no  knowl- 


edge of  these  facts,  is  protected.  Kuser 
V.  Wright,  52  N.  J.  Eq.  825  (1895),  rev'g 
Wright  V.  First  Nat.  Bank,  52  N.  J.  Eq. 
392  (1S94). 

2  County,  etc.  Bank  v.  Rudry  Merthyr, 
etc.  Co.,  [1895]  1  Ch.  629.  A  mortgagee 
is  chargeable  with  knowledge  of  the 
fact  that  the  statute  required  three  di- 
rectors, and  that  the  company  only  had 
two  directors  when  the  mortgage  was 
authorized.  Wright  v.  First  Nat.  Bank, 
52  N.  J.  Eq.  392  (1894).  It  is  no  defense 
to  a  mortgage  that  the  directors  au- 
thorizing It  were  irregularly  elected, 
the  stockholders  having  acquiesced. 
Savage  v.  Miller,  36  Atl.  Rep.  578  (N.  J. 
1897).  A  mortgagee  need  not  inquire 
whether  a  resolution  of  the  directors 
authorizing  a  mortgage,  and  recited 
therein,  has  been  actually  passed  by 
them.  Manhattan  Hardware  Co.  v, 
Roland,  128  Pa,  St.  119  (1889).  Where 
a  mortgage  on  its  face  has  been  reg- 
ularly executed  it  is  not  necessary 
in  a  foreclosure  suit  to  prove  a  resolu- 
tion of  the  board  of  directors  authoriz- 
ing it,  proof  of  delivery  and  the  pay- 
ment of  consideration  to  the  corpora- 
tion having  been  given.  Reed  v.  Helois, 
etc.  Co..  53  Atl.  Rep.  1057  (N.  J.  1903). 
See  also  §  768,  infra,  and  jj  712,  supra. 

3  Louisville, etc.  Ry.  v.  Louisville  Trust 


1823 


§  T25.] 


HOW    CORPOKATE    CONTRACTS    ARE    MADE.  [CH.  XLIII, 


corporate  officers.  As  already  explained,  the  authority  of  the  presi- 
dent, secretary  and  treasurer  and  other  officers  to  make  contracts 
for  the  corporation  is  exceedingly  limited.'  They  must  have  special 
authority  from  the  board  of  directors.  Hence  the  mere  fact  that 
they  have  signed  the  corporate  name  to  a  contract  and  affixed  the 
corporate  seal  does  not  make  the  instrument  binding  on  the  cor- 
poration. It  raises  a  presumption,^  but  this  presumption  may  be 
overthrown.  Consequently  it  is  difficult  to  lay  down  definite  rules 
as  to  when  a  corporation  is  and  when  it  is  not  bound  by  a  contract 
which  apparently  has  been  regularly  executed  by  the  corporation 
through  its  proper  officers.  The  tendency  is  to  hold  the  corporation 
liable,  inasmuch  as  it  selects  its  own  officers  and  should  be  to  a  cer- 
tain extent  responsible  for  their  acts  in  signing  the  corporate  name 
and  attaching  the  corporate  seal  to  contracts.  Where  the  charter 
provides  that  certain  contracts  may  be  made  only  after  an  act  has 
been  performed  by  the  company,  a  third  person  may  rely  on  the  com- 
pany's representation  that  the  act  has  been  done.'    A  by-law  requir- 


Co.,  174  U.  S.  552,  573  (1899),  the  court 
saying  also  that  the  records  of  the  cor- 
poration and  its  board  of  directors  are 
private  records  which  a  person  dealing 
with  the  corporation  is  not  bound  to 
inspect  as  he  would  be  bound  in  case 
of  a  public  record. 

A  bona  fide  purchaser  of  corporate 
bonds  is  entitled  "to  presume  that  all 
necessary  preliminaries  not  required  to 
be  a  matter  of  public  record  have  been 
properly  performed,"  and  hence  is  it  no 
defense  that  the  directors  met  out  of 
the  state  when  they  authorized  the 
mortgage  securing  the  issue.  Schultze 
r.  Van  Doren,  53  Atl.  Rep.  815  (N.  J.  1902). 
Where  the  board  of  directors  have 
power  to  borrow  money  and  issue  deben- 
tures, and  a  debenture  is  issued  in  due 
form  on  its  face,  a  bona  fide  holder 
thereof  is  protected,  although  the  com- 
pany had  not  been  fully  organized  and 
no  directors  had  been  appointed  and  no 
resolutions  passed  by  them.  Duck  v. 
Tower,  etc.  Co.,  [1901]  2KB.  314  Where 
a  person  loans  money  to  a  corporation 
and  pays  it  over  to  the  secretary  and 
takes  the  note  of  the  company.executed 
by  the  president  and  secretary,  th%  note 
is  good,   even   though    they  took   the 


money  and  used  it  to  pay  for  stock  in 
another  corporation.  Allen  v.  West 
Point,  etc.  Co.,  31  S.  Rep.  462  (Ala.  1902). 
Where  the  secretary  and  treasurer  and 
a  director  have  been  allowed  to  transact 
the  business  of  the  company  and  they 
borrow  money  for  the  company  and 
give  the  company's  bond  and  mortgage 
therefor,  and  produce  a  certified  copy 
of  a  resolution  passed  by  the  board  of 
directors,  the  lender  may  rely  on  such 
certified  copy,  even  though  it  after- 
wards turns  out  to  have  been  unau- 
thorized. Hutchison  v.  Rock  Hill,  etc. 
Co.,  43  S.  E.  Rep.  295  (S.  C.  1902). 

1  See  §§712-720,  supra. 

2  See  §  722,  supra. 

s  Hackensack  W^ater  Ca  v.  De  Kay,  36 
N.  J.  Eq.  548  (1883),  where  bonds  were 
to  be  issued  only  after  a  certain  amount 
of  the  capital  stock  had  been  paid  in; 
Royal  British  Bank  v.  Turquand,  5  El. 
&  B.  248  (1855),  where  a  resolution  was 
to  precede  all  contracts.  See  also  Ex 
parte  American,  etc.  Co.,  3  De  G.,  J.  & 
S.  147  (1865),  and  Prince  of  Wales  Ass. 
Co.  V.  Harding,  El,  Bl.  &  E.  183  (1857). 
See  also  Akin  v.  Blanchard,  32  Barb.  527 
(1860);  Kingsley  v.  New  England,  etc. 
Ins.  Co.,  62  Mass.  393  (1851);  Union,  etc. 


1824 


CH.  XLIII.]  HOW    COKPOKATE    COKTBACTS    ARE    MADE. 


[{ 


i'ZO. 


ing  that  contracts  be  made  only  by  certain  officers,  or  that  certain 
formalities  shall  be  observed,  is  of  little  avail  as  against  outside 
parties.  Persons  contracting  with  the  corporation  are  not  bound 
to  know  of  the  by-law,  and  the  courts  are  reluctant  to  invalidate  a 
contract  by  reason  of  it.' 


Ins.  Co.  V.  White.  106  111.  67  (1883);  Ir- 
vine V.  Union  Bank  of  Australia,  L.  R. 
3  App.  Cas.  366  (1877). 

1  Fay  V.  Noble,  66  Mass.  1  (1853);  Ten 
Broeck  v.  Winn,  etc.  Co.,  20  Mo.  App.  19 
(1885);  Walker y.  Wilmington,  etc.  R.  R., 
26  S.  C.  80  (1887):  Bank  v.  Cresson,  12 
Serg.  &  R.  (Pa.)  306  (1825);  Manville  v. 
Belden,  etc.  Co.,  17  Fed.  Rep.  425  (1883); 
Morrill  v.  Segar,  etc.  Co.,  32  Hun,  543 
(1884);  Samuel  v.  Holladay,  1  Woolw. 
400  (1869);  S,  C,  21  Fed.  Cas.  306;  Mechan- 
ics' Bank  v.  Smith,  19  Johns.  115  (1821), 
A  person  contracting  with  a  corpora- 
tion is  not  bound  to  know  that  a  by-law 
requires  that  corporate  contracts  of  a 
certain  kind  shall  be  approved  by  the 
board  of  directors.     Barnes   v.   Black 
Diamond  Coal  Co..  101  Tenn.  354  (1898). 
A  person  contracting  with  a  corpora- 
tion is  not  bound  to  take  notice  of  a 
by-law  requiring  the   approval  of  the 
president.  Allison  v.  Tennessee,  etc.  Co., 
46  S.  W.  Rep.  348  (Tenn.  1897).     A  cor- 
poration which  indorses  a  note  and  ob- 
tains the  money  thereon  cannot  defend 
against  the  indor-^iement  on  the  ground 
that  it  was  not  made  strictly  in  accord- 
ance with  its  by-laws.    First  Nat.  Bank, 
etc.  V.  Eureka,  etc.  Co.,  123   N.  C.    24 
(1898).     A  by-law  requiring  certain  cor- 
porate instruments  to  be  approved  by 
the  stockholders  before  being  executed 
does  not  apply  to  an   assignment  for 
the  benefit  of  creditors.    Goetz  v.  Knie, 
103  Wis.  366  (1899).     Even  though  the 
by-laws  require  the  president  and  treas- 
urer to  sign  notes,  yet  if  the  president 
and  secretary  have  been  accustomed  to 
sign  such  notes,  the  notes  so  signed  are 
valid  and  may  be  enforced.     Produce, 
etc.    Co.   V.   Bieberbach,  176  Mass.  577 
(1900).     A   person   contracting   with  a 
corporation  is  not  bound  to  know  that 


a  by-law  requires  that  corporate  con- 
tracts of  a  certain   kind    shall  be  ap- 
proved   by    the    board     of    directors. 
Barnes  v.  Black  Diamond  Coal  Co.,  101 
Tenn.   354  (1898).     A  person   who  re- 
ceives in  good  faith  a  note  of  the  cor- 
poration is  not  bound  to  know  that  a 
by-law  required  the  approval  of  two 
members  of  the  executive  committee 
to  such   note.     Lyndon   Sav.    Bank  v. 
International  Co.,  54  Atl.  Rep.  191  (Vt. 
1903).     A  by-law  limiting  the  author- 
ity of  an  officer  is  not  notice    to   a 
purchaser  from  such  officer.   Domestic, 
etc.    Assoc.  V.   Guadiano,  195   111.   223 
(1902).     A  company  is  bound   by  the 
customary    contracts    of    its    general 
freight  agent,  though  he  does  not  ob- 
tain the  approval  of  the  president  as 
required  by  the  by-laws.     Medbury  v. 
New  York,  etc.  R  R,  26  Barb.  564  (1858). 
Contra,  Susquehanna  Ins.  Co.  v.  Perrin, 
7  Watts  &  S.  (Pa.)  348  (1844).    A  by-law 
that  contracts  for  over  a  year  can  be 
made  by  the  directors  only  does  not 
bind  a  person  who,  without  knowledge 
thereof,  makes  a  longer  contract  with 
the  general  manager.     Moyer  v.  East 
Shore  Term.  Co.,  41  S.  C.  300  (1894).  The 
treasurer  cannot  make  a  corporate  note 
good  by  his  sole  signature  where  the 
by-laws   require  the  signature  of  the 
president    alsa      Re    Mill  ward  -  Cliff 
Cracker  Co.,  161  Pa.  St.  157  (1894).     A 
by-law  requiring  contracts  to  be  signed 
by  a  certain  officer  does  not  invalidate 
a  contract  signed  by  another  officer  if 
the  party  contracting  had  no  knowl- 
edge of  the  by-law.     Smith  v.  Martin, 
etc.  Co.,  19  N.  Y.  Supp.  285  (1892).     If 
the  company  receives  the  money  on  a 
note  with  knowledge,  it  cannot  set  up 
that  the  note  was  not  signed  by  the 
treasurer  as  required  by  the  by-laws. 


(115) 


1825 


§  T25.] 


HOW    CORPOKATE    CONTBACTS    ARE    MADE.  [CH.  XLIII. 


A  limitation  by  by-law  that  no  corporate  liability  shall  be  in- 
curred unless  expressly  authorized  by  the  directors  does  not  inval- 
idate corporate  contracts  made  by  agents  acting  "  within  the  ap- 
parent scope  of  the  agency."^ 

A  by-law  requiring  the  signature  of  the  secretary  to  notes  issued 
by  the  corporation  does  not  bind  a  person  taking  a  note  without 
actual  knowledge  of  the  by-law,  especially  where  it  has  been  long 


Grant  v.  Treadwell  Co.,  1  N.  Y.  App. 
Div.  367  (1896).  The  failure  of  the  treas- 
urer to  sign  a  note  as  required  by  the 
by-laws  does  not  avoid  the  note  in  bona 
fide  hands.  National  Spraker  Bank  v. 
Treadwell  Co.,  80  Hun,  363  (1894).  The 
general  manager  may  sell  a  part  of  the 
product,  even  though  a  by-law  requires 
the  consent  of  the  president.  Cone  v. 
Empire  Plaid  Mills,  13  N.  Y.  App.  Div. 
314  (1896).  Although  the  by-laws  require 
the  secretary  to  sign  notes,  yet,  if  the 
treasurer  is  accustomed  to  sign  them, 
notes  signed  by  him  are  good,  Milbank 
V.  Be  Riesthal,  82  Hun,  537  (1894).  So 
also  as  to  notes  signed  by  the  president 
only  when  the  by-laws  require  the 
treasurer  to  sign  also.  Grant  i\  Tread- 
well Co.,  83  Hun,  591  (1894).  A  person 
contracting  with  a  corporation  is  not 
bound  to  know  that  a  by-law  prohibits 
the  officers  from  borrowing  money  ex- 
cept by  order  of  the  board  of  directors. 
Arapahoe,  etc.  Co.u.  Stevens,  13  Colo. 534 
(1889).  A  by-law  that  all  notes  shall  be 
made  to  the  order  of  the  company  may 
be  disregarded.  Stewart  v.  St.  Louis, 
etc.  R.  R.,  41  Fed.  Rep.  736  (1887).  Secret 
instructions  limiting  the  apparent 
power  of  a  general  manager  to  contract 
do  not  affect  strangers.  Benesch  v- 
John  Hancock,  etc.  Co.,  11  N.  Y.  Supp. 
348  (1890).  Officers  intrusted  with  the 
management  of  the  corporate  business 
are  general  agents,  and  private  restric- 
tions imposed  by  the  corporation  are 
immaterial  against  third  persons  acting 
on  the  faith  of  the  agency.  Grafius  v. 
Land  Co.,  3  Phila.  447  (1859).  Where 
the  by-laws  provided  that  no  contract 
of  the  corporation  involving  a  liability 
of  over  $500  shall  be  voted  unless  signed 


by  the  president  and  treasurer  and 
sealed  with  the  corporate  seal,  a  lease 
to  the  corporation  on  a  rental  of  over 
$500,  and  signed  by  the  president  alone, 
was  held  to  be  void.  In  this  case  it 
seems  that  no  proof  of  even  an  apparent 
authority  of  the  president  was  given. 
Bohm  V.  Loewer's,  etc.  Co.,  9  N.  Y.  Supp. 
514  (1890);  Johnston  v.  Milwaukee,  etc. 
Co.,  46  Neb.  480  (1895).  A  by-law  limit- 
ing the  debts  of  the  company  is  waived 
where  such  excess  of  debt  is  reported  to 
the  stockholders  and  acquiesced  in  by 
them.  The  by-law  does  not  bind 
strangers  who  do  not  know  of  it.  Un- 
derbill V.  Santa  Barbara,  etc.  Co.,  93  CaL 
300  (1892).  The  question  of  the  regular- 
ity of  the  action  of  corporate  agents  and 
officers  in  making  contracts,  and  more 
especially  of  waiving  provisions  in  con- 
tracts in  violation  of  the  rules,  has  fre- 
quently arisen  in  insurance  policies 
where  provisions  have  been  waived 
orally  or  without  the  consent  of  speci- 
fied officers.  Carrugi  v.  Atlantic,  etc. 
Co.,  40  Ga.  135  (1869).  An  insurance 
policy  is  good  although  not  sealed  and 
without  a  clause  exempting  the  stock- 
holder from  liability  as  required  by  the 
by-laws.  Re  Athenaeum,  etc.  Soc,  4 
K  &  J.  549  (1858).  The  same  question 
has  also  arisen  in  regard  to  the  con- 
tracts of  municipal  corporations. 

iRathbun  v.  Snow,  123  N.  Y.  343 
(1890).  A  by-law  prohibiting  any  officer 
from  creating  any  liability,  except  by 
direct  authority  of  the  board  of  direct- 
ors, is  not  binding  on  a  person  who 
deals  with  the  officers  without  notice 
of  such  by-law.  Lake  Street,  etc.  R. 
R.  V.  Carmichael,  184  IlL  348  (1900). 


1826 


CH.  XLIII.]  HOW    CORPORATE    CONTRACTS    ARE   MADE.  [§  726. 

in  disuse.^  A  party  contracting  with  a  corporation  is  not  bound 
to  know  of  restrictions  in  the  by-laws  as  to  the  method  of  author- 
izino-  and  executino:  contracts,  nor  is  he  bound  to  take  notice  that  a 
quorum  of  the  directors  was  not  present  when  the  act  was  author- 
ized.- 

A  constitutional  and  statutory  provision  that  debts  shall  be 
incurred  only  upon  a  vote  of  the  stockholders  does  not  apply  to 
ordinary  business  debts.* 

The  subject  of  statutory  or  by-law  requirements  that  the  stock- 
holders shall  assent  to  the  issue  of  obligations  is  considered  else- 
where.* 

C.    ADMISSIONS   OF   AND   NOTICE   TO   THE   VARIOUS    OFFICERS    AND    AGENTS  ' 

OF   A    CORPORATION. 

§  726.  Admissions  and  declarations  of  a  director,  president, 
cashier,  general  manager,  treasurer,  agent,  or  stockholder  as  regards 
the  corporation. —  This  subject  is  closely  identified  with  the  ques- 
tions discussed  in  preceding  sections.  If  a  particular  officer  or 
agent  has  power  to  represent  or  contract  for  a  corporation,  he  may 
in  most  cases  bind  the  company  by  his  admissions  or  declarations  in 
regard  thereto.     But  his  power  to  do  so  must  be  shown. 

The  law  is  clear  that  the  admissions  of  a  stockholder  do  not 
bind  the  corporation.^    The  board  of  directors  acting  as  a  board 

1  Martin  v.  Niagara,  etc.  Co.,  122  N.  Y.  beyond  the  scope  of  the  powers  granted 

163  (1890).  to  it  by  law,  on  the  one  side,  and  an 

2County,  etc.  Bank u  RudryMerthyr.  irregularity     in    the    exercise    of  the 

etc.  Co.,  [1895]  1  Ch.  629.     See  also  §  808,  granted  powers,  on  the  other,  is  well 

infra.  established,   and  has  been   constantly 

3  Manhattan  Hardware  Co.  v.  Phalen,  recognized  by  this  court." 

128  Pa.  St.  110  (1889).  sPolleys  v.  Ocean  Ins.  Co.,  14  Me.  141 

*See  §  808,   infra.     Even  though  a  (1837);   Mitchell  v.  Rome  R,  R,,  17  Ga. 

statute  authorizing  one  railroad    cor-  574,   586  (1855);    Fairfield,   etc.   Co.   v. 

poratioh    to  guarantee   the   bonds   of  Thorp,  13  Conn.  173  (1839);  Ee  Kip,  1 

another    corporation     provides      that  Paige,  601  (1829);  Soper  v.  Buffalo,  etc. 

such    guaranty    shall    be    made    only  R  R..  19  Barb.  310(1855);  Hartford  Bank 

upon    a    petition    of    a    majority     in  r.  Hart,  3  Day  (Conn.),  491,  495  (1807); 

interest  of  the  stockholders  of  the  for-  Morrell  v.  Dixfield,  30  Ma  157  (1849); 

men  yet   if  the  guaranty   is  actually  City   Bank  v.  Bateman,  7   Har.   &  J. 

executed  by  order  of  the  board  of  di-  (Md.)  104  (1826);  Magill  v.  Kaufifman,  4 

rectors   without  any   such  petition,  a  Serg.  &R,  (Pa.)  317,  321  (1818);  Stewart 

bona  fide  purchaser  of  the  bonds  may  v.  Huntington  Bank,  11  Serg.  &  R  (Pa.) 

enforce    such    guaranty,    but  a    pur-  267,   269   (1824);   Hosack  v.   College  of 

chaser  with  notice  cannot  enforce  such  Physicians,   5  Wend.  547  (1830);  N.  Y. 

guaranty.     Louisville,  etc.  Ry.  v.  Louis-  Code  Civ.  Pro.,  g  839;  Angell  &  A.  Corp., 

ville  Trust  Co.,  174  U.  S.  552  (1899),  the  §S  309,  657-660;  1   PhilL  Ev.  487,  note 

court  saying:  "The  distinction  between  134,  saying,  "  the  admissions  of  corpo- 

the  doing  by  the  corporation  of  an  act  rators    or    quasi-corporators    in     the 

1827 


§  T23.J 


HOW    COEPORATE    CONTRACTS    ARE    MADE.  [CH.  XLIII. 


may  bind  the  company  by  admissions  and  declarations,  but  a  single 
director  cannot  do  so  except  as  a  special  agent  of  the  company.^ 
Neither  do  the  admissions  or  declarations  of  the  president  bind  the 
company  unless  he  has  extra  powers  given  to  him ;  ^  nor  ordinarily 


United  States  are  received  or  rejected 
upon  much  the  same  principle  as  gov- 
erns in  respect  to  admissions  of  agents." 
The  frequently  cited  case  of  Hartford 
Banii  V.  Hart,  3  Day  (Conn.),  491,  405 
(1807),  where  it  was  offered  to  prove 
that  the  president  and  directors  of  a 
bank  knew  when  they  discounted  a 
note  that  the  indorsement  was  forged, 
and  to  prove  this  by  the  confessions  of 
said  president  and  directors,  held,  that 
the  evidence  was  inadmissible. 

1  Magill  V.  Kauflfman,  4  Serg.  &  R. 
(Pa.)  317  (1818),  holding  that  while  acts 
and  declarations  of  trustees  and  agents 
of  the  congregation,  in  their  official  ca- 
pacities, are  evidence  against  those 
whom  they  represent,  yet  their  state- 
ments made  not  in  the  transaction  of 
the  business  of  their  principal  are  not 
evidence.  "  A  fact  once  admitted  by  a 
corporation  through  its  officer,  duly  and 
properly  acting  within  the  scope  of  his 
authority,  is  evidence  against  it,  and 
cannot  be  withdrawn  to  the  prejudice 
of  any  one  who,  in  reliance  upon  it,  has 
changed  his  situation  in  respect  to  the 
matter  affected  thereby.  In  such  a  case 
the  doctrine  of  estoppel  applies  to  a  cor- 
poration as  well  as  to  an  individual." 
O'Leary  v.  Board  of  Education,  93  N.  Y. 
1  (1883).  Admissions  of  a  director  who 
is  also  a  member  of  the  discount  board 
of  a  bank  do  not  bind  the  corporation 
unless  he  was  a  duly  authorized  agent. 
East  River  Bank  v.  Hoyt,  41  Barb.  441 
(1864).  A  declaration  of  a  director  that 
a  certain  person  is  a  corporate  agent 
does  not  bind  the  company.  Florida, 
etc.  R.  R.  V.  Varnedoe,  81  Ga.  175  (1888); 
Stewart  r.  Huntington  Bank,  11  Serg.  & 
R  (Pa.)  267  (1824),  where  certain  decla- 
rations of  bank  officers  as  to  the  dispo- 
sition to  be  made  of  certain  collaterals 
were  held  not  evidence  against  the 
bank.     Reports  to  stockholders  and  di- 


rectors do  not  bind  the  company  by  rea- 
son of  that  fact.  Hall  v.  Mobile,  etc. 
R.  R.,  58  Ala.  10  (1877).  The  company  is 
not  bound  by  a  director's  declaration 
tiiat  an  attorney  would  be  paid.  Hillyer 
V.  Overman,  etc.  Co.,  6  Nev.  51  (1870). 
Nor  as  to  the  purpose  of  a  fund.  Gray- 
ville.etc.  R.  R.  v.  Burnes,  93  111.  302  (1879). 
See  also,  in  general.  Peek  v.  Detroit,  etc. 
Works,  29  Mich.  313  (1874);  and  g  712, 
supra. 

2  The  admissions  of  the  president  of 
the  construction  company  which  is  op- 
erating the  road  are  not  admissible 
against  the  railroad  company  which  is 
sued  for  an  accident.  Chattanooga,  etc. 
R.  R.  V.  Liddell,  85  Ga.  482  (1890).  His 
admissions  cannot  create  a  liability. 
Spyker  v.  Spence,  8  Ala.  333  (1845); 
Henry,  etc.  Co.  v.  Northern  Bank,  63 
Ala.  527  (1879).  Admissions  of  the  presi- 
dent of  a  bank  that  it  did  not  own  a 
note  which  was  assigned  to  it  are  not 
admissible.  Tuthill,  etc.  Co.  v.  Shaver, 
etc.  Co.,  35  Fed.  Rep.  644  (1888).  See 
also  City  Bank  v.  Bateman,  7  Har.  &  J. 
(Md.)  104  (1826),  where  a  declaration  by 
the  president  of  a  bank  to  an  inferior 
officer,  that  certain  money  which  had 
been  brought  into  the  bank  by  one  of 
the  directors  was  the  money  of  the 
plaintiff,  was  held  not  admissible.  But 
his  admissions  may  prove  its  actual  in- 
debtedness. Hoag  V.  Lament,  60  N.  Y. 
96  (1875).  And  as  an  active  agent  his 
admissions  may  bind  the  company. 
Northrup  v.  Mississippi  Val.  Ins.  Co.,  47 
Mo.  435  (1871);  Spalding  v.  Susquehanna 
County  Bank,  9  Pa.  St.  28  (1848).  So 
also,  where  the  company  itself  first  uses 
his  admissions  as  evidence.  Western 
Union  Tel.  Co.  v.  Baltimore,  etc.  Tel.  Co., 
26  Fed.  Rep.  55  (1885),  the  court  saying: 
"  A  corporation  can  only  speak  through 
its  officers  and  agents;  and  their  decla- 
rations made  in  the  course  of  their  em- 


1828 


CH.  XLIII.]  HOW    CORPORATE    COIsTIlACTS    ARE    MADE. 


[§  T26. 


those  of  the  secretary  and  treasurer;  ^  nor  those  of  a  cashier,  except 
as  to  matters  in  the  ordinary  course  of  his  duties.^ 

The  power  of  a  superintendent  to  bind  the  company  by  his  ad- 
missions and  declarations  depends  on  whether  they  pertain  to  his 
work  and  duties.'  The  president  and  managing  agent  of  a  cor- 
poration have  authority  to  make  admissions  in  regard  to  the  ful- 


ployment,  and  relating  to  the  imme- 
diate transaction  in  which  they  are  en- 
gaged, are  always  competent  against 
the  corporation."  The  president's  ad- 
missions of  what  is  due  a  laborer  are 
not  good  in  enforcing  a  stockholder's 
statutory  liability,  unless  he  was  acting 
as  agent  of  the  company.  Truesdell  v. 
Churaar,  75  Hun,  416  (1894).  The  state- 
ment of  the  president  as  to  an  accident, 
he  not  being  present,  is  not  admissible. 
Lombard,  etc.  Ry.  v.  Christian,  124  Pa. 
St.  114  (1889);  Ricketts  v.  Birmingham 
St.  Ry.,  85  Ala.  600  (1889).  Under  the 
Alabama  statute,  evidence  of  a  person 
interested  in  the  suit  as  to  a  conversa- 
tion between  him  and  the  deceased 
president  of  a  corporation  is  inadmis- 
sible. Tabler  v.  Sheffield,  etc.  Co.,  87 
Ala.  305  (1889).     See  also  §  716,  supra. 

i  Alexander   v.    Cauldwell,   83   N.  Y. 
480  (1881);  Tripp  v.  New,  etc,  Co.,  137 
Mass.  499   (1884),   where  the   treasurer 
said   that  a  condition  had  been   per- 
formed; Kalamazoo,  etc.  Co.  v.  McAlis- 
ter,  36  Mich.  337  (1877),  where  he  stated 
a  matter  relative  to  a  salary.     Admis- 
sions or  declarations  of  a  secretary  as 
to  the  amount  due  the  corporation    on 
a  mortgage  are  not  admissible  unless 
it    IS    shown    that    he    was    specially 
authorized  to  make  them.    Johnston  v. 
Elizabeth,   etc.  Assoc,   104  Pa.  St.  394 
(1883).     A  statement  by  the  treasurer 
in  reference  to  a  bond  which  he  had 
nothing  to  do   with,   such  statement 
not  being  made  in  connection  with  the 
business  of  the  company,  is  not  admis- 
sible as  an  admission.     Hardwick,  etc. 
Co.   V.   Drenan,   72  Vt.   438   (1900).     A 
declaration   by  the  treasurer  not  made 
in    connection   with   his  duties  is  not 
admissible.     Stanton  v.  Baird,  etc.  Co., 
32  S.    Rep.  299  (Ala.    1902).     The  sec- 


retary and  assistant  treasurer  of  a  cor- 
poration has  no  authority  to  bind  the 
corporation  by  an  account  rendered  by 
him  to  a  creditor  of  the  corporation. 
Harvey  v.  West  Side,  etc.  Co.,  13  Hun, 
392  (1878).  The  assignee  of  a  contractor's 
claim  against  a  company  cannot  en- 
force it  on  the  ground  that  at  the  time 
of  assignment  the  secretary  of  the 
company  represented  that  it  would  be 
paid.  Barnett  v.  South  London,  etc 
Ry.,  L.  R.  18  Q.  B.  D.  815  (1887).  In  a 
suit  of  ejectment  against  a  corporation, 
evidence  that  a  corporate  officer  had 
tried  to  buy  the  land  of  plaintiff  is  not 
admissible  as  an  admission  by  the  cor- 
poration. Mobile,  etc  R.  R,  v.  Cogsbill, 
85  Ala,  456  (1888).     See  also  §  717,  supra. 

2  He  cannot  admit  that  the  signature 
of  the  person  to  whom  a  certificate  of 
deposit  is  issued  is  genuine.  Merchants' 
Bank  v.  Marine  Bank,  3  Gill  (Md.),  96 
(1845);  nor  that  a  new  company  is  liable 
for  the  debts  of  an  old  one,  Wyman 
V.  Hallowell,  etc  Bank,  14  Mass.  58 
(1817):  nor  make  representations  as  to 
an  indorser's  responsibility,  Mapes  v. 
Second  Nat.  Bank,  80  Pa.  St.  163  (1875). 
But  he  may  admit  to  a  surety  that  a 
note  has  been  paid.  Cochecho  Nat 
Bank  v.  Haskell,  51  N.  H.  116  (1871). 

3  The  admissions  of  a  superintendent 
that  a  reward  offered  by  his  company 
is  to  go  to  a  certain  person  is  not  bind- 
ing. Blain  v.  Pacific  Exp.  Co.,  69  Tex. 
74(1887);  nor  his  representations  as  to 
tlie  cost  of  mining.  Hanover,  etc  Ca 
V.  Ashland,  etc  Co.,  84  Pa.  St.  279  (1877). 
But  he  may  admit  the  amount  of 
damages  caused  by  a  nuisanca  Mc- 
Ginness  v,  Adriatic  Mills,  116  Mass.  177 
(1874).  He  may  make  admissions  as  to 
an  assault  made  by  an  employee.  Male- 
cek  V.  Tower,  etc  Ry.,  57  Mo,  17  (1874)^ 


1829 


§  726.J 


HOW  CORPORATE  CONTRACTS  ARE  MADE.      [CH.  XLIII. 


fillment  of  contracts.^  The  above  rules  apply  also  to  other  agentJB 
of  the  corporation.-  "  The  declarations  of  an  agent  or  officer  of  a 
corporation  are  not  admissible,  except  when  made  as  a  part  of  the 
res  gestcB,  or  in  the  performance  of  his  duties  as  agent  or  officer.'" 
It  is  of  course  elementary  law  that  an  agent's  admissions  made  sub- 
sequently to  the  transaction  are  not  admissible.^ 

The  admissions  and  representations  made  by  an  agent  of  a  cor- 
poration, acting  within  the  scope  of  his  authority  and  concerning 
matters  intrusted  to  him,  are  binding  upon  the  corporation.^  There 
are  a  large  number  of  cases  on  this  subject,  and  the  question  of 


1  Bullock  V.  Consumers'  Lumber  Co., 
31  Pac.  Rep.  367  (Cal.  1892). 

2 Their  admissions  in  regard  to  who 
paid  for  water  in  a  ditch  are  evidence 
as  to  ownership  thereof.  Iraboden  v. 
Etowah,  etc.  Co.,  70  Ga.  86  (1883).  So, 
also,  of  a  conductor  as  to  a  trunk, 
Morse  v.  Connecticut,  etc.  R.  R.,  72 
Mass.  450  (1856);  of  a  freight  agent  rel- 
ative to  the  delivery  of  freight.  Lane 
V.  Boston,  etc.  R.  R.,  112  Mass.  455 
(1873);  and  of  a  bridge-tender  as  to  the 
proper  way  to  pass  through.  Toll,  etc. 
Co.  V.  Betsworth,  30  Conn.  380  (1862); 
but  not  of  a  road-master  as  to  trees 
that  were  cut  down,  Coyle  v.  Ball,  etc. 
R  R.,  11  W.  Va.  94  (1877);  nor  as  to  an 
accident  after  it  had  happened,  McDer- 
mott  V.  Hannibal,  etc.  R.  R.,  73  Mo.  516 
(1881);  nor  of  trainmen,  Adams  v.  Han- 
nibal, etc.  R.  R.,  74  Mo.  553  (1881);  nor 
of  an  engineer  that  a  brakeman  would 
be  paid.  Stiles  v.  Western  R  R,  49 
Mass.  44  (1844);  nor  of  a  telegraph  op- 
erator, Sweatland  v.  Illinois,  etc.  Tel. 
Co.,  27  Iowa,  433  (1869);  nor  of  an  en- 
gineer  as  to  an  accident,  Robinson  v. 
Fitchburg,  etc.  R.  R,  73  Mass.  92  (1856). 
The  admissions  of  a  contractor  may 
bind  the  company.  Morris,  etc.  R  R. 
V.  Green,  15  N.  J.  Eq.  469  (1862).  Dec- 
larations of  agents  made  and  known 
by  the  officers  bind  the  corporation. 
Toll-bridge  Co.  v.  Betsworth,  30  Conn. 
380(1862);  120  Fed.  Rep.  925. 

•iCosgray  v.  New  England  P.  Co.,  23 
N.  Y.  A  pp.  Div.  455  (1897). 

^Thallhimer  v.  Brinckerhofif,  4  Wend. 
394  (1830);    Packet  Ca   v.  Clough,  20 


Wall.  528  (1874);  Waldele  v.  New  York 
C.  etc.  R.  R,  95  N.  Y.  274  (1884). 

5  Fairfield,  etc.  Co.  v.  Thorp,  13  Conn. 
173  (1839);  Stewart  V.  Huntington 
Bank,  11  Serg.  &  R.  (Pa.)  267  (1824); 
Hayward  v.  Pilgrim  Soc,  38  Mass.  270 
(1838);  Sterling  r.  Marietta  Co.,  11  Serg. 
&  R  (Pa.)  179  (1824);  Westmoreland 
Bank  r.  Klingensmith.  7  Watts  (Pa.),  523 
(1838);  Harrisburg  Bank  v.  Tyler,  3 
Watts  &  S.  (Pa.)  377  (1842);  Farmers' 
Bank  v.  McKee,  2  Pa.  St.  321  (1845); 
Hackney  v.  Allegheny  Ins.  Co.,  4  Pa. 
St  185  (1846):  Spalding  r.  Susquehanna 
County  Bank,  9  Pa.  St  28  (1848); 
Crump  V.  U.  S.  Min.  Co.,  7  Gratt  (Va.) 
352  (1851);  Baptist  Church  v.  Brooklyn 
Ins.  Co.,  18  Barb.  69  (1854);  Devendorf 
V.  Beardsley,  23  Barb.  656  (1857);  Troy 
Ins.  Co.  V.  Carpenter,  4  Wis.  20  (1855); 
Metropolis  Bank  v.  Jones,  8  Pet  13 
(1834);  Merchants'  Bank  r.  Marine 
Bank,  3  Gill  (Md.),  96  (1845):  Hartford 
Bank  v.  Hart,  3  Day  (Conn.),  491  (1807); 
Osgood  V.  Manhattan  Co.,  3  Cow.  612 
(1824);  PoUeys  v.  Ocean  Ins.  Co.,  14  Me. 
141  (1837):  Ruby  v.  Abyssinian  Soc,  15 
Me.  306  (1838);  Oldtown  Bank  v.  Houl- 
ton,  21  Me.  507  (1842);  Holman  v.  Nor- 
folk Bank,  13  Ala.  369  (1847);  Soper  r. 
Buffalo,  etc.  R  R,  19  Barb.  310  (1855); 
Mitchell  V.  Rome  R  R,  17  Ga.  574 
(1855);  Toll-bridge  Co.  v.  Betsworth,  30 
Conn.  380  (1862) ;  Morse  v.  Connecticut 
River  R  R,  72  Mass.  450(1856);  McGin- 
ness  V.  Adriatic  Mills,  116  Mass.  177 
(1874).  See  also  Green's  Brice,  Ultra 
Vires,  pp.  500-504;  Wood,  Railw.  Law, 
pp.  457-465.    The  declaration  of  an  eii- 


1830 


CH.  XLIII.]  HOW    CORPORATE    CONTRACTS    ARE   MADE. 


[§  727. 


*  how  far  the  corporation  is  bound  by  the  declarations  of  subordi- 
nate agents  frequently  arises  in  the  courts.  The  general  rule  is 
very  much  the  same  as  prevails  in  regard  to  admissions  made  by 
agents  of  a  large  business  copartnership.  If  the  admission  per- 
tained to  matters  within  the  scope  of  that  particular  agent's  pow- 
ers, or  apparent  powers,  the  principal  is  bound,  otherwise  it  is  not. 
Thus  an  inquiry,  by  a  purchaser  of  stock,  of  corporate  oilicers,  as 
to  whether  it  was  full-paid  stock,  must  be  made  of  officers  having 
authority  to  speak  for  the  corporation.^ 

§  727.  Notice  to  an  incorjwrator,  stoclcliolder,  agent,  superintend- 
ent, treasurer,  secretanj,  cashier,  president,  or  director  —  When 
does  their  Icnowledge  of  facts  constitute  a  notice  of  those  facts  to  the 
corporation  —  Corporate  hooks  as  evidence  against  directors  and 
stockholders  — Notice  of  fraud  perpetrated  on  the  corporation. —  It  is 
well  settled  that  a  corporation  is  not  chargeable  with  knowledge  of 
facts  merely  because  those  facts  were  known  to  its  incorporators - 


gineer  of  a  locomotive  is  not  admis- 
sible against  the  railroad  company  in 
an  action  by  a  passenger  for  damages 
for  an  injury,  the  question  being  as  to 
the  speed  at  which  the  engine  was  go- 
ing. Vicksburg,  etc.  R.  R.  v.  O'Brien, 
119  U.  S.  99  (1886).  The  statement  of 
the  general  agent  of  an  insurance  com- 
pany, sent  by  it  to  examine  into  the 
circumstances  connected  with  a  death, 
to  the  effect  that  it  would  be  better  for 
the  company  to  pay  the  policy,  is  not 
admissible  in  a  suit  on  the  policy.  In- 
surance Co.  V.  Malone,  21  Wall  152 
(1874).  Statements  by  an  engineer  in 
charge  of  a  locomotive,  made  prior  to 
an  accident,  as  to  the  condition  of  the 
engine,  are  not  admissible.  Louisville, 
etc.  R  R.  V.  Stewart,  56  Fed.  Rep.  808 
(1893).  In  the  case  of  Anderson  v. 
Rome,  etc.  R.  R.  Co.,  5-4  N.  Y.  334*  (1873), 
the  court  held  that  it  was  error  to  ad- 
mit the  declarations  or  admissions  of  a 
track  superintendent  of  the  defendant 
relative  to  his  knowledge  of  a  defect- 
ive rail  which  had  caused  an  accident. 
An  agent  of  a  railroad  corporation  has 
no  power  to  alter  or  make  admissions 
in  variation  of  such  contract.  Sulli- 
van V.  Louisville,  etc.  R.  R.,  138  Ala.  77 
(1901).  A  party  claiming  a  contract 
with  a  corporation  cannot  testify  that 


he  made  it  with  the  agent  of  the  cor- 
poration if  the  agent  is  dead  at  the 
time  of  the  trial.  Florida,  etc.  Co.  v. 
Usina,  111  Ga.  697  (1900). 

1  Browning  v.  Hinkle,  48  Minn.  544 
(1892);  73  S.  W.  Rep.  645. 

2  Where  an  owner  of  a  patent  makes 
a  contract  to  assign  it,  but  afterwards, 
instead  of  doing  so,  forms  a  corporation 
and  transfers  the  patent  to  it,  the  cor- 
poration is  protected  in  its  title,  al- 
though the  patentee  was  one  of  the 
incor|jorators  and  also  a  director  of  the 
corporation.  Davis,  etc.  Co.  v.  Davis, 
etc.  Co.,  20  Fed.  Rep.  699  (1884).  Upon 
the  reorganization  of  a  corporation 
after  bankruptcy  the  new  company  is 
not  bound  by  the  knowledge  of  its  cor- 
porators as  to  the  existence  of  incum- 
brances on  property  purchased  from 
the  old  company.  Burt  v.  Batavia  Pa- 
per Mfg.  Co.,  86  111.  66  (1877).  "  If  false 
and  fraudulent  representations  are 
made  to  persons  who  afterwards  be- 
come ofificers  or  agents  of  a  corporation, 
and  the  corporation  acts  on  the  faith  of 
such  representations  and  is  thereby 
defrauded,  an  action  will  lie  in  favor 
of  tlie  corporation  for  the  damages  thus 
sustained."'  Iowa,  etc.  Co.  v.  Ameri- 
can, etc  Co.,  32  Fed.  Rep.  735  (1887). 
Notice  before  incorporation  to  one  who 


1831 


727.] 


HOW    COKPOEATE    CONTRACTS    AEE    MADE.  [CH.  XLIII. 


or  stockholders^  or  clerk.^  But  the  corporation  has  notice  of 
facts  which  came  to  the  knowledge  of  its  officers  or  agents  while 
engaged  in  the  business  of  the  corporation,  provided  those  facts 
pertain  to  that  branch  of  the  corporate  business  over  which  the 
particular  officer  or  agent  has  some  control.  Thus,  a  corpora- 
tion has  been  charged  with  notice  of  facts  which  were  known 
at  the  time  to  its  agent,'  who  had  charge  of  the  transaction,  or  to 


afterwards  becomes  an  officer  of  the 
corporation  is  not  notice  to  the  latter. 
Brennanu.  Emery,  etc.  Co.,  99  Fed.  Rep. 
971  (1900).  Where  the  officers  of  a  cor- 
poration in  their  individual  capacity 
took  part  in  a  transaction  before  the 
corporation  was  formed,  whereby  a 
business  was  taken  over  by  tlie  corpora- 
tion on  an  agreement  that  title  should 
not  pass  until  payment  was  made,  the 
corporation  takes  with  notice  of  the 
facts.  Adams  v.  Roscoe,  etc,  Co.,  159  N. 
Y.  176  (1899).  Knowledge  of  the  cor- 
porators is  not  notice  to  the  corpora- 
tion. Grand  Rapids,  etc.  Co.  v.  Grand 
Hotel,  etc.  Co.,  70  Pac.  Rep.  838  (Wyo. 
1903). 

1 A  company  formed  to  purchase  a 
patent-right  is  protected  in  its  title, 
although  some  of  its  promoters  and 
stockholders  knew  of  an  infirmity  in 
the  title.  Racine,  etc.  Co.  v.  Joliet,  etc. 
Co.,  27  Fed.  Rep.  367,  375  (1888);  Housa- 
tonic  Bank  v.  Martin.  42  Mass.  294,  308 
(1840),  where  it  was  unsuccessfully 
sought  by  a  mortgagor  to  defeat  his 
deed  by  a  subsequent  assignment,  on 
the  ground  that  members  of  the  cor- 
poration mortgagee  had  knowledge  of 
the  assignment;  Union  Canal  Co.  v, 
Loyd,  4  Watts  &  S.  (Pa.)  393  (1842), 
where,  in  a  contest  over  title  to  land, 
evidence  was  held  properly  excluded 
which  depended  on  the  fact  that  a 
party  was  a  stockholder  in  a  compan}-, 
and  constructive  notice  of  adverse 
claims  was  thereby  sought  to  be  estab- 
lished against  the  company.  See  Fair- 
field Sav.  Bank  v.  Chase,  72  Me.  226 
(1881).  Knowledge  of  stockholders  is 
not  knowledge  of  the  corporation. 
Hence,  after  the  guilty  directors  are 


ousted  by  an  election,  the  corporation 
itself  may  sue  unless  inequitable  or 
rights  of  third  persons  have  intervened. 
Pacific  R,  R.  v.  Missouri  Pac.  R.  R.,  Ill 
U.  S.  505  (1884).  A  corporation  owning 
all  the  stock  of  another  corporation  is 
not  liable  for  the  rent  due  from  the 
latter  to  a  third  corporation,  even 
though  said  third  corporation  charges 
that  the  accounts  of  the  lessee  are  not 
properly  kept  by  such  owner  of  all  its 
stock.  East  St.  Louis,  etc.  Ry.  v.  Jar  vis, 
92  Fed.  Rep.  735  (1899).  A  record  of  a 
stockholders'  meeting  showing  accept- 
ance of  an  auditor's  report  is  an  ad- 
mission of  his  employment.  Clarke  r. 
Warwick,  etc.  Co.,  174  Mass.  434  (1899). 

'^  Knowledge  of  a  bank  clerk  of  the 
place  of  residence  of  a  party  chargeable 
as  indor.ser  is  not  notice  to  the  bank. 
Goodloe  V.  Godley,  21  Miss.  233  (1849). 

3  "  Notice  to  one  agent  of  a  corpora- 
tion, with  respect  to  a  matter  covered 
by  his  agency,  must  be  as  efficacious 
as  to  its  directors  or  to  its  president, 
since  these  also  are  only  agents,  with 
larger  powers  and  dutie.s,  it  is  true,  but 
not  more  fully  charged  with  respect  to 
the  particular  thing  than  he  whose 
authority  is  confined  to  that  one  thing." 
Saint  V.  Wheeler,  etc.  Co.,  95  Ala.  302 
(1892).  Notice  to  an  agent,  but  not  in 
the  course  of  his  business,  is  not  notice 
to  the  corporation.  Willard  v.  Denise, 
50  N.  J.  Eq.  482  (1892).  Where  two  cor- 
porations deal  with  each  other  through 
a  common  agent,  the  question  of  notice 
depends  upon  the  circumstances  of 
each  case.  Lyndon,  etc.  Co.  v.  Lyndon, 
etc.  Inst.,  63  Vt.  581  (1891).  The  cor- 
poration is  given  notice  of  a  breach  of 
trust  by  an  attorney  in  fact  for  the 


1832 


€H.  XLIII.]  HOW    CORrORATE   CONTRACTS    ARE    MADE. 


[§727 


a  local  agent,^  or  superintendent.^     So  also  as  regards  the  higher 
officers  of  the  company.      Thus,  the  company  has  been  charged 

transfer  of  stock,   the  attorney  being    agent  that  the  insured  is  insuring    for 


one  of  its  directors.    Tafft  v.  Presidio, 
etc.  Co.,  84  Cal.  131  (1890),  rev'g  22  Pac. 
Rep.  485  (1889).     "  In  case  of  a  corpora- 
tion created  for,  and  engaged  in,  trade 
or  business,  service  of  a  notice  on  any 
officer  or  agent  of  the  company  whose 
duty  it  is,  either  in  his  official  capacity 
or  by  vii'tue  of  his  employment,  to  com- 
municate the  fact  of  such  service    to 
the  governing  body  of  the  corporation, 
is  tantamount  to   personal  service   in 
case  of  a   natural    person."    State  v. 
Felton,  53   N.    J.   L.    161   (1889).      The 
knowledge  of  an  agent,  whose  powers 
are  no  greater  than  those  of  the  master 
of  a  ship,  is  not  notice  to  a  corporation. 
Craig  V.  Continental  Ins.  Ca,  141  U.  S. 
638  (1891).     In  Consolidated,  etc.  Co.  v. 
Kansas,  etc.  Co.,  45  Fed.  Rep.  7  (1891), 
the  court  said:     "  Facts  coming  to  the 
knowledge  of  an  agent  or  an  attorney 
while  engaged  about  the   business  of 
his  agency  are,  in  law,  presumed  to  be 
known  to  the  principal  or  client."    As 
to  when  a  client   is  chargeable  with 
knowledge  of  facts  known   to  the  at- 
torney, see  Slattery  u.  Schwannecke,  44 
Hun,  75  (1887);  aff'd,  118  N.  Y.  543.     A 
corporation  taking  an  assignment  of  a 
patent  without  notice    that    another 
party  was  entitled  to  it  is  protected. 
Averill  v.   Barber,   6  N.    Y.   Supp.  255 
(1889).     Notice  to  a  traveling  salesman 
of  a  change  in  the  firm  is  not  notice  to 
a  corporation.  Neal  v.  M.  E.  Smith,  etc. 
Co.,  116  Fed.  Rep.  20  (1902). 

1  Knowledge  of    a     local    insurance 


his  firm  is  notice  to  the  company. 
Keith  V.  Globe  Ins.  Co.,  52  111.  518  (1869). 
Knowledge  of  a  local  agent  that  the 
insured  had  gone  beyond  the  limits, 
and  receipt  of  premiums  thereafter, 
bind  the  company.  Wing  v.  Harvey,  5 
De  a,  M.  &  G.  265  (1854).  Notice  to 
insurance  company  of  a  subsequent 
insuranca  Schenck  v.  Mercer,  etc.  Ins. 
Co..  24  N.  J.  L.  447  (1854).  See  also,  in 
general,  as  to  insurance,  Troy,  etc.  Ins. 
Co.  V.  Carpenter,  4  Wis.  20  (1855):  Ben- 
nett V.  Maryland,  etc.  Co.,  14  Blatchf. 
422  (1878);  S.  C,  3  Fed.  Cas.  229;  McEwen 
V.  Montgomery,  etc.  Co.,  5  Hill,  101 
(1843).  And  see  text-books  on  insur- 
ance law.  "Notice  to  an  agent  of  a 
bank,  or  otlier  corporation  intrusted 
with  the  management  of  its  business, 
or  of  a  particular  branch  of  its  busi- 
ness, is  notice  to  the  corporation  in 
transactions  conducted  by  such  agent, 
acting  for  the  corporation,  within  the 
scope  of  its  authority,  whether  the 
knowledge  of  such  agent  was  acquired 
in  the  course  of  the  particular  dealing 
or  on  some  prior  occasion."  Cragie  v. 
Hadley.  99  N.  Y.  131  (1885);  Wood, 
Railw.  Law,  pp.  457-465;  Smith  u  Board, 
etc.  Co.,  38  Conn.  208  (1871).  To  this 
rule  there  are  certain  limitations  more 
or  less  depending  on  the  time  of  notice 
and  the  occasion  of  such  notice:  for 
example,  while  acting  in  the  ordinary 
course  of  his  employment  as  agent, 
notice  to  such  agent  of  a  corporation 
is  notice  to  the  corporation  itself.    But 


2  Knowledge  of  the  general  officers 
that  an  employee  is  incompetent  is 
notice  to  the  corporation,  and  it  is 
liable  for  his  negligence  in  running  a 
train.  Pittsburgh,  etc.  Ry.  v.  Ruby.  38 
Ind.  294,  313  (1871).  Knowledge  of  the 
company's  supervising  engineer  that 
the  contractors  in  the  construction  of 
the  bridge  are  innocently  omitting  cer- 
tain things   is  notice  to  the  company. 


Danville  Bridge  Co.  v.  Pomroy,  15  Pa. 
St.  151  (1850).  Knowledge  of  a  super- 
intendent of  an  unrecorded  lien  is  not 
notice  to  his  company  to  which  he  con- 
veys the  property  so  subject.  Wicker- 
sham  V.  Chicago,  etc  Co.,  18  Kan.  481 
(1877).  Knowledge  by  the  superin- 
tendent of  a  coal  mine  of  a  dangerous 
roof  is  notice  to  the  company.  Quincy, 
etc.  Co.  V.  Hood,  77  IlL  68  (1875). 


1833 


727.] 


HOW    COEPOKATE    CONTRACTS    ARE    MADE. 


[CH. 


XLIII 


with  notice  of  facts  known  to  the  treasurer,^  secretary,^  cashier,' 


if  such  notice  is  given  at  an  inoppor- 
tune time,  or  upon  an  inappropriate 
occasion,  constructive  notice  to  the 
corporation  may  ipso  facto  be  easily 
rebutted.  Seneca  County  Bank  v.  Neass, 
5  Denio,  329  (1848);  Holden  v.  New 
York,  etc.  Bank,  72  N.  Y.  294  (1878).  It 
is  well  known  that  presumptive  notice 
to  a  principal  by  reason  of  knowledge 
of  an  agent  or  trustee  interested  in 
concealing  the  fact  from  his  principal 
cannot  be  imputed  to  the  principal. 
Curtis  V.  Leavitt,  15  N.  Y.  194,  195 
(1857);  Commissioners  v.  Thayer,  94  U. 
S.  631  (1876).  This  is  equally  true  in 
the  case  of  corporate  agents.  Seneca 
County  Bank  v.  Neass,  5  Denio,  329 
(1848).  When  the  agent  himself  is  the 
person  charged  with  the  fraud,  notice  to 
the  principal  through  such  an  agent 
cannot  be  presumed,  for  it  is  the  in- 
terest of  the  agent  to  conceal  the  facts 
from  his  principal.  Cave  v.  Cave,  L.  R. 
15  Ch.  D.  639  (1880).  Knowledge  ob- 
tained by  the  corporate  attorney  and 
agent  in  another  transaction  does  not 
bind  the  corporation.  Constant  v. 
Rochester  University,  111  N.  Y.  604 
(1888):  Fairfield  Sav.  Bank  v.  Chase,  72 
Me.  226  (1881).  Notice  to  a  bank  clerk 
of  matters  not  under  his  charge  is  not 
notice  to  the  bank.  Goodloe  v.  Godley, 
21  Miss.  233  (1849). 

iHotchkiss,  etc.  Co.  v.  Union  Nat. 
Bank,  68  Fed,  Rep.  76  (1895).  Where 
the  treasurer  of  two  corporations  takes 
the  funds  of  one  and  places  them  with 
the  other  to  make  good  a  defalcation 
from  the  latter,  the  latter  corporation 
is  liable,  since  it  is  chargeable  with  the 
knowledge  of  its  treasurer.  Atlantic 
Cotton  Mills  V.  Indian  Orchard  Mills, 
147  Mass.  268  (1888).  Payment  to^tiie 
treasurer,  who  enters  the  same  on  the 
books,  is  notice  to  the  company,  since 
the  directors,  if  they  did  their  duty, 
would  know  of  such  entry.  New  Eng- 
land, etc.  Co.  V.  Union,  etc.  Co.,  4 
Blatchf.  1  (1857). 


2  Knowledge  of  the  secretary  that  a 
vessel  is  being  run,  not  by  the  owners, 
but  by  a  third  person,  is  notice  to  the 
corporation,  and  it  cannot  sue  the  own- 
ers for  work  done.  Ponchartrain  R.  R. 
V.  Heirne,  2  La.  Ann.  129  (1847).  Knowl- 
edge of  the  secretary  that  his  wife,  the 
owner  of  the  stock,  had  pledged  that 
stock,  is  not  notice  to  the  corporation. 
Piatt  V.  Birmingham,  etc.  Co.,  41  Conn. 
255  (1874).  Notice  to  one  acting  for 
the  secretary  in  his  absence,  and  at  his 
place  of  business,  is  as  effectual  as 
though  given  to  the  secretary  himself. 
McKenney  v.  Diamond,  etc.  Assoc,  8 
Houst.  (Del.)  557  (1889).  Notice  to  the 
secretary,  who  is  also  a  director,  that  a 
note  given  by  the  corporation  had  been 
assigned  by  the  payee  to  another  is 
sufficient  notice.  Lover'.  Anchor,  etc. 
Co.,  45  Pac.  Rep.  1044  (CaL  1896).  Where 
two  companies  have  the  same  secretary 
notice  to  one  of  them  is  not  necessarily 
notice  to  the  other.  Re  Fenwick,  etc. 
Co.,  [1902]  1  Ch.  507. 

3  Knowledge  of  the  cashier  and  man- 
ager of  a  bank,  acquired  in  the  bank 
business,  that  an  unrecorded  deed  has 
been  made,  defeats  the  bank's  deed. 
Johnston  v.  Shortridge,  93  Mo.  227  (1887). 
Even  though  the  president  of  a  com- 
pany fraudulently  executes  notes  to  a 
bank  in  which  he  is  cashier,  the  bank 
is  not  chargeable  with  notice  thereof. 
Produce,  etc.  Co.  v.  Bieberbach,  176 
Mass.  577  (1900).  A  bank  cannot  re- 
pudiate its  satisfaction  of  a  mortgage 
where  its  president  and  cashier  took 
part  in  another  capacity  in  the  making 
of  a  new  mortgage  based  on  such  sat- 
isfaction. Harris  v.  American,  etc. 
Assoc,  122  Ala.  545  (1899).  Where  a 
cashier  and  director  in  a  bank  borrow 
money  from  the  bank  on  their  note  the 
bank  is  not  chargeable  with  notice  of 
the  relations  between  them.  First 
Nat.  Bank,  etc.  v.  Briggs'  Assignees,  7C 
Vt.  594  (1898).  A  bank  may  be  a  bona 
fide  purchaser  of  a  draft  from  its  cash 


1834 


CH.  XLIII.]  HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§  727. 


and  raanairer.^  Xotice  to  the  president  of  a  bank  may  be  notice 
to  the  company  unless  he  is  interested  on  the  other  side  of  the 
transaction.- 


ier  who  has  notice  of  defenses.  Hum- 
mell  V.  Bank  of  Monroe.  75  Iowa,  689 
(1888).  Knowledge  of  the  cashier  of  a 
hank  that  stock  received  in  pledge  is 
trust  stock  is  notice  to  the  bank.  Lo- 
ring  V.  Brodie,  134  Mass.  453  (1883).  See 
also  Second  Nat.  Bank  v.  Howe,  40 
Minn.  390  (1889).  The  cashier's  knowl- 
edge of  fraud  in  a  note  is  notice  to  tlie 
company.  Fall,  etc.  Bank  i\  Sturte- 
vant,  66  Mass.  372  (1853).  Notice  to  the 
cashier  of  acceptance  of  the  bank  to 
receive  payment  in  bonds  is  good  no- 
tice. Bi-anch  Bank  v.  Steele,  10  Ala. 
915  (1846).  Notice  to  a  cashier  that 
bank  funds  have  been  loaned  is  notice 
to  the  bank.  New  Hope,  etc.  Co.  v. 
Phenix  Bank,  3  N.  Y.  156  (1849).  Where 
the  directors  acquiesce  in  the  cashier's 
assumption  of  exclusive  management 
of  the  bank's  business,  they  will  be 
held  chargeable  with  knowledge  of 
such  things  as  by  proper  diligence  they 
might  and  should  have  known  as  to 
the  condition  of  the  business.  Martin 
V.  Webb,  110  U.  S.  7  (1884).  Knowledge 
of  the  cashier  that  a  person  turning  in 
property  to  the  bank  is  insolvent  is 
notice  to  the  bank.  Witters  v.  Sowles, 
32  Fed.  Rep.  763  (1887).  Notice  to  the 
cashier  is  notice  to  the  bank.  Bank  of 
St.  Mary's  v.  Mumford,  6  Ga.  44  (1849): 
Trenton,  etc.  Co.  v.  Woodruff,  3  N.  J. 
Eq.  117  (1838).  But  knowledge  obtained 
by  the  cashier  outside  of  his  duties  is 
not  notice  to  the  bank  (dictum).  Sen- 
eca Co.  Bank  v.  Neass,  5  Denio,  329,  337 
(1848). 

1  Where  the  general  manager  and 
secretary  does  the  corporate  business 
entirely  as  he  sees  fit.  his  knowledge  of 
facts  is  notice  to  the  corporation.  An- 
derson V.  Kinley,  90  Iowa,  554  (1894). 
A  pledgee  is  entitled  to  collect  the 
dividends,  and  in  some  instances  may 
do  so,  even  though  the  stock  is  not 
transferred    to  him   on   the   books,   it 


being  shown  that  the  officers  knew  of 
the  pledge.  Guarantee  Co.  v.  East 
Rome  Town  Co.,  96  Ga.  511  (1895).  It 
may  be  a  question  of  fact  whetiier  a 
sale  of  property  to  the  corporation  for 
stock  was  made,  even  though  a  cer- 
tificate of  stock  was  issued.  The  de- 
livery of  all  the  papers  may  have  been 
in  escrow.  The  knowledge  of  a  jjro- 
moter  who  then  becomes  general  man- 
ager may  be  notice  to  the  corporation. 
Huron,  etc.  Co.  v.  Kittleson,  4  S.  D.  520 
(1894:.  Notice  prior  to  incorporation 
to  a  person  who  becomes  an  officer 
upon  incorporation  is  not  notice  to  the 
corporation,  even  tliough  he  transacts 
the  business.  Taylor  v.  Calloway,  7 
Tex.  Civ.  App.  461  (1894).  Although  a 
managing  director  of  one  company  is 
secretary  of  another  company,  yet 
knowledge  that  he  has  as  to  the  latter 
company  is  not  notice  to  the  former 
company.  Be  Hampshire  Land  Co., 
[1896J  2  Ch.  743.  Notice  to  a  managing 
director  while  acting  as  such,  and  af- 
fecting business  under  his  charge,  is 
notice  to  the  company.  Dr.  Jaeger's, 
etc.  Ltd.  V.  Walker  &  Sons,  77  L.  T. 
Rep.  180  (1897).  Knowledge  which  a 
managing  director  had  in  regard  to 
real  estate  three  years  prior  to  the  or- 
ganization of  the  corporation  is  not  in 
itself  notice  to  the  corporation.  Red 
River,  etc.  Co.  v.  Smith,  7  N.  Dak.  235 
(1898). 

2  Louisville  T.  Co.  v.  Louisville,  etc 
Ry.,  75  Fed.  Rep.  433  (1896).  See  S.  C, 
174  U.  S.  552.  Where  the  president  is 
interested  on  the  other  side  of  the  trans- 
action his  knowledge  of  facts  is  not  no- 
tice to  the  corporation.  Seaverns  r. 
Presbyterian,  etc..  173  111.  414  (1898). 
The  knowledge  acquired  by  the  presi- 
dent of  a  bank  while  acting  for  himself 
in  tlie  interest  of  himself  alone  is  not 
chargeable  to  the  bank.  First,  etc. 
Bank  v.  Skinner,  62  Pac,  Rep.  705  (Kan. 


1835 


§  T27.] 


HOW    CORPORATE   CONTRACTS    ARE   MADE. 


[CH.  XLIII. 


There  are  many  conflicting  decisions,  however,  on  this  subject  of 
whether  notice  to  the  president  is  notice  to  the  corporation,  and  in 
general  the  question  may  be  said  to  tarn  largely  on  the  particular 
facts  in  each  case.^    "Where  a  corporation  takes  title  to  land  through 


1900).  Notice  to  the  president  is  notice 
to  the  bank  in  a  bank  transaction. 
Fouche  V.  Merchants',  etc.  Bank,  110 
Ga.  837  (1900).  A-  bank  may  enforce  a 
note  given  by  a  person  to  the  bank, 
even  though  it  turns  out  that  such  note 
was  an  accommodation  note,  the  real 
borrower  being  the  president  of  the 
bank.  Richardson  v.  Watson,  51  La. 
Ann.  1390  (1899).  Where  a  bank  knows 
that  a  stockholder  has  pledged  his  cer- 
tificate of  stock,  the  bank  cannot  claim 
a  lien  upon  such  stock  for  a  debt  incurred 
to  the  bank  subsequent!}'  by  the  pledgor 
of  the  stock,  even  though  the  stock  is 
not  transferred  on  the  books,  and  even 
though  the  statute  requires  that  trans- 
fers should  be  made  only  on  the  books 
of  the  bank.-  But  the  fact  that  the 
pledgor  was  the  cashier  of  the  bank  is 
not  notice  to  the  bank,  nor  is  the  fact 
that  the  president  knew  of  the  pledge 
notice  to  the  bank  where  he  took  no 
active  part  in  the  management  of  the 
bank  and  was  not  acting  for  the  bank 
when  he  learned  of  the  pledge.  Cur- 
tice V.  Crawford,  etc.  Bank,  110  Fed. 
Rep.  830  (1901). 

1  The  case  of  Kissam  v.  Anderson,  145 
U.  S.  435  (1892),  reversed  the  decision 
below  on  the  ground  that  it  was  for  the 
jury  to  say  whether  the  bank,  whose 
funds  were  used  by  the  president  to 
pay  the  broker,  had  notice  of  payments 
by  the  broker  to  the  president.  A  cor- 
poration to  which  the  principal  stock- 
holder, incorporator,  and  president  con- 
veys land  is  a  purchaser  with  notice 
unless  it  proves  the  contrary.  Billings 
V.  Aspen,  etc.  Co.,  51  Fed.  Rep.  338,  349 
(1892).  A  lien  of  a  bank  on  stock  for  a 
debt  from  a  stockholder  to  the  bank  is 
subject  to  a  pledge  of  the  stock  where 
such  pledge  was  made  before  the  debt 
was  incurred,  and  the  bank  Incurred 
the  debt  with  knowledge  of  the  pledge. 


Knowledge  of  the  facts  by  the  president 
is  notice  to  the  bank.  Curtice  i\  Craw- 
ford, etc.  Bank,  118  Fed.  Rep.  390  (1902). 
A  creditor  who  knows  that  stock  has 
been  paid  for  by  property  taken  at  an 
overvaluation  cannot  afterwards  com- 
plain, and  if  the  same  person  is  presi- 
dent of  both  the  creditor  and  the 
debtor  his  knowledge  is  notice  to  the 
creditor.  Berry  v.  Rood,  67  S.  W.  Rep. 
(Mo.  1902).  Knowledge  of  the  president 
of  a  trust  company  acquired  in  taking 
a  mortgage  for  other  parties  is  not  no- 
tice to  the  trust  company.  Tate  v.  Se- 
curity T.  Co.,  53  Atl.  Rep.  313  (N.  J.  1902). 
The  president  of  a  slate  company  has 
no  power  to  make  a  time  contract  with 
a  railroad  to  ship  the  product  of  the 
company  over  such  road,  and  knowl- 
edge of  such  contract  by  the  president 
is  not  notice  to  the  corporation.  Ban- 
gor, etc.  Ry.  V.  American,  etc.  Co.,  52 
Atl.  Rep.  40  (Pa.  1902).  A  bank  is  not- 
given  notice  as  to  defenses  to  notes  of 
a  cattle  company  presented  to  the  bank 
by  its  president,  but  in  behalf  of  the 
cattle  company.  Corcoran  v.  Snow 
Cattle  Co.,  151  Mass.  74  (1890).  Drafts 
which  are  indorsed  to  the  corporation 
by  its  president,  who  held  thena  individ- 
ually, are  collectible  by  the  corporation 
as  a  ho7ia  fide  holder,  notwithstanding 
its  president  had  notice  of  defenses. 
Levy,  etc.  Co.  u  Kauffman,  114  Fed. 
Rep.  170  (1903).  A  corporation  purchas- 
ing a  note  from  another  corporation  is 
not  notified  of  defenses  thereto  by  the 
fact  that  the  president  of  the  selling 
corporation  was  superintendent  of  the 
buying  corporation,  it  appearing  that  he 
did  not  manage  the  financial  affairs  of 
the  latter.  Newman  v.  Aultman,  etc. 
Co.,  51  S.  W.  Rep.  198  (Tenn.  1899). 
Knowledge  which  a  trustee  of  a  rail- 
road moi'tgage  receives  as  trustee  binds 
another  company  in  which  he  is  presi- 


1836 


CH.  XLIII.]  HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§  727. 


its  incorporators,  and  all  of  them  as  well  as  the  president  had  con- 
structive or  actual  knowledge  of  a  flaw  in  the  title,  the  corporation 


dent  and  superintendent.     New  York,    of  the  extent  of  a  power  of  attorney 

given  by  a  third  person  to  its  president. 
Mechanics'  Bank  v.  Schaumberg.  38  Ma 
228  (1866).  Tlie  knowledge  of  the  vendor 
of  personalty  to  a  corporation  that  a 
cliattei  mortgage  exists  is  not  necessa- 
rily notice  to  the  corporation,  although 
he  becomes  its  president  and  general 
manager.  It  is  for  the  jury  to  decide 
whether  there  are  not  bona  fide  stock- 
holders who  would  be  injured  by  suclx 
a  result.  International,  etc.  Co.  v.  Mc- 
Morran,  73  Mich.  467  (1889).  Knowl- 
edge  of  one  who  is  president  of  a  rail- 
road and  also  of  a  bank,  where  the  bank 
discounts  paper  for  the  railroad,  is  no- 
tice to  the  bank  if  he  took  part  in  its 
action.  Waynesville  Nat.  Bank  v.  Irons, 
8  Fed.  Rep.  1  (1881);  and  see  the  note. 
Notice  to  a  member  of  a  copartnership 
is  not  notice  to  a  corporation  of  which 
that  member  is  president.  Miller  v. 
Illinois,  etc.  R.  R,  24  Barb.  313  (1857). 
The  president  and  treasurer  who  stand 
by  and  allow  another  to  purchase  prop- 
erty without  saying  that  the  company 
has  a  claim  thereon  bind  the  company 
thereby.  Mihills  Mfg.  Co.  v.  Camp,  49 
Wis.  130  (1880).  Knowledge  of  a  presi- 
dent and  director  of  a  transfer  of  stock 
is  notice  to  the  company.  Factors', 
etc.  Co.  V.  Marine,  etc.  Co.,  31  La.  Ann. 
149  (1879).  Knowledge  of  a  vice-presi- 
dent is  not  notice  to  the  company. 
Fisher  v.  Murdock,  13  Hun,  485  (1878). 
Although  the  president  and  cashier  are 
the  discount  committee  and  discounts 
note  which  is  indorsed  by  the  presi- 
dent, the  bank  is  not  charged  with  no- 
tice that  the  note  was  given  for  an  ille- 
gal purpose.  Graham  v.  Orange  County 
Nat.  Bank,  59  N.  J.  L.  225  (1896).  The 
fact  that  tlie  maker  of  a  note  tells  the 
president  of  a  bank,  at  the  office  of  an- 
other company  in  which  they  are  both 
directors,  that  a  certain  note  was  fraud- 
ulent, is  not  notice  to  the  bank  although 
it  afterwards  discounts  the  note.  Wash-- 


etc.  R   R.  V.  New  York,  etc.  R  R,  53 
Conn.  274,  280  (1884 ».      Notice  to  the 
president  that  stock  is  held  in  trust  is 
notice  to  the  company.    Porter  v.  Bank 
of  Rutland,  19  Vt.  410  (1847).      Notice 
to  the  president  of  a  bank  that  the  vil- 
lage is  being  sued  for  damages  due  to 
the  bank's  sidewalk   is    notice  to  tiie 
bank.     Port  Jervis  v.  First  Nat.  Bank, 
96  N.  Y.  550  (1884).     See  also  Gold  Min. 
Co.  V.  National  Bank,  96  U.  S.  640(1877). 
Knowledge  of  the  president  that  a  per- 
son who  is  turning  property  in  to  the 
bank  is  insolvent  is  notice  to  the  bank. 
G«tman  i:  Second  Nat.  Bank,  23  Hun, 
498  (1881).     See  also  Central,  etc.  Bank 
V.  Levin.  6  Mo.  App  543  (1879);  First 
Nat.  Bank  v.  Fricke,  75  Mo.  178  (1881). 
Cf.   First  Nat.  Bank  v.   Sherburne,    14 
Bradw.  (III.)  566  (1884).     Notice  to  the 
president  and  certain  stockholders  who 
are  sent  to  investigate  for  the  corpora- 
tion is  notice  to  the  corporation.     U.  S. 
V.  San  Pedro,  etc.  Co..  4  N.  M.  225  (1888). 
Knowledge  of  a  president  in  regard  to 
property  which  he  sells  to  the  company 
is  not  notice  to  the  company.      Barnes 
V.  Trenton,  etc.    Ccr,   27  N.   J.  Eq.   33 
(1876).     Where  it  was  attempted  to  im- 
pute to  a  corporation  the  knowledge  of 
its  president  of  a  prior  unrecorded  con- 
vej-ance,  it  was  held  this  could  not  be 
done  where  tlie  knowledge  was  general 
and  not  specific  or  official.     U.  S.  Ins. 
Co.  V.  Shriver,  8   Md.    Ch.  381    (1851); 
s.  c.  on  appeal,  sub  nom.  General  Ins. 
Co.  V.  U.  S.  Ins.  Co.,  10  Md.  517  (1857). 
Knowledge   by  the   president  of  out- 
standing equities    to  land   mortgaged 
by  him  to  the  corporation  is  not  notice 
thereof  to  the  company.     Wincliester 
V.  Baltimore,  etc.  R.  R.,  4  Md.  231.  239 
(1853).     Notice  to  a  stockholder  who  is 
also  president  of  another    company  is 
not  notice  to  the   latter.      First    Nat. 
Bank  v.  Anderson,  28  S.  C.  143  (1888). 
The  company  is  bound  to  take  notice 


1837 


727.] 


HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[CE. 


XLIII. 


thereby  had  similar  notice.^  Where  a  patentee  is  under  obligation 
to  assign  his  patent,  a  corporation  wholly  owned  by  him  is  not 
protected  as  a  bona  fide  purchaser  of  the  patent  from  him.^  Where 
an  attorney  in  fact  for  the  sale  of  a  patent  causes  his  friends  to 
organize  a  corporation,  and  then  sells  the  patent  to  the  corporation 
on  terms  entirely  beyond  his  authority,  his  principal  ma3''  repudiate 
the  sale,. and  the  company  is  not  a  hona  fide  purchaser,  inasmuch 
as  its  projector  and  organizer  was  the  attorney.  Another  company 
to  which  the  principal  again  assigns  his  patent  may  sue  the  former  , 
company  for  infringement.^  In  general  the  test  turns  on  whether 
the  corporate  agent  received  the  knowledge  in  the  regular  course 
of  business.  Knowledo^e  by  an  officer,  derived  as  an  individual 
and  not  while  acting  officially  for  the  corporation,  cannot  operate 
to  its  prejudice,  and  will  not  be  imputed  to  it.* 

The  corporation   is  sometimes   chargeable  with  knowledge  of 


ington  Nat.  Bank  v.  Pierce,  6  Wash.  491 
(1893).     Where  the  president  of  a  bank 
purchases  for  the  bank  a  note  from  a 
corporation  in  which  he  is  a  director, 
the  bank  is  chargeable  with  notice  of 
defenses    to  the    note    known   to   the 
vendor  of  the  note.  Traders'  Nat.  Bank 
V.  Smith,  23  S.  W.  Rep.  1056  (Tex.  1893). 
Knowledge  acquired  by  an  attorney,  as 
attorney,  of  the  execution  of  a  mort- 
gage, is   chargeable  to  a  corporation 
which  takes  a  subsequent  mortgage, 
where  the  attorney  is  the  president  of 
the  corporation.     Willard  v.  Denise,  50 
N.  J.  Eq.  482    (1893).      A  bank  is  not 
chargeable  with  knowledge  of  the  fact 
that  its  president,  in  depositing  money 
to  his  individual  credit,  was  depositing 
trust  funds.     Re  Plankinton  Bank,  87 
Wis.  378  (1894).     Where  the  president 
of  a  corporation  sells  property  to  it,  the 
corporation  is  not  chargeable  with  no- 
tice of  defects  in  the  title  known  to 
him.     Higgins  v.  Lansingh,  154  111.  301 
(1895).    Where  the  treasurer  of  a  corpo- 
ration is  also  vice-president  of  a  bank, 
and  draws  out  the  funds  of  the  former, 
taking  in  payment  a  draft  running  to 
himself  individually,  the  bank  is  not 
chargeable  with  notice  of  a  diversion 
of  the  corporate  funds  to  his  own  use. 
Gunster  v.  Scranton  Illuminating,  etc. 
Co.,  181  Pa.  St.  327  (1897). 


'  Simmons,  etc.  Co.  v.  Doran,  142  U.  S. 
417,  436  (1892). 

2  National  Conduit  Mfg.  Co.  v.  Con- ' 
necticut  Pipe  Mfg.  Co.,  73  Fed.  Rep.  491 
(1896).    See  also  §  663,  supra. 

3  Young  Reversible,  etc.  Co.  v.  Young 
Lock-Nut  Co.,  72  Fed.  Rep.  62  (1896). 

4  Casco  Nat.  Bank  v.  Clark,  139  N.  Y. 
307  (1893);  Merchants'  Nat.  Bank  v. 
Clark,  139  N.  Y.  314  (1893).  Concerning 
notice  to  an  officer  who  is  acting  as  a 
third  party,  and  not  for  a  company,  see 
also  First  Nat.  Bank  v.  Tompkins,  57 
Fed.  Rep.  20  (1893).  Where  the  same 
persons  are  officers  of  a  corporation  and 
trustees  for  the  benefit  of  its  creditors, 
notice  to  them  as  such  officers  is  not 
notice  to  them  as  trustees.  New  York 
Security,  etc.  Co.  u  Lombard  Inv.  Co., 
65  Fed.  Rep.  271  (1895).  Notice  to  an 
officer  who  is  personally  interested  is 
not  notice  to  the  corporation.  Victor, 
etc.  Co.  V.  National  Bank,  15  Utah,  391 
(1897).  A  corporation  is  not  charge- 
able with  notice  of  the  fact  that  the 
parties  conveying  property  to  it  for 
stock  are  doing  so  in  breach  of  trust, 
even  though  such  parties  are  directors 
in  the  corporation.  This  rule  will  be 
applied,  especially  where  the  benefici- 
arj'  has  been  guilty  of  laches.  Whittle 
V.  Vanderbilt,  etc.  Co.,  83  Fed.  Rep.  48 
(1897). 


1838 


CH.  XLIII.]  UOW    CORPORATE    CONTRACTS    ARE    MADE. 


[§  T2T. 


facts  which  are  known  to  one  of  its  directors;*  but  there  are 
so  many  exceptions  to  this  rule  that  the  only  safety  lies  in  a  study 
of  the  cases  themselves.^ 


1 A  corporation  is  chargeable  with 
notice  of  facts  known  to  its  directors 
whereby  the  corporation  acquired  title 
to  a  large  property  from  the  bondhold- 
ers of  a  foreclosed  company.  Rogers  v. 
New  York,  eta  Land  Co.,  134  N.  Y.  197 
(189^).  Notice  to  a  director  is  not  no- 
tice to  the  company  except  "in  the 
business  to  which  the  knowledge  is  ma- 
terial through  the  agency  of  such  di- 
rector acting  either  alone  or  as  one  of 
the  board."  Butrick  v.  Nashua,  etc.  E, 
R,  63  N.  H.  413  (1882).  The  knowledge 
of  a  patentee  that  a  label  claims  more 
than  is  correct  is  not  notice  to  a  cor- 
poration which  purchased,  owns,  and 
■  operates  the  patent,  although  he  is  a 
director.  Lawrence  v.  Holmes,  etc.,  45 
Fed.  Rep.  357  (1891).  The  fact  that  a 
director  in  a  bank  negotiates  the  sale 
of  commercial  paper  to  it  does  not 
charge  the  bank  with  notice  of  de- 
fenses to  the  paper.     Koehler  v.  Dodge, 

31  Neb.  328  (1891).  If  a  director  act  in 
behalf  of  a  bank  in  a  transaction  of 
which  the  bank  takes  the  beneiit,  the 
bank  is  chargeable  with  a  knowledge 
of  all  the  director's  acts  in  such  trans- 
action.   Smith  V.  South  Royalton  Bank, 

32  Vt.  341  (1859).  Notice  to  a  director 
who  is  acting  as  a  special  agent  is  no- 
tice to  a  bank.  Fulton  Bank  v.  Bene- 
dict, 1  Hall  (N.Y.),480,  557  (1829);  Farm- 
ers'  Bank  v.  McKee,  2  Pa.  St.  318 
(1845).  Notice  to  three  trustees  and 
superintendent  of  repairs  for  a  corpora- 
tion that  the  water  from  the  bank  build- 
ing was  not  properly  conducted  away 
is  notice  to  the  corporation.  The  "jury 
may  presume  that  the  trustee  did  his 
duty  by  communicating  to  the  corpo- 
ration the  knowledge  he  had  obtained, 
and  which  it  was  material  that  the 
corporation  should  know."  Winne  v. 
Ulster,  etc.  Inst.,  37  Hun,  349  (1885). 
Knowledge  of  a  firm  dissolution  im- 
parted to  the  board  by  a  director  at  a 


regular  meeting  is  notice  to  the  bank. 
Bank  of  Pittsburgh  v.  Whitehead,  10 
Watts  (Pa,),  397  (1840).     In  Re  Carew's 
Estate  Act,  31  Beav.  39  (1862),  where  a 
director  and  local  manager  of  a  bank 
obtained  possession  of  certain  accept- 
ances without  consideration,  had  them 
discounted  by  the  bank,  and  carried  to 
his  account,  which  was  largely  over- 
drawn, thfe  bank  was  held  to  have  no- 
tice sufficient  to  prevent  its  being  a 
bona  fide  owner.     Notice  once  given  to 
a  board  of  directors  is  notice  to  its  suc- 
cessor, although  the  individuals  consti- 
tuting it  are  all  different.     Mechanics' 
Bank  v.  Seton,  1  Pet.  299,  309  (1828).    A 
director  who,  as  attorney  for  the  com- 
pany, takes  an  acknowledgment  of  a 
mortgage  to  it,  binds  the  company  with 
notice  when  he  had  previously  taken 
an  acknowledgment  of  an  unrecorded 
deed.     Fairfield  Sav.  Bank  v.  Chase,  72 
Me.   226  (1881).    Contra,  Houseman  v. 
Girard,  etc.  Assoc,  81  Pa.  St.  256  (1876). 
-  Although  three  of  a  body  of  city 
commissioners  who  have  defrauded  the 
city    by  a    conspiracy    in    expending 
money  are  directors  in  a  bank  which 
advanced  the  money  to  the  city,  yet  the 
bank  may  collect,  it  being  proved  that 
these  three  did  not  attend  directors' 
meetings   in  reference  to  the  matter, 
and  did  not  act  for  the  bank  in  any  way 
in  regard  to  it.     Mayor,  etc.  v.  Tenth 
Nat.   Bank,   111  N.  Y.  446  (1888).     See 
also  National  Park  Bank   v.   German, 
etc.  Co.,  53  N.  Y.  Super.  Ct  367  (1886). 
Knowledge  of  a  majority  of  the  direct- 
ors that  an  unauthorized  note  has  been 
'given  is  not  notice  to  the  company. 
Edwards  v.  Carson  Water  Co.,  21  Nev. 
469   (1S93X     Notice  to  a  director  of  a 
bank,  acquired  by  him  not  in  the  bank's 
business,  but  privately,  is  not  notice  to 
the  bank.    Black  v.  First  Nat.  Bank,  54 
Atl.  Rep.  88  (Md.  1903).    Knowledge  of 
a  director  who  sells  a  note  to  his  bank 
1839 


§  727.] 


HOW    CORPOKATE    CONTRACTS    ARE    MADE. 


[CH.  XLIII. 


A  corporation  has  notice  of  facts  which  are  known  to  all  its 
officers  and  stockholders,  and  especially  to  a  contracting  firm  that 
owns  the  corporation  and  uses  it  to  carry  on  the  firm's  business.^ 


that  there  is  a  defense  to  the  note  is  not 
notice  to  the  bank.  Buffalo  County 
Nat.  Bank  v.  Sharpe,  40  Neb.  123  (1894). 
Where  two  of  fifteen  directors  sell  land 
to  the  corporation,  their  knowledge  of 
a  prior  vendor's  lien  is  not  notice  to  the 
corporation.  Bang  v.  Brett,  62  Minn.  4 
(1895).  Knowledge  of  a  director  that  a 
note  is  tainted  with  illegal  gambling  is 
not  notice  to  the  bank,  alWiough  he 
recommended  it  for  discount.  Shaw  v. 
Clark,  49  Midi.  384  (1882).  The  fact 
that  a  cashier  who  discounts  a  note  for 
a  corporation  payee  is  also  a  director  in 
the  latter  is  not  notice  to  the  bank  of 
facts  known  to  the  corporation  payee. 
First  Nat.  Bank  v.  Loyhed,  28  Minn.  396 
(1881).  Knowledge  of  a  director  that 
a  member  of  a  firm  in  which  the  di- 
rector is  also  a  member  has  withdrawn 
therefrom  is  not  notice  to  the  corpora- 
tion. But  it  was  proved  that  the  di- 
rector had  no  management  of  the  cor- 
porate affairs.  Powles  v.  Page,  3.  C.  B. 
16, 24, 81  (1846).  Where  a  director  causes 
his  bank  to  discount  a  note  which  he 
holds  as  an  indorsee,  the  bank  is  not 
chargeable  with  knowledge  of  facts 
w^hich  he  knows  and  which  would 
defeat  payment.  Loomis  v.  Eagle 
Bank,  1  Disney  (Ohio),  285  (1859); 
Louisiana  State  Bank  v.  Senecal,  13  La. 
525  (1889).  Where  a  board  of  bank  di- 
rectors discounted  a  note  for  one  of  their 
number,  who  had  knowledge  of  fraud 
in  its  inception,  the  maker  was  held 
liable  on  the  ground  that  the  knowledge 
of  the  director  which  was  not  commu- 
nicated to  any  other  director  could  not 
be  considered  notice  to  the  bank.  Ter- 
rell V.  Branch  Bank  at  Mobile,  12  Ala. 
502  (1847).  And  see  Lucas  v.  Bank  of 
Darien,  3  Ala.  (O.  S.)  280,  321  (1830); 
Washington  Bank  v.  Lewis,  39  Mass. 
24  (1839);  Commercial    Bank   v.    Cun- 


ningham, 41  Mass.  270,  276  (1841);  First 
Nat.  Bank  u  Christopher,  40  N.  J.  L.  435 
(1878).  Where  a  director  had  knowledge 
that  certain  bills  which  were  dis- 
counted at  the  bank  had  been  given 
originally  as  accommodation  paper,  but 
was  not  present  when  the  board  dis- 
counted them,  and  did  not  eommuni- 
cate  his  knowledge  to  any  one,  the  bank 
was  not  regarded  as  having  notice. 
Farmers',  etc.  Bank  v.  Payne,  25  Conn, 
444  (1857);  Westfield  Bank  v.  Cornen,  37 
N.  Y.  320  (1867).  But  if  the  director  wha 
has  such  knowledge  acts  for  the  bank 
in  discounting  the  note,  his  act  is  the 
act  of  the  bank,  and  the  latter  is 
affected  with  his  knowledge.  National 
Security  Bank  v.  Cushman,  121  Mass. 
490  (1877);  Bank  of  U.  S.  v.  Davis,  2 
Hill,  451,  464  (1842).  Cf.  North  River 
Bank  v.  Aymar,  3  Hill,  262.  274  (1842). 
Notice  to  an  individual  director,  who 
has  no  duty  to  perform  in  relation  to 
such  notice,  cannot  be  considered  a  no- 
tice to  the  corporation.  And  even 
knowledge  of  the  president  that  certain 
deposits  were  only  to  be  drawn  in  a  cer- 
tain manner  was  held  not  to  be  knowl- 
edge of  the  bank  so  as  to  render  it  liable 
when  such  money  had,  unknown  to  the 
president,  been  wrongfully  withdrawn. 
Fulton  Bank  v.  New  York,  etc.  Canal,  4 
Paige,  127,  136  (1833).  Knowledge  of 
directors  in  a  matter  of  their  own  in 
which  they  are  not  acting  for  the  cor- 
poration is  not  notice  to  the  latter.  So 
held  in  a  patent  case  where  this  defect 
of  actual  or  constructive  notice  enabled 
the  legal  title  to  prevail  over  the  equi- 
■  table.  Davis,  etc.  Wheel  Co.  v.  Davis, 
etc.  Wagon  Co.,  20  Fed.  Rep.  699  (1884). 
An  insurance  company  taking  mort- 
gages subsequent  in  date  to  an  unre- 
corded deed  of  the  same  premises  will 
not  be  charged  with  constructive  notice- 


1  Holly  Mfg.  Co.  V.  New  Chester,  etc.  Co.,  48  Fed.  Rep.  879  (1891).    See  also  §  663,. 
supra, 

1840 


CH.  XLIII.]  HOW    COEPOKATE    CONTRACTS    ARE   MADE. 


[§  T27. 


Where  railroad  property  purchased  at  foreclosure  sale  is  trans- 
ferred by  the  purchaser  to  a  corporation  for  the  bonds  and  stock  of 
the  latter,  the  New  York  court  of  appeals  holds  that  such  corpo- 
ration "  paid  no  value,  and  held  the  property  subject  to  any  equi- 
table lien  to  which  it  was  subject  in  the  hands  of  its  grantors."  ^ 


of  such  deed  by  the  fact  that  the 
grantor  and  mortgagor  was,  at  the  date 
of  the  deed  and  execution  of  the  mort- 
gages, a  director  in  the  insurance  com- 
pany. La  Farge  Fire  Ins.  Co.  v.  Bell,  22 
Barb.  54,  61  (1856).  Knowledge  of  a  di- 
rector, acquired  by  reading  a  notice 
thereof  in  a  newspaper,  that  a  firm  has 
dissolved  and  that  certain  partners  are 
no  longer  liable,  is  not  notice  to  the 
corporation;  he  did  not  acquire  the 
knowledge  nor  was  it  given  to  him  for 
the  corporation.  National  Bank  v.  Nor- 
ton, 1  Hill,  572  (1841).  On  a  question  as 
to  the  ratification  by  a  company  of  the 
unauthorized  act  of  its  president,  where 
it  is  necessary  to  show  knowledge  on  the 
part  of  the  company,  it  is  not  enough 
to  show  an  individual  knowledge  on 
the  part  of  the  minority  of  the  board  of 
trustees,  even  if  a  knowledge  by  all  of 
them  in  their  individual  capacity,  and 
not  acting  as  a  board,  would  be  sufii- 
cient.  Yellow  Jacket,  etc.  Co.  v.  Steven- 
son, 5  Nev.  224  (1869).  A  corporation  is 
not  chargeable  with  any  knowledge  of 
a  deed  which  a  director  discovers  on 
examining  the  record  unpflBcially.  Far- 
rell  Foundry  u  Dart,  26  Conn.  376  (1857). 
Notice  to  a  director,  not  constituted  an 
organ  of  communication  between  the 
parties,  that  a  promissory  note  was 
made  to  be  discounted  for  a  special  pur- 
pose, is  not  notice  to  the  bank,  altliough 
the  director  was  present  when  the  note 
was  discounted.  Custer  v.  Tompkins 
County  Bank,  9  Pa.  St.  27  (1848).  Knowl- 
edge by  a  director  of  a  deed  drawn  by 
him  professionally  is  not  notice  to  the 
corporation  whose  subsequent  deed  of 
the  same  property  is  first  recorded. 
Armstrong  v.  Abbott,  11  Colo.  220 
(1888).  Notice  of  an  unrecorded  lien 
does  not  come  to  the  corporation  by  the 
fact  that  a  stockholder  had  notice  and 


(116) 


that  he  afterwards  became  an  officer. 
The  Admiral,  1  Fed.  Cas.  178  (1856). 
Knowledge  of  a  director  that  a  bill  pur- 
chased by  the  company  is  accommoda- 
tion on  the  part  of  the  drawee  is  not 
knowledge  of  the  company  if  the  di- 
rector took  no  part  in  the  purchase. 
Re  Peruvian  Ry.,  L.  R.  2  Ch.  617  (1867). 
Knowledge  acquired  by  a  director 
while  acting  as  a  member  of  the  firm 
which  sells  a  note  to  the  company  is 
not  notice  to  the  company.  Atlantic, 
etc.  Bank  v.  Savery,  82  N.  Y.  291  (1880). 
Corporations  having  common  directors 
or  officers  are  not  chargeable  with 
knowledge  of  each  other's  transactions 
and  condition.  lie  Marseilles  Extension 
Ry.,  L.  R  7  Ch.  App  161  (1871).  See 
also,  in  general,  Third  Nat.  Bank  v.  Har- 
rison, 10  Fed.  Rep.  243  (1882);  West  Bos- 
ton Sav.  Bank  v.  Thompson,  124  Mass. 
506  (1878).  Where  the  president  of  a 
corporation  is  vice-president  and  man- 
ager of  a  bank,  and  obtains  money  from 
the  latter  in  the  name  of  the  former, 
but  for  his  own  use,  the  bank  cannot 
recover  from  the  corporation,  the  offi- 
cers of  the  bank  being  cognizant  of  the 
transaction.  Trapp  v.  Fidelity  Nat. 
Bank,  101  Ky.  485  (1897). 

1  Vilas  V.  Page,  106  N.  Y.  439,  465 
(1887).  See  also  ch.  XL,  supra.  Where 
the  officers  of  a  bank  use  its  funds  to 
buy  property  which  they  then  turn  in 
to  a  corporation  in  payment  for  stock, 
the  property  is  impressed  with  a  trust 
and  may  be  followed.  The  fact  that 
they  were  officers  of  the  corporation 
also  is  sufficient  to  give  it  notice.  The 
bank  may  follow  the  stock  or  the  prop- 
erty, at  their  option.  Farmers',  etc. 
Bank  v.  Kimball  Milling  Co.,  1 S.  D.  388 
(1890).  A  consolidated  company  takes 
with  notice  of  facts  known  to  one  of 
the  companies  consolidated.    Joy  v.  St. 


1841 


§  '^27.] 


HOW    CORPORATE    CONTRACTS    ARE    MADE. 


[CH. 


XLIII. 


A  director  cannot  claim  to  be  a  honajide  purchaser  of  bonds  upon 
their  issue  by  the  corporation.  He  is  bound  to  know  what  trans- 
pires in  the  meetings  of  the  board  of  directors.^  Where  a  com- 
pany sells  land  to  its  president  and  secretary,  they  are  charged 
with  knowledge  of  facts  known  to  the  company,  the  latter  having 
been  present  at  the  meetings.^  The  question  sometimes  arises 
whether  a  director  or  officer  of  a  corporation  is  chargeable  with 
notice  of  all  facts  contained  in  the  corporate  books.  The  general 
rule  is  that  he  is  not  chargeable  with  actual  knowledge  of  such  en- 
tries,' but  such  entries  are  admissible  in  evidence  against  him  in 


Louis,  138  U.  S.  1  (1891).  A  tripartite 
agreement  relative  to  a  right  of  way 
through  a  park  binds  the  successors  of 
one  of  the  companies.  Joy  v.  St.  Louis, 
138  U.  S.  1  (1891). 

1  Greenville  Gas  Co.  v.  Reis,  54  Ohio 
St.  549  (1896).    The  directors'  minute- 
book    is  evidence  against  a   director. 
Allison  V.  Coal  Creek,  etc.  Co.,  87  Tenn. 
fiO  (1888);  First  Nat.  Bank  u  Tisdale,  84 
N.  Y.  655(1881);  Leonard  v.  Faber,  52  N. 
IT,  App.  Div.  495  (1900).    See  also  §  714, 
mipra. 
2Rapley  v.  Klugh,  40  S.  C.   184  (1893). 
8 "There    is  no  rule  of  law^    which 
charges  a  director  or  stockholder  of  a 
corporation  with  actual  knowledge  of 
'.ts  business  transactions  merely  because 
^e   is  such   director    or  stockholder." 
Eence,  in  an  action  by  the  corporation 
for  an  accounting,  the  books    of  the 
company  are  not  competent  evidence 
to  establish  the  account  and  hold  him 
liable.     Rudd  v.  Robinson,  126  N.  Y.  113 
(1891).     General  entries  upon  the  ledger 
of  the  corporation  do  not  charge  a  di- 
rector with  notice  thereof,  unless  it  is 
proved  that  he  had  access  to  the  ledger 
or  control  over  it.     Leonard  v.  Faber, 
53  N.  Y.  App.  Div.  495  (1900),  the  court 
stating  that  corporate  books,  such  as 
the  stock-book  and  minute-books  con- 
taining records  in  which  third  parties 
are  not  interested,  are  evidence  of  the 
facts  set  forth  in  them  both  in  favor 
and  against  the  corporation,  but  that 
account  books  showing  transactions  be- 
tween the  corporation  and  third  per- 
sons are  similar  to  account  books  of 


other  parties  and  are  admissible  only 
as  admissions  by  the  corporation. 

In  a  suit  by  a  receiver  of  a  national 
bank  to  recover  back  dividends  ille- 
gally paid,  the  books  of  the  bank  are 
competent  evidence  to  prove  the  acts 
of  the  corporation    and    its  financial 
condition,   except  as  to   dealings    be- 
tween the  corporation  and  the  defend- 
ant.    Hayden  v.  Williams,  96  Fed.  Rep. 
279  ( 1 899).    As  against  the  officers  of  the 
company  it  may  be  proved  by  the  books 
of  the  company   that   they  had  con- 
verted to  their  own  use  the  funds  of  the 
company  illegally.     Saranac,  etc.  R.  R. 
V.  Arnold,  167  N.  Y.  368  (1901).     One 
who  is  a  stockholder,  director,  and  vice- 
president  is  chargeable  with  knowledge 
of  entries  on  the  corporate  books.  First 
Nat  Bank  v.  Tisdale,  18  Hun,  151  (1879); 
aff'd,  84  N.  Y.  655.    See  also  oh.  XXX, 
supra.     One  who  is  a  stockholder  and 
also  director  is  as  fully  bound  by  en- 
tries in  them  as  a  partner  is  by  entries 
in  the  partnership  books.  Montgomery 
V.  Exchange  Bank,  6  Atl.  Rep.  133  (Pa. 
1886).    The  books  of  the  company  are 
not,  per  se,  evidence  against  a  director. 
Powell  V.  Conover,  75  Hun,   11  (1894). 
See  §  55,  supra.    A  director  sued  by  a 
stockholder  for  negligence  in  not  at- 
tending to  his  duties  is  not  presumed  to 
have  knowledge  of  all  that  is  shown  by 
the  books  of  the  company.     Wallace  v. 
Lincoln  Sav.  Bank,  89  Tenn.  630  (1891). 
A  director  is  bound  to  take  notice  of 
calls,  and  cannot  set  up  that  he  had  no 
actual    notice.      Spellier,    etc.    Co.    i: 
Geiger,  147  Pa,  St.  399(1892).     Directors 


1842 


CH.  XLIII.]  HOW    COKPOKATE   CONTKACTS    AEE    MADE. 


[§  727. 


suits  brought  by  strangers.'     They  are  not  admissible  as  evidence, 
however,  as  against  strangers.' 

The  minutes  of  a  meeting  of  a  corporation  are  admissible  to 

of  an  insolvent  bank  obtaining  a  pref-    creditors  to  hold  a  director  liable,  under 

the  New  York  statute,  for  making  a 
false  report.  Huntington  v.  Attrill,  118 
N.  Y.  365  (1890).  In  a  suit  against  a 
director  to  enforce  a  statutory  liability, 
a  creditor  cannot  prove  his  debt  by  the 
books  of  the  company  unless  he  proves 
that  the  director  had  access  to  or  was 
familiar  with  such  books.  Minor  v. 
Crosby,  76  N.  Y.  App.  Div.  561  (1902). 
Corporate  books  are  admissible  in  evi- 
dence to  show  money  received  as 
against  a  corporate  officer  on  trial  for 
embezzlement,  even  though  the  entries 
were  not  made  by  him.  Humphrey  v. 
People,  18  Hun,  393  (1879).  The  minutes 
of  a  directors'  meeting  are  evidence 
of  who  were  present  and  what  was 
done,  so  far  as  a  suit  between  the  cor- 
poration and  one  of  those  who  were 
present  is  concerned.  Olney  v.  Chad- 
sey,  7  R  I.  224  (1862).  A  director  and 
vice  -  president  is  chargeable  with 
knowledge  of  what  is  on  the  corporate 
records.  First  Nat.  Bank  v.  Tisdale,  84 
N.  Y.  655  (1881).  Qucere,  as  to  entries  in 
miscellaneous  corporate  books.  Billings 
V.  Trask,  30  Hun,  314  (1883).  The  en- 
tries in  the  books  of  a  business  corpora- 
tion during  the  period  of  his  director- 
ship are  admissible  in  evidence  against 
one  who  has  been  a  director  in  the  cor- 
poration, and  as  such  took  part  in  its 
affairs.  Bedford  v.  Sherman,  68  Hun, 
317  (1893). 

2  A  person  contracting  with  a  corpora- 
tion is  not  bound  to  know  what  is  con- 
tained in  the  corporate  records.  Blair 
V.  St.  Louis,  etc.  R  R.,  25  Fed.  Rep.  684 
(1885).  Entries  in  the  corporation  books 
of  matters  relating  to  any  property  or 
right  claimed  by  them  can  never  be 
evidence  for  them  unless  made  so  by 
act  of  the  legislature.  They  are  not 
admissible  in  favor  of  the  corporation 
as  against  strangers.  Gravilie  v.  New 
York,  etc  R.  R.,  34  Hun,  224  (1884).  See 


erence  are  bound  to  know  tiiat  the 
bank  is  insolvent.  James  Clark  Co.  v. 
Colton,  91  Md.  195  (19C0).  Even  though 
a  corporation  is  insolvent,  yet,  if  the 
directors  believe  it  is  solvent,  although 
in  financial  distress,  they  may  loan 
money  to  the  corporation  and  take  se- 
curities as  collateral  thereto,  and  they 
are  not  bound  to  know  that  the  corpo- 
ration is  insolvent  Converse  v.  Sharpe, 
161  N.  Y.  571  (1900).  A  discussion  of 
what  constitutes  insolvency  of  a  cor- 
poration, and  stating  that  the  directors 
are  bound  to  know  the  condition  of 
business,  is  given  in  Consolidated  Tank 
Line  Co.  v.  Kansas  City  Varnish  Co., 
45  Fed.  Rep.  7  (1891).  Where  the 
president  discounts  a  note  for  the  com- 
pany and  pays  in  the  money  therefor, 
he  is  a  bona  fide  holder  of  it.  Hitch- 
ings  V.  St.  Louis,  etc.  Co.,  68  Hun,  83 
(1893).  Knowledge  imparted  to  the  cor- 
poration is  not  notice  to  its  president, 
who  buys  a  note  from  it.  Peckham  v. 
Hendren,  76  Ind.  47  (1881).  The  rule 
that  a  bank  is  estopped  by  the  state- 
ment of  its  cashier  to  a  surety  that 
his  principal  had  paid  the  note  is  not 
applicable  where  the  surety  is  a  di- 
rector of  the  bank,  for  he  will  be  con- 
clusively presumed  to  know  whether 
payment  was  made.  His  knowledge 
will  also  be  imputed  to  a  firm  which 
was  the  security  and  of  which  he 
was  a  member.  Merchants'  Bank  v. 
Rudolf,  5  Neb.  528  (1877).  See  also  §  714, 
supra.  A  director  cannot  hold  the 
president  liable  on  a  loan  by  the  former 
to  the  corporation  made  on  representa- 
tions of  the  condition  of  the  corporation. 
Hubbard  v.  Weare,  79  Iowa,  678  (1890). 
1  The  books  of  a  company  are  "  com- 
petent as  evidence  so  far  as  related  to 
any  entries  legitimately  contained  in 
them,  and  so  far  as  they  were  relevant 
to  the  issues  on  trial "  in  an  action  by 


1843 


§  727.] 


HOW    CORPORATE    CONTRACTS    ARE    MADE.  [CH.  XLIII. 


show  what  took  place  as  against  members  who  attended  the 
meeting.^ 

A  stockholder  is  chargeable  with  notice  of  entries  on  the  corpo- 
rate books  if  made  in  his  presence  and  he  personally  assented 
thereto.^  The  books  of  the  corporation  are  evidence  in  a  suit 
against  a  stockholder  on  a  call,  even  though  the  entries  are  not 
proved  to  be  correct  by  the  person  actually  making  them.^ 

But  "a  shareholder  in  a  corporation  is  not  chargeable  with  con- 
structive notice  of  resolutions  adopted  by  the  board  of  directors,  or 
of  provisions  in  the  by-laws  regulating  the  mode  in  which  its  busi- 
ness shall  be  transacted  with  its  customers."  *  In  a  suit  by  stock- 
holders to  dissolve  and  wind  up  the  corporation,  the  books  of  the 
company  are  not  admissible  as  against  them,  being  mere  declara- 


also  15  Wend.  256,  note;  Wait,  Insolv. 
Corp.,  §  528.  Cf.  Leonard  v.  Faber,  53 
N.  Y.  App.  Div.  495  (1900).  As  between 
claimants  to  the  property  of  a  corpora- 
tion, the  corporate  records  are  not  ad- 
missible as  evidence  to  show  the  title 
of  the  corporation.  Dolan  v.  Wilkerson, 
57  Kan.  758  (1897). 

1  Booth  V.  Dexter,  etc.  Co.,  118  Ala.  369 
(1898). 

2  See  Abbott's  Tr.  Ev.,  p.  53. 

3  Sigua,  etc.  Co.  v.  Brown,  171  N.  Y. 
488  (1903).    See  also  §  55,  supra. 

*  So  held  where  a  stockholder  in  a  tel- 
egraph company  sued  it  for  negligence 
in  sending  a  message.  Pearsall  v.  West- 
ern Union  Tel.  Co.,  124  N.  Y.  256  (1890), 
aff'g  44  Hun,  533.  A  stockholder  is  not 
chargeable  with  knowledge  of  corpo- 
rate contracts  of  which  as  a  fact  he 
knows  nothing.  Tarbox  v.  Gorman,  31 
Minn.  62  (1883).  Minutes  of  the  di- 
rectors have  been  held  to  be  evi- 
dence against  a  subscriber  to  dis- 
prove certain  defenses  set  up  by  him 
to  his  subscription.  Bedford  R.  R. 
V.  Bowser,  48  Pa.  St.  29  (1864).  The 
cases  of  Union  Canal  Co.  v.  Loyd,  4 
.  Watts  &  S.  (Pa.)  393,  398  (1842),  and 
Graff  V.  Pittsburgh,  etc.  R  R.,  31  Pa, 
St.  489,  495  (1858),  hold  that  a  stock- 
holder present  and  assenting  to  an 
entry  on  the  corporate  books  is  bound 
by  it.  But  Hill  v.  Manchester,  etc  Co., 
5  B.  &  Ad.  866  (1838),  per  Parke,  B., 


holds  that  corporate  minutes  are  not 
admissible  on  behalf  of  the  company  in 
a  suit  against  it  by  one  of  its  stock- 
holders. Coprorate  books  are  not  only 
evidence  of  corporate  acts  when  they 
are  to  be  proved,  but  are  to  the  same 
extent  evidence  against  stockholders 
who  are  chargeable  with  knowledge  of 
their  contents.  Blake  v.  Griswold,  103 
N.  Y.  489  (1886);  Billings  v.  Trask,  30 
Hun,  314  (1883).  As  between  stock- 
holders, the  books  of  a  corporation  and 
sworn  copies  thereof  are  competent  evi- 
dence to  show  the  acts  of  a  corporation. 
Hubbell  V.  Meigs,  50  N.  Y.  480  (1872). 
See  also  Lindley,  Companies,  p.  313; 
Black  V.  Shreve,  13  N.  J.  Eq.  455(1860); 
Haynesu  Brown,  36  N.  H.  545  (1858); 
Pittsburg  Coal  Co.  v.  Foster,  59  Pa.  St. 
365  (1868).  Where  a  per.son  is  merely 
in  possession  of  bank  stock  as  collateral 
security,  and  does  not  participate  in  the 
meetings  of  the  stockholders,  and  is  not 
recognized  by  the  stockholders  as  a 
member,  he  is  not  such  a  part  of  the 
corporation  as  to  be  bound  to  have 
knowledge  of  the  facts  in  possession  of 
the  corporation  or  its  officers.  Baker 
V.  Woolston,  37  Kan.  185,  189  (1883).  A 
pledgee  of  stock  who  takes  no  part  in 
the  stockholders'  meetings  is  not 
chargeable  with  notice  of  a  lien  which 
the  corporation  has  on  property  which 
he  purchases.  Baker  v.  Woolston,  27 
Kan.  185  (1883). 


1844 


CH.  XLIII.]  HOW   COEPOKATE    CONTKACTS    ARE    MADE.  [§  T27. 

tions  in  its  favor.^  Where  a  party  owns  all  the  stock  of  another 
corporation,  it  has  been  held  that  he  is  chargeable  with  notice  of 
entries  upon  its  books.^  A  stockholder  in  a  corporation  that  is  carry- 
ing on  a  patent  litigation  is  not  bound  by  its  admissions  as  affecting 
subsequent  litigations.* 

The  question  of  serving  notice  or  papers  upon  corporations  in 
judicial  proceedings  is  discussed  elsewhere.*  The  publication  of  a 
notice  in  a  newspaper  is  not  notice,  unless  the  party  notified  is 
proved  to  have  read  the  notice.* 

The  important  principle  of  law  that  a  person  taking  from  a  cor- 
porate officer  corporate  obligations  in  payment  of  a  personal  debt 
of  such  officer  is  not  a  lonafide  holder  of  the  same  is  considered 
elsewhere.® 

1  Matter  of  Dittman,  65  N.  Y.  App.  Contra,  Bank  of  South  Carolina  v. 
Div.  343  (1901).  Humphreys.  1  McCord  (S.  C). 388  (1821); 

2  Hamilton  Buggy  Co.  v.  Iowa  Buggy  Martin  v.  Walton,  1  McCord  (S.  C),  16 
Co.,  88  Iowa,  364  (1893).  (1821).     Notice  in  a  newspaper  taken  by 

3  American,  etc.  Co.  v.  Phoenix,  etc.    an  individual  is  not  notice.     Rawley  v. 
■  Co.,  113  Fed.  Rep.  629  (1902).  Home,  3  Bing.  2  (1825).     But  if  con- 

*  See  §  752,  infra.  tained  in  a  newspaper  taken  by  a  ma- 

6 See  §  119,  swpra.    Though  the  com-  rine  insurance  company,  and  is  marine 

pany  takes  a  newspaper,  the  announce-  news,  and  the  president  knew  the  fact 

ment  therein  of  a  dissolution  of  part-  involved,    the    company    has    notica 

nership  is  not  notice  to  it.     Vernon  v.  Creen  v.  Merchants'  Ins.  Co.,  27  Mass. 

Manhattan   Co.,  22  Wend.  183    (1839),  403  (1830). 
aflf'g  17  Wend.  524.    C/.  1  Hill,  578,  n.        «  See  g  293,  swpra. 

1845 


CHAPTER  XLIV. 

RATIFICATION,  ACQUIESCENCE,  OR  LACHES  AS  A  BAR  TO  A  STOCK- 
HOLDER'S ACTION  HEREIN. 


§  728.  Introductory. 

729.  Laches,  acquiescence,  or  ratifi- 

cation as  a  defense  to  a  stock- 
holder's action  to  remedy  ille- 
gal corporate  acts  which  are 
prohibited  by  statute  or  con- 
trary to  public  policy. 

730.  Express     ratification     lierein  — 

Transferee  of  stock  that  has 
been  voted  in  favor  of  the  act 
cannot  complain. 


§  731.  Stockholder  chargeable  with 
laches  only  after  he  has  a  full 
knowledge  of  the  facts. 

732,  What  length  of  time  constitutes 

laches  herein  —  Statute  of  lim- 
itations. 

733.  Miscellaneous     applications    of 

the  doctrine  of  laches  herein. 


§  T28.  Introductory. —  "When  a  stockholder  brings  an  action  to 
remedy  the  frauds,  ultra  vires  acts,  or  negligence  of  a  director  or 
third  person,  the  most  common  and  dangerous  defense  that  he  has 
to  encounter  is  the  defense  that  he  has  been  guilty  of  laches  in 
bringing  his  action.  Like  the  defense  of  contributory  negligence  — 
a  modern  principle  of  law  that  defeats  many  actions  for  negli- 
gence—  so  the  defense  of  laches,  acquiescence,  or  ratification  has 
sprung  up  to  defeat  stockholders'  actions  herein.  The  principles 
which  govern,  define,  and  explain  this  defense  have  become  well 
settled.     They  form  the  subject  of  this  chapter. 

§  729.  Laches,  acquiescence^  or  ratification  as  a  defense  to  a 
stocTiliolder'' s  action  to  remedy  illegal  coi'porate  acts  which  are  pro- 
hihited  ly  statute  or  contrary  to  piihlic  policy. —  It  has  already  been 
shown  that  a  stockholder  may  bring  an  action  to  remedy  frauds, 
negligence,  or  ultra  vires  acts.  As  regards  the  frauds  and  negli- 
gence of  corporate  oflBcers,  it  is  well  settled  that  laches  is  a  good 
defense  to  a  stockholder's  action  herein.  In  reference  to  ultra  vires 
acts,  however,  which  are  mala prohibita  or  mala  in  5^,  there  is  more 
difficulty.  It  is  very  clear  that  no  assent  or  acquiescence  of  the 
stockholders  can  validate  such  acts.^ 


1  See  Kent  v.  Quicksilver  Min.  Co.,  78 
N.  Y.  159, 186  (1879),  where  the  court  said : 
"  A  corporation  may  do  acts  which 
affect  the  public  to  its  harm,  inasmuch 
as  they  are  per  se  illegal  or  are  malum 
prohibitum.  Then  no  assent  of  stock- 
holders can  validate  them."  A  con- 
cract  in  which  the  directors  are  inter- 


ested, where  it  is  void  by  statute,  can- 
not be  enforced  on  the  ground  of  waiver 
by  the  corporation.  Barton  v.  Port 
Jackson,  etc.  Co.,  17  Barb.  397  (1854). 
"  Void  "  cannot  be  construed  as  "  void- 
able" in  a  statute  which  is  enacted 
from  public  policy,  and  not  for  the 
benefit  of  parties  only.     Rex  v.  Hips- 


1846 


CH.  XLIV.]       DELAY    AS    A    BAR   TO    STOCKHOLDER'S   ACTIONS.  [§  729. 

But  it  is  a  different  question  to  determine  whether,  after  long 
acquiescence,  the  stockholder  may  take  advantage  of  the  invalidity 
of  such  acts.  As  regards  acts  mala prohibita  —  that  is,  acts  expressly 
prohibited  by  statute  —  the  stockholder  may  be  barred  by  laches 
from  complaining  thereof,  since  the  state,  through  its  attorney- 
general,  may  protect  the  interests  of  the  public.^  The  stockholder, 
however,  may  sue  on  the  ground  that  unless  the  evil  is  corrected  the 
state  may  forfeit  the  corporate  franchises.^  As  regards  acts  mala 
in  se,  probably  the  rule  will  depend  on  the  circumstances  of  the 
case.  If  the  stockholder  has  participated  in  the  act  or  knowingly 
accepted  the  benefit  thereof,  the  court  will  not  aid  him,  since  he 
who  comes  into  equity  must  do  so  with  clean  hands.^  Thus,  where 
a  lease  of  a  railroad  is  ulti'a  vires,  a  bill  in  equity  filed  by  one  of 
the  parties  to  the  contract  will  not  lie  to  set  it  aside.  The  court 
will  aid  neither  party,  they  being  in  pari  delicto}  "When,  however, 
a  stockholder  has  not  participated  or  knowingly  accepted  the 
benefit  of  corporate  contracts  which  are  mala  in  se,  there  would 
seem  to  be  no  reason  why  mere  delay  on  his  part  in  bringing  suit 
to  set  aside  such  acts  should  be  fatal  to  his  bill.  As  to  the  corpo- 
ration itself,  the  fact  of  its  participating  in  an  act  which  is  merely 
beyond  the  powers  of  a  corporation,  but  is  not  prohibited  by  stat- 
ute or  pernicious  in  itself,  may  not  be  a  bar  to  recovery  upon  the 
contract.^  A  suit  in  equity  lies  at  the  instance  of  a  railroad  corpo- 
ration that  has  guaranteed  negotiable  bonds  of  another  railroad 
corporation  to  have  such  guaranty  canceled  and  suits  upon  the , 

well,  8  B.  &  C.  466  (1828),  concerning  a  2  Manderson  v.  Commercial  Bank,  28 

statute  against  binding  out   children.  Pa,  St.  379  (1857),  where  discounts  were 

For  a  collection  of  the  cases  on  ultra  vires  being  improperly  made, 

acts  as  mala  prohibita  and  mala  in  se,  3  See§  39,  supra.     A  stockholder  in  a 

see  an  article  in  The  Counsellor,  vol.  4,  corporation    cannot  sustain  a  bill   to 

p.  151.  have  the  charter  forfeited  and  the  cor- 

1  See  Stewart  v.  Erie,  etc.  Transp.  Co.,  poration  wound  up  on  the  ground  that 

17  Minn.  373  (1871);  and  Gray  v.  Chap-  it  was  formed  to  purchase  and  combine 

lin,  2  Russ.  Ch.  127  (1826),  where  the  various  competing  linseed-oil  mills  for 

court  held  that  the  stockholder  cannot  the  purpose  of  forming  a  monopoly, 

claim  that  the  public  is  wronged.     If  a  The  state  alone  can  ask  for  such  a  for- 

public  right  is  to  be  enforced,  it  must  feiture.     Moreover,  the  stockholder  by 

be  at  the  suit  of  those  to  whom  the  being  a  stockholder  is  estopped  from 

protection  of  public  rights  belongs.  Cf.  complaining,  and  is  presumed  to  have 

Ashbury,  etc.  Co.  v.  Riche,  L.  R  7  H.  L.  had  knowledge  of  the  facts  from  the 

653  (1875);  s.  C,  L.  R.  9  Exch.  224,  263.  time  when  he  became  a  stockholder. 

That    which   is   forbidden   by  statute  Coquard  v.  National  L.  S.  Co.,  171  III. 

cannot  be  ratified.     Nellis  Co.  v.  Nellis,  480  (1898).     Cf.  93  N,  W.  Rep.  997. 

62  Hun,  63  (1891):  Taylor  r.  Chichester.  *  St.  Louis,  etc.  R  R.  v.  Terre  Haute, 

etc.  Ry.,L.  R.  3  Exch.  356  (1867).     The  etc.  R  R,  145  U.  S.  393(1892). 

state  may  at  any  time  object.     Alex-  5  Bath   Gas   Light  Co.  v.  Claffy,  151 

ander  v.  Searcy,  81  Ga.  536  (1889>  N.  Y.  24  (1896). 

1847 


§  730.]  DELAY    AS    A   BAR   TO    STOCKHOLDER'S    ACTIONS.        [CH.  XLIV. 

guaranty  restrained,  because  of  facts  not  appearing  upon  the  face 
thereof  and  because  otherwise  the  bonds  may  pass  into  hona  fide 
hands.^  Where  a  director  is  one  of  the  committee  appointed  by  the 
board  of  directors  to  settle  claims  against  the  corporation,  and  he 
buys  some  of  the  claims,  he  must  turn  them  in  at  the  price  he  paid ; 
and  even  though  the  stockholders  and  directors  intended  to  allow 
him  the  profit,  yet  this  does  not  estop  the  corporation  from  object- 
ing.^ 

§  730.  Express  ratification  herein  —  Transferee  of  stoch  that  lias 
been  voted  in  favor  of  the  act  cannot  comjylain. —  There  are  in  gen- 
eral two  w^ays  in  which  a  stockholder  may  be  said  to  have  ratified 
an  act  of  the  directors  which  he  is  attempting  to  enjoin  or  set 
aside.  The  ratification  may  be  by  an  express  agreement  or  state- 
ment to  that  effect,  or  it  may  be  by  such  laches  or  acquiescence  as 
will  amount  to  an  implied  ratification.'  Cases  involving  the  de- 
fense of  an  express  ratification  rarely  arise,  since  this  defense  is 
easy  to  prove.*  But  a  provision  in  a  contract  of  subscription  to 
the  stock  of  the  company  whereby  the  subscriber  waives  notice  of 
all  contracts  between  the  promoters  and  the  company  is  not  bind- 
ing on  the  stockholder  if  such  waiver  is  tricky  and  fraudulent.*   If 


1  Louisville,  etc.  Ey.u  Louisville  Trust    dent  of  one  of  the  companies  takes  a 


Co.,  174  U.  S.  552  (1899). 

2  Kroegher  v.  Calivada,  etc.  Co.,  119 
Fed.  Rep.  641  (1902);  54  Atl.  Rep.  460. 

*  Thus,  in  Evans  v.  Smallcombe,  L.  R. 
3  H.  L.  249  (1868),  aff'g  L.  R.  3  Eq.  769, 
the  court  said:  "Consent  might  be 
either  express  or  might  be  inferred 
from  the  acquiescence  of  the  share- 
holders after  full  knowledge  of  the 
transaction  which  was  in  excess  of  the 
powers  of  the  directors."  See  also  Kent 
V.  Quicksilver  Min.  Co.,  78  N.  Y.  159, 
187  (1879). 

*  As  an  instance  of  express  ratifica- 
tion, see  Allen  u  Wilson,  28  Fed.  Rep. 
677  (1886);  Butterfield  v.  Cowing,  112 
N.  Y.  486  (1889):  Burden  u  Burden,  159 
N.  Y.  287,  304  (1899).  A  stockholder 
who  knows  that  her  stock  has  been 
voted  by  her  husband  in  favor  of  sell- 
ing all  the  corporate  property  for  stock 
in  another  corporation  cannot  object 
thereto  where  she  afterwards  disposes 
of  part  of  the  new  stock  so  issued. 
Hoene  v.  Pollak.  118  Ala.  617  (1898). 
Although  on  a  consolidation  the  presi- 


large  amount  of  the  new  common 
stock  for  services,  yet,  if  the  stock- 
holders knew  all  about  it  and  agreed 
that  he  should  have  the  stock,  they 
cannot  afterwards  hold  him  liable 
therefor.  Rusling  v.  Moses,  47  Atl. 
Rep.  1054  (N.  J.  1901).  Cf.  §§  652,  662, 
681,  supra. 

s  Greenwood  v.  Leather,  etc.  Co.  Ltd., 
[1900]  1  Ch.  421.  Where  the  promoters 
paid  to  a  person  who  is  to  act  as  chair- 
man of  the  directors,  and  his  firm  who 
underwrote  ten  thousand  shares,  a 
commission  of  twelve  thousand  shares, 
the  court  held  that  ten  thousand  of 
the  twelve  thousand  was  for  the  use  of 
his  name  and  only  two  thousand  shares 
for  the  commission,  and  hence  he  was 
liable  at  the  instance  of  an  investor  in 
the  stock  to  pay  to  the  corporation  the 
difference  between  the  amount  paid 
for  the  stock  and  its  actual  value  the 
day  after  an  allotment,  the  transac- 
tion not  being  fully  disclosed  in  the 
prospectus.  A  clause  in  the  prospectus 
that  there  "  may "  be    various    trade 


1848 


OH.  XLIV.]       DELAY   AS    A   BAE   TO   STOCKHOLDER'S    ACTIONS. 


[§  T30. 


the  complaining  stockholder  participated  in  the  act  complained  of, 
he  of  course  is  barred  of  his  remedy.^ 


contracts  and  business  arrangements 
and  underwriters'  agreements,  followed 
by  the  usual  waiver  as  to  tliem,  does 
not  apply  to  such  a  contract,  inasmuch 
as  the  word  ''may"  was  misleading. 
Cackett  v.  Keswick,  [1902J  3  Ch.  456. 

1  See  §§  39.  40,  supra,  and  ^  735,  infra. 
Acquiescence  and  ratification  of  the 
guaranty  by  one  railroad  of  stock  and 
bonds  of  another  railroad,  the  stock 
and  bonds  being  owned  by  directors  of 
the  former  company,  is  a  bar  to  an  ac- 
tion to  set  the  same  aside.  Barr  v. 
New  York,  etc.  R  R.,  125  N.  Y.  263 
(1891).  Stockholders  -who  have  partici- 
pated in  a  contract  between  the  corpo- 
ration and  its  oflScers  cannot  complain 
thereof.  Clark  v.  Pittsburgh,  etc.  Co., 
184  Pa,  St.  188  (1898).  A  stockholder 
who  votes  for  an  act  cannot  afterward 
complain  of  it.  McGeorge  v.  Big  Stone 
Gap  Imp,  Co.,  57  Fed.  Rep.  263  (1893). 
Stockholders  who  participate  in  an  al- 
leged fraudulent  reorganization  can- 
not complain.  Symmes  v.  Union  Trust 
Co.,  60  Fed.  Rep.  830  (1894).  A  stock- 
holder who  votes  for  the  purchase  of 
property  from  a  director  cannot  after- 
wards complain.  Barr  v.  Pittsburgh 
Plate  Glass  Co.,  51  Fed.  Rep.  33  (1892). 
See  also  ch.  XXXIX,  siipra.  A  director 
who  has  voted  for  a  sale  cannot  as  a 
stockholder  object.  Holton  v.  Wallace, 
66  Fed.  Rep.  409  (1895).  A  stockholder 
who.  as  secretary,  signed  certificates 
■of  stock,  cannot  claim  that  they  were 
watered  stock,  and  hence  that  tliey 
cannot  be  voted  at  a  meeting  called  to 
ratify  a  sale  of  property  to  a  director. 
Wisner  v.  Delhi,  etc.  Co.,  46  La,  Ann. 
1233  (1894).  Although  a  stockholder 
voted  in  favor  of  an  ultra  vires  lease, 
yet,  if  the  corporation  has  repudiated 
the  lease,  the  estoppel  is  destroyed  and 
the  stockholder's  suit  may  continua 
Memphis,  etc.  R  R  t?  Grayson,  88  Ala. 
572  (1890).  See  also  ch.  XL,  supra.  A 
stockholder  in  a  corporation  which  is 


acting  practically  for  the  profit  of 
another  corporation  cannot,  after  he 
expressly  assents  to  such  an  arrange- 
ment, object  thereto.  Hart  v.  Mt.  Pleas- 
ant, etc.  Co.,  97  Iowa,  353  (1896).  A 
stockholder  who  has  participated  in  a 
consolidation  cannot  object  thereto  as 
being  irregular.  Bradford  v.  Frankfort, 
etc.  R  R,  143  Ind.  383(1895).  Parties 
taking  part  in  an  extension  of  the  road 
cannot  object  that  the  charter  amend- 
ment authorizing  it  was  unconstitu- 
tional. Jones  V.  Concord,  etc.  R  R.  67 
N.  H.  119  (1891);  s.  C,  67  N.  H.  334.  See 
also,  in  general.  Steger  v.  Davis,  8  Tex. 
Civ.  App.  23  (1894).  Although  creditors 
may  complain  of  a  mortgage  given  to 
directors  by  the  corporation  when 
largely  in  debt,  yet  the  president,  who 
is  also  a  large  stockholder  and  who 
signs  the  mortgage,  cannot  do  so.  Perry 
V.  Pearson,  135  111.  218  (1890).  Where 
all  the  stockholders  unite  in  the  issue 
of  watered  stock  to  the  president  for 
his  own  use,  and  assent  to  a  contract 
between  him  and  the  company,  the 
corporation  itself  cannot  subsequently 
complain.  Arkansas,  etc.  Co.  v.  Farm- 
ers', etc.  Co.,  13  Colo.  587  (1889 1.  Where 
an  act  by  the  directors  amounts  to  a 
preference  to  them,  the  corporation  be- 
ing insolvent,  the  act  cannot  be  vali- 
dated by  a  vote  of  the  stockholders, 
the  directors  themselves  voting  a  ma- 
jority of  the  stock.  Farmers'  L.  &  T. 
Co.  V.  San  Diego,  etc.  Co..  45  Fed.  Rep. 
518  (1891).  See  also,  in  general.  Branch 
V.  Jesup,  106  U.  S.  468,  476  (1882);  U.  S. 
r.  Union  Pac.  R  R,  98  U.  S.  569,  613 
(1878).  If  all  of  the  directors  and  stock- 
holders know  of  a  sale  of  property  by 
a  director  to  the  corporation  and  do 
not  object,  and  use  the  property,  the 
transaction  cannot  be  set  aside.  Bat- 
telle  V.  Northwestern,  etc.  Co.,  37  Minn. 
89  (1887).  A  bondholder  who  is  a  party 
to  the  reorganization  plan,  under  which 
and  as  part  of  which  the  foreclosure 


1849 


i30.] 


DELAY    AS    A    BAK    TO    STOCKHOLDER  S    ACTIONS. 


[CH. 


XLIV. 


Moreover,  a  stockholder  who  holds  stock  which  has  been  voted 
in  favor  of  the  act  complained  of  cannot  bring  suit  as  the  holder 
of  that  stock. 1  A  purchaser  or  pledgee  of  stock  cannot  complain 
of  mismanagement  and  loss  of  funds  which  all  the  stockholder& 


sale  is  held,  cannot  object  to  the  legal- 
ity of  the  sale.  Crawshay  v.  Soutter,  6 
Wall.  739  (1867).  Knowledge  of  stock- 
holders is  not  knowledge  of  the  cor- 
poration. Hence,  after  the  guilty  di- 
rectors are  ousted  by  an  election,  the 
corporation  itself  may  sue,  unless  in- 
equitable, or  rights  of  third  persons 
have  intervened.  Pacific  R.  R.  v.  Mis- 
souri Pac.  R.  R,  111  U.  S.  505  (1884).  A 
stockholder  in  an  old  and  new  company 
who  aids  in  the  latter's  improvement  of 
property  purchased  by  it  from  the 
former,  and  is  instrumental  in  bringing 
about  the  sale  and  purchase,  is  estopped 
from  objecting  to  the  validity  of  the 
sale.  St.  Louis,  etc.  Co.  v.  Sandoval, 
etc.  Co.,  116  111.  170  (1886).  A  person 
who  sells  property  to  a  director  to  be 
paid  for  partly  in  the  stock  of  a  cor- 
poration cannot  afterwards  object  that 
the  director  was  disqualified  from  re- 
selling the  property  to  the  corporation. 
Mackey  v.  Burns,  64  Pac.  Rep.  485  (CaL 
1901),  the  court  holding  also  that  even 
though  directors  sell  property  to  the 
corporation  in  exchange  for  treasury 
stock  which  is  issued  to  them  at  twelve 
and  a  half  cents  on  a  dollar,  yet  if  they 
offer  to  allow  all  the  stockholders  to 
purchase  their  proportion  of  the  stock 
at  that  price,  and  they  all  take  the 
stock  excepting  one  director,  the  latter 
cannot  object  to  the  transaction,  where 
he  had  himself  moved  that  the  stock 
be  so  issued.     Of.  93  N.  W.  Rep.  997. 

1  See  §  40,  supra,  and  §  735,  infra;  Re 
Syracuse,  etc.  R.  R,  91  N.  Y.  1  (1883). 
The  purchaser  of  stock  which  was 
issued  to  directors  cannot  complain 
that  the  directors  were  guilty  of  fraud 
in  the  issue.  Barr  v.  New  York,  etc. 
R.  R,  125  N.  Y.  263  (1891).  In  Brown  v. 
Duluth.  etc.  Ry.,  53  Fed.  Rep.  889  (1893), 
the  court  refused  to  interfere  where  the 


transferee  of  the  stock  took  with  notice; 
The  court  said:  "The  complainant,  as 
their  transferee,  is  in  no  better  situation 
than  they  are.  He  has  no  greater  rights 
than  his  transferrers  as  regards  a  rem- 
edy invalidating  the  transaction.  The 
maxim  in  pari  delicto  applies,  and  a 
court  of  equitj'  will  not  aid  him.  He 
cannot  bring  suit  in  behalf  of  other 
stockholders  against  the  corporation  or 
other  parties  participating  in  the  issue> 
as  his  own  title  is  tainted  with  the  same 
fraud."  A  purchaser  of  stock  which 
was  voted'  in  favor  of  a  reorganization 
scheme  cannot  object  to  the  scheme  as 
being  ultra  vires,  there  being  nothing 
illegal  per  se  in  it.  Hollins  v.  St.  Paul, 
etc.  R.  R.,  9  N.  Y.  Supp.  909  (1889).  A 
purchaser  of  stock  that  has  voted  for 
an  issue  of  "watered"  bonds  and  stock 
is  estopped  from  complaining,  even 
though  the  issue  was  prohibited  by  the 
constitution  of  the  state  —  Pennsylva- 
nia. Wood  V.  Corry,  etc.  Co.,  44  Fed. 
Rep.  146  (1890).  Where  three  persons 
own  all  the  stock  of  a  company,  two  of 
them  may  buy  the  stock  of  the  third 
and  give  the  company's  notes  in  partial 
payment  for  the  same.  The  transac- 
tion is  legal,  inasmuch  as  no  one  is  in- 
jured and  all  consent.  Neither  subse- 
quent purchasers  of  the  stock,  nor  those 
who  become  stockholders  after  the 
notes  are  paid,  nor  stockholders  who 
consent  to  the  arrangement,  can  com- 
plain of  it.  Schilling,  etc.  Co.  v.  Schnei- 
der, 110  Mo.  83  (1893).  A  stockholder 
who  purchases  his  stock  after  the  acts 
complained  of  took  place  cannot  com- 
pel another  stockholder  to  repay  to  the 
company  dividends  which  he  has  re- 
ceived, due  to  contracts  by  which  the 
company  had  sold  coal  to  a  railway 
company,  for  which  railway  company 
such  latter  stockholder  was  purchasing 


1850 


CH.  XLIV.]       DELAY    AS    A   BAK   TO   STOCKHOLDER'S    ACTIONS. 


[§  730. 


acquiesced  in  prior  to  his  purchase  or  pledge.'  "Where  the  stock- 
holder, with  full  knowledge,  has  accepted  the  benefit  of  an  act,  he 
cannot  complain  thereafter.^  But  the  defense  of  an  implied  rati- 
fication is  more  difficult  to  establish.     An  implied  ratification  is 


ageut.  ^  Clark  v.  American  Coal  Co.,  86 
Iowa,  436  (1892).  As  to  whether  this 
same  principle  —  that  stock  which  has 
participated  in  a  fraudulent  act  cannot 
afterwards  be  the  basis  of  a  suit  to  set 
aside  that  fraud  —  should  be  applied  to 
bonds,  so  far  as  enforcing  the  covenants 
of  the  mortgage  is  concerned,  such  cov- 
enants being  waived  by  a  former  owner 
of  the  bonds  which  complainant  now 
owns,  see  Belden  v.  Burke,  147  N.  Y. 
543  (1895).  In  regard  to  this  case  and 
the  famous  litigation  in  which  it  was 
but  a  part,  see  §  766,  infra.  In  Ala- 
bama it  is  held  that,  if  the  stock  passes 
into  bona  fide  hands,  the  bona  fide 
holder  may  object  to  the  fraudulent  or 
ultra  vires  act,  even  though  the  stock 
itself  was  tainted  with  the  fraud  by 
reason  of  being  held  by  one  of  the  guilty 
parties  at  the  time  of  the  act.  Parsons 
V.  Joseph,  93  Ala.  403  (1891).  But  the 
weight  of  authority  holds  that  if  the 
stock  purchased  is  tainted  with  the 
fraud  —  that  is  to  say,  if  the  persons 
guilty  of  the  act  complained  of  owned 
that  stock  when  they  did  the  act  —  no 
action  will  lie  by  a  bona  fide  trans- 
feree of  that  stock.  Ffooks  v.  South- 
western Ry.,  1  Sm.  &  G.  143  (1858).  A 
transferee  of  stock  that  was  voted  in 
favor  of  the  act  cannot  complain. 
Symmes  v.  Union  Trust  Co.,  60  Fed. 
Rep.  880  (1894).  Where  a  private  cor- 
poration, with  the  consent  of  all  its 
stockholders  of  record,  agrees  with  its 
creditors  that  the  property  shall  be 
taken  charge  of  by  an  individual  and 
managed  for  the  purpose  of  paying  the 
debts  and  then  returning  the  property 
to  the  corporation,  and  one  of  the  stock- 
holders at  that  time  secretly  transfers 
some  of  the  certificates  of  stock  to  his 
wife,  and  she  holds  the  stock  for  three 
years  and  then   transfers   it   without 


consideration  to  a  party  who  brings 
suit  to  set  aside  the  transaction,  the 
court  will  not  give  such  relief.  Mar- 
bury  V.  Stone,  17  N.  Y.  App.  Div.  852 
(1897):  aff'd.  160  N.  Y.  701.  A  purchaser 
of  stock  from  a  director  may  join  in 
bringing  suit  against  the  directors  for 
negligence  to  the  injury  of  all  the 
stockholders,  even  though  the  director 
knew  of  such  negligence  when  he  sold 
the  stock.  Warren  v.  Robinson,  70  Pac. 
Rep.  989  (Utah,  1902).  Where  a  corpo- 
ration has  sold  all  its  property  with  the 
consent  of  all  its  stockholders  the  trans- 
action cannot  subsequently  be  attacked 
by  a  subsequent  purchaser  of  stock. 
City  of  Spokane  v.  Amsterdamsch,  etc., 
83  Wash.  173  (1900).  A  purchaser  of 
stock  which  has  assented  to  the  corpo- 
ration purchasing  its  own  stock  cannot 
complain.  Hodge  v.  United  States 
Sieel  Corp.,  53  Atl.  Rep.  601  (N.  J.  1902). 
Rev'd  on  another  point  in  54  Atl.  Rep. 
1  (1903).  Under  a  statute  requiring  the 
lessee  of  a  railroad  to  purchase  dissent- 
ing stock  of  the  lessor  within  thirty 
days  on  an  appraisal  of  its  value,  stock 
which  has  been  voted  in  favor  of  the 
lease  cannot  afterwards  be  the  basis  of 
a  claim  that  it  be  appraised  and  paid 
for.  In  the  appraisal  proceedings  all 
questions  arising  may  be  adjudicated 
If  tlie  dissentmg  stock  is  not  purchased 
under  the  statute,  the  lessee  runs  the 
risk  of  the  lease  being  held  void  at  the 
instance  of  a  dissenting  stockholder. 
Boston,  etc.  R,  R.  v.  Graham,  60  N.  E. 
Rep.  405  (Mass.  1901);  93N.  W.  Rep.  1024. 

1  Erny  v.  Sciimidt  Co.,  197  Pa.  St.  475 
(1901). 

'^  London  Assur.  Ca's  Case,  5  De  G,, 
M.  &  G.  465,  481  (1854).  See  also  Weed 
V.  Little  Falls,  etc.  Co.,  31  Minn.  154 
(1883).  A  party  who  has  invested 
$15,000  in  obtaining  a  bridge  franchise 


1851 


§  731.]  DELAY    AS    A    BAE   TO    STOCKHOLDER'S    ACTIONS.        [CH.  XLIV. 


generally  spoken  of  as  laches.     It  is  the  subject  of  the  remainder 
of  this  chapter.' 

§  Y31.  Stockholder  cliargeable  with  laches  only  after  he  has  a 
full  hnoivledge  of  the  facts. —  Laches  is  a  defense  only  when  the 
stockholder,  with  a  full  knowledge  of  the  facts,  has  delayed  an  un- 
reasonable length  of  time  in  bringing  his  action.  These  two 
elements,  knowledge  and  delay,  are  the  essential  elements  of  the 
defense.^  Until  the  stockholder  has  full  and  complete  knowledge 
of  all  the  essential  facts  which  would  be  likely  to  induce  him  to 
institute  the  action,  the  beginning  of  the  time  from  which  laches 
will  run  cannot  be  said  to  commence,^  For  instance,  an  American 
stockholder  in  an  English  corporation  is  not  estopped  from  com- 
plaining of  an  unfair,  illegal  scheme  of  reorganization,  merely  be- 
cause he  did  not  oppose  it  before  it  was  sanctioned  by  the  English 
courts  in  accordance  with  the  English  statute,  where  it  is  shown 
that  he  did  not  know  anything  about  it.*     Where,  however,  the 


and  for  plans  and  specifications,  and 
transfers  the  same  to  another  party  on 
the  agreement  of  the  latter  to  organize 
a  corporation  to  build  the  bridge  and 
to  give  to  the  former  $15,000  out  of 
$80,000  preferred  stock,  the  common 
stock  to  be  such  sum  as  the  latter  may 
desire,  may  object  to  the  latter  causing 
the  corporation  to  issue  $95,000  in  bonds, 
$80,000  in  preferred  stock,  and  $60,000 
in  common  stock  for  building  the 
bridge  at  a  cost  of  $71,000;  but  if  the 
former  takes  his  $15,000  preferred  stock 
and  keeps  it  for  six  years,  he  cannot 
then  complain.  Jutte  v.  Hutchinson, 
189  Pa.  St.  218  (1899).  If  the  stockhold- 
ers and  corporate  creditors  who  are 
prejudiced  thereby  do  not  object,  a 
going  corporation  may  sell  all  its  prop- 
erty to  another  corporation,  payment 
being  by  the  issue  of  stock  of  the  latter 
corporation  to  the  stockholders  of  the 
former  corporation,  together  with  the 
right  to  such  stockholders  to  subscribe 
for  additional  stock  In  the  purchasing 
corporation.  Dissenting  stockholders, 
who  under  protest  subscribe  for  the 
new  stock  and  then  wait  eighteen 
months  before  commencing  legal  pro- 
ceedings, are  estopped  from  objecting. 
Post  V.  Beacon,  etc.  Co.,  84  Fed.  Rep. 
371  (1898).    See  also  g  732,  infra. 


iSee  First  Nat.  Bank  v.  Drake,  29 
Kan.  311  (1883),  for  a  definition  of 
ratification. 

2  See  the  leading  case  of  Cumberland 
Coal  Co.  V.  Sherman,  30  Barb.  553  (1859), 
quoting  from  Lewinon  Trusts;  and  the 
equally  important  case  of  Hoffman,  etc. 
Co.  V.  Cumberland,  etc.  Co.,  16  Md.  456 
(1860). 

3  Gilman,  etc.  R.  R.  n  Kelly,  77  III 
426  (1875).  Where  a  minority  stock- 
holder had  no  notice  of  meetings  and 
no  opportunity  to  examine  the  books 
he  is  not  barred  by  laches  from  com- 
plaining of  a  misappropriation  of 
money  by  the  directors,  provided  he 
brings  suit  within  a  reasonable  time 
after  he  learns  the  facts.  Even  though 
he  is  barred  by  laches  as  to  oqe  cause 
of  complaint  this  is  no  bar  as  to  other 
causes  of  complaint.  Joy  v.  Ft.  Worth, 
etc.  Co.,  24  Tex.  Civ.  App.  94  (1900). 
The  lapse  of  time  without  knowledge 
or  means  of  knowledge  is  no  bar.  Fox 
V.  Robbins,  63  S.  W.  Rep.  815  (Tex.  1901). 
Where  there  is  not  a  full  disclosure  at 
a  stockholders'  meeting  tiie  members 
present  are  not  bound  by  their  assent. 
Ives  V.  Smith,  3  N.  Y.  Supp.  645  a888). 

4  Bank  of  China  v.  Morse,  168  N.  Y. 
458  (1901). 


1853 


CH.  XLIV.]        DELAY    AS    A    BAR    TO    STOCKHOLDER'S    ACTIONS. 


[§  T31. 


facts  would  be  well  known  to  any  intelligent  man,  and  the  means 
of  knowledge  are  open  to  the  stockholder,  he  is  chargeable  wnth 
knowledge  from  the  date  when  he  should  have  ascertained  the 
facts.^ 

Constructive  notice,  however,  does  not  apply  to  a  case  of  fraud, 
and  constructive  notice  cannot  relieve  a  party  from  responsibility 
for  a  fraud.2  It  is  not  incumbent  on  the  stockholder  to  keep  him- 
self informed  as  to  the  various  acts  of  the  corporation.  He  is  not 
chargeable  with  knowledge  merely  because  he  might  have  ascer- 
tained the  facts  by  an  examination  of  the  corporate  books.'^  More- 
over, it  is  the  well-established  rule  that  lapse  of  time  alone  cannot 
support  the  defense  of  laches.     There  must  be  both  knowledge  and 


'  Means  of  knowledge  are  equivalent 
to  knowledge.  Credit  Co.  v.  Arkansas 
Cent.  R.  R,  15  Fed.  Rep.  46  (1882). 
"Means  of  knowledge,  plainly  within 
reach  of  stockholders  by  the  exei'cise 
of  the  slightest  diligence,  is  in  legal 
effect  equivalent  to  knowledge."  Jesup 
V.  Illinois  Cent.  R  R.  43  Fed.  Rep.  483 
(1890).  In  a  suit  by  a  stockholder  in  a 
mining  company  to  set  aside  an  alleged 
fraudulent  scheme  by  which  the  prop- 
erty was  operated  for  the  benefit  of  a 
railway  company  and  finally  aban- 
doned, the  delay  of  the  plaintiff  for  five 
years  after  the  slightest  inquiry  would 
have  caused  him  to  know  of  the  facts 
is  fatal.  Loomis  v.  Missouri,  eta  Ry., 
165  Mo.  469  (1901).  Thirteen  years'  de- 
lay in  attacking  a  consolidation  as  not 
being  in  compliance  with  statutory 
provisions  is  a  bar.  "Whatever  is  suf- 
ficient to  excite  attention,  and  put  the 
party  on  his  guard  and  call  for  inquiry, 
is  notice  of  ever3'thing  to  which  the  m- 
quiry  would  have  led.  When  a  person 
has  sufficient  information  to  lead  him 
to  a  fact,  he  shall  be  deemed  conversant 
with  it."  It  is  immaterial  whether  the 
court  declare  the  consolidation  void  or 
voidable.  Leavenworth  County  ^\  Chi- 
cago, etc.  R  R,  18  Fed.  Rep.  209  (1883); 
Taylor  v.  South,  etc.  R..R,  13  Fed.  Rep. 
153  (1882),  the  court  saying:  "The 
means  of  knowledge  are  the  same  thing 
in  effect  as  knowledge  itself.  .  .  .  The 
circumstances  of  the  discovery  must 


be  fully  stated  and  proved,  and  the  de- 
lay which  has  occurred  must  be  shown 
to  be  consistent  with  the  requisite  dili- 
gence." See  also  Kelly  v.  Newbury- 
port,  etc.  R  R,  141  Mass.  496  (1886).  In 
Phosphate,  etc.  Co.  v.  Green,  L.  R  7  C. 
P.  43  (1871),  it  was  held  that  to  show 
assent  and  acquiescence  it  is  not  neces- 
sary to  prove  the  acquiescence  of  each 
individual  shareholder.  It  is  enough 
to  show  circumstances  which  are  rea- 
sonably calculated  to  satisfy  the  court 
or  a  jury  that  the  thing  to  be  ratified 
came  to  the  knowledge  of  all  who 
chose  to  inquire,  all  having  full  oppor- 
tunity and  means  of  inquiry. 

2  Converse  r.  Blumrich,  14  Micb.  121 
(1866);  Wilde  v.  Gibson,  1  H.  L.  Cas.  623 
(1848). 

3 He  Agriculturists',  eta  Co.,  L.  R  1 
Ch.  App,  161,511  (1866),  where  the  court 
said:  "It  is  no  part  of  the  duty  of  a 
shareholder  to  look  into  the  manage- 
ment of  the  business.  ...  It  is  enough 
to  show  that  they  might  have  become 
acquainted  with  the  management  of 
their  affairs.  It  must  be  shown  that 
they  did  so."  Ryan  v.  Leaven wortii, 
eta  R}^,  21  Kan.  365  (1879).  Also  Holmes 
V.  Newcastle,  etc.  Co.,  L.  R  1  Ch.  D.  683 
(1875),  holding  that  knowledge  of  a 
sale  of  property  is  not  knowledge  of  an 
illegal  dividend  from  the  proceeds. 
See  also  Spackman  v.  Evans,  L.  R  3  H. 
L.  171  (1868);  Houldsworth  v.  Evans,  L. 
R  3  H.  L.  263  (1868). 


1853 


:§  732.] 


DELAY    AS    A    BAR    TO    STOCKHOLDER'S    ACTIONS.        [CH.  XLIV. 


4elay.^  Mere  delay  is  not  laches,  but  is  strong  evidence  of  ac- 
quiescence. Laches  is  based  upon  estoppel  where  new  rights  have 
arisen.^  A  stockholder  who  was  not  present  at  a  stockholders' 
meeting  is  not  bound  by  the  ratification  by  such  meeting  of  the 
issue  of  a  large  amount  of  the  original  capital  stock  to  the  directors 
themselves,  who  were  illegally  elected,  but  who  thereby  acquired 
control  of  the  company.^  A  compromise  or  settlement,  or  receipt 
of  the  benefits  of  a  fraudulent  or  xiltra  vires  act,  does  not  estop  a 
stockholder  from  complaining,  where  he  was  not  fully  informed  of 
the  facts  at  the  time  of  such  compromise,  settlement,  or  receipt  of 
the  benefits  thereof.* 

§  732.  What  length  of  time  constitutes  laches  herein  —  Statute  of 
limitations. —  After  a  stockholder  has  knowledge  of  or  is  charge- 
able with  knowledge  of  an  nltra  vires,  fraudulent,  or  negligent  act 
of  the  directors,  he  must  institute  his  suit,  if  at  all,  within  a  reason- 
able time  thereafter.^     As  to  what  will  constitute  a  reasonable  time 


1  Evans  V.  Smallcombe,  L.  R.  3  H.  L. 
249  (1868),  aff'g  L.  R  3  Eq.  769,  the  court 
saying:  "Lapse  of  time  alone  certainly 
would  not  make  valid  that  which  at 
the  beginning  was  invalid.  .  .  .  Length 
of  time  may  in  many  cases  materially 
assist  in  establishing  the  presumption 
of  acquiescence  in  an  act  which  re- 
quires a  confirmation  to  give  it  valid- 
ity. But  then  it  is  not  time,  but  the 
acquiescence,  which  changes  what 
would  otherwise  be  a  void  act  into  a 
valid  one."  Ashhurst's  Appeal,  60  Pa, 
St.  290  (1869),  where,  however,  the  court 
says  that  "acquiescence  is  presumed 
from  delay." 

2  Montgomery,  etc.  Ca  v.  Lahey,  121 
Ala.  131  (1899). 

morris  v.  Stevens,  178  Pa.  St  563 
(1897).    See  54  AtL  Rep.  883. 

*"  A  receipt  of  money  as  a  part  of  the 
earnings  of  a  corporation  is  no  ratifica- 
tion of  acts  of  business  carried  on  out- 
side of  the  corporatioii  without  knowl- 
edge of  him  who  is  sought  to  be  charged 
with  them  that  the  money  came  from 
such  business."  Central,  etc.  Bank  v. 
Walker,  66  N.  Y.  424,  429  ri876).  Where 
a  corporation  owns  all  of  its  bonds,  ex- 
cepting a  few  held  by  one  holder,  such 
bonds  being  secured  by  a  pledge  of  se- 
curities, and  requests  the  trustee  hold- 


ing the  securities  to  sell  the  same, 
which  the  trustee  does  at  an  insufficient 
price,  the  corporation  itself  being  the 
buyer,  and  the  single  outside  holder  of 
bonds  not  being  notified  in  time  to  pro- 
tect his  interests,  he  may  either  follow 
his  securities  or  may  hold  the  trustee 
liable.  And  even  though  he  accepted 
a  small  sum  in  settlement  from  the 
trustee,  yet  if  that  settlement  was 
caused  by  misrepresentations  as  to  the 
value  of  the  securities,  he  is  not  bound 
by  them.  Other  holders  of  the  bonds 
who  have  turned  them  in  to  the  corpo- 
ration on  an  agreement  to  take  an  ex- 
change of  new  bonds  secured  by  the 
same  securities  will  also  be  allowed  to 
participate  the  same  as  the  bondholder 
who  did  not  turn  in  his  bonds.  An- 
thony V.  Campbell,  112  Fed.  Rep.  212 
(1901).  Where  a  suit  to  set  aside  a  for- 
feiture of  stock  by  the  corporation,  on 
the  ground  of  fraud,  is  compromised, 
thesame  stockholder  cannot  eight  years 
thereafter  file  another  suit  to  set  aside 
the  assessment  on  the  ground  of  frauds 
unknown  to  him  when  the  first  suit 
was  compromised.  Marks  v.  Evans,  62 
Pac.  Rep.  76  (Cal.  1900). 

5  Quoted  and  approved  in  Stoddard  v. 
Decatur,  etc.  Co..  184  III  53  (1900).  In 
Twin  Lick  Oil  Co.  v.  Marbury,  91  U.  S. 


1854 


CH.  XLIV.]        DELAY    AS    A    BAR   TO    STOCKHOLDER'S    ACTIONS. 


[§  732. 


depends  on  the  circumstances  of  the  case.  The  length  of  time 
during  which  a  stockholder  may  delay  in  bringing  his  suit  varies 
with  each  case,  according  to  the  circumstances  of  that  case.  The 
court  requires  that  reasonable  promptness  be  exercised  so  that  large 
investments  of  new  money  or  changes  in  the  ownership  of  the 
stock  or  property  may  not  be  prevented  or  jeopardized  by  an  un- 
reasonable delay  on  the  part  of  a  stockholder  in  objecting  to  the 
transaction.  Many  illustrations  of  this  principle  of  law  are  given 
in  the  notes  below, ^ 


587  (1875),  Mr.  Justice  Miller  gives  a 
olear  statement  of  the  law  herein.  Tay- 
lor V.  South,  etc.  Ry.,  13  Fed.  Rep.  152 
(1882);  Fredericks  r.  Pennsylvania  Canal 
Co.,  109  Pa.  St.  50  (1885);  Nashua,  etc. 
R.  R  V.  Boston,  etc.  R  R,  27  Fed.  Rep. 
821,  826  (188G);  72  S.  W.  Rep.  822. 

1  Where  the  trustee  sells  trust  prop- 
erty to  himself  personally,  and  the  ces- 
tuis  que  trust  are  cognizant  thereof  and 
do  not  object  for  several  years,  they 
cannot  set  the  transaction  asida     Hoyt 
V.   Latham,    143  U.  S.  553   (1893).    See 
also  Foster  v.  Mansfield,  etc.  R  R,  146 
U.   Sw   88    (1892).     A  stockholder,   who 
delays  nearly  four  years    before  com- 
plaining of  a  consolidation,  which  be 
alleges   was   ultra  vires,   will    not   be 
granted  any  relief.     Dimpfel  v.  Ohio  & 
]\L  Ry.,  110  U.  S.  209  (1884),  ali'g  9  Biss. 
127.     In  the  case  of  St.  Louis,  etc.  R.  R 
V.  Terre  Haute,  etc.  R  R,  145  U.  S.  393 
(1892),  where  a  suit  by  the  lessor  of  a 
railroad  to  set   aside  an  illegal  lease 
failed,  the  court  said:  "And  so  far  as 
the  plaintiff  corporation  can  be  consid- 
ered as  representing  the  stockholders 
and  seeking  to  protect  their  interests, 
it  and  they  are  barred  by  laches."    A 
stockholder's  suit  to  vacate  a  foreclos- 
ure decree  seven  years  after  it  was  en- 
tered and  three  years  after  a  decision 
that  he  was  entitled  to  make  the  appli- 
cation,  the  property  in  the  meantime 
having  passed  into  bona  fide  hands,  is 
too  late,  his  claim  being  that  he  was  a 
stockholder  in  a  company  that  was  con- 
solidated  with  another    company  and 
that  the  property  of  his  corporation  was 
-sold  on  the  foreclosure  of  a  mortgage 


of  the  latter,  which  mortgage  was  ex- 
ecuted prior  to  the  consolidation.     At- 
lantic Trust  Co.  V.  New  York,  etc.  Co., 
75  N.  Y.  App.   Div.  354(1902).    Where 
for  six  years  an  issue  of  stock  for  serv- 
ices has  appeared  fully  on  the  books  of 
the  company  and  has  not  been  objected 
to,  a   stockholder   cannot   have  it  set 
aside,  even  under  the  constitution  of 
Colorado,  especially  where  all  the  stock- 
holders at   the  time   of   the   issue  as- 
sented thereto,  and  the  party  receiving 
the  stock  used  a  large  portion  of  it  to 
interest  other  persons  in  the  company, 
and  even  though  the  stock  so  issued  to 
him  was  $125,000,  being  one-half  of  the 
entire  stock,  and  was  in  consideration 
of  services  rendered  in  obtaining  con- 
tracts and  options,  which  were  turned 
over  to   the  company.     Calivada,  etc. 
Co.  V.  Hays,  119  Fed.  Rep.  202  (1902). 
Five  years  after  a  corporation  has  sold 
all  its  property  to  another  corporation, 
and  received  the  consideration,  it  can- 
not maintain  a  bill  to  set  aside  the  sale 
as  ultra  vires,  the  rights  of  third  parties 
having  intervened    in  the   meantime. 
Bear  Valley,  eta  Co.  v.  Savings,  etc  Co., 
117  Fed.  Rep.  941  (1902).    A  stockholder 
cannot,  after  ten  years'  delay,  maintain 
a  suit  to  cancel  stock  issued  for  pat- 
ents, and  to  compel  the  holder  of  such 
stock  to  refund  dividends  thereon,  the 
transaction  having  been  spread  on  the 
records  of  the  company  and  open  to  the 
stockholders.     An   allegation  that  the 
patents  were  of  no  value  is  insufficient, 
even    though   the   constitution  of  the 
state  (Missouri)  required  that  stock  be 
issued    only    for   "money   paid,    labor 


1855 


§  732.]  DELAY   AS    A    BAR'  TO    STOCKHOLDER'S    ACTIONS.        [CH.  XLIV. 


There  has  been  considerable  doubt  and  difficulty  in  determining 
whether  the  statute  of  limitations  will  be  applied  by  a  court  of 


done,  or  money  or  property  actually  re- 
ceived," there  being  no  allegation  that 
the  patents  were  known  to  be  valueless 
at  the  time.     Kimbell  v.  Chicago,  etc. 
Co.,  119  Fed.  Rep.  103  (1902).     Where  a 
stockholder  delays  for  a  year  in  com- 
plaining of  a  sale  of  corporate  property 
to  two  of  the  directors,  and  innocent 
third   parties  have  acquired  rights  in 
the  property  in  the  meantime,  the  stock- 
holder's remedy  is    barred    by  laches. 
Snow  V.  Boston,  etc.  Co.,  158  Mass.  325 
(1893).     See  §  733,  infra.     Although  a 
shoe  company  employs  as  selling  agents 
a  firm  in  which  the  president  and  gen- 
eral manager   of  the  corporation  is  a 
member,  yet  where  this  has  been  done 
for  nine    years    without    objection,  a 
stockholder  cannot  claim  for  the  cor- 
poration the  benefit  of  the  firm's  profits 
from  such  contract.     Warren  v.  Para, 
etc.  Co.,  166  Mass.  97  (1896).     Where  a 
person  buys  land  for  $24,000,  and  after- 
wards becomes  a  director  and  then  sells 
it  to  the  corporation  for  $80,000,  a  ma- 
jority of  the  board  being  disinterested, 
the  company  cannot,  nine  years  after- 
wards, claim  that  it  should  pay  only 
the  then   market  value   of  the   land. 
Higgins  V.  Lansingh,  154  111.  301  (1895). 
Delay  for  two  years  on  the  part  of  one 
who  claims  he  is  entitled  to  come  into 
a  reorganization  is  fatal.     Farmers'  L. 
&  T.  Co.  V.  Bankers',  etc.  Tel.  Co.,  119 
N.  Y.  15  (1890),  the   purchaser  having 
denied  any  reorganization  agreement 
during  that  time.     A  stockholder  who 
objects,  but  waits  from  October  17  to 
March  7,  and  then  at  the  annual  meet- 
ing tries  to  have  action  taken,  is  not 
guilty  of   laches.     Byrne  u   Schuyler, 
etc.   Co..  65   Conn.  336  (1895).    A  stock- 
holder  who  is  also  a  director  cannot 
complain  of  a  diversion  of  funds  by  the 
manager  arising  from  an  unauthorized 
"swapping"  of  checks,  and  is  barred 
of  relief  where  he  had  known   of  its 
continuance  for  two  years.    Streight  v. 
Junk,  59  Fed.  Rep.  321  (lb93). 


Where    for  twenty-seven    years  no 
stockholder  has  complained  of  a  lease 
of  the  property  of  the  company  to  a 
lessee,  although  the  lessee  owned  a  ma- 
jority of  the  stock  of  the  lessor,  it  is  too 
late  to  complain.   Wolf  v.  Pennsylvania 
R.  R..  195  Pa.  St.  91  (1900).    A  lease  will 
not  be  set  aside,  even  though  a  major- 
ity of  the  directors  of  the  lessor  are  in- 
terested in  the  lessee,  and  even  though 
after  the  lease  was  made  they  became 
stockholders  and  directors  of  the  lessee, 
it   being  shown  that  the  lessor  had  a 
floating  and  bonded  debt  and  had  no 
funds,  and  had  never  paid  a  dividend, 
and  that  as  a  result  of  the  lease  the 
stock  advanced  fifty  per  cent,  in  value, 
and  the  complaint  is  not  made  until 
eigiiteen  months  after  the   lease  was 
made.     Dickinson  v.  Consolidated,  etc. 
Co.,  114  Fed.  Rep.  232  (1902).  A  creditor 
of  a  corporation  who  wishes  to  object 
to  a  transfer  of  its  assets  to  another 
corporation  must  do  so  promptly  after 
he  learns  of  the  same,  and  a  delay  of 
three    or    four    years,    during    which 
others   became   creditors   of  the  new 
corporation  and  the  latter  becomes  in- 
solvent, will  bar  his  claim  for  an  equi- 
table lien   o-n  the  assets.     Anthony  v. 
Campbell,   112    Fed.    Rep.    212    (1901). 
Whei-e  one  of  the  partners  in  a  firm  or- 
ganized to  locate,  develop,  and  operate 
mines  does  not  turn   in  to  the  firm  a 
mine   located    by   him,   but   transfers 
the  same  to  the  corporation  for  stock, 
and  the  other  partners  delay  for  two 
years  after  knowledge  thereof  before 
filing  a  bill  claiming  an  interest  in  the 
stock,  and  in  the  meantime  the  corpo- 
ration  has  expended  money,  and  the 
stock    may    have    passed    into    other 
hands,  the  court  will  refuse  relief  on 
the  ground  that  the  firm  evidently  in- 
tended to  deny  any  obligation  if  the 
mine  turned  out  to  be  worthless,  but  to 
claim  an  interest  if  it  turned  out  to  be 
valuable.    Curtis  v.  Lakin.  94  Fed.  Rep. 
251   (1899).    Two  years'  delay  on  the 


1856 


CH.  XLIV.]       DELAY    AS    A    BAK   TO   STOCKHOLDEk's    ACTIONS. 


[§  732. 


squity  to  cases  of  this  nature.     It  has  been  held  in  England  that 
the  statute  will  be  applied  to  a  corporate  action  to  compel  a  di- 


part  of  a  stockholder  in  complaining 
of  a  mortgage  given  by  the  corpora- 
tion to  raise  money  to  pay  a  debt  due 
to  the  president  is  fatal,  even  though 
the  president  had  originally  agreed  to 
require  payment  only  out  of  sales  of 
property  by  the  corporation.     Wills  v. 
Porter,  132  Cal.  516  (1901).    The  failure 
of  a  stockholder  to  discover  for  nearly 
six  years  a  sale  of  corporate  property 
to  one  of  the   directors  is  not  laches. 
Morgan  v.  King,  27   Colo.   539  (1900). 
Where  minority  stockholders  started  a 
suit  in  the  federal  court  to  set  aside  a 
sale  of  the  property  of  the  company  to 
another  corporation,  but  did  not  bring 
in  as  a  party  defendant  a  railway  com- 
pany which  was  about  to  issue  securi- 
ties, in  accordance  with  contracts  with 
the   two    companies,   and    afterwards 
start  a  suit  in  the  state  court  for  the 
same  relief,  and  bring  in  the  railway 
company  as  party  defendants,  laches 
in  bringing  in  the  railway  company  is 
a  bar  to  relief  against  that  company. 
A  prot-est  not  followed  by  prompt  ai> 
plication   to  a  court  does  not  excuse 
laches.     Mumford  v.  Ecuador,  etc.  Co., 
50  Atl.  Rep.  476  (N.  J.  1901).     A  stock- 
holder is  not  guilty  of  laches  in  apply- 
ing for  an  injunction  against  the  rati- 
fication by  the  stockholders  of  an  ultra 
vires  sale  of  the  corporate  property  by 
the  board  of  directors,  even  though  the 
sale   was    made   by  the   directors    on 
April  5th  and  the  injunction  was  not 
applied  for  until  June  4th,  two  days 
before  the  date  of  the  meeting  of  the 
stockholders  to  ratify  the  sale.    Forres- 
ter V.  Boston,  etc.  Co.,  21  Mont.  544,  565 
(1898).     See  s.  C,  22  Mont.  430  (1899).    A 
delay  of  several  years  in  attacking  the 
issue  of  stock  and  a  consolidation  is 
fatal.     Drake  v.  New  York.  etc.  Co.,  26 
App.   Div.  499  (1898).     Even  though  a 
company,  organized    to    manufacture 
and  sell  soap,  buys  and  sells  soap,  yet 
the    stockholders  who    are    guilty  of 


laches  cannot  complain  of  the  act  as 
ttltra  vires.    Petrolia  Mfg.  Co.  v.  Jen- 
kins.   29   N.  Y.  App.   Div.   403    (1898). 
Where  for  a  long  time  an  irrigation 
company  acquiesces  in  a  certain  con- 
struction of  an  agreement  to  furnish 
water,  and  such  construction  is  equita- 
ble, a  stockholder  cannot  obj^t,  even 
though  some  of  the  directors  are  mter- 
ested  personally.  Foster  v.  Bear  Valley 
Irr.    Co.,   65  Fed.   Rep.   836   (1895).     A 
stockholder  who  delays  nine  years  be- 
fore intervening  in  a  foreclosure  suit 
cannot  then  intervene  after  the  sale  is 
completed   and  the  money  ready  for 
distribution.     Boston,  etc  Trust  Co.  v. 
American  Rapid  Tel.  Co.,  67  Fed.  Rep. 
165  (1895).     Where  the  directors  of  a 
failing   linen-manufacturing    corpora- 
tion sell  a  part  of  the  plant  for  stock  of 
a   knit-goods  manufacturing  corpora- 
tion, a  stockholder  who  does  not  com- 
plain for  two  years  cannot  hold  the 
directors  liable  for  his  sliare  of  the 
property  so  exchanged  for  stock.     Pin- 
kus    V.    Minneapolis    Linen    Mills.    65 
Minn.  40  (1896).     Where  the  directors 
sell  unissued  stock  at  a  discount  to  a 
party  who  resells  part  of  it  to  a  director, 
other  stockholders  cannot,  ten   years 
afterwards,  hold  him  liable.   Keeney  v. 
Converse,   99  Mich.   316    (1894).     Four 
years'  delay  in  bringing  suit  to  compel 
a  corporate  officer  to  account  for  prop- 
erty purchased  by  him  at  an  execution 
sale  is   fatal.     Horbach   v.   Marsh,   37 
Neb.  22  (1893).     A  stockholder  who  for 
two  years  knows  that  an  illegal  salary 
is  being  paid  cannot  afterwards  object 
Brown  v.  De  Young,  167  111.  549  (1897). 
Even  though  a  director  sells  property 
to  the  company  and  overvalues  it,  yet 
if  the  company  caused  an  independent 
valuation   to  be  made,  and  for  three 
years  acquiesced  in   the  purchase,  it 
cannot     then     complain.     Stetson    v. 
Northern  Inv.  Co.,  104  Iowa,  393  (1898). 
"  Nine  years'  delay  on  the  part  of  a  mi- 


(117) 


1857 


§  732.] 


DELAY   AS   A    BAR   TO    STOCKHOLDER'S    ACTIONS.        [Cfl.  XLIV. 


rector  to  pay  over  to  the  corporation  money  received  by  him  as  a 
bribe,  and  that  the  statute  begins  to  run  from  the  time  when  the 


nority  stockholder  in  complaining  of 
the  act  of  the  directors  in  causing  the 
corporation  to    purchase    stock    upon 
whicli  they  received  a  secret  profit  is 
fatal  to  the  suit.    Cullen  v.  Coal  Creek, 
etc.  Ca,  42  S.  W.  Rep.  693  iTenn.  1897). 
A  reorganization  agreement  cannot 
be  successfully  attacked  by  stockhold- 
ers two  years  after  it  was  made,  espe 
cially  where  the  stockholders  do  not 
offer  to  pay  the  debt  due  nor  the  ex- 
penses of  foreclosure,  and  where  "  the 
relief    they    ask    under    their  bill,   if 
granted,  would  not  only  be  valueless  to 
them  and  other  stockholders,  but  would 
saddle  the  company  with  a  vast  debt 
of  nearly  $25,000,000,  wholly  due,  and 
bearing  a  high  rate  of  interest."   Carey 
V.  Houston,  etc.  Ry.,  52  Fed.  Rep.  671 
(189"^).      Three     years'    time      having 
elapsed    before    a    stockholder    ascer- 
tained a  fraudulent  sale  of  the  com- 
pany's stock  by  the  directors  to  them- 
selves, relief  will  be  denied  where  that 
sale  has  been  of  great  benefit  to  the  re- 
maining    stock.      Squair    v.    Lookout 
Mountain  Co.,  42  Fed.  Rep.  729  (1890). 
Thirteen  years'  delay  by  stockholders 
in  complaining  of  a  gift  of  town  lots  to 
the  town  by  a  committee  of  the  stock- 
holders upon  the  dissolution  of  the  cor- 
poration is  fatal.     Norton  v.  Kellogg, 
41   Fed.  Rep.    452   (1890).     A   delay  of 
twenty  years  in   complaining  that  a 
lease  taken  by  the  company  was  due 
to  the  fact  that  a  part  of  the  directors 
were  interested  in  the  stock  and  bonds 
of  the  lessor  company  is  fatal.     Jesup 
V.  Illinois  Cent.  E.  R.,  43  Fed.  Rep.  483 
(1890;. 

Laches  is  a  bar  to  a  suit  against  a 
corporation  the  same  as  against  indi- 
viduals, especially  as  new  stockholders 
are  continually  coming  in.  St.  Paul,  etc. 
Ry.  V.  Sage,  49  Fed.  Rep.  315  (1892). 
Eleven  and  one-half  years  is  no  bar  to 
a  stockholder's  suit  to  set  aside  illegal 
bonds  and  a   mortgage,  where  no  at- 


tempt was  made  to  enforce  the  bonds. 
Chicago  V.  Cameron,  120  111.  447  (1887). 
Eleven  years'  delay  is  fatal  to  a  com- 
plaint that    another    corporation    has 
purchased  a  majority  of  the  stock  of 
the  corporation  in  which  the  complain- 
ant stockholder  holds  stock.  Alexander 
V.  Searcy,  81  Ga.  536  (1889).     Where  for 
seven  years  a  stockholder  who  owned 
a  majority  of  the  stock  elected  himself 
and  two  of  his  dummies  as  directors  of 
the  company,  and  caused  the  board  to 
vote  a  large  salary  to  himeelf  as  presi- 
dent and  manager,  and  had  leased  to 
the  company  his  property  at  a  large 
rental,  the  salary  and  rental  are  illegal. 
Where  the  company  had  failed  to  pay 
its  dividends  by  reason  of  such  acts,  a 
court  of  equitj',  upon  the  suit  of  another 
stockholder,   ordered   the  president  to 
account,  and  appointed  a   receiver  of 
the    company   and    directed    that    its 
affairs  be  wound  up.  Miner  v.  Belle  Isle 
Ice  Co.,  93  Mich.  97  (1892).     Although  a 
stockholder  may  enjoin  a  consolidation 
of  his  company  with  another  under  a 
statute  passed  after  the  incorporation, 
the  object  of  the  consolidation  being 
different  from  that  of  the  original  cor- 
poration, yet  where  the  stockholder  de- 
lays applying  to  the  court  for  nearly  a 
year,  and  in  the  meantime  the  consoli- 
dated  company  has  borrowed   money 
and  given  mortgages,  and  such  mort- 
gages are  about  to  be  foreclosed,  the 
complaining  stockholder   is  guilty  of 
laches  and  his  remedy  is  barred.    Rabe 
V.  Dunlap,  51  N.  J.  Eq.  40  (1893).  Where 
a  fraudulent  foreclosure  was  made  on 
April  5th,  and  the  fraud  became  known 
on  June  5th,  and  suit  was  brought  in 
September,  the  suit  may  be  maintained, 
no  one  having  been  prejudiced  by  the 
delay.     Ex-Mission,  etc.  Co.  v.  Flash,  97 
Cal.  610  (1893).     Seven  years'  delay  in 
complaining  that  the  directors  issued 
bonds  to  themselves  for  no  considera- 
tion, and  then  foreclosed  and  bought 


1858 


CH.  XLIV.]       DELAY    AS    A    BAR   TO    STOCKHOLDER'S    ACTIONS.  [§  732. 

corporation  discovers  the  facts.'     In  the  United  States  the  courts 


the  road  in,  is  fatal.  Burgess  v.  St. 
Louis  County  E.  R.,  99  Mo.  496  (1890). 
Where  a  pledgee  bank,  having  a  right 
to  sell  at  private  Stile  and  without  no- 
tice, sells  the  pledge  through  its  presi- 
dent, who  buys  the  pledge  himself,  and 
the  president  openly  pays  the  bank  for 
it,  long  delay  on  the  part  of  the  bank 
in  complaining  is  fatal.  Raymond  v. 
Palmer,  41  La.  Ann.  425  (1889).  Laches 
is  a  bar.  Moore  v.  Silver,  etc.  Co.,  104 
N.  C.  534  (1890).  A  consolidation  of 
railroads  under  an  amendment  to  the 
charter  may  be  prevented  by  a  single 
stockholder.  But  several  years'  delay 
in  complaining  is  fatal.  The  stock- 
holder then  can  only  recover  the  value 
of  his  stock  and  past  dividends.  Deposit 
Bank  v.  Barrett,  13  S.  W.  Rep.  337  (Ky. 
1890).  Where  a  stockholder  delays  in 
bringing  a  suit  for  an  unreasonable 
length  of  time  for  the  purpose  of  ascer- 
taining whether  the  act  complained  of 
will  be  profitable  to  him,  his  suit  to  set 
aside  the  act  will  fail.  Boyce  v.  Mon- 
tauk,  etc.  Co.,  37  W.  Va.  73  (1893).  A 
director's  purchase  for  the  creditors 
and  certain  mortgage  bondholders  of 
the  mortgaged  property  at  a  foreclosure 
sale  cannot  be  set  aside  by  a  stock- 
holder five  years  after  the  sale,  where 
the  road  was  sold  for  all  it  was  worth, 
and  was  badly  in  debt,  and  required 
large  expenditures,  and  there  was  no 
possible  means  of  raising  more  money; 
and  the  stockholders  knew  of  the  con- 
dition of  things,  but  made  no  effort  to 
prevent  a  sale;  and  the  director  offered 
to  allow  the  stockholders  to  come  into 
a  reorganization,  and  offered  to  resell 
the  property  for  less  than  what  he  paid 
for  it.  This  is  the  rule  even  though  the 


property    subsequently   becomes  very 
valuable.     Osborne  v.  Monks,  21  S.  W. 
Rep.  101  (Ky.  1893).    The  regularity  or 
authorization  of  a  corporate  mortgage 
cannot  be  successfully  attacked  by  a 
stockholder  in  an  action  to  foreclose  the 
mortgage  where  for  twelve  years  the 
interest  has  been  paid  upon  the  bonds 
with  the  knowledge  and  acquiescence 
of  the  stockholder.    Warren  v.  Bigelow 
Blue  Stone  Co.,  74  Hun,  304  (1893).     A 
hotel  company  having  bought  a  com- 
peting hotel  and  paid  for  it  in  stock 
and  held  the  property  for  two  years,  a 
stockholder  cannot  have  the  purchase 
set  aside.     Steger  n  Davis.  8  Tex.  Civ. 
App.  23  (1894).     In  Fitzgerald   v.  Fitz- 
gerald,  etc.  Co.,  41  Neb.  374  (1894).  it  was 
held  that  where  two  corporations,  hav- 
ing contract  relations,  are  controlled  by 
the  same  board  of  directors  and  a  fraud 
is  committed,  the  delay  and  acquies- 
cence of  a  minority  director  did  not 
prevent  his  suing  to  remedy  the  fraud. 
Cf.  93  N.  W.  Rep.  1024.  Stock  voted  to  the 
president  as  a  salary  at  a  meeting  where 
his  presence  is  necessary  to  form  a  quo- 
rum may  be  recovered  back,  but  acquies- 
cence for  ten  years  is  fatal.     U.  S.  etc, 
Co.  V.  Reed,  2  How.  Pr.  (N.  S.)  253  (1885). 
See  also  Downes  v.  Ship,  L.  R.  3  H.  L. 
343  (1868);  Ashhurst's  Appeal,  60  Pa.  St. 
290  (1869);  Zabriskie  v.  Hackensack,  etc. 
R.  R.,  18  N.  J.  Eq.  178  (1867);  Nashua, 
etc.  R.  R.  V.  Boston,  eta  R.  R.,  27  Fed. 
Rep.  821,  826  (1886);  London,  etc.  Assoc. 
V.  Kelk,  L.  R  26  Ch.  D.  107  (1884);  Mc- 
Loughlin  v.  Detroit,  etc.    Ry.,  8  Mich. 
100  (1860);  Gray  v.  Chaplin,  2  Russ.  Ch. 
126  (1826),  where  the  stockholder  had 
acquiesced  forty-seven  years  in  an  ultra 
vires  lease.     In  Mills  v.  Central  R.  R, 


1  Metropolitan  Bank  v.  Heiron,  L.  R 
5  Exch.  D.  319  (1880).  The  statute  of 
limitations  is  no  bar  to  an  action 
against  a  director  for  fraud,  when  no- 
tice of  the  fraud  came  only  to  the  di- 
rectors, part  of  whom  were  also  impli- 
cated.    Be  Fitzroy,  etc  Co.,  50  L.  T. 

18 


Rep.  144  (1884).  The  statute  of  limita- 
tions does  not  begin  to  run  against  a 
promoter  who  takes  a  secret  profit  un- 
til the  facts  are  known  to  the  stock- 
holders. Ee  Sale,  etc.  Co.,  77  L.  T.  Rep. 
681  (1897),  reversed  on  another  point  in 
78  L.  T.  Rep.  368  (1898). 


§  732.]  DELAY    AS    A    BAR    TO    STOCKHOLDER'S    ACTIONS.        [CH,  XLIV. 

often  apply  to  a  suit,  brought  to  remedy  the  frauds,  ultra  vires  acts. 


41  N,  J.  Eq.  1,  9  (1886),  it  was  very 
properly  held  that  a  delay  of  fifty-four 
days  was  no  bar,  and  also  that  a  failure 
to  vote  against  the  act  was  no  bar.  In 
Gilford  V.  New  Jersey  R.  R.  &  T.  Co.,  10 
N.  J.  Eq.  171  (1854),  a  delay  of  twenty 
years  was  held  to  be  a  bar.  In  the  fol- 
lowing cases  the  court  held  delay  to  be 
a  bar:  Peabody  v.  Flint,  88  Mass.  53 
(1863),  the  delay  being  three  and  a  half 
years;  Gregory  v.  Patchett,  33  Beav. 
595  (1864),  six  years;  International,  etc. 
R,  R.  V.  Bremond,  53  Tex.  96  (1880),  two 
yeai's;  Graham  v.  Birkenhead,  etc.  Co., 
2  Macn.  &  G.  146  (1850),  eighteen  months; 
Kitchen  v.  St.  Louis,  etc.  Ry.,  69  Mo. 
224  (1878),  five  years;  Boston,  etc.  R.  R. 
u  New  York,  etc.  R.R.,  13  R.  I.  260(1881); 
Ashhurst's  Appeal,  60  Pa.  St.  290  (1869), 
seven  years;  Sheldon,  etc.  Co.  v.  Eicke- 
meyer,  etc.  Co.,  90  N.  Y.  607  (1882),  four 
years;  Pneumatic  Gas  Co.  v.  Berry,  113 
U.  S.  322  (1884);  Graham  v.  Boston,  etc* 
R.  R.,  118  U.  S.  161  (1886);  Re  Pinto  Sil- 
ver Min.  Co.,  L.  R.  8  Ch.  D.  273  (1878); 
Royal  Bank  v.  Grand  Junction  R  R,, 
125  Mass.  490  (1878);  Re  Magdalena,etc. 
Co.,  6  Jur.  (N.  S.)  975  (1860),  where  a  de- 
lay of  two  years  was  held  a  bar:  Brother- 
hood's Case,  31  Beav.  365  (1862),  twelve 
years;  Hervey  v.  Illinois,  etc.  Ry.,  28  Fed. 
Rep.  169  (1884);  Thompson  v.  Lambert, 
44  Iowa,  239  (1876);  Vigers  v.  Pike,  8  CI. 
&  F.  562,  650  (1840);  Zabriskie  v.  Cleve- 
land, etc.  R.  R.,  23  How.  381  (1859); 
Allen  V.  Willson.  28  Fed.  Rep.  677  (1886). 
Cf.  Boardman  u.  Lake  Shore,  etc.  Ry., 
84  N.  Y.  157  (1881);  Badger  v.  Badger,  2 
Wall  87  (1864);  Harwood  v.  Railroad 
Co.,  17  Wall.  78(1872);  Rochdale  Canal 
Co.  V.  King,  2  Sim.  (N.  S.)  78  (1851); 
§g  161, 162, 198,  sxipra.  Seventeen  years' 
delay  bars  the  right  of  preferred  stock- 
holders to  reach  a  fund  which  was  to 
be  given  them  as  a  compromise  by  first 
bondholders,  a  foreclosure  by  second 
bonds  having  subsequently  followed. 
Sullivan  v.  Portland,  etc.  R.  R..  94  U.  S. 
806  (1877).     Five  years'  delay  in  attack- 


ing a  consolidation  is  too  late.  Bell  v. 
Pennsylvania,  etc.  R.  R.,  10  Atl.  Rep. 
741  (N.  J.  1887).  But  a  delay  of  eleven 
years  and  a  half  was  held  not  fatal  to 
a  stockholder's  action  to  set  aside  an 
ultra  vires  issue  of  bonds,  where  the 
railroad  had  been  abandoned,  the  bonds 
never  dealt  in  nor  enforced,  and  the 
complainant  had  in  view  the  removal 
of  the  lien,  and  intended  to  proceed  and 
construct  the  road.  Chicago  v.  Came- 
ron, 120  111.  447  (1887).  Four  years'  de- 
lay in  suing  to  set  aside  an  ultra  vires 
assignment  of  property  held  fatal.  Des- 
combes  v.  Wood,  91  Mo.  196  (1887). 
Where  a  corporation  is  insolvent,  and 
turns  in  its  property  at  a  fair  price  to  a 
creditor  whose  debt  is  also  secured  by 
the  guaranty  of  the  president  of  the 
corporation,  and  the  creditor  at  once 
sells  the  property  to  the  president  at 
an  advanced  price,  a  stockholder  who 
delays  suit  for  two  years,  during  which 
time  the  property  becomes  valuable 
and  the  president,  who  purchased,  dies, 
is  barred  from  complaining.  Hancock 
V.  Holbrook,  40  La.  Ann.  53  (1888). 
Laches  bars  the  right  of  preferred  stock- 
holders to  object  to  an  ultra  vires  lease. 
Emerson  v.  N.  Y.  etc.  R.  R.,  14  R.  L  555 
(1894),  aff'g  Boston,  etc.  R.  R.  v.  New 
York,  etc  R.  R,  13  R  L  260  (1881). 
Three  years'  delay  is  fatal  to  a  stock- 
holder's suit  to  hold  the  president  liable 
for  illegal  acts,  where  the  former  was 
also  treasurer.  Dunphy  v.  Traveller 
Assoc,  146  Mass.  495  (1888).  A  lease  of 
corporate  property  may  be  ratified  by 
one  hundred  days'  delay  of  the  com- 
pany in  repudiating  it,  the  lessee  in  the 
meantime  expending  money  thereon. 
Hoosac,  etc  Co.  v.  Don  at,  10  Colo.  529 
(1888).  A  lessor  railroad  cannot,  nine- 
teen years  after  the  lease,  sue  in  equity 
to  set  aside  the  lease  as  ultra  vires. 
Laches  is  a  bar.  St.  Louis,  etc.  R.  R.  v. 
Terre  Haute,  etc  R.  R,  33  Fed.  Rep.  440 
(1888);  aflfd,  145  U.  S.  393  (1892).  Ten 
years'  delay  bars  an  action  by  a  stock- 


1860 


CH.  XLIV.]        DELAY    AS    A    BAR   TO    STOCKHOLDER'S    ACTIONS. 


[§  T32. 


or  neo-liffence  of  directors,  the  rew-ular  statute  of  limitations.*     It 


holder  to  set  aside  a  fraudulent  fore- 
closure of  a  mortgage  given  by  the 
company.  Foster  v.  Mansfield,  etc.  R. 
R.,  36  Fed.  Rep.  627  (1888);  aflf'd,  146  U. 
S.  88  (1893).  A  lease  of  a  water  com- 
pany's property  to  an  ice  company,  with 
the  privilege  to  the  stockholders  of  the 
former  to  take  stock  in  the  latter,  will 
not  be  set  aside  at  the  instance  of 
stockholders  who  did  not  oflfer  to  take 
such  stock  until  too  late,  and  who  de- 
layed complaining  until  after  the  ice 
company  proved  a  success.  Shaaber's 
Appeal,  17  Atl.  Rep.  209  (Pa.  1889).  The 
time  consumed  by  the  guilty  officers  in 
legal  proceedings  to  collect  their  gains 
is  not  included  in  the  time  which 
constitutes  laches  on  the  stockholders' 
■part.  Davis  v.  Gemmell.  70  Md.  356 
(1889). 

1  Watts's  Appeal.  78  Pa.  St.  370  (1875). 
See  also  Taylor  v.  South,  etc.  R.  R.,  13 
Fed.  Rep.  152  (1882).  As  to  Califor- 
nia, see  Dannmeyer  v.  Coleman,  11 
Fed.  Rep.  97  (1882),  holding  that  under 
the  statute  in  California  the  three- 
years'  limitation  to  actions  based  on 
fraud  after  discover.y  thereof  applies  to 
directors'  frauds  herein.  But  see  Phil- 
ippi  V.  Philippe,  115  U.  S.  151  (1885); 
Twin  Lick,  etc.  Co.  v.  Marbury,  91  U. 
S.  587  (1875);  Moyle  v.  Landers,  21  Pac. 
Rep.  1133  (Cal.  1889);  s.  C,  83  Cal.  579 
(1890).  See,  in  general,  Coit  v.  Camp- 
bell, 82  N.  Y.  509,  514  (1880);  Farnam  v. 
Brooks,  26  Mass.  212,  242(1830);  Godden 
V.  Kimmell,  99  U.  S:  201,  210  (1879); 
Preston  v.  Preston.  95  U.  S.  200  (1877); 
Badger  v.  Badger,  2  Wall.  87  (1864); 
Meader  v.  Norton,  11  Wall.  442  (1870); 
Bowman  v.  Wathen,  1  How.  189  (1843); 
Beckford  v.  Wade,  17  Ves.  Jr.  87  (1805). 
The  statute  of  limitations  is  a  bar  to  an 
action  against  directors  for  negligence 
in  allowing  overdrafts  and  illegal  loans. 
Williams  v.  Halliard,  38  N.  J.  Eq.  373, 
383  (1884).  An  action  against  a  third 
person  to  recover  money  paid  bj'  tlie 
corporation  to  him  for  stock  must  be 


brought  within  six  years  or  it  is  barred 
by  the  statute  of  limitations.  Pierson 
r.McCurdy,  33  Hun,  520  (1884);  aff"d,  100 
N.  Y.  608.  But  in  Pierson  v.  Morgan,  20 
Abb.  N.Cas.428(N.Y.  1887),  andBrincker- 
hoff  V.  Bostwick,  99  N.  Y.  185  (1885),  the 
ten-year  statute  was  applied  to  fraud. 
The  statute  of  limitations  may  consti- 
tute a  bar  to  an  action  by  the  corpora- 
tion against  its  secretary  for  funds  ap- 
propriated by  him. .  Landis  v.  Saxton, 
105  Mo.  486  (1891).  The  six-years'  stat- 
ute of  limitations  runs  against  an  ac- 
tion to  hold  a  director  liable  for  invest- 
ing corporate  funds  in  the  stock  of  an- 
other company.  Re  Lands  Allotment 
Co..  [1894]  1  Ch.  616.  An  action  by  a 
receiver  to  recover  money  from  direct- 
ors is  barred  in  six  years,  but  a  similar 
action  by  a  stockholder,  being  in  equity 
alone,  is  barred  in  ten  years,  in  New 
York.  Mason  v.  Henry,  83  Hun,  546 
(1895).  The  statute  of  limitations  does 
not  run  as  against  the  president's  mis- 
appropriation of  funds,  where  the  delay 
was  due  to  his  misrepresentations. 
Coxe  V.  Huntsville  Gas  Light  Co.,  106 
Ala.  373  (1895),  The  statute  of  limita- 
tions at  law  applies,  since  it  is  a  legal 
right  that  is  being  enforced  in  equity. 
As  to  negligence  the  time  is  within  six 
years  from  the  negligent  act.  in  Ten- 
nessee. Wallace  v.  Lincoln  Sav.  Bank, 
89  Tenn.  630  (1891).  The  directors  may 
be  liable  for  causing  the  railroad  com- 
pany to  purchase  the  stock  of  another 
railroad  company,  but  the  six-years' 
statute  of  limitations  is  a  bar  to  a 
stockholders"  suit  to  hold  them  liable, 
no  fraud  being  alleged.  Whitwam  v. 
Watkin,  78  L.  T.  Rep.  188  (1898).  Di- 
rectors guilty  of  malfeasance  are  held 
liable  as  trustees  »n  the  insolvency  of 
the  company,  especially  as  regards  the 
statute  of  limitations.  Boyd  v.  Mutual 
FireAssoc.,90N.  W.Rep.  1086  (Wis.  1902). 
The  statute  of  limitations  is  the  only 
bar  to  a  stockholders'  suit  to  compel  an 
officer  to  return  funds  which  he  has 
1861 


§  733.]  DELAY    AS    A    BAR   TO    STOCKHOLDEK's    ACTIONS.        [CH.  XLIV. 


is  established  law  that  where  equity  and  law  have  concurrent  juris- 
diction of  a  case,  equity  will  apply  the  statute  of  limitations.^ 

Where  there  are  a  series  of  transactions  between  the  president 
and  the  compan}'-,  the  statute  of  limitations  does  not  begin  to  run 
until  his  official  connection  ceases.-  If  the  running  of  the  statute 
been  stopped  as  to  one  complaining  stockholder  it  is  stopped  as  to 
all.^  In  general  a  court  of  equity  will  apply  the  statute  or  will  not 
apply  it,  as  may  seem  most  just,  and  will  even  shorten  the  time.^ 

The  statute  of  limitations  may  not  be  a  bar  to  a  receiver's  action 
to  recover  back  from  directors  a  salary  which  was  paid  in  breach 
of  trust.^ 

§  733.  Miscellaneous  applications  of  the  doctrine  of  laches  herein. 
The  ratification  of  an  act  which  the  stockholder  might  have  com- 
plained of  does  not  authorize  or  ratifj'-  in  advance  a  repetition  of 
that  act.^  A  stockholder's  right  to  object  to  a  director's  act  can 
be  exercised  by  him  alone.^  It  is  also  well  established  that  the 
ratification  which  will  bind  a  stockholder  must  be  by  himself  alone. 
It  cannot  be  by  the  other  stockholders.^    A  board  of  directors  can- 


misappropriated.  Montgomery,  etc.  Co. 
V.  Lahey,  121  Ala.  181  (1899).  A  suit  by 
a  promoter  to  compel  the  delivery  of 
stock  to  him  on  the  ground  that  with- 
out his  consent  and  knowledge  an  in- 
corporation made  in  accordance  with 
his  contract  had  been  abandoned  and  a 
new  one  adopted  from  which  he  had 
been  excluded  is  a  suit  for  breach 
of  trust  and  not  for  fraud,  and  hence 
the  statute  of  limitations  applicable  to 
the  latter  is  not  a  bar.  Farris  v.  Wirt, 
63  Pac.  Rep.  946  (Colo!  1901).  A  stock- 
holders' suit  to  hold  a  director  liable 
for  purchasmg  property  of  the  corpora- 
tion is  a  suit  for  breach  of  trust  and 
not  for  a  fraud  separate  from  sucli 
breach,  and  hence  a  statute  of  limita- 
tions applicable  to  the  former  is  the 
one  applicable  to  such  a  case.  Morgan 
17.  King,  37  Colo.  539  (1900). 

1  Baker  v.  Cummings,  169  U.  S.  189 
(1898). 

2  Danville,  etc.  R.  R.  v.  Kase,  39  At). 
Rep.  301  (Pa.  1898).  A  national  bank 
may  hold  its  officers  liable  for  making 
loans  to  an  individual  in  excess  of  ten 
per  cent,  of  the  capital  stock,  and  also 
for  making  other  loans  in  violation  of 
the  statutes,  and  such  suit  may  be  in 


equity  where  the  transactions  are  com- 
plicated. The  statute  of  limitations 
does  not  begin  to  run  until  such  officers 
have  gone  out  of  office.  National  Bank, 
etc.  V.  Wade,  84  Fed.  Rep.  10  (1897). 

3  Brinckerhoff  v.  Bostwick,  99  N.  Y. 
185,  194  (1885);  Cox  v.  Stokes,  156  N.  Y. 
491  (1898).  See  also  Richmond  v.  Irons, 
131  U.  S.  37  (1887).  But  see  Ashley's 
Case,  L.  R.  9  Eq.  Cas.  363  (1870);  also 
§  163,  supra. 

4  Sullivan  v.  Portland,  etc.  R.  R.,  94 
U.  S.  806,  811  (1876).  See  also  Ernest  v. 
Croysdill,  3  De  G.,  F.  &  J.  175  (1860), 
Re  Exchange  Banking  Co.,  L.  R.  31  Ch. 
D.  519  (1883). 

5  Ellis  V.  Ward,  137  111.  509  (1890),  hold- 
ing that  the  statute  of  limitations  is  no 
bar,  and  that  a  court  of  equity  is  gov- 
erned by  the  rules  of  laches  instead. 

6  Irvine  u  Union  Bank  of  Australia, 
L.  R.  3  App.  366  (1877);  Bloxham  v.  Met- 
ropolitan Uy.,  L.  R.  3  Ch.  337.  354  (1868). 

■^  Taylor  v.  Chichester,  etc.  R.  R.,  L.  R. 
3  Exch.  356,  378  (1867). 

8  Hazard  v.  Durant,  11  R.  1. 195  (1875). 
This  principle  of  law  is  substantially  a 
mere  restatement  of  the  principle  that 
the  majority  cannot  bind  the  minority 
as  regards  ultra  vires  acts;  nor  can  the 


1863 


OH.  XLIV.]        DELAY    AS    A    BAR   TO    STOCKHOLDER'S    ACTIONS.  [§   733. 


not  release  one  of  their  number  from  liabilit}'^  for  wasting  the  funds 
of  the  company.^  The  fact  that  an  officer  of  the  company  took 
part  in  a  swindling  scheme  does  not  deprive  the  company  of  its 
right  to  recover  back  moneys  of  which  it  was  wrongfully  deprived 
by  such  scheme.^  But  the  acquiescence  of  a  stockholder  bars  an 
action  by  any  transferee  of  that  stock.^ 

If  neither  the  defendants  nor  others  have  been  induced  by  the 
delay  to  act  upon  the  matters  which  are  complained  of,  laches  may 
not  be  a  bar  to  the  stockholder's  action.''  It  is  not  necessary  to 
allege  that  the  stockholders  have  been  free  from  acquiescence  or 
laches.^  The  question  of  laches  should  be  raised  by  answer  and 
not  by  demurrer.^     In  Xew  Jersey,  however,  it  has  been  held  that 


directors.  See  Gallery  v.  National  Exch. 
Bank,  41  Mich.  169  (1879).  See  also  ?;§  669. 
683,  supra.  Where  a  majority  of  the 
directors  of  an  irrigation  company  are 
members  of  an  association  which  de- 
sires to  obtain  water  from  such  corpo- 
ration, a  contract  to  that  effect  which 
is  solely  for  the  benefit  of  the  associa- 
tion is  illegal  and  may  be  repudiated 
b)--  the  corporation,  even  though  such 
contract  was  openly  made,  and  even 
though  the  directors  were  guilty  of 
laches  in  not  causing  the  contract  to 
be  set  aside,  and  in  the  meantime  the 
association  has  spent  its  money  in  in- 
stalling its  plant.  Goodell  v.  Verdugo, 
etc.  Co.,  71  Pac.  Rep.  354  (Cal.  1903),  the 
court  saying,  "  the  publicity  alone  of  an 
illegal  and  unauthorized  act  of  the 
directors  of  the  corporation  does  not 
make  it  legal  or  valid." 

Even  though  the  directors  are  to  re- 
ceive a  commission  on  bonds  which 
they  sell  for  the  corporation,  yet  if  the 
stockholders  are  notified  of  the  same 
and  ratify  the  transaction  in  meeting 
assembled,  the  minority  stockholders 
cannot  complain,  the  transaction  itself 
being  a  fair  one.  The  directors  may 
vote  their  own  stock  at  such  meeting 
and  the  ratification  is  legal,even  though 
their  stock  was  necessary  in  order  to 
carry  the  resolutions.  The  court  said: 
"  Like  other  stockholders,  they  had  a 
right  to  be  influenced  by  what  they 
conceived  to  be  for  their  own  interest, 
and   they  cannot  lawfully  be   denied 


that  right,  nor  can  it  be  limited  or  cir- 
cum.scribed  by  the  fact  that  they  occu- 
pied the  position  of  directors  in  the 
company."  Hodgeu.  United  StatesSteel 
Corp.,  54  Atl.  Rep.  1  (N.  J,  1903).  The 
court  further  said :  "  In  Leavenworth  v. 
Chicago  Ry.  Co.,  134  U.  S.  688,  it  was  held 
that  the  action  of  the  stockholders  vali- 
dated the  contract  where  nine  out  of 
thirteen  directors  were  personally  in- 
terested. In  the  case  of  Nye  v.  Storer, 
168  Mass.  53,  and  Bjorngaard  v.  Goodhue 
County  Bank,  49  Minn.  483,  a  like  in- 
firmity in  contracts  was  held  to  be 
eliminated  by  the  vote  of  a  majority  of 
stockholders." 

1  Gilbert  v.  Finch,  173  N.  Y.  455  (1903). 

2  Farrow  n  Holland  Trust  Co.,  74 
Hun,  585  (1893).  See  also  ^§  649-651. 
656,  sttpra. 

3  See  ^i;  40,  730,  supra,  and  g  735,  infra, 

4  Whitman  v.  Bowden,  27  S.  C.  53 
(1887). 

s  Horn  Silver  Min.  Co.  v.  Ryan.  43 
Minn.  196  (1889).  Cf.  Credit  Co.  v.  Ar- 
kansas Cent.  R  R,  15  Fed.  Rep.  46  (1882). 

*  A  demurrer  is  not  the  proper  way 
to  raise  the  question  of  laches.  Zeb- 
ley  V.  Farmers'  L.  &  T.  Co.,  139  N.  Y. 
461  (1893);- Sage  v.  Culver,  147  N.  Y.  241 
(1895).  Cf.  Crumlish  v.  Slienandoah 
Valley  R  R,  28  W.  Va.  623  (1886).  The 
complainant  need  not  allege  that  he 
did  not  take  part  in  the  transaction, 
but  the  question  of  laches  may  be 
raised  by  demurrer.  George  v.  Central 
R  R  etc.  Co.,  101  Ala.  607  (1894).    The 


1863 


§  733.]  DELAY   AS    A    BAK   TO    STOOKHOLDEe's    ACTIONS.        [CH.  XLIV. 

a  stockholder  must  allege  that  neither  he  nor  any  prior  owner  of 
his  stock  has  acquiesced  in  the  acts  complained  of,  where  the 
amount  of  the  stock  owned  by  him  is  very  small,  comparatively.^ 

Delay  due  to  the  fact  that  a  bill  had  previously  been  filed  and 
dismissed  on  technical  grounds  is  not  laches.^  And  a  suit  by  one 
signer  of  a  reorganization  agreement,  to  enforce  it,  prevents  laches 
oeino:  chara:ed  ag-ainst  other  signers  who  do  not  commence  suit 
usitil  a  longtime  subsequently ."■*  Where  all  the  other  stockholders 
consent  to  the  company  buying  property  owned  by  one  of  the  di- 
rectors, a  stockholder  who  was  present  and  does  not  object  cannot 
complain.*  The  assent  of  a  few  minor  stockholders  whose  stock 
was  given  to  them  may  be  presumed,  in  case  they  have  not  ob- 
jected to  an  agreement  whereby  some  of  the  stockholders  sell  their 
titock  to  the  others  and  take  their  pay  from  the  corporation  itself 
and  resign  their  offices  and  substitute  new  parties  as  directors.'^ 
The  failure  of  a  stockholder  to  attend  the  stockholders'  meeting  is 
not  a  waiver  of  his  right  to  object' to  the  acts  of  the  meeting  as 
ultra  vires,  even  though  the  notice  of  the  meeting  stated  what  was 
to  be  done.^  Ratification  does  not  arise  from  the  mere  fact  that 
the  directors'  minutes  were  ratified  at  a  stockholders'  meeting.'' 

If  it  is  evident  that  the  stockholder  waited  to  see  whether  the 
unauthorized  act  would  be  profitable  to  the  corporation,  the  court 
will  refuse  to  grant  him  any  relief.'     So  also,  if  the  stockholder, 

bill  for  relief  from  fraud  perpetrated  a  any  consideration  that  may  be  agreed 

long  time  prior  thereto  must  explain  upon  between  them,  it  is  legal  that  the 

in    detail    the    reason    of    the    delay,  consideration  be  a  right  extended  by 

Laches   may   be   raised   by   demurrer,  the  new  company  to  the  old  stockhold- 

Hubbard  v.  Manliattan  Trust  Co.,   87  ers  to  demand  partly*  paid  up  stock  of 

Fed.  Rep.  51   (1898).    The  question  of  the   new  company   within  a    limited 

laches    may    be    raised    by    demurrer  time,   a  dissenting  stockholder  being 

where  the  complaint  sets    forth    the  given  the  right  to  have  the  fairness  of 

facts   which  involve   laches.     Mott  v.  the  proposed  sale  passed  upon  by  the 

N.  Y.  etc.  Co.,  29  N.  Y.  Misc.  Rep.  39  court.  It  is  the  duty  of  the  stockholder 

(1899).  in  such  a  case  to  attend  the  meeting 

1  Trimble  v.  American,  etc.  Co.,  61  and  vote  against  it  if  he  objects.  It  is 
N.  J.  Eq.  340  (1901).  no  excuse  that  he  was  ill  or  abroad  or 

2  Miner  v.  Belle  Isle  Ice  Co.,  93  Mich.  97  negligent  in  dissenting,  under  the  Eng- 
(1893).  lish    statute.     Burdett-Coutts  v.  True 

3  Cox  V.  Stokes,  156  N.  Y.  491  (1898).  Blood,  etc.  Ltd.,  [1899]  2  Ch.  616. 

*  Steinway  v.  Steinway,  2  N.  Y.  App.  7  Jves  v.  Smith,  8  N.  Y.  Supp.  46  (1889). 

Div.  301  (1896);  aff'd,  157  N.  Y.  710,  and  8 story,  Eq  Jur.,  g  1539a;  Kitchen  v. 

in  163  N.  Y.  183.     Cf.  54  Atl.  Rep.  883.  St.  Louis,  etc.  Ry.,  69  Mo.  224  (1878) 

5  Raymond  v.  Col  ton,  104  Fed.  Rep.  Gregory  v.  Patchett,  33  Beav.  595  (1864) 
219  (1900).  Atchison,  etc.  R.  R.  u.  Fletcher,  35  Kan, 

6  McFadden  v.  Leeka,  48  Ohio  St.  513  236,  250  (1886);  Banks  v.  Judah,  8  Conn, 
(1891).  Under  a  statute  authorizing  145  (1830);  Watts's  Appeal,  78  Pa.  St 
one  company  to  sell  out  to  another  for  370  (1875);  Sheldon,  etc.  Co.  v.  Eicke 

1864 


CH.  XLIV.]        DELAY    AS   A   BAK   TO    STOCKHOLDEk's    ACTIONS. 


[§ 


^"  "33. 


after  a  full  knowledge  of  the  facts,  stands  by  and  allows  large 
operations  to  be  completed,  or  money  expended,  or  alterations  to 
be  made  before  he  brings  suit,  he  is  guilty  of  laches,  and  his  remedy 
is  barred.^  But  delay  after  the  damage  is  done,  and  while  the 
complaining  stockholder  served  as  a  director  in  the  hope  of  better- 
ing things,  is  not  a  bar.^  A  defendant  in  a  foreclosure  suit  cannot 
object  to  a  sale  on  the  ground  that  it  did  not  comply  with  the 
federal  statute,  where  he  took  no  appeal  and  made  no  objection 
until  after  the  sale  had  been  confirmed.'  Under  the  New  York 
statutes  a  suit  by  a  bank  against  its  president  for  loaning  money  on 
worthless  securities  survives  his  death.*  Even  though  the  stock- 
holders of  a  bank  assent  to  notes  being  accepted  in  payment  of 
subscriptions,  yet  a  receiver  may  hold  the  directors  liable  therefor.* 
But  where  all  the  stockholders  acquiesce,  the  corporation  itself  can- 
not complain." 

Acts  intra  vires  may  be  ratified  by  a  majority  of  the  stockhold- 
ers and  the   minority   cannot  complain.''     But  an  ultima  vires  or 
fraudulent  act  cannot  be  ratified  by  the  majority  so  as  to  bind  the 
.  minority ;  *  neither  can  it  be  ratified  by  the  board  of  directors.^    A 


meyer,  etc.  Co.,  90  N.  Y.  607  (1882); 
Boyce  v.  Montauk,  etc.  Co.,  37  W.  Va. 
73  (1892).  Quoted  and  approved  in 
Steger  v.  Davis,  8  Tex.  Civ.  App.  23 
(1894). 

1  See  §  732,  supra;  also  Houldsworth 
u  Evans,  L.  R  3  H.  L.  263,  276  (1868). 
Delay  of  eight  months  held  fatal. 
Great  Western  Ry.  v.  Oxford,  etc.  Ry., 
3  De  G.,  M.  &  G.  341  (4853).  See  also 
Boston,  etc.  R.  R.  v.  New  York,  etc.  R. 
R.,  13  R.  L  260  (1881);  Aurora,  etc.  Soc. 
V.  Paddock,  80  111.  263  (1875);  Stewart  v. 
Erie,  etc.  Transp.  Co.,  17  Minn.  372 
(1871);  Goodin  v.  Evans,  18  Ohio  St.  150 
(1868).  In  Covington,  etc.  R.  R.  v. 
Bowler,  9  Bush  (Ky.),  468  (1872),  how- 
ever, the  court  held  that  a  delay  of  six 
years  was  not  a  bar  to  the  stockhold- 
er's remedy;  and  the  court  said  that 
"  merely  remaining  passive  does  not 
deprive  a  party  of  the  right  to  seek  re- 
lief, unless,  in  addition  thereto,  he  does 
some  act  to  induce  or  encourage  others 
to  expend  their  money  or  to  alter  their 
condition,  and  thereby  render  it  un- 
conscientious for  him  to  enforce  his 
rigbtii"'     But  see  Pacific  R  R  of  Mo. 


V.  Missouri  Pac.  Ry.,  Ill  U.  S.  505  (1884), 
reversing  12  Fed.  Rep.  641,  holding 
that  delay  pendmg  appeal  is  not  fatal. 
See  also  §j;  161,  162,  supra.  A  stock- 
holder who  lies  by  and  allows  his  cor- 
poration, which  is  not  a  success,  to  be 
merged  with  other  property  into  a  new 
company,  payment  being  made  in 
stock  of  the  latter  company,  and  the 
enterprise  proves  a  success,  cannot 
cause  to  be  set  aside  an  assessment  to 
pay  a  debt  incurred  for  expenses  in 
bringing  about  such  results.  Taylor  v. 
North  Star,  eta  Co.,  79  Cal.  285  (1889). 

2  Land  is  v.  Sea  Isle,  etc.  Co.,  53  N.  J. 
Eq.  654  (1895). 

3  National,  etc.  Co.  v.  Nevada,  etc.  Syn- 
dicate, 112  Fed.  Rep.  44  (1901). 

*  Seventeenth,  etc.  Bank  v.  Webster, 
67  N.  Y.  App.  Div.  228  (1901). 

sCoddington  v.  Canaday,  157  Ind. 
243  (1901).     See  also  ^  701,  supra. 

6  Home,  etc.  Co.  v.  Barber,  93  N.  W. 
Rep.  1024  (Neb.  1903).     Cf.  n.  2,  p.  1848. 

^Bassett  v.  Fairchild.  61  Paa  Rep. 
791  (Cal.  1900). 

8  See  §  740,  infra. 

9  Even  though  the  cashier  of  a  bank. 


1865 


§  733.]  DELAY    AS    A    BAR   TO    STOCKHOLDER'S    ACTIONS.        [CH.  XLIV> 

court,  however,  may  authorize  its  receiver  to  compromise   such, 
claims.^ 

Although  a  corporate  debt  is  not  incurred  with  the  formalities 
required  by  statute,  yet  acquiescence  therein  by  a  stockholder  bars 
any  complaint  by  him.^ 


with  the  consent  of  the  directors,  takes 
a  part  of  the  profit  realized  by  the  pur- 
chaser of  land  from  the  bank,  yet  a 
stockholder  may  compel  him  to  repay 
that  amount  to  the  bank,  although  the 
purchaser  has  not  yet  paid  the  amount 
to  the  cashier.  Tenison  v.  Fatten,  64 
S.  W.  Rep.  810  (Tex.  1901).  Directors 
of  an  insurance  company  who  use  its 
money  to  procure  the  resignations  of 
the  directors  of  another  insurance  com- 
pany and  a  substitution  of  new  direct- 
ors are  personally  liable  for  money  so 
expended,  and  the  fact  that  parties  re- 
ceiving the  money  had  repaid  a  por- 
tion of  it  by  way  of  compromise  is  no 


bar  to  such  suit  for  the  balance.  A  re- 
lease by  the  board  of  directors  is  no  de- 
fense. Gilbert  v.  Finch,  73  N.  Y.  App. 
Div.  38  (1903);  aff'd,  173  N.  Y.  455.  See 
also  §§  649,  653,  663,  supra. 

1  See  §  701,  supra.  The  court  may 
authorize  the  receiver  to  sell  all  the 
assets  to  a  new  company  and  release 
the  directors  of  the  old  company  from 
personal  liability  to  the  stockholders, 
where  such  contract  is  a  fair  one,  even- 
though  some  of  the  stockholders  dis- 
sent. Feople  V.  Anglo-American,  etc 
Assoc,  66  N.  Y.  App.  Div.  9  (1901). 

2  Manhattan  Hardware  Ca  v.  Roland^ 
138  Fa.  St.  119  (1889). 


1866 


^ 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 

Los  Angeles 
This  book  is  DUE  on  the  last  date  stamped  below. 


m  1 0  W9^ 


taw  Llb'^a'^ 


fee 


'd. 


315 


in 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


AA    000  695  806    o 


■I 


J^ 


iifiilfi': 


